reality is only those delusions that we have in common...

Saturday, December 3, 2011

week ending Dec 3

Fed Balance Sheet Shrinks Over Past Week -- The U.S. Federal Reserve's balance sheet shrank a little over the last week as the central bank rejiggers its portfolio in a move to stimulate the economy. The Fed's asset holdings in the week ended Nov. 30 stood at $2.817 trillion, down from the $2.825 trillion reported a week earlier, the central bank said in a report released Thursday. Holdings of U.S. Treasury securities rose to $1.672 trillion from $1.665 trillion the week before, while central bank's holdings of mortgage-backed securities fell to $827.05 billion from $841.60 billion. The report Thursday showed holdings of Treasury securities with a remaining maturity exceeding 10 years increased over the past week. Total borrowing from the Fed's discount lending window was $9.82 billion, down from $9.88 billion a week earlier, according to the report. Borrowing by commercial banks climbed to $113 million from $105 million. The Fed report showed that U.S. marketable securities held in custody on behalf of foreign official accounts rose to $3.466 trillion from $3.450 trillion in the latest week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.748 trillion from $2.730 trillion the previous week. Holdings of agency securities declined to $718.22 billion, from $719.72 billion the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances Release Date: December 1, 2011

What Could Bernanke Do? - Over on the >Twitter Machine, Doug Henwood asks why us wild-eyed shrill types think Bernanke and his Fed should be doing more: First of all, Bernanke hasn't just taken the Fed balance sheet up to $2T. He has taken it up to $3T. That ain't chopped liver--that ain't even terrine de foie gras, truite fumée, champignons et poire. Second, I agree that normal Federal Reserve policy--declaring that long-run price stability is job #1 while buying and selling short-term Treasury bills for cash--does absolutely nothing right now: it is indeed pushing on a string. That said, the Federal Reserve might be able to spark a real economic recovery by…

  1. Announcing that it is going to keep short-term Treasury interest rates low not just as long as the economy is depressed but even afterwards when the economy has recovered and when it would normally be raising interest rates: that it is going to keep short-term Treasury interest rates low until it generates an inflationary boom, and that you had better start building capacity now to serve your customers during that inflationary boom or your competitors will do so and take your profits.
  2. Not just announcing but actually bailing-in the taxpayers of the United States of America as the risk-bearing partners of American financial institutions: with the taxpayers as their risk-bearings partners, financial institutions that were previously tapped-out on their risk-bearing capacity will now have the ability and the incentive to make more loans at more attractive terms to more potentially-expanding businesses.

Fed's Yellen Sees Scope for More Easing to Spur Recovery  - (Bloomberg) -- Federal Reserve Vice Chairman Janet Yellen said the central bank has leeway to spur the U.S. recovery and reduce unemployment by buying more assets or clarifying its plan to sustain record-low borrowing costs.“The Federal Reserve has some scope for action,” Yellen said today. “We are actively considering methods that we could use to provide greater clarity” on the central bank’s pledge to keep rates low through at least mid-2013, and new purchases have the potential to “flatten the yield curve.” Fed officials are divided over how to reduce a U.S. jobless rate that’s hovered near 9 percent or higher for more than two years. Four officials have dissented at policy making meetings this year, with Chicago Fed President Charles Evans calling for more stimulus while Richard Fisher of Dallas, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis voted against further easing.Economic growth in the U.S. and other advanced economies “has been proceeding too slowly to provide jobs for millions of unemployed people,” Yellen said in a speech at a San Francisco Fed conference. She called for “urgent” international action to combat a “dearth” of global demand and “critical challenges” that include signs of slowing growth in emerging markets.

Fed's Lockhart 'Skeptical' More Bond-Buying Will Aid Growth-- Federal Reserve Bank of Atlanta President Dennis Lockhart said expanding securities purchases is unlikely to give a sufficient boost to U.S. growth, without ruling out the strategy or other easing options. “I am skeptical that further asset purchases will produce much gain in terms of increased economic activity,” Lockhart, who votes on monetary policy next year, said in a speech in Atlanta. “I don’t believe further bond purchasing by the Fed is a potent policy option given the set of circumstances we currently face.” Fed policy makers are discussing whether to increase record monetary stimulus through a third round of securities purchases or being more specific about how long interest rates will remain close to zero. Lockhart has supported the use of unconventional policy instruments in August and September to revive a recovery that has left the unemployment rate stuck near 9 percent or higher for more than 30 months. “That is not to say that such a policy action would not be powerful and appropriate in other circumstances,” Lockhart said of additional asset purchases. “I don’t think any option should be taken off the table.”

Fed's No. 2 sees room for further monetary easing (Reuters) - Janet Yellen, the Federal Reserve's influential vice chair, said on Tuesday the U.S. central bank has room to ease monetary policy further, possibly by providing more information on the path of interest rates. Another top official, Atlanta Federal Reserve Bank President Dennis Lockhart, said he sees a benefit in providing more information on the policy assumptions underlying Fed forecasts. He made clear, however, that he believes the current policy stance is appropriate. With its usual economic lever of interest rates already pressed close to zero and its balance sheet triple the size of its pre-crisis norm, the central bank has been considering how it can better use communications as a policy tool. The Fed has been debating for months ways to provide more clarity on when it might eventually tighten monetary policy, although officials have differed on how best to proceed. Yellen said turmoil in financial markets stemming from both Europe's banking crisis and general uncertainty about the outlook had increased the risks to the global economy, and that the Fed could offer additional support to U.S. growth.

Will the Federal Reserve Implement ‘QE3’ This Month? - The nation's largest bond dealers say the U.S. Federal Reserve is likely to start a new phase of stimulus to jump-start the slow-growth U.S. economy, with the bank buying mortgage securities instead of U.S. Treasury bonds. What's more, institutional investors have already discounted -- or factored-in -- the third round of quantitative easing from the Fed -- even though it's far from a fait accompli. A Bloomberg News survey of 10 bond dealer firms indicated they expect the world's most powerful central bank to buy about $545 billion in mortgage-backed securities. The Fed purchased $2.3 trillion in U.S. Treasury securities and mortgage-backed securities between 2008 and June 2011. About one year and a half ago the Fed implemented QE2 when it became clear the economy, due to a lack of demand, was in danger of tipping back into a recession. U.S. GDP growth slowed to 0.4 percent in the first quarter, and only inched-up to 1.3 percent in the second quarter -- prompting concern that demand was ebbing. Further, even though GDP growth came in at 2.0 percent in the third quarter, that's not nearly strong enough growth to create the 150,000 to 200,000 new jobs per month needed to substantially lower the nation's high 9.0 unemployment rate.

Fed's Bullard: Wait and see on QE3 - -- Investors clamoring for another round of Federal Reserve bond buying need to root for a blue Christmas. That's according to St. Louis Fed President James Bullard, a self-described inflation hawk and influential member of the central bank. Bullard said at a Bloomberg hedge fund conference in New York Thursday that the Federal Reserve should get a read on the holiday season before making a decision on so-called third round of quantitative easing or QE3. 0PrintComment In other words, don't expect any quantitative easing in 2011. Bullard, who is not a voting member of the Fed's policy committee this year or in 2012, said he does not expect the U.S. to return to a recession unless the situation in Europe gets worse quickly. "You all are worried about a complete meltdown in Europe and you should be," said Bullard. But he predicts that the European crisis will drag on rather than blow up in the short-term. "It can probably roll on for a long time," said Bullard. "Italy can withstand high interest rates." If the EU crisis does worsen rapidly, what else might the Federal Reserve do to stem further problems in the US economy? Bullard said to look to 2008. "The first step would be to use battle tested things we've used before."

Failure to Extend Tax Cut Could Push Fed to Do QE3 - Failure to extend the payroll-tax cut by year’s end could push the Federal Reserve into a third round of quantitative easing, says Barclays Capital chief U.S. economist Dean Maki. Reverting the tax rate back to prior levels would result in a $110 billion tax increase next year and prompt the investment bank to cut 2012 estimates for gross domestic product growth. Maki notes that there’s a group within the policy-setting Federal Open Market Committee that finds current unemployment and growth trends unacceptable and are “itching to do more.” For Barclays, however, the only other scenario likely to trigger QE3 would be a complete meltdown in Europe.

Fed's Rosengren Says Jobless Rate 'Good News,' Not Enough - Federal Reserve Bank of Boston president Eric Rosengren said the drop in the US jobless rate, while “good news,” isn’t as favorable as he would like because it represents workers leaving the labor force. “While the rate is certainly a very favorable rate, I would highlight that a lot of it is because people pulled out of the workforce,” Rosengren said today in a speech in Boston. “It was good news. It’s just not as good news as I would actually like to see.” Fed policy makers are discussing the need for further easing to stimulate the economy and reduce unemployment more quickly. The debate may be complicated by today’s report of an unexpectedly large decline in the US jobless rate last month on dropouts from the labor force. “We’re trying to do what we can to get the economy growing more rapidly,” Rosengren, 54, said at the Massachusetts Investor Conference. A change in the unemployment rate of 0.5 percentage point is equivalent to about 750,000 jobs, and “if we’re able to do something without a large cost, that’s an awful lot of Americans that would have jobs that would not have had jobs, had we not taken that action,” Rosengren said.

Fed warms to idea of offering forecasts on rates‎ (Reuters) - Federal Reserve officials are warming to the idea of publishing their assumptions about the path of interest rates, a decision that could help ease financial conditions. For months the Fed had pledged to keep the overnight federal funds rate near zero for an extended period. It hardened that vow in September, saying it would stay ultra-low through at least the middle of 2013. By offering an assurance that they would be in no hurry to tighten monetary policy at the first signs of the recovery taking off, the central bank was hoping to keep investors from bidding market interest rates up. But officials are uncomfortable with a pledge that is tied to the calendar and not economic conditions. Adding interest rate projections to their usual quarterly economic forecasts would be a straightforward way of addressing those concerns. While some Fed officials appear to lean toward the somewhat more conventional step of purchasing bonds if a decision is taken to ease monetary policy further, communications is also on the table.

A Point of Real Interest in the Latest Fed Minutes - While Bernanke et al have been bungling through with hapless and ineffective quantitative easing policies and ‘operation twists’, commentators like Krugman – who cut his teeth getting Japan wrong for years – have come out in support of negative interest rate policies, which essentially means trying to provoke inflation that will cause real interest rates to be effectively negative. These are two sides of the same bad economic model, I’m afraid.  In fact, interest rate policy in the present environment is not simply worthless – it actually worsens the state of the economy to some degree. Why? Because of interest income channels.  If I’m a saver – and there are a LOT of savers out there these days – and the central bank lowers the interest rate or targets a negative real interest rate, I lose interest on my savings. This ‘interest income’ would have added to aggregate demand – that is, total spending power – as it would mean new net financial assets flowing into my bank account and encouraging me to consume more. Instead, my savings sit around idly earning nothing and so I have even less of an incentive to purchase goods and services. The MMTers – especially Warren Mosler – have been pointing this out for years, but to no avail. But now the idea is starting to get play among the VSPs (Very Serious Persons). While most analysts focused on yawn-inducing speculation about the possibility of the Fed running a pointless QE3 program, some more nuanced analysts noticed something of actual interest in the recently leaked Fed minutes. Per the minutes: It was noted that very low interest rates were negatively affecting pension funds and the profitability of the life insurance industry. That is not much, of course, but at least it is something. It is, at the very least, a jumping-off point for those of us who are sceptical about the efficacy of monetary policy to get a foot in the door.

Fed's Discount Rate Among Tools to Counter Europe's Debt Crisis -  The Federal Reserve could if necessary dig deeper into its toolkit to ease the sovereign-debt crisis in Europe, by cutting the U.S. discount lending rate or restarting a program that auctions loans to banks. Six central banks led by the Fed yesterday lowered the cost of emergency dollar funding for financial companies, reducing the premium banks pay to borrow dollars overnight from central banks by half a percentage point to 50 basis points. The Fed may reduce what it charges on emergency loans to banks by a quarter point to 0.5 percent by early next week, said Michael Cloherty, head of U.S. interest rate strategy at RBC Capital Markets. It probably won’t resort to its other options, including reopening the Term Auction Facility to give U.S. banks more access to funding, without a worsening in Europe’s crisis,  “The Fed is willing to be active if it thinks that’s necessary,” said Lieberman, a former head of monetary analysis at the New York Fed. “But I think the Fed will move a bit more cautiously, unless conditions weaken further in Europe. The U.S. side is looking much better.”

Secret Fed Loans Gave Banks Undisclosed $13B - The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing. The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue. Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse. A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

REVEALED: More Details On The Fed's Breathtaking $7.7 Trillion In Loans To Large Banks: While most people know about Congress' $700 billion TARP program, the Fed's secret emergency loans to banks during the financial crisis remains shrouded in mystery.. A new Bloomberg Markets report shines more light on this lending. After adding up all the guarantees and loans, the Fed committed $7.77 trillion to rescuing the financial system as of March 2009, the report said. Notably, while the banks were taking these huge loans, they maintained that they were fine From Bloomberg: The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue. Federal Reserve Chairman Ben Bernanke's excuse for all the secrecy was that revealing the details of those who borrowed money from the Fed would possibly make needy banks reluctant to borrow in the future and investors wary of investing in those institutions.

Have You Heard About The 16 Trillion Dollar Bailout The Federal Reserve Handed To The Too Big To Fail Banks? - What you are about to read should absolutely astound you.  During the last financial crisis, the Federal Reserve secretly conducted the biggest bailout in the history of the world, and the Fed fought in court for several years to keep it a secret.  Do you remember the TARP bailout?  The American people were absolutely outraged that the federal government spent 700 billion dollars bailing out the "too big to fail" banks.  Well, that bailout was pocket change compared to what the Federal Reserve did.  As you will see documented below, the Federal Reserve actually handed more than 16 trillion dollars in nearly interest-free money to the "too big to fail" banks between 2007 and 2010.  So have you heard about this on the nightly news?  Probably not.  Lately Bloomberg has been reporting on some of this, but even they are not giving people the whole picture. According to the limited GAO audit of the Federal Reserve that was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the grand total of all the secret bailouts conducted by the Federal Reserve during the last financial crisis comes to a whopping $16.1 trillion. Keep in mind that the GDP of the United States for the entire year of 2010 was only 14.58 trillion dollars.

Peeling Back the Veil at the Federal Reserve - At Citizen Vox Micah Hauptman uses the recent Bloomberg revelations (regarding the details of the Federal Reserve’s extraordinary efforts to stabilize the financial system) to frame a discussion of Fed transparency and accountability: The Fed has vigorously defended its secrecy, claiming that working behind closed doors is necessary to prevent panic in financial markets. According to the central bank, disclosing information about the Fed’s actions would create a stigma for the banks that took advantage of the measures, and cause investors and counterparties to shy away from doing business with them. But these excuses just don’t hold water. When the Fed spends money, it creates a government liability, for which the public is ultimately on the hook. And when the public is on the hook, it must be done in the light of day. Hauptman notes the recent formation by Senator Bernie Sanders of a panel of experts, featuring a number of Levy Institute scholars (including James Galbraith, Randall Wray, and Stephanie Kelton), that will make reform recommendations regarding these very issues.

Time to Demand Transparency and Accountability at the Fed - In its continuing series on the Fed’s bail-out of Wall Street, Bloomberg estimates that the banks got a $13 billion hand-out from the Fed’s easy lending terms. Using the excuse of the crisis, the Fed lent funds at near-zero interest to the banks. This was supposed to encourage them to begin lending to firms and households, to spark economic growth and recovery. Of course, the problem with that scheme is that households were already underwater with debt (hence, the recession), firms had no sales hence no reason to borrow to increase production, and banks were loathe to lend to households and firms that face a bleak future on account of Wall Street’s crashing of the economy. So instead, banks mostly bought Treasuries and played the yield curve—earning more on Treasuries than they had to pay the Fed. The $13 billion subsidy directly created by the ZIRP (Fed’s zero interest rate policy) directly created $13 billion of extra profits that Wall Street could then use to reward the same genius CEOs that created the crisis. Nice synergy. The same Bloomberg article reports that the bail-out itself cost $7.77 trillion—a lucky string of sevens if you happen to be in the top 1% and work on Wall Street. The true number is almost four times bigger–$29 trillion based on careful analysis done at UMKC. In any event, 7 trillion is a big enough number to raise eyebrows. It is more than 10 times the Treasury department’s $700 billion TARP program.

NY Fed to Release Its Surveys of Primary Dealers -- The Federal Reserve Bank of New York said Friday it will release to the general public surveys of primary dealer banks done in advance of each monetary policy meeting. The move is apparently a response to an article in the Wall Street Journal that said interactions central bankers were having with market participants were giving clues about the future of monetary policy, and potentially creating an unfair playing field as a result. Primary dealer banks are an elite roster of financial institutions that deal directly with the central bank. They participate in the buying, selling and borrowing of bonds that comprises the conduct of monetary policy, and they also underwrite Treasury debt auctions. Ahead of each gathering of the monetary policy setting Federal Open Market Committee the Fed surveys the dealers on what the New York Fed says are their “expectations for the economy, monetary policy, and financial market developments.” Starting Friday, the New York Fed released the question part of the survey. It says in the future questions will be posted when they’re sent to dealers, which the bank said is typically around eight days in advance of an FOMC gathering.

Central Banks Ease Most Since 2009 to Avert Contagion - Central banks across five continents are undertaking the broadest reduction in borrowing costs since 2009 to avert a global economic slump stemming from Europe’s sovereign-debt turmoil. The U.S., the U.K. and nine other nations, along with the European Central Bank, have bolstered monetary stimulus in the past three months. Six more countries, including Mexico and Sweden, probably will cut benchmark interest rates by the end of March, JPMorgan Chase & Co. forecasts. With national leaders unable to increase spending or cut taxes, policy makers including Australia’s Glenn Stevens and Israel’s Stanley Fischer are seeking to cushion their economies from Europe’s crisis and U.S. unemployment stuck near 9 percent. Brazil and India are among countries where easing or forgoing higher interest rates runs the risk of exacerbating inflation already higher than desired levels. “We’ve seen central banks that were hawkish begin to turn dovish” against a “backdrop of austerity” in fiscal policy, “You could debate how bad it will be for growth, but it can’t be good,” 

Time for the Fed to take over in Europe - Opinion - Al Jazeera - The European Central Bank (ECB) has been working hard to convince the world that it is not competent to act as a central bank. One of the main responsibilities of a central bank is to act as the lender of last resort in a crisis. The ECB is insisting that it will not fill this role. It is arguing instead that it would sooner see the eurozone collapse than risk inflation exceeding its 2.0 per cent target. It would be bad enough if the ECB's incompetence just put Europe's economy at risk. But the consequences of a euro meltdown go well beyond the eurozone. At the very least, the chaos following the collapse of the euro will mean a second dip to the US recession. The loss of the European export market, and the likely surge in the dollar that will result from a worldwide flight to safety, would be enough to turn a weak positive growth number into a negative. However, it is also likely that the financial panic following the collapse of the euro will lead to the same sort of financial freeze-up that we saw following the collapse of Lehman Brothers. In this case, we won't be seeing unemployment just edge up by a percentage point or two, we will be seeing unemployment possibly rising into a 14-15 per cent range. This would be a really serious disaster. Fortunately, the Fed has the tools needed to prevent this sort of meltdown. It can simply take the steps that the ECB has failed to do. First, and most importantly, it has to guarantee the sovereign debt of eurozone countries. The Fed simply has to commit to keep the interest rate yields on debt from rising above levels where it risks creating a self-perpetuating spiral of higher debt leading to higher interest rates, which in turn raises the deficit and debt.

Top central banks move to avoid global liquidity crunch (Reuters) - Central banks from the world's leading developed economies said on Wednesday they will take coordinated steps to prevent a lack of liquidity in the global financial system, as the euro zone attempts to find a way to stem its debt crisis. The U.S. Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan and Switzerland said in a joint statement they had agreed to lower the cost of existing dollar swap lines by 50 basis points from December 5. Other measures included setting up bilateral swap arrangements between the central banks so that any bank could tap additional liquidity in their own currencies if necessary. The swap arrangements are good through Feb 1, 2013. In the United States, the Fed noted that banks were not having difficulty now getting funds in short-term finding markets. But if conditions deteriorate, the U.S. central bank said it has "a range of tools available" to use as a backstop and would deploy them as necessary. The surprise coordinated move by central banks was aimed at preventing global financial markets from coming under pressure that could potentially lead to a seizing up of credit.

World's central banks act to ease market strains - Major central banks around the globe took coordinated action Wednesday to ease the strains on the world's financial system, saying they would make it easier for banks to get dollars if they need them. Stock markets rose sharply on the move. The European Central Bank, U.S. Federal Reserve, the Bank of England and the central banks of Canada, Japan and Switzerland all took part. As Europe's debt crisis has been rapidly spreading, the global financial system is showing signs of entering another credit crunch like the one that followed the 2008 collapse of U.S. investment bank Lehman Brothers. The possibility that one or more European governments might default on their debts have raised fears of a shock to the global financial system that would lead to severe losses for banks, recession in the United States and Europe and another global credit crunch. The central banks said in a joint statement the moves were designed to "provide liquidity support to the global financial system."The statement said the central banks have agreed to reduce the cost of temporary dollar loans to banks — called liquidity swaps — by a half percentage point. The new, lower rate will be applied to all central bank operations starting on Monday.

Here Comes The Global, US-Funded Liquidity Bail Out  As expected, the Fed has just bailed out the world once again: FED, ECB, BOJ, BOE, SNB, BANK OF CANADA LOWER SWAP RATES - - ECB, FED other major central bank to lower the pricing of existing USD liquidity swaps by 50BPS  And as we have been writing every single day, the worldwide dollar crunch is now confirmed: At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar  And finally, a promise to bailout Bank of America when it hits $4.00 again: U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets.  However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.  This means that the global situation is far, far more dire than the talking heads have said. Luckily, when this step fails, which it will, Mars can always come and bail us out.

Fed Statement on Coordinated Central Bank Action on Currency Swaps - This morning the Federal Reserve announced coordinated measures with foreign central banks to keep currency markets liquid. The following is the full text of the statement. The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity. These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

Central Banks Announce Coordinated Liquidity Effort to Alleviate Euromess -- Yves Smith - Any of you who are market oriented no doubt are all over the news of central bank coordinated liquidity efforts. This is from the Federal Reserve’s announcement: The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.  I’m not certain this changes things as much as markets assume. The ECB is ultimately responsible for creating euros. I’m not certain how much of a policy stance this move represents. If the ECB is committed to “printing”, then why the need to turn to other central banks for a coordinated effort?  In fact, what would help the Eurozone most is a MUCH cheaper euro, since the only way out of their fundamental problem (that of Germany running big trade deficits with periphery countries, but no longer wanting to fund the trade deficits that result) is by cheapening the euro greatly, so that Germany runs big trade surpluses with non-Euro countries, and the rest of Europe has more or less balanced trade. And the euro, which was not cheap, has rallied strongly today, amped up due to the 17 year high level of shorts outstanding.

Analysis: Central banks buy wiggle room, not solution (Reuters) - Central bank action on Wednesday to ease severe funding strains for the world's private sector banks may help cushion a brewing global credit crunch but it only buys some wiggle room for governments trying to resolve the euro debt crisis and keep banks lending. The intervention by top central banks from the world's richest countries -- including the U.S. Federal Reserve, European Central Bank, Bank of Japan and Swiss National Bank -- involved lowering the cost of emergency U.S. dollar funding for banks and expanding currency swap lines between countries. Although partly aimed at easing seasonal year-end financing conditions in an already stressful environment, the move was an important show of unity among the central banks. It also reveals the level of international official concern about the threat of the ongoing euro and banking crisis to global economic activity at large and comes the same day as China's central bank eased credit for its commercial lenders for the first time in three years. The European Central Bank is also widely expected to cut interest rates again next week.

Fed saves Europe’s banks as ECB stands pat - Stripped to essentials, America is once again having to rescue Europe from itself. The interwoven banking and sovereign debt crisis in the eurozone has become so dangerous for the world that the US Federal Reserve has been forced to take emergency action, acting as global lender of last resort to shore up Europe's banking system.  That it should have to do so as Germany and the European Central Bank hold back for legal reasons and refuse to commit decisive power adds a strange diplomatic twist.  The move came once it was clear that Europe's prostrate banks would struggle to roll over $2 trillion (£1.3 trillion) of debts denominated in dollars. Data from ratings agency Fitch shows that US money markets have slashed funding for French banks by 69pc and German banks by 50pc.  Strains have been ratcheting up over the past two weeks. European banks are mostly shut out of the dollar market, or only able to raise money for a week at a time.  The so-called "stress alarm" – the euro/dollar three-month cross currency basis swap – spiralled down to minus 166 points early on Wednesday, uncannily like the last days before the Lehman crisis metastasized in October 2008.

Central Banks Cut Cost of Borrowing Dollars to Ease Crisis - Six central banks led by the Federal Reserve made it cheaper for banks to borrow dollars in emergencies in a global effort to ease Europe’s sovereign-debt crisis. Stocks rallied, driving the Dow Jones Industrial Average up the most since March 2009, commodities surged and yields on most European debt fell on the show of force from central banks aimed at easing strains in financial markets. The cost for European banks to borrow dollars dropped from the highest in three years, tempering concerns about the euro’s worsening crisis after leaders said they’d failed to boost the region’s bailout fund as much as planned. “It’s supportive but not necessarily a game changer,”The impact is more psychological than anything else” as investors take heart from policy makers’ coordination, Girard said. The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said today in a statement in Washington. The so- called dollar swap lines will be extended by six months to Feb. 1, 2013. The Fed coordinated the move with the European Central Bank and the central banks of Canada, Switzerland, Japan and the U.K.

Central banks augment currency swap capabilities - The U.S. Federal Reserve, European Central Bank, and central banks of Canada, England, Japan, and Switzerland today announced a coordinated monetary action that could provide added assistance to interbank lending in the event of a further deterioration in global financial markets. Here I offer some thoughts on what the action signifies. First, a little background. U.S. monetary policy has gone through two distinct phases in trying to deal with the economic and financial challenges since 2008. The first phase was intended to address the breakdown of what in normal times were very liquid markets for short-term interbank loans or commercial paper. One of the tools that the Fed used for this purpose was the Term Auction Facility, which was created in December 2007 to provide an additional channel for U.S. banks to borrow from the Fed. Another emergency tool was the Commercial Paper Lending Facility, which began operations in October 2008 and lent as much as $350 billion in January 2009 before being closed in February 2010. A third tool used during the height of the crisis was currency swap agreements. As an example of how these work, the Federal Reserve might give the Bank of England 40 billion dollars in exchange for 22 billion pounds, with an agreement to swap the currencies back at some future agreed date. In the mean time, the Bank of England could use the funds to extend dollar-denominated loans to banks in the U.K.

What Are Fed Swap Lines and What Do They Do? - The Federal Reserve moved in coordinated action with foreign central banks this morning in order to provide a pressure-release valve for funding markets without exposing the U.S. central bank to much risk. The Fed announced an expansion of its program that supplies dollars to overseas markets at a cheaper rate. Basically, the Fed lends dollars to foreign central banks in return for their local currency for a specific period. Since the Fed isn’t lending to banks directly, the risk is essentially nonexistent, and it also isn’t exposed to changes in currency rates since the exchange rate is set for the duration of the swap. The liquidity swap arrangements have a history of use when there are tensions in funding markets. They were used following the terrorist attacks of September 11, 2001 and were revived in 2007 and used extensively during the financial crisis, especially after the collapse of Lehman Brothers when credit markets dried up. As market conditions improved, they were shut down in February 2010, but revived in May 2010 as sovereign debt problems began to emerge in Europe. (The Fed has a useful Q&A you can find here, and New York Fed research noted the success of the lines during the financial crisis)

What The Central Banks Did Today - Krugman - I’ll outsource this to Mark Thoma. I am, I have to say, somewhat mystified. Of course the Fed will make dollar liquidity available to other central banks as needed; that was never in question, because Bernanke doesn’t want to be the man who destroyed the world to save a few pennies. And reducing the interest rate on those loans seems to me to make virtually no difference; it was a trivial charge anyway. So this looks to me like a non-event. Yet markets went wild. Are they taking this as a signal that substantive actions — like the ECB finally doing what has to be done — are just around the corner? Are they misunderstanding the policy? Was this cheap talk that nonetheless moved us to the good equilibrium? (If so, not enough: Italian bonds still at more than 7 percent).A very strange day.

Did the Fed Go Far Enough? - Room for Debate - NYTimes - Global stock markets spiked upward after the Federal Reserve and other major central banks acted on Monday to lower the cost of temporary dollar loans to European banks.  This will make it easier for European banks to manage their debt, which includes extensive liabilities in the United States. The Fed is trying to limit the damage of the Europeans’ retrenchment on the U.S. economy.  Should the Fed be more aggressive in dealing with Europe’s financial crisis? What are the risks of its involvement? Here are the responses:

  • Mark Thoma: Reducing Risk for the U.S. - Today's action by the Fed was the best it can do to protect the U.S., but Europe needs to make some important decisions to overcome its troubles.
  • Dean Baker: It Needs to Do More - The Fed should guarantee manageable interest rates for the heavily indebted countries; if it doesn't, it will inflict more hardship on American workers.
  • Arnold Kling: What About the 99 Percent? - Why is it that you can always count on the Fed to lend money at low interest rates to big banks when large investors lose confidence in those banks?
  • Edward Harrison: Risky Business for All - Central bank intervention of this sort rings some very serious alarm bells about the fragility of our global financial system; this is not risk-free for the Fed.

Day X - Amid persistent rumors that yesterday the money markets were, in the words of economist Jeremy Cook, "a short shove away from complete collapse", all the world's central banks got together and decided to lower the cost of pushing US dollars across the globe.  Translation: billions of dollars more -albeit in short-term loans- were injected in what Alan Grayson yesterday depicted as "Russian Roulette". The stock markets of course are going through the ceiling; they love the smell of free money in the morning. The $16-$26 trillion the Fed has previously loaned may have largely been returned, but, says Grayson - and rightly so-, "what about next time?" After all, today's loans were poured into a financial system in which a whole set of first domino's are about to topple over. The market reaction shows that there is indeed very cheap cash to be had. But also, and most of all, it shows that there are still a lot of people out there who've never figured out the difference between liquidity and solvency. And that's going to bite, because all the banks and countries that were broke yesterday are just as broke today. Difference is, now it's going to bite you more, and the banks' investors less. Someone has to pay at the end of the day. Might as well be you; after all, you don't get to talk to the US Treasury Secretary for hot tips.

Did The Fed Just Buy Europe A Week? - One of our most watched indications of the pressure on European funding markets is the EUR-USD cross-currency basis swap. This simple trade is a way for European entities to take the excessive EUR funding they can get from the ECB and 'swap' it into USD to meet their significantly problematic USD funding needs. It has smashed higher (well lower in the charts) as the cost of the transaction moves with demand for the swap - indicating that demand for USD is huge and we are in as much of a liquidity crisis as we were in the middle of the 2008 critical period. What is fascinating to us is today's reaction - a 22bps jump - while being large, merely moves us back to the same levels of stress we were at one week ago. So even if this is seen as some huge form of liquidity surge, it seems not to have even solved the liquidity problems of banks, let alone solvency problems.

The ongoing lender of last resort debate - Atlanta Fed's macroblog - Two days do not a policy success make, and it is a fool's game to tie the merits of a policy action to a short-term stock market cycle. But at first blush it does certainly appear that Wednesday's announcement of coordinated central bank actions to provide liquidity support to the global financial system had a positive effect. The policy is described in the Board of Governors press release: "The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank… have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points.  Or, as explained by The Wall Street Journal:"Under the program, the Fed lends dollars to other central banks, which in turn make the dollars available to banks under their jurisdiction. Banks in Europe and elsewhere hold U.S. mortgage securities and other U.S. dollar securities. They get U.S. dollars in short-term lending markets to pay for these holdings. In 2008, when dollar loans became scarce, foreign banks were forced to dump their holdings of U.S. mortgages and other loans, which in turn pushed up the cost of credit for Americans. "The latest action was at least in part an attempt to head off a repeat of such a spiral."

Dollar Swap Change Could Drive Up Fed Balance Sheet - The Federal Reserve‘s decision Wednesday to ease the borrowing terms on its currency swap facility creates the potential for a big increase in the central bank balance sheet. If that were to happen, it could rattle the large camp of observers who fear the current arc of monetary policy is setting the stage for a big inflation surge down the road. That said, when the Fed halved the rate it charges other major central banks to borrow dollars, in a bid to calm international financial markets, there was no clarity whether the facility would be used in large size.

Adventures with coordinated statements, central banking edition - If six different central banks coordinate a big liquidity operation, you end up with six different press releases, from the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Swiss National Bank, and the Federal Reserve. All of them start the same way, talking about how they’re coordinating action, cutting the interest rate on their liquidity operations by 50bp, and agreeing to provide such operations in each others’ currencies, in future, should that become necessary. Think of it as a holiday greetings card from the banks to the market. And then, underneath the “happy holidays” boilerplate, each individual central bank adds a little personalized note about itself. Here’s how the ECB describes what it’s going to do: The ECB will regularly conduct US dollar liquidity-providing operations with a maturity of approximately one week and three months at the new pricing… In addition, the initial margin for three-month US dollar operations will be reduced from currently 20% to 12%. This isn’t some kind of hypothetical facility, it’s a very real injection of cheap liquidity into the European markets, and it is desperately needed.Across the Channel in London, the Bank of England is saying essentially the same thing: the window’s open, fill yer boots!

Will the Fed's move to help Europe hurt the U.S.? - Since these are loans between central banks -- the U.S. Fed will not lend to any foreign banks directly -- there is essentially no risk to the U.S. If the Fed makes a loan to the European Central Bank, and the ECB lends the money to a bank that later fails, it is the ECB that is on the hook for losses, not the U.S. The European Central Bank would still be obligated to pay back the U.S. in full. The other possible downside is that the short-term expansion in the Fed and other central bank balance sheets that would come with these loans will stoke inflation fears. But since these loans have an expiration date (i.e. the balance sheet will be expected to contract at some point in the future), this shouldn't be a big problem.  Finally, note that while this move can ease financial market conditions, it does nothing to address the underlying problems creating those conditions. So this is no substitute for the difficult decisions that Europe must make to overcome its troubles.

Why The Lastest Euro Bank Bailout is Bullish for America - The bottom-line truth about today's Federal Reserve-led coordinated effort by developed worlds' central banks to ease the liquidity problems of European banks is this: It doesn't change anything. European leaders still have the same tough decision to make. Either impose even stricter austerity measures on Europe's struggling nations or force Germany and other stronger European nations to come forward with an even bigger bailout, or, of course, kiss the Euro good-bye. And in fact that choice got a little tougher last night, after European bank leaders said that the plan to lever up the funds already in place to help the struggling Eurozone nations may not work. What's more, if the move leads to an even bigger bailout the result could be a new round of emerging market inflation, and the need for more rate hikes in China and elsewhere, which could slow the entire global economy. If that is so, why did U.S. stocks rise 490 points on Wednesday on news of the latest effort to prop up Europe's banks? As one analyst put it, the amount of people who bought stocks this morning on the news that central banks around the world were lowering currency swap lines probably far outweights the number of people who know what currency swap lines are.

Why Do Foreign Banks Need Dollars? - The announcement Wednesday that the Federal Reserve, working with other central banks, will offer dollars to foreign banks at cut-rate prices surely raises the question: Why do foreign banks need dollars? The simple answer is that foreign banks really like the things that dollars can buy. They liked investing in American government debt, and lending money to American corporations, and most of all they liked buying American mortgages and all manner of crazy investments derived from those mortgages. Bank holdings of assets denominated in foreign currencies ballooned from $11 trillion in 2000 to $31 trillion by mid-2007, according to a 2009 report by the Bank for International Settlements. European banks posted the fastest growth, and that growth was concentrated in dollar-denominated assets. By the eve of the crisis, the dollar exposure of European banks exceeded $8 trillion. Many of these investments were funded on a short-term basis. The paper from the Bank for International Settlements estimates that European banks had a constant need for $1.1 trillion to $1.3 trillion in short-term funding. The banks raised that money mostly by borrowing domestically and then acquiring dollars through foreign-currency swaps. Banks also sold short-term debt to American money-market funds. The financial crisis happened in large part because investors stopped providing banks with short-term funds. They lost confidence in their ability to discern which banks could repay such loans.

Is Anything Better Yet?, by Tim Duy: I think the world's central banks just validated my pessimism - the Eurozone financial system is falling apart. Will this be enough to put the pieces back together? Paul Krugman is doubtful: I am, I have to say, somewhat mystified. Of course the Fed will make dollar liquidity available to other central banks as needed; that was never in question, because Bernanke doesn’t want to be the man who destroyed the world to save a few pennies. And reducing the interest rate on those loans seems to me to make virtually no difference; it was a trivial charge anyway. Indeed, the only surprise here is that it took this long for somebody to push the panic button. Actually, there was another surprise - the dissent of Richmond Fed President Jeffrey Lacker to the increased swap lines. From Reuters: "I dissented on the vote because I opposed the temporary swap arrangements to support Federal Reserve lending in foreign currencies," Lacker said in an emailed statement. "Such lending amounts to fiscal policy, which I believe is the responsibility of the U.S. Treasury. The Federal Reserve has provided and can continue to provide sufficient dollar liquidity through purchases of U.S. Treasury securities," he said. This is misguided. The Fed is responsible for protecting the US financial sector, and needs to do so, when possible, even if the threat is eminating from overseas. US banks may not be in need of dollar liquidity, but their foreign counterparties might be - and failure to provide it would more rapidly turn a European problem into a US problem.

Does Anybody Who Gets It Believe Central Banks Did All That Much Yesterday? -- Yves Smith - I’m still mystified as to the market reaction on Wednesday to the coordinated central bank effort at waving a bazooka at the escalating European financial crisis. But as readers pointed out in comments, the big move was overnight, in futures, when trading is thin, and there was no follow through when markets opened. And volume was underwhelming.  The officialdom in the US seems to have been slow to wake up as to the direct effects of the Eurobank wobbles on the US economy. I worked for the Japanese in the 1980s, did some work for the US ops of a major German bank in the 1990s, and the story of big foreign banks in the US is largely unchanged: they provide commodity credit (big corporate lending facilities and acting as participants in loan syndications) as their best route to breaking into more lucrative services at the same companies. So as the Journal noted earlier this week, Eurobank stress is leading to a big crunch on all sorts of lending activities.  I have to admit I didn’t believe the intervention could amount to as little as it seemed to in the announcement. Surely the ECB was also committing to buying more bonds? I figured there had to be more to this and there was some juicy intelligence in the foreign language press that wasn’t yet in the English language papers. Wrong. A short roundup of deserved skeptical comments.

Rob Johnson on Real News Network on the Fed’s Lifeline to Eurobanks, and the Rationale for Austerity -  Yves Smith - Rob Johnson brings a wide ranging perspective (from politics, as a former Senate staffer; from markets, as a former hedge fund manager; and an economist, by training and via his current role as head of the Institute for New Economic Thinking) to this interview on the immediate and deeper implications of the central bank intervention on behalf of the Eurozone earlier this week. Johnson is deeply skeptical both of the near and longer-term approaches taken to rescue the Euro. This talk has a particularly clear and layperson friendly discussion of the rationale for and failings of austerity.

For those with lingering questions on how forex swaps work - In general, these swaps involve two transactions. When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve. Dollar liquidity swaps have maturities ranging from overnight to three months.  When the foreign central bank loans the dollars it obtains by drawing on its swap line to institutions in its jurisdiction, the dollars are transferred from the foreign central bank’s account at the Federal Reserve to the account of the bank that the borrowing institution uses to clear its dollar transactions. The foreign central bank remains obligated to return the dollars to the Federal Reserve under the terms of the agreement, and the Federal Reserve is not a counterparty to the loan extended by the foreign central bank. The foreign central bank bears the credit risk associated with the loans it makes to institutions in its jurisdiction.

The Fed’s European “Rescue”: Another Back-Door US Bank / Goldman bailout? - Nomi Prins - In the wake of chopping its Central Bank swap rates, the Fed has been called a bunch of names: a hero for slugging the big bailout bat in the ninth inning, and a villain for printing money to help Europe at the expense of the US. Neither depiction is right. The Fed is merely continuing its unfettered brand of bailout-economics, promoted with heightened intensity recently by President Obama and Treasury Secretary, Tim Geithner in the wake of Germany not playing bailout-ball. Recall, a couple years ago, it was a uniquely American brand of BIG bailouts that the Fed adopted in creating $7.7 trillion of bank subsidies that ran the gamut from back-door AIG bailouts (some of which went to US / some to European banks that deal with those same US banks), to the purchasing of mortgage-backed–securities, to near zero-rate loans (for banks). Similarly, today’s move was also about protecting US banks from losses – self inflicted by dangerous derivatives-chain trades, again with each other, and with European banks. 

Goldman On Today's Coordinated Central Bank Bailout: "It Isn’t Enough To Save Anyone Or Solve Averything" And "Why Now?"  -  Naturally, if there was one party that would be disappointed by today's action, it would be Goldman Sachs: on one hand because it is nowhere near enough to actually fix anything, and on the other because it delayed the moment when the 2-3 European banks which we have been saying for over a week would keel over and die leaving a power vacuum for Goldman to fill, has just been delayed. As a result, Goldman dissatisfied note makes more than enough sense: "Up, up, and away for stocks after the coordinated ease this morning. USD funding just got cheaper, which is of course a good thing. But the difference between OIS + 50 and OIS + 100 isn’t enough to save anyone or solve everything. It’s the symbolism of policy-makers again acting in concert that I find most encouraging." But, and there is always a but: "Although there is the obvious counter: why act now – is there something lurking around the corner? Those are worries for tomorrow though." Indeed, and when the worries resurface, as they will, especially following the resumption in European record yielding auctions, which incidentally the Fed's action does nothing to fix, following France and Spain bond auctions. And who knows what else.

Fed Made Decision To Bail Out Europe On Monday - It appears that the Fed decision to bail out Europe was not made this morning, or yesterday, but on Monday as per the following two headlines:


It also means that the decision was leaked on Monday, and explains the relentless surge in stocks since then despite progressively worse news out of Europe. Q.E.D. - a plan so good Hank Paulson could have leaked it to his hedge fund buddies.

Vital Signs: Easing Inflation Expectations - A weaker global economy and easing commodity prices have helped temper inflation expectations. The difference between the yields on 10-year Treasury notes and 10-year Treasury inflation-protected securities — a proxy for bond investors’ inflation outlook — was 2.05 percentage points Thursday, compared with 2.45 percentage points at the start of July.

Worries continue - If you're prone to worry about where the economy's headed, last week's developments weren't very reassuring. On Tuesday, the Bureau of Economic Analysis revised its estimate of third-quarter real GDP growth down from the initially reported 2.5% annual rate to a new figure of 2.0%. That revision in itself is not particularly scary, since it mostly came from the fact that inventories were drawn down even more than originally estimated-- real final sales still grew at a decent 3.6% annual rate for the third quarter. But more troubling is the fact that Tuesday's figures also gave us the first reading on an alternative measure of third-quarter GDP that is based on a calculation of the total income being earned. This measure, gross domestic income, is conceptually equivalent to GDP but indicated only 0.4% annual real growth for 2011:Q3. Fed economist Jeremy Nalewaik maintains that GDI can give a slightly better early warning of a business cycle turning point. One reasonable procedure is to go with the average of the GDI and GDP growth rates, which gives an anemic 1.2% annual real economic growth rate for the third quarter.

Why central bank intervention should make us more worried - It was little more than a bandage applied to a patient in need of surgery. But for investors around the world, Wednesday’s moves by the world’s major central banks to keep money flowing were enough to trigger euphoria.In the face of a looming global credit crunch and the failure of European leaders to stem their worsening debt crisis, the central banks’ action to inject cash into the financial system sent stocks soaring. The euro, Canadian dollar and other currencies climbed against the U.S. dollar, while oil, gold and other commodities rallied as investors decided it was safe to take riskier bets again. The co-ordinated response by the central banks of the United States, Canada, the United Kingdom, Japan, Switzerland and Europe to dangerous stresses building in the global system was a return to the crippling credit crisis of 2008, when monetary officials also joined forces to thaw frozen credit markets. But giddiness over the intervention is likely to give way to a more sober reflection. If anything, the central bank moves – along with a surprise Chinese decision to reduce bank reserve requirements – plainly signal that the situation has gone from bad to worse.

Will October's Economic Momentum Last? - Consumer confidence rebounded strongly in November, the Conference Board reports. David Semmens, an economist at Standard Chartered Bank, opines that "the improvement in the labor market must be offering greater comfort to consumers." The question, of course, is whether the labor market's "improvement" can survive the sentiment attack blowing through the global economy via the euro crisis. Today's rise in the Conference Board's consumer benchmark provides fresh encouragement for thinking positively, but this is still mostly guesswork until the major economic reports for November arrive. For the moment, it's still a blank slate. The good news is that October's numbers are clearly in the growth camp, as the table below reminds. Other than housing starts and new durable goods orders, the tide was rising across the board last month. Even better, the year-over-year trend is largely in the black too. A good tailwind never hurts, but as the OECD reminds, there's no shortage of risks for the global economy. It's debatable how much relevance the recent past has for the immediate future, but we'll all find out soon enough... one economic report at a time.

Fed's Beige Book: "Economic activity increased at a slow to moderate pace" - Fed's Beige BookOverall economic activity increased at a slow to moderate pace since the previous report across all Federal Reserve Districts except St. Louis, which reported a decline in economic activity. ... District reports indicated that consumer spending increased modestly, on balance, during the reporting period. ... Hiring was generally subdued, but some firms with open positions reported difficulty finding qualified applicants. And on real estate: Overall residential real estate activity increased, but conditions were varied across Districts. Philadelphia, Richmond, Minneapolis, Kansas City, and Dallas noted increased activity. New York, Boston, Cleveland, and San Francisco reported flat activity at relatively low levels. Atlanta and St. Louis indicated decreased sales. Residential construction remained sluggish. Single-family home construction remained weak, while multifamily construction picked up in New York, Philadelphia, Cleveland, Chicago, and Minneapolis. San Francisco remained "anemic," while St. Louis and Kansas City reported decreased activity. Commercial real estate markets remained sluggish across most of the nation.

Fed Beige Book Sees Slow to Moderate Growth in 11 Districts - The Federal Reserve said the economy expanded at a "moderate" pace in 11 of 12 districts, led by gains in manufacturing and consumer spending. "Overall economic activity increased at a slow to moderate pace since the previous report across all Federal Reserve districts except St. Louis, which reported a decline in economic activity," the Fed said in its Beige Book survey released today in Washington covering October and the first half of November. The report reinforces the central bank's view that the economy, while strong enough to skirt a recession, remains too weak to bring down an unemployment rate stuck near 9 percent or higher for more than two years. At their last meeting Nov. 1-2, some Fed policy makers said the central bank should consider easing policy further, according to minutes of the meeting. Today's report said "hiring was generally subdued" and residential real estate "generally remained sluggish." In the previous Beige Book report released Oct. 19, the Fed said that the economy was expanding "although many districts described the pace of growth as 'modest' or 'slight.'"

Euro Zone in Mild Recession, US May Follow: OECD - The global economic recovery is running out of steam, leaving the euro zone stuck in a mild recession and the United States at risk of following suit, the OECD said on Monday, sharply cutting its forecasts. The threat of even more devastating downturns looms if the euro zone does not get to grips with its debt crisis and U.S. lawmakers fail to agree a spending-reduction plan, the Organization for Economic Cooperation and Development warned. In the absence of decisive action from euro zone leaders, the European Central Bank (ECB) alone has the power to contain the bloc's crisis, the Paris-based OECD said. In the United States, however, the Federal Reserve had little ammunition left. While solid growth in big emerging economies would provide a boost, slumping global trade would drag on Chinese output, the OECD said. Its twice-yearly Economic Outlook forecast world growth would slow to 3.4 percent in 2012 from 3.8 percent this year.

OECD Growth Outlook, Country by Country - In its twice-yearly report on the global economic outlook, the OECD lowered its growth forecasts for the world’s largest economies, and said the euro zone has fallen into recession. It also warned that the bloc’s debt crisis, now affecting countries previously seen as safe havens, could “massively escalate economic disruption if not addressed.” Here are some country-by-country highlights:

  • U.S. 2012 growth forecast 2.0% vs 1.7% in 2011. Economic recovery lost significant momentum. Equity market losses and house-price falls weighed on households. Demand to be restrained for some time.  Full U.S. article
  • Euro Area 2012 growth forecast 0.2% vs 1.6%. Recovery stalled amid escalating sovereign debt crisis.  Risks from slow growth, sovereign debt, weakness in bank system, lack of policy cohesion.
  • Germany 2012 growth forecast 0.6% vs 3.0%. Faces period of weakness amid lower global exports, investment. Economic activity to recover during 2012. Fiscal situation improved rapidly.
  • U.K. 2012 growth forecast 0.5% vs 0.9%. Weak international demand, consumer belt-tightening halted recovery. Further quantitative measures warranted. Fiscal consolidation has bolstered credibility.  Full U.K. article

Can the US Decouple From the Eurozone?, by Tim Duy: The OECD cut forecasts for 2012. Via the Wall Street Journal: The Paris-based think tank cut its forecasts among its 34 members to 1.9% this year and 1.6% in 2012, from 2.3% and 2.8% in May. The OECD said it expects the euro zone's economy to contract by 1% at an annualized rate in the last quarter of this year and by 0.4% in the first three months of 2012. For 2012, the OECD said the 17-country bloc's economy will only grow by 0.2%.This is far too optimistic. The European economy is about to fall over a cliff, and last week's Eurostat report on new industrial orders reveals that manufacturing is leading the way. New orders fell by a whopping 6.4%, a move that hearkens back to the darkest days of 2008. Will the US be able to resist the pull of the European downturn? These charts don't offer much optimism:  Not a perfect match, but enough to suggest the idea of substantial decoupling looks like more myth than reality, especially in the face of a severe recession. Bottom Line: Don't take US resilience for granted this time around - Europe is getting ugly, and it is far too late to prevent severe recession. The best policymakers can hope for at this point is too avoid a depression.

Global growth: Recessions for whom? - - TIM DUY asks whether America's economy can decouple from the euro-zone economy, and he posts this chart: European industrial orders collapsed in September. Given how tightly correlated orders were during the 2008 collapse, one might think, the drop in European orders will quickly translate into an American slowdown. I share the view that America will be unable to insulate itself from European difficulties, but I don't think the chart above explains why. Europe's enormous output decline in 2008 and 2009 was not primarily due to the drop in American output. As Paul Krugman wrote at the time: One way to think about this is to ask what it would take for a U.S. recession to impose a one percent of GDP negative demand shock on the rest of the world. For this to happen, U.S. imports would have to decline from 6 to 5 – a 17% decline. Given that the typical estimate of the income demand for imports is around 2, this would require a decline of more than 8% in U.S. GDP.  What was more important was the international financial multiplier. Financial markets are far more integrated than product markets, and they acted as a conduit of contagion from the American banking system to banks abroad. Falling asset prices in one place impact the balance sheet of leveraged institutions in another place. This transmits the crisis, which then impacts the real economy.

The terrifying new theory that Europe’s economic troubles could devastate the U.S. -  The severity of the ongoing economic crisis in the Eurozone is perhaps best brought home by a striking statement made Monday by conservative Polish politician Radek Sikorski. "I will probably be the first Polish foreign minister in history to say this," he said, "but here it is: I fear German power less than I am beginning to fear its inactivity." Poland is not in the Eurozone, but it’s easy to see why Polish officials are panicking. Exports to the Eurozone members constitute more than 10 percent of Polish GDP, so a recession there would almost certainly spill over to Poland. Should Americans share this fear? A similar analysis for the United States suggests we have much less to worry about. Our exports to the Eurozone are closer to 1.3 percent of GDP. That’s not nothing, but it’s a pretty small piece of the economic pie. It suggests that the economy has less to fear from reduced exports to a careening Europe than it does from the looming expiration of the Bush income tax cuts and the Obama payroll tax cuts. But a different kind of analysis suggests that the United States could face catastrophe if the Eurozone tanks.Steve Keen on BBC on How to Get Out of Our Current Depression -  Yves Smith - Australian economist Steve Keen minces no words during this BBC interview, calling our downturn a depression and calling for radical measures, namely large scale debt writedowns. I can’t imagine a discussion like this getting airtime on a US mainstream media outlet.

Fighting The National Debt, Out Of Their Own Pockets - Atanacio Garcia isn't waiting for Washington to reduce the national debt. The 84-year-old retired postal worker from San Antonio, a man of simple means and a simple credo, donates $50 a month from his pension, plus whatever he makes from collecting aluminum cans in his neighborhood, to reduce Uncle Sam's IOU. "I'm a believer in our country," said Garcia, an Army veteran who has promised that he will contribute "until the debt is paid off or until I die."

Fitch Cuts U.S. Outlook to 'Negative' -- Ratings agency Fitch Monday affirmed its 'AAA' rating on United States' long-term debt but revised its outlook to "negative" because of declining confidence in the sustainability of government finances. The change follows the failure of the Congressional Joint Select Committee on Deficit Reduction to agree on a $1.2 trillion deficit reduction plan earlier in November, and puts the federal government's triple-A rating under increasing risk. In August, Standard & Poor's lowered its rating on U.S. debt by one notch to 'AA+', the first downgrade from 'AAA' in the country's history. Also in August, Moody's maintained its top rating for the U.S. government debt -- a view it has held since 1917 -- but placed the rating under "negative" status, signaling a potential cut in the future. In its report released Monday, Fitch said its negative outlook indicates a 50% chance of a downgrade in the next two years. "Failure to reach agreement in 2013 on a credible deficit reduction plan and a worsening of the economic and fiscal outlook would likely result in a downgrade of the U.S. sovereign rating," the agency said in its statement.

Christina Romer on the One Thing That Disillusioned Her: The Fiscal Policy Debate » -- Christina Romer: The one thing that has disillusioned me is the discussion of fiscal policy. Policymakers and far too many economists seem to be arguing from ideology rather than evidence…. [T]he evidence is stronger than it has ever been that fiscal policy matters—that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term. And yet, this evidence does not seem to be getting through to the legislative process.That is unacceptable. We are never going to solve our problems if we can’t agree at least on the facts. Evidence-based policymaking is essential if we are ever going to triumph over this recession and deal with our long-run budget problems.

How to Solve the Economic Problem; and Why We're Not - The economic situation really hasn't changed much in the last 12 months.  The US economy is still barely growing, meaning the high unemployment rate won't get much higher, but also won't get much lower.  So -- how do we actually end this situation? From Bill Keller of the NY Times: There really is a textbook way to fix our current mess. Short-term stimulus works to help an economy recover from a recession. Some kinds of stimulus pay off more quickly than others. Once the economic heart is pumping again, we need to get our deficits under control. Yes, there is  a simple way to solve the problem.  And while I've been over it many times, let's revisit it again.
1.) Borrow money.  Despite the incredibly stupid complaints of people about federal spending, the bond market isn't worried about the US' fiscal situation right now.  The 10-year bond is trading right around 2%.
2.) Rebuild the nation's infrastructure: According to the society of civil engineers, the US' infrastructure gets a grade of D-.  I recently noted a story from AgWeb that also illustrates the problem.
3.) Hire people to do the work.  Considering that half the un\employed are blue collar workers (people that do things like ... construction) this would lower unemployment -- which also happens to be a big problem right now.
4.) This increases aggregate demand, which increases GDP.  Once you get GDP growing at 3%+ for a few quarters, the economy because self-sustaining.  This also helps to halt the debt/GDP growth rate. 
SOOOOOOOO why don't we do this?

How to Pay for What We Need - Here’s the gist of it: using the monetary methods of Lincoln, updated to employ the inflation-fighting tools of the Federal Reserve, we could pay for a faster recovery and a great many worthy projects without higher taxes, without more national debt, and believe it or not, without inflation. How? By letting Congress exercise a little-known power that is used (very quietly indeed) by the Federal Reserve: the power to create new money.  In an interview with 60 Minutes on March 15, 2009, Scott Pelley asked Bernanke to state the cost to American taxpayers of the Fed’s attempts to prop up banks. Bernanke: “It’s not tax money. The banks have accounts with the Fed … so, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money.” Pelley: “You’ve been printing money?” Bernanke: “Well, effectively.”If the Federal Reserve can create new money, couldn’t Congress do the very same thing? The answer is yes, and here’s the precedent: the Legal Tender Act of 1862, in which the Republican-controlled Congress authorized creation of “United States Notes,” known as greenbacks, that were printed up and spent into use.

Tom Ferguson: Democratic Governance Is Becoming Discredited - video - I suspect many Naked Capitalism readers would regard “democratic governance” as something of an oxymoron in the US. Our favorite curmudgeon, political scientist Tom Ferguson, discussed the failure of the supercommittee negotiations and what it means for politics and the economy. He sees the danger of government by technocrats, meaning experts who are really fronts for banking interests, as rising.

Super Committee Was Never About Deficit Reduction - Most of the postmortem analyses of the super-bust committee’s entirely predictable but nonetheless impressive crash-and-burn last week so far has mostly been nothing more than after-the-fact spin by the participants. Here’s what you actually need to know to understand what didn’t happen and why: First, this never really was about reducing the deficit, so the fact that the anything-but-super committee didn’t succeed at doing that shouldn’t have surprised anyone. The committee, the expedited legislative process that would have been used had it come up with something, the Nov. 23 deadline and the automatic spending cut if the process collapsed were all created so that House and Senate Republicans and Democrats could vote for an increase in the federal debt ceiling this past summer. At best, reducing the budget deficit would have been a bonus to getting past that impasse. If you have any doubts about this, look at the parts of the agreement that have and haven’t worked.

"The first thing we do, let's kill all the beancounters." - Or, how political discourse in America is becoming more like that in Greece. I’ve been away in Europe for much of the last few weeks, and have heard plenty about the euro crisis (and US fiscal paralysis). And while I think the comparisons often made between the Greek and American fiscal situations are overstated (different debt-to-GDP ratios and trajectories, and critically very different arrangements with respect to central banks), in one way -- namely the way in which Greece managed to enter into EMU, and to hide its debt to GDP ratio -- the US could become more like Greece, if some in the political sphere have their way. From the FT: The head of Elstat, Greece’s new independent statistics agency, faces an official criminal investigation for allegedly inflating the scale of the country’s fiscal crisis and acting against the Greek national interest. "I am being prosecuted for not cooking the books," Mr Georgiou told the Financial Times. "We would like to be a good, boring institution doing its job. Unfortunately, in Greece statistics is a combat sport."   So what does this have to do with America? Consider this statement: "If you’re serious about health care reform, abolish the Congressional Budget Office," calling the agency -- which has positively scored President Obama’s health care proposals, as "dishonest." That statement was made by Newt Gingrich.

Gingrich and the Destruction of Congressional Expertise - Newt Gingrich, who is leading the race for the Republican presidential nomination in some polls, attacked the Congressional Budget Office. In a speech in New Hampshire, Mr. Gingrich said the C.B.O. “is a reactionary socialist institution which does not believe in economic growth, does not believe in innovation and does not believe in data that it has not internally generated.” Mr. Gingrich’s charge is complete nonsense. The former C.B.O. director Douglas Holtz-Eakin, now a Republican policy adviser, labeled the description “ludicrous.” Most policy analysts from both sides of the aisle would say the C.B.O. is one of the very few analytical institutions left in government that one can trust implicitly. It’s precisely its deep reservoir of respect that makes Mr. Gingrich hate the C.B.O., because it has long stood in the way of allowing Republicans to make up numbers to justify whatever they feel like doing. For example, Republicans frequently assert that tax cuts, especially for the rich, generate so much economic growth that they lose no revenue. This theory has been thoroughly debunked, most recently by the tax cuts of the George W. Bush administration, which, according to C.B.O., reduced revenues by $3 trillion. Nevertheless, conservative groups like the Heritage Foundation (where I worked in the 1980s) still peddle the snake oil that the Bush tax cuts paid for themselves.

The Stench of Elitism in Defense Spending - The stench of elitism is permeating Washington, just as it did a decade ago when everyone of consequence bought the proposition that Saddam Hussein had weapons of mass destruction-and even if there was room for doubt, he was a threat and "had to go."  Today, the subject matter is different, but the methods are the same:  say things that are demonstrably false but use enough extreme rhetoric from four star admirals, cabinet secretaries and congressional chairmen to establish a middle ground that eliminates opposition.  Those who fear being labeled out of the mainstream, especially the major media, are buying it just as mindlessly as they did before the March 2003 invasion of Iraq. This time the subject matter is the defense budget.  Cutting it is the target of rhetorical gibberish, just as President George Bush warned of a "mushroom cloud" over America if we didn't invade Iraq.  Nonetheless, it is politically potent and intimidating to opponents who might otherwise speak up. The most extreme language and the most Rumsfeld-esque display of "facts" are coming from the Chairman of the House Armed Services Committee, Congressman Buck McKeon (R-CA).  His latest is to forecast the military draft if the defense budget is cut.  He also told his staff to display numbers to up his ante.  They dutifully wrote an "Assessment of Impact of Budget Cuts" (at that listed various reductions they found unavoidable if the defense budget is cut:  200,000 fewer Soldiers and Marines; fighter aircraft reduced by a 24 percent, and an overall spending level that "degrades our ability to deter a rising China from challenging other allies." 

Defense Spending as Jobs Program - New study out of UMass-Amherst affirms the obvious in a methodologically rigorous way: Congressional debates on deficit reduction have highlighted the assertion that large cuts in the military budget would produce negative impacts on jobs in the U.S. economy. The Pentagon itself suggested that military cuts in the range of $1 trillion over the next decade would add one percentage point to the U.S. unemployment rate. But whether or not this particular forecast is accurate, the most important question is not the absolute number of jobs that are created by spending a given amount. It is rather whether spending that money on the military creates a greater or lesser number of jobs relative to spending the same amount on alternative public purposes, such as education, health care or a clean-energy economy, or having consumers spend that amount of money any way they choose. As Pollin and Garrett-Peltier show, in comparison to alternative uses of funds, spending on the military is a poor source of job creation. They find that $1 billion spent on the military will generate about 11,200 jobs. By contrast, spending those funds on alternative purposes would create 15,100 jobs for household consumption, 16,800 jobs for clean energy, 17,200 jobs for healthcare, and 26,700 jobs for education.

Congress Wrestles With 2012 Unemployment Benefits Extension - Nearly overshadowed by debates over more contentious issues, Congress is wrestling with how to extend federal unemployment benefits that are about to expire. Senior aides to both parties confidently predict that the emergency benefits for the long-term unemployed, which are due to expire Dec. 31, will be extended. But lawmakers are still negotiating over how long, how generous and what strings should be attached to an extension. It’s a debate that is quietly paralleling the more visible fight between Republicans and Democrats over extending a payroll tax holiday that also lapses at year’s end. The parties are at odds over how to cover the cost of that tax-break extension. Democrats rallied Wednesday to call attention to the impending lapse of the emergency unemployment benefits, which have allowed the long-term jobless to receive income support for up to 99 weeks. They argued that it would be unfair and unprecedented to allow that aid to lapse while unemployment remains high. “This isn’t a subject for horse trading,” said Rep. Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee. “This is a subject for action.”

Expiration of jobless benefits sparks debate — The looming expiration of federal unemployment insurance is reigniting a debate1 that could result in substantial changes to a program that serves as a lifeline to millions of jobless Americans. The failure of the congressional supercommittee to reach a debt-reduction agreement that would have included an extension of benefits has left people who have been out of work for more than six months in danger of losing their payments. If lawmakers allow the unemployment program to expire on Dec. 31, an estimated 1.8 million people would lose benefits by the end of January. The magnitude of the problem will come in stark relief Friday when the Labor Department is expected to report that the unemployment situation changed little in November. With long-term unemployment continuing to weigh down the economy, experts say that insurance benefits can be a significant boost because recipients quickly spend the money on day-to-day needs. Members of Congress are working on a measure to extend the program, and advocates are hopeful that a deal will be reached. But, they added, given the sharply differing views among members of Congress, nothing is guaranteed.

The Obama Spending Non-Surge - Paul Krugman - Anyway, what I’m seeing in comments and reactions, once again, is the claim that Obama has presided over a vast expansion of government — a claim backed not by describing any specific programs, but by pointing to the share of federal spending in GDP. Indeed, federal spending rose from 19.6% of GDP in 2007 to 23.8% in 2010 (it was briefly 25 in 2009, but that was a number distorted by the financial bailouts). So there has been a roughly 4 points of GDP rise in the spending share. What’s that about? Well, part of the answer is that the ratio is up because the denominator is down. According to CBO estimates, in fiscal 2010 the economy operated about 7 percent below potential. This means that even if what the government was doing hadn’t changed, the federal spending share of GDP would have risen by 1.4 percentage points. Then, look inside the budget data (pdf), specifically at Table E-10. You’ll see a surge in spending on “income security”; that’s basically unemployment insurance, food stamps, and similar items. In other words, spending on safety-net programs is up because the economy is depressed, and more people are falling into the safety net. You’ll also see a sharp rise in Medicaid; again, this is because the lousy economy has pushed more people into hardship, making them eligible for the program.

The Politics of Economics in the Age of Shouting —I share a virtual neighborhood with a legion of Times reporters, editors and columnists who know more than I will ever know about business and economics.  So for the past several weeks my airplane and bedside reading has consisted of sexy documents like “A Roadmap for America’s Future” and “The Way Forward” and “The Moment of Truth” and “Restoring America’s Future” and “Living Within Our Means and Investing in the Future.” I’ve also reached out to a few economists respected for the integrity of their science and their patience with economic illiterates.  The first thing I gleaned from this little tutorial will probably not surprise you: There really is a textbook way to fix our current mess. Short-term stimulus works to help an economy recover from a recession. Some kinds of stimulus pay off more quickly than others. Once the economic heart is pumping again, we need to get our deficits under control. The way to do that is a balance of spending cuts, increased tax revenues and entitlement reforms. There is room to argue about the proportions and the timing, and small differences can produce large consequences, but the basic formula is not only common sense, it is mainstream economic science, tested many times in the real world.

Report: Payroll tax cut extension is likely - The two key downside risks to the U.S. economy are contagion from the European financial crisis and more rapid fiscal tightening. On fiscal tightening, there have been several recent reports suggesting that some sort of deal will be reached an the extension of the payroll tax cut. From the LA Times: Parties look to payroll tax deal after collapse of deficit talks The Obama administration has asked Congress to extend payroll tax cuts set to expire at the end of the year, and also to renew unemployment benefits. The tax-cut extension could cost the Treasury an estimated $112 billion, but if it lapses American workers will see an immediate tax increase on Jan. 1 that would cost a typical family $1,000 per year....Economists warn that a failure to extend the payroll tax cut and unemployment benefits could cut the economy’s weak growth almost in half next year. It seems likely that some sort of deal will be reached to extend both the payroll tax cut and emergency unemployment benefits, but there will be some politics first.

Top Republican Opposes Payroll Tax Cut Extension: Sen. Jon Kyl (R-AZ), the retiring minority whip, said he is opposed to extending the payroll tax cut — raising taxes an average of $1000 on American families and risking eliminating half-a-million jobs from the economy — because he is concerned about the longevity of Social Security. “The problem here is payroll doesn’t go into general revenue, it supports Social Security, and you can’t keep extending the payroll tax holiday and have a secure Social Security,” he said on Fox News Sunday. Kyl didn't address the upcoming fight over a millionaires surtax to pay for the tax cut. That revenue would be transferred into the Social Security system under the Senate Democratic plan — though it is sure to face opposition to anti-tax Republicans. Kyl's Democratic counterpart, Sen. Dick Durbin (D-IL), was incredulous at Kyl's position: “I can’t believe that," he said. "That the Republican position is they’ll raise the payroll tax on working families? I think that just defies logic.”

Saturday’s Jon Kyl vs. Sunday’s Jon Kyl - On Saturday, Senate Minority Whip Jon Kyl (R-Ariz.), along with his five other GOP colleagues from the super-committee, wrote a Washington Post op-ed on the debt-reduction process. Kyl’s point wasn’t subtle: he and other Republicans just can’t accept tax increases, at least for the foreseeable future. Kyl called tax increases “the wrong medicine for our ailing economy,” and said the mere possibility of tax increases has “put a wet blanket over job creation and economic recovery.” That was Saturday. Just 24 hours later, Kyl told a national television audience he’s comfortable with a payroll tax increase on all American workers on 2012. The No. 2 Senate Republican, Jon Kyl, expressed concern on Sunday about President Obama’s proposal to continue a reduction in the Social Security payroll tax and questioned whether the tax cut had fostered the creation of jobs, as Democrats say.  Mr. Kyl’s comments offered a preview of a fight looming in the Senate, which plans to vote this week on the proposal to extend the payroll tax “holiday” enacted last December. To justify his position, Kyl argued on Fox News, “The payroll tax holiday has not stimulated job creation.”

Little Sign of Compromise on Payroll Tax Cut Extension - If President Barack Obama is feeling more optimistic about the chances of a deal to extend last year’s payroll tax cut, it wasn’t immediately clear from his remarks in Scranton, Pa. In a feisty speech to a supportive crowd, the president cast Democrats as protectors of the middle class and Republicans as bad guys looking to raise their taxes. Democrats have said they would pay for the tax cut extension with a 3.25% surtax on personal income over $1 million; Republicans said Wednesday they would fund a similar plan by freezing salaries of federal workers and shrinking the size of the federal workforce. Sen. Bob Casey (D., Pa.) estimated that the payroll-tax cut bill would cost $265 billion, of which $241 billion is a payroll-tax cut for employers and employees. Mr. Obama didn’t mention the possibility of compromise in his speech urging Congress to act. Rather, he emphasized repeated GOP opposition to his jobs plan and said Republicans could redeem themselves by voting to extend the payroll tax cut when it comes before the Senate in the coming days.

Should Congress Extend the Payroll Tax Holiday? - Should Congress extend and expand the payroll tax cut it first passed a year ago? In a bizarre but not unexpected role reversal, Democrats insist that at a time of economic uncertainty, Congress must not only extend this tax cut but make it even more generous. And Republicans seem to have somehow discovered a tax break that is deeply flawed. Who is right? They both are. With the Senate likely to vote on the issue this week, the payroll tax cut has devolved into yet another dreary black-and-white partisan debate. Yet, the consequences of a deeper cut in the payroll tax are ambiguous at best. Yes, it will put more money into the pockets of people likely to spend it (or at the very least not take money out of their pockets). And while the economic recovery remains fragile, that is probably a good idea. About 160 million workers would benefit and supporters estimate that the expanded tax cut would be worth $1,500 for a typical family. But the payroll tax holiday was poorly designed—certainly compared to President Obama’s Making Work Pay Tax Credit that it replaced. Some economists argue that because people are more aware of the payroll tax cut than they were of the obscure MWP, they are more likely to spend the extra dollars. Still, the payroll tax break has big problems.

GOP Set to Back Payroll-Tax Cut - Republican leaders said Tuesday they would join Democrats in supporting an extension of the 2011 payroll-tax cut despite some reluctance within the GOP, virtually assuring that American wage-earners will continue to receive the benefit next year. Republicans still oppose Democrats' plan to pay for the tax break with a tax on people earning more than $1 million a year. GOP leaders said they would find another way to pay for the tax break and predicted it would pass. "I think at the end of the day, there's a lot of sentiment in our conference—clearly a majority sentiment—for continuing the payroll-tax cut" Workers this year have seen their payroll taxes cut to 4.2% of their salary from 6.2%. Democrats want to cut it further, to 3.1%, but Republicans are unlikely to support that.

Republicans Back Payroll Tax Cut Extension ‎ -After initial reluctance, Republicans in Congress Tuesday threw their support behind a one-year extension of a payroll tax cut for workers aimed at helping stimulate the U.S. economy. The move by Republicans could help avert an end-of-year battle with Democrats following months of bitter disputes over spending cuts, tax policy and government borrowing. "In all likelihood we will agree to continue the current payroll tax relief for another year,'' Senate Republican leader Mitch McConnell told reporters following a closed-door meeting of his colleagues. McConnell added that there is now ``a majority sentiment'' among Republicans for continuing the temporary tax cut. Without congressional action by Dec. 31, the payroll tax that workers pay would revert to 6.2 percent, up from the current, temporary 4.2 percent tax.

In Congress, Role Reversal Over Federal Payroll Tax Cut - In a sharp role reversal, Democrats and Republicans have become divided over whether to extend a federal payroll tax cut enjoyed by every working American last year, with Democrats leading the charge for the tax break and many Republicans demanding that the cut be paid for if it is extended at all.  It is a shift from the recently failed deficit talks when Republicans pushed for extending Bush-era tax cuts without paying for them and Democrats argued against added tax breaks for the most affluent Americans. Now the fight over how to handle the tax cuts as well as added unemployment benefits is set to play out in the final month of the year as the two parties prepare for a politically charged 2012.  Congressional Republicans have long insisted that tax cuts keep money in the hands of Americans who then funnel it back into the economy, negating the need to offset the revenue loss. Echoing many of his Republican colleagues, Senator Jon Kyl of Arizona, the No. 2 Senate Republican, once said that “you should never have to offset the cost” of tax cuts on Americans.  But the party appears to be making an exception for renewing and extending a cut that would reduce the Social Security payroll tax paid by employees by half, to 3.1. percent of wages from 6.2 percent.

Republicans Make Rare Retreat on Payroll Tax Cuts— There was a time—up until last night—when Republicans would not support a payroll tax cut in order to goose the economy. The party swallowed it in last December’s agreement on the Bush tax rates, and so this year Americans were subject to a payroll tax rate of 4.2 percent instead of 6.2 percent. But in the ensuing months, most Republicans made it clear they wouldn’t support extending the payroll tax cut again because they felt it didn’t do enough and cost too much money. “I think that it is time we stop with putting these Band-Aids over huge chest woundsYou may notice that these rationales are pretty thin. Saying that a payroll tax cut is a “sugar high” or a “Band-Aid” concedes the basic argument it will actually help the economy—and indeed, an analyst for Barclay’s said yesterday that allowing the payroll tax cut to expire would shave 1.5 percent off of GDP. The real reason Republicans opposed the payroll tax cut, one must conclude, is that Obama was for it—he made it one of the top items on his agenda in recent months. The longstanding motivation of Congressional Republicans has been to deny the president any victories on any issue.

Senate Republicans: Freeze Federal Pay, Shrink Workforce to Extend Payroll Tax Cut - Senate Republicans offered their version of a payroll tax cut extension Wednesday, funding it by freezing federal salaries and shrinking the federal workforce in contrast to the Democrats’ surtax on millionaires. Republicans have faced political pressure to join Democrats in pushing for an extension of the current payroll tax cut, which reduces rates for workers from 6.2% of their salary to 4.2% and is due to expire Dec. 31. But Republicans do not want to increase the tax cut and extend it to employers, as Democrats propose. The GOP plan would save considerably more than the $110 billion cost of simply extending the tax break, so Republicans would use the additional money to cut the deficit by $111.5 billion over 10 years. Senate Minority Leader Mitch McConnell (R., Ky.) defended the Republicans’ approach, saying the Democrats’ surtax would hurt employers whose jobs are badly needed. “We’re not arguing against extending the payroll tax cut,” Mr. McConnell said. “We just think we shouldn’t be punishing job creators to pay for it.”

Smaller government isn’t always cheaper - One of the ways that Senate Republicans want to pay for their $120 billion extension of the payroll tax cut, as Suzy Khimm notes below, is by shrinking the size of the federal civilian workforce 10 percent through attrition. As federal workers retire, they won’t get replaced. The basic theory here seems to be that fewer bureaucrats will translate into less government spending. But is that always true? Not necessarily. As it turns out, shrinking the federal workforce can sometimes lead to more spending than would otherwise be the case. It’s worth noting that the size of the federal civilian workforce has remained roughly static — hovering around two million workers — since the 1960s. (The Pentagon has shrunk somewhat since the Cold War and other agencies have grown slightly, especially Homeland Security.) As John Gravois points out in the Washington Monthly, that’s striking given that the size of the U.S. population has grown roughly 100 million over the same time frame. What’s more, Congress has heaped greater and greater responsibilities on the government over the years. One could just as easily wonder if the federal workforce is currently too small rather than too large.

G.O.P. and Democrats Differ on How to Prevent Social Security Payroll Tax Increase - Republicans in both houses of Congress said Wednesday that they wanted to prevent an increase in Social Security payroll taxes that would otherwise occur in January, but they remained far apart from Democrats on the specifics of how to do it.  A small number of Republican lawmakers indicated that they would be open to the idea of raising additional revenues to offset the cost of extending the payroll tax cut, a break in what has been the party’s nearly solid ranks against tax increases.  Senate Republican leaders introduced a bill that would keep the payroll tax rate at its current level for another year. The cost is roughly $120 billion. Senate Republicans would offset most of the cost by freezing the pay of federal employees through 2015 and gradually reducing the federal work force by 10 percent. In addition, Senate Republican leaders would go after “millionaires and billionaires,” not by raising their taxes but by making them ineligible for unemployment compensation and food stamps and increasing their Medicare premiums. Democrats said that this part of the Republican proposal was not serious, pointing out that high earners were already ineligible to receive food stamps.

Extension proposals from both parties fail in Senate — The Senate late Thursday rejected competing partisan visions for extending a temporary tax break that benefits virtually every American worker, clearing the way for more serious negotiations over how to cover the cost of the tax cut. All but a handful of Democrats voted in favor of their party’s proposal, but in a surprising turn, more Republicans voted against the GOP plan than in favor of it. Senate Minority Leader Mitch McConnell (R-Ky.) predicted this week that a majority of his conference would vote for the party’s plan to extend the payroll tax cut. The vote suggests that rank-and-file Republicans remain divided on the merits of keeping the tax cut, leaving their party vulnerable to criticism from Democrats that they would raise taxes on the middle class as Americans are struggling economically. Congressional leaders in both parties agree that the tax break should be extended to avoid harming the fragile economic recovery, but they are arguing over how to replace the lost revenue and avoid increasing the federal budget deficit.

The Balanced Budget Multiplier is Not Negative - Senate Republicans have a condition for supporting the continued payroll tax holiday: Senate Republican leaders introduced a bill that would keep the payroll tax rate at its current level for another year. The cost is roughly $120 billion. Senate Republicans would offset most of the cost by freezing the pay of federal employees through 2015 and gradually reducing the federal work force by 10 percent. The marginal propensity to consume for reductions in payroll taxes maybe be high but it is still less than unity. So if we reduce government purchases by the same amount as reduce payroll taxes – this proposal would be contractionary. I guess the good news here is that some of the reduction in government purchases would be deferred.  I guess in a world of PAYGO, however, we should ask how the Democrats propose to offset the loss in payroll taxes revenues: Senate Democratic leaders want a deeper temporary reduction in Social Security payroll taxes. They would provide payroll tax relief to employers as well as employees. And they would offset the cost with a 3.25 percent surtax on modified adjusted gross income in excess of $1 million.

End welfare for the wealthy The debate in Congress this week about whether to pay for extending the payroll tax cut by imposing a new tax on millionaires will have nothing to do with solving our nation's economic challenges and everything to do with election-year politics.  I intend to offer an alternative. Instead of punishing the rich with higher taxes, I will give Congress the option of helping pay for extending the payroll tax cut by ending welfare to the wealthy. Read Sen. Coburn's report, "Subsidies of the Rich and Famous" Every year, politicians on both sides engage in a process of reverse Robin Hood in which they steal $30 billion from low- and middle-income Americans and provide handouts to the rich and famous. These write-offs include mortgage interest deductions on second homes and luxury yachts, gambling losses, business expenses, electric vehicle credits and even child care tax credits. Meanwhile, direct handouts for millionaires have included $74 million in unemployment checks, $316 million in farm subsidies, $89 million for preservation of ranches and estates, $9 billion in retirement checks and $7.5 million to compensate for damages caused by emergencies to property that should have been insured. Millionaires have even borrowed $16 million in government-backed education loans to attend college since 2007.

It’s the (Payroll) Holiday Season - U.S. News and World Report has an online debate regarding the payroll tax holiday, and here are a bit of my remarks: This bill would make the tax code more complicated, more unstable from year to year, and more redistributive - all damaging to long term economic growth. It is essentially the 2012 version of cash for clunkers.  Economists claim that the payroll tax holiday would stimulate consumption spending, and it very well might in the short term.  But just as cash for clunkers merely shifted car sales from the future into the present, this too will merely shift future consumption into 2012.  We would basically be borrowing from ourselves and future generations. The bill I'm referring to is the Senate Democrat's bill that combines a payroll tax holiday with a millionaire surtax, which was voted down last night.  Republicans countered with a bill that pairs a more limited payroll tax holiday with a federal employee pay freeze among other measures, none of which nearly pays for the holiday.  That doesn't mean there is a lack of bipartisan support for a payroll tax holiday, rather that politicians can't find a plausible way to pay for it.  That's good; that means the budgeting process is working.

Funding the Payroll Tax Cut - I am not completely up on the politics of this. However, my understanding is that there is to be a Payroll Cut extension but that Dems want to pay for it by taxing Millionaires while the GOP wants to pay for it by shrinking government. I suggest we pay for it by Issuing 10 year TIPS at just over 0.2% percent real interest and then revisit the issue in ten years. Delaying paying for the 119 Billion extension in this way will raise the total cost – including compounded interest – to roughly 120.4 Billion. This is about as cheap as can kicking can get. Then you raise that 120 Billion on a tax base that is significantly larger. If its not significantly larger then

  • (A) You have much bigger problems than this 120 Billion.
  • (B) That implies an economy so bad 10 year TIPS rates will be negative, so you can get paid for kicking the can still further.

The Rebirth of Social Darwinism - Robert Reich - What kind of society, exactly, do modern Republicans want?  They say they want a smaller government but that can’t be it. Most seek a larger national defense and more muscular homeland security. Almost all want to widen the government’s powers of search and surveillance inside the United States – eradicating possible terrorists, expunging undocumented immigrants, “securing” the nation’s borders. They want stiffer criminal sentences, including broader application of the death penalty. Many also want government to intrude on the most intimate aspects of private life. They call themselves conservatives but that’s not it, either. They don’t want to conserve what we now have. They’d rather take the country backwards – before the 1960s and 1970s, and the Environmental Protection Act, Medicare, and Medicaid; before the New Deal, and its provision for Social Security, unemployment insurance, the forty-hour workweek, and official recognition of trade unions; even before the Progressive Era, and the first national income tax, antitrust laws, and Federal Reserve. They’re not conservatives. They’re regressives. And the America they seek is the one we had in the Gilded Age of the late nineteenth century.

Poll: It's still the economy, stupid - Politics is now the enemy of problem solving. Want proof? Just look at the current gridlock in Washington. The country is facing two big problems — the economy and the deficit. Those two issues demand conflicting solutions. Policies that could reduce the deficit are likely to make the economy worse. Policies that could jump-start the economy are likely to make the deficit worse. The answer is to treat the economy as the more urgent problem in the short run and the deficit as a long-term problem. Why can’t we do that? Because of politics. For the past year, Congress has been obsessed with the wrong problem. To voters, the real urgency is the economy. The deficit, not so much. In a November Gallup Poll, 66 percent of Americans named jobs or the economy as the most important problem facing the country. The deficit? Six percent. We can worry about the deficit later, once the economy gets going.

"A Share of the Burden" - A little less than two weeks ago, I said:This trick is used again and again to oppose raising taxes on one interest group or another, but the fact that raising taxes on a particular group won't fully solve the debt problem does not imply that the change in taxes for that group should be zero." Here's Paul Krugman making the same point -- more forcefully with numbers -- and he shows that raising taxes on the wealthy makes a contribution to deficit reduction that is far from trivial. But even if the numbers were smaller, it still wouldn't imply that the change in these taxes should be zero. Even then, the wealthy "should be bearing a share of the burden" whatever that share might be: Where The Money Is, by Paul Krugman: I’ve been getting the predictable hysterical reactions to today’s column. And it’s true — I’m a Sharia Jewish atheist Marxist who hates America! Bwahahaha!  But one thing actually worth reacting to is the assertion I keep getting that this is all a distraction, that even if we seized all the money of the top 0.1% it would make no difference to the fiscal outlook. Here’s a piece of advice nobody will take: before you make assertions about numbers, look at the numbers.

Things to Tax, by Paul Krugman - The supercommittee was a superdud — and we should be glad. Nonetheless, at some point we’ll have to rein in budget deficits. And when we do, here’s a thought: How about making increased revenue an important part of the deal? Think about it: The long-run budget outlook has darkened, which means that some hard choices must be made. Why should those choices only involve spending cuts? Why not also push some taxes above their levels in the 1990s?  Let me suggest two areas in which it would make a lot of sense to raise taxes in earnest, not just return them to pre-Bush levels: taxes on very high incomes and taxes on financial transactions. About those high incomes: In my last column I suggested that the very rich, who have had huge income gains over the last 30 years, should pay more in taxes. The I.R.S. reports that in 2007, that is, before the economic crisis, the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and it wouldn’t be hard to devise taxes that would raise a significant amount of revenue from those super-high-income individuals.

Money At The Top - Krugman - A bit more on the subject of whether there’s significant money to be raised through higher taxes on the very rich. As it happens, there’s a recent analysis from the nonpartisan Tax Policy Center that bears quite closely on this subject.The TPC analysis points out that before the 1981 tax cuts there used to be a larger number of tax brackets, with a number of brackets well above the current 35 percent maximum. And it asks how much revenue would be raised if those above-35 brackets were still in place; that’s quite close to the question of how much money might be raised through higher taxes on the very rich.  Their answer is that in 2007 the higher brackets would have raised an additional $78 billion, or a bit over half a percent of GDP. By the way, that estimate takes into account the likely “elasticity of taxable income”, i.e., the disappearance of some income from the tax rolls either through reduced actual earnings or through avoidance.So, what I did was to apply that revenue as a percent of GDP to CBO projections of GDP over the next decade. And what this says is that going back to pre-Reagan-type higher-income taxation would yield about $1.1 trillion over the next decade. That would not by itself close the budget gap– but as I’ve been saying, no one thing would. And, you know, $1.1 trillion here, $1.1 trillion there, and soon you’re talking about real money.

Top Income Tax Rates and Revenue: A Historical Perspective - If the debate over the original 2010 expiration of the Bush-era tax cuts is any guide, much will center on whether the top rate should increase from 35 percent to the pre-2001 level of 39.6 percent. While these rates will be characterized as being very high, in historical terms they’re actually quite low. Between 1954 and 1963, for example, there were 24 tax brackets (compared to 6 today), and 19 of them were higher than 35 percent. The top rate? A whopping 91 percent. Massive federal deficits and rising income inequality make it worth asking: just how important were those higher rates in raising revenue? To answer to that question, we compiled IRS data on the amount of tax generated at each statutory marginal tax rate, dating back to 1958. This is what we found: Those high rates really did raise revenue. Although only a small fraction of tax returns were affected by very high rates, the taxes paid at those rates accounted for a substantial portion of individual income taxes paid. Between 1958 and 1986, an average of 14% of individual income tax revenues were generated at rates above 39.6 percent, and an average of 6% of revenues were generated at rates above 50 percent. At their peak in 1986, rates above 39.6 percent accounted for an impressive 23% of income tax revenue.

The Top Marginal Tax Rate Should Be 65%. - Over at the economic oriented blog Angry Bear, author Mike Kimel has been in a longer term investigation trying to determine what the top marginal federal tax rate should be.  Kimel’s work tells him that top rate should be at or close to 65%.   This rate, Kimel believes, provides maximum government revenue while also spurring maximum investment in the private sector. Kimel has received some academic support from work by economists Peter Diamond and Emmanuel Saez.  These two academic economists (Diamond is a Nobel prize winner) argue that the optimal top marginal tax rate is about 73%–but unlike Kimel this paper includes all taxes, not just the federal ones. Kimel also argues that non academics like himself may have some approaches that are superior than those used by academics. As I noted above, my approach is somewhat simpler, and easier to follow than that of Diamond and Saez. Part of the reason is that they come at it from a point of view of elasticities. But with all due respect to my betters (Diamond and Saez, and Krugman as well considering the explanation in his post) I think this is the wrong way to consider the problem. It requires all sorts of assumptions and generalizations about people’s behavior, some of which are both false and create resistance from folks on the right.

Top Marginal tax rate of 70% ? - I agree with Diamond and Saez that the top marginal income tax rate should be slightly over 70%, but I don't agree with what I take their reasoning to be. They argue that the tax rate should be chosen to maximize taxes collected from the super rich. the argument that we should tax the super/rich to less than the peak of the Laffer curve follows.  The assumptions aren't even crazy. Assume there are three types of people, the super-rich, the rich and the middle-class. Labor of the super-rich and of the rich are perfect substitutes with the super-rich 10 times as good at everything. Labor of the middle-class and labor of the richandsuperrich enter in production cobb douglass. Reduction of labor supply by the super-rich reduces GDP by their wage. It also causes the wage of the rich to go up and the wage of the middle class to go down. This second effect reduces welfare. At the top of the supper-rich Laffer curve, a tiny reduction in the tax on the super-rich causes the same income of the rest of society and a more equal distribution of that income. So it causes increased welfare. This is true for any fixed tax rates on the rich and the middle class and for tax rates which are adujsted optimally (the second by the envelope theorem).

The 70% Solution - Emmanuel Saez and the Nobel laureate economist Peter Diamond. Saez and Diamond argue that the right marginal tax rate for North Atlantic societies to impose on their richest citizens is 70%. It is an arresting assertion, given the tax-cut mania that has prevailed in these societies for the past 30 years, but Diamond and Saez’s logic is clear. The superrich command and control so many resources that they are effectively satiated: increasing or decreasing how much wealth they have has no effect on their happiness. So, no matter how large a weight we place on their happiness relative to the happiness of others – whether we regard them as praiseworthy captains of industry who merit their high positions, or as parasitic thieves – we simply cannot do anything to affect it by raising or lowering their tax rates. The unavoidable implication of this argument is that when we calculate what the tax rate for the superrich will be, we should not consider the effect of changing their tax rate on their happiness, for we know that it is zero. Rather, the key question must be the effect of changing their tax rate on the well-being of the rest of us. From this simple chain of logic follows the conclusion that we have a moral obligation to tax our superrich at the peak of the Laffer Curve: to tax them so heavily that we raise the most possible money from them – to the point beyond which their diversion of energy and enterprise into tax avoidance and sheltering would mean that any extra taxes would not raise but reduce revenue.

The Facts about Small Businesses and the Millionaire Surcharge - US Treasury Notes: This week Congress will vote on President Obama’s proposal to extend and expand the payroll tax cut for working families and to add two new payroll tax cuts for employers. These tax cuts would benefit 160 million working Americans and their families, would lower taxes for employers, especially small businesses and those who are expanding their payrolls, and would provide the economy a much needed boost for the coming year. These tax cuts can be fully paid for by asking the most fortunate Americans to pay a modest 3.25 percent surcharge on incomes over $1 million. Contrary to recent statements made by some in Congress, this surcharge would affect only a very, very small number of small business owners. Specifically, a recent discussion paper by Treasury’s Office of Tax Analysis shows that only 1 percent of all small business owners have adjusted gross income over $1 million and would be affected by this surcharge. Not only will the remaining 99 percent of small business owners be protected from paying this surcharge, they will receive a net benefit from the employer-side payroll tax cuts.  Critics of the plan often use a definition of “small business” that includes many investment managers, lawyers and extremely wealthy people who are not by any common sense definition small business owners. In fact, more than half of the top 400 earners – whose average annual income was $271 million – would qualify as small business owners under their definition.

Flat-tax Simplicity with a Progressive Twist - There are good reasons to favor a simpler tax system that emphasizes taxes on consumption over income. Some policy experts across the political spectrum embrace exactly that approach to tax reform. But all these plans would be much less progressive than our current income tax, and that’s neither appropriate nor politically viable. What we need are tax-reform proposals that would maintain progressivity while harvesting many of the benefits of simplicity and consumption taxation. The late Princeton economist David Bradford offered one simple approach: Add progressive rates to a flat tax. Columbia Law School Prof. Michael Graetz offered another: Pair a broad-based VAT with an income tax for folks with high incomes. These ideas might not have much traction among GOP primary voters. But they offer a much better starting point for reform than the plans on the table today.

Tax Reform: Not Till 2014 At The Earliest - Because of the failure of the anything-but-super committee to come up with a plan that included it, I don't see how "tax reform" can be enacted and start to be implemented until 2014 at the earliest. And even that may be overly optimistic. That's not to say that some tax changes won't be discussed and enacted before then. Contrary to what many are saying, I actually expect some changes to be adopted by the end of this year, that is, within the next four weeks. For example, one way or another an extension of the payroll tax cut seems particularly likely to happen before Congress leaves for Christmas. But however important they might be, changes like that are tinker toys compared to the comprehensive tax reform that is now very much on the wish list of many corporations, individuals, lobbyists, associations, academics, and pundits.  You know the one: the plan that would lower the overall tax rate while eliminating many of the existing deductions and credits in the code.

The Coming Flood of Estate Tax Returns - Fewer than 3,300 estates will owe federal estate tax this year, the smallest number in more than 75 years (other than 2010 when the tax disappeared for the year). But, paradoxically, even as Congress shrinks the number of taxable estates, the law also encourages many more estates to file returns—even if they owe no tax. That will increase costs to those who want to do prudent estate planning, keep their planners and lawyers busy, and swamp the IRS with many times the number of returns filed in recent years. The reason: the portability provision in the 2010 Tax Relief Unemployment Insurance Reauthorization and Job Creation Act that allows surviving spouses to claim on their own estate tax returns any exemption not used by their spouses. The 2011 exemption is $5 million. If a husband dies this year and leaves an estate with a taxable value of $3 million, his estate owes no tax and his wife’s estate may claim the unused $2 million exemption when she dies. Thus, if the $5 million exemption remains in effect, her estate could avoid tax on its first $7 million..

A Family’s Billions, Artfully Sheltered - Yet for Mr. Lauder, an heir to the Estée Lauder fortune whose net worth is estimated at more than $3.1 billion, the evening went beyond social and cultural significance. As is often the case with his activities, just beneath the surface was a shrewd use of the United States tax code. By donating his art to his private foundation, Mr. Lauder has qualified for deductions worth tens of millions of dollars in federal income taxes over the years, savings that help defray the hundreds of millions he has spent creating one of New York City’s cultural gems.

The problematic charitable-donation tax deduction - David Kocieniewski has a long article about Ronald Lauder as sophisticated consumer of tax-avoidance advice, who has managed to become worth somewhere north of $3 billion even as he’s given away hundreds of millions of dollars to charitable causes. (In 1988 he was worth less than $250 million; he inherited a lot of money from his mother in 2004, but today his stake in Estee Lauder constitutes only about one fifth of his net worth.) Kocieniewski’s article raises a salient question: should the tax deduction for charitable contributions be abolished, capped, or otherwise profoundly reworked? President Obama’s jobs bill includes an idea he’s been unsuccessfully pushing ever since he became president: that the deduction for charitable giving be capped at 28%, even if your top marginal tax rate is 35%. According to a recent paper from the Center on Philanthropy at Indiana University, this modest tweak to the tax code would produce about $20 billion per year for the public fisc, while reducing total charitable giving by about $2 billion per year. That seems like a great idea to me, whether or not the government uses some of the proceeds to support the worthy charities which lose out.

Policy-Making Billionaires - OVER the past 30 years, as the gap between wealthy and poor grew ever wider, total philanthropic giving almost tripled, In an age of widening partisanship and plummeting trust in government, this outpouring of philanthropy has produced a distinct breed of philanthropist: The policy-making billionaire.  Bill Gates, the Microsoft co-founder, has invested more than $13 billion in public health initiatives around the world through his foundation. William E. Conway Jr., a founder of the Carlyle Group investment company, is planning to give away $1 billion of his personal fortune, and is said to be considering how his money can aid in financing major infrastructure projects.  In keeping with the anti-government spirit of the times, the new philanthropists share a disdain for established politics and an impatience with the slow churn of old-fashioned policy making. Last month, the Starbucks executive Howard Schultz, whose net worth approaches $750 million, proposed using Starbucks’ corporate foundation and customer donations to create an economic development and job training program for the unemployed, one that he hopes can generate tens of millions of dollars in loans to small business.  “As corporate citizens of the world, it is our responsibility — our duty — to serve the communities where we do business,”

The Philanthropy of the Rich Does Have a Cost - Dean Baker -  The NYT reported on a new philanthropic trend among the wealthy, where rich people try to use their money to deliberately influence public policy in part by funding pilot programs that can serve as a model for larger public programs. At one point the article refers to funding for various education projects in New York and Newark and told readers: "Officials in New York and Newark say the money from private sources will not replace existing public programs, but will instead allow rapid experimentation with new approaches to old and seemingly intractable problems, at no cost to taxpayers." Actually, the money that wealthy people donate to philanthropies does carry a cost to taxpayers. It is deducted from their taxable income or the estates that they would pass on to their heirs. Depending on the relevant tax rate, the dollars contributed to philanthropies by the wealthy could lead to losses of government revenue of as much as 50 percent of the money contributed.

Dodd-Frank could be more vulnerable without Barney Frank - With the departure of Sen. Chris Dodd in 2010, Frank has become the primary public face for the legislation in Washington, playing a significant role in an implementation process that’s taken far longer2 and become far more complicated3 than many had expected. “You lose a great, strong voice … the best advocate for meaningful financial reform,” one Democratic Hill staffer told me. “We are going to be nervous to the extent that there are going to be efforts to repeal or peel back little layers of bills. We’re going to be looking for someone to be that voice. I don’t think we have it in the House.”Next in line for Frank’s leadership seat on the House Financial Services Committee is Rep. Maxine Waters4 (D-Calif.), who hasn’t been closely involved in developing or defending the major pieces of Dodd-Frank. Waters, in fact, is currently under investigation by the House Ethics Committee for intervening on behalf of a bank requesting bailout money in 2008, which could cast a shadow over her new role if she takes up the reins.

The Huntsman Alternative - Simon Johnson - This week we also learned more about the underhanded and undemocratic ways in which the Federal Reserve saved big banks last time around. (You should read Ron Suskind’s book, “Confidence Men: Wall Street, Washington, and the Education of a President.” To understand Mr. Geithner’s philosophy of unconditional bailouts, remember that he was president of the Federal Reserve Bank of New York before becoming Treasury secretary.) Is there really no alternative to pouring good money after bad? In a policy statement released this week, Jon Huntsman, the former governor of Utah who is seeking the Republican presidential nomination, articulates a coherent alternative approach to the financial sector, which begins with a diagnosis of our current problem: too-big-to-fail banks: To protect taxpayers from future bailouts and stabilize America’s economic foundation, Jon Huntsman will end too-big-to-fail. Today we can already begin to see the outlines of the next financial crisis and bailouts. More than three years after the crisis and the accompanying bailouts, the six largest U.S. financial institutions are significantly bigger than they were before the crisis, having been encouraged by regulators to snap up Bear Stearns and other competitors at bargain prices. Mr. Geithner feared the collapse of big banks in 2008-9, but his policies have made them bigger. This makes no sense.

Simon Johnson Interviewed by Russ Roberts: On Bailouts, Regulatory Capture, Too Big to Fail, Deregulation, Moral Hazard, and Transparency - Simon Johnson, MIT professor, and author of 13 Bankers, is interviewed by Russ Roberts, George Mason professor, and author of The Price of Everything. As always, there is much more to this interview than the few selected notes below. The full podcast is available via the link at the bottom of this post.

Geithner: U.S. to defend stronger financial rules -- Treasury Secretary Timothy Geithner Thursday said the Obama administration will fight efforts to slow or weaken regulations meant to avert a repeat of the 2008 financial crisis.  "If these efforts to weaken reform are successful, then consumers will be more vulnerable to future abuse, businesses will be more vulnerable to future contractions in credit availability caused by financial mistakes, and the economy will be more vulnerable to devastating crises ," Geithner said in excerpts of remarks prepared for a conference on financial regulations.  The Dodd-Frank financial-overhaul law, enacted last year, aims to prevent a repeat of the 2008 financial meltdown by limiting risky behavior among banks and other financial firms. U.S. regulators are writing dozens of rules to implement the overhaul, a process that could take at least another year to complete.

Blue sky money two - money and not banking - Nick Rowe - Banking is a subset of finance. Money and finance go together.  Money and banking go even more together. But they don't have to go together. Maybe they didn't ought to go together. Finance is unstable. Banking is even more unstable than the rest of finance. A bank makes promises it knows it might not be able to keep. A bank is an accident waiting to happen. Unstable money is a very bad thing, much worse than unstable finance or unstable banking. Why do we have an economy in which money is linked to unstable finance? Why do we have an economy in which money is linked to the most unstable part of finance? Isn't this a really stupid sort of monetary system to have? If we had a monetary system in which money and finance, or money and banking, were separate, then financial instability would just be a spectator sport for monetary economists. You could bail out the banks, or not. Just like you could bail out the carmakers, or not. And us monetary economists would shrug our shoulders and stay out of it, and let the finance guys and industrial economics guys argue it out among themselves. If a financial crash didn't cause an excess demand for money, and the resulting recession, only the microeconomists would care. Sure, there might be some structural unemployment, as workers switched from finance and investment industries to producing consumer goods instead, but monetary policy can't do much about that anyway.

$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months - While everyone was focused on the impending European collapse, the latest soon to be refuted rumors of a quick fix from the Welt am Sonntag notwithstanding, the Bank of International Settlements reported a number that quietly slipped through the cracks of the broader media. Which is paradoxical because it is the biggest ever reported in the financial world: the number in question is $707,568,901,000,000 and represents the latest total amount of all notional Over The Counter (read unregulated) outstanding derivatives reported by the world's financial institutions to the BIS for its semi-annual OTC derivatives report titled "OTC derivatives market activity in the first half of 2011." Indicatively, global GDP is about $63 trillion if one can trust any numbers released by modern governments.  What is probably just as disturbing is that in the first 6 months of 2011, the total outstanding notional of all derivatives rose from $601 trillion at December 31, 2010 to $708 trillion at June 30, 2011. A $107 trillion increase in notional in half a year. Needless to say this is the biggest increase in history. So why did the notional increase by such an incomprehensible amount? Simple: based on some widely accepted (and very much wrong) definitions of gross market value (not to be confused with gross notional), the value of outstanding derivatives actually declined in the first half of the year from $21.3 trillion to $19.5 trillion (a number still 33% greater than US GDP). Which means that in order to satisfy what likely threatened to become a self-feeding margin call as the (previously) $600 trillion derivatives market collapsed on itself, banks had to sell more, more, more derivatives in order to collect recurring and/or upfront premia and to pad their books with GAAP-endorsed delusions of future derivative based cash flows.

Slipping Backward on Swaps - WALL STREET loves to do business in the shadows. Sunshine, after all, is bad for profits. So it is perhaps unsurprising that players in the derivatives market want to thwart one of the worthier aims of the Dodd-Frank financial regulation: to bring transparency to the huge market for instruments known as swaps. Now some in Congress, on both sides of the aisle, are trying to block that goal, too.  Dodd-Frank focused on adding transparency to derivatives in a couple of ways. The area now under fire involves its directive that the Commodity Futures Trading Commission create rules to “promote pre-trade price transparency in the swaps market.”  The idea is that customers should get a clear picture of prices. Right now, many swaps are traded one-on-one, over the telephone. The price is usually whatever the dealer says it is.   Dodd-Frank sensibly asked that market participants provide trade and position details to regulators so this arena could be monitored better. But a lack of transparency in the market as it relates to swaps customers hasn’t been addressed. And it is here that many on Wall Street, as well as some in Congress, are pushing back.

Money Found in Britain May Belong to MF Global - About $200 million in customer money that vanished from MF Global is believed to have surfaced at JPMorgan Chase in Britain, according to people briefed on the matter. The discovery could be the most significant breakthrough in a monthlong hunt for the missing funds.During MF Global’s last chaotic days, the brokerage firm overdrew an account at JPMorgan, according to another person who is close to the matter. Some investigators now believe the firm used customer funds to patch at least some of the hole, which would have been a significant breach of federal law.MF Global transferred the roughly $200 million in the days before the firm filed for bankruptcy, said the people, who requested anonymity because the investigation was incomplete.

MF Global accessed client funds for weeks - MF Global had been dipping into client funds for weeks before its failure – rather than just in its final days as had been previously reported – say US authorities investigating the broker-dealer’s collapse. This comes as the failed company’s bankruptcy trustee revealed that some customer money from MF would never be recovered.  “The trustee has determined that even if he could recover everything that is at US depositories, there will be a shortfall in what MF Global management should have segregated at US depositories,” James Giddens, the trustee, wrote in a briefing document distributed to congressional officials this week. He has estimated the customer shortfall at $1.2bn. That MF Global had used customer funds more widely than had been thought heightens concerns about what actions led to the collapse of the firm run by Jon Corzine, a former governor of New Jersey. Authorities are asking whether customer money was inadvertently used as the firm scrambled to cover margin calls and customer redemptions or if someone within MF authorised the use of customer funds when necessary. It is illegal to use customer funds for a firm’s purposes.

Ann Barnhardt: The Entire Futures/Options Market Has Been Destroyed by the MF Global Collapse - (w/ transcript) Jim is joined by Ann Barnhardt, who recently closed her commodity brokerage firm Barnhardt Capital Management after the MF Global collapse. She believes that her client monies were no longer safe in the futures and options markets, and that the entire system has been 'utterly destroyed' by the MF Global collapse.

Corzine compelled to testify to US Congress - Jon Corzine, the former head of MF Global, will be forced to attend a congressional hearing into the collapse of the broker-dealer next week alongside top regulators. The House agriculture committee said on Friday it was taking the “extraordinary step” of using Congress’s legal power to compel the ex-chief executive and former New Jersey governor to turn up at its hearing on December 8. Jill Sommers, commissioner at the Commodity Futures Trading Commission, who is leading the regulatory inquiry, is also expected to face a grilling from lawmakers at the same panel, according to congressional aides.  Mr Corzine has stayed out of public view since MF Global filed for bankruptcy on October 31. A committee spokesman said lawmakers had moved to force his attendance after not receiving a response to an invitation. A spokesman for Mr Corzine declined to comment. In a statement, Frank Lucas, the committee’s Republican chairman, and Collin Peterson, its senior Democrat, said Mr Corzine’s “testimony is critical to fulfil our objectives on behalf of our constituents, which is why we have taken this extraordinary step to ensure his attendance”. The congressmen said many of their constituents had lost funds “and many more have lost confidence in futures and derivatives markets”.

Dylan Ratigan: To Eric Holder – A Simple Way To Prosecute Bank Crimes - Shahien Nasiripour has a great scoop in the FT – bank regulators have uncovered up to 5000 military families who were foreclosed on illegally by mortgage servicers. Foreclosures on active duty troops is usually a big no-no, for a lot of reasons – for instance, when your credit rating is damaged by a foreclosure, it can impact your national security clearance. In addition, there’s enormous stress that the soldier goes through when his or her family is facing a threat of eviction, and it’s the kind of stress that makes him or her less equipped to be ready in a warzone. Congressman Bob Filner has even accused banks of “homicide” against American troops, blaming the banks for suicides resulting from the increased stress brought on by aggressive debt collection techniques. There have been laws to protect troops from unscrupulous lending practices going all the way back to the First World War. The most recent revision to these laws is the Servicemember Civil Relief Act, which was signed in 2003. Congressman Brad Miller, who helped author the most recent version of this law, explained the rationale for the law as follows: The Service Members Civil Relief Act is very clear: if you’re in harm’s way in our nation’s military, you can devote your whole energy to our nation’s service without worrying what’s happening in a courthouse back home. And if you have a claim against someone in our military, you can wait until they get home and can defend themselves.

Eliot Spitzer: “In retrospect, I wish we had put more people in handcuffs.” Dylan Ratigan: Eliot Spitzer was a law enforcement official so tough on corporate malfeasance that the US Chamber of Commerce helped coin a new term “Spitzerism” to describe what he was doing. As New York Attorney General, Spitzer pioneered a strategy of using state resources to enforce laws that were typically within Federal jurisdiction. He pursued standard consumer rights cases that most state attorneys general find as their bread and butter, but he also went after white collar crimes and Wall Street conflicts of interest that came to light after the bursting of the internet bubble. Since a scandalous fall from grace as New York Governor, Spitzer has picked up his aggressive law enforcement chops as a writer and spokesman for law and order. He has become one of the most outspoken opponents of the Federal Reserve and the generally lax Federal regulatory environment. He was on our show yesterday, talking about the power of the banks, the Fed’s secret loans, MF Global, and Citigroup. I’ve known Spitzer for a long time. He was in fact the very first guest on the Dylan Ratigan Show. Here’s his interview.

Too Big To Jail -- On November 25th, the Friday evening after Thanksgiving, the PBS NewsHour ran a segment called In Aftermath of the Financial Crisis, Who's Being Held Responsible? Yves Smith of Naked Capitalism served as one of the four people interviewed, and noted after the fact that the Friday after Thanksgiving is one of the slowest news days of the year. She also noted that the PBS NewsHour format does not permit cross-talk among those being interviewed, which guarantees that no crucial information will emerge in debate. There is no debate. Everyone agreed on the central fact under discussion: not a single high-ranking Wall Street banker has gone to jail in the aftermath of the Housing Bubble and financial meltdown. To maintain a Fair & Balanced discussion without crosstalk, PBS included a republican lawyer (Anton Valukas), a liberal blogger (Yves Smith), a conservative think-tanker (Mark Calabria), and an actual former SEC regulator (Lynn Turner). Of the four, only Turner and Smith seemed to think it might be a good idea to prosecute some people, to put some people in jail. (My own view is that a few public executions would have a wondrous effect on banking practices.)

Wall Street Is Already Occupied - Last week, I had a conversation with a man who runs his own trading firm. In the process of fuming about competition from Goldman Sachs, he said with resignation and exasperation: “The fact that they were bailed out and can borrow for free — It’s pretty sickening.” Though the sentiment is commonplace these days, I later found myself thinking about his outrage. Here was someone who is in the thick of the business, trading every day, and he is being sickened by the inequities and corruption on Wall Street and utterly persuaded that nothing had changed in the years since the financial crisis of 2008. Then I realized something odd: I have conversations like this as a matter of routine. The insiders have a critique similar to that of the outsiders. The financial industry has strayed far from being an intermediary between companies that want to raise capital so they can sell people things they want. Instead, it is a machine to enrich itself, fleecing customers and exacerbating inequality. When it goes off the rails, it impoverishes the rest of us. When the crises come, as they inevitably do, banks hold the economy hostage, warning that they will shoot us in the head if we don’t bail them out.

Capitalism in the Spotlight in the Occupy Movement - It’s easy for people involved in progressive political movements to be jaded by political discourse. One of the reasons why the Occupy movement has been interesting is that it has been something genuinely new and experimental. And it is not afraid to use the ‘C’ word in an unadmiring way. The blogger JW Mason writes: “Most of us very seldom experience ourselves as political agents, in the sense of being active participants in the collective decision-making of our community. For better or worse, most of the time we delegate collective decision-making to specialists who represent us more or less faithfully, as the case may be. The only reason for protest — for any kind of mass politics — is that this system has broken down. The message of any protest is: There is a political subject, a We, that is not being represented.” And so it is with Occupy. Perhaps the key meme arising from it has been the slogan of “We are the 99%”. The phrase speaks directly to the sensed breakdown of an implicit social contract in the U.S. and the idea that for the vast majority, the system as it is set up is not delivering. Right wing commentators have been quick to try and ‘spin’ the protests as ‘Anti-Capitalist’ and  “Anti-American”.

Quelle Surprise! Banks Lied About Bailout Funds and Got $13 Billion in Profit from Them - Yves Smith - Bloomberg News is continuing with the tankless task of pushing forward with FOIA requests relative to the Fed’s lending programs, and once it eventually gets its troves of documents, having to slog through them to see what they reveal.Bloomberg has a long article up on its site about its latest findings. And the bottom line is everybody close to the process lied like crazy. For instance: Banks lied during the crisis. The big banks said they were in really good shape even as they were sucking tons of credit from the Fed. The ones that arguably were healthier, like JP Morgan, tried the “they threw me in the br’er patch, I really didn’t want all that money,” in fact stayed in the program well beyond the acute phase of the crisis because it liked getting all that cheap funding. Now this sort of misrepresentation is a securities law violation, but since the regulators presumably winked and nodded and it would be hard to prove damages, no bank executive will be held to account. Bloomberg also performs the useful task of trying to ascertain how much benefit the banks derived from the cheap funding. They come up with $13 billion, or roughly 23% of profit (they assume typical margins, when it would take a good deal of internal data to make more refined estimates). This is actually a very narrow definition of profit impact. The Fed stepping into the markets to shore up the banks by design stabilized and boosted asset prices, which surely had a significant profit impact.  Regulators lied to Congress. The article does a good job of marshaling details:

Lend Freely BUT AT A PENALTY RATE!! Blogging: Yes, the U.S. Government Ought to Own the Banks Now » Without the Fed and the Treasury, the shareholders of every single money-center bank and shadow bank in the United States would have gone bust. Felix Salmon:Chart of the day, Morgan Stanley bailout edition: Ladies and Gentlemen, this is what a lender of last resort looks like…. The black line is Morgan Stanley’s market capitalization, which… fell as low as $9.8 billion in November 2008. The orange line is the amount that Morgan Stanley owed to the Federal Reserve… which peaked at $107 billion on September 29, 2008. And the red line is… Morgan Stanley’s debt… as a percentage of its market value. That ratio… peaked… north of 750%. Many congratulations are due to Bloomberg, for extracting this information…. [I]f the ECB wants to avert a liquidity crisis, charts like this give a sobering indication of just how far it might have to go, and how quickly it might have to act…. The Fed didn’t blink: it kept on lending, as much as it could, to any bank which needed the money, because, in a crisis, that’s its job.

Yes, Virginia. The banks really were bailed out - I find it really depressing that I have to write this. But it seems I have to write it. Substantially all of the TARP funds advanced to banks have been paid back, with interest and sometimes even with a profit from sales of warrants. Most of the (much larger) extraordinary liquidity facilities advanced by the Fed have also been wound down without credit losses. So there really was no bailout, right? The banks took loans and paid them back. Bullshit. Suppose you buy fire insurance from Inflammable Insurance. You pay $1000 for a year of insurance. There is no fire, so you make no claim. Next year, you find a different provider offering a better price, and you switch. Soon after your relationship has ended, you discover that Inflammable failed to pay any claims at all during the year you were insured, because all customer premiums were diverted to the Cayman Islands and then spent on kiddy porn and Pez. Were you defrauded? Do you have any cause for complaint? After all, ex post your cash flows turned out to be the same as if you had been dealt with fairly. Of course you have been defrauded. You did not get what you had paid for. You had paid for Inflammable to bear risk on your behalf. It did not do so. The money you paid was simply stolen.

The $7 trillion secret loan program: The government and big banks should be punished for deceiving the public about their hush-hush bailout scheme. - Eliot Spitzer - Imagine you walked into a bank, applied for a personal line of credit, and filled out all the paperwork claiming to have no debts and an income of $200,000 per year. The bank, based on these representations, extended you the line of credit. Then, three years later, after fighting disclosure all the way, you were forced by a court to tell the truth: At the time you made the statements to the bank, you actually were unemployed, you had a $1 million mortgage on your house on which you had failed to make payments for six months, and you hadn’t paid even the minimum on your credit-card bills for three months. Do you think the bank would just say: Never mind, don’t worry about it? Of course not. Whether or not you had paid back the personal line of credit, three FBI agents would be at your door within hours. Yet this is exactly what the major American banks have done to the public. During the deepest, darkest period of the financial cataclysm, the CEOs of major banks maintained in statements to the public, to the market at large, and to their own shareholders that the banks were in good financial shape, didn’t want to take TARP funds, and that the regulatory framework governing our banking system should not be altered. Trust us, they said. Yet, unknown to the public and the Congress, these same banks had been borrowing massive amounts from the government to remain afloat. The total numbers are staggering: $7.7 trillion of credit—one-half of the GDP of the entire nation. $460 billion was lent to J.P. Morgan, Bank of America, Citibank, Wells Fargo, Goldman Sachs, and Morgan Stanley alone—without anybody other than a few select officials at the Fed and the Treasury knowing. This was perhaps the single most massive allocation of capital from public to private hands in our history, and nobody was told. This was not TARP: This was secret Fed lending. And although it has since been repaid, it is clear why the banks didn’t want us to know about it: They didn’t want to admit the magnitude of their financial distress.

Better than a Bank Bailout: A Federal Lottery -- The growing outrage over the Fed’s rescue of too big to fail banks was stoked by news from Bloomberg that banks made 13 billion dollars in profit from low interest discount window loans. However, as many people have pointed out, the outrage isn’t that the banks were rescued – we’d all be worse off if they had been allowed to fail. The outrage is that similar help was not offered to households struggling with the recession, in particular the lack of job creation initiatives to help workers looking for jobs in such a lousy economy.  It didn’t have to be this way. It would have been possible to help both banks and households and in the process avoid much of the anger over the inequities in the bailout process. Here’s how. Suppose that when the crisis hit, we had held a national lottery. All households would have an equal chance of winning, and if your household’s number comes up one of several things will happen. First, if you have a mortgage, then the government will pay off one third of it up to a maximum amount. If you owe less than the maximum, you get the balance in cash.  Second, if you have student loans, the government will pay them in full if your number is drawn (up to a predetermined maximum). And again, if your loan is less than the maximum you get the balance in cash. Finally, if you are a renter and do not have student loans (i.e. everyone not in the first two categories), then you get cash if your number is drawn.

Paulson Gave Hedge Funds Advance Word - It was July 21, 2008, and market fears were mounting. Four months earlier, Bear Stearns Cos. had sold itself for just $10 a share to JPMorgan Chase & Co. (JPM) On the morning of July 21, before the Eton Park meeting, Treasury Secretary Henry Paulson had spoken to New York Times reporters and editors, according to his Treasury Department schedule. A Times article the next day said the Federal Reserve and the Office of the Comptroller of the Currency were inspecting Fannie and Freddie’s books and cited Paulson as saying he expected their examination would give a signal of confidence to the markets. At the Eton Park meeting, he sent a different message, according to a fund manager who attended. Over sandwiches and pasta salad, he delivered that information to a group of men capable of profiting from any disclosure.  The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie into “conservatorship” -- a government seizure designed to allow the firms to continue operations despite heavy losses in the mortgage markets.  The managers attending the meeting were thus given a choice opportunity to trade on that information.

Hank Paulson’s inside jobs - What on earth did Hank Paulson think his job was in the summer of 2008? As far as most of us were concerned, he was secretary of the US Treasury, answerable to the US people and to the president. But at the same time, in secret meetings, Paulson was hanging out with his old Goldman Sachs buddies, giving them invaluable information about what he was thinking in his new job. The first news of this behavior came in October 2009, when Andrew Ross Sorkin revealed that Paulson had met with the entire board of Goldman Sachs in a Moscow hotel suite for an hour at the end of June 2008. He told them his views of the US and global economies, he previewed a market-moving speech he was about to give, and he even talked about the possibility that Lehman Brothers might blow up. Maybe it’s not so surprising that Goldman Sachs turned out to be so well positioned when Lehman did indeed do just that a few months later. Today we learn that the Goldman meeting in Moscow was not some kind of aberration. A few weeks later, on July 28 2008, Paulson met with a who’s who of the hedge-fund world in the headquarters of Eton Park Capital Management — a fund founded by former Goldman superstar Eric Mindich.

Hank Paulson’s Secret: Of Course the System Is Rigged - When former Goldman Sachs exec Henry Paulson was Treasury Secretary he apparently gave his hedge fund buddies extremely helpful and lucrative secret information about his plans to seize Fannie Mae and Freddie Mac while still assuring the public everything was fine. To a room full of hedge fund mangers, including many of his former colleagues, Paulson let it be known the companies would soon go into conservatorship. From Bloomberg (I highly recommend you read the whole shocking article): Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said. The fund manager says he was shocked that Paulson would furnish such specific information — to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information.This is an important reminder that we don’t have a meritocracy. We don’t have a fair or free market. Many of the people at the very top with all the wealth are not now making incredibly more money than regular Americans because they are super genius Galtian “job creators.”

Mission Not Accomplished - Krugman - Matt Yglesias and Kevin Drum say the right thing about revelations that big banks got very easy terms during the financial crisis: the real scandal isn’t so much that those banks got rescued as that the rest of the population didn’t. For sure, the Fed and Treasury should have driven harder bargains. I think the political landscape would look different and better right now if the Obama administration had in fact taken at least one big bank into receivership. But in the crisis, money had to flow freely, and the truth is that the gifts bankers received are more a source of annoyance than a source of current problems. What’s unforgivable is the way policymakers, both at the Fed and elsewhere, basically declared Mission Accomplished as soon as the panic in financial markets subsided and stocks were up again. When spring rolls around, we’ll reach the third anniversary of Ben Bernanke’s declaration that “green shoots” were making an appearance — and there will still be 4 million Americans who have been out of work for more than a year. Yet there has been no sense of urgency about dealing with unemployment; indeed, most of the elite conversation has been about stuff like cutting Social Security payments a decade or two from now.

Elected Dirty Dealers - – Imagine that you are an elected member of the United States House of Representatives in the middle of the debate on the health-care reform act that was passed in 2010. In a House committee meeting, you learn before anyone else that a proposed public-insurance option – a program that would compete with private insurance, – will not be included. This information will have a large impact on health-care companies’ stock prices. Can you trade these companies’ shares before it is made public? Morally, it is difficult to separate this example from traditional cases of corporate insider trading. Yet no law prohibits the practice. The US Congress – the legislative branch of the country’s government – effectively exempts itself from the normal rules of insider trading. Congress and the US Supreme Court are the only federal agencies whose employees may, without restrictions, trade stocks based on non-public information. All other US government employees who traded on privileged information of the type described above would be acting illegally.

Congress push to relax US securities laws - Proposals for a big relaxation of US securities laws are being pushed forward in the US Senate in the face of opposition from state regulators, academics and a group of Democrats.  A hearing of the Senate banking committee will examine on Thursday a package of measures to encourage “capital formation” that has drawn White House support but which critics warn could hurt investors and make markets more opaque. The proposals, pushed by both Republicans and Democrats, include allowing companies to engage in “crowd funding” to solicit investments online and helping fast-growing companies such as Facebook keep their accounts private. Behind the scenes, the measures have engendered a fierce fight between lobbyists for traditional exchange operators such as NYSE Euronext and newer private-shares marketplaces such as SecondMarket.  Congressional aides said privately that a number of senior Democrats intended to object to some of the measures. They are joined in their concerns by academics, lawyers and the North American Securities Administrators Association, the association of state regulators, who warn that proposals would see investor protection sacrificed in the name of cutting red tape.

In Case You Were Wondering Why We Keep Bailing Out Wall Street...: Not that there was any mystery about why the government keeps shafting Main Street and bailing out Wall Street, but in case you had any doubts, this chart excerpt below from XKCD should put them to rest. More than anyone else, Wall Street has the power to hire and fire our elected officials. So it's no wonder that those officials take care of Wall Street first. (The Wall Street money, by the way, goes to both sides of the aisle. And that's to be expected. If you're a bank, there's no sense in picking a side when you can just own both teams.)

Europe’s Lenders Find Branch Trumps a Unit  - European banks are restructuring their businesses outside their home countries in ways that reduce the impact of tough new regulations that were adopted in response to the financial crisis. In the U.S., U.K. and Portugal, at least a few large European banks have altered their legal structures or moved assets and business lines between units, partly in an attempt to avoid local rules and oversight, according to bank disclosures and people familiar with the matter. The latest example came in Portugal this week. Deutsche Bank AG converted its business there from an independently incorporated local subsidiary into a branch of the parent company. The switch means the giant German bank's Portuguese operations are no longer subject to new capital and other requirements that Portugal imposed in the wake of the country's international rescue earlier this year. In the U.K., a number of big European banks, including France's BNP Paribas SA, recently moved assets between different legal entities, at least partly to reduce the scope of operations subject to aggressive British regulations and oversight. The maneuvering follows recent examples of major European banks, including Deutsche and Barclays PLC, that tinkered with the structures of their U.S. operations in ways that enabled them to skirt last year's Dodd-Frank financial-overhaul law.

S&P Downgrades Dozens of Global Banks - Standard & Poor’s on Tuesday cut its credit ratings for many of the world’s largest banks, including Citigroup (NYSE: C), Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC). The move follows S&P’s shift, announced earlier this month, in the methods it uses for rating the banks. Citigroup, Goldman Sachs and Bank of America Corp. each had their long-term credit rating downgraded a single notch to A- from A. Similar cuts were applied to JPMorgan Chase (NYSE: JPM), Wells Fargo & Co. (NYSE: WFC) and Morgan Stanley (NYSE: MS). Dozens of other banks were also affected by S&P’s new criteria and many of the downgrades stemmed from the affected banks’ exposure to the European debt crisis. S&P cited weaker confidence in governments' ability to bail out struggling banks. The new criteria for rating banks comes in the wake of criticism leveled at all three major rating firms – Moody’s and Fitch’s are the other two -- that they rubber stamped their highest ratings on investment products loaded with subprime mortgages in the years leading up to the financial crisis. Congress has considered reforming ratings system to remove perceived conflicts of interest.

BofA, Goldman, Citi Credit Ratings Cut by S&P -- Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS) and Citigroup Inc. had long-term credit grades reduced to A- from A by Standard & Poor’s after the ratings firm revised criteria for dozens of the world’s biggest lenders.  S&P made the same cut to Morgan Stanley and Bank of America’s Merrill Lynch unit today. JPMorgan Chase & Co. (JPM) was reduced one level to A from A+. S&P upgraded Bank of China Ltd. (3988) and China Construction Bank Corp. to A from A- and maintained the A rating on Industrial & Commercial Bank of China Ltd. (1398), giving all three lenders higher grades than most big U.S. banks.  The moves may increase pressure on firms already dealing with weak economies and Europe’s mounting sovereign debt crisis. Lenders including Bank of America, Citigroup and Morgan Stanley have said they may have to post billions of dollars of additional collateral and termination payments on trades because of a one-level downgrade in their credit ratings.  “It’s evident that stress from the European banking system is taking its worldwide toll,”

Banks scramble to plug capital deficits - European banks have been in the centre of the storm for months, struggling to finance themselves on wholesale markets amid concerns about their holdings of peripheral eurozone sovereign debt.Now, urged by regulators trying to prevent the debt crisis metastasising into a large-scale banking meltdown, they are collectively working out the best way to strengthen their balance sheets.   The continent’s 70 biggest cross-border banks have until the end of June 2012 to attain a core tier one capital ratio, a key measure of financial strength, of 9 per cent – far higher than the level currently required by regulators. The target, set by the European Banking Association, which represents the European Union’s 27 national watchdogs, is meant to ensure large lenders can absorb losses on bonds from countries such as Greece, Italy or Portugal.  But so far banks are conspicuously eschewing the most obvious way to raise capital levels: by tapping existing and new shareholders for more funds. “This is the first mass bank recapitalisation exercise where basically no money is going to be raised,” says one banking analyst.

Should the Courts Appoint an Equitable Receiver for Bank of America? - The question the reviewers ask: Should the bankers who helped to create the financial catastrophe we call the subprime debt crisis be held accountable at law? They conclude:  "If serious prosecutions of fraud by Wall Street firms are never brought, the public's suspicion about Washington's policies toward bankers will only grow, as will cynicism about the rule of law as it is applied to the rich and powerful. Moreover, if investing institutions and individuals come to believe that bankers cannot be trusted, the underpinnings of the market will be eroded. Without solid, well-functioning markets, the economy cannot adequately and efficiently allocate capital to high-valued uses and create jobs. Lack of ethics and corrupt behavior will channel the nation's resources to uses that are wasteful and unproductive, as they arguably have for several decades now as too many unethical practices have gone unchallenged."  Most of the readers of The IRA would probably agree with the statement above by Partnoy and Madrick. But an important and almost equally important issue regarding professional malfeasance is the question of how, in practical legal terms, investors and other creditors pursuing bad actors and organizations for civil money damages. Here the situation is quite clear, but not the way you might think. Even with all of our collective experience and time spent on the housing finance mess, there are new details for investors and professional advisors to discover and evaluate every day.

Bank debit card fee plans face Justice Dept. antitrust review - The Justice Department said Tuesday it is reviewing banks for possible antitrust violations in decisions to charge fees for debit card use. The department is "reviewing the statements and actions by banks and their trade associations regarding possible increases in consumer fees for using debit cards," Assistant Atty. Gen. Ronald Weich wrote to Rep. Peter Welch (D-Vt.). "Please be assured that if it finds that individuals, banks or other parties may have violated the antitrust laws, the Department will take appropriate action," Weich said in the letter, which was released by Welch. Following a flurry of announcements last month of possible debit card fees, Welch asked Atty. Gen. Eric Holder to investigate whether banks and trade associations engaged in price signaling or collusion in reaction to new federal limits on the amount that large financial institutions can charge retailers for processing debit card transactions. Because of the limits, which took effect Oct. 1, Wells Fargo & Co. and JPMorgan Chase & Co. began testing debit card fees for their customers in some states. And Bank of America said it would begin charging some customers a $5 monthly fee for debit card use.

Where is Wal-Mart when we need it? - Has the financial industry become less efficient? This lead commentary in the Vox debate on the financial sector argues that, despite all of its fast computers and credit derivatives, the current financial system is no better at transferring funds from savers to borrowers than the financial system of 1910.

Financial-Services Pay Plunges - Financial-services workers are bracing for an icy dive into a shallow year-end bonus pool. Employees at big Wall Street firms could see annual compensation sink 27% to 30% from a year earlier to the lowest level since the 2008 financial crisis, according to a closely watched compensation study due out Monday. Bonuses, which constitute a substantial part of many finance workers' pay, are on track to plunge 35% to 40%, on average, according to the forecast by Options Group, an executive search and consulting firm. Pay is likely to be hardest hit in areas such as fixed income, which comprises trading in bonds, currencies and commodities. An investment-grade-bond trader who is a managing director at a top securities firm is likely to make $1.7 million to $1.8 million in 2011, according to the study. That is down from $2.9 million, said Options Group managing partner Michael Karp. The company compiles its annual report using surveys of industry professionals and conversations with executives.

 Are CEOs paid their value added? - Remember Paul Krugman’s forays into “the wage reflects what the top earners are really worth” topic, and the surrounding debates?  Why should this discussion be such a fact-free zone?  Why so little discussion of tax incidence?Read this paper by Kevin Murphy (pdf), especially pp.33-38.  Admittedly the paper is from 1999 and it won’t pick up the more recent problems with the financial sector.  But most of the data are from plain, ol’ garden variety CEOs.  In many of the estimations we see CEOs picking up less than one percent of the value they create for the firm, and all of the estimates of their value capture are impressively small, albeit rising over time.  Never is the percentage of value capture anything close to one hundred percent.  “One percent value capture” is an entirely plausible belief.  You might be thinking “Ha!  Burn on Krugman!,” but not so fast.  Like Wagner’s music, Krugman’s position here is “better than it sounds,” though not nearly as strong as Krugman would like it to be. Let’s turn to taxation of the top 0.1 percent, and focus on these CEOs.  If the tax rate on their income/K gains goes up, the firm will compensate by giving them more equity/options, to keep them working hard.  In other words, the tax rate on the top earners can be hiked without much effect on CEO effort because there is an offset internal to the firm.  At some margin the firm’s shareholders will be reluctant to chop off more equity/options to the CEO, but the marginal value created by maintaining the incentive seems to be very high, for reasons presented above, and so the net CEO incentives will be maintained, even in light of new and higher taxes on CEO earnings.

Executive Compensation and Risk Taking - NY Fed - The financial crisis and its aftermath have spurred calls for bank compensation packages that mitigate risk-taking incentives. In this post, I review some of the issues linking executive compensation and risk and then describe a novel scheme that links executive pay to credit default swap (CDS) spreads. As I will argue, compensation reform that includes risk-based measures can be effective and efficient in addressing policy concerns about excessive risk taking.

CEOs’ crusade is a howl of frustration with Washington - This month Erskine Bowles – the American political figure who co-headed a bipartisan fiscal panel last year – is launching a desperate new crusade. As Europe writhes in fiscal meltdown, Bowles is quietly appealing to American chief executive officers to join a new “CEO fiscal reform council” on how to tackle America’s debt headache – and prevent the nation from following Europe’s fate. His idea is that by bringing business leaders into the debate, this could break Washington’s fiscal gridlock, and reduce the risk of America heading into “the most predictable financial crisis in history”, as he says; where the “supercommittee” of politicians failed, in other words, CEOs might (possibly) succeed in forcing action. Or so the hope goes.  Personally, I do not expect that any “CEO council” will actually cut America’s $14.3tn debt pile soon; nor, for that matter, affect Treasury yields. But the move is a fascinating straw in the wind. For essentially, this plan marks a howl of frustration against traditional politics; it is born from the same cultural imperative – albeit a different tone – as the Occupy Wall Street movement, or the eurozone upheavals that are propelling technocrats such as Mario Monti to power. Everywhere from the streets to CEO suites there is a sense that the normal democratic processes are falling short and a hunt for something – anything – else. That impetus is likely to intensify, as debt headaches mount.

Moody’s Proposal May Trigger CMBS Downgrades, Analysts Say - Moody’s Investors Service has proposed changes in rating criteria that may trigger cuts on commercial-mortgage bonds, according to Deutsche Bank AG and Credit Suisse Group AG analysts. The rating company has requested comments on altering the way it treats so-called interest-only classes of securitized debt, which could affect bonds from $600 billion of deals backed by commercial property loans, Deutsche Bank analysts led by Harris Trifon in New York said in a report yesterday. Moody’s expects the ratings criteria to be implemented in the first weeks of 2012. This could force some investors to sell their holdings as these securities, composed of interest payments on the underlying loans, typically carry top grades, the analysts wrote. The “most striking example” is an interest-only portion of a deal by JPMorgan Chase & Co., sold just two months ago, which could lose its AAA grade, Credit Suisse analyst Roger Lehman, said in a report yesterday.

Unofficial Problem Bank list unchanged at 980 institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Dec 2, 2011. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  Since the publication of the Unofficial Problem Bank List in August 2009, this is the first week there are no changes to report as the list remains unchanged at 980 institutions with assets of $400.5 billion. A year-ago, the list held 919 institutions with assets of $410.3 billion. The calendar only has about two more Fridays favorable for closures, so the FDIC will have to step it up if it needs to close anything else before year-end. Prime closing candidates may be the 25 institutions operating under a Prompt Corrective Action order.  Here is a graph of bank failures by week (cumulative) for the last several years. In 2008, 25 banks failed, 140 banks failed in 2009, 157 in 2010, and only 90 so far in 2011.

Federal Judge Pimp-Slaps the SEC Over Citigroup Settlement - Matt Taibbi - Just a quick update on a big piece of news that came through yesterday. In one of the more severe judicial ass-whippings you’ll ever see, federal Judge Jed Rakoff rejected a slap-on-the-wrist fraud settlement the SEC had cooked up for Citigroup. I wrote about this story a few weeks back when Rakoff sent signals that he was unhappy with the SEC’s dirty deal with Citi, but yesterday he took this story several steps further. Rakoff’s 15-page final ruling read like a political document, serving not just as a rejection of this one deal but as a broad and unequivocal indictment of the regulatory system as a whole. He particularly targeted the SEC’s longstanding practice of greenlighting relatively minor fines and financial settlements alongside de facto waivers of civil liability for the guilty – banks commit fraud and pay small fines, but in the end the SEC allows them to walk away without admitting to criminal wrongdoing. This practice is a legal absurdity for several reasons. By accepting hundred-million-dollar fines without a full public venting of the facts, the SEC is leveling seemingly significant punishments without telling the public what the defendant is being punished for. This has essentially created a parallel or secret criminal justice system, in which both crime and punishment are adjudicated behind closed doors.

Judge Rakoff Whacks SEC Yet Again, This Time Over Citi CDO Settlement - Yves Smith - Judge Jed Rakoff’s latest ruing, nixing a $285 million settlement between the SEC and Citigroup over a billion dollar fund that came a cropper, has broader implications than simply embarrassing the securities regulator (which given the fallen standing of the agency, and low standards in Washington generally, is harder to do than it ought to be). Rakoff has effectively said judges have no business sanctioning settlements in which the accused party admits to nothing.  What has Rakoff’s dander up is that the allegations made by the SEC in its lawsuit were that Citigroup stuffed the fund full of crappy CDO tranches and went short against them, and got investors to buy it by telling them the assets were selected by an independent party. Citi was a typically inefficient looter, earning about $160 million while investors lost $700 million (note that Rakoff had to pry that information out of the parties). Citi is admitting only to negligence when the violations the SEC described its filing and in a related case amount to fraud, or in securities speak, scienter.  Rakoff’s ruling calls the entire process a sham:Here, the S.E.C.’s long-standing policy – hallowed by history, but not by reason – of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations, deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.

Jed Rakoff’s fraught decision - Jed Rakoff’s decision to block the proposed $285 settlement between the SEC and Citigroup is very welcome, but also raises all manner of questions about what might happen next. The ruling is worth reading — as are all Rakoff’s judgments — but at heart it’s pretty simple. The clever part of the ruling comes at the beginning, where Rakoff notes that the SEC’s complaint against Citigroup employee Brian Stoker includes language about Citigroup which is not included in the complaint against Citigroup itself. According to the complaint against Stoker, Citigroup “knew” that it couldn’t place the synthetic CDO with investors if it had made full disclosures about how it had been put together. But that knowledge of Citigroup’s never made it into the complaint against Citigroup. That’s important, because the SEC’s stated reason for letting Citi off more lightly than Goldman Sachs is that Goldman had knowing and fraudulent intent (or “scienter”, as it’s known in legal jargon), while Citigroup didn’t. The most powerful part of Rakoff’s ruling, then, is where he basically demolishes that argument. He shows that the Citi fraud (as alleged by the SEC) was worse than the Goldman fraud, because in this case Citi was itself the beneficiary.

Judge Rakoff Humiliates Mary Schapiro By Nullifying Citi MBS Settlement, Calls It "Neither Fair, Nor Reasonable, Nor In Public Interest" - Once again Judge Jed Rakoff, also known as the only person in the Southern District of New York who calls out the SEC consistently and routinely on their corruption, has ruined the day for both Mary Schapiro and for Vic Pandit, by making the proposed $285 million MBS fraud settlement wrist slap null and void, and setting a trial date for July 16, 2012 in which Citigroup will actually face a jury and defend itself to peers instead of to future Citi employees in the form of SEC porn addicts. It is unclear if the reversal is a bigger slap in the face for Citi or for the SEC, but one thing is certain: both parties are to be massively embarassed as a result of this ruling which essentially says that both entities are culpable - the first of committing a far greater crime than the $285 mm fine deems fit, and the second of being a complicit enabler of precisely this kind of criminal behavior which it then fines with some token amount and things can continue as they were. And just like in the case of SEC vs BofA, Rakoff crucifies the SEC's worthless organizationL: "the Court concludes, regretfully, that the proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest." He continues: "Most fundamentally, this is because it does not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards. Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance."

Fannie and Freddie watchdog under fire - The US regulator overseeing Fannie Mae and Freddie Mac has displayed “undue deference” to the mortgage groups’ decision-making, a federal auditor has said. The Federal Housing Finance Agency “too often” accepts assertions made by the mortgage financiers, which have been operating under a federal conservator since September 2008, the FHFA Office of Inspector-General said in a report to be released on Tuesday. In one case, the FHFA’s failure to properly examine Freddie’s procedures for determining how lenders repurchase soured loans probably saddled US taxpayers with billions of dollars in losses, the report said. In another, it said, the housing regulator readily accepted Fannie and Freddie’s justification for paying their top six officers more than $35m in compensation for 2009 and 2010, declining to consider other factors that may have led to lower pay-outs. Those two cases are among a handful identified by the inspector-general as “sufficiently important to warrant greater involvement and scrutiny by the agency”, the auditor wrote in its report. The FHFA “basically relies on the corporate governance process to resolve business decisions” at Fannie and Freddie, said Steve Linick, inspector-general. The agency relies heavily on the mortgage groups’ board of directors and tries to stay out of daily business decisions, preferring to only review the most important matters, Mr Linick said.

Fitch may lower Fannie, Freddie debt outlook — The Fitch ratings agency will likely lower its outlook for debts linked to the U.S. government to negative, including debt of government-controlled mortgage buyers Fannie Mae and Freddie Mac. Fitch, one of the three major ratings agencies, said Tuesday it expects to announce the revised outlooks over the next several days. The announcement comes a day after the agency downgraded its outlook on U.S. debt to negative. The agency kept its rating for long-term U.S. debt at the top AAA level but said it has less confidence in the federal government's ability to rein in the deficit. Ratings are based on the likelihood of default. The AAA rating is the highest available and signifies an extremely low likelihood of default.

HARP's Dirty Little Secret: Most HARP Refis are of Positive Equity Mortgages - So the Administration has announced that it is expanding the HARP refinancing program to help underwater borrowers.  Originally, HARP enabled borrowers with up to 125% loan-to-value (LTV) ratios to refinance (105% for adjustable rate loans).  The revised program removes the LTV cap for fixed-rate loans, reduces some refi fees, permits refis of loans that have been mildly delinquent recently, and extends the eligibility date.  All the news accounts have stated that the number of HARP refinancings is expected to roughly double, from about 900,000 refinancings to perhaps 1.8 million refinancings. This is trumpeted as a boon for underwater homeowners.   The revised program may well help some underwater homeowners lower their monthly payments. Unfortunately, the 900,000 and 1.8 million numbers are seriously deceptive.  Most of the HARP refinancings to date have been for borrowers with positive equity.  HARP has refinanced very few underwater borrowers.  As of 2Q 2011, 92% of HARP refinancings (776,009 of 838,441) were of loans between 80% LTV and 105% LTV. Only 62,432 refis were between 105% and 125% LTV.  In other words, HARP has provided very little help for underwater borrowers.

Attorney General Martha Coakley sues 5 US banks for mortgage fraud - Massachusetts Attorney General Martha Coakley is suing five major US banks for allegedlyseizing properties unlawfully and failing to help struggling borrowers keep their homes by lowering mortgage payments. The civil lawsuit — filed yesterday in Suffolk Superior Court — targets Bank of America Corp.,Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc., and GMAC, a subsidiary of Ally Financial Inc. Also named are Mortgage Electronic Registration System Inc., a widely used mortgagerecording firm, and its parent company. ‘‘Our suit alleges that the banks have charted a destructive path by cutting corners and rushingto foreclose on homeowners without following the rule of law,’’ said Coakley, citing whatshe called their illegal behavior. It is the first major legal action taken against the nation’s biggest banks since they startedforeclosure-settlement negotiations with the 50 state attorneys general in the spring. The talksbegan after the attorneys general launched an investigation into reports of fraudulent and sloppyforeclosure-related practices by the banks. Most of the lenders named by Coakley said they were disappointed by the suit. They pledgedto keep working toward a settlement with the attorneys general, and talked about their efforts toprevent foreclosures.

Massachusetts sues top five lenders - FT - Massachusetts sued the five biggest mortgage companies in the US on Thursday, accusing them of “corrupting” the state’s land records through pervasive use of fraudulent documentation in seizing borrowers’ homes. Martha Coakley, Massachusetts attorney-general, alleged that the banks illegally foreclosed on borrowers’ mortgages because they were not the actual holders of those mortgages, among other accusations. This was due to their failure to properly review, assign and transfer critical paperwork, she said, adding that the banks “had no legal right to conduct the foreclosure”. The failure by Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial to perform the various legal steps needed to properly foreclose on a mortgage “has adversely impacted titles to hundreds, if not thousands, of properties”, Ms Coakley said. Her lawsuit throws a wrench into ongoing discussions between various federal and state agencies and the five lenders to settle allegations of faulty mortgage practices. The two sides have been nearing a $25bn deal over the past year to resolve claims sparked by the discovery that the banks employed so-called “robosigners”, or workers who signed foreclosure documents en masse without properly reviewing individual borrowers’ paperwork. BofA said it continues to work with federal and state agencies in hopes of reaching “a fair and comprehensive solution to these critical issues”. JPMorgan said it was “disappointed.” Wells said Ms Coakley’s action “will do little to help Massachusetts homeowners”. Citigroup said it had not yet reviewed the suit, but it had “operated appropriately, in compliance with existing laws”. Ally said it will “vigorously” defend itself in court.

Massachusetts Announces First Comprehensive Lawsuit Against Major Banks - Yves Smith - The Massachusetts Attorney General has announced a major lawsuit against the biggest banks in the foreclosure game, namely Bank of America, JP Morgan, Citigroup, Wells Fargo, GMAC (now Ally) as well as MERS and its parent MERSCorp. It seeks accountability for violations in the foreclosure process, including robosiging, initiating foreclosures when they were not entitled to do so, the use of MERS (both a violation of land records requirements and what amounts to unjust enrichment via failure to pay local recording fees) and deceptive practices in foreclosure (as in failing to offer modifications as required by law and would be good for borrowers).  In the press conference, Coakley described that there were numerous unnecessary and illegal foreclosures, and cited how not for profits had succeeded in obtaining loan mods, yet were unable to get mods processed for vastly larger number of similar borrowers.She stressed how the banks didn’t care about the impact of their actions on borrowers and communities, and engaged in the same sort of reckless conduct as they did in predatory mortgage lending. Coakley specifically discussed what amounts to a failure of the 50 state settlement negotiations, particularly the failure of the banks to provide accountability and their insistence on obtaining broad relief, including on MERS-related issues, which Coakley said Massachusetts had said was always off the table as far as she was concerned. She had said the negotiations had taken too long and were unwilling to provide real relief. This is an important step forward, and shows clearly what a sham that the so called “settlement” talks.

Inside the Coakley Foreclosure Fraud Lawsuit - So we now have the complaint in Massachusetts Attorney General Martha Coakley’s lawsuit against five big banks for foreclosure fraud, the first lawsuit to directly target banks for robo-signing (Catherine Cortez Masto in Nevada went after some low-level employees of document processing company LPS, but hasn’t worked her way up to the banks yet). Simply put, Coakley seeks penalties for “unfair and deceptive practices” in violation of state consumer protection laws, in particular the Massachusetts Consumer Protection Act. The top list of complaints tells the story:

    • 1. Engaging in unfair and deceptive foreclosure practices by conducting foreclosures when the defendants lacked the right to do so and misrepresenting to homeowners their roles as mortgagees or as the holders of the mortgages;
    • 2. Engaging in false documentation practices to facilitate their foreclosure practices;
    • 3. Deceiving homeowners in the course of servicing mortgage loans by misrepresenting to borrowers regarding its loan modification programs, acting deceptively in implementing loan modifications and deceiving borrowers regarding foreclosure proceedings; and
    • 4. Failing to comply with Massachusetts’ registration statute

GMAC Mugs Massachusetts for Insisting on the Rule of Law, Suspends Mortgage Lending in the State - Yves Smith - This move by GMAC, now Ally, is remarkably brazen. GMAC has effectively said that Massachusetts must hew to its demands of how to deal with foreclosures. It announced it is withdrawing from mortgage lending in the state in an effort to bring it to heel.GMAC may be in a better position to exercise this sort of threat than other banks. Full service banks have broader business lines, so government bodies in the state could retaliate by moving other business (pension funds, cash management, payment services) from them. This is very similar to the retaliation described in Gretchen Morgenson and Josh Rosner’s Reckless Endangerment, when Georgia had the temerity to try to pass tough lending laws (emphasis ours): Because of the state’s new Fair Lending Act, S&P said that it would no longer allow mortgage loans originated in Georgia to be placed in mortgage securities that it rated. Moody’s and Fitch soon followed with similar warnings.  It was a critical blow. S&P’s move meant Georgia lenders would have no access to the securitization money machine; they would either have to keep the loans they made on their own books, or sell them one by one to other institutions.  GMAC is trying to get other big banks to follow suit. I hope the state and other groups that do substantial financial business with banks (largish churches are also attractive clients) make it clear than any effort to punish the state for enforcing the law will be met by moving their accounts to smaller institutions that respect the law.

While Coakley Sues Banks, Treasury Goes After Penny-Ante Mortgage Thieves - Emptywheel got there first, but I wanted to add something. On the same day that Martha Coakley sued five banks for systematically stealing homes, the Treasury Department, the CFPB and the Special Inspector General for TARP have announced a task force. Not to go after those same banks, based on the evidence of systematic fraud. No, their task force goes after penny-ante scam artists that rip people off with the promise of helping secure HAMP modifications: I agree that homeowners struggling to make their mortgage payments should beware of con artists and scams. They should also beware of the con artists servicing their mortgages, the scams to take their homes away without the legal right of ownership, and the criminal enterprise at the heart of the entire mortgage operation. But the juxtaposition between this announcement and Martha Coakley’s lawsuit announcement couldn’t be more stark. Coakley is going after the source of the problem – the 800 pound gorilla that has caused the foreclosure crisis. Treasury is going after some tiny little antecedent. I can’t believe they think it’s worth their time, other than to generate a few headlines to pretend their are paying attention to “fraud.” Not the systemic fraud from the banks, mind you, but this other fraud. In fact, these same players in the executive branch want very much to SETTLE with banks over their fraudulent activities. The two-tiered system of justice is made very clear here. This is like responding to a wave of neighborhood robberies by cracking down on jaywalking.

Breakingviews: Big U.S. foreclosure settlement isn’t dead yet - The bumper foreclosure settlement between 50 U.S. attorneys general and the major mortgage lenders is still not dead. Massachusetts Attorney General Martha Coakley today officially broke ranks and filed her own stand-alone suit against the alleged perpetrators. That might seem to further crack the unified front by the nation's states engaged in negotiations with big mortgage servicers, but it hasn't yet torpedoed their joint efforts. In fact, the suit could breathe new life into negotiations. The suit accuses Bank of America, JPMorgan, Citigroup, Wells Fargo and GMAC of engaging in deceptive and illegal practices in the foreclosure and loan modification process. It certainly casts a long shadow over the prospects of a broad settlement to end the foreclosure fallout once and for all. After all, Coakley is hardly a renegade AG, so her suit could embolden simpatico attorneys general to follow her lead. Several have already been working hard to make sure banks don't get off the hook too easily, including New York's Eric Schneiderman, Nevada's Catherine Cortez Masto and Delaware's Beau Biden. The banks want any settlement to go beyond just foreclosure to give them cover against claims on other mortgage-related practices. But the prospect of multiple lawsuits rather than one blanket settlement could be just unpalatable enough to cajole banks to soften their stance.

Some Failed Institutions Always Foreclose; The Reason: FDIC Sponsored Fraud - A couple of readers asked me to comment on the Sun Sentinel article Are loss-share lenders gouging us? In the wake of the recent real-estate meltdown, the borrower of a nonperforming loan called his lender with promising news: "I have a buyer looking to make an all-cash offer for my Florida property. Will you meet with us tomorrow?" The lender's answer: "No." Disturbingly, this implausible response is not uncharacteristic of lenders who exploit FDIC loss-share agreements by seeking to foreclose on nonperforming loans, even when prudent business judgment calls for short sale or loan modification solutions. By perverting the terms and spirit of loss-share agreements, these lenders are reaping windfalls while prolonging the foreclosure crisis, depressing real-estate values and sticking taxpayers with the bill. Rather than comment directly, I asked Patrick Pulatie at LFI Analytics to chime in. Pulatie writes ....Essentially, here is what is going on. Shared Loss Agreements were executed by the FDIC with the banks that took over failed institutions. Some had the terms that the author describes. Others did not have the same terms, and were much more restrictive. The author is referring to the Shared Loss Agreements similar to OneWest Bank/IndyMac, which I wrote about.

“The Wikipedia of Land Registration Systems” -- Pretty amazing opinion in Culhane v Aurora Loan Services of Nebraska byJudge Young of the US District Court for the District of Massachusetts. Judge Young breaks out a fresh can of whoop-ass on MERS, which wasn't even a litigant. How are these choice lines:  "MERS is the Wikipedia of Land Registration Systems."  Now I like Wikipedia, but property title isn't do-it-yourself. Or this gem: "a MERS certifying officer is more akin to an Admiral in the Georgia navy or a Kentucky Colonel with benefits than he is to any genuine financial officer."  That said, for all of his misgivings about MERS supplying "the thinnest possible veneer of formality and legality to the wholesale marketing of home mortgages to large institutional investors," Judge Young still says that it's kosher, if unseemly.  The issue here was whether there could be a foreclosure by a naked mortgagee--that is a mortgagee who is not the noteholder.  (That's the issue before the Supreme Judicial Court of Massachusetts currently in Eaton v. Fannie Mae.)  Judge Young say no:  the note and mortgage need to be reunited before foreclosure; a naked mortgagee can't foreclose.  In this case, however, Judge Young found that the mortgage and note were reunited before the foreclosure was brought. 

LPS Foreclosure Fraud Whistleblower Found Dead (Updated) - Nevada notary Tracy Lawrence, who was due to be sentenced today to up to a year in jail for a single count of misdemeanor fraud, went missing from her sentencing hearing today and was found dead. Per the Associated Press (hat tip reader Scott): Las Vegas police say it could be weeks before investigators know how 43-year-old Tracy Lawrence died. Her body was found about 11:30 a.m. Monday at her Las Vegas apartment. Police Sgt. Matt Sanford says there’s no apparent sign of foul play, and coroner toxicology tests could take up to eight weeks.  Update: Holy moley, the initial press reports omitted the key fact: it was Lawrence who turned Nevada Attorney General Catherine Cortez Masto on to two mid level LPS employees who face up to 30 years in jail each if found guilty. From MSNBC: Lawrence came forward earlier this month and blew the whistle on the operation, in which title officers Gary Trafford, 49, of Irvine, Calif., and Geraldine Sheppard, 62, of Santa Ana, Calif. — who worked for a Florida processing company used by most major banks to process repossessions — allegedly forged signatures on tens of thousands of default notices from 2005 to 2008. Trafford and Sheppard were charged two weeks ago with 606 counts of offering false instruments for recording, false certification on certain instruments and notarization of the signature of a person not in the presence of a notary public.

Matt Stoller: Mortgage Servicers – Getting Away with the Perfect Crime? - In 2004, the FBI warned Congress of an “epidemic of mortgage fraud,” of unscrupulous operators taking advantage of a booming real estate market. Less than two years later, an accounting scandal at Fannie Mae tipped us off that something was very wrong at the highest levels of corporate America. Of course, we all know what happened next. Crime invaded the center of our banking system. Wall Street CEOs were signing on to SEC documents knowing they contained material misstatements. The New York Fed, riddled with conflicts of interest, shoveled money to large banks and tried to hide it under the veil of central bank independence. And yet, no handcuffs. The big news on prosecutions in the traditionally high-powered Southern District of New York are convictions for relatively petty insider trading that are unrelated to the collapse of the economy. The criminal charges could have been filed in the 1980s. And what happens when this kind of fraud goes unprosecuted? It continues, even today. The same banks that ran the corrupt home mortgage securitization chain are now committing rampant fraud in the foreclosure crisis. Here’s New Orleans Bankruptcy Judge Elizabeth Magner discussing problems at Lender Processing Services, the company that handles 80 percent of foreclosures on behalf of large banks (emphasis added):

Michael Olenick: Are Remotely-Processed Mortgage Assignments Another Smoking Gun? - Assignments of mortgages are the legal instruments that transfers ownership of a mortgage from one party to another. In a securitized mortgage, a trust holds thousands of mortgages on behalf of investors. The investors in the various bonds that get cash flows from a single trust expect the trust to be in a position to take advantage of the rights conferred by the mortgages when certain events occur, usually payoff or default. I used my crowd-sourced online software,, to help categorize 2,500 assignments in Palm Beach County, FL, which were recorded in late 2008 and early 2009. Palm Beach County, like any Florida county, is a high foreclosure state and, thanks to strong public records laws in Florida, serves as a good bellwether about bank business practices both in Florida and around the country. Common sense would say that an assignment should be executed either by a lawyer for the trustee for the trust, or an agent of the trust, which in this case would be a servicer or a lawyer working for the servicer. Lawyers should be geographically close to the foreclosed property, because they will need to eventually appear in court. Bankers should be close to major banking operations, since they almost always sign as senior officials: Vice President is the most typical title.  We know from the robo-signing scandal that the signers don’t read what they’re signing, but it is also apparent that they’re scattered almost randomly around the country.

US lenders review military foreclosures - Ten leading US lenders may have unlawfully foreclosed on the mortgages of nearly 5,000 active-duty members of the US military in recent years, according to data released by a federal regulator.JPMorgan Chase and Bank of America this year reached legal settlements in which they agreed to pay damages to nearly 200 service members who claimed that their homes had been improperly seized. Data released last week by the Treasury’s Office of the Comptroller of the Currency, which regulates national banks, shows that 10 lenders – including BofA, but not JPMorgan, which was not part of the study – are reviewing nearly 5,000 foreclosures of homes belonging to service members and their families to see if they complied with the law.Under the Servicemembers Civil Relief Act of 2003, mortgage servicers have to follow special procedures when foreclosing on homes belonging to active-duty members of the armed forces and their families. For instance, there are restrictions on so-called default judgments, in which homes are seized after the borrower fails to appear in court. In April, JPMorgan reached a multimillion-dollar settlement with members of the armed services. The bank admitted to 27 wrongful foreclosures in May. Jamie Dimon, JPMorgan chief executive, apologised for his bank’s errors, calling it a “painful aberration”.

Occupy’s next frontier: Foreclosed homes - - Occupy Wall Street is promising a “big day of action” Dec. 6 that will focus on the foreclosure crisis and protest “fraudulent lending practices,” “corrupt securitization,” and illegal evictions by banks. The day will mark the beginning of an Occupy Our Homes campaign that organizers hope will energize the movement as it moves indoors as well as bring the injustices of the economic crisis into sharp relief. Many of the details aren’t yet public, but protesters in 20 cities are expected to take part in the day of action next Tuesday. We’ve already seen eviction defenses at foreclosed properties around the country as well as takeovers of vacant properties for homeless families. Occupy Our Homes organizer Abby Clark tells me protesters are planning to “mic-check” (i.e., disrupt) foreclosure auctions as well as launch some new home occupations. This is a shift from protesting Wall Street fraud to taking action on behalf of people who were harmed by it. It brings the movement into the neighborhoods and gives people a sense of what’s really at stake,”

Occupy Y’all Street: Occupy Atlanta Fights Foreclosure, Fannie Mae Demands Protesters’ Emails - The day after Fannie Mae evicted a police officer and his family from their suburban Atlanta home, the government-owned mortgage giant demanded the family turn over all its correspondence with members of Occupy Atlanta, according to court documents. In early November, Christopher Rorey, an officer with the DeKalb County Police Department, had invited the activists affiliated with the Occupy Wall Street movement to his quiet neighborhood in Gwinnett County, about 25 miles outside of Atlanta. The Rorey family had spent 13 months fending off foreclosure. They were on their second lawyer and second civil suit. After losing a last ditch court hearing, attended by Occupy protesters, an eviction was imminent. The Roreys were down to last options. The demonstrators set up large orange-and-blue tents on the Rorey front lawn, unrolled bedding in their basement, and hung signs from their porch that read: "THIS HOME IS OCCUPIED" in rainbow colors.

Bankers, Too, Cast a Safety Net - The combination of housing market events and the profit motive of mortgage lenders turned trillions of dollars of household debt into a huge safety net. Household debt had been increasing during the 1980s and 1990s, but the rate of increase was extraordinary in the years leading up to the recession. By 2007, household sector debt had reached 114 percent of the nation’s personal income – more than $14 trillion. The change was almost entirely due to accumulation of home mortgage debt. Normally, home mortgages are fully secured by a residential property, and when a homeowner fails to make the scheduled payments on time, the lender can seize the property and sell it to recover its principal, interest and fees. When the lender has this valuable foreclosure option, borrowers overwhelming either make their home mortgage payments on time or sell their property in an orderly fashion to obtain the money to repay the mortgage lender, even in cases when the homeowner is unemployed.When residential property values plummeted in 2008 and 2009, a number of residential properties were suddenly “under water” — worth less than the mortgages they secured. In those cases, the lender’s foreclosure option was no longer valuable – selling the property would be likely to yield too little money to cover principal, let alone interest and fees.

Fracking, Mortgages and Insurance - Homeowners who sign gas leases to permit hydraulic fracturing for shale gas in Maryland, New York, West Virginia, Pennsylvania and other states may be defaulting on their mortgages, risking loss of title insurance and homeowners' insurance coverage, and preventing future buyers from obtaining title insurance or mortgage loans on affected property.  These are the consequences described by attorney Elizabeth Radow in an article in the New York State Bar Journal available here.  The  story has also been covered in the New York Times stories here and here.  Several members of Congress have asked mortgage regulators including FHA and FHFA, the overseer of Fannie Mae and Freddie Mac, to determine how many families may unwittingly have breached their mortgage terms, and presumably what can be done to balance the risks to lenders with the potentially harsh consequences for families.  While homeowners may be caught in the middle, the potential dispute may bring large financial institutions and the energy industry face to face in a battle over the genuine risks of fracking, on the one hand, and the validity of somewhat obscure mortgage contract terms, on the other.

Fannie Mae and Freddie Mac Serious Delinquency Rates mostly unchanged in October - Fannie Mae reported that the Single-Family Serious Delinquency rate was unchanged at 4.00% in October. This is down from 4.52% in October of 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate increased to 3.54% in October, up from 3.51% in September. This is down from 3.82% in October 2010. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. These are loans that are "three monthly payments or more past due or in foreclosure". Tracking this on a monthly basis this is kind of like watching grass grow, but the serious delinquency rates are generally falling - but only falling slowly. The reason for the slow decline is most likely the backlog of homes in the foreclosure process. The "normal" serious delinquency rate is under 1%, and at this pace of decline, the delinquency rate will not be back to "normal" for a number of years.

Renting Out Government-Owned Homes is the Right Move – But Probably Wouldn’t Make Any Difference to You - The Federal Housing Finance Agency (FHFA), the regulator for Fannie Mae and Freddie Mac, is considering proposals for selling government-owned homes to investors, who would then turnaround and sell or rent them out. (The official request for policy ideas is here.) It’s hoped that this move would help government agencies earn some much-needed revenue, boost neighborhood home values by getting buyers or renters into vacant homes and ease tight rental markets by expanding the supply of rental housing. Even though Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) are national agencies, housing markets are local, which means that the vacant, foreclosed properties they own are concentrated in regions that were hit hardest by the housing crisis. Among larger metro areas, these agencies own the most foreclosed property – known as REO (real estate owned) – in Las Vegas and Atlanta, after adjusting for metro area size. Several metros in Arizona, Michigan and California are also among the top 20 metros where the government owns a lot of homes.

A Banker Speaks, With Regret - If you want to understand why the Occupy movement has found such traction, it helps to listen to a former banker like James Theckston. He fully acknowledges that he and other bankers are mostly responsible for the country’s housing mess.  As a regional vice president for Chase Home Finance in southern Florida, Theckston shoveled money at home borrowers. In 2007, his team wrote $2 billion in mortgages, he says. Sometimes those were “no documentation” mortgages.  “On the application, you don’t put down a job; you don’t show income; you don’t show assets,” he said. “But you still got a nod.”  “If you had some old bag lady walking down the street and she had a decent credit score, she got a loan,” he added.  Theckston says that borrowers made harebrained decisions and exaggerated their resources but that bankers were far more culpable — and that all this was driven by pressure from the top. “You’ve got somebody making $20,000 buying a $500,000 home, thinking that she’d flip it,” he said. “That was crazy, but the banks put programs together to make those kinds of loans.”

Former Award Winning Chase Banker Describes Predatory Mortgage Lending Practices - - Yves Smith - Readers need to read today’s op ed by Nicholas Kristof in the New York Times, and pronto. It is a former insider debunking of the idea that borrowers rather than bankers bear primary responsibility for the housing bubble and aftermath. I’ve not been a big fan of the “greedy borrowers” theory of the mortgage crisis, particularly now, since the people who clearly bought too much house relative to their incomes defaulted quickly, in the 2007-2008 time frame, and are different than the people who are hitting the wall now. The current group in large measure is people who have suffered a setback, either as a result of the crappy economy (caused by the financial crisis, remember?) or personal disasters, such as a medical emergency.  But even for people who did stretch to buy a house, “greedy” is not necessarily the right moniker. The standard advice has long been to buy as much house as you can afford, with the assumption that people early in their careers will see income gains and have a comfortable margin in a few years. Another reason buyers strained to buy better homes, as Elizabeth Warren set forth long form in her book The Two Income Trap, is the competition for better schools. The premium for houses in decent school districts has gotten larger over time.

LPS: Mortgages In Foreclosure Process at an All-Time High - From LPS Applied Analytics: LPS' Mortgage Monitor Report Shows Delinquencies Down Nearly 30 Percent from Peak, Foreclosure Inventory at an All-Time High The October Mortgage Monitor report released by Lender Processing Services, Inc. (NYSE: LPS) shows mortgage delinquencies continue their decline, now nearly 30 percent off their January 2010 peak. Meanwhile, foreclosure inventories are on the rise, reaching an all-time high at the end of October of 4.29 percent of all active mortgages. The average days delinquent for loans in foreclosure extended as well, setting a new record of 631 days since last payment, According to LPS, 7.93% of mortgages were delinquent in October, down from 8.09% in September, and down from 9.29% in October 2010.  LPS reports that a record 4.29% of mortgages were in the foreclosure process, up from 4.18% in September, and up from 3.92% in October 2010. This gives a total of 12.22% delinquent or in foreclosure. It breaks down as:
• 2.33 million loans less than 90 days delinquent.
• 1.76 million loans 90+ days delinquent.
• 2.21 million loans in foreclosure process.
For a total of 6.30 million loans delinquent or in foreclosure in October. This graph shows the total delinquent and in-foreclosure rates since 1995.  This graph provided by LPS Applied Analytics shows foreclosure inventories by process.  The third graph shows the origination percentage by product and year. This is a reminder that the worst of the worst loans were private label and were made in 2005 and 2006.

CoreLogic: 10.7 Million U.S. Properties with Negative Equity in Q3 - CoreLogic released the Q3 2011 negative equity report today.  CoreLogic ... today released negative equity data showing that 10.7 million, or 22.1 percent, of all residential properties with a mortgage were in negative equity at the end of the third quarter of 2011. This is down slightly from 10.9 million properties, or 22.5 percent, in the second quarter. An additional 2.4 million borrowers had less than 5 percent equity, referred to as near-negative equity, in the third quarter.  Here are a couple of graphs from the report: This graph shows the break down of negative equity by state. Note: Data not available for some states. From CoreLogic:  "Nevada has the highest negative equity percentage with 58 percent of all of its mortgaged properties underwater, followed by Arizona (47 percent), Florida (44 percent), Michigan (35 percent) and Georgia (30 percent). This is the first quarter that Georgia entered the top five, surpassing California which had been in the top five since tracking began in 2009."  The second graph shows the distribution of equity by state- black is Loan-to-value (LTV) of less than 80%, blue is 80% to 100%, red is a LTV of greater than 100% (or negative equity). Note: This only includes homeowners with a mortgage - about 31% of homeowners nationwide do not have a mortgage.

Counting the Underwater Homeowners - Analysts have been celebrating various pieces of good economic news, including an uptick in consumer spending. But the housing hangover is still raging. At the end of the third quarter, 10.7 million homeowners owed more on their mortgages than their home is worth, according to new data from CoreLogic. That is down but a smidgen from the second quarter, when 10.9 million homeowners were underwater. But it is still more than one in every five mortgages. Those homeowners may continue to pay their note, but those who suffer a shock like job loss or illness are at a high risk of foreclosure because they are unable to downsize by selling. Some conservative economists have suggested that the housing market be left to heal itself, while liberals and, increasingly, centrists have warned that failure to intervene will severely restrict the economy’s ability to grow.The 200,000 decrease did not represent homeowners whose home values suddenly recovered, but people who lost their homes. They were easy to find in a report on household debt by the New York Federal Reserve, which found that 264,000 people had a foreclosure noted in their credit report in the third quarter. The total of seriously delinquent mortgages increased for the first time since the third quarter of 2009.

Case Shiller: Home Prices decline in September - S&P/Case-Shiller released the monthly Home Price Indices for September (a 3 month average of July, August and September). This release includes prices for 20 individual cities and and two composite indices (for 10 cities and 20 cities) and the national quarterly index for Q3. Note: Case-Shiller reports NSA, I use the SA data. Here is a table of the year-over-year and monthly changes for both SA and NSA. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 32.5% from the peak, and down 0.4% in September (SA). The Composite 10 is 0.5% above the June 2009 post-bubble bottom (Seasonally adjusted). The Composite 20 index is off 32.5% from the peak, and down 0.6% in September (SA). The Composite 20 is at a new post-bubble low. The second graph shows the Year over year change in both indices. The Composite 10 SA is down 3.3% compared to September 2010. The Composite 20 SA is down 3.6% compared to September 2010. This is slightly smaller year-over-year decline than in August. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices. Prices increased (SA) in 5 of the 20 Case-Shiller cities in September seasonally adjusted.

5th Consecutive Month Of House Price Drops As Case-Shiller Misses Expectations Again - The bottom-calling will continue of course but for the fifth month in a row, September's Case-Shiller home price index fell year-over-year as the Non-seasonally adjusted price index fell for the first time month-over-month since February. The overall index dropped 3.9% YoY, compared to expectations of a 3.1% drop. The more narrowly focused 20 City Index also missed expectations, falling 3.59% (relative to expectations of -3.00%). The index value is back below 142 (back at 2003 levels), its lowest in 3 months, as prices muddle along the bottom here with the mix most likely holding us from a more vertical drop. We assume the second derivative crowd will note the -3.9% drop is slower than the -5.79% drop of Q2, but October and November have been tumultuous months and we suspect the acceleration top the downside will revert - especially given recent rises in delinquencies to record highs.

A Look at Case-Shiller by Metro Area - S&P/Case-Shiller home-price data moved lower in September on both a monthly and annual basis. The composite 20-city home price index, a key gauge of U.S. home prices, dropped 0.6% from August and fell 3.6% from a year earlier. Seventeen cities posted monthly declines, while the other three showed gains. Atlanta, Las Vegas and Phoenix posted new index level lows. Eighteen of the 20 cities posted annual declines in September, with just Detroit and Washington D.C. notching gains. On a seasonally adjusted basis, which aims to take into account the slower selling season in the autumn, five cities — Cleveland, Dallas, New York, Portland and Washington, D.C. — posted monthly increases. The overall 20-city index was down 0.6% from the previous month on a seasonally adjusted basis. See a sortable table of home prices in the 20 cities in the Case-Shiller index. Read the full story. Read the full S&P/Case-Shiller release.

Las Vegas home prices fall to February 1998 levels - Las Vegas-area home prices fell again in September to a new low during the current recession, Standard & Poor’s reported Tuesday. Stung by elevated unemployment and high levels of foreclosures and underwater mortgages, Las Vegas saw housing prices fall 1.4 percent from August and 7.3 percent from September 2010, Standard & Poor’s said. Data from Standard & Poor’s S&P/Case-Shiller Home Price Indices show Las Vegas-area prices are now at levels last seen in February 1998 after September’s decline. Of 20 big U.S. markets tracked by Standard & Poor’s, the average decline from August was 0.6 percent while the year-to-year decline was 3.6 percent. “It is a bit disturbing that we saw three cities post new crisis lows. For the prior three or four months, only Las Vegas was weakening each month. Now Atlanta and Phoenix have fallen to new lows too,” Standard & Poor’s analyst David Blitzer said in a statement.

U.S. home prices 7.8% below year ago - U.S. home prices run 7.8% below a year ago in major markets, according to one homebuying index. The national homebuying index from DataQuick and its analysts at DQNews attempts to give a weekly snapshot into most-recent trends, using “not modeled” home sales counts and median selling prices. This math — we’ve dubbed it the “DQ98″ — tracks on a weekly basis the freshest homebuying patterns in 98 out of the 100 largest U.S. markets (sorry, Louisville and Wichita!) to compile a national benchmark. The latest reading — as of Nov. 24 — showed pricing down and sales activity down vs. the previous week. Here’s a peek inside the “DQ98″…

  • Top 98 markets’ median home selling price of $175,250 — that is down -1.27% vs. the previous week; down 7.8% vs. a year ago; and down 18.50% vs. the same week three years ago.
  • Pricing momentum — based on average median prices — in the last three weeks was down 1.4% vs. the three previous weeks.
  • Top 98 market’s total home sales of 165,729 — that is down 1.65% vs. the previous week; up 2.00% vs. a year ago; and down 9.90% vs. the same week three years ago.
  • Sales pace — average weekly actvity — in the last three weeks was down 2.5% vs. the three previous weeks.
  • Since the start of 2009, when this index’s history starts, these DQ98 markets averaged 182,251 sales in the trailing 30-day periods.

Average New House Price Drops To Lowest Since 2003 - Today's new annualized home sales print was 307k, below expectations of 315k (yet oddly better than last month's downward revised which moved from 313k to 303k, wink wink nudge nudge Census bureau). This is not to be confused with the actual number of houses sold which came at a whopping 25k, and the third month in a row in which under 500 homes sold in the over $750,000 category. Yet the most notable data point was the average new house sale price which dropped to $242,300. This is the lowest price since 2003! Something tells us that an MBS LSAP is pretty much guaranteed at this point.

Real House Prices and House Price-to-Rent - Case-Shiller, CoreLogic and others report nominal house prices. However it is also useful to look at house prices in real terms (adjusted for inflation), as a price-to-rent ratio, and also price-to-income (not shown here). Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices are back to 1999/2000 levels, and the price-to-rent ratio is also back to 2000 levels. The first graph shows the quarterly Case-Shiller National Index SA (through Q3 2011), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through September) in nominal terms (as reported). In nominal terms, the Case-Shiller National index (SA) is back to Q4 2002 levels, the Case-Shiller Composite 20 Index (SA) is back to April 2003 levels, and the CoreLogic index is back to June 2003. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to Q1 1999 levels, the Composite 20 index is back to May 2000, and the CoreLogic index back to April 2000. In real terms, all appreciation in the '00s is gone. This graph shows the price to rent ratio (January 1998 = 1.0). On a price-to-rent basis, the Composite 20 index is back to June 2000 levels, and the CoreLogic index is back to May 2000.

Housing Prices Slip Back Down; 10.7 Million Homes Underwater - Earlier this month, the Center for Responsible Lending put out a study asserting that the foreclosure crisis is only half over. We got some more data confirming that today in the form of the Case-Shiller report: U.S. home prices are falling again in most major cities after posting small gains over the summer and spring. The report suggests the troubled housing market remains weak and won’t recover any time soon. The Standard & Poor’s/Case-Shiller index released Tuesday showed prices dropped in September from August in 17 of the 20 cities tracked. That was the first decline after five straight months in which at least half the cities in the survey showed monthly gains. A separate index for the July-September quarter shows prices were mostly unchanged from the previous quarter. The only thing that has changed the dynamic on home prices in the last three years has been the first-time homebuyer’s tax credit. And that wasn’t very advisable, since it subsidized a class of well-off homebuyers who didn’t need the help and just shifted purchases rather than increasing them. Since that expired, no other meaningful solution to the housing crisis has been attempted. There have been little programs here and there, but nothing to fit the scale of the problem. And so sales and prices have moved either sideways or downward.

New Home Sales in October: 307,000 SAAR - The Census Bureau reports New Home Sales in October were at a seasonally adjusted annual rate (SAAR) of 307 thousand. This was up from a revised 303 thousand in September (revised down from 313 thousand). The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. The second graph shows New Home Months of Supply. Months of supply decreased to 6.3 in October. The all time record was 12.1 months of supply in January 2009. This is still slightly higher than normal (less than 6 months supply is normal). The seasonally adjusted estimate of new houses for sale at the end of October was 162,000. This represents a supply of 6.3 months at the current sales rate. Starting in 1973 the Census Bureau broke inventory down into three categories: Not Started, Under Construction, and Completed. This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale was at 60,000 units in October. The combined total of completed and under construction is at the lowest level since this series started. The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In October 2011 (red column), 25 thousand new homes were sold (NSA). This was just above the record low for October of 23 thousand set in 2010. The high for October was 105 thousand in 2005.

New Home Prices: Average Lowest since 2003 - As part of the new home sales report, the Census Bureau reported that the average price for new homes fell to the lowest level since September 2003. From the Census Bureau: "The median sales price of new houses sold in October 2011 was $212,300; the average sales price was $242,300." The following graph shows the median and average new home prices. The average new home price is at the lowest level since August 2003. The second graph shows the percent of new home sales by price. At the peak of the housing bubble, almost 40% of new homes were sold for more than $300K - and over 20% were sold for over $400K. In October, only 20% were sold for more than $300K - and only 8% for over $400K. Almost half of all home sales in October were under $200K - and about 80% of home sales were under $300K. This is the lowest percentage under $300K since November 2002. The third graph shows existing home sales (left axis) and new home sales (right axis) through October. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared due mostly to distressed sales. The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders can't compete with the low prices of all the foreclosed properties.

Vital Signs: New Home Sales Stuck at Low Level - New home sales inched up last month. There were 307,000 new homes sold, at an annual rate, up from 303,000 in September. With little new construction, the inventory of new homes remained at 162,000 — the lowest level on records going back to 1963. At October’s sales pace, it would take a half year to exhaust that supply; in 2005, it would have taken less than two months.

Visible Existing Home Inventory declines 17% year-over-year in November - I've been using inventory numbers from HousingTracker / DeptofNumbers to track changes in inventory. Tom Lawler mentioned this back in June (Tom also discussed how the NAR estimates existing home inventory - they don't aggregate data from local boards!) Using the for monthly inventory (54 metro areas), it appears inventory will be back to 2005 levels this month. This graph shows the NAR estimate of existing home inventory through October (left axis) and the HousingTracker data for the 54 metro areas through November. The HousingTracker data shows a steeper decline in inventory over the last few years (as mentioned above, the NAR will probably revise down their inventory estimates in a few months). The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the November listings - for the 54 metro areas - declined 16.9% from the same month last year.  This is just "visible inventory" (inventory listed for sales). There is a large percentage of distressed inventory, and various categories of "shadow inventory" too, but visible inventory has clearly declined in many areas.

Pending Home Sales Jump in October - The Pending Home Sales Index, a forward-looking indicator based on contract signings, surged 10.4 percent to 93.3 in October from 84.5 in September and is 9.2 percent above October 2010 when it stood at 85.5. The data reflects contracts but not closings....The PHSI in the Northeast surged 17.7 percent to 71.3 in October and is 3.4 percent above October 2010. In the Midwest the index jumped 24.1 percent to 88.7 in October and remains 13.2 percent above a year ago. Pending home sales in the South rose 8.6 percent in October to an index of 99.5 and are 9.7 percent higher than October 2010. In the West the index slipped 0.3 percent to 105.5 in October but is 8.1 percent above a year ago.

Mortgage applications plummet 11.7% - Mortgage applications fell 11.7% this past week as demand for refinanced loans cooled across the country, an industry trade group said. The Mortgage Bankers Association noted that its market composite index – a measure of loan application volume – dropped 11.7%. The steep drop is tied to a 15.3% decline in the refinancing index. Meanwhile, the seasonally adjusted purchase index fell a slight 0.8% from the previous week. Refinancing activity stalled over the course of the past week, with it now making up 73.9% of all loan applications, down from 75.9% a week earlier. The average rate for a 30-year, fixed rate mortgage valued at $417,500 or less fell to 4.21% from 4.23%. In addition, the average contract interest rate for a 30-year, FRM jumbo declined to 4.55% from 4.59%. The 30-year, FRM backed by the FHA also declined to 4%, and the average 15-year, FRM remained unchanged at 3.58%. In addition, the average contract interest rate for 5/1 ARMs fell to 2.98% from 3%.

Construction Spending increased in October - This morning the Census Bureau reported that overall construction spending increased in October:  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during October 2011 was estimated at a seasonally adjusted annual rate of $798.5 billion, 0.8 percent (±1.6%) above the revised September estimate of $792.1 billion. The October figure is 0.4 percent (±1.9%) below the October 2010 estimate of $802.0 billion. This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 65% below the peak in early 2006, and non-residential spending is 32% below the peak in January 2008. Public construction spending is now 14% below the peak in March 2009. The second graph shows the year-over-year change in construction spending. On a year-over-year basis, both private residential and non-residential construction spending have turned positive, but public spending is now falling on a year-over-year basis as the stimulus spending ends. The year-over-year improvements in private non-residential are mostly due to energy spending (power and electric).

New evidence that being underwater on your house limits labor mobility - Rortybomb has long argued there is no significant effect.  I’ve never had a horse in this race, in any case here are new results from Planem Nenov, on the job market from MIT: The present paper studies the impact of a housing bust on regional labor reallocation and the labor market. I document a novel empirical fact, which suggests that, by increasing the fraction of households with negative housing equity, a housing bust hinders interregional mobility. I then study a multi-region economy with local labor and housing markets and worker reallocation. The model can account for the positive co-movement of relative house prices and unemployment with gross out-migration and negative co-movement with in-migration observed in the cross section of states. A housing bust creates debt overhang for some workers, which distorts their migration decisions and increases aggregate unemployment in the economy. This adverse effect is amplified when regional slumps are particularly deep as in the recent U.S. recession. In a calibrated version of the model, I find that the regional reallocation effect of the housing bust can account for between 0.2 and 0.5 percentage points of aggregate unemployment and 0.4 and 1.2 percentage points of unemployment in metropolitan areas experiencing deep local recessions in 2010. Finally, I study the labor market effects of two policies proposed for addressing the U.S. mortgage

Landlords Turning To 'Powerful Software' To Hike Up Rents This Season - We know landlords, like car dealers, will do almost anything to get you to sign on the dotted line.  Now Matt Hudgins reports in the Times that they've been using "powerful software tools" to jack their rents even higher on new and renewing leases. The technology, mainly produced by two companies in Texas and Georgia, has become a go-to tool in the past decade for thousands of landlords who have been hurt by the rise in vacancies.  According to the National Renter's Association, the nation has seen some of the lowest occupancy rates since 2002. The software works similar to travel sites like Travelocity and, wherein users punch in dates and times to pull up rents based on "competitors’ rental rates, market conditions, seasonal trends and hundreds of other variables," writes Hudgins.

Household Debt Mountain Grows, Nobody Cares - The Federal Reserve released its Quarterly Report on Household Debt and Credit report this week. Calculated Risk duly reported on the results, which included this text from the Fed. Aggregate consumer debt fell approximately $60 billion to $11.66 trillion in the third quarter of 2011 according to the Federal Reserve Bank of New York’s latest Quarterly Report on Household Debt and Credit." The decline in outstanding consumer debt reveals that households continue to try and deleverage in the wake of a challenging economic environment and large declines in home values," . "However, our findings also provide evidence that consumer credit demand continues to increase, a positive sign for consumer sentiment."Even as "consumers" struggled to get out of debt while also facing a "challenging" economic environment—this is a euphemism for the the economy can't suck enough—and large declines in home values, credit demand continues to increase according to the Fed, although aggregate debt fell by about $60 billion out a total of $11.66 trillion. That's $60,000,000,000 out of a total if 11,660,000,000,000, which works out to about 0.5%. I'll leave it to you to work out the various contradictions in the Fed's statement. Hint: is more debt the solution to a debt problem?

Why has (private) debt increased? - I'm not talking about government debt. I'm talking about the debt of households and firms. And I'm talking long run, not just the last few years. Over the last several decades, the ratio of debt to GDP has increased a lot. Not just in Canada, but in most rich countries, as far as I know. Why? I don't have a good answer to that question. Or rather, I have several answers, but I don't know if any of them are good answers. I'm not sure if any of the effects I'm talking about are big enough to matter. And I'm not sure if they fit all the facts. So I'm going to crowd-source the question. Here are two popular "explanations" that don't add up:

  • 1. "Everybody has been borrowing and spending too much!" To get debt, you need both a borrower and a lender. Demand and supply. If everyone was borrowing and spending more than their income....they couldn't. Because there would be nobody lending and spending less than their income.
  • 2. "The banks created loans out of thin air, and lent too much!"

Jump in Confidence Suggests Consumers Tuning Out Washington - Consumer confidence rose sharply in November, the Conference Board reported today, in a sign that recent gains in the labor market and modest momentum in the recovery may be starting to lift Americans’ gloomy spirits. And perhaps, also, that Americans, like Wall Street, are starting to tune out Washington as further drama unfolds across the Atlantic. The Conference Board said its index of consumer sentiment shot up to 56 this month from 40.9 in October. That’s still a very weak reading by historical standards, indicating consumers remain in sour mood. But the jump returns the index to levels not seen since last July. That bodes well for the recovery because when consumers feel better about the economy, they spend more, fueling growth. Hence last weekend’s big retail sales figures to kick off the holiday shopping season. The rise in confidence follows data in recent weeks that suggest the pace of layoffs is declining, possibly leading to further gains in the jobs market. Consumers were also likely boosted by a dip in the unemployment rate to 9% from 9.1% and an easing in consumer prices.

Vital Signs: Improving Consumer Mood - Americans cheered up this month. In November, the Conference Board’s index of consumer confidence rose to 56 from 40.9 in October. While still leaving the gauge well below prerecession levels, that was the sharpest increase since April 2003. Consumers are feeling better about the job market, which is expected to show continued gains in Friday’s employment report.

Consumer Moods Improve a Bit, RBC Survey Finds - U.S. consumers were slightly less pessimistic about the economy this month, according to a survey released Thursday, but most expect muted growth in 2012. The Royal Bank of Canada said its consumer outlook index increased to 40.3 in December from 39.6 in November. The RBC current conditions index increased to 29.8 from 27.7, and the expectations index rose to 52.1 from 51.7. All the December readings are at their highest respective levels since July. In contrast to other recent improving readings on the U.S. labor markets, the RBC results show consumers were slightly more downbeat on the jobs situation this month. The RBC Jobs Index fell 0.6 points to 48.4. The Labor Department is scheduled to release its November employment report on Friday. The median forecast among economists is that payrolls grew by a solid 125,000 and the unemployment rate stayed at 9.0%. In a series of special questions, RBC asked about holiday shopping plans and consumers’ forecast for the 2012 economy. The results of the first question show 45% plan to spend less this year compared to 2010. Only 7% plan to spend more and a large 14% plan no spending at all.

Who Is "The Consumer"?: Ahead of the inevitable forensic analysis of holiday shopping trends and the health of "the consumer" this is a good reminder of who "the consumer" actually is from Dan Greenhaus at BTIG: When discussing “the consumer,” it is important to remember that in reality, “the consumer” is the top 20% of income earners and then everybody else. The top 20% of income earners (who own about 80-90% of the equity market) account for about 40-45% of all spending in the economy. One need look no further than the performance of certain companies since the equity market bottom. While the S&P 500 is up 71% since March 2009, COH is up 400%, TIF is up 308% and JWN is up 262%. Conversely, while TJX is up 170%, KSS and WMT are up 55% and 19% respectively. At the other end of the spectrum, DLTR is up 188%, DG is up 85% and FDO is up 82%, all outperforming the index over the same time frame. Clearly consumer weakness depends on where you want to find it.

Black Friday Sales Rise 6.6% to Record: ShopperTrak - Black Friday sales increased 6.6 percent to the largest amount ever as U.S. consumers shrugged off 9 percent unemployment and went shopping.  Consumers spent $11.4 billion, ShopperTrak said in a statement yesterday. Foot traffic rose 5.1 percent on Black Friday, according to the Chicago-based research firm. “This is the largest year-over-year gain in ShopperTrak’s National Retail Sales Estimate for Black Friday since the 8.3 percent increase we saw between 2007 and 2006,” . “Still, it’s just one day. It remains to be seen whether consumers will sustain this behavior through the holiday shopping season.”

Report: Black Friday sales up 7% - With all the "Black Friday" reports, it is important to remember that retail sales are only a small portion of consumer spending.  According to the Bureau of Economic Analysis (BEA), of the $10.8 trillion in personal consumption expenditures in Q3 (seasonally adjusted annual rate), about 34% was spent on goods. From Suzi Khimm at the Wonkblog: Why a Black Friday frenzy doesn’t mean jobs are coming back Consumer spending on goods is starting to rebound, but spending on services — a key driver of job growth — is lagging significantly farther behind.  And from MarketWatch: Black Friday posts big retail-sales gains vs. 2010 U.S. retailers posted sizable "Black Friday" gains vs. 2010's day-after-Thanksgiving sales results, according to data released Saturday. Store sales, according to Chicago-based ShopperTrak, rose 7%, as shoppers spent $11.4 billion, up nearly $1 billion from a year ago ...

Big Box Brother: While You Shop the Mall, the Mall Shops You - From Black Friday though to the end of the December, two malls in southern California and Richmond, Va., will be following shoppers by tracking their cell phone signals. When somebody walks out of the Gap, into the Starbucks, out through the Nordstrom and on to the Auntie Annes pretzel stand, the mall will be monitoring.  Creepy? Maybe. But the information is anonymous and won't be used to target individual shoppers. Instead, it's part of a quiet information revolution among retailers to figure out how crowds move, where they cluster, and what stores they ignore. Tracking crowds isn't new. Tracking crowds through their cell phones is. If you've got a problem with malls paying attention to your smart phone, you might want to stay away from the mall for, say, the rest of your life. The future of shopping, according to retail analysts I spoke with for a recent special report, is malls and phones talking to each other.

You definitely want to avoid this - Some friends and I spent most of the weekend touring the future site of our resilient community in central Chile, just a few hours’ drive south of Santiago on a very modern highway. When I returned to my apartment in Santiago and got caught up on major news events from around the world, some friends sent along the usual batch of Black Friday shopping videos. They’re hilarious… and utterly pathetic. Almost without exception, the situation gets worse every year. People get bruised and bloodied as crowds battle each other for deep discounts. Last year several people died… and in response, most of the major retailers adjusted their specials and staggered their stores’ opening times to reduce the crowd levels. It didn’t help much, as this year’s barrage of Black Friday incidents underscores yet again how hopeless the mindless culture of consumerism has become. People still trample each other, fight each other, etc. Now they are pepper-spraying each other… or even waiting in the parking lots to mug each other as shoppers exit the stores.  Then there’s this video showing the utter chaos and calamity that ensued when shoppers were fighting over towels put on sale at $1.28 each. Towels.

Black Friday Boom Masks Physical Retailers’ Desperation -  In tough economic times, people will do almost anything to get good bargains. But the earlier opening hours, the extreme discounts, and the super-hyped sales signify a problem with the retailing industry — not with America's consuming culture.  For in addition to the smells of fragrances, mistletoe, and the occasional burst of pepper spray, the odor you're sniffing in bricks-and-mortar stores this year is the whiff of desperation.  Take a walk with me through the most recent retail sales data, and you'll see what I mean. The headline number looks good. Retail sales in October were a record $397.7 billion, up from September, and up 7.2 percent from October 2010. But some of the biggest and most rapidly growing components of retailing include segments that we don't really think of as shopping. The biggest retail sector is cars and car parts, which account for about 18 percent of the total; they're up 10.1 percent so far this year. Food and beverage stores — i.e. groceries—constitute about 13.2 percent of sales, and they're up 5.6 percent through the first ten months. Gasoline stations alone account for 11.7 percent of total sales, and their sales are up 19 percent so far in 2011, thanks to higher gas prices. Food service and drinking places account for 10.7 percent of total sales.

Why a Black Friday frenzy doesn’t mean jobs are coming back - Consumer spending on goods is starting to rebound, but spending on services — a key driver of job growth — is lagging significantly farther behind. The Wall Street Journal points out that spending on goods is up about 9.1 percent since the worst of the recession, comparable to what happened after the 2001 downturn and fueling some optimistic forecasts for Black Friday retailers. But spending on services is only up 2.8 percent overall, significantly lower than during previous recoveries. (Wall Street Journal) As Alan Krueger, chair of the president’s Council of Economic Advisers, explains to the Journal: “Services account for about half of GDP, and over half of jobs.”

U.S. Light Vehicle Sales at 13.6 million SAAR in November, Highest since Aug 2009 - Based on an estimate from Autodata Corp, light vehicle sales were at a 13.63 million SAAR in November. That is up 11.4% from November 2010, and up 3.1% from the sales rate last month (13.22 million SAAR in Oct 2011). This was above the consensus forecast of 13.4 million SAAR. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for November (red, light vehicle sales of 13.63 million SAAR from Autodata Corp). This was the highest sales rate since August 2009 ("Cash-for-clunkers"), and other than August 2009, this was the highest since June 2008.  The second graph shows light vehicle sales since the BEA started keeping data in 1967. This shows the huge collapse in sales in the 2007 recession. This also shows the impact of the tsunami and supply chain issues on sales, especially in May and June. Growth in auto sales should make a strong positive contribution to Q4 GDP. Sales in Q3 averaged 12.45 million SAAR, and so far (October and November) sales have averaged 13.42 million SAAR in Q4, an increase of 7.6% over Q3.

Excluding Cash for Clunkers, November Car Sales Are the Highest Since June 2008, 2.5 Years Ago - Auto sales were released today by Autodata, and excluding the artificially high "cash for clunker" month of August 2009,  light vehicles sales in November were the strongest in any month since June 2008, almost two and-a-half years ago (see chart above).  On a seasonally adjusted annual rate, 13.63 million cars were sold last month, which was an 11% gain from the same month last year and almost a 3% improvement from October.  Sales gains for November were led by Chrysler, which experienced a 44.5% increase over last year, followed by strong gains from Kia (39.1%), Volkswagen (28.7%), Madza (20.4%) and Nissan (19.4%).  Many of the luxury brands reported strong annual sales gains in November including Mercedes (46.2%), Land Rover (30.7%) and BMW (14.8%).    

Nov. Chicago PMI accelerates to seven-month high --- The November reading of the Chicago PMI rose to 62.6% from 58.4% in October, which is a seven-month high and the 26th straight month over the 50% level that indicates expansion. Economists for MarketWatch had expected the gauge to stay at 58.4%. Gauges for production, new orders and order backlogs all accelerated. One panelist said, "From observation from our company it feels as if the market is making a comeback."

US Economic Data Reporting Now Officially A Farce: Every Economic Data Point Prints 4+ Std Devs Above Consensus - It appears that central bank intervention was not the only thing in full force today: The US version of the Chinese Ministry of Truth in economic reporting has now officially joined the fray. Anyone wondering just how much of a joke the US high frequency economic data updates have become should look no further than these three charts showing Wall Street forecasts (consensus and distribution) and actual prints for the ADP Payroll, the Chicago PMI and Pending Home Sales. Not one indicator has come below 4 standard deviations above the average forecast, and every single one has printed above the highest forecast. It is now safe to say without any doubt that US data is equal if not more equal in credibility terms with that of China. Below are the charts showing sellside forecast distribution for ADP, Chicago PMI and Pending Home Sales. Nuf said.

Dallas Fed Manufacturing Survey shows contraction in November - From the Dallas Fed: Texas Manufacturing Activity Declines Texas factory activity decreased in November, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, dipped from 4.1 to –5.1, registering its first negative reading in two years. Other measures of current manufacturing conditions also indicated contraction in November. The new orders index suggested deterioration of demand, falling to –5.1 after a year in positive territory. ... The capacity utilization index tumbled to –10.2 after several months of weak readings centered around zero.Here is a graph comparing the regional Fed surveys and the ISM manufacturing index: The New York and Philly Fed surveys are averaged together (dashed green, through November), and five Fed surveys are averaged (blue, through November) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through October (right axis). The ISM index for November will be released Thursday, Dec 1st and the regional surveys suggest another fairly weak reading in November. The consensus is for a slight increase to 51.7 from 50.8 in October.

ISM Manufacturing index indicates slightly faster expansion in November - PMI was at 52.7% in November, up from 50.8% in October. The employment index was at 51.8%, down from 53.5%, and new orders index was at 56.7%, up from 52.4%.  From the Institute for Supply Management: November 2011 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector expanded in November for the 28th consecutive month, and the overall economy grew for the 30th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report.  Here is a long term graph of the ISM manufacturing index. This was above expectations of 51.7%, and suggests manufacturing expanded at a slightly faster rate in November than in October. It appears manufacturing employment barely expanded in October with the employment index at 51.8%. New orders were up, and prices declined.

Will Manufacturing's November Revival Last?  - Yesterday's update on the ISM Manufacturing Index offers another encouraging data point that builds on the acceleration in jobs creation via ADP's November employment report. If it wasn't for ongoing euro crisis and the potential for instability in the budget negotiations in Washington, optimism would be a no-brainer. But we live in interesting times, and so expectations must be managed carefully. The ISM Manufacturing's pop last month comes at a time when the labor market seems to be strengthening, albeit from dangerously low levels of growth. Ditto for the latest ISM number, which jumped to 52.7 in November, up from 50.8 in October. Readings above 50 indicate growth and so it's helpful that we've put some distance between the dividing line of expansion and contraction. Of course, the fact that we've been flirting with the 50 mark in recent months is a reminder that the macro trend is still precarious.

Rebuilding American manufacturing - MIT News - A cohort of leading engineers, scientists, business executives and government officials gathered at MIT on Monday for a daylong forum, part of a White House initiative with an ambitious goal: turning America’s abundant laboratory advances into new technologies that will jump-start the U.S. economy.  The meeting was part of the Advanced Manufacturing Partnership (AMP), created by President Barack Obama in June, which will deliver specific policy recommendations on manufacturing industries to the administration next spring. The meeting was the second of four regional workshops intended to stimulate interest in and promote local connections around a prospective renaissance in American manufacturing. AMP’s premise is that there exists a substantial “innovation gap,” as many forum participants called it, in which not enough of the country’s research discoveries move on to form the basis of viable businesses. Helping those innovations move into the marketplace could strengthen the nation’s manufacturing sector and reverse the sector’s long decline in employment.

Lamentably common misunderstanding of meritocracy - Tyler Cowen pointed to an article by business-school professor Luigi Zingales about meritocracy. I’d expect a b-school prof to support the idea of meritocracy, and Zingales does not disappoint. But he says a bunch of other things that to me represent a confused conflation of ideas. Here’s Zingales: America became known as a land of opportunity—a place whose capitalist system benefited the hardworking and the virtuous [emphasis added]. In a word, it was a meritocracy. That’s interesting—and revealing. Here’s what I get when I look up “meritocracy” in the dictionary:

1 : a system in which the talented are chosen and moved ahead on the basis of their achievement
2 : leadership selected on the basis of intellectual criteria

Nothing here about “hardworking” or “virtuous.” In a meritocracy, you can be as hardworking as John Kruk or as virtuous as Kobe Bryant and you’ll still get ahead—if you have the talent and achievement. Throwing in “hardworking” and “virtuous” seems to me to an attempt (unconscious, I expect) to retroactively assign moral standing to the winners in an economic race.

Jobs, jobs, jobs -- Hale Stewart of BondDad blog discusses jobs...and jobs...

1. V shaped real retail sales and industrial production recoveries vs. jobs: ...Comparing those with private jobs (red) and total payrolls (green), we can see that the percentage losses in sales and production were steeper, and have made up nearly or more than all of their ground compared with jobs. Meanwhile, private jobs have regained only slightly over 30% of their losses. When government employment is added for the total jobs picture, fewer than 25% of the losses have been regained.
2. Comparing improvements in aggregate hours and jobs: ...Another point I have frequently made is that aggregate hours worked are recovering faster than new jobs. Since more hours were lost than jobs during the recession, if past was prologue then we would have to wait for aggregate hours to regain their lost comparative ground before job growth would match the growth in hours....
3. Comparing real retail sales with jobs: ...This is yet another indication of just how significant government job losses have been to the relatively poor jobs recovery. At the same time, because real retail sales are a leading indicator for jobs, this reinforces that we should expect to continue to see positive job growth in the economy, with private jobs at least being added at something like a 2% YoY rate.

Jobless Claims Rise For 2nd Week In A Row -- New jobless claims rose last week, taking some of the wind out of yesterday's inspiring rebound in ADP's November employment report. Filings for unemployment benefits increased 6,000 to a seasonally adjusted 402,000—the first time in a month that the numbers have settled above the 400k mark. But it's too soon to argue that the labor market is headed for a reversal of fortunes. Let's start with the standard caveat that weekly jobless claims numbers are forever volatile in the short term and so it's the trend that matters. Fortunately, the trend has been mildly friendly in recent months, as the declining four-week moving average shows. Last week's four-week average of less than 396,000 is near the lowest levels since the spring.  New claims continue to fall on a year-over-year basis as well, as the second chart below shows. Weekly filings dropped more than 10% last week vs. the year-earlier week on a seasonally unadjusted basis. That's a bit softer than the annual decline from recent weeks, but it's still quite strong and so it implies that there's more positive momentum ahead for the labor market.

Initial Jobless Claims Back Over 400K, Prior Revised Higher As 91% Of The Time - Reality once again creeps back in, confirming that the 4 sigma beats in the economic indicators pointed out yesterday were mostly duds, except of course for the drop in the Employment index in the Chicago PMI. After a few brief weeks with a 3 handle in initial claims, initial layoffs once again jumped over 400k, to 402,000 in the Thanksgiving shortened week. As is now par for the course of the data fudgers at the BLS, the previous number was revised higher as is 100% the case always now on a weekly basis, from 393K to 396K. As a reminder, last week's forecast had been for a 388K print, so the 5k miss certainly looked better than an 8k, or 60% higher miss. Unadjusted claims was the silver lining, declining by 69.7k following the massive surge the week prior. Continuing claims also missed expectations, rising from an upward revised 3,705K to 3,740K, on consensus print of 3,650K. Probably most notable is the surge in EUCs as over 76k people dropped off continuing claims and had to file for extended benefits. Absent a further extension in the 99 week cliff at the end of the year, many people are going to lose their continuing continuing benefits. And going back to the BS from the BLS, as John Lohman's chart below shows that in 2011 initial and continuing claims have been revised higher the week following 91% and 100% of the time, respectively. A purely statistical explanation for this phenomenon is "impossible." 

Planned layoffs edge down in November: Challenger (Reuters) - The number of planned layoffs at U.S. firms edged down marginally in November, though job cuts for the year have surpassed 2010's total, a report on Wednesday showed. Employers announced 42,474 planned job cuts this month, down 0.7 percent from 42,759 in October, according to the report from consultants Challenger, Gray & Christmas Inc. November's job cuts were down 12.8 percent from the same time a year ago when 48,711 layoffs were announced. But with just one month left in the year, employers have announced 564,297 cuts for 2011, exceeding 2010's total of 529,973. Cuts in the government sector accounted for 44 percent of November's layoffs, the eighth time this year the sector has led all others in monthly job cuts. Of the 18,508 government job cuts announced this month, 13,500 were the result of civilian workforce cuts made by the United States Air Force. "Over the past six months, we definitely have seen a shift away from the heavy government job cuts at the state and local level toward increased job cuts at the federal level,"

Job cuts surpass 2010 levels (Audio) Announced job cuts so far this year now exceed last year's total, and Challenger, Gray and Christmas CEO John Challenger says that contradicts the economic recovery story we've all been told.

Survey: Small Business hiring picking up - From NFIB on small business hiring: November Brings First Positive Growth in Months “The jobs report this month bears the first good news in a while. While the net change in employment per firm wasn’t much different from zero, it had a positive sign in front of it for the first time in nearly half a year. On average, owners reported increasing employment an average of 0.12 workers per firm. ...“Forty-seven (47) percent of small business owners hired or tried to hire in the last three months and 35 percent of them reported few or no qualified applicants for positions, both figures up 4 points from October. “The percent of owners cutting jobs has returned to ‘normal’ levels. ... And the percent of owners adding employees (creating jobs) continued to trend up.  Over the next three months, 11 percent plan to increase employment (up 2 points), and 11 percent plan to reduce their workforce (down 1 point), yielding a seasonally adjusted net 7 percent of owners planning to create new jobs, a 4 point improvement and the strongest reading in 38 months. This graph shows the net hiring plans for the next three months. Hiring plans were still fairly low in November, but the trend is up - and this is the strongest reading in 38 months.  This fits with data from ADP that also shows a pickup in small business hiring

ADP Says Job Creation Accelerated In November - Job creation rolls on, today’s ADP Employment Report advises. The preliminary update for November shows a net gain of 206,000 private sector jobs on a seasonally adjusted basis. That’s the highest monthly advance for this series since December 2010. If there’s a recession brewing in the U.S., it’s not obvious in these numbers. Never say never, but history strongly suggests that new recessions don't arrive with this level of job creation. Granted, there’s always a contingency these days, and it starts with the euro crisis. With Europe widely expected to dip into a recession, if it’s not there already, the strength in U.S. job growth could evaporate quickly. Even so, the revival in private sector jobs provides an additional buffer against future troubles.

ADP: Private Employment increased 206,000 in November - ADP reportsADP today reported that employment in the U.S. nonfarm private business sector increased by 206,000 from October to November on a seasonally adjusted basis. The estimated advance in employment from September to October was revised up to 130,000 from the initially reported 110,000. The increase in November was the largest monthly gain since last December and nearly twice the average monthly gain since May when employment decelerated sharply. Employment in the private, service-providing sector rose 178,000 in November, which is up from an increase of 130,000 in October. Employment in the private, goods-producing sector increased 28,000 in November, while manufacturing employment increased 7,000.  This was well above the consensus forecast of an increase of 130,000 private sector jobs in November. The BLS reports on Friday, and the consensus is for an increase of 112,000 payroll jobs in November, on a seasonally adjusted (SA) basis.

Vital Signs: Strong Private Hiring - Hiring picked up last month, according to payroll giant Automatic Data Processing. The private sector added 206,000 jobs in November, after adding an upwardly revised 130,000 in October. The payroll firm’s figures don’t always jibe with official data, but they nonetheless prompted some economists to up their estimates for Friday’s employment report from the Labor Department.

Economists on ADP Report: Won’t Get Fooled Again - Wednesday’s closely watched ADP report stunned economy-watchers with its strong reading of 206,000 new jobs created in the U.S. private sector in November. But economists weren’t quick to change their forecasts for Friday’s nonfarm payroll number (which includes both private and government jobs). Chalk it up to “once bitten, twice shy” caution. As economists will tell you, for any given month, ADP can vary widely from the official jobs tally put out by the Bureau of Labor Statistics partly because of different methods for collecting data. Remember back in early July, ADP announced June payrolls had soared by 157,000 new slots, but the BLS reported a much more subdued 57,000 private jobs. Besides, another job estimate released Wednesday showed a marked slowdown in hiring this month. TrimTabs Investment Research tracks daily income tax deposits to the U.S. Treasury from all salaried U.S. employees to calculate job growth. TrimTabs says only 64,000 jobs were added this month. The median forecast of economists for the change in November nonfarm payrolls is 125,000 — close to the middle of the two reports.

Which November Jobs Report Estimate Is Wrong? - After yesterday’s announcement of coordinated action by central banks around the globe to add liquidity to the banking system, the S&P 500 surged 4.3%, capping a 7.6% gain over three days. Amid the euphoria, investors cheered the ADP Employment Report, which estimated that the private sector added 206,000 jobs in November, double that of previous months. For investors, it was a loud signal to buy stocks. “November’s increase in employment normally would be associated with a decline in the unemployment rate,” Joel Prakken, chairman of Macroeconomic Advisers, said in a statement Wednesday. “An acceleration of employment is consistent with data showing that GDP growth, which slowed sharply around the turn of the year, is gradually recovering.”ADP’s estimate compares with economists’ consensus of 126,000, according to a survey by Bloomberg. TrimTabs Investment Research is even more cautious. The company said Wednesday that the U.S. economy likely added only 64,000 jobs in November, an estimate that went unnoticed by investors caught up in the exuberance. The sharp deceleration in job growth in November has us concerned,” says Madeline Schnapp, director of macroeconomic research at TrimTabs. “It appears that hiring managers have rolled up the welcome mat due to the raging debt crisis in Europe.”

U.S. Adds 120,000 Jobs; Unemployment Drops to 8.6% —The United States logged yet another month of mediocre job growth in November.  The Labor Department said Friday that the nation’s employers added 120,000 jobs last month, after adding 100,000 jobs in October.  The unemployment rate fell to 8.6 percent, after having been mired around 9 percent for most of 2011.   “The unemployment rate has been stuck in the mud all year,” said Andrew Tilton, a senior economist at Goldman Sachs.  November’s jobless rate was the lowest recorded since March 2009. The rate fell partly because more workers got jobs, but also because about 315,000 workers dropped out of the labor force, and the jobless rate counts only people who are actively looking for work.

November Employment Report: 120,000 Jobs, 8.6% Unemployment Rate -  From MarketWatch: U.S. economy adds 120,000 jobs in November:The U.S. gained 120,000 jobs in November and the unemployment rate fell to 8.6% from 9.0%, the Labor Department said Friday. The government also revised jobs data for October and September to show that 72,000 additional jobs were created. ... Hiring in October was revised up to 100,000 from 80,000 and the job gains in September were revised up to 210,00 from 158,000. In November, companies in the private sector hired 140,000 workers ... Government cut 20,000 jobs...The following graph shows the unemployment rate. The unemployment rate declined to 8.6%.  Some of the decline in in the unemployment rate was related to a decline in the number of workers in the labor force.   The second graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.  The red line is moving slowly upwards. This was still a weak report, and slightly below consensus. There were decent upwards revisions to the September and October reports.

Jobs Report, First Impressions - Employment was up 120,000 last month and the unemployment rate dropped significantly, to 8.6% in November down from 9% in October.  Job growth in October and September was revised up by 72,000. While the employment story has improved over the past few months, the decline in the November unemployment rate isn’t as good as it sounds.  People who drop out of the labor force, like those who give up looking for work, are not counted in the jobless rate, and about half of the 0.4 percentage point decline was due to this factor.  In fact, about 190,000 of the unemployed left the labor force last month. Once again, the private sector added jobs—140,000 last month—and the public sector cut them (down 20,000). The report is consistent with slightly better economic performance over the past few months.  It’s always useful to average over a few months to work out some of the monthly noise in the data and over the past three months, employment is up by an average of about 140,000 per month, compared to 84,000 over the prior three months. But there’s still a great deal of slack in the job market.  Average weekly hours worked didn’t budget and hourly wages ticked down slightly—over the past year, hourly earnings, before inflation, are up 1.8%, well behind inflation.

Jobs Report, Second Impressions - Why did the labor force decline?  Well, first we should loudly establish the monthly caveat; there’s a lot of noise in the monthly data so we shouldn’t read too much into any one month. That said, the labor force declined 315,000 last month and that explains about half of the large and unexpected decline in the jobless rate.  We can get a better feel for the dynamics at play here if we consider the components of the monthly flows behind this drop. The labor force is the sum of the employed and the unemployed from the BLS Household survey.  Last month the labor force count was 153.9 million, the sum of 140.6m employed and 13.3m unemployed. About 55% of the decline in the labor force last month was people giving up looking for work, meaning they are no longer classified as unemployed by the BLS—they’re out of the labor force.  The rest were employed people who went from working to neither working nor looking for a job.  Some of those may have gotten laid off and decided not to try to find another job yet.  Others may just be retiring or taking some time out of work—we don’t know how those shares distribute. The figure shows the long term trend of the share of the population in the labor force (aka the labor force participation rate) Note that in the 1990s recovery the LFPR slid in the recession and then grew in the recovery.  That didn’t happen in the 2000s and it’s not happening now.

Employment Situation...Spencer England (with 9 graphs) The payroll report showed a gain of 120,000 jobs in November, consisting of a 140,000 gain in private payrolls and a 20,000 drop in government employment. The household survey months showed the stronger gains it has in recent with a gain of some 278,000 jobs. With this 278,000 gain the unemployment rate fell -0.4% from 9.0% to 8.6%. The jobs gain alone was not enough to generate a 0.4% drop in the unemployment rate as the participation rate also fell-0.2%.  Moreover, employment as a percent of the population actually rose last month, reinforcing the point that this one months drop in the participation rate is noise, not a trend. The work week for all employees was unchanged at 33.4 hours while the average workweek for nonsupervisory workers fell from 33.7 to 33.6 hours. As a consequence the index of aggregate hours worked for nonsupervisory workers fell -0.1%. Over all this does not appear to be a trend change and could very well be revised away. Although the index of hours worked is still far below its pre-recession peak, compared to gains in other jobless recoveries it is showing nice gains. Average hourly earnings for all employees fell from $23.20 to $23.18 while for nonsupervisory employees it rose from$19.53 to $19.54. Overall average hourly wage growth continues to slow and still is threatening to hit a new all time low. Moreover, average weekly wages are also stagnating and the recent strength in consumer spending stems more from a falling savings rate rather than a surge in income.

Economy Creates 120,000 Jobs, Rate Tumbles to 8.6 Percent… Job creation remained weak in the U.S. during November, with just 120,000 new positions created, though the unemployment rate slid to 8.6 percent, a government report showed Friday. The rate fell from the previous month’s 9.0 percent, a move which in part reflected a drop in those looking for jobs. The participation rate dropped to 64 percent, from 64.2 percent in October. The actual employment level increased by 278,000. The total amount of those without a job fell to 13.3 million. The measure some refer to as the “real” unemployment rate, which counts discouraged workers, also took a steep fall to 15.6 percent from 16.2 percent, its lowest level since March 2009. Average earnings were essentially flat, up two cents to $23.18 an hour. Private payrolls increased 140,000, considerably less than a report earlier this week showing that nongovernment jobs were up by more than 200,000 for the month. As expected, the service sector was responsible for the bulk of job creation, adding 126,000 jobs against just 2,000 for manufacturing. The average duration for joblessness surged to a record-high 40.9 weeks. Stagnation in wages also continues, as more employed workers took on second jobs. There were just under 7 million multiple job-holders for the month, the highest total in 2011 and the most since May 2010.

American Unemployment Falls to 8.6%: Amazing News, But Is It a Game Changer? - Just when we were expecting the economy to go boom it went zoom. The unemployment rate in November dropped faster than it has in more than 11 years. You have to go back to September 2010 to get a quicker decline. What's more, the jobless percentage, which fell to 8.6% in November from 9.0% a month before, was the lowest it's been in two and a half years. This alone is good news but it's even more amazing considering where we came from. Just four months ago, the obstacles for the economy seemed to be piling up. The debt stand-off in Washington was ugly. The U.S.'s credit got downgraded. Consumer confidence plunged. The Labor Department reported that employers added zero, nada, new jobs in August. And then came the growing debt problems in Europe. A double dip recession seemed inevitable. Apparently it wasn't. "Clearly, the growth of the recovery has stronger underpinnings than we thought," says Gary Burtless, a labor market economist at left leaning think tank Brookings Group. "All of these shocks were not enough to knock us down." (But the question remains: Is the economy stuck in a slow growth mode, or is it about to take off?) On the face of it the numbers look mixed.

Labor Dept Says Private Payrolls Rose A Moderate 140,000 In November - Private nonfarm payrolls rose 140,000 last month, the Labor Department reports. That’s ok and it’s certainly far enough above zero to keep chatter about an imminent recession at bay. But today’s number is a bit of a disappointment after ADP’s strong report on Wednesday, which implied that the government's estimate of employment growth would be much higher. Still, beggars can't be choosy and a net gain of 140,000 private sector jobs is respectable given all the headwinds from Europe these days. Even so, November's payrolls growth is middling at best, as the chart below shows. The average monthly increase in private sector jobs so far this year through last month is a moderate 156,000, which puts November's report slightly below average.  Meanwhile, the unemployment rate dropped to 8.6% in November from 9.0% previously.  The change looks impressive, although it's not really clear how much of the fall in the jobless rate is due to genuine growth vs. more jobless workers giving up on the search and thereby falling off the radar of official surveys.  As for the job growth last month, virtually all of it came from the services sector. Meantime, the cyclically sensitive goods-producing industries lost jobs for the second month in a row, albeit marginally so.

The November Employment Situation - Some good news, but it all has to be put in perspective. As Mark Thoma points out, 120,000 jobs is about what is needed to keep unemployment from rising. In addition, the drop in the unemployment rate was driven largely by the drop in the participation rate, not the rise in employed. That’s going to be greater relevance if the extension of unemployment benefits is further blocked (in other words, there are offsetting employment effects from UI, as discussed in this rejoinder to Mulligan). More discussion at Izzo/WSJ RTE. I’m going to focus on data from the establishment survey. The main points:

  • Nonfarm payroll, and the civilian employment series adjusted to conform to the NFP series both continue to rise, with the latter rising more rapidly.
  • Aggregate weekly hours in the private sector continues to rise more rapidly than employment, but has not caught up.
  • Total government employment continues to decline.
  • Most of the decline in government employment is at the state and local levels.

A very good week - PERHAPS it's time to dial back some of the gloom. This week gave us positive news on two fronts. First, the underlying American economy seems to be in reasonably good shape. Second, the biggest risks hanging over the economy—policy errors in America and Europe—receded just a bit.  America's Bureau of Labour Statistics reported today that non-farm employment grew 120,000 in November from October and the unemployment rate plunged to 8.6% from 9%, its lowest level since the latter stages of the recession in early 2009. The job growth was a tad below the Wall-Street consensus of 125,000 and well short of what the ADP survey on Wednesday had hinted. But the BLS also revised up previous months: non-farm employment grew 100,000 instead of 80,000 in October, and it advanced a whopping 210,000 in September, up from the previous estimate of 158,000. The fact that revisions lately have been positive is suggestive of an economy re-acclerating from its summer swoon.  Not surprisingly, government employment remains a drag: it fell 20,000, while private payrolls advanced 140,000. Within the private sector, manufacturing was flat and construction declined. Retail was up sharply, by 50,000, which suggests retailers are anticipating a robust holiday season.

Unemployment Rate Dips to 8.6% as 487,000 Drop Out of Labor Force - Here is an overview of November Jobs Report, today's release.

  • US Payrolls +120,000
  • US Unemployment Rate Declined .4 to 8.6%
  • Civilian labor force fell by 315,000
  • Those Not in Labor Force rose by 487,000
  • Participation Rate fell .2 percentage points to 64.0%, nearly matching a low last seen in 1984
  • Actual number of Employed (by Household Survey) rose by 278,000
  • Unemployment fell by 594,000
  • Civilian population rose by 172,000
  • Average workweek for all employees on private nonfarm payrolls was unchanged at 34.3 hours for the second consecutive month.
  • The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged down 0.1 hour to 33.6 hours in November.
  • Average hourly earnings for all employees in the private sector fell by 2 cents to $23.18
  • Government employment decreased by 20,000
  • The private sector has only recovered 33 percent of jobs lost in the peak-to-trough period of January 2008 to February 2010.

NEW Employment graph gallery (fast, no scripting)

Unemployment rate drops to lowest since 2009 - In the United States, about 13.3 million people are counted as unemployed. Private employers added 140,000 jobs in November, while governments shed 20,000. Governments at all level have cut almost a half-million jobs this year. More than half the jobs added last month were by retailers, restaurants and bars. Professional and business services also rose. Those tend to be higher-paying jobs -- engineers, accountants and high-tech workers. Still, more than 300,000 people stopped their job searches last month, so they were no longer officially counted as unemployed. That accounts for some of the drop in the unemployment rate.The so-called underemployment rate, which counts people who have given up looking and people who are working part-time but want full-time jobs, did fall -- to 15.6 percent from 16.2 percent. But even with the recent gains, the economy isn't close to replacing the jobs lost in the recession. Employers began shedding workers in February 2008 and cut nearly 8.7 million jobs for the next 25 months. The economy has regained about 2.5 million.

Unemployment Falls, But Is It Good News? - At first glance the fall in the unemployment rate seems like good news, but a closer look at the numbers reveals some weakness in the report. The 120,000 jobs that were created in November is enough to keep the unemployment rate from going up, but it is not enough by itself to absorb all the new workers entering the labor force and at the same time reduce the fraction of people that are currently unemployed.  Second, the report shows a decline in the labor force of 315,000 for November, and about half of the decline is attributed to discouraged workers giving up the search for a job. This exit of workers rather than job creation is the main source of the fall in the unemployment rate, and since so much of it is from discouraged workers this is not an encouraging development. Third, many of the unemployment duration numbers continue to increase. Average search duration reached a new peak for this downturn of 40.9 weeks, and hence long-term unemployment is getting worse, not better. Fourth, many of the jobs that were created are in the retail sector. Thus, while some workers are finding new jobs, the new employment does not, in general, pay as well as previous employment.

Jobs: Good Headline, Better Details - The job market seems to be getting better, and it is doing so in surprising areas. Jobs seem to be going to people with less education, and the number of long-term unemployed is coming down. Over all, the unemployment rate fell to 8.6 percent in November from 9 percent a month earlier. That rate comes from a survey of households, which is subject to sampling error. During the summer, when jobs data looked poor and talk of a new recession grew, it was much weaker than the other survey, of employers. But this fall it has been much stronger. Over long periods, those reports tend to come together, so perhaps the household numbers will not look as good as they do now. Or maybe it will simply turn out that the jobs report — which is based on a survey of employers — has been too pessimistic. Over the last three months, the job survey has averaged gains of 143,000 per month, while the household survey has gained 318,000 per month. Moreover, the job survey has been regularly revised upward. August went from zero — a number that seemed terrifying at the time — to a decent 104,000. The September gain was 103,000 when it was first reported; now the figure is 210,000. October was 80,000 when first reported; now it is 100,000 with one more revision to come. These are signs of a generally strengthening labor market.

Video: November Jobs Report - Kelly Evans leads a News Hub discussion about the U.S. jobs picture in light of the government’s announcement that the unemployment rate dipped to 8.6%.

Why Did the Unemployment Rate Drop? - The U.S. added 120,000 jobs in November, but the unemployment rate posted a huge drop to 8.6% from 9% and a broader unemployment rate fell even more to 15.6% from 16.2%. Why? The number of jobs added comes from a survey of establishment payrolls. The unemployment rate comes from a separate survey of U.S. households. The household survey is much smaller than the establishment survey, and as a result it can swing around a lot — and move the unemployment rate up and down when it does. The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force. In October, the household survey showed the number of people unemployed fell by 594,000, but the labor force — the number of people working or looking for work — fell by a little more than half that amount. That means that though the number of employed people rose, a large group just stopped looking for work. So the decline in the unemployment rate to 8.6% was about half due to people finding jobs and half people dropping out.

What About that Falling Jobless Rate? (video) November's employment data generates some head-scratching. Mark Zandi puzzles it out with the CNBC crew.

Meh. And I Say That With Feeling - Krugman - A belated reaction to today’s employment report (I’ve been closeted in a room with a bunch of men in suits, myself included, talking about the depressed and depressing world.) In a word: meh. It could have been worse, but the basic story remains the same as it has been for 2 1/2 years: an economy that’s growing, but not enough to feel anything like a real recovery. The measured unemployment rate has trended down for a while, but it’s all basically reduced numbers of people actively searching. My favorite measure these days is the employment-population ratio for prime-age workers, which isn’t affected by changing demography. Here it is for the past decade; see the trend since the recession officially ended? Neither do I. Of course, my meh corresponds to enormous and continuing waste, vast hardship, and millions of ruined lives. Maybe someone should do something.

Some Thoughts on the U.S. Jobs Report and Implications - As often is the case, economic data can be a bit of a Rorschach test, in that reasonable people can see and value different aspects of the report. This holds for today’s US employment report. The headlines were good–140k private sector jobs were created, near expectations, back months were revised up by 72k, and the unemployment rate fell unexpected to 8.6%.  The details are less inspiring. First, on the surface it may appear there has been some acceleration of job creation, but this is not really the case. The 12-month average private sector job growth is just below 160k, somewhat above today’s report (that said, revisions have been to the upside in the past few reports). Second, the work week did not increase and hourly pay slipped 0.1%, paring the 0.3% rise in Oct. On a year-over-year basis, hourly earnings have risen 1.8%, just above the 1.7% trough last Dec. And what a contrast to the recent corporate earnings season. When adjusted for inflation, real wage growth is negative and this must limit consumption, as savings are finite.  Third, the decline in the unemployment rate is also not as impressive when you look at the details. The household survey, from which the unemployment rate itself is calculated, showed a 278k increase in jobs AND 315k dropping out of the work force. A likely explanation is that many were looking for seasonal work and if they did not find it, they stopped looking.

The Household Survey: A Note on the December 2, 2011 Report » We do not typically see 40 basis-point declines in the unemployment rate in a single month. The decline that we would like to see would be this one: a 60 basis-point decline generated by an increase in employment, partially offset by a 20 basis point-rise generated by an increase in labor force participation. That would show very strong demand for labor by firms. And that would show workers confident that demand for ther labor would be strong and hence reentering the labor force. That is not what we saw in November with our 40 basis-point decline in the household-survey unemployment rate to 8.6%. What we saw in November, instead, was a 15 basis-points decline in the unemployment rate generated by more people at work. That is welcome. But most of the decline was a 25 basis-point decline generated by a fall in labor force participation. Workers as a group did not become more optimistic about their long-run employment opportunities, but rather less. That is not welcome. It is harder to pull people into employment if they are out of the labor force than if they are in the labor force and unemployed. Hence the fall in the labor force participation rate leads us to mark down the long-term potential output growth path of the American economy.

Falling unemployment may not be making voters happy -The unemployment rate dropped in November to 8.6 percent from 9.0 percent in October and from 9.8 percent a year ago. This is clearly welcome news. However, the underlying dynamics of the drop-off in unemployment this last month and over the last year are disappointing and have clear implications for policy and for politicians. The issue is a decline in labor force participation, a topic that both Jared Bernstein and Ezra Klein have picked up on. To be blunt, among groups with high voter turnout rates, the fall in unemployment has been driven by people leaving the labor force and not because of job gains: this applies to those 25 and older who have a high school credential, some college, or a college degree or further education. In contrast, job gains were responsible for falling unemployment among lighter voting groups: young people (ages 16-24) and the 8.0 percent of the labor force that lacks a high school credential. The only exception to this breakdown is that job gains lowered the unemployment rate of those 55 and older (but only 40 percent of this group is in the labor force). Among women, unemployment has fallen very little (0.3 percent) while employment has fallen as well, indicating that job growth has not driven their modest unemployment gains. Men, in contrast, have seen a large drop in unemployment (1.2 percent) but modest growth in employment, indicating a shrinking labor force as the major explanation.

Did Economy Really Create Nearly 500,000 Jobs in November? - According to one little-followed measure, the economy created about 500,000 jobs last month — more than four times as many as the government’s official figure of 120,000. The divergence between the two figures is one among a number of peripheral statistics — including upward revisions to past job gains and growth in temporary employment — that suggest the job market may well be better than at first glance. The discrepancy could mean a number of things. Officially unemployed people might be scraping together off-the-books work. The government’s monthly count of jobs also might be missing new small businesses and other start-up companies. Past research has shown that some workers, in particularly the elderly, are reported as unemployed in one survey and employed in another. It could also be wrong — surveys always come with a margin of error. But when so many are pointing the same way, it’s worth taking a closer look. Getting to the 500,000 jobs figure requires blending the logic behind the government’s two monthly jobs surveys. The first and most closely-watched survey, called the establishment survey, asks companies and governments how many workers are on their payrolls. That’s where the 120,000 new jobs figure comes from.

Jobless rate drops, but so do hourly earnings – Nonfarm payrolls increased 120,000 last month, the Labor Department said on Friday, in line with economists’ expectations for a gain of 122,000. The relative strength of the report was also bolstered by revisions to the employment counts for September and October to show 72,000 more jobs created than previously reported.. All the increase in nonfarm payrolls in November again came from the private sector, where employment rose 140,000 after increasing 117,000 in October. Government employment fell by 20,000. Public payrolls have dropped in 10 of the past 11 months as state and local governments have tightened their belts. Outside of government, job gains were almost across the board, with retail surging 49,800. Elsewhere, construction payrolls fell 12,000 after losing 15,000 jobs in October. Factory jobs edged up 2,000, with most of the gains coming from automakers. Health care and social assistance hiring rose 18,700 after adding 30,300 job in October. Temporary hiring — seen as a harbinger for future hiring – increased 22,300 after adding 15,800 jobs last month. The average work week was unchanged at 34.3 hours, with hourly earnings falling two cents.

Employment Summary, Part Time Workers, and Unemployed over 26 Weeks - This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses.  The following graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate declined to 8.6% (red line). The Labor Force Participation Rate was declined to 64.0% in November (blue line). This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although some of the decline is due to the aging population. The Employment-Population ratio increased to 58.5% in November (black line). . The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) dropped by 378,000 over the month to 8.5 million. The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) decreased to 8.5 million in November from 9.27 million in October. This just reverses some of the increase in August and September. These workers are included in the alternate measure of labor underutilization (U-6) that decreased to 15.6% in November from 16.2% in October. Unemployed over 26 Weeks This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 5.691 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 5.876 million in October.

Charts of the Day: Labor Force and Unemployment Rate Adjusted for Population Growth Since 1948 Show Falling Unemployment Rate is "Statistical Mirage" - In Unemployment Rate Dips to 8.6% as 487,000 Drop Out of Labor Force I presented some quick facts on the drop in the unemployment rate.

  • In the last year, the civilian population rose by 1,726,000. Yet the labor force fell by 67,000. Those not in the labor force rose by 1,793,000.   
  • In November, those "Not in Labor Force" rose by a whopping 487,000. If you are not in the labor force, you are not counted as unemployed.  
  • Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.
Reader Tim Wallace responded with a very nice set of graphs and commentary. Wallace writes ... In the entire history of the labor force data, only in 1951, 1961, 1964, and 2009 did the labor force "shrink". It also "shrank" in 2011 off 2010. Also note that from 1964 to 2007, only in 1991 at 631,000, 1995 at 723,000 and 2002 at 801,000 did the labor force fail to add more than 1,000,000 people.  However, in 2008 the labor force only expanded by 776,000. This was followed by a loss of 826,000 in 2009, a trivial gain of 155,000 in 2010 and a loss of 67,000 in 2011.  If you look at the average labor force growth from 1948 to 2007 of 1,579,000 the labor force should have expanded by 6,316,000 2008-2011. Instead the labor force expanded by a mere 38,000! Thus, 6,278,000 people are unaccounted for in the unemployment numbers based on historical averages.

Seasonal Retail Hiring, Duration of Unemployment, Unemployment by Education and Diffusion Indexes - According to the BLS employment report, retailers hired seasonal workers at close to the pre-crisis pace in November. Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. Here is a graph that shows the historical net retail jobs added for October, November and December by year. Retailers hired 423.5 thousand workers (NSA) net in November, and 547.2 thousand in October and November combined. This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. Only one category increased in November: The "15 to 26 Weeks" group. This is probably spillover from the increase in short term unemployment in August and September. A little bit of good news is that short term unemployment (less than 14 weeks) has declined. The the long term unemployed declined to 3.7% of the labor force - this is still very high, but the lowest since October 2009. Unemployment by Education This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). This says nothing about the quality of jobs - as an example, a college graduate working at minimum wage would be considered "employed". Diffusion Indexes This is a little more technical. The BLS diffusion index for total private employment was at 54.7 in November, down from 59.6 in October. For manufacturing, the diffusion index decreased to 49.4, down from 52.5 in October. Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS.

US Needs To Generate 263,700 Jobs Monthly To Return To Pre-Depression Employment By End Of Obama Second Term - We will simply copy and paste, with the appropriate adjustments, the form text we put up after each and every NFP report calculating the number of people that have to be added by the end of a hypothetical second Obama term. Using the November boilerplate: "Every few months we rerun an analysis of how many jobs the US economy has to generate to return to the unemployment rate as of December 2007 when the Great Financial Crisis started, by the end of Obama's potential second term in November 2016. This calculation takes into account the historical change in Payroll and includes the 90,000/month natural growth to the labor force, and extrapolates into the future. And every time we rerun this calculation, the number of jobs that has to be created to get back to baseline increases: First it was 245,500 in April, then 250,000 in June, then 254,000 in July then 261,200 in October [and finally 262,500 in November] . As of today, following the just announced "beat" of meager NFP expectations, this number has has just risen to an all time high 262,500 263,700. This means that unless that number of jobs is created each month for the next 5 years, America will have a higher unemployment rate in October 2016 than it did in December 2007. How realistic is it that the US economy can create 15.8 million jobs in the next 61 60 months? We leave that answer up to the US electorate."

U.S. November Underemployment Up From a Year Ago -  Underemployment, a measure that combines the percentage of workers who are unemployed with the percentage working part time but wanting full-time work, is 18.1% in November, as measured by Gallup without seasonal adjustment. That is up from 17.8% a month ago and 17.2% a year ago. Many employers appear to have chosen to hire part-time rather than full-time employees for this holiday season.  Unemployment, as measured by Gallup without seasonal adjustment, is 8.5% in November -- up slightly from 8.4% in October, but down from 8.8% a year ago. Gallup's unemployment measure suggests the government is likely to report essentially no change for November 2011 in its seasonally adjusted unemployment rate. An additional 9.6% of U.S. employees work part time but want full-time work, up from 9.4% in October. The current reading is significantly higher than the 8.4% of November 2010.

What Does The Decline in Labor Force Participation Tell Us - Brad Delong suggests that its evidence of weak aggregate demand What we saw in November, instead, was a 15 basis-points decline in the unemployment rate generated by more people at work. That is welcome. But most of the decline was a 25 basis-point decline generated by a fall in labor force participation. Workers as a group did not become more optimistic about their long-run employment opportunities, but rather less. That is not welcome. It is harder to pull people into employment if they are out of the labor force than if they are in the labor force and unemployed. Hence the fall in the labor force participation rate leads us to mark down the long-term potential output growth path of the American economy. This has a lot of intuitive appeal, my concern is that when we think about the labor market failing to clear we mean to say that there are people looking for jobs who cannot find them. If they stop looking this is not obviously a market failure. If it is in fact the case that the real wage is not enough to entice them to work, then they should not work.  If we were seeing a great stagnation, a supply shock, or even certain forms of hangover, this is how it should manifest itself and from a business cycle perspective does not represent any malfunctioning of the market system.

Older Workers and Joblessness - As I wrote in an article on Friday, even those who are back at work are not necessarily doing so well: only 7 percent of those who lost jobs after the financial crisis have recovered their income and standard of living. What’s more, the downturn and its aftermath have disproportionately hit people with less education. Even though the unemployment rates of high school dropouts and graduates have fallen from recent highs, they are still much higher than the rate for college graduates. The Labor Department’s jobs report for November, released Friday morning, also shows that the number of employed high school graduates actually fell by 187,000 over the last 12 months, while the number of employed college graduates has gone up 1.1 million during the same period.  More than half of all unemployed workers 45 to 54 years old have been out of work for six months or more, and among unemployed 55-to-64-year-olds, close to 60 percent have been searching for work for more than six months. People in the older of these two groups are worse off than they were a year ago. The median duration of unemployment rose from 36.6 weeks a year ago to 42.7 weeks this November. The younger of the two groups is slightly better off; its median duration of unemployment fell to 27.9 weeks, down from 30.2 weeks a year ago.

Bobo’s Travels - Plenty of Job Offers for Skilled Engineers IF You Can be Like Bobo - I received an interesting email today from a reader "Freemon" regarding the trials and tribulations of his engineer on the move friend "Bobo". "Freemon" writes ... My Florida nuclear power plant work ended sooner than promised, so I networked my contacts and in 6 working days landed 2 solid offers. Yep, it's moving time again.  I'm flying to Vancouver CA to work for 3 weeks, then flying back to Florida to move my stuff to AZ. I'm driving my truck the southern route - New Orleans, San Antonio River Walk and Alamo, Austin City Limits, etc. Then I'm going to Nevada for my next job building a new gold mine. Let's see, that makes 4 states, 3 companies, 2 countries, and 5 different job-sites for me in the past 11 months. Pack-and-move and pack-and-move and pack-and-move. My world is spinning faster and faster and I can barely hold on anymore. I've rented my house, sold all my furniture, dumped my camping gear, and given away my t-shirts, and now I live out of cardboard boxes. Anything I buy is too much trouble to drag around. I have simplified so much that all I own anymore is a cell phone, a laptop, and an email address. Travel light, move fast, and stay alive. There's no middle ground anymore. There are thousands of starving engineers, spun out into a ditch, unable to make that next move, meet that upcoming deadline, or attend tomorrow's meeting. So I travel light and move fast. Very fast. Always faster than the last time. Always faster than the next guy. Always jumping higher and farther and better than ever before. One day I'll just burn up, spin out, or perhaps just give up. But not just yet. Somehow, somehow still, I keep missing career death with that one well-placed contact. With that one quick jump, with that one flexible move, lucky me, I just survived another crash.

For Jobless, Little Hope of Restoring Better Days- People across the working spectrum suffered job losses in recent years: bricklayers and bookkeepers as well as workers in manufacturing and marketing. But only a select few workers have fully regained their footing during the slow recovery. . According to a new study, to be released Friday by the John J. Heldrich Center for Workforce Development at Rutgers, just 7 percent of those who lost jobs after the financial crisis have returned to or exceeded their previous financial position and maintained their lifestyles. The vast majority say they have diminished lifestyles, and about 15 percent say the reduction in their incomes has been drastic and will probably be permanent. According to the Rutgers study, those with less education were the most ravaged by job loss during the recession. Even among those who found work, many made much less than before the downturn.  More than two years after the recovery officially began, American employers have reinstated less than a quarter of the jobs lost during the downturn, according to Labor Department figures. Of the 13.1 million people still searching for work, more than 42 percent have been unemployed for six months or longer. About 8.9 million more are working part time because they cannot find full-time work.

Skilled Jobs Go Begging? Not Quite - The Wall Street Journal has a piece up this weekend about the difficulty that many companies are having hiring skilled workers in certain areas. But there's more to this story than meets the eye. Here's a description of some skilled job openings at Union Pacific railroad:This doesn't require a bachelor's degree but demands technical skills gained either through an associates' degree or four years of experience in electronics. And it is grueling work. Technicians have to climb 50-foot communications towers, clamber up utility poles and work outdoors through Wyoming winters and Kansas summers. They put in 10-hour days, in clusters of eight or ten days, and are routinely away from home more than half of each month. As installation technicians, they would earn $21.64 an hour, or close to $48,000 a year for the railroad's regular work schedule.  So here's the story. Union Pacific is offering $48,000 per year for skilled, highly specialized, journeyman work that's physically grueling and requires workers to be away from home about half of each month. The competition is offering 50% more, but not only is UP not willing to increase their starting wage, they're so certain they can fill all their positions that they make qualified candidates pay for their own aptitude test. And despite all this, they filled all 24 of their positions in ten hiring sessions.

As Public Sector Sheds Jobs, Blacks Are Hit Hardest —Mr. Buckley is one of tens of thousands of once solidly middle-class African-American government workers — bus drivers in Chicago, police officers and firefighters in Cleveland, nurses and doctors in Florida — who have been laid off since the recession ended in June 2009. Such job losses have blunted gains made in employment and wealth during the previous decade and undermined the stability of neighborhoods where there are now fewer black professionals who own homes or who get up every morning to go to work.  Though the recession and continuing economic downturn has been devastating to the American middle class as a whole, the two and a half years since the declared end of the recession have been singularly harmful to middle-class blacks in terms of layoffs and unemployment, according to economists and recent government data. About one in five black workers have public-sector jobs, and African-American workers are one-third more likely than white ones to be employed in the public sector.

George Will Is Confused by Numbers at the Post Office - Dean Baker - I know, everyone is saying that "George Will" and "confused by numbers" is repetitive, but it is nonetheless necessary to say in reference to his latest piece calling for privatization of the United States Postal Service (USPS). The point is supposed to be that the USPS is hopelessly inefficient compared to its private sector competitors and that if it were required to be run at a profit it would soon be out of business. Actually, the data don't really make this case. In 2006 Congress required the USPS to advance fund retiree health benefits. While this may be advisable, this is not the normal practice among private businesses. Furthermore, it required that it build up the advance funding at a rapid pace (over 10 years), using health care cost growth assumptions that are way out of line with those used in the private sector.The result was an added expense of roughly $5.5 billion a year that shifted the USPS from profits to losses in 2007 and 2008 and made its losses considerably larger in each of the last two years. Even accepting the pre-funding requirement, if the shortfall was made up over 30 years, and the USPS was allowed to use the same health care cost growth assumptions as those heroic job creators in the private sector, the USPS would have been profitable in the years 2007 and 2008 and had considerably smaller losses the last two years.

The Future of Jobs - That the American and global economies are being transformed by the forces of globalization, demographics, and over-indebtedness is self-evident. What is less self-evident is the impact this transformation will have on the future of work, earned income, and financial security.The key question an increasingly vulnerable workforce is asking is: What skills will be in demand once this transition occurs? In order to answer this question, it's necessary to understand the macro trends that will shape the nature of employment in this new era. In our previous look at The Future of Work, we focused on the US economy’s dependence on debt as a driver of growth and found that debt saturation was correlated with declining employment. But there are many other long-term dynamics influencing the economy, and no survey of the future job market would be complete without considering these other factors. Most cultural and economic trend changes begin on the margin and then spread slowly to the core, triggering waves of wider recognition along the way. Thus some of these long-wave trends may not yet be visible to the mainstream, and may remain on the margins for many years. Others are so mature that they may be primed for reversal.

Serfing the Web: Sites Let People Farm Out Their Chores - "Manage our worm bin!" That was the help-wanted note new mom Rachel Christenson posted a few weeks ago at online marketplace TaskRabbit Inc. Neither she nor her husband wanted the "gross" job of dealing with an overflowing compost bin, so she clicked her mouse in search of someone who would do her dirty work.After about 11 hours and a few crazy questions like, "Are your worms nice?" Ms. Christenson, 27 years old, found a taker. Douglas Ivey, a 45-year-old research scientist, drained the "worm juice" from the bin, put back the compost, mixed in newspaper and hosed it all down. The price? $31. "That guy was bold," says Ms. Christenson, of San Francisco. "He just jumped right in.""It was completely disgusting," says Mr. Ivey, who added, "I don't mind. Actually, I find the really gross jobs pay pretty well."

Philly Fed State Coincident Indexes increase in October - From the Philly Fed: In the past month, the indexes increased in 43 states, decreased in five, and remained unchanged in two (Georgia and New Mexico) for a one-month diffusion index of 76. Over the past three months, the indexes increased in 42 states, decreased in seven, and remained unchanged in one (Delaware) for a three-month diffusion index of 70. Note: These are coincident indexes constructed from state employment data. From the Philly Fed:  The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged). In October, 45 states had increasing activity, up from 39 in September. This is the highest level since April.  Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession, and all green earlier this year - but this is an improvement from September.

Long-Term Unemployment Carries Risks for U.S. - Robert Shiller - THE failure of the Congressional supercommittee to come up with any agreement on the budget deficit makes it even less likely that Congress will rise above its partisan divisions and act on behalf of the millions of out-of-work Americans.  Yet without government intervention, we may well have high unemployment and social discord for years to come. How did this disaster happen?  Probably the most important reasons for the failure to rescue the unemployed are intellectual, rather than purely political. First, there is a lack of scientific proof that government spending — fiscal stimulus — will do much to remedy unemployment. Second, there is a lack of appreciation of the human impact and social consequences of high, long-term joblessness.  To see how divided economists are about the effects of fiscal stimulus, ask them to gauge the “multiplier” effect — the response of the broader economy to a dollar spent by the government. In September, the Journal of Economic Literature published several surveys of the literature on the subject; those surveys came up with so many different answers that it’s hard to show with certainty that stimulus even works. 

Many American families running on financial fumes - Once successful real estate agents making six figures, Hanson and Wright are now living on the poverty line. "We made some good money," Hanson said. "But with new regulations in real estate and different laws and just the amount of foreclosures on the market, it literally took our business away." The last few years have been a downward spiral, says the Atlanta couple, who have been living off their savings. They've sold jewelry and cars, and now they're trying to sell their home to survive. Every day, they are faced with a tough decision. They're not alone. Millions of American families have slipped into what the U.S. Census Bureau defines as poor. About 46.2 million people are considered to be living in poverty, 2.6 million more than last year."Those that are in dire need, they'll sell all their personal belongings to survive,"

If the Safety Net is So Good Why Is the Economy So Bad - Casey Mulligan says: One interpretation of these results is that the safety net did a great job:  Another interpretation is that the safety net has taken away incentives and serves as a penalty for earning incomes above the poverty line. But in a labor force as big as ours, it takes only a small fraction of people who react to a generous safety net by working less to create millions of unemployed. I suspect that employment cannot return to pre-recession levels until safety-net generosity does, too. I assume – based on Casey’s general thesis – that his point here is that the expansion of the safety net is a major cause of the decline in employment. A core problem with this interpretation is that it models the decline as resulting from an expansion in individual budget constraints; now you can work less and avoid poverty were as before you couldn’t.  If that’s the case the people are not not working because “the economy is bad”, they are not working because the economy is awesome.Yet, they don’t talk and act like that. They talk and act as if something bad has happened; as if they are more afraid of their economic future than they were before; as if they are afraid to spend; as if they are afraid to quit their jobs. Indeed, the quit data shows a sharp decline in quits associated with the recession. One would expect an expansion of the budget constraint to be associated with an increase in quits.

Social Insurance and Unemployment: Do People Deserve Poverty? - Casey Mulligan claims that social insurance is a big reason that unemployment is so high: it takes only a small fraction of people who react to a generous safety net by working less to create millions of unemployed. I suspect that employment cannot return to pre-recession levels until safety-net generosity does, too.A comment from this post responding to Casey Mulligan takes on this claim: I'm sure my daughter connived to get herself laid off at Peet's Coffee just as her health insurance would have kicked in and live on $98 a week, far less than she would have brought in in wages, and not even enough to pay her $500 a month rent. The idea that the unemployment problem is due to lack of effort on behalf of the unemployed rather than a lack of demand is convenient for the moralists, but inconsistent with the facts. But what really irks me is the implicit moralizing, the idea that people deserve to be thrown into poverty. Someone who gets up every day and goes to a job day after day, often a job they don't like very much, to support their families can suddenly become unemployed in a recession through no fault of their own. They did nothing wrong -- it's not their fault the economy went into a recession and they certainly couldn't be expected to foresee a recession that experts such as Casey Mulligan missed entirely.

A Large Middle Class Isn’t Necessarily Normal - I have a bias that modernity is more fragile than commonly believed.  One aspect of that is income/wealth distributions.  Inequality was far more pronounced in the past, and was fairly stable in being so.  So why should the last 150 or so years not be viewed as a possible aberration? Let me give you five or so reasons why the middle class should shrink:

  • 1) Education — middle classes in the developed world were relatively large when the education systems produced a large portion of the educated people of the world.  That is no longer so,
  • 2) Lazy choices for majors/jobs — “follow your bliss” is stupid advice if no one wants to fund your bliss.  All prosperity comes through serving the needs of others.
  • 3) Technology — some technological advances aid equality, and some aid inequality — we have been getting more of the latter lately.
  • 4) Global Conditions — Resources are scarce.  Capital is somewhat scarce.  Unskilled labor is not scarce. 
  • 5) Personal Ethics — Societies that tolerate many children conceived out of wedlock, and no-fault divorce create an underclass of poor women with children, and the children are far less able to compete because they have no father figure.

Ethics and Inequality - Consider some facts: the 400 wealthiest Americans have more money than the bottom 50 percent of all Americans combined. Between 1979 and 2007, the incomes of the top 1 percent of the population grew by 275 percent while the incomes of the middle class rose only 40 percent. And according to newly released measures, a staggering one in three Americans, or 100 million people, suffer in poverty or near poverty. These are startling facts, and the Occupy movement, with its references to “the 1 percent” and “the 99 percent,” has brought them to the fore of public consciousness. In response some critics have argued that the popular protest against inequality is inspired by mere envy, or an effort to inflame class warfare. We disagree. Inequalities can—in this case do—raise ethical concerns, and we think citizens are right to be outraged at the gap between the 1 percent and the 99 percent. We seek here to explain why these inequalities are so troubling.

Fairness and the Occupy Movement Revisited, by Jeff Sachs: A recent Wall Street Journal article by Arthur C. Brooks on the Occupy Movement and fairness says some interesting things about potential common ground between free-market ideas and the Occupy movement. Yet Brooks also commits some very important errors. ... Brooks, the head of the American Enterprise Institute, denounces crony capitalism as the dark side of American politics and economics. On this we should all agree. The level of corruption in Washington is staggering, growing, and rife in both parties. The Republicans answer to crony capitalism is to slash government. Yet by this they mean mainly an attack on the remaining social programs. This is a kind of bait-and-switch strategy: rev up the anger against government corruption, and then kill the life-support programs of the poor and working class. Crony capitalism exists mainly in the big-ticket sectors of the economy -- banking, oil, real estate, private health insurance, military contractors, and infrastructure -- not in the essential but much smaller parts of the economy: malnutrition of poor children, lack of quality pre-school, insufficient job training, and inadequate student loan coverage.

Comfortably Numb - As I observe the zombie like reactions of Americans to our catastrophic economic highway to collapse, the continued plundering and pillaging of the national treasury by criminal Wall Street bankers, non-enforcement of existing laws against those who committed the largest crime in history, and reaction to young people across the country getting beaten, bludgeoned, shot with tear gas and pepper sprayed by police, I can’t help but wonder whether there is anyone home. Why are most Americans so passively accepting of these calamitous conditions? How did we become so comfortably numb? I’ve concluded Americans have chosen willful ignorance over thoughtful critical thinking due to their own intellectual laziness and overpowering mind manipulation by the elite through their propaganda emitting media machines. Some people are awaking from their trance, but the vast majority is still slumbering or fuming at erroneous perpetrators.

The Branding Of The Occupy Movement — Kalle Lasn, the longtime editor of the anticonsumerist magazine Adbusters1, did not invent the anger that has been feeding the Occupy Wall Street2 demonstrations across the United States.  But he did brand it.  Last summer, as uprisings shook the Middle East and much of the world economy struggled, Mr. Lasn and several colleagues at the small magazine felt the moment was ripe to tap simmering frustration on the American political left.  On July 13, he and his colleagues created a new hash tag on Twitter: #OCCUPYWALLSTREET. They made a poster showing a ballerina dancing on the back of the muscular sculptured bull near Wall Street in Manhattan.  For some people they were just words and images. For Mr. Lasn, they were tools to begin remodeling the “mental environment,” to create a new “meme,” the term coined by the evolutionary biologist Richard Dawkins for a kind of transcendent cultural message.

Camps Are Cleared, but ‘99 Percent’ Still Occupies the Lexicon - Whatever the long-term effects of the Occupy movement, protesters have succeeded in implanting “We are the 99 percent,” referring to the vast majority of Americans (and its implied opposite, “You are the 1 percent,” referring to the tiny proportion of Americans with a vastly disproportionate share of wealth), into the cultural and political lexicon.  Within weeks of the first encampment in Zuccotti Park in New York, politicians seized on the phrase. Democrats in Congress began to invoke the “99 percent” to press for passage of President Obama’s jobs act — but also to pursue action on mine safety, Internet access rules and voter identification laws, among others. Republicans pushed back, accusing protesters and their supporters of class warfare; Newt Gingrich this week called the “concept of the 99 and the 1” both divisive and “un-American.”

The First of Many Posts on Inequality - I’m compelled to write a bunch about inequality. So let’s start with facts of the case. If you want to quickly and efficiently get up to speed on the income inequality story in the US—and who doesn’t?—read this from my CBPP colleagues.  It takes you pretty far into the weeds on data sources and the like, but this is one of those economic issues where the sources matter a great deal.  Series that fail to include realized capital gains, for example, will miss important dynamics going on in the upper tail of the income scale. Here’s their summary of the broad trends:

  • The years from the end of World War II into the 1970s were ones of substantial economic growth and broadly shared prosperity.
    • Incomes grew rapidly and at roughly the same rate up and down the income ladder, roughly doubling in inflation-adjusted terms between the late 1940s and early 1970s.
    • The income gap between those high up the income ladder and those on the middle and lower rungs — while substantial — did not change much during this period.
  • Beginning in the 1970s, economic growth slowed and the income gap widened.
    • Income growth for households in the middle and lower parts of the distribution slowed sharply, while incomes at the top continued to grow strongly.
    • The concentration of income at the very top of the distribution rose to levels last seen more than 80 years ago (during the “Roaring Twenties”).
  • Wealth (the value of a household’s property and financial assets net of the value of its debts) is much more highly concentrated than income, although the wealth data do not show a dramatic increase in concentration at the very top the way the income data do.

How Much are Workers to Blame for Income Inequality? - A common refrain in conversations about poverty—and unemployment and income inequality—is that more education will lead people to better-paying jobs and higher living standards. I certainly don't want to make an argument against education, but recent research from MIT economist Frank Levy and business professor Tom Kochan provides an especially sharp illustration of why just focusing on the worker side of the equation probably won't get us too far. In this white paper, Levy and Kochan look at how wages have fared over the past 30 years. The benchmark is growth in labor productivity, a measure of the usefulness a firm derives from a worker. Since 1980, labor productivity has risen by 78%, but compensation for full-time workers, including fringe benefits, has grown by just about half of that. Less-educated workers—those most prone to poverty—have fared the worst.  Wages for people with graduate degrees kept up with productivity gains until about a decade ago, but have lagged since then, as well. Even if we assume that some subset of workers is more valuable to firms (and driving labor productivity growth), we're still left with the question of why no group of workers is reaping the benefit.

Restore the Basic Bargain - Robert Reich - For most of the last century, the basic bargain at the heart of the American economy was that employers paid their workers enough to buy what American employers were selling. That basic bargain created a virtuous cycle of higher living standards, more jobs, and better wages. Back in 1914, Henry Ford announced he was paying workers on his Model T assembly line $5 a day – three times what the typical factory employee earned at the time. The Wall Street Journal termed his action “an economic crime.” But Ford knew it was a cunning business move. The higher wage turned Ford’s auto workers into customers who could afford to buy Model T’s. In two years Ford’s profits more than doubled. That was then. Now, Ford Motor Company is paying its new hires half what it paid new employees a few years ago. The basic bargain is over – not only at Ford but all over the American economy. New data from the Commerce Department shows employee pay is now down to the smallest share of the economy since the government began collecting wage and salary data in 1929. Meanwhile, corporate profits now constitute the largest share of the economy since 1929.

The End of Poverty? - Documentary: The aphorism "The poor are always with us" dates back to the New Testament, but while the phrase is still sadly apt in the 21st century, few seem to be able to explain why poverty is so widespread. Activist filmmaker Philippe Diaz examines the history and impact of economic inequality in the third world in the documentary The End of Poverty?, and makes the compelling argument that it's not an accident or simple bad luck that has created a growing underclass around the world. Diaz traces the growth of global poverty back to colonization in the 15th century, and features interviews with a number of economists, sociologists, and historians who explain how poverty is the clear consequence of free-market economic policies that allow powerful nations to exploit poorer countries for their assets and keep money in the hands of the wealthy rather than distributing it more equitably to the people who have helped them gain their fortunes. Diaz also explores how wealthy nations (especially the United States) seize a disproportionate share of the world's natural resources, and how this imbalance is having a dire impact on the environment as well as the economy. The End of Poverty? was an official selection at the 2008 Cannes Film Festival.

29 Amazing Stats Which Prove That The Rich Are Getting Richer And The Poor Are Getting Poorer - In the United States today, there is one group of people that is actually living the American Dream.  The ultra-wealthy have seen their incomes absolutely explode over the past three decades.  Meanwhile, the U.S. middle class has been steadily declining and the ranks of the poor have been swelling.  But this is what always happens when an economy becomes highly centralized.  Today, gigantic corporations and “too big to fail” banks totally dominate our economic system.  The whole game is rigged.  Our system is now designed to funnel wealth away from the bottom 90 percent of the population and into the pockets of the ultra-wealthy.  When you allow a handful of giant entities to run everything, it is going to inevitably create a situation where there are a small number of very big winners and a massive amount of losers.   Yes, there will always be poor people.  Yes, those that work really hard and produce something of great value for society should be greatly rewarded.  The way that our system should work is that it should empower individuals and small businesses to come up with new ideas, start companies, create jobs and produce massive amounts of new wealth.  But instead, the number of small businesses in America is rapidly declining.  The giant banks and the giant corporations that run everything are constantly running around stomping all of the “little guys” out of existence. 

Your New American Dream - It's really something to live in a country that doesn't know what it is doing in a world that doesn't know where it is going in a time when anything can happen. I hope you can get comfortable with uncertainty.   If there's one vibe emanating from this shadowy zeitgeist it's a sense of the total exhaustion of culture, in particular the way the world does business. Everything looks tired, played out, and most of all false. Governments can't really pay for what they do. Banks have no real money. Many households surely have no money. The human construct of money itself has become a shape-shifting phantom. Will it vanish into the vortex of unpaid debt until nobody has any? Or will there be plenty of worthless money that people can spend into futility? Either way they will be broke.  The looming fear whose name political leaders dare not speak is global depression, but that is not what we're in for. The term suggests a temporary sidetrack from the smooth operation of integrated advanced economies. We're heading into something quite different, a permanent departure from the standard conception of economic progress, the one in which there is always sure to be more comfort and convenience for everybody, the economy of automatic goodies.

When The Clock Strikes 12 – The Midnight Economy Of Food Assistance - We have a serious economic crisis on our hands and the media simply fails to acknowledge it.  You might be waking up to the first of the month thinking the wheels of the economy are fine.  Yet silently, millions of Americans drive into mega supercenters like Wal-Mart only to wait for their monthly allotments of food assistance so they can pay for basic groceries.  This trend is so prevalent that certain Wal-Mart centers are fully staffed at midnight since a large part of our society is waiting for that first day of the month to purchase food for their family.  46 million Americans are now receiving food assistance.  How is this issue swept under the rug?  We also have many more Americans losing their unemployment benefits because of the long-term employment issues.  The statistics show this number decreasing simply because people are falling off of their maximum number of months that they can receive benefits.  Sadly, the country is entering into a low wage environment where the working and middle class have limited employment security yet financial institutions have all the protection from the Federal Reserve even when they operate in a system of graft and irresponsibility.

Hard Times Generation: Families Living In Cars - Scott Pelley brings "60 Minutes" cameras back to central Florida to document another form of family homelessness: kids and their parents forced to live in cars.

Lingering joblessness taxes nation's food banks - The face of hunger in America is changing. It’s a little more ex-middle class, a little more desperate and there are a lot more mouths to feed, people who run the nation's food banks say.   “We’re seeing a lot more families, many who are running out of money and benefits because of long-term unemployment,” said Bill Clark, executive director of food bank Philabundance. “Since 2007, the changing face of hunger has been influenced a lot by unemployment.”  Clark doesn’t put much credence in the monthly fluctuations in employment data from the government. Every day he sees how the long-term jobless are struggling to meet basic needs. The food bank, which serves 450 cupboards and pantries throughout Pennsylvania and New Jersey, has seen a 26 percent spike in need this year and now serves food for about 65,000 people weekly.  On Friday, the Labor Department will release employment data for November. In October, employers added 80,000 jobs, offering a glimmer of hope for the beleaguered employment market.

Economy, diet rules curb Meals on Wheels programs - Federal guidelines meant to help Americans eat healthier foods are straining Meals on Wheels and other nonprofits already laboring to make sure the elderly get enough to eat at all.Lanakila Meals on Wheels in Honolulu, Hawaii, already has a waiting list of 90 people, most of them elderly, who have asked for food the organization can't afford to provide. The program can always use more volunteers, but what it really needs now is money. "We're looking for $120,000 just to maintain our existing programs and another $170,000 to meet the needs of the 90 people who are on our wait list," "It's a real time of uncertainty," Moku said, because "everyone is having a hard time just with the way the economy is and unemployment." Some Meals on Wheels programs in the U.S. support themselves solely through donations and fundraisers, but many — like Lanakila Meals on Wheels — also rely on government funding. The Hawaii program says it gets about 60 percent of its funding from government sources.

Hundreds of Unemployed, Poverty Stricken Americans Line Up For Food Vouchers - As millions of Americans lined up at shopping centers around the nation last week, Black Friday had a completely different meaning for hundreds of Floridians who began lining the streets for free food vouchers. Because there were only 3000 vouchers available, many showed up well in advance of the Saturday giveaway, hoping to ensure that they could receive one of the vouchers worth about $120 and redeemable for a bag of food containing pork, rice, beans, milk, bread and other items. Some people began to line up last Friday. Many of those who waited in line for hours were either unemployed or they live on a fixed income and can’t afford any extras. Any American who still thinks there is nothing wrong with our economy and the direction we’re headed need only look to this latest example for evidence that things are not at all as pleasant as they may seem: (Video Report Below Excerpts and Commentary)

Hunger in America, By the Numbers - Last year, 17.2 million households in the United States were food insecure, the highest level on record, as the Great Recession continued to wreak havoc on families across the country. Of those 17.2 million households, 3.9 million included children. On Thanksgiving weekend, here’s a look at hunger in America, as millions of Americans struggle to get enough to eat in the wake of the economic crisis.

    • 17.2 million: The number of households that were food insecure in 2010, the highest number on record. They make up 14.5 percent of households, or approximately one in seven.

    • 48.8 million: People who lived in food insecure households last year.

    • 3.9 million: The number of households with children that were food insecure last year. In 1 percent of households with children, “one or more of the children experienced the most severe food-insecure condition measured by USDA, very low food security, in which meals were irregular and food intake was below levels considered adequate by caregivers.”

    • 6.4 million: Households that experienced very low food security last year, meaning “normal eating patterns of one or more household members were disrupted and food intake was reduced at times during the year because they had insufficient money or other resources for food.”

    • 55: The percentage of food-insecure households that participated in one or more of the three largest Federal food and nutrition assistance programs

Horsemeat Datapoint Confirms Economy on Upswing - (OTCB News) As if the booming stock market is not enough confirmation that “Happy Days Are Here Again”, multiple news outlets are reporting that the economy is SO good that horsemeat will soon be as common on U.S. dining tables as cowhide and tripe: Horsemeat Back On The Menu. Economists look for improvement in luxury goods sales as a leading indicator in the economy. Given that horsemeat is a rare delicacy usually only available in far away foreign lands, Congressional action to restore horsemeat access to a clamoring U.S. consumer is a clear tell that not only has the economy stabilized but is growing rapidly. “Horsemeat demand is a metric we rely upon heavily. If you compare horsemeat consumption trends to GDP the correlation is astounding” said Winnie Mudder, an analyst at JP Morgan Chase.

A costly winter ahead for home heating oil users Metal thieves target car catalytic converters - Catalytic converters, copper plumbing and even central air conditioning units have topped some thieves’ most-wanted lists in recent weeks as they hope to cash in on rising scrap metal prices. Area police say the recent rash of metal thefts likely is a reflection of the sluggish economy and are warning homeowners and residents to take steps to protect their property. In the last month, eight catalytic converters, a pollution-control device that helps reduce vehicle emissions, have been cut from six vehicles at Waikem Auto dealerships in Perry Township. It’s not the catalytic converter part, however, that is luring thieves to Waikem’s lots: It’s the metals inside them. Catalytic converters contain metals such as palladium and rhodium. “You can blame it on the economy. People don’t have jobs, and scrap is at a peak right now,”

It’s Official! Societal Collapse is Mainstream - As noted in our President’s Message welcoming freshmen preppers to Malthus University, Trends Research Institute founder Gerald Celente had predicted that 2010 would be the year that neo-survivalism would go mainstream. Seems he’s only off by a few months as to the timing. Take note of this article from the website of KMOX, the CBS affiliate in St. Louis: “Survival shop Reports Jump in Sales to People Preparing for Possible Collapse It’s a brief read, so please take the time, but here’s a snippet: “There are people that have property and they’ve set up different things they’re building to protect themselves like towers they can stand up and watch,” (manager Steve) Dorsey said, “There’s a lot of people I’m dealing with who buy all kinds of stuff because they have like twenty or thirty people going in on this together and they’re all going to go to this one spot if something like this happens.”

The US immigration system is broken - Under the US constitution, people are entitled to all sorts of rights, particularly around personal liberties and freedoms. The current state of the immigration system in the United States is clearly violating some of these rights. Case in point is immigration detention; under the law, immigrants can be indefinitely detained while awaiting decisions on their cases, although a recent court case may change that. As my colleague Flavia Dzodan has pointed out, immigration detention is a global, multibillion dollar industry. The US spends $5.5m daily on immigration detention. Expenditures are mounting every year, the result of a growing number of immigrants in detention, and at the same time, detainees are being deprived of due process thanks to a growing backlog of immigration cases that may leave people sitting for weeks, months, even years while they wait for hearings. To say nothing of conditions for detainees with disabilities, many of whom do not understand the proceedings against them and cannot adequately mount defences in court, some of whom are in the US legally, but get deported anyway. This is part of the prison industrial complex in the US. The profits to be made from immigration detention are vast, especially as growing numbers of facilities are being privatised. Proponents claim this makes it cheaper to run detention centres, but this is not actually supported by the numbers, and it's also ripe for exploitation and embezzlement, as seen when prison officials do things like pocketing budgets earmarked specifically for food.

Too Much Imprisonment - The U.S. criminal justice system and its health care system have an intriguing point of similarity: They are both systems where the U.S. spends a lot more than other countries, but doesn't see substantially better outcomes--whether in terms of better health or lower crime rates.  It's perhaps useful to begin with a brief review of how the U.S. crime rate has evolved over time. Perhaps the best-known source is the Uniform Crime Reports data from the FBI, but there is also a National Crime Victimization Survey. The broad trends in all of these data sources are the same. For example, in the UCR data, the number of violent crimes doubled from about 300,000 at the start of the 1960s to 600,000 by 1968, then doubled again to 1.2 million in 1979, and continued rising to peak at 1.9 million in the early 1990s. However, since then the numbers of violent crimes have been falling and was down to 1.3 million by 2009. In other words, rates of crime have been falling for two decades, and have fallen substantially.

U.S. States Face $40 Billion in Deficits in 2013, Survey Shows (Bloomberg) -- U.S. states must tackle at least $40 billion in budget gaps in the year beginning in July as federal stimulus funds decrease and expenses rise, according to a survey released today by the National Governors Association and the National Association of State Budget Officers. Not all states have made forecasts for that year -- only 17 made deficit predictions -- and most are still grappling with shortfalls for fiscal 2012 that total $95 billion, the groups said. Revenue, while improved in 2012, won’t meet costs in areas such as health care and prisons, the report said. “Growth is weak and there is not enough money for all of the bills coming in,” said Scott Pattison, executive director of the budget officers group, in a statement. “State officials will still be cutting some programs, and increases in funding for any program except for health care will be rare.” Fourteen states are showing signs of economic stress, even after the 18-month recession ended in June 2009, according to Bloomberg Economic Evaluation of States data comparing the 12 months ended June 30 with the year-earlier period. Today’s survey shows that their struggles aren’t over.So far in the fiscal year, 15 states are seeing revenue outpace estimates, 22 states are in line, and seven are recording lower-than-expected collections, according to the report.

Federal Cuts Give Maine A Chill As Winter Approaches - Michele Hodges works six days a week but still cannot afford a Maine winter’s worth of heat for her trailer in Corinth, a tiny town where snowmobiles can outnumber cars. Ms. Hodges and her two teenage daughters qualified for federal heating assistance last year, but their luck might have run out. President Obama has proposed sharply cutting the Low Income Home Energy Assistance Program, and Maine is at this point expecting less than half of the $55.6 million that it received last winter, even as more people are applying. The average state benefit last year was about $800 for the season; now it may be closer to $300. Eligibility requirements have tightened too, and with oil prices climbing — the average in Maine was $3.66 a gallon last week, up from $2.87 a year ago — many here are anticipating days or weeks of forgoing heat. “We’ll survive,” said Ms. Hodges, who is 49 and works as an accountant and a sorter at a recycling center. “We can put a blanket up to separate off the living room and just sleep in there. But those who don’t have jobs, who are disabled or whatever, I don’t know how they’re going to make it.”

California Budget Shortfall Will Trigger Automatic Cuts  - Back in July, California did the improbable: they passed an on-time, balanced budget which included a sales tax rate decrease.  However, the nonpartisan California Legislative Analyst's Office (LAO) recently released a report that projects that revenues are likely to fall $3.7 billion short of the amount needed to cover the outlays for the current fiscal year, despite previously rosy expectations. Due to the stipulations of the budget that was passed, this shortfall will trigger automatic cuts to several government programs.These automatic cuts, sometimes called "sequestration" cuts, are divided into two tiers by the California budget. Tier One cuts are triggered if revenues are forecasted to fall $1 billion below the budget assumptions, and Tier Two cuts are triggered on a prorated basis if there is a forecasted revenue shortfall of $2 billion or more. Should the recent LAO report be used to determine cuts, the expected shortfall of $3.7 billion would make for cuts deep into the Tier Two category, and would result in a total of $2 billion in sequestration cuts.

California Governor Brown seeks $7 billion from tax hikes (Reuters) - The wealthy in California would pay more income tax and shoppers would face a sales tax increase under a measure to be unveiled by Governor Jerry Brown to raise $7 billion for the cash-strapped state. Details of the initiative were being nailed down on Thursday with lawmakers, advocates and labor unions so it could be made public as soon as Friday, according to sources in the state capital of Sacramento familiar with the measure. Brown aims to put the initiative on next November's ballot, which may see several more tax measures if proponents manage to gather at least half a million signatures to qualify them. The measures are likely to face tough opposition from the state's entrenched anti tax activists. Brown's plan would tack on a half-cent to the state sales tax. It would also impose income tax increases of 1 percent to individuals with income starting at $250,000 a year, 1.5 percent for those who make between $300,000 and $500,000 a year and 2 percent for those making more than $500,000 a year. The levies would expire at the end of 2016. The governor's initiative would circumvent the legislature, where a two-thirds vote is needed to increase taxes. Brown's fellow Democrats control the legislature but are a handful of votes short of being able to pass tax bills on their own, allowing Republicans to effectively block tax plans.

Minn. lawmakers brace for potential $1B deficit -- On the eve of the release of the state's economic forecast, there were some nervous lawmakers eager to get the new numbers. Most were expecting a budget deficit in the $750 million range. "This is one of the more uncertain times I've done a forecast," MN State Economist Tom Stinson says. He's been issuing these forecasts since 1987. He says the hard copy will be around 100 pages. "The rumors are at this point, is the state of Minnesota will face another billion dollars in the hole when the fiscal forecast comes out on Thursday," Hamline University Political Expert David Schultz said. Schultz say that billion will be added to the $5 billion deficit lawmakers dealt with when balancing the 2 year budget, and that fight lead to a government shutdown. Schultz says it's like dealing with an unplanned expense at home. "In your own household you're budgeting a thousand dollars to spend this month. Halfway through the month you suddenly realize you have, let's say, 200 dollars less than you're allowed to spend." Schultz predicts cuts could come in the areas of health and human services and education.

Monday Map: Unequal Soda and Candy Taxes - Today's Monday Map comes from our recent report on sugar and snack taxation. It shows whether groceries are subject to a state's sales tax, and whether or not soda and candy are treated the same way.

Our Municipal Dollars, Ourselves - "They don't know how to fix this," said New York City Mayor Michael Bloomberg about Occupy Wall Street on MSNBC yesterday, according to the Daily News. "They want their government to fix. They don't even know what the problem is, much less how to fix it, but they know that things aren't working well." He says that like it's a bad thing. Here's how it's not. Creating enduring conversations around complicated issues is one of the hardest things to do in politics, and Occupy Wall Street has managed to do it. Bloomberg and others go on about how Occupiers need to get their ideas poured into legislative vessels and get themselves elected-- as if those are the only way to participate in politics. They're not. Politics presents plenty of roles to play, and what's happening in Oregon right now with municipal banking reform shows how that's the case.

Detroit council braces for state intervention in budget mess - As hopes of solving Detroit's financial crisis grow dimmer, the once-defiant City Council conceded Monday that the state likely will intervene by broadening the authority of some elected officials to privatize bus and lighting services, gain deep union concessions and sell government property. Although such an intervention -- called a consent agreement -- would increase the chances for an emergency manager, which the council strongly opposes, it offers the council and mayor new authority to make sweeping budget cuts to stop the city from running out of cash for basic services by April. "A consent agreement gives the city some tools to restructure and keep a democratic structure in place," Council President Pro Tem Gary Brown said. "We are going to have a consent agreement. The only question is whether we will have a seat at the table to shape the agreement."

Detroit’s Broken-Down Buses Keep Residents Immobile as City Faces Takeover - Detroit lost a quarter of its population in the past decade, it may go broke by April and fall under state control, and Frances Lockett has a hard time getting to her job 10 miles from home. The reliable unreliability of public transit -- on average one-third of the 305 scheduled buses are off the road for repairs each day -- exemplifies the crisis that threatens the 18th-largest U.S. city with bankruptcy or state takeover. Lost revenue from plunging property values and a dwindling, poorer population have nearly broken its ability to deliver basic services in a city receding amid swaths of vacant land. Detroit faces a $155 million deficit that by June may grow by an additional $44 million without spending cuts, according to an analysis by Ernst & Young LLP. Mayor Dave Bing, the City Council and municipal employee unions are at odds over how to attack it. Yesterday, Bing dismissed the idea of a financial review that may be the first step toward state supervision.

Number of NJ Residents Receiving Food Stamps Doubles - The number of New Jersey residents receiving food stamps has doubled in the last four years despite the state’s standing as No. 2 wealthiest in the nation. One in every 10 people in the state now receive aid – totaling 400,000 households, according to New Jersey Department of Human Resources. The increase might be partly due to changes in income requirements, a public awareness campaign and a streamlined application process, according to state officials. The income requirement was raised from 130 percent of the federal poverty level to 185 percent, meaning a family of four with an annual income of $41,364 can now receive food stamps, which reflects the high cost of living in New Jersey. Even so, the primary reason the numbers have increased so sharply is due to the economy and the rise in joblessness.

Child Poverty Rises in 96 of Top 100 School Districts Since 2007 -- The child poverty rate rose during the economic recession in 1 of every 5 counties across the nation, according to the U.S. Census Bureau. The increase in poverty between 2007 and 2010 was especially pronounced in the nation’s largest school systems, where 96 of the top 100 districts reported growth in the number of poor children, according to data compiled by Bloomberg. “When we see a dramatic rise in child poverty from the recession, when unemployment is rampant, I don’t think it should surprise anyone that we would see more and more children showing up for school homeless and qualifying for free lunches,” said Patti Hassler, vice president for communication and outreach for the Children’s Defense Fund, a Washington-based advocacy group. “But it should be a call to action.”

Homeless elementary students face harsh reality of job loss-- Losing a job can mean losing a home. It's a reality thousands of Utah families have confronted in the last few years. Homelessness has deeply impacted the lives of two young girls, and the situation is becoming so common that schools are having to adjust.  For example, about one in five of the students here at Washington Elementary live in the homeless shelter. It's a fluid situation that poses challenges for educators and especially for young students who are trying to make sense of it all, as well as trying to fit in.  Tara and Rylee are at a brand new school - their third in three months.  "I lived in Tooele, because we lost our house in Ogden in August," said 7-year-old Rylee. "I didn't know where we were going to stay or what we were going to do."  Starting at a new school is tough for any young girl, but when you live in a homeless shelter, the other kids can be especially mean.  "They think that when you live in a homeless shelter, you get stinky - or something,"

Line Grows Long for Free Meals at U.S. Schools - Millions of American schoolchildren are receiving free or low-cost meals for the first time as their parents, many once solidly middle class, have lost jobs or homes during the economic crisis, qualifying their families for the decades-old safety-net program.  The number of students receiving subsidized lunches rose to 21 million last school year from 18 million in 2006-7, a 17 percent increase, according to an analysis by The New York Times of data from the Department of Agriculture, which administers the meals program. Eleven states, including Florida, Nevada, New Jersey and Tennessee, had four-year increases of 25 percent or more, huge shifts in a vast program long characterized by incremental growth.  The Agriculture Department has not yet released data for September and October.  “These are very large increases and a direct reflection of the hardships American families are facing,” said Benjamin Senauer, a University of Minnesota economist who studies the meals program, adding that the surge had happened so quickly “that people like myself who do research are struggling to keep up with it.”

A student a day busted in public schools - School-safety agents arrested 63 students in public schools between July and September — an average of about one a day, according to NYPD data revealed yesterday. The collars, required to be made public under a law enacted this year, were for violations ranging from disorderly conduct to felony assault. Most were 15 or older, but more than a dozen were 12 to 14. And 94 percent were black or Latino — though they make up just 70 percent of the city’s public-school students, according to data posted online yesterday by the New York Civil Liberties Union. “If the Bloomberg administration is truly serious about closing the [racial] achievement gap, [it] must focus on educating children, not arresting them,” said NYCLU Executive Director Donna Lieberman.

Rosiest Projections Leave San Diego Schools With $72 Million Deficit — San Diego Unified board members got a presentation about what mid-year budget cuts would mean for the district. If revenue projections from the state’s legislative analyst are on track, the district would lose $26 million in state funds as of Feb. 1, according to Ron Little, the district's chief financial officer. That's an improvement over the worst case scenario of $30 to $32 million in cuts that are possible under the state's budget. Earlier this month the Legislative Analyst's Office released a report predicted state revenues would miss the target set in this year's budget by $3.7 billion. A revenue shortfall would trigger cuts that grow for every billion the state is short up to $4 billion. Even the $26 million cut would leave the district with a budget gap of up to $97 million for the coming year, Little said. Without mid-year cuts district officials would still face a $72 million shortfall for the 2012-13 school year. Board of Education members have to approve a draft of the 2012-13 budget that accommodates mid-year cuts at their Dec. 13 meeting.

Pension costs soar for Montgomery County schools - The Montgomery County school system will need to significantly increase its contributions to employee pension plans over the next two to three years, according to new findings by the County Council's Office of Legislative Oversight. The increase -- necessary in fiscal 2014 and 2015, which begin on July 1, 2013 -- could be greater than 17 percent, according to the report, despite a 2 percent increase this year in employee contributions to the plan and reduced pension benefits for new hires. If Montgomery County Public Schools hire new teachers or raise salaries between now and June 30, 2016, that number will further increase, the report says. And with student enrollment predicted to grow by 8,000 students before the 2016-2017 academic year begins, Bowers said, additional hiring is to be expected. School employees have given up cost of living increases for three consecutive years and step increases for two, according to Montgomery County Public Schools spokesman Dana Tofig.

Unintended Consequences in School Accountability Policies » NY Fed - Over the past two decades, state and federal education policies have tried to hold schools more accountable for educating their students. A common criticism of these policies is that they may induce schools to “game the system” with strategies such as excluding certain types of students from computation of school average test scores. In this post, based on our recent New York Fed staff report, “Vouchers, Responses, and the Test Taking Population: Regression Discontinuity Evidence from Florida,” we investigate whether Florida schools resorted to such strategic behavior in response to a voucher program. We find some evidence that Florida’s schools strategically reclassified weak students into exempt categories, and we draw some lessons that are applicable to New York City’s education policies.

Lending is the right model - Book publishers are struggling with eBook lending. The latest to have a problem is Penguin who announced last week they would opt out of library lending programs citing security concerns. (They subsequently softened their exit to something temporary). The Penguin move specifically highlighted the Kindle lending program. Of course, this is just the latest following Harper Collins’ approach to limit lending to 26 times per year. And as many have pointed out, the problem publishers have with eBook lending is the same problem they have with book lending: it undermines their business model of relying on ownership to sell books. Here is the central fact about book publishing: lending is the natural state. Authors produce a book that is improved by others (including editors etc). Then people read the book and that is where it has primary value. Notice that there is no ‘then people buy the book’ stage in the middle or ‘then people place the book on their shelves forever more’ after these. Those are things people did because (a) they had to buy a physical copy and (b) they got used to keeping the physical copy. But for libraries, none of that was relevant.

The People's Library of Occupy Wall Street Lives On - For the past six weeks I have been living and working as a librarian in the People’s Library, camping out on the ground next to it. I’m an English professor at the University of Pittsburgh, and I’ve chosen to spend my sabbatical at Occupy Wall Street to participate in the movement and to build and maintain the collection of books at the People’s Library. I love books—reading them, writing in them, arranging them, holding them, even smelling them. I also love having access to books for free. I love libraries and everything they represent. To see an entire collection of donated books, including many titles I would have liked to read, thoughtlessly ransacked and destroyed by the forces of law and order was one of the most disturbing experiences of my life. My students in Pittsburgh struggle to afford to buy the books they need for their courses. Our extensive collection of scholarly books and journals alone would have sufficed to provide reading materials for dozens of college classrooms. With public libraries around the country fighting to survive in the face of budget cuts, layoffs and closings, the People’s Library has served as a model of what a public library can be: operated for the people and by the people. 

Occupy Economics - The Occupy Wall Street movement, displaced from some key geographic locations, now enjoys a small but significant encampment among economists. Concerns about the impact of growing economic inequality fit neatly into a larger critique of mainstream economic theory and its deep faith in the efficiency of markets. Many unbelievers (including me) insist that we inhabit a global capitalist system rather than an efficient market. Willingness to use the C-word (capitalism) often signals concerns about a concentration of economic power that unfairly limits individual choices, undermines political democracy, generates financial and ecological crises and limits access to alternative economic ideas. We can’t address these concerns effectively without a wider discussion of them. Seventy Harvard students dramatized dissatisfaction with the economics profession when they walked out of Prof. Gregory Mankiw’s introductory economics class on Nov. 2, protesting, in an open letter to their instructor, that the course “espouses a specific — and limited — view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today.”  The event prompted online discussion of conservative bias in introductory economics textbooks, including an anti-Mankiw blog set up by Daniel MacDonald, a graduate student in my own department.

A Columnist Recants, but the WSJ Edit Page Won’t Hear it - A year and a half ago, George Mason University economics professor Daniel B. Klein wrote a column about his finding that liberals scored much worse on a test about basic economics than libertarians and conservatives. The Wall Street Journal trumpeted it with this sneering headline: Are You Smarter Than a Fifth Grader? Self-identified liberals and Democrats do badly on questions of basic economics. The problems with the column were obvious, as left-leaning publications were quick to point out. It was based on responses to eight questions that were almost all tilted toward conservative ideas. In some instances, it counted the correct answer as the wrong answer or counted answers as false that are in fact unfalsifiable (meaning, can’t be proven false one way or another; e.g. “blue is the best color”). For instance: 5) Third World workers working for American companies overseas are being exploited (unenlightened answer: agree). 6) Free trade leads to unemployment (unenlightened answer: agree). 7) Minimum wage laws raise unemployment (unenlightened answer: disagree).

Pell grant austerity - The House Appropriations Committee recently offered up a bill that would cut students' Pell Grants - the cornerstone of the student aid system - by $44 billion over 10 years. The bill, if passed, would slash millions of students' Pell Grants: completely eliminating grants for more than 550,000 students next year and for more than 1 million students in 2017, and reducing grants for millions more. The statistics can't be ignored: though the unemployment rate for recent college graduates was 9.1 percent in 2010, that's still less than half the unemployment rate for young adults with only a high school diploma. A recent bipartisan poll showed that young adults of all backgrounds and across the political spectrum oppose cutting access to Pell Grants.

At Top Colleges, Anti-Wall St. Fervor Complicates Recruiting - College students seeking jobs on Wall Street have always had hurdles to overcome — grueling applications, endless rounds of interviews and fierce competition for the relatively few available spots at top firms. This year’s Wall Street hopefuls have had a new force to contend with: the wrath of their peers. Banks and hedge funds have long wooed undergraduates from elite colleges with lavish dinners, personalized e-mails and free trips to New York for interviews. It’s all part of an annual courtship ritual known as on-campus recruiting. But this fall, the antibank animus of the Occupy Wall Street movement has seeped onto college campuses. At some schools, anger at big banks has turned the on-campus recruiting process into a crucible of controversy. “I teach financial markets, and it’s a little like teaching R.O.T.C. during the Vietnam War,” said Robert J. Shiller, a professor of economics at Yale University. “You have this sense that something’s amiss.”

The Dwindling Power of a College Degree - Over the past four decades, we have experienced the oil embargo, Carter-era malaise and a few recessions. Mixed in were the thrills of the late 1990s and mid-aughts, when it seemed as if you were a sap if you weren’t getting rich or at least trying. But these dramas prevented many of us from realizing that the economic logic was changing fundamentally. Starting in the 1970s, labor was upended by a lot more than just formal government work rules. Increased global trade devastated workers in many industries, especially textiles, apparel, toys, furniture and electronics assembly. Computers and other technological innovations had an arguably greater impact. While factories continue to make more stuff in the United States than ever before, employment in them has collapsed.  One of the greatest changes is that a college degree is no longer the guarantor of a middle-class existence. Until the early 1970s, less than 11 percent of the adult population graduated from college, and most of them could get a decent job. Today nearly a third have college degrees, and a higher percentage of them graduated from nonelite schools. A bachelor’s degree on its own no longer conveys intelligence and capability. To get a good job, you have to have some special skill — charm, by the way, counts — that employers value. But there’s also a pretty good chance that by some point in the next few years, your boss will find that some new technology or some worker overseas can replace you.

Student Loan Debt: Who Are the 1%? - A continuing refrain of Occupy Wall Street protesters has been “student debt is too damn high,” as James Surowiecki wrote in The New Yorker. In some cases — like for the college graduate profiled in a recent article in the Chronicle of Higher Education who has $100,000 in debt and uncertain job prospects — this is unarguably true. But such cases make for dramatic reading precisely because they are so rare. The first thing to note is that most of those with that much debt have graduate degrees; it is difficult to accumulate that much debt in an undergraduate program. The chart below shows the percentage of beginning undergraduate students who, six years later, had accumulated more than the indicated levels of debt. Only one-tenth of 1 percent of college entrants, and only three-tenths of 1 percent of bachelor’s degree recipients, accumulate more than $100,000 in undergraduate student debt. If you have more than $75,000 in undergraduate debt, you are the 1 percent – just not the 1 percent you might have been hoping for.

The student loan racket - The loud commotion you hear rattling the global economy is the massive debt bubble imploding.  A few notable economists have stated that too much debt is reached simply when the public acknowledges that there is too much debt.  To this point the public is now waking up to the reality that too much debt is being taken on for higher education.  Where there is money to be made you now have Wall Street and the government walking hand and hand smiling to fleece the American student without producing any measurable increase in value.  With a web of connections and political pay for play we now have a giant bubble that is causing financially disastrous results for many young Americans walking out with diploma in hand and a massive albatross of debt securely wrapped around their bare wallets.  With youth unemployment rivaling those of third world nations we are starting to see cracks in the current system.  It seems that the $1 trillion mark with student debt might have been a tipping point.

AA retirees face sharp benefit cuts: PBGC -- Retirees of American Airlines parent AMR Corp.could lose $1 billion in benefits if the bankrupt carrier decides to end its four pension plans, according to a Tuesday statement from the U.S. agency responsible for protecting pension benefits. AMR's pension plans cover almost 130,000 participants, but collectively had just $8.3 billion in assets to cover about $18.5 billion in benefits, the Pension Benefit Guaranty Corp. said. Congress limited the size of pensions the PBGC can pay for, so AMR retirees should expect their pensions to be dramatically cut, the agency said. "As we did with Visteon, and with some plans at Delta and Northwest Airlines, we will encourage American to fix its financial problems and still keep its pension plans," the agency said. The PBGC added it recorded a $26 billion deficit as a result of failed plans the agency has already assumed.

Retirement Preparation in U.S. Reaching Crisis Levels: Small-Business Survey - Americans are unprepared for retirement, so much so that it's reached crisis levels, according to the majority of small business owners. Seventy-five percent of small business owners said Americans are so financially unprepared for retirement that it's becoming a crisis, according to a survey by Nationwide Financials released Monday. Still, less than 20 percent of small business owners say they offer employees a 401(k) or other employee self-funded retirement plan. Americans are becoming increasingly concerned about retirement as the economic downturn stymied income growth and wreaked havoc on investments such as stock portfolios and homes. More than three quarters of middle-class Americans said they don't think they'll be able to afford to retire until they're 80, according to a recent survey from Wells Fargo. And two-thirds of Americans ranked not having enough money for retirement as their top financial concern in a recent Gallup poll, up from 53 percent 10 years ago.  Despite the retirement anxiety, only 11 percent of small business owners said they plan to offer an employee-sponsored 401(k) plan in the next two years, the Nationwide survey found. And while nearly 80 percent of small business owners say having a retirement plan is important for attracting more qualified employees, more than half say it's too expensive.

Seniors Have Fastest-Growing Population - Senior citizens have become the largest and fastest-growing segment of the U.S. population, a demographic shift that influences everything from consumer behavior to health-care costs, according to this Census release. The United States’ 65-and-over population grew 15.1% from 2000 to 2010 to 40.3 million people. That age group now represents 13.0% of the population, up from 12.4% in 2000. One interesting stat: There were 53,364 people 100 and older in the U.S., up 5.8% from 2000. While the entire country is getting older, the picture varies considerably across the nation, according to this research by William Frey at the Brookings Institution, which shows that suburbs have generally aged faster than cities (there are, of course, many more people living in suburbs). Not surprisingly, among states, Florida has the largest share of its population that is 65 or over, with 17.3%, followed by West Virginia (16.0%) and Maine (15.9%). Alaska (7.7%) and Utah (9.0%) have the lowest shares and are the only states with less than 10% of their population 65 or over.

Florida Tax-Relief Plan Crippled by Medicaid Costs, Scott Says - Florida Governor Rick Scott, who has cut a corporate tax-relief proposal to less than 1 percent of what he called for last year, said he scaled back the plan because of a ballooning deficit driven by health-care spending. “Reducing taxes, as you would expect, when you walk in with budget deficits, is harder than when you don’t have budget deficits,” the former health-care executive said today in an interview. “Medicaid is growing way faster than we thought.” Florida, which closed a $3.8 billion budget gap for fiscal 2012, is facing another of as much as $2.3 billion next year. Speaking in Orlando, Scott said he hadn’t anticipated a 2013 deficit, partly because he expected to get a federal waiver letting the state expand its use of managed care for recipients of Medicaid, the health-insurance program for the needy. The state hasn’t gotten the permission needed to make the changes.

Spending Patterns for Prescription Drugs Under Medicare Part D - CBO Director's Blog - The centerpiece of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Modernization Act) was the creation of Medicare Part D, a subsidized pharmaceutical benefit that went into effect in 2006. That additional coverage constituted the most substantial expansion of the Medicare program since its inception in 1965. In 2010, the federal government spent $62 billion on Part D, representing 12 percent of total federal spending for Medicare that year. Under Medicare Part D, all enrollees receive a subsidy for prescription drug insurance. For enrollees with sufficiently low income and assets, an additional low-income subsidy (LIS) is available (enrollees who receive the LIS benefit are referred to here as LIS enrollees). Today CBO published an issue brief that reviews patterns of Medicare Part D utilization and spending among LIS and non-LIS enrollees in 2008—the most recent year for which data were available when CBO undertook this analysis.

Kaiser's Fascinating Obamacare Data - The Kaiser Family Foundation does regular polling about the public's view of healthcare reform, and the results are always interesting. This month's results, however, are even more interesting than usual. I might write a longer post about some of this later, but for now I just want to briefly highlight a few of the questions that most caught my interest. The full poll results are here. My top five most interesting results are below.Overall favorability toward Obamacare has gone down only slightly since last year. But look at the partisan breakdown: Republicans and Independents have stayed rock steady the entire time. The decline has been almost entirely due to waning favorability among Democrats. Among those who don't like Obamacare, nearly half admit that their dislike has nothing much to do with the law itself. They're just mad at Obama and/or Washington DC. Only 37% of the public feels favorably toward Obamacare, but 50% want to keep or expand it. It turns out that many of the unfavorable/don't know opinions aren't from people who dislike healthcare reform, they're from people who don't think Obamacare went far enough.  Virtually every specific aspect of Obamacare is viewed favorably by over half the public. The only exception is the individual mandate. Even Republicans, it turns out, like most of the specific provisions of the law. A fifth of the public says Obamacare has caused their premiums to go up and their benefits to go down. Needless to say, this is nothing more than a fantasy fueled by Fox News.

The Individual Health Insurance Mandate Is Still Very Unpopular - The individual mandate, a requirement in the Affordable Care Act that individuals buy private health insurance or pay a fine, is still very unpopular according to the newest Kaiser Family Foundation poll. According to the poll 63 percent have a somewhat or very unfavorable opinion of the individual mandate, while only 35 percent have a very or somewhat favorable opinion of it. The poll also found that the individual mandate was one of the most cited reasons for why people don’t like the overall law. The fact that the individual mandate has been unpopular since it was proposed and remains unpopular two years after its adoption shouldn’t be news.  Yet early this month many different supporters of the Affordable Care Act cited results from a poorly written CNN/ORG poll question to claim the public now supports the individual mandate. That CNN/ORC poll found that 52 percent support the provision requiring all Americans to get insurance, while 47 percent opposed. The CNN/ORG poll language, however, left out any mention of a fine, penalty or punishment for not getting insurance.

It’s not all bleak, all the time - A report from the Georgetown University Health Policy Institute has some good news on uninsured children: In 2010, the overall number of uninsured swelled to 47.2 million, an 8.5 percent increase from 2008. However, there was better news for America’s children in 2010, as Medicaid and the Children’s Health Insurance Program (CHIP) helped families secure coverage even as many more children found themselves living in poverty. The number of children in poverty increased significantly from 13.2 million in 2008 to 15.7 million in 2010. Yet the number of uninsured children decreased from 6.9 million in 2008 to 5.9 million in 2010. In other words, despite the fact that the number of children living in poverty increased by 18.9 percent, the number of uninsured children decreased by 14.0 percent– a true bright spot in an otherwise challenging landscape for America’s children. Of course, the cynic in me can’t help but point out that this still leaves almost 6 million children in the richest country in the world without health insurance. That’s not by their “choice”. I bring this up because as we talk about slashing Medicaid funding, I feel compelled to remind all of you that Medicaid is really a program for poor children and poor pregnant women. The program covers one in three kids in the US, as well as one in three births. Cut Medicaid severely, and you will make this bit of good news vanish. I hope the states in yellow below think hard about that.

The Other 1 Percent: Sick People (Chart) Here's a 1 percent no one wants to be part of: According to a recent analysis by Christopher Conover, a Duke University researcher on health policies and inequalities, barely 1 percent of the population accounts for nearly 20 percent of the nation's already inflated health care spending. These few people each account for, on average, $115,000 in health care spending every year, which is almost three times the annual salary of the average American worker. Only 5 percent of the population accounts for fully 50 percent of all the nation's health care spending. Everybody else generates, on average, about $360 a year in health care costs, or about 3 percent. So it's not hard to  see where some of the problems lie in the health care system, which is the biggest driver of the country's long-term deficit problems. Conover helpfully provides a chart from his forthcoming book, American Health Economy Illustrated:

Self-referral leads to more negative exams for patients: Physicians who have a financial interest in imaging equipment are more likely to refer their patients for potentially unnecessary imaging exams... "Self-referral," whereby a non-radiologist physician orders imaging exams and directs patients to imaging services in which that physician has a financial interest, is a concerning trend in medicine and a significant driver of healthcare costs. "Self-referred medical imaging has been shown to be an important contributor to escalating medical costs," said Ben E. Paxton, M.D., radiology resident at Duke University Medical Center in Durham, N.C. ... Between 2000 and 2005, ownership or leasing of MRI equipment by non-radiologists grew by 254 percent, compared to 83 percent among radiologists. The U.S. Government Accountability Office (GAO) reported that the proportion of non-radiologists billing for in-office imaging more than doubled from 2000 to 2006. During that same time period, private office imaging utilization rates by non-radiologists who control patient referral grew by 71 percent.

CDC: 240000 Americans have HIV and don't know it - Once a death sentence, AIDS can now be managed so effectively that people with the disease can live almost as long as those without it - but that's true only for those who get good medical care.  Unfortunately only one in four Americans with AIDS has the virus under control, according to a new CDC report. "The big picture is we could do a lot better than we're doing today," said Dr. Thomas Frieden, the CDC's director. Why is the treatment success rate so low? Partly because, of the 1.2 million Americans who have HIV - the infection that  causes AIDS - 20 percent don't know they're infected. That's 240,000 people. People can have the infection for years without developing symptoms.  Another reason for the low success rate,  only about 40 percent of people with HIV are getting HIV-fighting medications regularly. Worse, only 28 percent have gotten the virus to low levels in their blood. That translates to roughly 850,000 Americans who don't have the virus controlled, Frieden said. Success rates were lowest in blacks and women, he said.

 Health Status - world database - OECD

Study: Over Time, Even a Little Too Much Tylenol Can Kill - When it comes to acetaminophen (aka Tylenol or paracetamol), taking slightly too much for a few days may be more deadly than taking way too much all at once. A study in the British Journal of Clinical Pharmacology found that a quarter of the 663 patients admitted to the Scottish Liver Transplant Unit since 1992 suffered liver failure after a “staggered overdose,” in which people took a couple extra doses of acetaminophen for several days. 37 percent of patients with staggered overdoses died or required a liver transplant, compared to 28 percent of those with single overdoses.

Atrazine in Water Tied to Hormonal Irregularities -  Women who drink water contaminated with low levels of the weed-killer atrazine may be more likely to have irregular menstrual cycles and low estrogen levels, scientists concluded in a new study. The most widely used herbicide in the United States, atrazine is frequently detected in surface and ground water, particularly in agricultural areas of the Midwest. Approximately 75 percent of all U.S. cornfields are treated with atrazine each year.

Arsenic In Juice - Arsenic has long been recognized as a poison and a contaminant in drinking water, but now concerns are growing about arsenic in foods, especially in fruit juices that are a mainstay for children. Controversy over arsenic in apple juice made headlines as the school year began when Mehmet Oz, M.D., host of “The Dr. Oz Show,” told viewers that tests he’d commissioned found 10 of three dozen apple-juice samples with total arsenic levels exceeding 10 parts per billion (ppb). There’s no federal arsenic threshold for juice or most foods, though the limit for bottled and public water is 10 ppb. The Food and Drug Administration, trying to reassure consumers about the safety of apple juice, claimed that most arsenic in juices and other foods is of the organic type that is “essentially harmless.” But an investigation by Consumer Reports shows otherwise. Our study, including tests of apple and grape juice (download a PDF of our complete test results), a scientific analysis of federal health data, a consumer poll, and interviews with doctors and other experts, finds the following:

  • Roughly 10 percent of our juice samples, from five brands, had total arsenic levels that exceeded federal drinking-water standards. Most of that arsenic was inorganic arsenic, a known carcinogen.
  • Andromeda Strain: Scientists tinker with a deadly influenza virus that could wipe out civilization - – A group of scientists is pushing to publish research about how they created a man-made flu virus that could potentially wipe out civilization. The deadly virus is a genetically tweaked version of the H5N1 bird flu strain, but is far more infectious and could pass easily between millions of people at a time. The research has caused a storm of controversy and divided scientists, with some saying it should never have been carried out. The current strain of H5N1 has only killed 500 people and is not contagious enough to cause a global pandemic. But there are fears the modified virus is so dangerous it could be used for bio-warfare, if it falls into the wrong hands.

    How food manufacturers turn mouldy, mislabelled or outright contaminated foods into edible — and profitable — goods - In order to save money, many companies remove damaged or mouldy parts of their products before blasting the goods with strong heat in order to disinfect the food.  After they use temperature changes to disinfect, the companies then repackage the food and send it off to their clients as if nothing is wrong.  The heat-blasting technique is common.  As is the one where processors take faulty or mislabelled blueberry ice cream and mix it with chocolate so that the taste is hidden. Not only do producers sell and distribute food that contains mould or insects, the FDA advises the companies that their practices are fine, presenting 'levels of natural or unavoidable defects in foods that present no health hazards for humans'.

    How Food Affects Genes - Institute for Science in Society - Tiny RNA molecules in food eaten can circulate in the bloodstream and turn genes off in the body; what are the implications of eating genetically modified food? In my article on the subject [5] Darwin’s Pangenesis, the Hidden History of Genetics, & the Dangers of GMOs (SiS 42), I raised the potential dangers of genetically modified (GM) nucleic acids in GM food being taken up by cells in our body.  Now, a team of researchers in China have documented just this possibility. Plant nucleic acids are found to survive digestion in the gut, escape into the bloodstream, and taken up into the liver cells to target a very specific gene for silencing [6].

    Corporate Food Graphic Showing Big Producers: The Consolidation of American Food - graphic

    Monsanto Corn May Be Failing to Kill Bugs, EPA Says - Monsanto Co. (MON) corn that’s genetically engineered to kill insects may be losing its effectiveness against rootworms in four states, the U.S. Environmental Protection Agency said. Rootworms in Iowa, Illinois, Minnesota and Nebraska are suspected of developing tolerance to the plants’ insecticide, based on documented cases of severe crop damage and reports from entomologists, the EPA said in a memo dated Nov. 22 and posted Nov. 30 on a government website. Monsanto’s program for monitoring suspected cases of resistance is “inadequate,” the EPA said. “Resistance is suspected in at least some portions of four states in which ‘unexpected damage’ reports originated,” the EPA said in the memo, which reviewed damage reports. The insects, which begin life as root-chewing grubs before developing into adult beetles, are among the most destructive corn pests, costing U.S. farmers about $1 billion a year in damages and chemical pesticides, according to the U.S. Department of Agriculture.

    Agriculture Needs Massive Investment To Avoid Hunger, Scientists Warn - Billions more investment is needed in agriculture and food distribution systems around the world in the next few years, if widespread hunger is to be avoided, according to a group of leading scientists. If that investment is directed towards sustainable forms of agriculture, then farming can also be made into a weapon in the fight against dangerous global warming, they said, as more environmentally friendly farming methods can result in soils absorbing carbon dioxide rather than releasing it. Agriculture has been neglected in international climate change negotiations, but if governments persist in ignoring the problem then millions are likely to go hungry, according to a new report published on Wednesday morning, before the next round of negotiations in South Africa later this month. "If you intensify agriculture to produce more food while producing less [greenhouse gas emissions] then you deliver benefits in terms of climate change as well – reducing emissions and increasing food security in vulnerable regions," said Sir John Beddington, the UK's chief scientist and one of the authors of the report,

    Livestock farmers warn ethanol industry’s demand for corn could lead to meat shortages -  Livestock farmers are demanding a change in the nation’s ethanol policy, claiming current rules could lead to spikes in meat prices and even shortages at supermarkets if corn growers have a bad year. The amount of corn consumed by the ethanol industry combined with continued demand from overseas has cattle and hog farmers worried that if corn production drops due to drought or another natural disaster, the cost of feed could skyrocket, leaving them little choice but to reduce the size of their herds. A smaller supply could, in turn, mean higher meat prices and less selection at the grocery store. The ethanol industry argues such scenarios are unlikely, but farmers have the backing of food manufacturers, who also fear that a federal mandate to increase production of ethanol will protect that industry from any kind of rationing amid a corn shortage. The subject of debate is the Renewable Fuel Standard, a 2005 law requiring the nation to produce 7.5 billion gallons of renewable fuel by 2012. The standard was changed in 2007 to gradually increase the requirement to 36 billion gallons by 2022.

    Clean air, water rules spark different responses - Large and small companies have told Republican-led congressional committees what the party wants to hear: dire predictions of plant closings and layoffs if the Obama administration succeeds with plans to further curb air and water pollution.But their message to financial regulators and investors conveys less gloom and certainty. The administration itself has clouded the picture by withdrawing or postponing some of the environmental initiatives that industry labeled as being among the most onerous. Still, Republicans plan to make what they say is regulatory overreach a 2012 campaign issue, taking aim at President Barack Obama, congressional Democrats and an aggressive Environmental Protection Agency. "Republicans will be talking to voters this campaign season about how to keep Washington out of the way, so that job creators can feel confident again to create jobs for Americans,"

    Arctic Sea Ice Hockey Stick: Melt Unprecedented in Last 1,450 Years - Many climate change “skeptics” obsess over the ‘hockey stick‘, and their discussion inevitably leads back to 1998, when climate scientist Michael Mann first published his paper indicating that current global warming was anomalous in the last 1000 years or so. In plain language, Mann’s work suggested that current warming was likely due to mankind’s carbon dioxide pollution, not any as-yet-unidentified, or yet-to-be-discovered or observed natural phenomenon. Despite the “skeptics” cherry-picked focus on a  peer-reviewed paper more than a decade old, the science has moved on considerably since then. Paper after paper has basically affirmed that current warming is outside the bounds of natural variation, and therefore likely due to human activities. For example we have seen a sea level hockey stick, an underwater hockey stick, a South American hockey stick, an Arctic summer temperature hockey stick, a tropical glacier hockey stick, a North American mountain snowpack hockey stick, a glacier length hockey stick, and warming of Atlantic water into the Arctic hockey stick.

    Grim Report Card - Greenland Ice Sheet 2011 – Highlights:
    • A persistent and strong negative North Atlantic Oscillation (NAO) index was responsible for southerly air flow along the west of Greenland, which caused anomalously warm weather in winter 2010-11 and summer 2011.
    • The area and duration of melting at the surface of the ice sheet in summer 2011 were the third highest since 1979.
    • The lowest surface albedo observed in 12 years of satellite observations (2000-2011) was a consequence of enhanced surface melting and below normal summer snowfall.
    • The area of marine-terminating glaciers continued to decrease, though at less than half the rate of the previous 10 years.
    • In situ measurements revealed near record-setting mass losses concentrated at higher elevations on the western slope of the ice sheet, and at an isolated glacier in southeastern Greenland.
    • Total ice sheet mass loss in 2011 was 70% larger than the 2003-09 average annual loss rate of -250 Gt y-1. According to satellite gravity data obtained since 2002, ice sheet mass loss is accelerating.

    NSIDC bombshell: Thawing permafrost feedback will turn Arctic from carbon sink to source in the 2020s, releasing 100 billion tons of carbon by 2100 - We predict that the PCF will change the arctic from a carbon sink to a source after the mid-2020s and is strong enough to cancel 42-88% of the total global land sink. The thaw and decay of permafrost carbon is irreversible and accounting for the PCF will require larger reductions in fossil fuel emissions to reach a target atmospheric CO2 concentration. That’s the stunning conclusion from “Amount and timing of permafrost carbon release in response to climate warming” (subs. req’d), a major new study in Tellus by NOAA and the National Snow and Ice Data Center (NSIDC).  As we’ll see, the figure above is almost certainly too conservative post-2080. The permafrost permamelt contains a staggering “1.5 trillion tons of frozen carbon, about twice as much carbon as contained in the atmosphere, much of which would be released as methane.  Methane is 25 times as potent a heat-trapping gas as CO2 over a 100-year time horizon, but 72 times as potent over 20 years

    Thawing permafrost vents gases to worsen warming -  Massive amounts of greenhouse gases trapped below thawing permafrost will likely seep into the air over the next several decades, accelerating and amplifying global warming, scientists warn. Those heat-trapping gases under the frozen Arctic ground may be a bigger factor in global warming than the cutting down of forests, and a scenario that climate scientists hadn't quite accounted for, according to a group of permafrost experts. The gases won't contribute as much as pollution from power plants, cars, trucks and planes, though. The permafrost scientists predict that over the next three decades a total of about 45 billion metric tons of carbon from methane and carbon dioxide will seep into the atmosphere when permafrost thaws during summers. That's about the same amount of heat-trapping gas the world spews during five years of burning coal, gas and other fossil fuels And the picture is even more alarming for the end of the century. The scientists calculate that about than 300 billion metric tons of carbon will belch from the thawing Earth from now until 2100. Adding in that gas means that warming would happen "20 to 30 percent faster than from fossil fuel emissions alone,"  "You are significantly speeding things up by releasing this carbon."

    There is still time to avoid being locked into a high-carbon energy system - but not much - THE WORLD is losing the battle against climate change. Last year, the greenhouse gas emissions, blamed by scientists for causing global warming, increased by more than 5 per cent, despite all the efforts being made by many countries to contain them and even against the backdrop of the worst economic recession for decades. Globally, a record 30.6 gigatonnes – 3,600,000,000 tonnes – of carbon dioxide was pumped into the atmosphere in 2010, compared to 29 gigatonnes during the previous year, according to the International Energy Agency, which provides its 28 member states with energy policy analysis, research and statistics. The big jump in emissions is higher than even the “worst-case scenario” outlined by the UN’s Intergovernmental Panel on Climate Change just four years ago. If emissions continue rising at this rate, experts predict that average global temperatures would increase by a catastrophic four degrees by the end of this century. Even with new policies favouring renewable energy sources, the agency warned that cumulative carbon dioxide emissions over the next 25 years would lead to a long-term increase of 3.5 degrees in global temperatures. “Were the new policies not implemented, we are on an even more dangerous track, to an increase of six degrees.”

    For Humans, The Economy Is Everything - I made the mistake yesterday of writing about the climate. It's not a mistake I will make twice. The study by Schmittner et. al. I cited yesterday, which showed a lower sensitivity for a doubling of CO2 in the atmosphere, has set off a firestorm of protest among environmental activists, among them Joe Romm of Climate Progress. It turns out that this latest study, if correct, implies that even with a lower sensitivity, there will be "drastic changes" (for example, as expressed in extreme weather events) on land in the mid to high latitudes, which happens to be where most of us Americans live, not to mention Europeans, the Japanese, Russians, Canadians and so on. This latest study, flawed or not, doesn't matter, just like the many studies which preceded it. Why doesn't this study matter? Here's why: Homo sapiens—yes, that's you and me folks—is not going to do diddly-squat about climate change. And why not? As if we had to learn this lesson all over again in the three years since the financial meltdown, we have once again discovered that for human beings, the economy is everything.

    Will the Lights Stay On in Texas and New England? - Texas and New England may soon run short of the generating capacity they need to reliably meet peak loads, largely because old plants will be retired rather than retrofitted to meet new pollution rules, the North American Electric Reliability Corporation reported on Monday. The reliability corporation, assigned by the federal government to enforce rules on the power grid, issued a 10-year forecast that conveys a greater level of uncertainty than previous predictions. One problem is that about 600 large plants are likely to be shut for several months for the installation of pollution controls, executives said, and coordinating the shutdowns to avoid local electricity shortages will be a formidable task. The 600 are a substantial fraction of the grid’s generating resources; although there are about 15,000 plants on the grid, more than half of them are quite small. “Over all, the North American grid and bulk power supply continue to be adequate, and sufficient plans are in place,’’ said Gerry Cauley, president and chief executive. But two areas require extra attention, he said: the bulk of Texas, which is served by a grid isolated from the rest of the United States, and New England. “There’s some uncertainty in their resources at this point,’’ he said.

    EPA Said to Give Power Companies Options to Delay Pollution Rule - Bloomberg: The Environmental Protection Agency would let power plants apply for more time to comply with new pollution standards under a rule sent to the White House for review, according to people familiar with the process. The EPA stopped short of granting an across-the-board delay in implementing the rules, as sought by companies such as American Electric Power Co. (AEP) and Southern Co. (SO), according to the people, who spoke on condition of anonymity while the proposal is under review by the White House Office of Management and Budget. Instead, it’s designed to offer guarantees that the EPA rule won’t endanger electric reliability by forcing companies to shut plants that burn coal. The EPA “will reinforce that an additional year is available,” Christine Tezak, a senior policy analyst at Robert W. Baird & Co. in McLean, Virginia, said in an interview. “But people will still have to ask for it.” The rule, estimated by the EPA to cost $11 billion in 2015, is one of the most expensive proposed by President Barack Obama’s administration. It is set to be issued next month and take effect in 2015.

    Big emitters aim for climate delay - As this year's UN climate summit opens, some of the developing world's biggest greenhouse gas emitters are bidding to delay talks on a new global agreement. To the anger of small islands states, India and Brazil have joined rich nations in wanting to start talks on a legal deal no earlier than 2015. The EU and climate-vulnerable blocs want to start as soon as possible, and have the deal finalised by 2015. The UN summit, in Durban, South Africa, may make progress in a few areas. "We are in Durban with one purpose: to find a common solution that will secure a future to generations to come," said Maite Nkoana-Mashabane, South Africa's minister of international relations, who is chairing the summit. But the process of finding that common solution, in the form of an agreement that can constrain greeenhouse gas emissions enough to keep the global average temperature rise below 2C, will entail some complex and difficult politics. Developing countries will certainly target rich governments such as Japan, Canada and Russia over their refusal to commit to new emission cuts under the Kyoto Protocol, whose current targets expire at the end of next year.

    Can the Durban Climate Negotiations Succeed? - Two weeks of international climate negotiations begin today in Durban, South Africa.  These are the Seventeenth Conference of the Parties (COP-17) of the United Nations Framework Convention on Climate Change (UNFCCC).  The key challenge at this point is to maintain the process of building a sound foundation for meaningful, long-term global action, not necessarily some notion of immediate, highly-visible triumph. In other words, the answer to the question of whether the Durban climate negotiations can succeed depends — not surprisingly — on how one defines “success.” Let’s Place the Climate Negotiations in Perspective. Why do I say (repeatedly, year after year) that the best goal for the climate talks is to make progress on a sound foundation for meaningful, long-term global action, not some notion of immediate triumph?  The reason is that the often-stated cliche about the American baseball season — that it’s a marathon, not a sprint — applies even more so to international climate change policy.

    Top UN climate scientist lays out dangers of global warming, benefit of controlling pollution - The U.N.’s top climate scientist cautioned climate negotiators Wednesday that global warming is leading to human dangers and soaring financial costs, but containing carbon emissions will have a host of benefits. Rajendra Pachauri, head of the Nobel-winning Intergovernmental Panel on Climate Change, summarized a litany of potential disasters at a U.N. climate conference in the South African city of Durban. Although he gave no explicit deadlines, the implication was that time is running out for greenhouse gas emissions to level off and begin to decline. Heat waves currently experienced once every 20 years will happen every other year by the end of this century, he said. Coastal areas and islands are threatened with inundation by global warming, rain-reliant agriculture in Africa will shrink by half and many species will disappear. Within a decade, up to 250 million more people will face the stress of scarce water….

    How Negotiators at Durban Can Agree Emissions Targets - The parties to the UN Framework Convention on Climate Change are meeting once again in Durban, South Africa, from November 28 to December 9.  The United States is at loggerheads with the developing world, especially China–now the world’s largest emitter of greenhouse gases (GHG)–and India.   Fortunately, there might be a way to break through this roadblock.  A formulas-based approach, building on existing commitments, could attain desired mitigation of concentrations of Greenhouse Gases, while yet avoiding the imposition of disproportionate economic costs on any single country or group of countries.  The political feasibility of our proposal has been borne out over the last year, in that the specifics have turned out to be consistent with positions recently taken by the important players.  This despite what appears to be a Gordian knot too big to be untied.On the one hand, the leaders of India and China are clear: They won’t cut emissions until after the United States and other developed countries have cut theirs first. After all, the industrialized countries created the problem of global climate change, and got rich in the process. Developing countries shouldn’t be denied their turn at economic development, they argue. As the Indians point out, Americans emit more than 10 times as much carbon dioxide per person as they do.

    Kent rejects climate ‘guilt payment’ to poorer countries - The Kyoto Protocol is built on an outdated view of the developed and developing world and the unacceptable demand for climate reparations from poorer countries, Environment Minister Peter Kent says. As he prepares to leave for the UN climate conference in South Africa this week, Mr. Kent continued to deflect questions on whether Canada would actually pull out of the Kyoto accord as was reported this week. But he made it clear the Harper government opposes the very foundations of the United Nations treaty, which was signed in 1997 by former prime minister Jean Chrétien. That includes the longstanding agreement among developed countries that they bear primary responsibility for the current buildup of greenhouse gases, and that they therefore carry the burden of reining in emissions and should transfer hundreds of billions of dollars to poor countries to help them cope. “There is a fairly widely held perception in the developing world of the need for guilt payment” to be built into any international deal on climate, Mr. Kent said in an interview Tuesday. It’s a view Ottawa does not share.

    Darwin Comes to Durban: Overcoming "Survival of the Fittest" Mentality at UN Climate Talks - This recent Bloomberg headline sums up just about everything that's wrong with the UN climate negotiations, which get underway in Durban, South Africa tomorrow: "Saudis Seek to Ensure Climate Talks Won’t Hurt OPEC Oil Income." Addressing climate change by definition requires countries to look beyond their national self interests, but in practice, a Darwinian "survival of the fittest" mentality has taken hold. And by "fittest" I mean major emitters from both developed and developing countries that apparently have all but stitched up an agreement amongst themselves to delay new binding international climate action until 2020.  (BBC) If they succeed, this would be a scandalous abrogation of duty and a breach of the public trust. "Shocking and irresponsible" is how Grenada's Minister for the Environment described it.   In the most optimistic scenario, existing pledges amount to roughly half of what we need to stave off catastrophic climate change -- now is the time to ratchet up ambition, not dial it down. Excuses for inaction are as threadbare as an old carpet.

    Thoughts on why energy use and CO2 emissions are rising as fast as GDP - In a recent post, I discovered something rather alarming–the fact that in the last decade (2000 to 2010) both world energy consumption and the CO2 emissions from this energy consumption were rising as fast as GDP for the world as a whole. This relationship is especially strange, because prior to 2000, it appeared as though decoupling was taking place: GDP was growing more rapidly than energy use and CO2 emissions. And even after 2000, many countries continued to report decoupling. I decided to sift through individual country results, to see if I could see a pattern emerging behind these changing results. When I did this, I found three major groupings of countries:

    • 1. Southeast Asia, excluding Japan, Australia, and New Zealand. This group has been rapidly industrializing. In total, the group’s energy consumption has grown as rapidly as GDP in the last decade, and CO2 emissions have grown faster than GDP. This group includes China, India, Korea, Viet Nam, and a long list of other countries in Southeast Asia, including nearby islands.
    • 2. Middle Eastern Countries. This group showed energy use growing more rapidly than GDP,  suggesting that it was taking more energy to extract oil and to pacify its population, over time. I included all countries in this group that BP includes in its Middle Eastern grouping, even though Israel (and perhaps some other countries) do not fit the pattern well.
    • 3. Rest of the World. This group is the only group showing a favorable trend in energy growth relative to GDP growth, even in the last decade, although the pace of improvement has slowed

    In Praise of Dirty Energy: There Are Worse Things Than Pollution and We Have Them - This is going to be a long conversation but I want to stake out my point clearly from the start so when we keep coming back to it you will know where I am coming. I hold these positions:

    1. Climate Change is almost certainly real
    2. Humans are almost certainly causing it with carbon emissions, deforestation and domestication of animals
    3. There will be large environmental costs associated with climate change include a very rapid increase in extinctions
    4. There are likely to be major population dislocations because of climate change
    5. There are likely to be major agricultural shifts because of climate change.

    Nonetheless, we should pursue the development of fossil fuels as rapidly as possibly including looking for ways to streamline regulation in North American regarding fossil fuel production.

    Pepperspraying the future - A whiff of pepper spray rising from a suburban big box store, a breathtakingly absurd comment by an American politician, a breathtakingly cynical statement from a Canadian minister: three scraps of data sent whirling down the wind unnoticed by most of today’s disinformation society, which are also three clues to the exceptionally unwelcome future the industrial world is making for itself. Let’s take them one at a time, in reverse order.  On Monday, as a new round of climate change talks got under way in Durban, Canadian environment minister Peter Kent confirmed earlier media reports that Canada will refuse to accept any further cuts in its carbon dioxide output under the Kyoto treaty. Since Canada is one of only two countries on Earth that uses more energy per capita than the United States—an impressive feat, really, when you think about it—you might be tempted to believe that there was room for some modest cuts, but that notion is nowhere in Kent’s view of the universe.  The week before, in a debate among candidates for the GOP’s presidential nomination, Newt Gingrich responded to a question about oil supplies by insisting that the United States could easily increase its oil production by four million barrels a day next year, if only those dratted environmentalists in the other party weren’t getting in the way. This absurd claim was quickly and efficiently refuteded by several peak oil writers—Art Berman’s essay over on the Oil Drum is a good example—but outside the peak oil blogosphere, nobody blinked, as though a serious contender for the position of most powerful human being on the planet hadn’t just gone on record claiming that two plus two is whatever you want it to be.  All of which brings us inevitably to a Los Angeles suburb on Thanksgiving, where a woman seems to have peppersprayed her fellow shoppers to get a video game console to put under her Christmas tree.

    Wind power to make up half of Danish energy use in 2020 - Denmark aims to have wind power supply half of the country’s electricity needs in 2020, under a new programme presented by Climate and Energy Minister Martin Lidegaard on Friday. “Denmark must use a lot more renewable energy and we will have to become much better at using energy efficiently,” Lidegaard told reporters. The country aims to be 100 percent free of fossil fuels in 2050, relying instead on wind power, biomass and biogas, the government said on its website where it presented its new “Our Energy” programme.

    Offshore Wind Could Meet 14% of Europe’s Energy Demand by 2030, Leveraging $193 Billion in Investments - The European Union, long the global leader in offshore wind, will likely stay that way for the next decade — even with the fast-growing wind market in China catching up. That’s according to new figures released by Europe’s wind trade group, the European Wind Energy Association. In a report issued earlier this month, EWEA projects that the European offshore wind market will grow from 3.9 gigawatts of capacity today to 40 gigawatts of capacity, generating roughly 148 terawatt-hours of energy annually — or about 4% of Europe’s electricity demand. By 2030, cumulative installation levels could reach about 150 GW — enough capacity to generate roughly 14% of European demand. That compares to the 30 GW of capacity expected for China’s offshore wind market by 2020, as projected by the Chinese Renewable Energy Industries Association.

    What Keeps Solar Energy Executives Up All Night - I found myself stumbling across a lot of discussion about solar energy the past few days. There is both good news and bad news. San Francisco where I live is host to the U.S. Solar Market Insight conference which is officially sold out so conference organizer GTM Research has teased those of us not attending with online conference highlights. GTM is doing the event in collaboration with the solar industry trade group, the Solar Energy Industries Association® (SEIA®). SEIA is crowing because it expects the US to install about 2,000 MW of new solar capacity in 2011 passing the 1GW annual capacity addition bragging rights mark after a much more modest 887MW installed in 2010 and only 435Mw in 2009. So you see the good news about the continued growth of solar energy.

    Breakthrough in Battery Technology Could Radically Change the Energy World - It is hoped that wind and solar energy will one day become major contributors to a future energy grid that has reduced its reliance upon fossil fuels. But one of the biggest problems facing these sectors is the fact that the sun doesn’t always shine and the wind doesn’t always blow. To maintain a consistent energy supply to the grid during such periods we would need a method of storing the energy. Unfortunately current battery technology is poor and performance degrades quickly, only allowing for several hundred recharge cycles. Advancements would need to be made so that the batteries have a far longer life, can hold much higher levels of energy, and are cheap to produce. A team of Stanford researchers have recently taken the first steps to producing such a miracle battery. They have used nanoparticles of a crystalline copper hexacyanoferrate to create a high-power, durable, cheap negative-electrode (cathode). In fact it is so inexpensive to make, so efficient and so durable that it could be used to build batteries big enough for economical, large-scale energy storage on the electrical grid – something researchers have sought for years.

    Japan nuclear meltdown ‘maybe worse than thought’ - Molten nuclear fuel at Japan’s Fukushima plant might have eaten two thirds of the way through a concrete containment base, its operator said, citing a new simulation of the extent of the March disaster. Tokyo Electric Power (TEPCO) said their latest calculations showed the fuel inside the No. 1 reactor at the tsunami-hit plant could have melted entirely, dropping through its inner casing and eroding a concrete base. In the worst-case scenario, the molten fuel could have reached as far as 65 centimetres (2 feet) through the concrete, leaving it only 37 centimetres short of the outer steel casing, the report, released Wednesday, said. Until now, TEPCO had said some fuel melted through the inner pressure vessel and dropped to the containment vessel, without saying how much and what it did to the concrete, citing a lack of data. “Almost no fuel remains at its original position,” TEPCO said in the report.

    Reactor Core Melted Fully, Japan Says - Japan's tsunami-stricken nuclear-power complex came closer to a catastrophic meltdown than previously indicated by its operator—who on Wednesday described how one reactor's molten nuclear core likely burned through its primary containment chamber and then ate as far as three-quarters of the way through the concrete in a secondary vessel. The assessment—offered by Japan's government and Tokyo Electric Power Co., the operator of the Fukushima Daiichi nuclear complex—marked Japan's most sobering reckoning to date of the nuclear disaster sparked by the country's March 11 earthquake and tsunami.   But it came nearly six months after U.S. and international nuclear experts and regulators had reached similar conclusions.

    Protesters Disrupt German Nuclear Waste Shipment (photo essay) Last Wednesday, November 23, a train carrying 11 tubular containers of highly radioactive nuclear waste departed Normandy, France. The nuclear waste, which originated in German reactors years ago and was processed for storage by a French firm, is now bound for a temporary storage facility in a former salt mine near Gorleben, Germany. The 750-mile trip has taken far longer than anticipated, due to thousands of protesters causing disruptions along the way. Staging sit-ins, chaining themselves to the rails, and even sabotaging the railway, demonstrators are denouncing the transportation of dangerous material through populated areas. This is the last of 12 contractually obligated shipments of nuclear waste from France. Germany recently pledged a complete phase-out of nuclear power within a decade and has already shut down 8 of its 17 reactors. Hundreds of demonstrators were removed from railroads and streets by an estimated 20,000 police deployed along the German portion of the route, and the shipment is now near its final destination. [31 photos]

    Have we passed peak travel? - Most economists understand is that growth in mobility and travel has for centuries signalled growing prosperity. Indeed, measures of transport miles are often used as indicators of economic activity.  The graph below is from Millard-Ball and Schipper’s 2010 article on trends in per capita vehicle miles, showing the strength of this relationship since 1970 in a selection of developed countries. But what the authors also observed was a turning point in the relationship around 2003.  Was it peak travel, or a sign that such an event is around the corner?

    Burning Love - Americans have never met a hydrocarbon they didn’t like. Oil, natural gas, liquefied natural gas, tar-sands oil, coal-bed methane, and coal, which is, mostly, carbon—the country loves them all, not wisely, but too well. To the extent that the United States has an energy policy, it is perhaps best summed up as: if you’ve got it, burn it.  America’s latest hydrocarbon crush is shale gas. Shale gas has been around for a long time—the Marcellus Shale, which underlies much of Pennsylvania and western New York, dates back to the mid-Devonian period, almost four hundred million years ago—and geologists have been aware of its potential as a fuel source for many decades. But it wasn’t until recently that, owing to advances in drilling technology, extracting the gas became a lucrative proposition. The result has been what National Geographic has called “the great shale gas rush.” In the past ten months alone, some sixteen hundred new wells have been drilled in Pennsylvania; it is projected that the total number in the state could eventually grow to more than a hundred thousand. Like many rushes before it, the shale-gas version has made some people wealthy and others miserable. Landowners in shale-rich areas have received thousands of dollars an acre in up-front payments for the right to drill under their property, with the promise of thousands more to come in royalties.

    Fracking pollutes water supply- EPA investigates- Gas deal falls thru - This is a big, developing story, which will all but kill forevermore the gas industry's dishonest claim that "hydro-fracking has never polluted a single water supply." A deal to sell a controversial central Wyoming natural gas field has fallen apart amidst allegations that drilling there has caused water pollution. Texas-based Legacy Resources backed out of a $45 million deal to buy the field near Pavillion, Wyom., from EnCana last week, soon after the Environmental Protection Agency said it had detected cancer-causing benzene at 50 times the level safe for humans and other carcinogenic pollutants during its latest round of sampling. . Did you get that? Not only is the EPA on the case, but the stench that something has gone wrong in Wyoming is SO strong, that another gas company now will not risk buying this gas field and all the liability it now represents.

    Did fracking kill Dunkard Creek? - In late August 2009, dead fish began washing up in Dunkard Creek, a small river that runs through West Virginia and southwestern Pennsylvania. During the next month about 22,000 fish washed ashore (some estimates say as many as 65,000 died). At least 14 species of freshwater mussels – the river’s entire population – were destroyed, wiping out nearly every aquatic species along a 35-mile stretch of the waterway. “That’s the ultimate tragedy,” says Frank Jernejcic, a fisheries biologist with the West Virginia Department of Natural Resources. “Fish will come back, we can get the fish back. The mussels are a generational thing.” The scene was horrific: Three-foot long muskies washed up along the riverbanks. Mud puppies, a kind of gilled salamander that lives underwater, had tried to escape by crawling onto nearby rocks. Many of the fish were bleeding from the gills and covered in mucous. The die-off marked one of the worst ecological disasters in the region’s history.

    Kasich, Koch and Big-Industry Bucks: Why Ohio Is the Next Fracking Frontier - Fracking opponents in southern Ohio won a victory last week when the United States Forest Service (USFS) withdrew more than 3,000 acres of public lands from a federal oil and gas lease sale scheduled for December 7, 2012. The USFS announced that it needed more time to review the potential effects of fracking after receiving petitions and letters from local leaders who used the old-fashioned method of collecting signatures to catch the attention of government officials.The fracking industry, on the other hand, has spent $747 million dollars in the past decade to lobby Congress and support politicians in states like Ohio, Michigan and New York as part of a campaign to keep fracking unregulated, according to a recent Common Cause report. Fracking is short for horizontal hydraulic fracturing, and Ohio is the next ground zero for the rapidly expanding natural-gas drilling method, which has enraged environmentalists and provoked controversy across the country. Fracking involves injecting millions of gallons of water and chemicals - some of them toxic - into deep underground wells to break up rock and release natural gas. Common Cause reports that fracking companies spent $2.8 million in political contributions to Ohio parties and candidates since 2001. Republican Gov. John Kasich tops the list and has received $213,519 in campaign contributions from the industry.

    To Understand What's Happening with Fracking Decisions in New York, Follow the Money: In a November 25 article titled, "Millions Spent in Albany Fight to Drill for Gas," The New York Times reported: Companies that drill for natural gas have spent more than $3.2 million lobbying state government since the beginning of last year, according to a review of public records. The broader natural gas industry has been giving hundreds of thousands of dollars to the campaign accounts of lawmakers and the governor…The companies and industry groups have donated more than $430,000 to New York candidates and political parties, including over $106,000 to Mr. Cuomo, since the beginning of last year, according to a coming analysis of campaign finance records by Common Cause. Those who were wondering the motive behind NY Democratic Governor Anthony Cuomo's decision to lift New York's moratorium on fracking now have a better sense for his enthusiasm: campaign cash. Back in June, I wrote, Despite the copiously-documented ecological danger inherent in the unconventional drilling process and in the…gas emissions process, as well as the visible anti-fracking sentiment of the people living in the Marcellus Shale region, Cuomo has decided it's 'go time.' Other than in New York City's watershed, inside a watershed used in the city of Syracuse, in underground water sources deemed important in cities and towns, as well on state lands, spanning from parks

    Shale Pioneers Plan Next English Wells After First Frack Causes Earthquake - The sound that woke Caroline Murphy after midnight on April 1 was so loud she thought a car had crashed into her house. She doesn’t feel any better knowing it was the U.K.’s first recorded earthquake caused by natural-gas exploration. Murphy’s home is within three miles of a drill site belonging to Cuadrilla Resources Ltd., an explorer that says it’s found more natural gas trapped in the local shale rock than Iraq has in its entire reserves. The magnitude 2.3 tremor that shook Murphy, and a second weaker quake on May 27, forced Cuadrilla to suspend hydraulic fracturing, the process of blasting sand, water and chemicals into shale that’s made the U.S. the world’s largest natural-gas producer. The company plans to start fracturing again next year as debate intensifies on shale’s potential in the U.K. The earthquakes are another argument for campaigners who say fracking, as the technique has become known, blights the landscape and risks polluting water supplies -- an issue in this part of England, where farms grow cabbages, zucchini and radishes using water from underground aquifers.

    Helms says EPA could halt fracking in oil patch: With millions, if not billions, of dollars hanging over the ledge, the boom in the oil patch would go into a free-fall if drilling suddenly stopped. Thousands of workers unemployed overnight, housing starts abandoned, businesses shuttered and bustling oil towns from Williston to Belfield emptying out instead of filling up are all part of a future few would prefer — even if they despair of the changes to land and lifestyle wrought by the upswing of oil. Even with oil near $100 a barrel and 200 rigs drilling in North Dakota last week, the specter of some sort of free-fall caused by a federal push to regulate hydraulic fracture treatment weighs heavily on Lynn Helms. He’s the director of the Department of Mineral Resources, the one man most in charge of this seemingly unstoppable surge centered on the Bakken. Every single well in the Bakken and associated formations is fracture-treated. By now, that amounts to 3,000 wells, a fraction of future oilfield development. Fracking, with high-pressure injections of water, sand and chemicals, has so far proved the only successful way to make oil flow from the dense source rock.

    Analysis: Harper's bet may pay off; China open to Canadian oil - (Reuters) - China is set to embrace Canada's offer of more crude, heating up competition with the United States as the world's top two oil consumers jostle to secure supplies and meet ravenous demand. Shipments from a politically stable country such as Canada will be a welcome diversification of supply sources as top consumers make plans to deal with a supply shock if tensions in the Middle East escalate and choke off Iranian exports, barely a year after markets coped with a disruption from Libya. Canada's plan to ship crude to Asia got a boost after Prime Minister Stephen Harper said his nation would step up efforts to supply the region after the United States delayed a decision on a pipeline supply link. "A Canadian source could offer a diversity of supply attractive particularly to North Asia," . "Canada is a stable country, not subjected to geopolitics, and the crude would be valued in the market to make it competitive."

    China invests billions in Canada oil sands - - As U.S. companies look toward oil riches in northern Canada, they're encountering increasing competition - as well as some much-needed cash infusions - from the Far East. U.S. and Canadian companies have dominated Alberta's oil sands for decades. Now, though, Chinese firms are rushing to snap up Canadian oil sands resources and invest in ongoing projects - to the tune of $15 billion in the past 18 months in Alberta alone. They are motivated by a desire to jump into one of the world's lowest-risk oil investments and to quench the exploding energy demands of Asian markets - even though getting the product from Canada to Asia is just a pipe dream now. The foreign funding can help pay for what research firm IHS CERA estimates will be $100 billion in spending on oil sands projects over the next decade. And for a growing number of U.S. oil companies, many based in Houston, the infusion of Chinese cash in Canadian projects is welcome funding for some capital-intensive oil sands projects.

    China Digs Deeper Into Canadian Tar Sands During Durban Talks - Although China boasts of its green progress, the booming nation is also making major bets on North and South American tar sands, one of the most carbon-intensive fuels on the planet. This play for civilization-threatening energy comes even as the world’s nations jockey over the fragile international climate accords in Durban, South Africa: On Monday, China National Offshore Oil Corp (CNOOC) closed its acquisition of bankrupt Canadian tar sands producer OPTI Canada Inc. CNOOC gets OPTI’s 35 percent working interest in Long Lake and three other project areas located in the Athabasca region of northeastern Alberta, split with Canadian operator Nexen Inc. The deal cost $34 million for OPTI stock and $2 billion in debt. [Reuters] On Wednesday, CNOOC and Nexen formed a joint venture, giving CNOOC a 20 percent working interest in the Kakuna, Angel Fire, and Cypress deepwater exploration wells in the Gulf of Mexico. [BusinessWeek] These dirty investments in North American fossil fuel projects are just the latest in a rapid string of deals to give China access to high-polluting carbon energy from the Americas. Over the last three years, China-owned companies have invested over $18 billion in tar sands, shale gas, and coal projects in Canada and Venezuela:

    Canadians Push New Routes for Oil - Canadian politicians and energy executives are ratcheting up support for several big infrastructure projects aimed at redirecting the country's growing oil output to thirsty Asian markets—a move seen as crucial in preventing a looming bottleneck of crude. The push has taken on fresh urgency after Washington this month pushed back approval of a pipeline envisioned to boost oil exports from Canada to the U.S. Canadian officials lobbied hard for the line, TransCanada Corp.'s Keystone XL, which would run from Alberta to the U.S. Gulf Coast.

    Democrats Need to Re-Think U.S. Energy Policy - Charles K. Ebinger, director of the Brookings Institution's Energy Security Initiative, writing in the L.A. Times: Today's Democratic leadership has reached a nadir in rational energy policymaking. In the last several years, congressional party leaders have squandered opportunities for a nuclear waste management storage program and have shown opposition to shale gas production. This month, the party reached a new low: The Obama administration's delay of the Keystone XL pipeline from Canada, in spite of its promise of an additional 750,000 barrels of oil per day and the thousands of new jobs it would create, was an inexcusable political decision unbecoming of a pragmatic leader.  Whoever is president in 2013, it will be the first time in 40 years that the United States has a serious chance to transform its energy landscape. The previously accepted inexorable decline in U.S. oil and gas production is being reversed: New "tight oil" — resources trapped in low-porosity formations such as shale rock — could provide the country with several million barrels of oil per day in the coming decades, and the country's abundant and accessible shale gas reserves may leave us gas independent for up to a century. There also are still conventional reserves to be tapped, most notably in Alaska, where the Beaufort and Chukchi seas and the North Slope hold an abundance of hydrocarbon reserves.

    Black gold, man: A new oil patch is on the way - Goldman issued a report on the 10th anniversary of 9/11 that says the United States will be the world's largest producer of petroleum by 2017. The reason: The same techniques that have opened massive new natural gas supplies in places like the Haynesville Shale are starting to perform the same miracle for oil all over the country.Goldman says U.S. production will rise from 8.3 million barrels a day to 10.9 barrels a day over the next five years. Russia's production is 10.6 million barrels. Not everyone is convinced. Sources such as the Oil Drum and the Oil and Gas Investment Bulletin note that Goldman's prediction is based on a liberal definition of what oil is and on even more liberal estimates of the amount of oil available in shale formations. The Energy Information Administration estimates that U.S. production will be 6 million barrels a day in 2020. But Goldman's credibility got a boost from the fact that U.S. production increased by more than a million barrels a day between 2008 and 2010. People have been predicting big changes in the energy industry for a long time — peak oil, widespread use of electric vehicles, draconian environmental regulations, a collapse in Saudi production. The difference is that the trend Goldman sees is happening now with technology that already exists. No revolution or calamity is required.

    Crude Futures Have Risen Significantly, So Why are Gasoline Prices Relatively Low? - West Texas Intermediate Crude is back above $100 from a plunge to $76 at the beginning of October. Brent is $112. So why are gasoline prices lagging the rally in crude? Reader Tim Wallace writes I am now paying $3.15 for gasoline here in North Carolina while the price of oil flirts now around $100 for the past several weeks. Historically I would have expected to see the price now moving up towards $3.50 per gallon. So why is the price so "low" - a relative term - with the oil price escalating since summer? The only reason I can assume is per the attached spreadsheets - the demand of gasoline is once more heading down, once again at a rate that brings it well below the crash of 2008/2009.  I have attached the database from the EIA with two charts I added at the front. The first chart shows the annual year on year changes in usage in thousands of barrels from 2005 to today. You can see the constant growth the first three years of the chart as all data points show growth above the zero line. We then have the plummet of '08 on '07 - the same time period oil was going speculatively through the roof.  You can see that '09 was also below the zero line, showing that all growth from 2004 on was gone.

    US crude oil supplies grew by 3.9 million barrels -The nation's crude oil supplies increased last week, the government said Wednesday. Crude supplies rose by 3.9 million barrels, or 1.2 percent, to 334.7 million barrels, which is 6.9 percent below year-ago levels, the Energy Department's Energy Information Administration said in its weekly report. Analysts expected an increase of 1 million barrels for the week ended Nov. 25, according to Platts, the energy information arm of McGraw-Hill Cos. Gasoline supplies rose by 200,000 barrels, or 0.1 percent, to 209.8 million barrels. That's 0.1 percent below year-ago levels. Analysts expected gasoline supplies to increase by 1.5 million barrels. Demand for gasoline over the four weeks ended Nov. 25 was 2.9 percent below a year earlier, averaging 8.7 million barrels a day. U.S. refineries ran at 84.6 percent of total capacity on average, 0.9 percentage point down from the prior week. Analysts expected capacity to rise to 86 percent. Supplies of distillate fuel, which include diesel and heating oil, rose by 5.5 million barrels to 138.5 million barrels. Analysts expected distillate stocks to decline by 1.5 million barrels.

    A Reality Check on Oil Supply For Newt Gingrich - During the CNN Republican presidential debate Tuesday, November 23, Newt Gingrich made statements about U.S. potential oil supply that reveal either total ignorance of energy or supremely dangerous demagoguery. He stated that the United States could discover and produce enough oil in 2012 to cause a worldwide oil price collapse. GINGRICH: But let me make a deeper point. There's a core thing that's wrong with this whole city. You said earlier that it would take too long to open up American oil. We defeated Nazi Germany, fascist Italy, and Imperial Japan in three years and eight months because we thought we were serious.  If we were serious, we would open up enough oil fields in the next year that the price of oil worldwide would collapse. Now, that's what we would do if we were a serious country. If we were serious... Earlier in the debate, when discussing the impact on Europe and the global price of oil of stopping Iranian exports through sanctioning its central bank, Gingrich said that would not be a problem. The United States would simply provide an additional 4 million barrels of oil per day to Europe to cover the Iranian shortfall.  It seems absurd to have to rebut these preposterous statements, but here are the facts.

    Growing doubts over Saudi Arabia’s supply stand-ins - Saudi Arabia does not plan to expand its oil production capacity beyond is target of 12.5m barrels a day, as Khalid al-Falih, chief executive of state-owned Saudi Aramco, says that other countries will meet rising demand over the next few years.Can others really rise to the challenge and meet the expected rise in demand? The International Energy Agency forecasts that four nations, on top of Saudi Arabia, would provide the bulk of new supply: Iraq, Brazil, Canada and Kazakhstan. Many have questioned already whether Iraq would deliver. Now, Brazil is also in doubt. Petrobras, the partly state-owned Brazilian company, plans to boost the country’s oil production from 2.1m b/d in 2011 to 3.1m b/d by 2015 and a hefty 4.9m b/d by 2020. The expansion plan will cost at least $120bn – and probably more – and will develop the so-called offshore pre-salt oilfields, which would account for 40 per cent of the country’s production by the end of the decade, up from less than 2 per cent at the moment. Yet Brazil has struggled with its 2011-15 business plan and over the past three years has been able to add only 150,000 b/d in supply, less than the increase in its demand in the same period. As an industry executive put it to me recently: “Brazil is a source of consumption growth, rather than a source of supply growth.”

    The Peak Oil Crisis: The IEA’s Road Show - Although I had already plowed through the 600-page IEA World Energy Outlook and extracted some wisdom for these columns, I thought it might be interesting to hear about how the IEA's leaders, who oversaw the scope and approved the findings of the new report, saw the global energy situation. The Agency's new Executive Director and former Economic Affairs Minister for the Netherlands, Maria van der Hoeven, went first, making the point that the global energy situation has become far more challenging during the past year due to the Fukushima nuclear meltdowns, the Arab Spring uprisings, and the financial upheavals in the EU. She emphasized that the world must invest some $38 trillion over the next 25 years to maintain the flow of energy that we have become accustomed to having. IEA's Chief Economist Fatih Birol gave the heart of the presentation. Birol began with his three principal worries: Despite global lip service to slowing global warming, CO2 concentrations in the atmosphere continued to grow last year; All governments claim to want more efficient use of energy resources, yet efficiency continues to drop; and finally high energy prices with oil prices on track to top $150 a barrel within a few years will kill any economic recovery. As an example, Birol pointed out that coal had been selling for $60 a ton as long as the Chinese were exporting it. This year when China switched from being a coal exporter to becoming even a rather small importer, prices rose to $120 a ton.

    Getting Ready For 'Peak Oil' - While researching his 2004 book, “The End of Oil” author Paul Roberts was allowed to see the Shayba oil field in Saudi Arabia’s “empty quarter.” Full of pride, Robert's Saudi engineer hosts boasted about the remarkable infrastructure built over the Shayba, rattling off a list of impressive production statistics. Saudi oilmen are usually very tight-lipped about their oil data, sanctimoniously guarding their data like state secrets. But this was a new post-911 world, and the Saudis found themselves in an unusual predicament: They needed to convince the US that they were a stable and dependable supplier of oil. Roberts shifted the discussion from his hosts' presentation of the Shayba field, when he asked them about the Qhawar field some three hundred miles to the northwest. Ghawar is by far the largest field ever discovered. From the time it was tapped in 1953 it has contributed roughly one barrel out of every twelve consumed on the planet. Like a proud parent sensing their guest had not fully appreciated the work they had done; a moment of careless bravado took over the Saudi oilmen. Unable to contain themselves, an engineer began to brag about the Shayba while throwing a few pot-shots at the rival operations at Ghawar, “The Shayba is self-pressurized, at Ghawar they have to inject water.” He continued, “At Ghawar the water-cut is 30 percent.” The hairs rose on the back of Roberts’s neck. If true this means that the Ghawar field is much further along the road to depletion than previously thought. Their secret was out.

    Peak (Cheap) Oil: How It Will Change Your Life (Micro-Doc)Energy Shock, the latest micro documentary (available for viewing below) from producer Daniel Ameduri of Future Money Trends highlights a topic that has been discussed and debated for decades – with a slightly different twist. It is often argued the the Earth has a limited amount of oil in the ground, and as modern industrialized society continues to increase consumption, we are slowly but surely using up the one precious resource that makes it all function. Proponents of the peak oil theory suggest that we have already reached the production tipping point, and that in a matter of a decade or two there will be not be enough oil left to support the needs of a growing global population. Opponents of the theory says that there is plenty of oil in the ground (and under our oceans), and that it’s just a matter of finding new and innovative ways to get it out. Energy Shock details the challenges facing the world as more nations transition from emerging to growth economies, like China, which has increased its oil consumption by some 400% over just the last several years. Yes, there is still oil in the ground and under our oceans. The problem is that we are rapidly losing the ability to easily access and produce cheap oil, and we’re having to depend more and more on costly drilling methods that will significantly affect the price of oil, gas and liquid fuels over the long-term.

    Do giant oil field discoveries fuel internal armed conflicts? Do natural resource windfalls, such as those arising from the discovery of giant oil fields, increase the risk of internal armed conflict? This column argues that giant oil field discoveries, which are largely down to chance, significantly increase the incidence of conflict. This is especially so in countries with recent histories of political violence, where locals may have little to gain from such discoveries

    China to Protect Iran Even if Result Starts World War III; What's the Best Way to Deal with Iran? -- Does the US have the right to defend itself? If so why doesn't any nation have the right to defend itself? What is the best way for the US to deal with Iran? Here is a video in Chinese, with English subtitles, in which China says it will defend Iran.

    Pimco's 4 "Iran Invasion" Oil Price Scenarios: From $140 To "Doomsday" Pimco's Greg Sharenow has released a white paper on what the Newport Beach company believes are the 4 possible outcomes should Iranian nuclear facilities be struck as increasingly more believe will happen given enough time; here they are: "i) Scenario 1: Exports minimally effected. Concerns would drive initial price response; Oil could spike initially to $130 to $140 per barrel and then settle in a higher range, around $120 to $125; ii) Scenario 2: Iranian exports cut off for one month. In this case, we would expect prices could reach previous all-time highs of $145/bbl or even higher depending on issues with shipping; iii) Scenario 3: Iranian exports are lost for half a year. We think oil prices could probably rally and average $150 for the six months, with notable spikes above that level; iv) Scenario 4: Greater loss of production from around the region, either through subsequent Iranian response or due to lack of ability to move oil through Straits of Hormuz. This is the Armageddon scenario in which oil prices could soar, significantly constraining global growth. Forecasting prices in the prior scenarios is dangerous enough. So, we won’t even begin to forecast a cap or target price in this final Doomsday scenario."

    Is a U.S. Mining Company Funding a Violent Crackdown in Indonesia? - American mining giant Freeport-McMoRan is paying the same local police who have used violence against mine workers asking for better wages. More than four thousand meters above sea level, the mine is said to be so high that its mining trucks must be tracked via satellite, as clouds typically cloak them from view. Adding to the isolation, the American mining company, Phoenix-based Freeport-McMoRan, rarely allows visitors to enter its facilities. The access road is for official vehicles only, and foreign journalists are almost exclusively forbidden. Yet despite its cover, Freeport's giant Grasberg mine is on high alert. Production there has ground to a near halt as 8,000 workers strike for better wages, currently set between $1.50 and $3 an hour. Now in its third month, this strike is not only the longest in Indonesian mining history, but also one of the more violent, with sabotage to pipelines and deadly attacks on company employees. "

    China to Embrace Fracking In an Effort to Ramp up Energy Production - China is leaving no shale deposit unturned in its effort to develop indigenous energy resources. On 24 November China’s Ministry of Land and Resources geological exploration department head Peng Qiming said during a press conference that China’s combined oil and natural gas output, 280 million tons in 2010, is projected to rise to 360 million tons of oil equivalent by 2015, a 23 percent increase in four years and will rise to 450 million tons by 2030, a 62 percent increase over 2010 production, impressive rises in production by any yardstick. And Beijing authorities in their drive are embracing a controversial natural gas production technique that is coming under increasing government scrutiny in both the United States and Britain – hydraulic fracturing, or ‘fracking.” China has started drilling to meet an ambitious annual production target of 80 billion cubic meters by 2020 by which time the government is seeking to meet a target of generating 10 percent of its energy needs from natural gas and 15 percent from renewable sources and launched a national shale gas research center in August 2010.

    Andy Stern on China and of Course a Little Philosophy on Top - Andy Stern suggests that America should emulate China While we debate, Team China rolls on. Our delegation witnessed China’s people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader—Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily—including, our delegation was told, 700,000 units of public housing annually. Meanwhile, the Chinese government can boast that it has established in Western China an economic zone for cloud computing and automotive and aerospace production resulting in 12.5% annual growth and 49% growth in annual tax revenue, with wages rising more than 10% a year. Rebuttals tend to note the fact that China is engaged in catch-up growth, or that China is still poorer than the United States. However, these miss the point. If China continues along its current trajectory it will almost certainly surpass the United States in GDP per capita and consumption per capita. There is also a fair chance that it will end up with a more egalitarian society. It will be both richer and more evenly distributed in wealth. Which is to say simply further out on the social possibilities frontier.

    If there is a recipe for growing too fast forever, I have yet to see it - Karl defends Andy Stern on China by making a claim about economic growth that on the one hand I think is partly true, but I think he overstates the case. His argument is that it is possible for economies to grow too fast in some sense, because economic growth is not the same thing as welfare. You can take too much from current generations in the name of stimulating economic growth.  Karl has made this point in the past more explicitly, pointing to China’s 40% savings rate outside the bounds of plausible optimal savings rate. This much I agree with, or at least I agree that it is possible and worth considering (I don’t know what the bounds of optimal savings are for China, or if they’re actually outside it). The problem is to use this to defend the notion that China can go too fast forever and use their current strategy to one day surpass us in per capita GDP. The essence of the problem is still is that while China may be growing too fast because of too much savings, they also still owe a lot of their fast to catch up growth. There are still many things that go into determining a growth rate, and many of these things will weigh China down in the long-run no matter how high they keep savings rates.

    Chinese manufacturing activity slows - Chinese manufacturing activity has contracted for the first time in almost three years, adding to fears about the health of the global economy. The decline comes a day after the US Federal Reserve led a co-ordinated move to ease global liquidity concerns – particularly in Europe – and the Chinese central bank loosened monetary policy. Chinese government data released on Thursday showed that the official purchasing managers’ index fell to 49 in November from 50.4 in October. The worse than expected fall marked the first decline since February 2009. A reading of less than 50 means the manufacturing sector has contracted. In a surprise move that was clearly timed to offset the negative impact of the PMI number, China’s central bank on Wednesday kicked off a new round of monetary easing by announcing a cut in the reserve ratio for banks for the first time in three years. “The markets have been handed a powerful one-two combo, in the form of a shocking PMI print and an aggressive RRR cut,” . “The message is clear: the economy is slowing much faster than expected and the government has stepped into the ring.”

    China Factory Sector Shrinks First Time in Nearly 3 Years - China's factory sector shrank in November for the first time in nearly three years, an official purchasing managers' index (PMI) showed on Thursday, underlining the central bank's move to cut bank reserve requirements to shore up the economy. The fall in the PMI to 49 from 50.4 in October is likely to feed worries that the global economy is on a slippery slope as the euro zone struggles to decisively tackle its two-year debt crisis. China's export orders fell sharply. The PMI from the China Federation of Logistics and Purchasing (CFLP) was below the median forecast of 50 in a Reuters poll. That level demarcates expansion from contraction. The PMI has been around 50-51 since June. "The November PMI dropped further to below the boom-bust line of 50... indicates that the economic growth pace would continue to moderate in the future," Zhang Liqun, a researcher with the Development Research Centre of the State Council, wrote in the CFLP statement. China's economic growth has been slowing all this year as Europe and the United States — China's top two export markets — have struggled to recover from the global financial crisis in 2008-2009. In addition to global headwinds, China's once red-hot real estate sector is slowing down as home prices and sales fall.

    HSBC China Manufacturing PMI - PDF - November 2011. Manufacturing PMI shows operating conditions deteriorating at fastest rate in 32 months during November. November data showed Chinese manufacturing sector operating conditions deteriorating at the sharpest rate since March 2009. Behind the renewed contraction of the sector were marked reductions in both production and incoming new business. The latest survey findings also showed a marked easing in price pressures, with average input costs falling for the first time in 16 months. In response, manufacturers reduced their output charges at a marked rate. After adjusting for seasonal variation, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – dropped from 51.0 to a 32-month low of 47.7 in November, signalling a solid deterioration in manufacturing sector performance. Additionally, the month-on-month decline in the index was the largest in three years. Manufacturing production in China fell for the first time in four months during November, with the rate of decline the fastest since March 2009. Panelists generally attributed reduced output to falling new business. The latest decline in new orders was marked, and the steepest in 32 months. Moreover, the month-on-month decline in the respective index was among the greatest since data collection began in April 2004.

    Inflation Fears Easing, China’s Central Bank Turns to Lifting Growth - China’s central bank, in a surprise move on Wednesday, shifted its economic focus from fighting inflation to stimulating growth by freeing the nation’s commercial banks to lend more money.The bank’s move was separate from the subsequent announcement by central bankers in the United States, Europe and Japan that they would pump more dollars into the European banking system. And Western officials said Beijing’s move was not done in coordination with theirs. Still, China’s motive was similar: to keep credit flowing through the financial markets. For more than a year, the Chinese central bank tried to squeeze the country’s banking system in hopes of restraining inflation. Its action on Wednesday’s indicated that China’s government feared the country’s growth engine was starting to falter. On Thursday morning, the Chinese government released its latest monthly survey of purchasing managers, which confirmed spreading weakness in the economy. The index dropped to 49.0 in November, from 50.4 in October; any reading below 50 suggests a slowing economy, and the November figure was the first below 50 in more than two years.

    China Cuts Reserve-Requirement Ratio - The People's Bank of China, China's central bank, said Wednesday it will cut the reserve-requirement ratio for banks by half of a percentage point, the first such cut since December 2008. The cut essentially frees up banks to lend additional money. The cut late Wednesday in Beijing cheered European markets, with the benchmark Stoxx Europe 600 index up 0.8% midday, while London's FTSE was up 0.8%. "The data for the last few weeks has been bad," said Mark Williams, China economist at Capital Economics. "There's zero growth in property starts, electricity output growth has slowed, the export numbers for November will be awful and they may have had a sneak preview of that. All of these things could have triggered a shift in policy." Wednesday's move will take the reserve-requirement rate to 21% for major banks. It will free up around 390 billion yuan (about $61 billion) in funds for the banks to lend, according to calculations by The Wall Street Journal based on data for bank deposits in October.

    Why does capital not go to where the greatest returns are - This post developed from thoughts from comments here. I think China's ace, which could also be considered its curse, is that it has a glut of people it has to provide employment for, or its society may break down. Hence its policies. I think US's ace, which could also be considered its curse, is that it has a glut of capital it has to provide a return for, or its society may break down. Hence its policies. Capital tends to congregate in the US because of its perceived safe haven. China population is stuck in China because of the constraints of its nation-state borders. We know why they are stuck, but why does all the world capital necessarily have to congregate in the US? Capital is supposed to be free to go almost anywhere in the world nowadays. This is something that the proponents of market liberalization had not counted on. Capital mobility was promoted as one of the hallmarks of globalization because its natural inclination was supposed to be to go where the returns are, and hence, it was supposed to go to all corners of the world in search of profit, until all the world's frontiers were finally ushered into the same first world standard of living. It did not happen that way. .

    China says can't use reserves to rescue foreign countries - (Reuters) - China cannot use its $3.2 trillion in foreign exchange reserves to rescue other countries, a top foreign ministry official said on Friday, in Beijing's strongest rebuttal yet to talk that it should help Europe overcome its debt crisis. Vice Foreign Minister Fu Ying said at a forum that the argument that China should rescue Europe does not stand and that Europeans may have misunderstood how China manages its reserves. She said China's reserves are akin to the country's savings and that the 1997 Asian financial crisis taught Beijing how important reserves are to the nation. As the owner of the world's largest foreign exchange reserves, China is one of the few governments with pockets deep enough to buy European government debt and help pull the region from its economic maliase.

    Another Asian Wake-Up Call - Stephen S. Roach - Never before has America, the world’s biggest consumer, been so weak for so long. Until US households make greater progress in reducing excessive debt loads and rebuilding personal savings – a process that could take many more years if it continues at its recent snail-like pace – a balance-sheet-constrained US economy will remain hobbled by exceedingly slow growth. A comparable outcome is likely in Europe. Even under the now seemingly heroic assumption that the eurozone will survive, the outlook for the European economy is bleak. The crisis-torn peripheral economies – Greece, Ireland, Portugal, Italy, and even Spain – are already in recession. Moreover, with fiscal austerity likely to restrain aggregate demand in the years ahead, and with capital-short banks likely to curtail lending – a serious problem for Europe’s bank-centric system of credit intermediation – a pan-European recession seems inevitable. It is difficult to see how Asia can remain an oasis of prosperity in such a tough global climate. Yet denial is deep, and momentum is seductive. After all, Asia has been on such a roll in recent years that far too many believe that the region can shrug off almost anything that the rest of the world dishes out.

    Japan Economy to Face Severe Situation for Time Being - Bank of Japan Governor Masaaki Shirakawa said Monday that the Japanese economy is likely to continue to face a "severe" situation especially in terms of exports amid the slowdown in overseas economies and the yen's rapid rise, seen as a spillover from the eurozone debt problem. Speaking in Nagoya, one of Japan's biggest export bases with the presence of such major firms as Toyota Motor Corp., Shirakawa also stressed that "due attention" needs to be paid to the risk that the yen's rise will dampen the country's future growth through factors such as a decline in exports and corporate profits, Japan's News Agency (Kyodo) reported. "As the aftershocks of the collapse of Lehman Brothers and the impact of the sovereign debt problems in Europe have persisted, the yen has stayed at a higher level...given this development, firms are returning to the strategy of shifting production overseas," he said. "If the pace of this shift increases excessively, it may be difficult to create replacement job opportunities at home at a similar pace," he added.

    Outsourcing Giant Finds It Must Be Client, Too-  Every three months, India’s prime minister, Manmohan Singh, meets with a special panel assigned the ambitious task of figuring out how to produce 500 million skilled workers over the next two decades.  The panel is a cross section of India’s power elite, including many of the usual figures like the education minister, the finance minister and the former chief executive of the country’s biggest software outsourcing company. Then there is a more curious choice: Manish Sabharwal.  Mr. Sabharwal runs TeamLease, a Bangalore-based agency that has created thousands of jobs by fielding temporary workers for companies in India that want to expand their work force while skirting India’s stringent labor laws, which businesses say discourage the hiring of permanent employees. Many labor leaders and left-leaning politicians accuse him of running the nation’s largest illegal business.   Indian companies outsource their own jobs within their own country.  Walk into any of India’s shining new shopping malls that sell expensive brands, like Gucci and Satya Paul, and many of the store clerks, janitors and security guards will be on the payrolls of outsourcing companies, not those of the owners of the mall or stores in it, executives say.

    Australia's Four Largest Banks Downgraded by S&P on Criteria (Bloomberg) -- Commonwealth Bank of Australia, the nation's largest lender, and its three biggest rivals were downgraded by Standard & Poor's as the ratings company applied its revised criteria to Asia-Pacific financial institutions. Commonwealth, Westpac Banking Corp., Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. were cut one level to AA- from AA, New York-based S&P said in a statement yesterday. Sydney-based Macquarie Group Ltd., Australia's largest investment bank, was downgraded two grades, to BBB from A-. Standard Chartered Plc was raised to A+ from A, while Japan's Nomura Holdings Inc. was kept at BBB+. S&P this week cut the ratings of banks in the U.S. and Europe led by Goldman Sachs Group Inc. as a result of changes to its criteria initiated three years ago, while China's three biggest lenders got higher grades than most of their largest U.S. rivals. Australia's top four banks, which control more than 80 percent of lending in the country, rely on credit markets for about 40 percent of the funds they use for lending. "To some extent you could say that we've already baked into our current ratings an expectation of continuing funding difficulties,"

    Long-term youth unemployment doubles in four years - A study looking at youth employment has found young people make up almost a quarter of Australia's long-term unemployed. The Foundation for Young Australians has just released its annual How Young People Are Faring report. The foundation's director of research and evaluation, Dr Lucas Walsh, says full-time job opportunities for teenagers are decreasing. "In a highly competitive labour market you've got a choice between a younger person, who perhaps is less experienced, as against an older member of the population," he said. "We really need to be giving these young people a go because what we do for them now will reap benefits for us in the future."

    World-Wide Factory Activity, by Country - Global manufacturing was contracted in most of the world last month, but the U.S. stood as an outlier reporting stronger expansion. The euro zone fell further into contractionary territory last month, while China’s factory sector shrank for the first time in nearly three years. Despite the trouble elsewhere in the world, purchasing managers in the U.S. were optimistic: “Respondents cite continuing concerns about the general economic environment, government regulations and European financial conditions, but are cautiously more optimistic about the next few months based on lower raw materials pricing and favorable levels of new orders,” said the Institute for Supply Management, which compiles the report. See a sortable chart of manufacturing activity, by country.

    House of horrors, part 2 - The bursting of the global housing bubble is only halfway through. MANY of the world’s financial and economic woes since 2008 began with the bursting of the biggest bubble in history. Never before had house prices risen so fast, for so long, in so many countries. Yet the bust has been much less widespread than the boom. Home prices tumbled by 34% in America from 2006 to their low point earlier this year; in Ireland they plunged by an even more painful 45% from their peak in 2007; and prices have fallen by around 15% in Spain and Denmark. But in most other countries they have dipped by less than 10%, as in Britain and Italy. In some countries, such as Australia, Canada and Sweden, prices wobbled but then surged to new highs. As a result, many property markets are still looking uncomfortably overvalued. The latest update of The Economist’s global house-price indicators shows that prices are now falling in eight of the 16 countries in the table, compared with five in late 2010.

    IMF’s Lagarde Seeks Latin America Help in ‘Historic About-Turn’ - International Monetary Fund chief Christine Lagarde will seek support from Latin America’s largest economies this week to help contain Europe’s mounting debt crisis. Her first visit to Latin America since taking office in July marks a role reversal for a region that harbors deep-seated resentment over decades of IMF-imposed austerity measures, said Roberto Abdenur, a former Brazilian ambassador to the U.S. “Previously local authorities trembled when even the most junior IMF official visited,” Abdenur said in a telephone interview. “Today, the chief is coming to seek aid. It’s an historic about-turn.”

    Correlating US and European New Orders - I noted the other day that industrial new orders in Europe appear to have gone off a cliff. Now Tim Duy has a very important post showing the extremely strong historical correlation between European and US industrial new orders.  Key graph above. Further evidence that a severe recession in Europe is unlikely to stay on that side of the Atlantic.

    Canada and Mexico to Join U.S. in NAFTA of the Pacific - At the recent APEC meetings, Canada and Mexico announced their interest in joining the U.S., along with other countries already engaged in negotiations to establish what has been referred to as the NAFTA of the Pacific.  The leaders of the nine countries that are part of the Trans-Pacific Partnership (TPP) met at the Asia-Pacific Economic Cooperation (APEC) summit in Hawaii and agreed on the broad outlines of a free trade agreement. The current members include the U.S., Australia, New Zealand, Malaysia, Vietnam, Singapore, Brunei, Peru and Chile. The TPP has been hailed as a, “landmark, 21st-century trade agreement, setting a new standard for global trade and incorporating next-generation issues.” Key features of the TPP are that it would provide comprehensive market access and be a fully regional agreement designed to facilitate the development of production and supply chains. Various working groups have been discussing issues such as financial services, government procurement, intellectual property, investment, rules of origin, telecommunications and trade remedies. The next round of talks will take place in December and there are hopes of concluding negotiations before the end of 2012. Apart from Canada and Mexico, Japan has also expressed interest in being part of the TPP. The door is also open for other countries to join which is why many consider it to be a building block for an Asia-Pacific free trade zone.

    Fall Surge in World Trade Missing - The above shows global trade through September 2011 (with almost full data) and preliminarily through October 2011 (based on only 20 out of 71 countries that have reported so far).  This is based on the monthly data from the WTO (and see here for more methodological detail). This data is a bit tricky to interpret since there is clearly strong seasonality and yet it's such a short series, and with such a giant anomaly in the middle from the 2008 recession, that straightforward seasonal adjustment methods are unlikely to give good results. Accordingly, I have marked with a green oval the August-October period in each past year to assist visual comparisons of different years.  You can see that normally at this time of year there's a big surge of pre-Christmas trade, with the exception of 2008 when the financial crisis overwhelmed it.  You can also see that this surge is completely absent this year (red oval) - there is a small downturn in September/October instead.   I take the fact that imports and exports show a very similar pattern as evidence that the sample is large enough to capture the main trend at least roughly.

    Seasonally Adjusted Global Trade is Contracting  - Yesterday I posted this chart of monthly global trade: and noted that the usual fall surge of global trade was missing. To make the point clearer I wanted to seasonally adjust the numbers which is a bit tricky both because the series is short and because there's a giant anomaly in the middle from the 2008 financial crisis.  To get around this, I cut the series into two pieces - Jan 2006 to Jun 2008 and Feb 2009 to Jun 2011 (leaving the financial crisis part on the cutting room floor).  I separately fit quadratics to each of those regions and used those fits to derive seasonal adjustment factors, which then look as follows: I take the reasonable agreement between imports and exports (which were adjusted separately) as evidence that the procedure is not crazy.  One can also tell a reasonable narrative about what these mean: there are surges in the fall (as merchandise for Christmas is shipped) and again in the spring as summer retail goods are shipped.

    Crisis in Europe Tightens Credit Across the Globe - Europe’s worsening sovereign debt crisis has spread beyond its banks and the spillover now threatens businesses on the Continent and around the world.  From global airlines and shipping giants to small manufacturers, all kinds of companies are feeling the strain as European banks pull back on lending in an effort to hoard capital and shore up their balance sheets.  The result is a credit squeeze for companies from Berlin to Beijing, edging the world economy toward another slump. The deteriorating situation in the euro zone prompted the Organization for Economic Cooperation and Development on Monday to project that the United States economy would grow at a 2 percent rate next year, down from a forecast of 3.1 percent growth in May. It also lowered its economic outlook for Europe and the rest of the world, and a credit contraction could exacerbate the slowdown.

    OECD Projects Brief Mild Recession in Europe - The OECD has an economic outlook out today: The graph above shows the OECD's projections for economic growth in the US and Europe (to the right of the green line) in the context of data for the last few years (left of green line).  As you can see, the OECD baseline scenario calls for slight contraction in Europe that will be over by Q2 of next year.  That it turn will cause a small notch down in US growth but not an actual recession. Personally, I'm significantly more bearish.  The best case requires Europe to perform major surgery on its institutions while in the middle of a recession.  The worst case is the Eurozone falls apart altogether.  I don't see how the best case is consistent with only a mild and brief recession given the level of uncertainty that is bound to arise (indeed has already arisen).  It seems to me that a disruption on the level of 2008 is a more likely outcome with multiple important institutions failing and needing to be rescued (the body count is already up to two with Dexia and MF Global). The worst case probably looks more like the 1930s.

    Oh? ECD - Krugman - Today, the OECD warns that things are looking vewy, vewy bad: Decisive policies must be urgently put in place to stop the euro area sovereign debt crisis from spreading and to put weakening global activity back on track, says the OECD’s latest Economic Outlook. The euro area crisis remains the key risk to the world economy, the Outlook says. Concerns about sovereign debt sustainability are becoming increasingly widespread. If not addressed, recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption. Pressures on bank funding and balance sheets increase the risk of a credit crunch. Another serious downside risk is that no action would be agreed to offset the large degree of fiscal tightening implied by current law in the United States. This could tip the economy into a recession that monetary policy could do little to counter. That’s all perfectly sensible. But how did we get here? In large part, by listening to people like … the OECD, which demanded both fiscal austerity and interest rate hikes back in early 2010. And yes, it was the same people now running scared of the consequences of those spending cuts and rate hikes.

    Citi Says Euro Crisis to Escalate; Cuts Global Forecast - The crisis in the euro zone will escalate in 2012, economists at Citi said on Tuesday, sending the countries that share the euro into recession next year and resulting in no more than “modest but sustained growth in the U.S. and still relatively strong – albeit slowing – growth in Asia." In its sixth consecutive monthly downgrade, Citi cut its 2012 global growth forecast and now expects global growth to slow from 4.2 percent in 2010 and about 3.0 percent in 2011 to 2.5 percent in 2012. For 2013, it expects “a modest reacceleration in global growth”, to 3.1 percent. “The hangover from the pre-recession credit boom will continue to cast a deep shadow across industrial country growth in 2012 and beyond," Citi said in a note. It pointed out that global growth would be led by Asia. “Our base case is that the EMU (European Monetary Union) sovereign crisis will escalate, provoking a sufficiently strong policy response from the ECB and creditor governments to prevent EMU disintegration and a string of disorderly sovereign debt defaults,” Citi said. It expects sovereign yield spreads vs Bunds to remain high in many euro zone countries. “We do not, however, expect the euro area to break up in 2012 or the following years, nor do we expect the disorderly default of an EA (euro area) sovereign,” Citi said.

    Mysterious Europe - Krugman - What I have never understood, and still don’t understand, is how European leaders think this is going to work out. What’s the plan? Or lacking a plan, what’s the story with a happy ending? As I see it, the underlying eurozone story is pretty clear and simple. After the creation of the euro, investors developed a false sense of security about lending to peripheral economies; this led to large capital flows from the core to the periphery, and corresponding current account imbalances: These capital inflows also caused a boom in the periphery that raised costs and prices dramatically compared with the core: Now all of that has to be unwound. So how is that supposed to happen? It seems obvious that spending cuts in the periphery have to be offset by spending increases in the core, and also that a way has to be found to make the required real depreciation in the periphery feasible. But eurozone policy is for austerity everywhere, and a low inflation target for the area as a whole, which means crippling deflation in the periphery. So where is the story about how this is supposed to work?

    Is Germany the next victim of the euro crisis? - Belgium saw its credit rating downgraded on Friday and its bond yields have been rising steadily. The situation in Italy continues to deteriorate. In auctions on Friday, Italy was forced to pay sharply higher interest rates on short-term financing. In fact, the yield on three-year bonds spiked above the yield on 10-year bonds, at one point topping 8%. It's a really bad sign when countries have to pay more for short-term money than long-term money. That's an indication of increased concern in markets that Italy might default in the near term. Both Italy and Spain are paying more for short-term funding than Greece. Whatever little faith investors may have had that newly appointed Prime Minister Mario Monti can turn the Italian ship around appears to have quickly evaporated. Yet amid all of these dramatic events, the most stress-inducing actually came from a very unexpected source: Germany. On Wednesday, a German government bond auction failed, raising only about 60% of the targeted amount. Some analysts tried to explain this event away as a result of technical factors and special circumstances, and thus not a statement on Germany's creditworthiness or demand for Bunds. Perhaps that's true. But we can't ignore the implications of that auction either. Could Germany get embroiled in the debt crisis as well?

    Breakeven Bad - Krugman - One measure I’ve been tracking lately is the German 5-year breakeven. That’s the difference between the interest rate on ordinary German 5-year bonds and the interest rate on 5-year bonds that are indexed to inflation (as measured by the euro area harmonized CPI); because one bond is protected against inflation while the other isn’t, the breakeven amounts to an implicit market forecast of inflation. If you think about the nature of the adjustment that has to take place in Europe, you realize that inflation had better not be too low. With three percent inflation over the next 5 years, adjustment might work; with 1 percent or less, no way. Right now the breakeven is 0.88.

    European rumourthon misses the mark - Last week we witnessed both the European Commision and Merkozy state that the direction forward for Europe required greater loss of fiscal sovereignty by Euro-Zone member states. From the European commission: The European Union demanded Wednesday sweeping powers to override national budgets and proposed issuing joint eurozone bonds to help resolve and prevent a repeat of the debt crisis. The head of the executive EU arm, Barroso presented radical plans that would allow him and Economy Commissioner Olli Rehn to decide to intervene in national policymaking. And from Merkozy: .. leaders didn’t spell out what kinds of changes are in the pipeline. However, they said they will present a plan ahead of the next European Council meeting Dec. 9, including proposals to grant Brussels oversight and disciplinary powers over national budgets that exceed euro treaty restrictions on public debt and deficits. If taken out of context you may have got the idea that this was a co-ordinated effort and the beginnings of a new “master plan”, however as usual in Europe the reality seems quite different. Germany’s response to the EU Commission’s other idea has been anything but supportive:

    Europe Scrambles for Solutions -  Monday morning is fast approaching, and European leaders are scrambling to come up with something credible to float ahead of the market opening. Recall that we ended last week with the S&P downgrade of Belgium, and policymakers would like to have something on the table in response. Most significant is that policymakers now realize that changing the Lisbon Treaty to enshrine fiscal discipline is a far too lengthy process to serve as an effective counterweight to emerging the soveriegn debt crisis. From Reuters: Germany's original plan was to try to secure agreement among all 27 EU countries for a limited change to the Lisbon Treaty by the end of 2012, making it possible to impose much tighter budget controls over the 17 euro zone countries -- a way of shoring up the region's defenses against the debt crisis.But in meetings with EU leaders in recent weeks, it has become clear to both German Chancellor Angela Merkel and French President Nicolas Sarkozy that it may not be possible to get all 27 countries on board, EU sources say.Even if that were possible, it could take a year or more to finally secure the changes while market attacks on Italy, Spain and now France suggest bold measures are needed within weeks.

    Snow fences for Europe – A recent post by Karl Smith  got me thinking about sovereign bonds: is it possible to use the disciplining power of the market in a currency union at all? Or in any country for that matter? One argument against using the market is that you need to be willing to let countries default — with all that entails. According to a report by the German newspaper Süddeutsche Zeitung, Italy and France are now trying to remove private sector involvement (PSI) from the European Stability Mechanism (ESM) that is bound to replace the EFSF in 2013 because the PSI for Greece allegedly has caused contagion (I doubt that, but that is not the point today). Another related argument against default (or PSI) is that sovereign borrowing works, until it doesn’t. In other words, the market does not discipline the sovereign through interest rates, but once it does, the self-fulfilling nature of the crisis leads to default. This mechanism, as far as I can see, works for countries with a central bank as lender of last resort as well. It will just hit at a later point in terms of debt load.

    Italy, Spain, and the European Central Bank - The financial crisis in Europe, seemingly never-ending, has now entered a potentially disastrous phase. With interest rates on Italian and Spanish debt soaring, France looking shaky, and even Germany having trouble in the debt market, there’s a real possibility that the euro zone might just break apart—with dire consequences not just for Europe but also for the rest of us. Yet what’s easy to miss, amid the market tremors and the political brinksmanship, is that this is that rarest of problems—one that you really can solve just by throwing money at it.  To be sure, Italy and Spain have genuine troubles: their economies are weak and their debt loads are high. But these problems are manageable as long as the interest rate on their debt stays reasonably low. (This is in contrast to Greece, which had no hope of ever paying off all its debts.) Italy’s fiscal situation is not good, but it’s not much worse than it was a decade ago. Indeed, it’s one of only a small handful of countries in the developed world that are running a so-called primary surplus: that is, if you exclude interest payments on its debt, it actually takes in more in tax revenue than it spends. The problem, then, isn’t the debt itself but, rather, the soaring interest rates, and these are driven more by fear than by economic fundamentals.

    Is it easy to guarantee Italian debt? - No, no no, says I.  Here is a recent post by Karl Smith, another by Brad DeLong.  In those posts there is not enough emphasis on public choice problems and the longer term and the forward-looking nature of markets.  The Italian economy does not have per capita growth over the last twelve years, and it is increasingly thinkable it won’t have growth any time soon, even apart from recent problems with aggregate demand.  Population is aging and shrinking and institutions remain dysfunctional.  In the comments, Morgan Warstler put it well: There’s no free lunch – this is not about past debts (debt can be written off), it is about accepting the inevitable future… There is the same problem over time for any ECB strategy; it’s not enough to break the back of the speculators once or twice.   If Germany and a few other, smaller AAA countries were to guarantee or monetize the debts of Italy, Spain, and possibly France and Belgium, never mind Greece and Portugal, Germany would not be AAA itself.  The German median voter has very little interest in guaranteeing the above-mentioned debts.  If German yields are flipping upwards, it is, in my view, because investors now see the whole euro deal as unraveling and don’t want to deal with the complexities and flak. 

    IMF Readying Loan of as Much as $794 Billion for Italy, La Stampa Reports - The International Monetary Fund is preparing a 600-billion euro ($794 billion) loan for Italy in case the country’s debt crisis worsens, La Stampa said. The money would give Italy’s Prime Minister Mario Monti 12 to 18 months to implement his reforms without having to refinance the country’s existing debt, the Italian daily reported, without saying where it got the information. Monti could draw on the money if his planned austerity measures fail to stop speculation on Italian debt, La Stampa said. Italy would pay an interest rate of 4 percent to 5 percent on the loan, the newspaper said. The amount could vary from 400 billion euros to 600 billion euros, La Stampa said.

    IMF and ECB to offer Italy a 600 billion euro bailout (sources) - There is a flurry of activity going on in Euroland this weekend. I have a number of stories up on different proposals in the offing. Clearly, European policy makers have got religion about saving the euro. Expect some kind of announcement soon. According to Austrian daily Der Standard, Italy is to receive a 600 billion euro bailout courtesy of the IMF. Note: the article has what I assume to be a typo, referring to 600 million euros instead of 600 billion. I have fixed that in the translation below. Also note that the ultimate source of this information is La Stampa, an Italian daily newspaper. Translation from German: According to a media report, the International Monetary Fund (IMF) is preparing an assistance program with a capacity of up to 600 billion euros for heavily indebted Italy. Appropriate credit could be awarded for a period of twelve to 18 months in order to stabilize the financial situation of the country, reported the Italian newspaper "La Stampa " on Sunday, citing an IMF official. With interest rates between four and six percent, it would be much cheaper than current two-and five-year bonds with interest rates of more than seven percent.

    Europe agrees on EFSF; IMF may aid Italy: reports— European officials have agreed on how to leverage a key rescue fund, while Germany and France are looking at how to deepen fiscal integration in the euro zone, according to news reports. Finance ministers from the euro zone were slated to meet Tuesday and were expected to agree to rules for borrowing against the European Financial Stability Facility (EFSF), as well as guidelines for intervening in the euro-zone bond markets and providing credit lines to governments, according to a Reuters report Sunday. Such an agreement would mark a key milestone for the 440-billion-euro-strong ($586 billion) EFSF, after European leaders agreed to leverage the fund last month. Meanwhile, the International Monetary Fund denied a report in Italy’s La Stampa that the IMF would offer up to €600 billion in aid to Italy. Analysts had cited the report as helping Asian stocks rally in Monday trading.

    Reports Of IMF Package For Italy Not Credible - International Financial Officials: A report that the International Monetary Fund could offer Italy between EUR400 billion and EUR600 billion in financial support is not credible, people familiar with ongoing international discussions on the European debt crisis said Monday. The report is "not credible," one of the people told Dow Jones Newswires. "I think it is baseless," another source also told Dow Jones Newswires. "There has been no talk on something like that among (Group of Seven) authorities." Italian newspaper La Stampa reported from New York on Sunday that the IMF could offer Italy between EUR400 billion and EUR600 billion in financial support to give Italian Prime Minister Mario Monti a window of 12 to 18 months to enact reforms sufficient to restore waning market confidence in Italy's ability to repay its debt.

    IMF Says No Talks Under Way With Italy - The International Monetary Fund said it isn’t discussing a rescue package with Italy and Japan said no such talks have occurred within the Group of Seven, amid concern that Italy will struggle to bring down borrowing costs. The Washington-based lender isn’t in discussions with Italian authorities on a program for IMF financing, a spokesperson for the fund said today in an e-mailed statement. Italy’s La Stampa newspaper reported that the IMF may be preparing a loan of as much as 600 billion euros ($798 billion) to support Italian efforts to restore investor confidence. “The IMF simply does not have the resources” on its own for such aid, It’s also unclear whether the fund would be able to get agreement on leveraging its lending capacity to such a degree, he wrote.

    Is a Eurofix Around the Corner? - Yves Smith - After telling readers that the Eurozone leader look to be suffering from “dulled reaction times…so out of line with market events that even if they were to snap our of their stupor now, it would be too late,” news reports suggest that they have finally roused themselves. Or have they? Ed Harrison has translated a report in Die Welt that describes what on the surface looks like a meaningful change in the Bundesbank’s position (and make no bones about it, the Bundesbank has been and presumably will continue to determine ECB behavior). Less than two weeks ago, a Der Spiegel article that clearly reflected conversations with the new leader of the Bundesbank, Jens Weidmann, depicted him as firmly opposed to monetizing periphery country debt: One man is bracing himself against the storm. In the battle to save the euro, Europe’s monetary watchdogs are under growing pressure from around the world to buy up unlimited quantities of the sovereign bonds of ailing member states. But the head of the Bundesbank is saying no, and he is making his message loud and clear, not only in Berlin, but also in Brussels, Paris and Washington. If the ECB gave in to the pressure, Weidmann argues, it would not only be violating European treaties and the German constitution. Such a move would also be “synonymous with the issuance of euro bonds.”  It looks as if the market perturbations of last week have either led to a religious conversion, or someone with the 5×7 glossies on Weidmann has had a heart to hear talk with him. Suddenly, Eurobonds are not longer verboten. Per Die Welt:

    Just Another Goldman Sachs Take Over - Strange, isn’t it. Italy, the largest EU country that requires a bailout of its debt, can still sell its bonds, but Germany, which requires no bailout and which is expected to bear a disproportionate cost of Italy’s, Greece’s and Spain’s bailout, could not sell its bonds. In my opinion, the failed German bond auction was orchestrated by the US Treasury, by the European Central Bank and EU authorities, and by the private banks that own the troubled sovereign debt. My opinion is based on the following facts. Goldman Sachs and US banks have guaranteed perhaps one trillion dollars or more of European sovereign debt by selling swaps or insurance against which they have not reserved.  This, of course, is what ruined the American insurance giant, AIG, leading to the TARP bailout at US taxpayers’ expense and Goldman Sachs’ enormous profits. If any of the European sovereign debt fails, US financial institutions that issued swaps or unfunded guarantees against the debt are on the hook for large sums that they do not have. The reputation of the US financial system probably could not survive its default on the swaps it has issued. Therefore, the failure of European sovereign debt would renew the financial crisis in the US, requiring a new round of bailouts and/or a new round of Federal Reserve “quantitative easing,” that is, the printing of money in order to make good on irresponsible financial instruments, the issue of which enriched a tiny number of executives.

    Euro Zone Weighs Plan to Speed Fiscal Integration - Euro-zone countries are weighing a new plan to accelerate the integration of their fiscal policies, people familiar with the matter said, as Europe's leaders race to convince investors they can resolve the region's debt crisis and keep the currency area from fracturing.  Under the proposed plan, national governments would seal bilateral agreements that wouldn't take as long as a cumbersome change to European Union treaties, according to people familiar with the matter.The pact that euro members are considering could be announced before the EU summit on Dec. 9. Some German and French officials fear that an EU treaty change could take far too long. That has prompted the search for a faster option.  A new, binding fiscal regime would not be enough to justify the creation of collective euro-zone bonds, German officials say. But it might be enough to justify ECB action to stabilize bond markets.

    Germany, France plan quick new Stability Pact - German Chancellor Angela Merkel and French President Nicolas Sarkozy are planning more drastic means - including a quick new Stability Pact - to fight the euro zone sovereign debt crisis, Welt am Sonntag reported on Sunday. The report, which echoed a Reuters report on Friday from Brussels, quoted German government sources as saying that the crisis fighting plan could possibly be announced by Merkel and Sarkozy in the coming week. The report said that because it would take too long to change existing European Union treaties, euro zone countries should avoid such delays be agreeing to a new Stability Pact among themselves - possibly implemented at the start of 2012

    Europe's Leaders Pursue New Pact - Euro-zone leaders are negotiating a potentially groundbreaking fiscal pact aimed at preventing the currency bloc from fracturing by tethering its members even closer together. The proposal, which hasn't yet been agreed to, would make budget discipline legally binding and enforceable by European authorities. Officials regard the moves as a first step toward closer fiscal and economic coordination within the currency area. That would mark a seminal shift in the governance of the 17-nation euro zone. European officials hope a new agreement, which would aim to shrink the excessive public debt that helped spark the crisis, would persuade the European Central Bank to undertake more drastic action to reverse the recent selloff in euro-zone debt markets.The proposed pact represents the boldest attempt by Europe's leaders to halt the spread of the crisis since they agreed in July to offer Greece a new bailout and to bolster the region's bailout fund. Those steps, initially hailed as a breakthrough, quickly proved insufficient.

    Germany mulls "elite bonds" with 5 nations - The German government is considering the possibility of issuing joint bonds with five fellow triple A euro zone countries that are being referred to as "elite bonds" or "AAA bonds," newspaper Die Welt reported on Monday. Chancellor Angela Merkel and her center-right government have repeated ruled out collectivizing debt and the introduction of common euro zone bonds. The conservative daily cited "high European Union diplomats" involved in fighting the sovereign debt crisis saying the Berlin government was nevertheless considering issuing bonds jointly with France, Finland, Netherlands, Luxembourg and Austria. The joint bonds could be used not only to finance borrowing for those six countries but also could be used to raise funds under strict conditions for countries such as Italy and Spain, the newspaper reported. The goal would be to stabilize the situation in the AAA countries as well as "building a credible firewall to calm the financial markets," Die Welt said. The interest rate for the bonds should be somewhere between 2 and 2.5 percent -- or only slightly above the level for German government bonds.

    The Question of Eurobonds—Several countries that belong to the Eurozone and thus use the euro as their currency are in peril of defaulting on their sovereign debt. (In fact Greece is certain to default.) If they default it will probably alleviate their economic woes, because their sovereign debt will (in a total default) be wiped out. They may not even have to pay high interest rates to borrow more money, because with their existing debt wiped out their ability to pay interest on new debt will be greater. Nations have defaulted in the past without terrible consequences; and the deeper the economic hole a nation finds itself in, the less costly default is.  Still, these countries would prefer not to default. They would prefer to borrow at low interest rates. (Who wouldn’t?) They want the European Central Bank to buy their sovereign debt with bonds issued by the bank, bonds that these countries would pay back at their leisure. Naturally the stronger countries of the EU, especially Germany, do not want to throw good money after bad by lending on generous terms to the PIIGS. Instead they want to secure these debts by persuading or coercing the PIIGS to slash their government spending, so that their revenues, diminished by the worldwide depression though they are, will cover their debt service and thus stave off default.

    Italy borrowing costs jump in small auction = Italy saw another jump in borrowing costs Monday as it sold 567 million euros ($758.4 million) of inflation-linked government bonds set to mature in 2023. The Treasury sold the bonds at a gross yield of 7.30%. That's up sharply from 2.90% in a previous auction in March 2010, according to Dow Jones Newswires. Bids exceeded supply 2.16 times, up from 1.62 times in the previous auction. Italian bond yields have risen sharply across the curve in recent months, sparking fears the euro zone's third-largest economy could eventually be forced to seek a bailout. A more crucial test comes Tuesday when Italy will attempt to sell up to 8 billion euros in various bonds.

    Woe Is Europe - Things are now hanging by a thread in Europe. In a disastrous auction of two-year bonds and six-month bills on Friday, Italy was forced to pay interest rates of 7.8 percent and 6.5 percent, respectively—levels far higher than those that sent Greece into the arms of its troika of lenders. Spain, despite the emphatic election a week ago of a new right-wing government committed to austerity, on Tuesday paid an average yield of 5.11 percent on three-month bills and 5.23 percent on six-month bills. The three-month yields were more than double what the country paid a month ago, while the six-month bills had cost it only 3.30 percent in October. Rumors have begun circulating that the new government is planning to ask for some form of outside help to service its debts. Belgium’s credit rating was downgraded by Standard & Poor’s and Portugal was downgraded to junk by Fitch. Even Germany felt the tremors of market turbulence, managing on Thursday to sell only 3.64 billion euros worth of 10-year bonds, in a 6-billion-euro auction, in what one analyst called “a major global event.”Despite a widespread fear that the euro is about to collapse, Berlin refuses to budge.

    Greeks Balk at Paying Steep New Property Tax - Ioannis Chatzis is 86 and lives in a tiny, single room, surviving on a pension that is just enough to pay for food and care for his bedridden wife. But in its latest push to raise cash, the Greek government sent him a new $372 real estate tax1 bill, incorporated into his October electric statement. Mr. Chatzis says he is being asked to choose between lights and paying for his wife’s medicines, since he cannot afford both on his $720-a-month pension. “I have nothing left to give. I will not be paying it.” Mr. Chatzis is far from alone in that vow, and it is not certain that the Greek government will do anything about the tax rebels. As the first due dates approach on the Greek government’s novel idea of linking electricity to tax payments, a growing resentment is settling over many parts of this country — one that some local officials believe could even shake its political stability.

    Foreign News: The missing 20,000 Greek pensioners - Short report today on foreign-language news:

    • Grecia no encuentra a 20.907 de sus jubilados – ABC (Spain) reveals that investigations carried out by Greece’s social security administration concluded that thousands of pensioners in Greece who were receiving benefits had already died, their surviving family members receiving the money in their stead. In total almost 21,000 people receiving benefits could not be located. Given Greece’s fiscal problems, this report puts the the magnitude of Greek administrative lapses in context.
    • Le Figaro – Flash Eco : Italie : ”coeur de la zone euro atteint” Le Figaro (France) reports that French President Sarkozy’s office has stated “if there is a problem for Italy, then it goes to the core of the euro zone.” Sarkozy’s office added that "Nicolas Sarkozy and Angela Merkel are working very hard to support Italy,” without specifying details. We know that it is rumoured that this support will be unveiled as a secret plan to create bilateral aid agreements that would facilitate, EU fiscal oversight in Italy, followed by ECB intervention.

    Diary: In Greece - In a brightly lit room decorated with photographs of cross-sections of the living brains of unwell Greeks I meet Graeme Hesketh, an English radiologist married to a Greek cardiologist. He’s lived in Greece for thirty years. He’s a tall man with a sardonic expression, in a pale blue tunic and trousers and orthopaedic sandals. He hurt his foot recently and it hasn’t brightened his outlook. ‘The Greeks are getting what they deserve,’ he says. ‘The lifestyle in Greece for the last twenty years was entirely artificial. It’s not based on any actual production or actual capabilities of the Greek economy. It’s based on borrowed money.’ 

    Inner Workings of Currency Trades  Readied for Euro Breakup - Companies that provide the plumbing for the $4 trillion-a-day foreign-exchange market are testing systems that could handle trading of previously shelved European currencies.ICAP PLC, which operate the biggest system for enabling currency trades between banks, said Sunday that it is prepping electronic-trading systems for a possible exit by Greece from the euro zone and a return of the drachma, the country's previous currency. CLS Bank International, whose platform enables banks to settle their currency trades, is running "stress tests" to prepare for a dissolution of the euro, people familiar with the matter said. The moves are signs of deepening concern that at least one country might leave the euro. Banks, analysts and investors are preparing for what many of them say is an increasing likelihood of a euro-zone breakup, either completely or in parts, leading to the potential return of currencies such as the drachma, German mark or Italian lira. That scenario appeared far-fetched just a few months ago, but a growing number of analysts and investors now say they have no choice but to get ready, even if a breakup never happens.

    ICAP Testing Trades In Greek Drachma Against Dollar and Euro -ICAP Plc, the world's largest inter-dealer broker (one that carries out transactions for financial institutions rather than private individuals), is now Testing Trades In Greek Drachma Against Dollar, Euro ICAP Plc is preparing its electronic trading platforms for Greece's potential exit from the euro and a return to the drachma, senior executives at the inter-dealer broker said Sunday. ICAP is the latest firm to disclose such preparations, joining the growing ranks of banks, governments and other key players in the global financial system whose officials are worried enough about the stability of the common currency to be making contingency plans for a possible break-up. The firm has been testing systems that would allow dealer banks to trade the drachma against both the dollar and the euro, the ICAP executives said, cautioning that the measures taken in recent weeks were precautionary. They said the currency pairs would not be accessible for trading unless required by market events, and may never be used. Certain decisions, such as how many decimal places would be used when representing the drachma's exchange rate, have not been finalized. .

    Moody’s Signals Possible Cut For Europe Banks - Banks in 15 European nations, including the largest lenders in France, Italy and Spain, may have their subordinated debt ratings cut by Moody’s Investors Service Inc. to reflect the potential removal of government support.  All subordinated, junior-subordinated and Tier 3 debt ratings of 87 banks in countries where the subordinated debt incorporates an assumption of government support were placed on review for downgrade, the ratings company said in a statement today. The subordinated debt may be cut on average by two levels, with the rest lowered by one grade, Moody’s said.  Lenders in Spain, Italy, Austria and France have the most ratings to be reviewed as governments in Europe face limited financial flexibility and consider reducing support to creditors, the rating company said. Moody’s has said that a “rapid escalation” of Europe’s sovereign debt crisis threatens the entire region. U.S. President Barack Obama renewed pressure on European leaders to prevent a dismantling of the euro.

    Moody's says all EU ratings under threat - US rating agency Moody's has warned that all European Union sovereign ratings are threatened by the current financial crisis. "The continued rapid escalation of the euro area sovereign and banking credit crisis is threatening the credit standing of all European sovereigns," the agency said in a new special comment. Moody's said that "in the absence of policy measures that stabilise market conditions over the short term, or those conditions stabilising for any other reason, credit risk will continue to rise." Ireland, Greece and Portugal have all suffered rating downgrades in the past two years. Spain and Italy - which opened its books to international auditors - have also come under pressure in recent days.France recently announced deep budget cuts in a bid to retain its top Triple-A rating status. Economists say it is struggling to hold onto the top ranking it shares with the stronger eurozone economies of Germany, the Netherlands, Austria, Finland and Luxembourg.

    New Reports Warn of Escalating Dangers From Europe's Debt Crisis - Moody’s Investors Service warned on Monday that Europe’s rapidly escalating sovereign debt crisis may lead multiple countries to default on their debts or exit the euro, which would threaten the credit standing of all 17 countries in the currency union.  In a starkly worded report, the ratings agency said that while European politicians have expressed their commitment to holding the euro together and preventing defaults, their actions to address the crisis only seem to be taking place “after a series of shocks” force their hand.  As a result, more countries may be shut out of borrowing in financial markets “for a sustained period,” Moody’s said, raising the specter of additional taxpayer bailouts on top of the multi-billion euro lifelines currently supporting Greece, Ireland and Portugal.  “The probability of multiple defaults by euro-area countries is no longer negligible,” Moody’s said. “A series of defaults would also increase the likelihood of one or more members not simply defaulting, but also leaving the euro area.”

    Moody's: "The Probability Of Multiple Defaults By Euro Area Countries Is No Longer Negligible" - If all it takes for the ES to soar by over 30 points is some propaganda about US consumer spending (pretty much ridiculed by all at this point), and two outright lies about Europe being fixed, the following factual statement by Moody's should certainly send risk soaring now that bizarro mode is fully on: "over the past few weeks, the likelihood of even more negative scenarios has risen. This reflects, among other factors, the political uncertainties in Greece and Italy, uncertainty around the final haircut imposed on holders of Greek debt, the emphasis in the recent Euro Summit statement on the conditional nature of the existing support programmes and the further worsening of the economic outlook across the euro area. Alternative outcomes fall into two broad categories: those involving one or more defaults by euro area countries (in addition to Greece's PSI programme); and those additionally involving exits from the euro area. The probability of multiple defaults (in addition to Greece's private sector involvement programme) by euro area countries is no longer negligible. In Moody's view, the longer the liquidity crisis continues, the more rapidly the probability of defaults will continue to rise."

    Paul Krugman and the Euro - The looming potential collapse of Euro countries has brought increasing scrutiny over the merits of the European Welfare state and the future of a common monetary union. For Paul Krugman, a fan of the European welfare model, this presents a problem. While he granted enormous credence to the idea that bank failures in 2008 amounted to an indictment of the entire philosophy of free-market economics, he now refuses to see the current European problems as reflecting anything deeper about the sustainability of European economies: What a tragedy. A rich, productive continent, which has produced arguably the most decent societies in human history, is tearing itself apart because its elite insisted on embarking on a dubious monetary project, and now can’t bring itself to take the steps necessary to give that project a chance of working. That is, Paul Krugman insists that the European debt crisis has nothing to do with excessive government spending.  The problem, to him, is a failed monetary experiment that deprives nations like Greece and Italy of the ability to print money to inflate away excessive debts. 

    The Euro Curse - Krugman - Joe Weisenthal has a smart post comparing Sweden and Finland. Both look solid, and fiscally are in good shape. But where Swedish bond yields have been plummeting, Finnish yields have risen. As he says, this looks like the penalty Finland is paying for being part of the euro and lacking a lender of last resort. I thought I’d look into this a bit more. Here are Swedish and Finnish 10-year bond yields: You can see the big divergence as the euro crisis has exploded. But I think it’s interesting that Finland and Sweden started to diverge back in April. What happened then? Ah, yes — the ECB started raising rates. And as Rebecca Wilder points out, that’s precisely when euro bond spreads began their upward march, culminating in the current crisis. By itself, that rate hike — although it was obviously, obviously a big mistake — should not have mattered that much. But maybe it acted as a signal of the ECB’s bloody-mindedness, and that’s what set off the panic. If that’s what happened, then the ECB’s hard-money madness may have destroyed the euro.

    The ECB's Reverse FDR - Krugman - Ryan Avent joins the chorus of those suggesting that the European Central Bank’s decision last spring to start raising rates — a decision that seemed crazy then, and looks even crazier now — was the point at which everything started to fall apart.  But how could what were, in the end, relatively small rate hikes have done large damage? As Avent says, here is where the expectations channel may have been crucial. One way to look at it is as a reverse FDR. A few years ago Gauti Eggertsson published a persuasive analysis (pdf) of the big economic recovery of 1933-37; he argued that it had a lot to do with changed expectations of future monetary policy. Specifically, by taking America off the gold standard — a shocking move at the time — and explicitly calling for a return to pre-Depression price levels, FDR created an expectation of rising prices that had a salutary effect on demand. So what happened in spring 2011? The ECB raised rates even though there was no sign of underlying inflationary pressure beyond a commodity blip, and even though the needed price adjustment in the periphery clearly needed a reasonably high inflation target. Trichet might as well have gone on TV and announced, “My colleagues and I are determined to make the debt problems of southern Europe insoluble.” And they’ve succeeded.

    No bailout, just monetary policy: ECB vs US Fed - We enter yet another interesting week in Europe with the same discussions on how high interest rates will be in Italy or Spain, rumors on a possible IMF program for Italy (doubtful) and pressures on the ECB to do more. So far ECB officials argue that "bailing out" Euro governments will violate their legal framework and it is a bad idea. Without going again into the arguments of whether the ECB can and should buy Euro government debt, here is a quick comparison between the US Fed and the ECB in terms of holdings of government debt. The chart below measures the holding of US government debt at the US Fed and Euro government debt at the ECB. They are measured in billions of local currency (USD for the US, EUR for the ECB). If you look carefully at the last months you see a small increase in the ECB holdings that reflect their recent  attempts to bring some stability to financial markets and keep bond yields under control. But how does it compare to the US Fed actions over the last two years?

    France, Germany 'spar over top ECB job' - France and Germany are battling for a key post at the European Central Bank amid deepening differences over the role the bank should take in the eurozone debt crisis, sources revealed on Tuesday. Until now, Berlin had assumed its number two at the finance ministry, Joerg Asmussen, would automatically take over from fellow German Juergen Stark as the ECB's chief economist when he steps down at the end of the year.But sources familiar with matter told AFP that Paris has also now thrown its hat into the ring in the person of Benoit Coeure -- chief economist of the French economy and finance ministry and number two at the French treasury.The source was confirming a corresponding report in German business daily Handelsblatt on Tuesday."Berlin and Paris are both laying equal claim to the post. It's a dead heat," the newspaper quoted French government and central bank sources as saying. "Benoit Coeure clearly has the competence and the profile for the position of chief economist,"

    S&P may cut France rating outlook: paper (Reuters) - Credit rating agency Standard & Poor's could change its outlook on France's AAA rating to negative within days, a French newspaper reported on Monday, adding to fears France may lose its position among the top rank of sovereign borrowers. S&P declined to comment on the report, based on anonymous sources. If true, it would signal that the risk of a downgrade has risen after months of concern about the impact on French public finances of sluggish growth and the costs of the euro zone debt crisis. Economic and financial daily La Tribune said S&P -- which on Friday cut Belgium's credit rating to AA from AA+ -- had planned to make an announcement on France the same day but postponed it for unknown reasons. "It could happen within a week, perhaps 10 days," La Tribune quoted a diplomatic source as saying of a change to the outlook.

    Germany Cuts Off Its Nose — Locked into their modern-day orthodoxies, German politicians look at Greece with something akin to contempt. Aid to Greece — aid that is given grudgingly, when it is given at all — must be accompanied by severe austerity measures, the Germans believe, because the Greeks need to learn how to live within their means, the way Germans do.  For months, Germany has strongly supported the European Central Bank’s unwillingness to do the one thing that might have stemmed the euro crisis: buy and guarantee large amounts of distressed sovereign debt.  Can’t the Germans see, one wonders from afar, that their economy was the great beneficiary of the bubble economy that caused Greece — and the other peripheral euro-zone countries — to get in over their heads, because they were buying German exports? Don’t they understand that their banks should share the blame for lending to countries that couldn’t repay the debts? Don’t they realize that the collapse of the euro zone — unthinkable a year ago; perhaps inevitable now1 — will hurt Germany much more than Greece? Other currencies will be devalued against Germany’s, making German exports more expensive. And German banks — woefully undercapitalized and stuffed with sovereign debt — will face a major solvency crisis when other sovereigns devalue or default.

    The German bond market is all about "buy and hold" Icap’s weekly European repo report shines some light on recent eurozone bond developments. For example, it blames illiquidity in German bond markets for causing chaos in the asset class rather than a sudden change in mindset. The illiquidity, it says, is specifically related to the perceived virtue of the asset (everyone wants to buy the bonds outright) rather than a sudden rush for the exit. More to the point, Icap picks up on another interesting trend. Repo durations are getting shorter, especially in bond collateral markets like France and Finland, a fact which is driving up volumes as churn rates increase: We continue to witness a push towards shorter maturities in repo markets – both in terms of shorter dated collateral and shorter trades. The result is seen clearly in the rising nominal volumes for many core Eurozone markets running through BrokerTec’s trading platform, boosted as they are by the higher churn rate that accompanies a shift from term-financing into the day-to-day maturities.

    Could Germany just leave the euro zone? Not easily. - The warnings on Europe sound extra-apocalyptic this week. “The eurozone really only has days to avoid collapse,” blares the headline on Wolfgang Münchau’s column. And, while European leaders are frantically thrashing out plans for further fiscal union to save the euro, German Chancellor Angela Merkel is still resisting sweeping reform measures. As my colleagues report, “investors and world leaders alike hang on Merkel’s every word, searching for a hint that her resistance is simply a bluff to scare countries into behaving more like hers.” And maybe Merkel is just bluffing. But plenty of observers seem freaked out enough to start asking the question no one wants to ask: What would a breakup of the euro zone actually look like? The FT’s Gavyn Davies runs through some likely scenarios. Maybe a few periphery countries like Greece and Ireland decide to exit the euro zone, default on their debts, and revert back to their old, devalued currencies in order to start afresh. Or, alternatively, maybe financially stable countries like Germany and the Netherlands decide to leave the euro, bid their troubled neighbors adieu, and form their own, smaller currency zone. These sorts of scenarios are no longer unthinkable. But a recent report suggests that either move would be far more painful than most people seem to realize. Indeed, a crack-up could prove far more costly to Germany than a bailout of its neighbors.

    Spain's jobless rate may rise to 23% - Spain's unemployment rate could climb to 23% next year, the Organization for Economic Cooperation and Development said on Monday in its latest global Economic Outlook. The Paris-based body of 34 mainly developed nations predicts that the Spanish economy will end this year with 0.7% growth before slipping back into recession in 2012 with a 0.3% reduction in gross domestic product. Unemployment in Spain , already at 21.5%, will rise to 23% next year then slowly begin to decline in 2013, the OECD said. The prediction for the country's economic evolution derives in part from the reduction in public employment at all levels of the administration to comply with the objectives of reducing Spain's public debt to 3% by 2013, a goal the OECD expects to be met. The authors of the OECD report expect a tentative recovery of Spanish GDP of 1.3% in 2013.

    Armies of the unemployed - LABOUR markets in the euro zone suffered about as badly during the Great Contraction as did the labour market in America. Both economies saw a surge in the unemployment rate that topped out above 10%, and both economies then experienced a slow but steady decline in the rate of joblessness. But where unemployment in America seems to have temporarily leveled off at around 9%, the rate of joblessness in the euro zone is once again rising. As of October, the unemployment rate in the single-currency area was back to 10.3%. There are several striking facts about recent movements in euro-zone labour markets. The first is the remarkable extent to which increased joblessness is due to deteriorating conditions around the periphery. Since the beginning of the year, Greek unemployment is up nearly 4 percentage points. The jobless rate in Germany, by contrast, has fallen a full percentage point over that period (see chart). Much of the decline in German unemployment occurred early in the year, when the economy's export machine was running hot. It is interesting to see the extent to which this trend has continued, however. In September, new industrial orders in Germany fell 4.4%, yet from September to October Germany's unemployment rate dropped, from 5.7% to 5.5%. It's no wonder that there is less of a sense of urgency to the crisis in Germany.

    European Unemployment Rising - European unemployment numbers for October are out and, probably to no-one's surprise, they are continuing to increase: The euro area (EA17) seasonally-adjusted unemployment rate was 10.3% in October 2011, compared with 10.2% in September.  It was 10.1% in October 2010. The EU27 unemployment rate was 9.8% in October 2011, compared with 9.7% in September.  It was 9.6% in October 2010.  Eurostat estimates that 23.554 million men and women in the EU27, of whom 16.294 million were in the euro area, were unemployed in October 2011. Compared with September 2011, the number of persons unemployed increased by 130 000 in the EU27 and by 126 000 in the euro area. Compared with October 2010, unemployment rose by 440 000 in the EU27 and by 367 000 in the euro area. and Among the Member States, the lowest unemployment rates were recorded in Austria (4.1%), Luxembourg (4.7%) and the Netherlands (4.8%), and the highest in Spain (22.8%), Greece (18.3% in August 2011) and Latvia (16.2% in the second quarter of 2011).

    Germany Insists that Euro Zone Countries Move Aggressively to Slow Growth and Raise Unemployment - The euro zone economies continue to operate well below their potential GDP, with large amounts of excess capacity and huge numbers of unemployed workers. In this context, the main impact of the austerity being demanded by Germany of countries across the euro zone will be a further reduction in growth and increase in unemployment. Slower growth will worsen budget deficits across the region. This point should have been mentioned in a Washington Post article on the pursuit of austerity in euro zone countries. Many Post readers may not recognize that the predicted effect of these policies is to slow growth and raise unemployment.

    WSJ: European Commission Will Propose A New Joint Bank Debt Guarantee Program: The European Commission is considering a game-changing bank debt guarantee program, according to WSJ. According to sources cited by the report, the Commission "will propose a new scheme for pricing bank-debt guarantees that seeks to isolate the 'intrinsic' risk of a bank from the risk of its home-country government." The proposal would allow EU states to alter the price they pay to guarantee their debt by funding them jointly. Banks have to pay a guarantee to borrow based on the risk associated with sovereign debt in their home country (which would have to do with the price of credit default swaps). This proposal would create a jointly funded "syndicate" to provide guarantees that would mitigate or even reverse the premium a bank in, say, Italy would have to pay to guarantee its debt over one located in an AAA-rated sovereign like Germany. The report does not establish specific details about the program, but if it is sufficiently strong, it might go a long way in dissociating banks from their home sovereigns.  This would aim to stem the vicious cycle of bank fears and tightening credit conditions that have led yields on sovereign debt, particularly in the PIIGS, to skyrocket over the last few months.

    The IMF-ECB ‘Plan’ – Fig-Leaf upon Fig-Leaf - Politics in the Eurozone has turned into a strange and tragic farce in the recent weeks and months. While the peripheral countries continue to judge successful economic policy on the amount of tax liabilities they can levy to smother their depressed economies, the big dogs play various games in which they try to hide their shame behind ever more sophisticated veils. Their ‘shame’, of course, being that the ECB, the issuer of the euro, has to ultimately write the check in order to fund the peripheral countries whether they like it or not. Being the liberated fiscal nudists that we are, we fully embrace such actions, but we recognise that our brothers and sisters within the Eurocracy may need some time and, excuse the pun, cover to adjust before they can embrace their inner MMTer.  And so we praise what works, even with the ever more bizarre choices of clothing that they care to don. This time they have chosen something akin to a shiny faux fur plastic coat in the middle of a California summer. And while they have yet to wear it with pride, we encourage them to come out of the closet and move in the said direction for all our sakes.

    Italy sells bonds, yields jump to euro-era highs - Italy saw borrowing costs rise sharply as it sold a total of 7.5 billion euros ($10 billion) of a new three-year benchmark and other government bonds Tuesday. The Treasury sold 3.5 billion euros of three-year bonds, producing a euro-era record-high yield for a three-year of 7.89%, Reuters reported, up from 4.93% in a sale of three-year paper in October. A sale of September 2020 bonds saw the yield set at 7.28%, reports said, while a sale of March 2022 bonds produced a yield of 7.56%. Italian bond yields had risen sharply in the secondary market ahead of the sale. The 10-year yield remains up 24 basis points at 7.31%. Yields rise as prices fall.

    Nouriel Roubini: Italy's Debt Must Be Restructured - Italy's government debt is unsustainable and needs an orderly restructuring to avoid a disorderly default, economist Nouriel Roubini wrote on Tuesday. Italy, with public debt at 120 percent of gross domestic product, has real interest rates close to five percent and no economic growth. It needs a primary surplus of five percent of GDP – compared with the current near-zero surplus – to stabilize its debt, Roubini said in a blog published on the Financial Times Web site. "Soon real rates will be higher and growth negative. Moreover, the austerity that the European Central Bank and Germany are imposing on Italy will turn recession into depression," he wrote. Prime Minister Mario Monti's technocratic government is "much more credible" than Silvio Berlusconi's was, but it faces the same constraints of unsustainable debt and policies to reduce it and they will only make matters worse, according to Roubini. In his opinion, this is why the markets have pushed Italian spreads higher. Italy and countries in a similar position would need a lender of last resort to prevent sovereign spreads "exploding" while they implement reforms and regain market credibility, Roubini said.

    Confused on Higher Level About More Important Things: Euro-Crisis Edition - Had a very interesting call with a correspondent this morning about the European Repo Market. Most writing on bond markets treats bonds as if they are a savings vehicle and that the pricing is determined by how risky savers think the loan the bond represents is. I have struggled over the past 4 years or so to determine whether this model of the world was only partially wrong or completely wrong. The reason is that the marginal bond does not serve primarily as an investment vehicle but as collateral for repurchase agreements or Repos. What really matters is not the probability of default but the time path of the probability of default and the correlation of the probability of default to other instruments. If I have a bond A whose default probability is concentrated in the out years and is inversely correlated to the default probability of other assets then A is quite valuable as a liquidity hedge because when *stuff* hits the fan I know I will still be able to Repo my bond for short term cash, which can have very high value. If I have a bond B that has a more uniform default probability and that probability is correlated with other bonds, then bond A can be more valuable than bond B even if the hold-to-maturity value of bond B is greater under all possible states of nature.

    OECD Warns Of 'Highly Devastating Outcomes' From The European Crisis: The Organization for Economic Cooperation and Development says policy makers around the world must "be prepared to face the worst," as the economic impact of Europe's debt crisis threatens to spread around the developed world. The Paris-based OECD says in its latest Economic Outlook that continued failure by EU leaders to stem the debt crisis that has spread from Greece to much-bigger Italy "could massively escalate economic disruption" and end in "highly devastating outcomes." The bi-annual report released Monday recommends urgently boosting the EU bailout fund and calls on Europe's central bank to do more to stem the crisis.

    Poland appeals to Germany to save Europe (Reuters) - Europe stands on the brink of disaster and only Germany, its biggest economy, can avert an "apocalyptic" breakup of the euro zone and the EU's single market, Poland's foreign minister said in a dramatic appeal to Berlin. "There is nothing inevitable about Europe's decline. But we are standing on the edge of a precipice. This is the scariest moment of my ministerial life but therefore also the most sublime," Radoslaw Sikorski said in Berlin on Monday evening. "I demand of Germany that, for your own sake and for ours, you help it (the euro zone) survive and prosper. You know full well that nobody else can do it." Alluding to his country's troubled past ties with its bigger, richer western neighbor, Sikorski said: "I will probably be the first Polish foreign minister in history to say so but here it is: I fear German power less than I am beginning to fear German inactivity."

    When the Euro Was Good for Germany - During the good years, the economic benefits of the common currency in Europe were fairly easy to recognize. The countries on the eurozone's periphery -- Spain, Portugal, Greece, and to a lesser degree Italy -- had improved access to international capital markets, enjoyed lower borrowing costs, and experienced substantial investment booms as a result. Meanwhile, the countries in the eurozone core such as Germany, France, and the Benelux countries enjoyed a surge in exports to the rapidly-growing periphery. Importantly, they also enjoyed the higher returns that they could earn by investing in companies, assets, and projects in southern Europe.  Now, of course, Germany is pondering just how much it is willing to pay to keep the currency union intact. An important part of that calculation is an understanding of what the benefits to Germany were during the good years. There's been some debate about that in recent weeks, for the most part focusing on whether and how much Germans benefited from the export boom of 2004-08. But another element of the calculation should be the higher investment income that German individuals and corporations earned from the new investment opportunities afforded by the common currency. The following charts illustrate the surge in investment income earned by the core eurozone countries during the 2000s. The first expresses foreign investment income in billions of euro, while the second shows that income relative to GDP. (Data is from Eurostat.)

    German economy strengthens amid Europe’s gloom   - The euro zone is plunging into recession, but you wouldn’t know that from Germany. Europe’s biggest economy keeps getting bigger and, on Wednesday, reported enviable unemployment and retail sales numbers. Prices of its sovereign bonds continue to rise and exports are booming. Germany appears to be an island of good fortune in an expanding sea of misery. In an attempt to head off a European credit crunch, the European Central Bank and the central banks of Britain, Canada, Japan, Switzerland and the United States announced Wednesday that they are cutting charges for international access to U.S. dollars. Perversely, the euro zone debt crisis seems to be helping Germany as much as hurting it. As confidence in the euro zone’s ability to stick together falls off, so does the value of the euro. German exports of manufactured goods have surged as a result, and there is no shortage of forecasts that put the euro even lower. “In general, the fact is that Germany benefits from the lower exchange rate,” He noted that if the mighty deutschmark were still alive, its value might now be soaring and the currencies of debt-swamped countries dumped, in turn potentially making German exports uncompetitive. The country is the world’s second-largest exporter, after China.

    Internal Devaluation German Style -When countries are members of a single currency are, such as the Euro, they cannot depreciate their currencies to boost their exports. The only way to produce the equivalent of a depreciation is to keep costs growing at a lower rate than other countries. This can only be achieved through wage moderation - not in absolute terms but relative to productivity growth. This is sometimes called an internal devaluation and it is normally thought as being more difficult to achieve than a straight devaluation or depreciation of the currency because it involves changes in wages. Many see this today as a challenge for Souther European countries as they might have been losing competitiveness relative to the other Euro countries and now they cannot just use their exchange rate to gain it back. The recent OECD economic outlook talked about all this and had a chart that I am reprinting below. The chart shows unit labor costs of selected Euro countries. The striking pattern of the chart comes from Germany. Germany managed to keep unit labor costs constant while all other countries in the chart saw increasing labor costs since the creation of the Euro. It is important to notice that this is not just about the usual suspects, France looks very similar to all the "club med" Euro countries. What is really remarkable is the behavior of Germany! What I find interesting in this chart is that with the creation of the Euro, Germany managed to "engineer" such an increase in competitiveness while it did not manage to do it when it had its own currency.

    Barack Obama says US willing to help Europe resolve debt crisis - After meeting European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso, President Obama said he was keen to see the eurozone crisis end.  "I communicated to them that the United States stands ready to do our part to help them resolve this issue. This is of huge importance to our economy," he told reporters.  A possible step would be for Washington to support more aid to Europe from the International Monetary Fund, where the United States is the biggest shareholder.  But William Kennard, the US envoy in Brussels, said there was no discussion of the United States making any financial obligations to help Europe or increasing its payments to the IMF - moves bound to face stiff political opposition given fiscal pressures gripping the US Congress.

    Obama’s morbid fear of EU meltdown - For a summit with a continent in crisis, this week’s meeting between Barack Obama and European leaders was a strangely low-key affair, with only a moment set aside for photographers and no joint press conference at its end. But behind the scenes, within both the administration and Mr Obama’s campaign team in Chicago, there is a morbid fear about a eurozone meltdown and its flow-on impact on the US economy and the president’s re-election chances. “The thing that matters the most in determining the health of the US economy and job creation is what happens in Europe,” says a senior administration official. Mr Obama and his advisers met on Monday with Herman Van Rompuy, the European Council president, José Manuel Barroso, the European Commission president, and Catherine Ashton, the region’s chief foreign policy official. Afterwards, Mr Obama was diplomatic. His ambassador to the European Union, William Kennard, was more blunt, saying: “The president has made clear repeatedly he would like to see bolder, quicker, more decisive action by European leaders.”The administration worries that the tentative US recovery, and any success it might have in pushing a new stimulus plan through Congress, will be undone by the eurozone’s inability to negotiate a political settlement of its debt problems.

    More Europessimism, by Tim Duy: I hate to beat a dead horse, but the situation in Europe is dire, and two issues crossing my desk this afternoon only add to my angst. First, Karl Smith at Modeled Behavior sees that the ECB is losing all control of monetary policy: Based on entirely different indicators this looks to be the point where the ECB’s control over Eurozone monetary policy began to come unmoored. At the crux of the problem seems to be the inability to arbitrage away differences in funding costs between institutions and countries because of malfunctioning in the European Repo market. This malfunctioning appears to be down right mechanical with trades regularly not settling on time, collateral not being delivered, awkward interventions by local regulatory agencies and a host of other deep, deep problems. Very, very scary - remember that the ECB is the last great hope. But it can't be effective if the European banking system collapses, which looks more likely each day. A signal that the related rush to cash is severe is that the ECB is no longer able to fully sterilize its asset purchases. Stories at the Wall Street Journal and the Financial Times. Recognize the risk that even when the ECB switches to quantitative easing, the resulting cash just sits unused in bank reserves. Sound familiar? Europe has liquidity trap written all over it. A second point comes from Edward Harrison, who spots a story which claims France and Germany are looking to impose a strict zero (!) percent budget deficit target by 2016. Harrison's take:. So implicitly, Germany and France are calling for a massive private sector dissaving or a large reduction in the external value of the euro area currency. I see this as a pipe dream. It tells you that bad things are definitely going to happen in Euroland.

    Europe's Race to the Bottom: How Austerity is Killing the Euro - Stock markets may have soared after central banks around the world, led by the Fed, got together in a rare coordinated action to provide more dollars to Europe's strained financial sector. But we also got an indication of just how bad things have become. And though that potential danger may have been averted (probably only in the short term), the central bank decision has done nothing to alleviate the underlying sovereign debt crisis in the euro zone. We're about to get some more action on that front as well, however, with yet another summit of European leaders approaching on December 9. The indications are that German Chancellor Angela Merkel and French President Nicolas Sarkozy want to push ahead with some sort of “fiscal union,” or at least their vision of one. As I wrote in a recent TIME magazine story, a fiscal union would probably be a real solution to the debt crisis. By coordinating national budgets and centralizing at least some decision making over spending priorities, a fiscal union could start repairing the shattered finances of euro zone countries, provide a backbone of support for weaker members like Italy, and convince investors that Europe will truly do whatever it takes to save the euro.

    Why can’t Europe save austerity for later? - Right now, the European countries facing debt crises are all being told the same thing: Austerity is the answer! Cut spending, raise taxes, pay off your debts. Now. The pitfall, of course, is that austerity measures could trample the already-fragile growth in places like Italy and Spain, which will, in turn, just exacerbate their short-term debt problems. As an example, the OECD is predicting that Britain’s austerity experiment could push the country into recession, which might, in turn, lead to a higher debt-to-GDP ratio than before the Cameron government began slashing.So here’s a question: Why don’t countries like Spain or Italy or France try to do what the Obama administration has proposed in the United States? Enact some stimulus this year, while the economy’s weak, and then cut future spending. Avert a recession now, austerity later. This is what the IMF has recommended, after all. Why wouldn’t that placate the bond markets? One problem, says Joe Gagnon of the Peterson Institute for International Economics, is that the structure of European political institutions make these sort of timed cuts a lot more difficult.

    Euro Zone Sees Shortfall in Rescue Fund - Euro-zone finance ministers acknowledged on Tuesday that the bloc's bailout fund would have less capacity to help troubled nations than once hoped, and stepped up calls on the European Central Bank and the International Monetary Fund to come to their aid. An analysis presented at a meeting of finance ministers here suggested the fund would be able to raise a maximum of €500 billion to €700 billion ($666 billion to $932 billion), far short of the €1 trillion or even €2 trillion that many had expected. ... ministers are exploring further measures to stem the crisis, which they hope to announce at a European summit on Dec. 8-9.These sums would fall shy of the amount that would be needed to convince financial markets there is enough in the pot to rescue Italy and Spain.

    Fears of shortfall lead to moves to boost EFSF - Eurozone finance ministers are weighing more radical options to strengthen their firewall against the sovereign debt crisis, after acknowledging that plans to expand the €440bn eurozone rescue fund could deliver as little as half the extra punch that was anticipated. Exploratory discussions at a meeting in Brussels on Tuesday evening covered options to leverage the European financial stability fund further or establish new ways to provide credit lines, including by funnelling European Central Bank loans via the IMF to struggling countries.  After the meeting, Olli Rehn, Europe’s economic affairs commissioner, said talks were already under way to try to furnish the IMF with more lending capacity, but declined to specify who might provide it.  “We are – together with the IMF – consulting potential contributors through bilateral loans,” he said. “Among the euro area member states, there’s very broad support to increase the IMF’s resources through bilateral loans.” ECB financial support for Italy via the IMF would require a massive policy U-turn by the central bank, and would run into fierce opposition from Germany’s Bundesbank. The ECB is wary about relaxing the pressure on Rome for fiscal and structural reforms.  In addition, ministers signed off on the European Union’s share of the latest €8bn loan payment to Greece, following a letter from Greek opposition leader Antonis Samaras, which endorsed the broad targets in the country’s bail-out programme.

    European Officials Agree to Bolster Bailout Fund - With the euro zone debt crisis1 worsening by the day, finance ministers from the 17 countries that use the currency approved more loans on Tuesday to stave off a Greek default and agreed to bolster their bailout fund.  Speaking after the meeting, Jean-Claude Juncker, who heads the euro zone finance ministers, said they had agreed to release their portion of an 8 billion-euro loan to Greece. The International Monetary Fund is expected to sign off on its share — roughly one third — early next month, making the loans available by the middle of December.  The ministers also agreed on rules to increase the firepower of their bailout fund, the European Financial Stability Facility, and will be able to offer insurance to those buying the bonds of nations like Spain and Italy. In these cases, insurance certificates — attached to make bonds more attractive — will themselves be tradable, said Klaus Regling, who heads the bailout fund. The fund will also seek investment from sovereign wealth funds and other non-European sources.  Though a goal of 1 trillion euros, or $1.3 trillion, was set for the expanded bailout fund, ministers acknowledged that this was now unlikely, and no figure was given at Tuesday night’s news conference.

    More European financial chicanery - The changes to the EFSF has been ratified by the European Finance ministers: Euro area Finance Ministers agreed on 29 November on the terms and conditions to extend EFSF’s capacity by introducing sovereign bond partial risk participation and a Co-Investment approach. Ministers also adopted amended EFSF guidelines concerning intervention in the primary and secondary debt markets and precautionary credit lines in order to use leverage. Klaus Regling CEO of EFSF commented “Both options are designed to enlarge the capacity of the EFSF so that the new instruments available to the EFSF can be used efficiently”. Under the partial risk protection, EFSF would provide a partial protection certificate to a newly issued bond of a Member State. The certificate could be detached after initial issue and could be traded separately. It would give the holder an amount of fixed credit protection of 20-30% of the principal amount of the sovereign bond. The partial risk protection is to be used primarily under precautionary programmes and is aimed at increasing demand for new issues of Member States and lowering funding costs.

    Europa, Europa - Well, things are getting a little gnarly in Europe.  When you're down to the point of celebrating that Italy managed to place some debt at the low, low price of 7.6% . . . well, it's two for one drinks specials at the first class bar on the Titanic!  But don't worry: they have a plan!  Ladies and Gentlemen, I give you, Plan #9,784: "Under the partial risk protection, EFSF would provide a partial protection certificate to a newly issued bond of a member state. "The certificate could be detached after initial issue and could be traded separately. It would give the holder an amount of fixed credit protection of 20-30 percent of the principal amount of the sovereign bond. The partial risk protection is to be used primarily under precautionary programmes and is aimed at increasing demand for new issues of Member States and lowering funding costs. "Under option two, the creation of one or more Co-Investment Funds (CIF) would allow the combination of public and private funding. A CIF would purchase bonds in the primary and/or secondary markets.

    Eurogroup signs off on 8bn euro aid payment - Eurozone finance ministers agreed on Tuesday to release an 8bn euro aid payment to Greece, part of an 110bn euro package of support agreed with the government last year, an EU diplomat said. The joint EU/IMF payment is the sixth installment of loans to help Greece finance itself since being cut off from financial markets. Without the payment, the country risks going bankrupt. The payment was dependent on a written commitment from Greece that it would meet its obligations to cut its budget deficit and keep finances in check. "The Eurogroup endorsed the payout of the sixth tranche to Greece", The payment has been held up for a month because of delays in Greece's commitment to cut spending and increase taxes.

    Eurozone ministers OK $10.7 billion Greek loan — Eurozone ministers threw a lifeline to Greece on Tuesday as they scrambled to prevent financial chaos from spreading further and driving Europe's common euro currency into a catastrophic breakup. The monthly meeting of 17 nations was dominated by attempts to keep Greece afloat and find enough money to coat a veneer of credibility over Europe's rescue fund. It came on the third straight day that Italy has taken a beating in the bond markets, with investors growing increasingly wary of the country's chances of avoiding default. The finance ministers approved the next installment of the Greece's bailout loan — euro8 billion ($10.7 billion). Without that money, Greece would have run out of cash before Christmas, unable to pay employees or provide services. Two officials in Brussels reported the development, speaking on condition of anonymity while the meeting was still going on. The installment is part of a euro110 billion ($150 billion) bailout from eurozone nations and the International Monetary Fund that Greece has been dependent on since May 2010. The new cash came after the EU demanded, and received, letters from top Greek political leaders pledging their support for tough new austerity measures.

    Another European "Solution" Coming?, by Tim Duy: Financial market participants continue to digest what is viewed as generally good news coming out of Europe. Importantly, European policymakers appear to be aggressively moving toward what they see as an overarching response to the crisis. Edward Harrison at Credit Writedowns offers a possible three pillar policy path that has emerged in recent days. My summary:

    1. An IMF aid package for Italy and likely Spain, financed by the ECB.
    2. A credible, binding agreement for EU fiscal oversight. In return, the ECB would intervene more aggressively to support sovereign debt.
    3. A path to Eurobonds, assuming point 2 above.

    Despite these optimistic signals, there remains room for plenty of disappointment in the days ahead. Notably, Reuters reports that German Chancellor Angela Merkel will not back Eurobonds or additional ECB intervention. This may be just internal posturing, but does speak to the high degree of internal resistance toward greater EU fiscal integration. Moreover, we have seen in the past the internal bickering yields responses that seem bold at first but quickly fail to stabilize the crisis. And, when assessing the economic impact, what you don't see is as important as what you do see.

    Eurobills, not Eurobonds - Recent events have highlighted the need for stronger coordination of liquidity provision and financial regulation in the Eurozone. Some go further and argue that the crisis demonstrates the need for deeper integration including perhaps fiscal integration and Eurobonds.  Fiscal union is now officially on the European agenda, but the issue of Eurobonds remains controversial. This column argues that the Eurozone instead needs Eurobills – debt instruments of maturities under a year. It claims that issuing Eurobills – up to 10% of Eurozone GDP – would help with crisis management as well as financial regulation and monetary policy, while minimising the risks of moral hazard.

    Europe delays major debt decisions for 10 days… Under pressure to deliver shock treatment to the ailing euro, European finance ministers failed to come up with a plan for European countries to spend within their means. Such a plan is needed before Europe's central bank and the International Monetary Fund consider stepping in to stem an escalating threat to the global economy. The ministers delayed action on major financial issues - such as the concept of a closer fiscal union that would guarantee more budgetary discipline - until their bosses meet next week in Brussels. Stock markets fell Wednesday as a top EU official conceded that the future of the euro now rests heavily on the meeting of European heads of state on Dec. 9. Stock markets had risen this week on hopes that intense bond market pressure would finally force the eurozone into quicker and more robust action. "We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union," EU Monetary Affairs Commissioner Olli Rehn said, adding: "There is no one single silver bullet that will get us out of this crisis."

    Banks to Slash Bond Sales By 60% as Costs Soar, SocGen Forecasts: Banks will slash bond sales by 60 percent in Europe next year as the sovereign debt crisis sends issuance costs soaring, Societe Generale SA predicts. Lenders will sell 50 billion euros ($67 billion) of senior notes, down from a euro-era low of 121 billion euros so far this year, according to SocGen. The extra yield that investors demand to hold European bank bonds is the highest since May 5, 2009, while the cost of insuring the debt is near a record. Banks are the biggest holders of plunging euro-region government bonds, and are already finding it hard to sell their own debt. That's forcing them to consider alternative sources of funding such as top-rated covered bonds and even asset sales to help refinance some of the $800 billion of notes that Moody's Corp. estimates will come due next year. "We can expect massively reduced issuance of unsecured bank debt," said Roger Francis, an analyst at Mizuho Securities Co. Ltd. in London. "Most banks have got contingency plans for how to get around this. Banks are saying they can do more private placements and then there's always the covered bond market, which has been open intermittently."

    Greek bank deposit outflows in Sept-Oct hit 13-14 bln euros - Greece's bank deposit outflows reached 13-14 billion euros in the September-October period, the country's central bank chief said on Tuesday, an annual jump of about 17 percent in October. "In September and October, two very bad months due to political uncertainty, we had a loss of 13-14 billion euros," Bank of Greece Governor George Provopoulos told a parliamentary committee. "This is a very big amount," he said, adding that bank deposit outflows continued in the first 10 days of November. October bank deposit outflows jumped about 4.6 percent month-on-month. Based on the governor's estimates the outstanding net deposit outflows stood at 174.6 billion last month. Deposits in September dropped to 183.2 billion euros from 188.7 billion euros in August, or by 2.9 percent, the Bank of Greece said. It has not yet released data for October. A shrinking deposit base, in part caused by capital flight, has added to the strains of Greek banks, which have become reliant on European Central Bank funding for their liquidity needs as access to wholesale funding remains shut on sovereign debt fears.

    Mosler/Pilkington: Response to Yanis Varoufakis Regarding Our Eurozone Exit Plan - Recently the Greek economist Yanis Varoufakis responded to the euro exit plan that we published on Naked Capitalism a few days ago. While Varoufakis was broadly supportive of the plan if an exit was absolutely necessary, he criticised some of the details therein.Before we deal with some of the issues he raised – some of which are very important – we should first note as clearly as possible that neither one of us is advocating exit from the Eurozone for any countries therein. We both agree with Varoufakis that this would probably be a more painful option than simply staying in the currency union even with the current austerity programs in place.  In addition to this, both of us have published pieces arguing that the Eurozone will likely weather this crisis and the ECB, in some shape or form, will probably step in to backstop the debt of the peripheral governments in the coming months. We merely published our sketch of an exit plan because both of us believe that it is always good to have a Plan B at the ready should any contingencies arise. We also think that having a viable plan in hand strengthens peripheral governments bargaining power vis-à-vis their neighbours.

    Trouble around the other periphery - The Economist - THE wires are atwitter with a striking statement made by Poland's foreign minister, Radek Sikorski, in a speech given yesterday: I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity. As remarkable as the above line is from an historical standpoint, it's easily understandable. Poland's economy is closely linked to the euro zone and it trades heavily with Germany. A collapse in the euro zone would drag much of central Europe into a deep recession. The urgency of Mr Sikorski's statement may be linked, however, to the very real financial pressure facing central European economies right now. As European banks look to shore up balance sheets and increase capital ratios, they are curtailing loans to emerging markets. Capital flight out of those markets is leading to tumbling currencies (see chart at right). Capital flight can feed on itself. As foreign investors exit a country its currency drops, reducing the return on inward investment and leading others to rush for the exit as well. The resulting stampede can be very destabilising. Economic activity within the affected economy can be seriously disrupted. A plunging currency raises import prices, sometimes substantially, which can fuel inflation in economies in which expectations are less well-anchored.

    What the IMF should tell Europe - Martin Wolf  - Can the International Monetary Fund save the eurozone? No. But it can help. The world, whose interests the IMF represents, has a stake in what happens. That gives the IMF the right to act. The question is how.The world has reached a new and potentially even more devastating stage of the financial crisis that emerged in the advanced countries in the summer of 2007. Its epicentre is the eurozone. Unwilling to focus on the critically ill patient in front of it, eurozone leaders spend their time on designing an exercise regime to ensure he never has another heart attack. This is displacement activity. In the view of many policymakers outside the eurozone, “they just do not get it”. Its members, above all Germany, the most important player, seem paralysed by domestic politics. That is not surprising, since politics remain national. But it also suggests that the project was premature at best, and unworkable at worst. The latest economic outlook from the Organisation for Economic Co-operation and Development paints a grim picture. Even if catastrophe is avoided, the economy of the eurozone is forecast to stagnate next year. But, notes the OECD, “serious downside risks remain”. Moreover, “a large negative event would ... most likely send the OECD area as a whole into recession, with marked declines in the US and Japan, and prolonged and deep recession in the euro area”. Even emerging markets would suffer.

    Italy Pays More Than 7% at Auction of EU7.5 Billion of Bonds -- Italy was again forced to pay above the 7 percent threshold that led Greece, Portugal and Ireland to seek bailouts when it sold 7.5 billion euros ($10.1 billion) in bonds today, short of the maximum target for the auction. The Rome-based Treasury sold 3.5 billion euros of a new three-year bond, 2.5 billion euros of 2022 bonds and 1.5 billion euros in 2020 bonds, just shy of the top range of 8 billion euros for the sale. The three-year bond yielded 7.89 percent while the 2022 bond yielded 7.56 percent, up from 4.93 percent and 6.06 percent respectively when similar-maturity debt was last sold on Oct. 28. It was the third time in a week that Italy had to pay more than 7 percent to auction debt. Demand for the 2014 bond was 1.5 times the amount sold, while the bid-to-cover ratio for the 2022 bond was 1.34 times. That compared respectively with 1.35 times and 1.27 times at the Oct. 28 auction. The auction is competing this week with sales of securities in Belgium, France and Spain of as much as 10 billion euros. The Treasury yesterday sold 567 million euros of 2023 inflation- linked notes to yield 7.3 percent, as investors shunned Italian bonds amid concern about the sustainability of a debt load which is bigger than Spain, Greece, Ireland and Portugal combined.

    Italy and Belgium’s Borrowing Costs Soar — Italy and Belgium’s borrowing costs soared again at debt auctions Tuesday, adding to the pressure on European officials gathering in Brussels for their latest attempt at easing the crisis in the euro area.  At an evening session, euro-zone ministers were hoping to nail down guidelines on how to expand the European Financial Stability Facility, the main bailout fund for heavily indebted euro-zone countries. Such a step could in theory make it possible for the fund to begin buying government bonds on a large scale by early next year.  The ministers were also expected to approve the release of an €8 billion, or $10.7 billion, loan to Greece — the latest installment in its international rescue package.  Both actions have been debated for months — a reminder of the painfully slow pace of European decision making, compared to the speed with which the financial markets have battered confidence in the euro. As the crisis drags on, fears have grown that the euro currency union could collapse, with potentially catastrophic consequences for Europe and the global economy.

    Official Action and Why Italy is Still at the Vortex - The focus is on next week’s ECB meeting and the EU summit. Nearly every one is expecting a 25 bp rate cut and if expectations are wrong, it is more likely that it is because of more aggressive action, like a 50 bp cut, than less. Separately, it will also likely provide long-term refi operations. It currently has a 1 year repo outstanding and next month will offer 13-month money that covers two year end periods. Next week it may offer 2-3 year money. It may also liberalize its collateral rules again.  The EU Summit is the last opportunity of the year, and some observers say the last opportunity period, for action that will begin seriously addressing the crisis. Tomorrow France’s Sarkozy is expected to present his proposals tomorrow and Germany’s Merkel Friday. Germany and French proposals to expedite a fiscal union are important, but watch what Italy does. Before the summit, Italy will likely announce a new package of austerity that will take several important steps toward what Merkel and Sarkozy have in mind that are necessary for fiscal union.  Italy’s technocrat-led government will likely propose more austerity than envisioned by the Berlusconi government and will make more realistic assumptions on growth, preparing, for example, for a 0.5% contraction, which is what the OECD projects. A wealth tax of sorts also seems likely.

    Italy and Japan - Consider the following differences between Italy and Japan. Italy has a history of lower budget deficits, as well as forecast budget deficits for the next few years that are dramatically lower than those forecast for Japan: Italy's debt to GDP ratio has remained roughly constant over the past 15 years, while Japan's has climbed steadily higher: Both countries have had relatively poor economic growth over the past decade, with little difference between them: And yet, despite all of this, yields on Japanese 10-year government bonds hover around 1.0%, while yesterday the Italian government was forced to pay nearly 8.0% to borrow money for 10 years. Given how much worse Japan's public finances look when compared to Italy's, it seems unlikely to me that investors are demanding higher interest rates from Italy simply because they are worried about excessive budget deficits or debt.  So what explains the dramatic disparity in investor willingness to lend to Italy compared to Japan? There are three crucial differences between Italy and Japan that, when put together, create a coherent story about what lies at the heart of this crisis:
    1. Japan has the ability to create its own currency, while Italy does not.
    2. Japan has been running current account surpluses, while Italy has had a current account deficit for the past several years.
    3. Japan can borrow at 1.0% while Italy must pay much more to borrow.

    Europe is Not the United States - Europe is now struggling with the inevitable adverse consequences of imposing a single currency on a very heterogeneous collection of countries. European politicians who insisted on introducing the euro in 1999 ignored the warnings of economists who predicted that a single currency for all of Europe would create serious problems. The euro’s advocates were focused on the goal of European political integration, and saw the single currency as part of the process of creating a sense of political community in Europe. But the key argument made by European officials and other defenders of the euro has been that, because a single currency works well in the United States, it should also work well in Europe. After all, both are large, continental, and diverse economies. But that argument overlooks three important differences between the US and Europe. First, the US is effectively a single labor market, with workers moving from areas of high and rising unemployment to places where jobs are more plentiful. In Europe, national labor markets are effectively separated by barriers of language, culture, religion, union membership, and social-insurance systems.

    Italy 3-yr auction yield jumps to record 7.89 pct (Reuters) - Italy paid record yields of nearly 8 percent to sell three-year paper on Tuesday, a level seen driving its debt burden out of control if sustained over time. The yield on a new three-year BTP soared to euro lifetime high of 7.89 percent at the closely watched auction which allowed Rome to raise 7.5 billion euros. The amount was close to the top of a targeted range of between 5 billion and 8 billion euros. The new Nov. 2014 issue carries a 6 percent coupon, the highest for this maturity from 1997. Only a month ago, Italy had paid a 4.93 yield to sell three-year paper. The yield on a 10-year BTP bond due in March 2022 rose to 7.56 percent, marking a new euro lifetime high, from 6.06 percent at the end of October.

    Italy can save itself and the euro: The euro currency may soon collapse even though there is no fundamental reason for it to fail. Everything depends on Italy, because financial markets now fear that it may be insolvent. If the Italian government has to continue paying a seven or even eight per cent interest rate to finance its debt, the country’s total debt will grow faster than its annual output and therefore faster than its ability to service that debt. If investors expect that to persist, they will stop lending to Italy. At that point, it will be forced to leave the euro. And if it does, the value of the “new lira” will reduce the price of Italian goods in general and Italian exports in particular. The resulting competitive pressure could then force France to leave the euro as well, bringing the monetary union to an end. But this need not happen. Italy can save both its own economic sovereignty and the euro if it acts decisively and quickly to convince the financial markets that it will balance its budget and increase its rate of economic growth…. It already has a “primary budget surplus”…. [I]f it cuts spending and raises revenue by a total of just three per cent of its GDP…. If reforms to strengthen incentives and reduce regulatory impediments raise its growth rate to two per cent, that together with a long-term balanced budget would cause Italy’s public debt to decline from today’s 120 per cent of GDP to about 65 per cent over the next 15 years.

    How is This Going to Work?  - From the FT today: The auction came as Mario Monti, Italy’s new prime minister leading a caretaker government of technocrats, appointed the rest of his team, with three deputy ministers and 25 under-secretaries sworn in on Tuesday morning. Vittorio Grilli, director of the Treasury, becomes deputy minister for the economy. None of the appointees are politicians. For all that a lot of us love to bash politicians, it seems to me that being a politician is actually a very demanding job requiring a lot of particular skills, knowledge, and personality traits (we can tell that it's a difficult job by the fact that so few of us are happy with the performance of our politicians).  The effect of picking a government of non-politicians will be a government that largely lacks those skills and traits.  It would seem that the predictable consequence will be a government that quickly angers the populace and lands itself in new political crises that it will be poor at managing. I cannot conceive of a large business stating of its new executive management team "None of our team have prior business experience".  Shareholders would panic and defect in droves, and rightly so.  And yet somehow this is supposed to be a way to run a country?

    Draghi faces spat over ECB economics job - Just what the eurozone did not need right now: another possible German-Franco row, this time over jobs at the European Central Bank. In Brussels late on Tuesday, Wolfgang Schäuble, German finance minister, pressed for his deputy Jörg Asmussen to take over the ECB’s economics department from Jürgen Stark when he joins the ECB’s six-man executive board at the start of 2012. The problem is that France’s Benoit Coeuré, an academic economist as well as French civil servant, who will arrive at the ECB at the same time as Mr Asmussen, is arguably much better suited for the economics portfolio. Since the ECB was created in 1998, a German has overseen the economics division, with responsibility for presenting interest rate proposals to ECB governing council meetings.  Mr Stark, like his predecessor Otmar Issing, was an upholder of traditional, fiercely conservative German economics. German media described them both as the ECB’s ”chief economist”, although formally there is no such position. Germany’s presumption that the post is theirs will not be well received elsewhere, however, even if Paris is not pushing aggressively for any particular job for Mr Coeuré. As a result Mario Draghi, the new ECB president, has another dilemma to resolve over Christmas. Denying Mr Asmussen the economics post would risk undermining (further) German trust in the ECB; giving into pressure from Germany might damage his own reputation elsewhere.

    The Summer Of Confidence - Krugman - Ah, memories. Jean-Claude Trichet, June 2010: One cut after another: many economists say that there is a clear risk of deflation. What are your views on this? “I don’t think that such risks could materialise. On the contrary, inflation expectations are remarkably well anchored in line with our definition – less than 2%, close to 2% – and have remained so during the recent crisis. As regards the economy, the idea that austerity measures could trigger stagnation is incorrect.” Incorrect? “Yes. In fact, in these circumstances, everything that helps to increase the confidence of households, firms and investors in the sustainability of public finances is good for the consolidation of growth and job creation. I firmly believe that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

    Europe’s Financial Crisis, in Plain English - Much like our own recent housing crisis, the European financial mess is unfolding in a foreign language. It is the lingua franca of financial obscurity — “sovereign credit spreads” and other terms that most people don’t need, or care, to know.  Yet the bottom line is simple: Europe’s problems are a lot like ours, only worse. Like Wall Street, Germany is where the money is. Italy, like California, has let bad governance squander great natural resources. Greece is like a much older version of Mississippi — forever poor and living a bit too much off its richer neighbors. Slovenia, Slovakia and Estonia are like the heartland states that learned the hard way how entwined so-called Main Street is with Wall Street. Now remember that these countries share neither a government nor a language. Nor a realistic bailout plan, either.  Lack of fluency in financialese shouldn’t preclude anyone from understanding what is going on in Europe or what may yet happen. So we’ve answered some of the most pressing questions in a language everyone can comprehend. Though the word for “Lehman” in virtually any language is still “Lehman.”

    The euro: Beware of falling masonry - FIRST Greece; then Ireland and Portugal; then Italy and Spain. Month by month, the crisis in the euro area has crept from the vulnerable periphery of the currency zone towards its core, helped by denial, misdiagnosis and procrastination by the euro-zone’s policymakers. Recently Belgian and French government bonds have been in the financial markets’ bad books. Investors are even sniffy about German bonds: an auction of ten-year Bunds on November 23rd shifted only €3.6 billion-worth ($4.8 billion) of the €6 billion-worth on offer. Worse, there are signs that the euro zone’s economy is heading for recession, if it is not there already. Industrial orders in the euro zone fell by 6.4% in September, the steepest decline since the dark days of December 2008. A closely watched index of euro-zone sentiment, based on surveys of purchasing managers in manufacturing and services, is also signalling contraction, with a reading of 47.2: anything below 50 suggests activity is shrinking. The European Commission’s index of consumer confidence fell in November for the fifth month in a row.

    Pressure Builds As Eurozone Ponders Debt Solutions — Under pressure to deliver shock treatment to the ailing euro, European finance ministers failed to come up with a plan for European countries to spend within their means. Such a plan is needed before Europe's central bank and the International Monetary Fund consider stepping in to stem an escalating threat to the global economy. The ministers delayed action on major financial issues — such as the concept of a closer fiscal union that would guarantee more budgetary discipline — until their bosses meet next week in Brussels. Stock markets fell Wednesday as a top EU official conceded that the future of the euro now rests heavily on the meeting of European heads of state on Dec. 9. Stock markets had risen this week on hopes that intense bond market pressure would finally force the eurozone into quicker and more robust action. "We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union," EU Monetary Affairs Commissioner Olli Rehn said, adding: "There is no one single silver bullet that will get us out of this crisis."

    The eurozone really has only days to avoid collapse: In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough, the politicians finally act – eurobond, debt monetisation, quantitative easing, whatever. I am not so sure. The argument ignores the problem of acute collective action. Last week, the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function. The banking sector, too, is broken. Important parts of the eurozone economy are cut off from credit. The eurozone is now subject to a run by global investors, and a quiet bank run among its citizens. This massive erosion of trust has also destroyed the main plank of the rescue strategy. The European Financial Stability Facility derives its firepower from the guarantees of its shareholders. As the crisis has spread to France, Belgium, the Netherlands and Austria, the EFSF itself is affected by the contagious spread of the disease. Unless something very drastic happens, the eurozone could break up very soon.Technically, one can solve the problem even now, but the options are becoming more limited. The eurozone needs to take three decisions very shortly, with very little potential for the usual fudges. First, the European Central Bank must agree a backstop of some kind…. The second measure is a firm timetable for a eurozone bond…. The third decision is a fiscal union. This would involve a partial loss of national sovereignty, and the creation of a credible institutional framework to deal with fiscal policy….

    Eurozone Only Days Away From Collapse? - That’s what Wolfgang Münchau at The Financial Times says:Technically, one can solve the problem even now, but the options are becoming more limited. The eurozone needs to take three decisions very shortly, with very little potential for the usual fudges. First, the European Central Bank must agree a backstop of some kind, either an unlimited guarantee of a maximum bond spread, a backstop to the EFSF, in addition to dramatic measures to increase short-term liquidity for the banking sector. That would take care of the immediate bankruptcy threat. The second measure is a firm timetable for a eurozone bond. The European Commission calls it a “stability bond”, surely a candidate for euphemism of the year. There are several proposals on the table. It does not matter what you call it. What matters is that it will be a joint-and-several liability of credible size.  The third decision is a fiscal union. This would involve a partial loss of national sovereignty, and the creation of a credible institutional framework to deal with fiscal policy, and hopefully wider economic policy issues as well. The eurozone needs a treasury, properly staffed, not ad hoc co-ordination by the European Council over coffee and desert. As Stephen Green notes, it’s hard to see Europeans ever agreeing to this, never mind agreeing to it anytime within the next two weeks, month, or however much longer they might actually have.

    70 years after WWII, Europe faces "ten days" to save its currency — and perhaps the EU itself - The European Union rose from the ashes of World War II, a conflagration that pitted the continent's great powers against each other and left scars on the land and the mind alike. And from the start, the question was whether this unique experiment in goodwill would ever become a United States of Europe, where cooperation ranked ahead of nationalism. Now the time for the decision is at hand. People on the continent face a historic choice that is as much about themselves as it is about their money: Do they see themselves going forward primarily as Europeans or governed as French, Germans, Italians, Spaniards and so on? The immediate cause of the urgency is the precarious state of the euro, the currency shared by 17 EU countries. It is teetering on brink of breakup precisely because that basic question has never been answered. The euro's woes have shown that, with respect to a currency, halfway integration doesn't work. Diverging national plans have been out of whack with a united monetary policy. And political leaders have said that if the euro fails, the EU may well follow.

    Sweden and the euro: Out and happy - WHEN Swedes voted in 2003 on whether or not to join the euro, most political and business leaders were strongly in favour. Today even the euro’s supporters are grateful to the 56% of voters who said no. As worried investors push up yields on government bonds right across the euro zone, yields on Swedish ten-year bonds have fallen to 1.7%, more than half a point below German Bunds. Anders Borg, the finance minister, still thinks that in the long run Sweden should join the euro. But he seems happy to be out for now. Fears that Sweden, a small export-based economy, might suffer if it kept the krona were a strong pro-euro argument in 2003. Yet Mr Borg says that Sweden has gained something from standing aside. “Being an outsider, you must make sure your competitiveness and public finances are in order. We have had to impose on ourselves a self-discipline that euro countries did not feel they needed. If you know the winter will be very cold, you have to ensure the house has been built well. Otherwise you will freeze.”

    Europe's shrinking money supply flashes slump warning - Telegraph - The three main gauges – M1, M2, and M3 – have each begun to decline in absolute terms after slowing sharply over the Autumn. The broad M3 measure tracked closely by the European Central Bank as an early warning indicator shrank last month by €59bn to €9.78 trillion, a sign that Europe's long-feared credit squeeze is underway as banks retrench to meet tougher capital requirements. "This is very worrying," said Tim Congdon from International Monetary Research. "What it shows is that the implosion of the banking system on the periphery is now outweighing any growth left in the core. We are seeing the destruction of money and it is a clear warning of serious trouble over the next six months." "This is the first sign of an emerging credit crunch," Banks cut their balance sheets by €79bn in October, while mortage lending saw the biggest drop since December 2008. Simon Ward from Henderson Global Investors said "narrow" M1 money – which includes cash and overnight deposits, and signals short-term spending plans – shows an alarming split between North and South. While real M1 deposits are still holding up in the German bloc, the rate of fall over the last six months (annualised) has been 20.7pc in Greece, 16.3pc in Portugal, 11.8pc in Ireland, and 8.1pc in Spain, and 6.7pc in Italy. The pace of decline in Italy has been accelerating, partly due to capital flight. "This rate of contraction is greater than in early 2008 and implies an even deeper recession, both for Italy and the whole periphery," said Mr Ward.

    The Euro-Crisis is Much Worse Than It Looks - I haven’t completely sorted this out yet but for a number of reasons I believe that the ECB has lost control of monetary policy in the Eurozone. By that I mean the ECB is no longer controlling the marginal cost of funding and that indeed the cost of such funding is rising much higher than the official 1.25% rate, at least up to 2.25% and perhaps as high as 6 – 7%. This incredibly contractionary monetary “policy” began sometime earlier this year and is continuing to accelerate. I put policy in scare quotes because there is no policy as such there is simply contraction. Paul Krugman and Joe Weisenthal look at the growing spread between Sweden and Finland and conclude that failure of the ECB to act as Lender of Last Resort explains the difference. This is a position I would have endorsed as recently as yesterday, but now I am not so sure.Based on entirely different indicators this looks to be the point where the ECB’s control over Eurozone monetary policy began to come unmoored. At the crux of the problem seems to be the inability to arbitrage away differences in funding costs between institutions and countries because of malfunctioning in the European Repo market. This malfunctioning appears to be down right mechanical with trades regularly not settling on time, collateral not being delivered, awkward interventions by local regulatory agencies and a host of other deep, deep problems.

    ECB Balance Sheet Swells to Record High - The Eurosystem’s balance sheet reached a record high in the week ending Nov. 25, amid continued buying of euro-zone government bonds and massive lending to cash-strapped banks, ECB data showed Tuesday. The balance sheet of the Eurosystem, which comprises the Frankfurt-based European Central Bank and the 17 euro-zone national central banks, grew by EUR26.2 billion compared with the previous week, settling at EUR2.42 trillion. This was EUR503.6 billion larger than a year earlier. The ECB has been criticized for increasing the volume of its balance sheet due to the purchases of government bonds and other non-standard measures. However, new ECB head Mario Draghi said early this month that the bank’s balance sheet ”is not at risk.” Net lending to credit institutions decreased by EUR10.4 billion to EUR189.7 billion last week. Still, lending at its main refinancing operations rose. Last Wednesday, a main refinancing operation of EUR230.3 billion matured and a new one of EUR247.2 billion settled. Earlier Tuesday, the ECB said it lent EUR265.5 billion to banks in seven-day funds, the highest demand for seven-day funds since June 2009.

    Battening down the hatches - THE past 24 hours have seen a flurry of action around the world, in response to growing concern about the euro zone's sovereign-debt crisis. The story begins in Europe, where finance ministers meeting to discuss the future of the European Financial Stability Facility seem to have taken some key decisions regarding the fund. The EFSF will be able to lever its meagre €440 billion in capital (less amounts already committed to rescues for Greece, Ireland, and Portugal) in two different ways. First, by using its resources to guarantee 20% to 30% of the bond issues of struggling peripheral economies and, second, by creating "co-investment funds" that (it is hoped) will attract money from other investors and which can be deployed to buy bonds. The trouble is that the total firepower of the EFSF is likely to fall short of expectations and well short of what will probably be necessary. It may amount to €1 trillion, but that's far too little to manage serious trouble for, say, Italian bonds. The ministers are increasingly eyeing the IMF for assistance, but its capital is also limited; the IMF has under $400 billion available to lend. There are hints that leaders are exploring the idea of channeling loans from the European Central Bank through the IMF, but it isn't clear that this will fly with the ECB's conservative, German contingent. There is an element of collective breath-holding, as everyone waits to see what will emerge from a meeting of euro-zone heads of state on December 9th—quite possibly a make-or-break gathering.

    Wolfgang Schauble admits euro bail-out fund won't halt crisis - Europe's "big bazooka" bail-out fund is not ready and won't stem the debt crisis that on Tuesday pounded Italy and the European Central Bank (ECB), admitted Wolfgang Schauble, Germany's finance minister. Mr Schauble said eurozone finance ministers, who are meeting in Brussels, could not agree on the terms of the European Financial Stability Facility (EFSF). He told Germany’s Handelsblatt that although Europe needed a fund “capable of action”, plans for the EFSF were too “intricate and complex” for investors to understand. The finance ministers, who were meeting ahead of a full Ecofin summit today, acknowledged the €440bn (£376bn) fund would not win support to leverage it up to €1 trillion. Its capacity would be between €500bn and €700bn instead – a total that is unlikely to be big enough to rescue Spain and Italy. However, the ministers concurred that the €8bn of international aid to Greece should be disbursed before Athens runs out of cash in two weeks. Evangelos Venizelos, Greece’s finance minister, said: “In Greece we have all the necessary conditions in order to go ahead with the next disbursement.”

    Watchdog leaves EU banks in dark on capital (Reuters) - Europe's banking watchdog has delayed telling individual lenders how much capital they must raise to safeguard their survival until EU finance ministers can agree on broader plans to shore up confidence in the financial system. The delay is a blow to banks and investors keen to get to grips with how much cash is needed as the bank sector faces multiple risks that threaten to spill over to the real economy. The European Banking Authority (EBA) had planned to finalise by Wednesday how much cash banks need to meet a minimum 9 percent core capital -- a preliminary estimate had put it at 106 billion euros ($141.5 billion) for the 70 lenders under scrutiny. But European Union finance ministers (Ecofin) meeting to discuss the euro zone debt crisis need to help banks as part of a wider plan. If they agree on the bank measures, the EBA is likely to release details next week, a spokeswoman for the EBA said.

    A French downgrade could derail eurozone rescue -- In what would be another blow to Europe's beleaguered rescue fund, there is growing speculation that France will eventually lose its top-tier credit rating. Standard & Poor's could change its outlook for France's AAA credit rating within 10 days, according to a widely circulated report Tuesday in La Tribune, a French financial daily newspaper. If true, analysts say the move could lead to an official downgrade of the nation's rating within months. S&P declined to comment on the report. "It wouldn't surprise me if France got downgraded," said Kathy Jones, fixed-income strategist at Charles Schwab, noting that several other European governments have recently faced their own downgrades. But a downgrade of France's credit rating would have serious repercussions for the European Financial Stability Facility1, which European Union leaders have billed as a "firewall" against the debt crisis spreading across the eurozone.

    France and Germany want the stability and growth pact hurdle to move to zero percent by 2016 - According to Spanish website Cinco Dias, France and Germany want to move from a 3% deficit target to balanced budget by the year 2016. The website said France is working with Germany to propose a deal which will include a balanced budgets and deficit limit in national constitutions along with additional facets to ensure supranational fiscal solidarity. This aim points to a clear intention by the two countries to present a deal on fiscal integration and priorities in the coming days. My translation of Cinco Dias is as follows: the French Minister of Budget, Public Accounts and State Reform, Valérie Pécresse, has confirmed that France and Germany are working on a revision of Europe’s Stability and Growth Pact with the aim of giving "greater discipline to the euro area" which includes the obligation to reach a zero deficit in 2016. Pécresse stressed that all euro area countries should impose a zero deficit target."The golden rule is to return to balance in 2016," said the minister. Note that an adjustment to balanced budgets throughout the euro zone would require either an exactly equivalent offset in private sector savings down and/or in the export sector up. So implicitly, Germany and France are calling for a rapid and massive private sector dissaving and/or reduction in the external value of the euro area currency. I see this as a pipe dream. More likely, the cuts in the public sector will lead to a deflationary spiral via bank balance sheet deleveraging. This proposal tells you that bad things are definitely going to happen in Euroland.

    The German Hour - A series of developments over the last few weeks have set in motion a downward spiral for the eurozone. Unless officials – especially German officials – act fast, the verdict of financial markets is bound to be ruthless. First, the eurozone has failed to turn the tide. Mario Draghi, President of the European Central Bank, was right to note that, despite numerous ministerial meetings and three summits, implementation of the decision to increase significantly the firepower of the European Financial Stability Facility (EFSF) is still lacking. Second, and partly as a consequence, virtually all eurozone countries’ debt is trading at a discount relative to German Bunds. While it was necessary to price risk more accurately, it is difficult to believe that the Netherlands, with a debt ratio nearly 20 percentage points lower than Germany’s, deserves to be assessed as a higher default risk.Third, financial-market participants and, increasingly, real businesses are pricing in a possible breakup of the eurozone, if not the end of the euro itself. Fourth, Germany has become the eurozone’s undisputed leader. Although France continues to play its role as the other half of the European Union’s leading couple, it has lost influence and the ability to take the initiative.

    Thoughts on Europe, Nov 2010 and Dec 2011 - As Jim observed yesterday, the Fed’s extension of swap lines to European central banks only solves the liquidity problem; if you think this was going to happen eventually anyway, you would be befuddled (see Krugman) by the extent of the equity market boom (for more on the effect of these currency swap arrangements, see Goldberg et al.). What will do the trick? Tim Duy has a summary of what is, and is not, on the table. Here’s his list of what you don’t see:

    1. A path to true fiscal integration, which would imply direct transfers from relatively rich to relatively poor member states.
    2. Similarly, a new path toward internal rebalancing. A commitment to stronger fiscal oversight implies continued pursuit of rebalancing via deflation in troubled economies. Moreover, as Paul Krugman notes, this will be attempted in the context of low inflation, which only exacerbates and extends the pain of adjustment. This path only ensures deeper recession.
    3. A coordinated, continent-wide banking sector recapitalization. Note that Moody's just placed European bank debt under review. Downgrades are almost inevitable at this point.
    4. An open door for stimulative policies to offset the demand contraction currently underway.

    Businesses plan for possible end of euro - International companies are preparing contingency plans for a possible break-up of the eurozone, according to interviews with dozens of multinational executives. Concerned that Europe’s political leaders are failing to control the spreading sovereign debt crisis, business executives say they feel compelled to protect their companies against a crash that can no longer be wished away. When German chancellor Angela Merkel and French president Nicolas Sarkozy raised the prospect of a Greek exit from the eurozone earlier this month, it marked the first time that senior European officials had dared to question the permanence of their 13-year-old experiment with monetary union. “We’ve started thinking what [a break-up] might look like,” Andrew Morgan, president of Diageo Europe, said on Tuesday. “If you get some much bigger kind of ... change around the euro, then we are into a different situation altogether. With countries coming out of the euro, you’ve got massive devaluation that makes imported brands very, very expensive.” Executives’ concerns are emerging as eurozone finance ministers weigh ever more radical options to tackle the sovereign debt crisis, including the possibility of funnelling European Central Bank loans to struggling countries via the International Monetary Fund.

    Insight: In euro zone crisis, companies plan for the unthinkable (Reuters) - When Novo Nordisk's chief financial officer met marketing colleagues last Friday the conversation moved far beyond the usual discussion of sales and performance. Jesper Brandgaard asked a simple, far-reaching question: how would the firm set prices for two pivotal new insulin products if the euro collapsed? The Danish firm, the world's biggest maker of insulin for the treatment of diabetes, sits outside the euro zone but sells into it. It's a question that is being echoed - in various forms - in the boardrooms of banks, brokerages, trading houses, law firms and the world's leading manufacturers. "It's hard to make detailed plans but we need to think through how our pricing strategy would fare if there were suddenly a dismantling of the euro," Brandgaard told Reuters. "How do we avoid falling into a trap? This is the first time I've asked such a question. It's a topic that is increasingly on the radar."

    European Nations Pressure Own Banks for Loans —Some European nations, struggling to find buyers for their bonds, are pressuring their own already-stressed banks to fill the gap by acting as lenders of last resort—in certain cases, pushing the amount of risky European debt on those institutions' books even higher. Italy and Portugal, among other European governments, are leaning on their banks to continue buying—or at least to stop selling—government bonds, according to people familiar with the matter.  Meanwhile, in Spain and other European countries, the quantities of loans banks are doling out to local and national governments have been rising sharply.

    Central Bankers Around the World Suspect Eurozone is Beyond Saving and Are Preparing For the Worst - From Reuters China’s central bank said it lowered the reserve ratio by 50 basis points. That reduces the ratio for the biggest banks to 21 percent from a record high 21.5 percent, freeing up funds that could be used for lending to cash-strapped small firms. "It’s a surprising move — the market was not expecting the central bank to (cut RRR) so fast," said Shi Chenyu, an economist with the investment banking unit of Industrial and Commercial Bank ofChina."The move sends a clear message that the central bank is ready to relax its policy stance."The central bank, which has already loosened credit curbs to help cash-starved small firms, has pledged to "fine-tune" policy if needed. The new level becomes effective on December 5, the central bank said in a short statement on its website. How long ago was China’s primary focus curbing inflation and rebalancing the export driven economy. Was that two months? At the time its seemed clear that China was prepared to do that on the backs of Small and Medium Sized Enterprises (SME) in an effort to maintain stability for State Owned Enterprises (SOE).

    More Evidence That The European Money Markets Are Shutting Down Idiosyncratically - From Izabella at Alphaville Fresh off the wire on Wednesday:RTRS – ITALY TREASURY SAYS TO LAUNCH AUCTIONS TO LEND OR BORROW SIGNIFICANT AMOUNTS OF CASH ON MONEY MARKET USING TRSY’S ACCOUNT AT BANK OF ITALY RTRS – ITALY SAYS AUCTIONS TO NORMALLY OFFER OVERNIGHT MATURITIES WITH CREDIT LIMITS, WILL HOLD MORNING AND SOMETIMES AFTERNOON AUCTIONS An interesting announcement by the Italian Treasury indeed.For two reasons. First, it reveals that the Italian Treasury is prepared to intervene in the money markets directly — presumably to ease tensions, a job usually reserved for the central bank. Second, the facility sounds awfully like the Supplemental Financing Program which was introduced by the US Treasury in cooperation with Fed in the fall of 2008. The move could therefore be designed to give the Italian central bank a little more fighting power and control of money market rates.What’s key to note here is that this operation is being done in by the Italian Treasury in conjunction with the Bank of Italy. Which is to say it is not just illiquidity in the money markets, but idiosyncratic illiquidity. Within a single currency zone money should wash across borders so that if the ECB injected liquidity anywhere it would show up everywhere. That is not what is happening. This implies that the ECB is effectively not managing monetary policy in the Eurozone.

    French President Warns of Dire Consequences if Euro Crisis Goes Unsolved -  Saying that he wanted to tell the truth to the French people, President Nicolas Sarkozy said Thursday night that Europe could be “swept away” by the euro crisis if it does not change. He said that Europe would “have to make crucial choices in the next few weeks,” and that France and Germany together were supporting a new treaty to tighten fiscal discipline and promote economic convergence in the euro zone.  The European Union needs “an overhaul,” Mr. Sarkozy said, to remain relevant and competitive, but he was vague about the details of what needs to be done. “If Europe does not change quickly enough, global history will be written without Europe,” he said. “Europe needs more solidarity and that means more discipline.”  His televised speech came against a backdrop of deepening alarm about the contagious nature of the euro crisis, which threatens Italy and has begun to sap confidence in France and Germany, the strongest economies among the 17 European Union countries that use the single currency. The crisis has exposed the seeming inability of European leaders to resolve the onerous debt problems of its weaker members, calling into question the survival of the euro, once seen as a glue that would bind Europe together.

    A Euro Crisis Deal Emerges - European Central Bank President Mario Draghi signaled the bank could ramp up its role battling the debt crisis if euro-zone governments enforce tougher deficit cutting—suggesting outlines are emerging of a deal that investors have been clamoring to see happen. In his first appearance before the European Parliament since taking the ECB helm last month, Mr. Draghi offered a road map for policy makers. He called on euro-zone governments to quickly craft a "new fiscal compact," calling it "the most important element to start restoring credibility." He added that "other elements might follow, but the sequencing matters."

    Shape of last-ditch eurozone deal emerges - The shape of the grand plan that European Union leaders hope to agree in Brussels next week to stem the eurozone’s debt crisis is increasingly clear. Leading players in the negotiations – Angela Merkel, German chancellor, Nicolas Sarkozy, French president, Mario Monti, Italian prime minister, and Mario Draghi, his compatriot at the head of the European Central Bank, plus Herman Van Rompuy, the European Council president in Brussels – seem to be singing from the same song-sheet. Essential details, however, are still the subject of intense negotiations that could run right up to the EU summit on December 9, not just between France and Germany, but with the European Commission – the EU executive – and smaller member states. The deal involves accelerated agreement on what Mr Draghi described on Thursday in the European parliament as a “fiscal compact” between the 17 eurozone members to enforce much stricter budget discipline and debt control throughout the monetary union. Ms Merkel and Mr Sarkozy have promised to submit joint proposals for EU treaty changes on that score next week, although they have yet to agree on some critical questions, such as whether sanctions should be automatic for rule-breakers. Treaty change is what Ms Merkel has been fighting for to make her idea of “fiscal union” enforceable, against considerable opposition from her partners. She won another key ally on Thursday – Donald Tusk, the Polish prime minister, in addition to Mr Draghi.

    ECB May Target Yields–Is it Too Late? - Simon Nixon suggests that the ECB is ready to step up to the plate The second task is to stabilize sovereign debt markets to ease solvency concerns, cut interest costs and shore up confidence. The ECB is considering a big increase in its Securities Markets Program including targeting explicit government bond yields. The hope is that, by setting a credible target in conjunction with a long-term bank liquidity facility, it can ensure governments retain access to bond markets; banks will borrow to buy bonds at attractive yields knowing any losses are capped.  Obviously I have long advocated this as the only way to stem the crisis.  At this point, however, I am not sure it will work. The ECB may have a larger problem if the marginal cost of cash is diverging across countries.  The irony is that assuming basic market theory and fully integrated and liquid markets, this program can’t work as advertised. Targeting rates on bonds should cause the bonds – at least at the very short end – to collapse towards the same yield.  If not, then that tells us something about the integration of the money markets which in turn tells us something about the ECB’s ability to stem the crisis with this type of action alone.

    Has The ECB Completely Lost Control of Monetary Policy, Ctd - Draghi assures us, not quite yet Dysfunctional government bond markets in several euro area countries hamper the single monetary policy because the way this policy is transmitted to the real economy depends also on the conditions of the bond markets in the various countries. An impaired transmission mechanism for monetary policy has a damaging impact on the availability and price of credit to firms and households. This is the very important monetary policy reason for the ECB’s non-standard measures. But of course, such interventions can only be limited. Governments must – individually and collectively – restore their credibility vis-à-vis financial markets. The ECB has taken several measures in 2010 and 2011 to ensure that banks continue to have access to funding sources. This has enabled them to continue lending to firms and households. See Izabella Kamniska for some of the important details.  Let me give you the briefest of rundowns from a American Fed-centric perspective. In normal times banks lend overnight money to each other without demanding any collateral. This market is the crux of the financial system. In the US its called the Fed Funds market. In Eurozone, EONIA. Monetary policy usually revolves around managing this market. However, in stressful times this market can breakdown.

    Central Banks Pushed to Act as Funding Squeeze on Banks Worsens (Bloomberg) -- The squeeze that has driven funding costs for European banks to the highest since the aftermath of Lehman Brothers Holding Inc.'s collapse is prompting economists and traders to urge central banks to do more to fight the worsening debt crisis. The Euribor-OIS spread, a measure of banks' willingness to lend to each other, widened to 98.2 basis points at 9:15 a.m. in London, the biggest gap since March 2009, up from 96.6 basis points yesterday. The cost for European banks to fund in dollars rose to the highest level since October 2008, a month after New York-based Lehman filed for bankruptcy protection. European Central Bank President Mario Draghi has resisted pressure from politicians to backstop governments as contagion spreads to Italy and France, confronting leaders with what Morgan Stanley calls a "critical moment in European history." While the ECB is already offering banks unlimited cash and has cooperated with the Federal Reserve to keep dollars flowing through the financial system, other options may include cutting its benchmark interest rate, expanding liquidity lines or working with the International Monetary Fund.

    6 Central Banks Act to Buy Time in Europe Crisis — The Federal Reserve and other major central banks moved on Wednesday to help foreign banks more easily borrow and lend money, seeking to forestall a breakdown of global financial markets and giving Europe more time to wrestle with its debts. The latest round of interventions by central banks, including the expansion of an existing Fed program that lets foreign banks borrow dollars at a low interest rate, reflects growing concerns that Europe’s financial problems are hampering growth.  In a sign that the fallout is increasingly global, the Chinese central bank, which has sought to slow an overheated economy and inflation over the last year, also moved unexpectedly but independently Wednesday to encourage new lending by Chinese commercial banks.  In Europe and the United States, where the announcement broke well ahead of stock market openings, the prospect of more cheap money to ease banks’ operations sent stock indexes soaring.

    Did A Large European Bank Almost Fail Last Night? - Need a reason to explain the massive central bank intervention from China, to Japan, Switzerland, the ECB, England and all the way to the US? Forbes may have one explanation: "It appears that a big European bank got close to failure last night.  European banks, especially French banks, rely heavily on funding in the wholesale money markets.  It appears that a major bank was having difficulty funding its immediate liquidity needs. The cavalry was called in and has come to the successful rescue." Granted the post is rather weak on factual backing and is mostly  speculative, but it would certainly make sense. That said, it harkens back to our original question: just how bad was the situation if the global central banking cabal had to intervene all over again, and just what was not being told to the general public? Lastly, and most important, slapping liquidity bandaids on solvency gangrenes does nothing but buy a few days at most. Furthermore, we now expect the stigmata associated with borrowing from the Fed to haunt each and every European bank as vigilantes will now use the weekly ECB update on borrowings from the Fed as a signal to hone in on this and that weak Italian and French, pardon, European bank.

    World's Central Bankers Hand Dying Europe a Band-Aid - This morning, a group of central banks, including the Fed, announced coordinated action to ease the cost of currency swap lines in Europe.  Essentially, these are facilities that allow local banks to borrow in dollars or yen or what have you from their central bank, with the ECB getting the money from the central bank that controls the currency in question. While this is billed as a coordinated global action, this is really about dollars, and the Fed.  No other currency is seeing that much excess demand. This is a band-aid.  It's a good band-aid.  But making it easier for local banks to borrow in dollars does not, in the end, fix any of the problems with the euro-zone.  It just delays the rate at which the current sovereign crisis turns into a banking crisis. 

    German 1-year bunds move to negative yield for first time ever - The yield on 1-year German bunds turned negative today for the first time ever, according to Bloomberg data, as the European Central Bank looks set to ramp up measures to fight the debt crisis. The yield on the 1-year note fell 13 basis points to -0.05% by midday. This is the first time it has seen a negative yield since Bloomberg began compiling data on the asset class in 1995. Yields on the 6-month bunds, known as Bubills, turned negative last week, dropping to -0.05% on Friday. It was the first time 6-month bunds have offered a negative yield since the creation of the euro.

    French Yields Drop Most in 20 Years, Spain Bonds Rise - France’s 10-year yields fell the most since 1991 as the nation sold 4.3 billion euros ($5.79 billion) of bonds due between 2017 and 2041. Spanish notes rose for a fourth day as it auctioned 3.75 billion euros of securities, the maximum target. Italy’s 10-year yields fell below 7 percent for the first time in a week as European Central Bank President Mario Draghi signaled the ECB may do more to fight the crisis as long as governments push the euro area toward a fiscal union. “There’s a generally brighter sentiment at the moment and Spain’s was a very good auction with strong demand,” said Norbert Aul, a European rates strategist at RBC Capital Markets in London. “There’s still fuel in the tank from policy actions and the ECB will offer more next week.” French 10-year yields dropped 27 basis points, or 0.27 percentage point, to 3.12 percent at 4:01 p.m. London time. The 3.25 percent bond due October 2021 rose 2.205, or 22.05 euros per 1,000-euro face amount, to 101.030.

    How can the euro zone prevent the next fiscal crisis? - PAUL KRUGMAN reminds us that the problems of southern Europe are not caused by past profligacy. He is right in some sense. It is true that according to any off-the-shelf definition of the government budget, a number of these countries (though certainly not all) were doing fine: running surpluses and reducing the debt burden. Yet it isn't clear that a static, cash-basis accounting concept of the government budget is the most reasonable. Within the euro zone, where a one-size-fits-all monetary policy tends to make business cycles longer and more pronounced, it is critical to consider the budget over the whole of the cycle. In particular, it's important to consider macroeconomic imbalances. Spain and Ireland, for instance, were riding on an unsustainable wave of real estate gains and banking profits associated with significant inflows of capital. Bugeting should have taken into account the risk that those flows might ultimately slow or reverse. If Norway was spending all its oil revenues on government consumption while running a small surplus, would anyone call that a sustainable budget? Germany's large deficits, which even violated the Stability and Growth Pact, were less risky, by contrast, given growth in its current account surplus.

    Banks Vie With Nations to Sate $2T Funding Need - Europe’s banks will compete with their governments to borrow $2 trillion next year as the two groups refinance maturing bonds and bills.  Euro-area governments have to repay more than 1.1 trillion euros ($1.5 trillion) of long- and short-term debt in 2012, with about 519 billion euros of Italian, French and German debt maturing in the first half alone, data compiled by Bloomberg show. European banks have about $665 billion of debt coming due in the first six months, with a further $370 billion by the end of the year, according to Citigroup Inc., based on Dealogic data.  “Serious investors are fleeing from both European sovereign and European bank debt in droves,”  “The financials of both classes are in question, and nothing of substance has been achieved to correct the problems and quell the European crisis.”  The 440 basis-point yield premium investors demand to hold bank bonds rather than benchmark government soared to 448 Nov. 30, the most since January 2009, according to Bank of America Merrill Lynch’s EUR Corporates, Banking Index. The average spread between January 2005 and January 2007 -- before the crisis struck -- was 38 basis points, the data show.

    UBS On "How Bad Might It Get" And Why "Sooner Or Later Intense Instability Will Resume" - Despite the very short term bounce in markets on yet another soon to be failed experiment in global liquidity pump priming, UBS' Andrew Cates refuses to take his eyes of the ball which is namely preventing a European collapse by explaining precisely what the world would look like if a European collapse were allowed to occur. Which explains today's release of "How bad might it get", posted a day after the Fed's latest bail out: because instead of attempting to beguile the general public into a false sense of complacency, UBS found it key to take the threat warnings to the next level. Which in itself speaks volumes. What also speaks volumes is his conclusion: "Finally it is worth underscoring again that a Euro break-up scenario would generate much more macroeconomic pain for Europe and the world. It is a scenario that cannot be readily modelled. But it is now a tail risk that should be afforded a non-negligible probability. Steps toward fiscal union and a more proactive ECB, after all, will still not address the fundamental imbalances and competitiveness issues that bedevil the Euro zone. Nor will they tackle the inadequacy of structural growth drivers and the deep-seated demographic challenges that the region faces in the period ahead. Monetary initiatives designed to shore up confidence can give politicians more time to enact the necessary policies. But absent those policies and sooner or later intense instability will resume." 

    Preparing for the Worst: The High Price of Abandoning the Euro - SPIEGEL - The warning signs are mounting, and fresh news is adding to the gloom every day. Britain's financial watchdog has instructed banks to brace for a possible break-up of the euro zone. British currency trader CLS Bank is reportedly conducting stress tests to prepare for this worst-case scenario. Polish Foreign Minister Radoslaw Sikorski made a dramatic appeal to Germany on Monday to prevent a collapse of the currency union, saying: "We are standing on the edge of a precipice." German investors are jettisoning derivatives on a large scale because they have lost confidence in the instruments. For the first time, it appears, people across Europe regard the downfall of the euro as a real possibility. There is mounting speculation that the euro zone will break apart, or even that the single currency will be abandoned altogether. It often sounds as if such scenarios wouldn't be so bad for Germany. In fact the consequences would be catastrophic for Europe and for its largest economy.

    EU Bank Writedown to Exclude Pre-’13 Debt - The European Union may exempt bank debt issued before 2013 from proposals forcing investors to take losses at failing lenders, said a person familiar with the plan. Excluding the debt is designed to prevent lenders’ funding costs from rising, said the person, who declined to be identified because the discussions are private. The exemption could be extended if banks struggle to raise funds, the person said. The law would need approval from national governments and the European Parliament before taking effect.  Michel Barnier, the EU’s financial services chief, has promised to propose draft rules to end the need for taxpayer bailouts of failing banks. Under draft proposals obtained by Bloomberg News, holders of long-term unsecured senior debt in a collapsing bank would be first in line to take losses once a lender’s capital and other subordinated debt is exhausted. Long-term bonds would be those with a maturity of more than one year. A spokeswoman for the European Commission declined to comment on the draft law. 

    Europe's Real Problem? Deflation - European markets experienced a rare moment of respite yesterday, but this was just a pause in the panic. No comprehensive solution to the continent’s sovereign debt woes seems to be near at hand. Why can't policymakers and market participants come to a consensus about what needs to be done? I suspect the problem is a serious misunderstanding about what is actually happening in Europe and why it will have dire economic consequences. Europe is experiencing a stealth monetary contraction, which is another way of saying it is undergoing massive deflation . This might sound odd to many readers. The voices out of the European Central Bank  all sound the alarm of inflation  . And it’s not just the central bankers. Journalists too start clanging on about inflation whenever a serious plan for addressing Europe’s problems is proposed.  What the inflationistas are missing is that Europe is actually suffering from a profound contraction of its money supply. This contraction is crippling the banking system and will bring the economy to a grinding halt if it is not allieviated.  It’s easy to miss the contraction of the money supply because it involves a destruction of financial assets that we do not usually think of as “money” but that, in fact, operate as money — or did until relatively recently.

    You are all wrong, printing money can halt Europe's crisis - This will enrage many readers — especially the "Austrian" internet vigilantes — but I have to say it. A near universal view has emerged that Europe's crisis can only be solved by governments and fiscal policy, with varying views over the proper dosage of pain. I beg to differ. This is a monetary crisis, caused by a jejune central bank that aborted a fragile recovery by raising rates earlier this year, allowed the money supply to collapse at vertiginous rates in southern Europe, and caused a completely unnecessary recession — and a deep one judging by the collapse in the PMI new manufacturing orders in November. Needless to say, drastic fiscal austerity is making matters a lot worse. You cannot push two-thirds of the eurozone into synchronized fiscal and monetary contraction without consequences.  Note that five-year break-even spreads have dropped below zero for Italy, meaning that markets are now pricing in outright deflation. For a country with public debt stock of 120pc of GDP, that is a death sentence. The eurozone economy is in imminent danger of crashing into deflation, bringing down the whole interlocking edifice of sovereign debt and distressed lenders. And bear in mind that Europe's bank nexus — including the UK, Swiss, Scandies — is €31 trillion. Big stuff.

    The End Of The Euro - Simon Johnson - Investors sent Europe’s politicians a painful message last week when Germany had a seriously disappointing government bond auction. It was unable to sell more than a third of the benchmark 10-year bonds it had sought to auction off on Nov. 23, and interest rates on 30-year German debt rose from 2.61 percent to 2.83 percent. The message? Germany is no longer a safe haven. Since the global financial crisis of 2008, investors have focused on credit risk and rewarded Germany with low interest rates for its perceived frugality. But now markets will focus on currency risk. Inflation will accelerate and the euro may break up in a way that calls into question all euro-denominated obligations. This is the beginning of the end for the euro zone.

    Killing the Euro, by Paul Krugman - Can the euro be saved? Not long ago we were told that the worst possible outcome was a Greek default. Now a much wider disaster seems all too likely..., even optimists now see Europe as headed for recession, while pessimists warn that the euro may become the epicenter of another global financial crisis. How did things go so wrong? The answer you hear all the time is that the euro crisis was caused by fiscal irresponsibility. Turn on your TV and you’re very likely to find some pundit declaring that if America doesn’t slash spending we’ll end up like Greece. Greeeeeece! But the truth is nearly the opposite. Although Europe’s leaders continue to insist that the problem is too much spending in debtor nations, the real problem is too little spending in Europe as a whole. And their efforts to fix matters by demanding ever harsher austerity have played a major role in making the situation worse.

    Who killed the euro zone? - THERE are many facets to the crisis in the euro zone, but at heart the problem is fairly straightforward. The euro zone developed a balance-of-payments problem; some of the countries in the single currency accumulated large external debts. To service those debts, the deficit countries need to become surplus countries, which is difficult to do without the flexibility of a floating currency. The difficulty of adjustment has led markets to doubt the solvency of some institutions, and these doubts have, in the absence of a lender-of-last-resort, metastasised into a contagion that threatens to leave banks and sovereigns bankrupt. When you frame the crisis like that, it begins to look inevitable, and perhaps it was. It is worth pointing out, however, that perceptions of solvency are very much state-contingent. It was never a given that a country like Italy would flip from one equilibrium to another. Prior to the crisis, Italy's government was running a primary surplus and bringing down its debt-to-GDP ratio. So long as markets were prepared to finance Italy's old debt at low rates, it was in good shape. Now, of course, markets aren't prepared to do that. One interesting question is why.

    Euro doomed from start, says Jacques Delors - The euro project was flawed from the start and the current generation of European leaders has failed to address its fundamental problems, Jacques Delors, the architect of the single currency, declares today.  In an interview with The Daily Telegraph, Jacques Delors, the former president of the European Commission, claims that errors made when the euro was created had effectively doomed the single currency to the current debt crisis. He also accuses today’s leaders of doing “too little, too late,” to support the single currency.  The 86-year-old Frenchman’s intervention comes the day after France and Germany took another step towards the creation of a full “fiscal union” within the European Union and David Cameron insisted that Britain must remain a major player in Europe. Mr Delors, who led the commission from 1985 to 1995, played a central role in the process that led to the creation of the euro in 1999. In his first British newspaper interview for almost a decade, he says that the debt crisis reflects a threat to Europe’s global role and even basic Western democratic values.

    The Four Horsemen Of The Europocalypse: Great ‘toon from the Economist which we hope motivates the Eurocrats to get something done. The U.S., U.K, and Japan should not be so smug and take warning as the Four Horsemen of the debt apocalypse will be coming their way if they don’t get their fiscal house in order. We’re going to come up with a Four Horsemen watch for Europe similar to our exercise during the U.S. government credit downgrade. Any suggestions and what indicators they should be? France-Germany bond spread? European Bank Equity Index? Euro/dollar? Italian/Spain-Germany bond spread? German bond yields? Money quote from the Economist piece: Europe needs an all-encompassing deal to save itself. The crisis is now about the survival of the euro, so it requires a big response; nobody will be spared if the euro collapses. A sensible compromise would be to impose greater discipline now, in exchange for the eventual introduction of conditional Eurobonds. A paper by the Brussels-based think-tank Bruegel adds the need for a euro-zone finance ministry, with power to raise its own taxes and to oversee the banking system. With time running short, an all-encompassing deal might take too long to negotiate. That said, a limited German-style treaty would also take time. A balanced deal is more likely to be accepted by voters, in both creditor and debtor states, and to assuage markets. It may need to be done in phases. In the short term, it must be enough to free the ECB to intervene without limit, by assuaging fears of moral hazard. In the long term it needs to signal to investors that the euro’s problems are being fixed for good. Only then might the apocalypse be cheated.

    French Presidential Election – Coup De Grâce For The Euro? - Amidst a flood of proposals, plans, and rumors to save the euro and the Eurozone, much has been made of the Merkozy couple, the uneasy partnership between French President Nicolas Sarkozy and German Chancellor Angela Merkel.  Sarkozy reemphasized his commitments: the ECB must remain independent, and France and Germany must remain the pillar of stability. “To defend the euro is to defend Europe,” he said. Alas, he may be out of a job by May 2012—and his potential successors to the left and to the right have different ideas. France isn’t doing well. Unemployment, which has been rising since May, breached 9%. Wages haven’t kept up with inflation, and purchasing power has dropped. Industrial orders plummeted. Layoffs have been announced. Yields are rising. Banks are teetering. Sarkozy had tried to reform the French welfare and tax system. Result: rising income disparity, tax loopholes for the rich, diminished pension benefits for the middle class, reduced subsidies for the poor, etc., and now ugly unemployment trends. Voters are angry. If the economy deteriorates further, Marine Le Pen, president of the National Front, might beat Sarkozy in the first round. Media savvy and endowed with a captivating presence, she’d stunned the French political establishment by beating Sarkozy in the polls earlier this year. “Let the euro die a natural death,” she said in August (article in English). And she often speaks out against the rules of the European Union. Should she become president, though unlikely, she’d pull France out of the Eurozone.

    Will Angela Merkel Act, or Won't She? - The day before, the debt crisis that’s been spreading for two years singed Germany, as investors shied away from an auction of 10-year government bonds. By the market close, Germany’s 10-year borrowing costs stood at 2.2 percent a year, three-tenths of a percentage point higher than those of the wastrel U.S. For Merkel, it seemed like a moment of truth. Germany is the sole country in a position to prevent a collapse of the euro currency—an event that could trigger a financial crisis and perhaps another global recession. It’s only a slight exaggeration to say that the fate of the world is in one woman’s hands. Yet to the frustration, bewilderment, and mounting anger of leaders from Paris to Beijing to Washington, Merkel repeatedly has refused to act. Ten minutes into the news conference, as Merkel’s turn to speak arrived, markets and fellow politicians were parsing her German for a sign that the Chancellor was ready to quell the panic by finally agreeing to issue euro bonds, perhaps, or supporting unlimited bond purchases by the European Central Bank. Or something. Merkel yielded not a millimeter. Euro bonds—by which German taxpayers would become jointly liable for debts incurred by the likes of Greece and Italy—were “not needed and not appropriate.”

    Is Germany Doubling Down - And as if on cue I am back to questioning this type of assertion from Tyler Cowen: Do not think that Germany has merely to waive a magic wand, or incur a one-time cost, to set things right in the eurozone.  Any “set things right” action on Germany’s part is, one way or another, a form of doubling down.  If it fails it means a bigger eurozone implosion in the future than would happen now, including much higher costs for Germany.  The choice is not “German action vs. doom now,” it is “German action and some chance of even bigger doom later on vs. doom now.” That’s a tough call.  The Germans understand that one better than do most of the bloggers I’ve been reading on the topic. We want to be explicit about this. What exactly is the way that it gets worse? Maybe Tyler has a scenario, but the worse case endgame for a Euro failure is collapse of the global capitalist system, the political collapse of the West and the end of the Enlightenment. That’s fairly bad as things go and it could indeed happen. Perhaps, the risk of this happening increases in the future but I don’t see how off hand. If nothing else a richer and more culturally Western China serves as a bulwark against systemic collapse of the Western Project.

    Germany's Merkel fights for euro, Cameron for UK (Reuters) - British Prime Minister David Cameron threatened on Friday to obstruct a Franco-German drive for swift change to the European Union's treaty intended to help save the euro. After talks with French President Nicolas Sarkozy, Cameron said he was not convinced treaty change was needed to reinforce the single currency zone, which Britain has refused to join. If the 27-nation bloc's charter were reopened at a crunch summit next week, he would have his own agenda. The British leader said euro zone institutions such as the European Central Bank needed to "get behind the currency" to convince markets that it had the required firepower, and member states had to make their economies more competitive. "Neither of those things require treaty change, but if there is treaty change I will make sure that we further protect and enhance Britain's interests," he told reporters. There was no immediate comment from Sarkozy's office. Cameron faces pressure from Eurosceptics in his Conservative party to loosen Britain's ties with the EU and secure guarantees that any move towards fiscal union on the continent does not harm the interests of the City of London financial centre. Sarkozy tried to persuade him to allow stricter budget discipline procedures for the euro zone without insisting on returning powers over social and judicial affairs from Brussels to London or seeking a veto right over EU financial regulation.

    Germany printing Deutsche Marks, British Foreign Office warns of euro chaos - Germany has its printing presses working overtime but they are not printing euros but Deutsche Mark notes in case the eurozone sovereign debt crisis ends in a return to national currencies. At the same time the British Foreign Office has issued warnings to embassies in the eurozone to prepare to handle the problems of its expatriates who may be unable to access local bank accounts and face rioting mobs. Perhaps this is only an example of highly developed countries planning for all eventualities but disaster planning always adds to fear as it shows that the previously unthinkable is now being contemplated: a break-up of the eurozone single currency. Euro failure But there is no mechanism in place to achieve this in an orderly fashion. The planning has not been that good. The euro’s founding fathers thought that allowing for failure might encourage it to happen. No matter we have gotten there anyhow. It is only a matter of time before the long-awaited Greek debt default brings the house of cards down. Greece has to repay its next debt instalment on December 17th so a pre-Christmas financial market crash is very likely now.

    Prepare for riots in euro collapse, Foreign Office warns -  British embassies in the eurozone have been told to draw up plans to help British expats through the collapse of the single currency, amid new fears for Italy and Spain. As the Italian government struggled to borrow and Spain considered seeking an international bail-out, British ministers privately warned that the break-up of the euro, once almost unthinkable, is now increasingly plausible. Diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis. The Treasury confirmed earlier this month that contingency planning for a collapse is now under way. A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time. “It’s in our interests that they keep playing for time because that gives us more time to prepare,” the minister told the Daily Telegraph.

    King Says U.K. Must Have Contingency Plan as Euro Risks Rise (Bloomberg) -- Bank of England Governor Mervyn King said the U.K. is being “increasingly threatened” by the euro- area crisis, and authorities must be ready to act if it continues to escalate. “What we have to do is to be ready and prepared with contingency plans and to make sure that as far as possible our banking system is as robust as possible to withstand whatever shocks that come from the eurozone,” King told lawmakers at a Parliament committee in London yesterday. There are “early signs” of a credit crunch emerging in euro area in the difficulties banks have in accessing funding, he said. The central bank restarted bond purchases in October for the first time in almost two years, citing risks from the crisis in the euro area, and some policy makers have said more may be needed. As the region’s leaders struggle to prevent turmoil spreading to core countries such as Germany and France, King has said the bank can’t quantify the possible impact of the “most extreme events” in the region. “There are many things that could happen if developments in the eurozone get worse, but I honestly don’t think it makes much sense to pretend we can precisely know how this will play out,” he said.

    UK Economic Forecast Downgraded - The British government has revealed a gloomier outlook about the economy, but says the pain will be much worse if eurozone countries do not solve their sovereign debt crisis. Treasury chief George Osborne said Tuesday that the Office for Budget Responsibility expects Britain's GDP to grow by 0.9 percent this year, down from its March forecast of 1.7 percent. For next year, the OBR predicts growth of 0.7 percent, sharply down from the 2.5 percent prediction in March. Osborne told Britain's House of Commons that the forecast assumes there will be a solution of the eurozone turmoil. "A more disorderly outcome is clearly possible," the budget office said. "Even though we believe there is an equal chance that growth will come in above or below our central forecast, the probability of a much worse outcome than the central forecast is greater than the probability of a much better one," the OBR added.

    Osborne’s Deficit Targets at Risk as U.K. Economy Stagnates - Chancellor of the Exchequer George Osborne’s plan to reduce Britain’s budget deficit is under pressure from an economy that is bordering on its second recession in three years, according to a Treasury survey. Government predictions today will show that Osborne needs to borrow an extra 86 billion pounds ($133 billion) over the four fiscal years to April 2015 as growth forecasts are lowered to just under 1 percent this year and cut by more than half for 2012, the survey of 14 economists published this month shows. “While official projections for public borrowing are likely to be revised higher in response to weaker economic growth, there is little chance of a volte-face in fiscal policy that would fray bondholders’ nerves,” Andrew Kenningham, an economist at Capital Economics in London, said in a note to clients. Osborne says he will “do what it takes” to maintain Britain’s credibility with investors and shield the U.K. from the sovereign debt crisis in the euro area. A Treasury official said the government’s fiscal credibility has reduced debt- interest costs by more than 21 billion pounds from forecasts made in March.

    Britain has no more room to keep AAA rating: Fitch — Fitch ratings agency warned Tuesday that Britain's top triple-AAA debt rating was on the line if any further financial and economic shocks hit the country. Calling the lower growth forecasts the British government released Tuesday as more realistic and adding credibility to its effort to put public finances on a sustainable path, Fitch warned that Britain is now on course to become the highest indebted AAA-rated country behind the United States. "The capacity of UK public finances to absorb adverse economic and financial shocks that would result in yet higher public debt while retaining its 'AAA' status has largely been exhausted," Fitch said in a statement. Like a number of other top-rated countries, Britain would need to take off-setting measures to ensure public finances do not worsen in case of a further shock.

    Bleeding Britain - Krugman - These days, ambulance-chaser economists like yours truly have an embarrassment of riches: so much is going wrong, in so many places, that one hardly knows where to start. But let’s spare a moment for a disaster that’s being overshadowed by the euro crisis: Britain’s experiment in austerity. When the Cameron government came in, it was fully invested in the doctrine of expansionary austerity. Officials told everyone to read the Alesina/Ardagna paper (which is succinctly criticized by Christy Romer (pdf)), cited Ireland as a success story, and in general assured everyone that they could call the confidence fairy from the vasty deep. Now it turns out that contractionary policy is contractionary after all. As a result, despite all the austerity, deficits remain high. So what is to be done? More austerity! It really is just like a medieval doctor bleeding his patient, observing that the patient is getting sicker, not better, and deciding that this calls for even more bleeding. And the truly awful thing is that Cameron and Osborne are so deeply identified with the austerity doctrine that they can’t change course without effectively destroying themselves politically.

    British banks could ask taxpayers for more cash - Banks have been ordered to slash bonuses to staff and payments to shareholders to get their houses in order as a second credit crunch bears down on the country.  Warning that the cost of borrowing is set to soar and "given the current exceptionally threatening environment", the Bank of England's Financial Policy Committee (FPC) instructed lenders to "limit distributions" – code for bonuses and dividends.  It also urged them to "give serious consideration to raising external capital in the coming months" – a move that would either require the taxpayer to inject more money into the banks or dilute the Governments' stakes, making it more difficult to recover the £66bn invested in Royal Bank of Scotland (RBS) and Lloyds Banking Group.  Coming the day after central banks across the world took desperate co-ordinated action to ensure European lenders can secure the funding needed to survive, Sir Mervyn King, the Bank's Governor, confirmed that there are "signs of a credit crunch already in the euro area".

    Public sector job losses to hit 600,000 by 2016 - George Osborne was forced today to acknowledge a grim picture of declining growth and rising unemployment for the UK over the coming years. Unemployment was forecast to increase from 8.1% this year to 8.7% in 2012 before falling back to 6.2% by 2016. And the OBR warned that as many as 600,000 jobs could be lost in the public sector by 2015/16 - a dramatic 50% increase on its previous estimate of 400,000. By the following year, that number could have reached 710,000. The Chancellor insisted he was still on course to meet his key targets of eliminating the UK's structural deficit within five years and getting national debt on a downward course as a proportion of GDP by 2015/16. But his Labour shadow Ed Balls said the economy was flatlining and the country was suffering "all of the pain and none of the gain" at the Government's hands.

    Majority of U.K. Voters Want Government to Ease Up on Austerity - A majority of British voters want the government to ease up on its austerity program in order to boost growth, according to an opinion poll released on the eve of Chancellor of the Exchequer George Osborne‘s budget statement.Of the 1,001 adults surveyed by ComRes between Nov. 25-27 on behalf of the Independent newspaper, 69% agreed the government should slow its budget cuts. Osborne will Tuesday present lawmakers with a raft of new measures to revive flagging growth, most of which involve attempts to provide more and cheaper loans to businesses, as well as encouraging private investors to back infrastructure programs. But Osborne is expected to reaffirm his commitment to implementing a total of 110 billion pounds in spending cuts and tax increases designed to halt the rise in government debt by the middle of this decade. However, critics of his austerity program say it has weakened the economy, which now faces additional headwinds as a result of the euro zone’s fiscal crisis.

    Britons Strike as Government Extends Austerity Measures… Hundreds of thousands of public employees walked off their jobs in schools, hospitals, airports, courtrooms, libraries, museums and government offices on Wednesday, as British workers became the latest in Europe to demonstrate mass fury at government austerity measures.  The one-day strike was the biggest here since the 1970’s, the era that brought forth the Winter of Discontent, with waves of labor disputes that all but crippled the country. This time, the immediate issue was Prime Minister David Cameron’s proposal to require public employees to work for more years and pay more toward their pensions each month.  But the strikers’ anger goes far deeper, and as they passed government buildings in Whitehall, some chanted: “We strike right back!” — a reference to the Conservative-led government’s budget-cutting measures, which some feel amount to a war on lower-income workers. Many strikers said that the policy of decreasing welfare benefits and tax credits while reducing spending has left them struggling at a time of rapidly rising prices.

    Up to two million set for UK strike - Public sector workers are staging a strike over pensions in what unions say is set to be the biggest walkout for a generation. Schools, hospitals, courts and government offices around the UK are among services being disrupted, as more than 1,000 demonstrations take place. The chancellor urged more talks, saying strikes would not achieve anything. Unions object to government plans to make their members pay more and work longer to earn their pensions. The strike is having the following effects:

    Pensions, like life, aren't fair - Yesterday, British public-sector workers went on strike in response to demands that they work longer and contribute more to their pensions. I am struck by how much the word "fair" is being used. Dave Prentis, the general secretary of Unison (Britain's largest trade union), calls proposed reforms unfair to public-sector workers. For his part, Education Secretary Michael Gove points out that continuing current funding of pensions is unfair to the taxpayer. Each have a point; public-sector workers are going to have to pay more and get less than what they were initially promised. One also feels for the taxpayers in the private sector, who probably lack a defined-benefit pension, and who must fund their own retirement and bear investment risk. The sources of current troubles are clear. People are living longer and there are ever fewer workers for each pensioner. Growth and returns on investments have fallen short of the expectations held at the time many obligations were assumed. And efforts to boost weak economies have left interest rates at extremely low levels, complicating efforts to shore up pension funds.

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