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

Saturday, January 28, 2012

week ending Jan 28

Fed's Balance Sheet Unchanged In Latest Week - The Fed's asset holdings in the week ended Jan. 25 were $2.922 trillion, level with a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities grew to $1.662 trillion on Wednesday from $1.652 trillion in the previous week. The central bank's holdings of mortgage-backed securities decreased to $835.62 billion from $847.43 billion. The report Thursday showed holdings of Treasury securities with a remaining maturity exceeding five years rose over the past week, while the amount of shorter-term maturities declined. Meanwhile, Thursday's report showed total borrowing from the Fed's discount lending window was $8.18 billion on Wednesday, down from $8.60 billion a week earlier. Commercial banks borrowed $7 million from the discount window, up from $2 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts was $3.407 trillion, up from $3.403 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts grew to $2.679 trillion from $2.677 trillion in the previous week. Holdings of federal agency securities grew to $728.20 billion from the prior week's $726.56 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances -- January 26, 2012

Fed Begins an Effort to Remove All Doubt on What It’s Doing - The Federal Reserve, which does not like to surprise financial markets, has worked unusually hard to prepare the public for the changes to its communications policies that it plans to introduce on Wednesday. While the changes could make it easier for the Fed to move ahead with another round of asset purchases later this year, by helping to explain why the economy needs additional stimulus, officials have indicated that any such plans remain on the back burner, and may stay there so long as the economy continues to recover. Indeed, the Fed is able to focus on communication in part because it is no longer devoting all of its energies to crisis management. These are improvements that the Fed’s chairman, Ben S. Bernanke, has waited five years to make, reflecting his vision for how the Fed should operate in periods of calm, too. The centerpiece of the new policies is a plan to publish the predictions of senior Fed officials about the level at which they intend to set short-term interest rates over the next three years — including when they expect to end their three-year-old commitment to keep rates near zero. The Fed also will describe the expectations of those officials for the management of the central bank’s vast investment portfolio.

Federal Reserve unlikely to raise interest rates before late 2014 - The Federal Reserve said Wednesday that it is unlikely to raise interest rates before late 2014, extending a period of record-low rates by more than a year. The Fed says it is keeping rates low to help lift a weak but modestly growing economy. The new timeframe hints at details in the Fed's quarterly economic forecast, which will be released later. That will show in what year policy members expect the first increase in the Fed's benchmark interest rate. The Fed has kept its key interest rate at a record low near zero for three years. In a statement released after its two-day meeting, the Fed said the economy is growing moderately, despite some slowing in global growth. It held off on any other new steps to boost the economy. The statement was approved on a 9-1 vote. Jeffrey Lacker, president of the Richmond regional Fed bank, dissented, saying he objected to the new time period. The extended timeframe is a shift from the Fed's previous plan to keep the rate low at least until mid-2013. The change is intended to reassure consumers and investors that they will be able to borrow cheaply well into the future. And some economists said it could lead to further Fed action to try to invigorate the economy.

The Fed will Keep Rates at "Exceptionally Low Levels" Through Late 2014 - The Press Release describing the decisions of the Fed's monetary policy committee decisions was released this morning, and it is very similar to the press release from its last meeting in mid December with one notable exception. The Fed announced a commitment to "maintain a highly accommodative stance for monetary policy" by keeping the federal funds rate at "exceptionally low levels" at least through late 2014. The previous policy was to keep rates low through "at least through mid-201," so this extends the commitment by a year and a half and represents an easing of policy (I would have preferred more aggressive easing, it's not clear how much effect extending the commitment will have -- I don't expect it to be large -- but this is certainly a step in the right direction). As for the tone of this statement relative to the statement in December, there is not much of a difference. There are a few minor changes, for example the statement about business investment is slightly more negative this time, and the committee dropped a statement about continuing to monitor inflation and inflation expectations closely (the "subdued outlook for inflation over the medium run" is one of the reasons the Fed decided to ease policy further), but beyond the change described above the two statements are very similar.

Fed sets path for three years of low rates - The US Federal Reserve has set the stage for three more years of ultra-loose monetary policy in the world’s largest economy, prompting an immediate fall in bond yields. The rate-setting Federal Open Market Committee predicted low interest rates until late 2014 and set a formal inflation objective of 2 per cent, reflecting chairman Ben Bernanke’s long-held goal of providing greater transparency. The Fed’s previous estimate was for rates on hold until at least mid-2013. The FOMC downgraded its estimate of growth in the coming quarters from “moderate” to “modest” and Mr Bernanke indicated that another monetary boost for the economy – most likely another round of quantitative easing, or QE3 – remained an option. “We are prepared to take further steps in that direction if we see that the recovery is faltering or if inflation is not moving toward target,” Mr Bernanke said. The Fed also published its first detailed forecasts of future interest rates. They revealed deep divisions within the central bank and muted some of the impact of the late 2014 date in its statement. Three out of 17 officials on the FOMC would like to raise rates this year, and three more in 2013, while two think the first rise should not come until 2016. The divergence of views is an early challenge to the new communications framework that Mr Bernanke has championed for more than a decade. Mr Bernanke urged investors to focus on the date in the FOMC statement, saying that the committee will always “trump” the individual forecasts.

Bottom Line: Federal Reserve Says No Rate Hikes Until At Least Late 2014 - The U.S. Federal Reserve said Wednesday it will not raise interest rates until at least late 2014, even later than investors expected, in an effort to support a sluggish economic recovery. Without making major shifts to its outlook for the economy, the central bank described the unemployment rate as still elevated and said it expects inflation to remain at levels consistent with stable prices. During a press conference Wednesday afternoon, Fed Chairman Ben Bernanke said the 2014 forecast is simply the Fed’s “best guess.” Bernanke said the central bank’s ability to forecast that far out is limited, and that the Fed could adjust the time frame if economic conditions change. Still, he added, all signs suggest the Fed won’t change its record-low rate for nearly three years. “Unless there is a substantial strengthening of the economy in the near term, it's a pretty good guess we will be keeping rates low for some time,”

Fed: Interest rates unchanged, no rate hikes likely till late 2014 – Consumers and businesses can brace for another two years of exceptionally low interest rates after the Federal Reserve said Wednesday that it is likely to keep its rates below 1% until late 2014 because of the economy's continued weakness. he decision means the era of historically low rates on loans — and savings — that the Fed kicked off at the peak of the financial crisis in late 2008 will run longer unless the economy improves faster than Fed policymakers predict. The Fed said unemployment would stay near its 8.5% level through the end of this year and could still be in the range of 6.7% to 7.6% at the end of 2014. Housing remains depressed while growth in business investment has slowed, it said.Meanwhile, inflation is staying below 2%. Fed Chairman Ben Bernanke left open the possibility that the Fed could do more to fight joblessness, even at the short-term risk of inflation above the bank's 2% annual target. Text of Federal Reserve statement Jan. 25 : New voting members at Fed : Fed's economic projections

Fed Watch: Notes on the Fed Meeting - The basics are well known at this point. The Fed extended its expectation for low rate out through the end of 2014, with the new hawk on the FOMC, Richmond Fed President Jeffrey Lacker, dissenting. The growth and inflation forecasts for 2012 were downgraded, while the unemployment forecast was upgraded slightly. Individual forecasts of the path of the Federal Funds rate were revealed, with six participants anticipating interest rate hikes in 2012 or 2013, in contrast to the broader expectation for low rates through 2014. The Fed now has an explicit inflation target of 2%. No new QE at this time. [...] Bottom Line: The Fed is poised for additional easing, but the next round of QE is not quite a certainty yet. But I think we would need to see some significant upside surprises in the data in the near term to put plans for additional easing on hold. Watch the unemployment rate. We are already at 8.5%, the upper end of the Fed’s forecast. The lower end is just 8.2% - not far away, and something that is plausible at early as next week. The Fed’s forecast just doesn’t feel right given the 0.6 percentage point decline over the past four months.

Analysis: Bernanke paves the way for QE3 - A few quick thoughts ...
• Fed Chairman Ben Bernanke made it clear that no decision on additional asset purchases has been made and that any additional balance sheet expansion would be a "collective" decision, however ...
• Bernanke made it clear that maximum sustainable employment and stable prices (defined as 2% inflation of personal consumption expenditures) are on "equal footing".
• The current projections are for unemployment to be significantly too high for years and inflation to be at or below the Fed's target. That is a strong argument for additional monetary accommodation.
• In the Q&A, Bernanke made it clear that even if inflation moved above the target - and unemployment was still very high - the Fed would only slowly pursue policies to reduce the inflation rate.
Although the FOMC might still wait until one of the two day meetings in April or June, the likelihood of QE3 being announced at the March 13th meeting has increased significantly.

The FOMC Sticks Out Its Neck - Again -  The first big piece of news is in the FOMC statement in this paragraph:  To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The previous statment from December read as follows:  The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions to warrant exceptionally low levels for the federal funds rate at least through mid-2013. So, policy is now to be more accommodative. Presumably something changed. Somehow the state of the world must look worse in some unexpected way on dimensions the Fed cares about. What could it be? In the first paragraph of the current statement, we learn that the recovery is proceeding, perhaps more slowly than might have been anticipated a year or two ago, but maybe a little more quickly than was expected at the last FOMC meeting. Inflation has decreased slightly, but the Fed had expected that, and the inflation rate is increasing in terms of core measures. So why the policy change?

Fed Statement Following January Meeting - The following is the full text of the Fed’s statement following its January meeting:

Parsing the Fed: How the Statement Changed - The Fed’s statement following the January meeting noted a shift in policy toward low rates for a more extended period. The move came amid expectations of continued slow growth and increased global risks. (Read the full January statement.)

Richmond Fed President Lacker on FOMC Dissent - At the recent meeting that concluded on January 25, this guidance stated that the Committee currently anticipates that 'economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.'"I dissented because I do not believe economic conditions are likely to warrant an exceptionally low federal funds rate for so long. I expect that as economic expansion continues, even if only at a moderate pace, the federal funds rate will need to rise in order to prevent the emergence of inflationary pressures. This increase in interest rates is likely to be necessary before late 2014. "In addition, the Summary of Economic Projections (SEP) now contains detailed information on the forecasts of Federal Reserve governors and Reserve Bank presidents for the evolution of economic conditions and the federal funds rate under appropriate policy. My dissent also reflected the view that statements about the future path of interest rates are inherently forecasts and are therefore better addressed in the SEP than in the Committee's policy statement.

More evidence that Bernanke is a dove - More on the endlessly interesting Bernanke press conference: Robin Harding from the Financial Times: Mr. Chairman, while I look at these forecasts for 2014, the median of the forecast is I think 0.75 and the mean is 1.12 percent. If I were to draw a line for these–these dots, how should I draw it so I best understand what the FOMC is most likely to do? I expected Bernanke to dodge the question.  He’d emphasized elsewhere that these were just forecasts, and when the time came the Fed would have to look at current data.  (After someone pointed out that 11 of 17 favored increased rates by late 2014, despite high unemployment.)   And he’d talked about why the names attached to each forecast were being kept secret. But he did answer the question: I guess my suggestion would be to look at the median, the middle of the–of the distribution because we do have a democratic process in the Committee, and so the median will give you some sense of where the weight balances against the higher–in favor of higher or lower–lower rates. Again, we did note that in support of our assessment of late 2014, which is a Committee decision and of course there was a 9 to 1 vote in favor of that, but that is supported by the observation that 11 of the 17 participants expect the funds rate at the end of 2014 to be 1 percent or less.

A less opaque Fed will become boring - The Golden Age of the Fed-watcher is at an end.Intense interest in the doings of the US Federal Reserve began in the 1970s, as the end of the Bretton Woods exchange rate system led to an era of economic volatility, and interest rate movements became the news that fuelled rapidly globalising financial markets. There arose a mystique around the US central bank. Like an order of wizards, Fed officials spoke in riddles and did not announce their actions, but left the world to infer them from their consequences in financial markets. The central bank was the fief of two formidable chairmen: Paul Volcker from 1979 to 1987 and Alan Greenspan from 1987 to 2006. Demand for Fed-watching and analysis grew and grew into a cottage industry that keeps hundreds of economists, analysts and journalists in gainful employment. But with yesterday’s announcement of an explicit Fed inflation objective of 2 per cent and the launch of forecasts by the Fed of its own future interest rates, there is now far less room for markets to misunderstand the central bank’s intentions. The chairmanship of Ben Bernanke has meant a last flare of Fed-watching activity, as the central bank launched into bail-outs and quantitative easing, but when economic conditions eventually return to normal its monetary policy intentions will be very clear. The Fed will become boring.

The Fed’s New Interest Rate Forecasts - kid dynamite - You may have heard that the Federal Reserve will be releasing a new form of  interest rate forecasts starting with Wednesday’s policy meeting.  FT Alphaville has a great Q&A on what the Fed is trying to accomplish, and reasons why it may or may not work. I disagree with the theory that placating market assumptions about interest rates in the future – reassuring the market that rates will stay low for a long time -  will make it more likely for people to want to borrow NOW.  Let me explain:  right now, one appealing factor of home buying/selling decisions is that interest rates are very low – you can afford to buy more house.   If I think that interest rates are going to remain low for a long period of time, I will be in no hurry to lock in this low rate on the debt I’m borrowing – I will be in no hurry to go out and buy a house….. Same for issuing fixed rate debt:  if I’m a company looking to expand and I think interest rates will be going higher, I have more incentive to borrow money NOW, at this low rate.   But if the Fed assures me that rates will be low for a long time, then I have no reason to rush my borrowing (and subsequent spending) plans.   It seems to me that by assuring the Market that rates will be low for a long period of time, the Fed is giving borrows an excuse to NOT borrow (and thus not spend) now with any sense of urgency.

Is QE/ZIRP Killing Demand? - Warren Mosler recently ran a very succinct account of why the Fed/Bank of England’s easy monetary policies – that is, the combination of Quantitative Easing and their Zero Interest Rate Programs – might actually be killing demand in the economy.Mosler’s argument runs something like this: when interest rates hit the floor they suck interest income payments that might flow to rentiers and savers. And no, we’re not just talking about Johnny Moneybags refusing to buy his daughter a new Prada handbag. We’re also talking about regular savers and, as the Fed recently noted, pension funds seeing their income fall – not to mention certain industries, like insurance, finding their profits lowered (and hence their premiums raised?). Mosler sums it up well:Lowering rates in general in the first instance merely shifts interest income from ‘savers’ to borrowers. And with the federal government a net payer of interest to the economy, lowering rates reduces interest income for the economy.  He then goes on to make the point that we’d have to see borrowers spending more than savers to see any real stimulative effect on the real economy. But alas, such is probably not the case. The only way a rate cut could add to aggregate demand would be if, in aggregate, the propensities to consume of borrowers was higher than savers. But fed studies have shown the propensities are about the same, and, again, so does the actual empirical evidence of the last several years. And further detail on this interest income channel shows that while income for savers dropped by nearly the full amount of the rate cuts, costs for borrowers haven’t fallen that much, with the difference going to net interest margins of lenders. And with lenders having a near zero propensity to consume from interest income, versus savers who have a much higher propensity to consume, this particular aspect of the institutional structure has caused rate reductions to be a contractionary and deflationary bias.

The Fed's Long-Term Interest Rate Forecast May Backfire - The Fed is about to release it first long-term interest rate forecast. Gavyn Davies explains how this could enable U.S. monetary policy to add more stimulus without actually expanding its balance sheet. It would do so  by managing nominal expectations. Here is Davies:What is the motivation behind these changes? Mr Bernanke has normally justified such steps in terms of stabilising expectations about the Fed’s genuine intentions, especially on inflation and the forward path for interest rates. At a time when the extension of the balance sheet is causing political difficulties for the Fed, and when inflation expectations could become unhinged by the rapid expansion of the monetary base, the chairman is looking for alternative ways of easing monetary conditions without printing more money. With short rates not able to drop below zero, the real rate of interest could be too high to equilibrate savings and investment in the economy, so the normal monetary route back to lower unemployment might be blocked. The answer, said Krugman, was for the central bank deliberately to increase the expected rate of inflation, and therefore to cut the real rate of interest while nominal short rates were fixed at zero. That is how the Fed hopes it will turn out. I think it will backfire because what observers really need is to know where the expected path of the federal funds will be relative to the expected path of natural (or equilibrium) federal federal funds.  Here is what I said about this previously:

Between Various Rocks and Various Hard Places:  Eventually, this ceases to be an academic question and becomes one of actual financial impact on people via higher taxes, smaller checks, lower purchasing power, etc. For example, the dismal failure of the Federal Reserve's QE2 goosing of the economy has eroded its political support and thus its freedom of action. Fed Chairman Ben Bernanke has the look of someone who is realizing his own limits and is thus pondering retirement (a speculative forecast I made last year, i.e. that Ben wouldn't last and would be forced out or quit). Bernanke has more or less confessed that he 1) doesn't understand why the economy isn't responding "like it should" i.e. as described in textbooks, and 2) that he is tired of the political heat created by QE2 and he is dropping the burden of "saving" the U.S. economy. He looks like a person who has lost his confidence and is going through the motions until he can figure out a way to exit the leadership stage gracefully. It is painfully obvious to all that his QE2 did nothing to heal the real economy while attracting global attention and ire. The whole project was lose-lose, with the only gain being "extend and pretend."

The FOMC Confuses Me - The FOMC has spoken and here is what it said (my bold): To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.Now what does this all mean?  The first bold claims the Fed has been running a highly accommodative monetary policy and will continue to do so. Really, the Fed has been running a highly accommodative monetary policy?  I did not realize that an ongoing nominal spending slump, high cyclical unemployment, elevated money demand, a shortage of safe assets, and a persistent output gap were signs of a highly accommodative Fed policy. Nor did I realize that the Fed Chairman acknowledging that the Fed may need to do further large scale asset purchases in the near future was also considered a sign that the Fed was being highly accommodative.

How the Fed Makes a Forecast - The highlight of Wednesday’s Federal Reserve meeting will be the release for the first time of internal projections by central bank officials of where they think short-term interest rates should be in the coming years. The projections matter so much because the market’s expectations for future interest rates shape where interest rates are today, which in turn affects the economy and investment decisions. The exercise raises a question worth exploring before the release: How do Fed officials go about making forecasts in the first place? The Fed has a short primer on its website here. A speech by Betsy Duke, a Fed governor in Washington, also shines some light onto the process:

The Long, Long Term View Of Interest Rates - Sometimes a picture really is worth a thousand words... and a couple of centuries. Graphing 222 years of U.S. long-term interest rate history isn't exactly actionable information, but it's damn interesting just the same. You want perspective? Here it is in spades. Heck, it's also a great party favor for your next financial mixer. Thanks to Barry Ritholtz at The Big Picture and the primary source, Bianco Research, for this deep dive data dig. The obvious point is that we're near all-time lows in the long bond. If that doesn't spark a few thoughts, nothing will.

Reuters IFR: Bankers decry Fed’s secrecy in Maiden Lane auction - A new, privately arranged process used by the Federal Reserve Bank of New York this week to accept highly confidential bids from only four broker-dealers for US$7bn of its Maiden Lane II portfolio raised the ire of other market players shut out of what they call a glaringly non-transparent strategy.  Credit Suisse ultimately won the auction today, buying US$7.014bn in face value from the approximately US$20bn remaining in the MLII portfolio of distressed RMBS assets formerly owned by AIG. The portfolio originally had a face value of more than US$30bn, but about US$9.5bn was sold in a public auction process last spring that eventually fizzled and was halted indefinitely.   The latest auction was prompted by an initial reverse inquiry from Goldman Sachs, but the Fed opted to honor an original commitment it laid out in March 2011 to adhere to a competitive process to dispose of the former AIG-owned distressed securities. It therefore opened up the bid to a limited pool of market players.As IFR first reported last Friday, America’s largest regional Federal Reserve Bank took bids on the MLII parcel from only four banks: Goldman Sachs, Barclays Capital, Bank of America Merrill Lynch, and Credit Suisse. The auction was tightly under wraps when it started today, as the Fed required the dealers, as well their investor accounts, to sign strict non-disclosure agreements (NDAs) regarding the specific bonds and prices on the bid list.

Fed says long-term inflation goal is 2% -  The Federal Open Market Committee said Wednesday that the long-term inflation goal is 2%, as measured by the annual change in the price index for personal consumption expenditures. That's the most explicit the Fed has been in terms of setting an inflation target. Eleven of the 17 Federal Open Market Committee participants believe a rate hike would not be appropriate before 2014, according to the first-ever rate forecasts published Wednesday. Three members want the first hike by this year, three want them in 2013, five want them in 2014, four more in 2015, and two in 2016. The Fed also forecasts GDP growth between 2.2% and 2.7% this year, an unemployment rate between 8.2% and 8.5% and PCE inflation between 1.4% and 1.8%; the growth forecast is down from November levels, as are the jobless and inflation views. The Fed sees longer-term rates reaching between 4% and 4.5%.

FOMC: Sets 2% Inflation Target, January Summary of Economic Projections (SEP) and Press Briefing - Earlier the FOMC released a statement for the January meeting.  Here are the longer run projections The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. ... FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent. Here are the updated forecasts from the January meeting. The key details are below the video. "The shaded bars represent the number of FOMC participants who project that the initial increase in the target federal funds rate (from its current range of 0 to ¼ percent) would appropriately occur in the specified calendar year." Most participants project the first rate hike will appropriately occur in 2014 or later. "The dots represent individual policymakers’ projections of the appropriate federal funds rate target at the end of each of the next several years and in the longer run. Each dot in that chart represents one policymaker’s projection." Most participants think the Fed Funds rate will be in the current range into 2014. Then there is some disagreement.

Federal Reserve Abandons Core Consumer Price Index - Amidst all the hoopla surrounding the Federal Reserve's announcement yesterday of long term policy, the Fed statement was very clear that the relevant measure is the deflator for personal consumption expenditures, which is the broadest measure of prices in the economy. The Fed made a fundamental policy change in moving away from the concept of core Consumer Price Index which excludes food and energy, as its key inflation measure. Their exact words were,  The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate targets.

Two Percent Is Not Enough - Krugman - I’m being asked for comments on the Fed’s low-rates-until-2014 announcement. It’s a step in the right direction — and it has had a visible effect on markets, pushing long-term rates down, which is all good. But why is the inflation target only 2 percent? Actually, I understand why; the inflation hawks are still a powerful force that must be appeased. But the truth is that recent experience has made an overwhelming case for the proposition that the 2 percent or so implicit target prior to the Great Recession was too low, that 4 or 5 percent would be much better. Even the chief economist at the IMF says so.  The thing is, if we’re going to lock in a formal inflation target, now would be a good time to get it right, instead of waiting until the memory of the crisis fades and everyone gets complacent again.

Inflation target tyranny - Ever since the first signs of the global financial crisis emerged back in 2007, the central bankers of the developed world (most importantly the US Federal Reserve, the European Central Bank and the Bank of England) having been making policy on the run, trying one expedient after another, even while insisting that nothing has really changed.  The central banks of the leading developed countries failed spectacularly in the lead-up to GFC. Their failure was centred on what most central bankers still regard as the great achievement of the 1990s, the shift to a system of ‘inflation targeting’, in which the sole objective of monetary policy was to keep the rate of inflation in a target range, typically close to 2 per cent.  Inflation targeting led central bankers, most notably Alan Greenspan of the US Fed, to ignore or even applaud the unsustainable bubbles in speculative real estate that produced the crisis, and to react too slowly as the evidence emerged. Worse still, in the post-crisis environment, achievement of inflation targets has no longer promoted stable economic growth. Rather, low  inflation has been a drag on growth. But with inflation clearly under control, central bankers like former European Central Bank President Jean-Claude Trichet have been able to describe their own performance as ‘impeccable’, even as the economies and currencies they manage appear headed for collapse.

Fed Inflation Hawks Moved Bond Market Most - The Federal Reserve‘s inflation hawks had the greatest influence on the bond markets in 2011, even as the central bank as a whole pursued economic-stimulus measures and promised to keep interest rates ultra-low for years. Federal Reserve Bank of St. Louis President James Bullard, who spoke out against the Fed’s bond-buying programs, caused the greatest movement in the bond market last year among 17 Fed officials, according to an annual analysis from Macroeconomic Advisers LLC released Friday. Bullard caused a cumulative 17-basis-point swing to the two-year Treasury note’s yield during his 19 policy speeches last year. The weight of his words was notable as he didn’t have a vote in 2011 on the Federal Open Market Committee, the Fed’s interest-rate setting body. Bullard matched Philadelphia Fed President Charles Plosser as having the greatest impact per speech, just less than a full basis point. Plosser, like Bullard, worries that the Fed’s policies could stoke inflation. He was one of three voters last year to protest the central bank’s explicit commitment to keep the federal-funds rate low at least through mid-2013. Fellow dissenter Dallas Fed President Richard Fisher had the second-largest cumulative impact, moving the two-year note’s yield by 14 basis points during 21 speeches, the most among Fed officials.

Newt Gingrich, Gold and Property Rights - Simon Johnson - Newt Gingrich wants to broaden his primary appeal by invoking traditional conservative values and by extending his list of recommended policy changes. Unfortunately, he has chosen to follow the lead of Ron Paul in moving toward the gold standard, rather than pick up on the ideas of Jon Huntsman — who emphasized the need to re-establish property rights in the United States. Ron Paul is right to question the balance of power that lies behind our monetary system (as I wrote here three weeks ago). But proposing the gold standard — or a commission to study how to reinstate the gold standard — is no kind of solution to these issues. The imbalance of power in the United States at the end of the 19th century, under gold, was just as extreme as it is today. And the idea that pegging the value of the dollar or any currency relative to gold leads to financial and economic stability is an illusion. During the 19th century the dollar was freely convertible into gold — except when it wasn’t.  The gold standard is just a rule and rules are broken by powerful people under all monetary systems. Assuming that this won’t happen in any future arrangement just encourages illusions.

 Fed Signals That a Full Recovery Is Years Away — — The Federal Reserve1, declaring that the economy would need help for years to come, said Wednesday it would extend by 18 months the period that it plans to hold down interest rates in an effort to spur growth. The Fed said that it now planned to keep short-term interest rates near zero until late 2014, continuing the transformation of a policy that began as shock therapy in the winter of 2008 into a six-year campaign to increase spending by rewarding borrowers and punishing savers. The economy expanded “moderately” in recent weeks, the Fed said in a statement released after a two-day meeting of its policy-making committee, but jobs were still scarce, the housing sector remained deeply depressed and Europe’s flirtation with crisis could undermine the nascent domestic recovery. The Fed forecast growth of up to 2.7 percent this year, up to 3.2 percent next year and up to 4 percent in 2014, but at the end of that period, the central bank projected that the recovery would still be incomplete. Workers would still be looking for jobs, and businesses would still be looking for customers. “What did we learn today? Things are bad, and they’re not improving at the rate that they want them to improve,”

Is the Fed Undermining the Recovery? - By most measures the economy in the past few months seems to be improving. Yet, on Wednesday, the U.S. central bank said that it plans to keep short-term interest rates near zero until at least late 2014. That is 18 months longer than its previous promise of mid-2013. Low interest rates usually indicate the economy is weak. So a promise to keep interest rates low for another 2 1/2 years, suggests the Fed thinks the economy will be in pretty bad shape for, well, about another 2 1/2 years. Or maybe not. When Bernanke was pressed at the press conference following the Fed’s interest rate announcement on why they chose late-2014 and not, say, 2015 or 2020 — after all, the Fed’s own prediction was that unemployment would still be at a high 7.5% in late 2014 — Bernanke didn’t have a good answer. We all know now how poor the Fed’s ability to predict the economy is. Recently released documents from Fed meetings back in 2007 show that almost none of the Fed’s policy makers thought we were headed for a recession at the time. So why do it? Like many other things the Fed does, to help the markets. Promising low interest rates should help goose the stock and bond markets, and it did this time around as well. Shortly after the Fed made its announcement both stocks and bonds rose. The question is whether it will have the opposite affect on the real economy.

IMF: European Debt Poses Risk to U.S. - The European debt crisis threatens to spill over to the U.S. and emerging markets, requiring a bigger financial firewall, more bank recapitalization and limits on bank deleveraging, the International Monetary Fund said. While European policy makers have taken steps to contain the crisis, it still poses risks to U.S. stability and may spread to emerging markets beyond central and Eastern Europe, the IMF said. The U.S. in particular is at risk, including the direct exposure of banks, according to the IMF. “The United States and other advanced economies are susceptible to spillovers from a potential intensification of the euro-area crisis,” the IMF wrote in an update of its Global Financial Stability Report released today. Some countries must overcome political obstacles to reducing budget deficits, it said. The Washington-based lender said Europe should build a larger “firewall” to contain the crisis and create a monitor to ensure that “deleveraging plans are consistent with sustaining the flow of credit to support economic activity and to avoid a downward spiral in asset prices.”

The IMF Downgrades Global Growth But Sees No Fallout For The US - Does the International Monetary Fund's diminished outlook for the global economy lay the groundwork for thinking that recession risk is elevated for the U.S.? Perhaps, although the IMF's latest numbers suggest otherwise. Indeed, IMF projections for US GDP remain intact. "Global growth prospects dimmed and risks sharply escalated during the fourth quarter of 2011," according to the World Economic Outlook report, which was released yesterday. The world economy will expand 3.3% in 2012, the IMF predicts—down from its previous 4.0% forecast. Quite a bit of the downgrade is due to deteriorating conditions in the euro area, which the IMF says will contract by 0.5% this year. But the stronger headwinds in Europe aren't projected to slow the U.S. economy, which is expected to expand by 1.8% in 2012, a rate that's unchanged from the IMF's previous forecast in September. In fact, the latest numbers from Europe suggest there may more strength than it appears and so the recession in the euro zone may be milder than expected.

Is the Recession Just a Lack of Housing Related Demand? - Dean keeps saying It is also important to note that the financial crisis has little direct relevance to the current weakness of the economy. The problem is simply that there is nothing to replace the demand generated by the housing bubble. Consumption is actually unusually high relative to income and investment in equipment and software is back to its pre-recession share of GDP. I just don’t know in what sense this is a meaningful reading of the facts. CPE is high relative to GDP but this is largely a way of saying that Medicare and Medicaid keep paying on behalf of beneficiaries even during a recession. As I have mentioned many times, if we look at real retail sales they are no where near recovered: and of course the gap is largely cars and trucks. Equipment and Software is growing well, though importantly not in nominal terms in real terms. So, I can’t easily get good charts out of BEA and FRED doesn’t have exactly what I want but consider this: Here is the growth Equipment and Software on the balance sheets of Non Nonfinancial Corporate Business. Now here is Investment in Equipment and Software from the NIPA tables.There are a couple of things going on here. One, there is depreciation, which is not counted in the gross investment figures. Two there are financial corporations which are big investors in Equipment and Software, by which we mean, Custom Software.

Less of a menace from oil - If I had to pick the economy's likeliest spoiler this year, it would be oil prices. Whether it's Iran trying to close the strait of Hormuz or the Arab Spring  wafting through Saudi Arabia, I have no idea; but nothing matches the track record of oil in delivering nasty economic surprises. But over the long run, something important is happening to the role of imported oil in the American economy: it's shrinking. This comes through quite strikingly in the outlook released today by America's  Energy Information Administration. The remarkable expansion of U.S. production from shale gas and unconventional oil sources such as the Bakken formation in North Dakota are relatively well known. There is, however, less awareness that American consumption is barely growing (see the nearby chart). The EIA has sharply revised down how much liquid fuel it reckons America will consume in 2035, to 20m barrels a day, from 22m it projected last year, which would be below the 2005 peak. Couple that with rising domestic production, and America will rely on net imports for just 36% of its liquid fuel needs in 2035, compared to 60% in 2005.

Will December's Economic Momentum Survive The Month's Final Updates? - The full profile of the U.S. economy for December is nearly complete, and so far the numbers continue to look mildly encouraging. It’s hardly a perfect report card, and we’re still waiting for some key numbers. But based on the data released so far, it appears that growth had the upper hand in the last month of 2011. As the table below shows, 10 of the 14 economic reports for December that are available to date posted gains last month vs. November. Even better, 11 of the 14 were in the black on a year-over-year basis through December. Among the leading indicators, 6 or the 8 currently known reports for last last month are up vs. the year-earlier figures, suggesting that the expansion will roll on.

Dwelling in Uncertainty - I want to emphasize again that I am neither a cheerleader for recession, nor a table-pounder for recession. It's just that given the data that we presently observe, an oncoming recession remains the most probable outcome. When unseen states of the world have to be inferred from imperfect and noisy observable data, there are a few choices when the evidence isn't 100%. You can either choose a side and pound the table, or you can become comfortable dwelling in uncertainty, and take a position in proportion to the evidence, and the extent to which each possible outcome would affect you. With most analysts dismissing the likelihood of recession, I have been vocal about ongoing recession concerns not because I want to align myself with one side, but because the investment implications are very asymmetric. A slow but steady stream of modestly good economic news is largely priced in by investors, but a recession and the accompanying earnings disappointments would destroy some critical pillars of hope that investors are relying on to support already rich valuations. We're always open to shifting our investment stance and outlook in response to new evidence, but the "optimistic" evidence that many observers are using to discard recession concerns is generally based on coincident or lagging data.

WSJ/NBC Poll: Voters View Economy More Positively - A new Wall Street Journal/NBC News poll raised caution signs for Republicans’ strategy of putting the economy at the center of his presidential campaign. Partial results, released Wednesday, found voters feeling more positive about the economy and President Barack Obama’s handling of it. Some 30% of those surveyed believed the country was headed in the right direction, up eight percentage points from a month ago. Some 60% said the country was on the wrong track, down from 69% in December and from 74% last October. The question is considered an important measure of voters’ mood. For the first time in seven months, the poll found more people approving of Mr. Obama’s job performance than disapproving, 48% to 46%. Some 45% said they approved of his handling of the economy – up six percentage points from mid-December. More voters are encouraged by recent glimmerings of economic improvement: 37% said they expected the economy to get better over the next year, while 17% said they expected it to get worse. Also, expectations have risen since December, when optimists outnumbered pessimists 30% to 22%. The poll of 1,000 adults was conducted from Sunday through Tuesday and had a margin of error of plus or minus 3.1 percentage points.

How’s The Recovery Doing: A Look at the Data -- GDP useful as a summary stat for people who are not deep in the weeds but can you say that you looked at any GDP report current or past and said “Ah, just looking at Census and BLS data I couldn’t really get a sense for what direction the economy was moving in at the time but now I get it” That means the information content is pretty low. A couple of things that are of interest. New Claims bounced back and pretty strongly. There was a little more weakness here than I expected and so that always downgrades our estimate of the chances the recovery will catch. Nonetheless, its looking pretty good. This recovery has shown more churn than in the past, and so we have had stronger job growth relative to new claims as compared to the last 25 years.  So a key question is – is the reduction in new claims showing a normalization between the relationship between new claims and job growth or is it suggesting even faster job growth. I actually don’t have a good angle to think about that problem.

December Economic Activity Improved, Chicago Fed Reports - Yesterday's news that the Chicago Fed National Activity Index (CFNAI) increased last month provides another data point to consider in the debate about recession risk. Looking backward doesn't necessarily tell us what's coming, but it's clear that December's economic momentum strengthened. January and beyond, of course, are still open to interpretation. "Led by improvements in production- and employment-related indicators, the Chicago Fed National Activity Index increased to +0.17 in December from –0.46 in November," according to an accompanying statement. "The index’s three-month moving average, CFNAI-MA3, increased from –0.19 in November to –0.08 in December—its highest value since March 2011." CFNAI is a weighted average of 85 indicators of U.S. economic activity. The Chicago Fed recommends reading its 3-month moving average (CFNAI-MA3) as follows: a value below -0.70 after a period of economic expansion "indicates an increasing likelihood that a recession has begun." By that standard, the December CFNAI-MA3 reading of -0.08 suggests that another downturn was nowhere in sight last month.

Chicago Fed Says Economic Activity Improved in December - According to the Chicago Fed National Activity Index, in December economic activity improved, but the current level remains slightly below its historical trend. Here are excerpts from the report: Led by improvements in production- and employment-related indicators, the Chicago Fed National Activity Index increased to +0.17 in December from –0.46 in November. Two of the four broad categories of indicators that make up the index improved from November, and only the consumption and housing category's contribution remained negative in December.  . [Download PDF News Release] The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. The index is constructed so that the historical index average is zero. Postive monthly values indicate above-average growth, negative values indicate below-average growth.  The first chart below is based on the complete CFNAI historical series dating from March 1967. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of coincident economic activity. I've also highlighted official recessions.

Fourth Quarter GDP Growth - I’ll try to get to some details later, but fourth quarter GDP just came out and the growth rate was 2.8%, slightly below expectations but a OK pop nevertheless. Remember, the rule of thumb here—and while it doesn’t hold quarter-to-quarter, it’s pretty reliable year-to-year—is that for every point real GDP grows about the trend rate of 2.5%, the unemployment rate should come down about a half a percent.  So a sustained growth rate close to 3% should shave one-quarter of a percentage point off of the jobless rate. The question is sustainability.  Headwinds persist—Europe (and the UK) pose growth and financial contagion risks, oil price spikes, and fading stimulus all come to mind, and the capacity of this Congress to self-inflict economic wounds is also hanging out there (failure to extend the UI and payroll tax cut, e.g., would definitely hurt near-term growth). One notable data signal from the report is the growth rate of final sales, which excludes inventory buildups or drawdowns, and is thus considered a cleaner measure of actual real-time demand in the economy.  Final sales grew only 0.8% last quarter, meaning inventory buildup was a big part of the topline number and suggesting that the real, underlying growth rate of the ongoing expansion is still too slow.

Real GDP increased 2.8% annual rate in Q4 -- From the BEA:  - Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.8 percent in the fourth quarter of 2011 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.  The acceleration in real GDP in the fourth quarter primarily reflected an upturn in private inventory investment and accelerations in PCE and in residential fixed investment that were partly offset by a deceleration in nonresidential fixed investment, a downturn in federal government spending, an acceleration in imports, and a larger decrease in state and local government spending.  The following graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The dashed line is the current growth rate. Growth in Q4 at 2.8% annualized was below trend growth (around 3%) - and very weak for a recovery - but the best since Q2 2010. A few key numbers:
• Real personal consumption expenditures increased 2.0 percent in the fourth quarter, compared with an increase of 1.7 percent in the third.

• Change in private inventories added 1.94 percentage point. This was partially ffset by a decline in government spending (subtracted 0.93 percentage points).
• Investment growth slowed, except residential investment: "Real nonresidential fixed investment increased 1.7 percent in the fourth quarter, compared with an increase of 15.7 percent in the third. Nonresidential structures decreased 7.2 percent, in contrast to an increase of 14.4 percent. Equipment and software increased 5.2 percent, compared with an increase of 16.2 percent. Real residential fixed investment increased 10.9 percent, compared with an increase of 1.3 percent."

US Economic Growth Accelerates Modestly In Fourth Quarter - Another backward-looking economic report dispatched a fresh round of hope today for thinking that a new recession isn't knocking on our collective doorstep. The U.S. economy expanded at an annual real rate of 2.8% in last year's fourth quarter, the Bureau of Economic Analysis reports. That's a respectable bit of improvement over Q3's 1.8% sluggish pace. Granted, the latest number fell short of the consensus forecast, which called for a 3.1% rise .But it's hard not to notice that the Q4 GDP still rose at the fastest rate since the second quarter of 2010. Perhaps it's fair to say we're slumping toward progress. At any rate, between this morning's advance estimate of GDP and the revival in December's reading of the Chicago Fed National Activity Index, it's safe to say that 2011 was recession free. With that clean break, it's on to debating if 2012 will succumb to the darker forces of the business cycle.

Fed's Dudley Sees Significant Impediments to Economic Growth - Federal Reserve Bank of New York President William C. Dudley said the U.S. economy will probably slow this year while confronting risks “skewed to the downside.” “It is unlikely that the faster growth experienced in the fourth quarter of 2011 will be matched in the first half of 2012,” Dudley said today in remarks in New York. “In addition to the temporary nature of some of the recent improvement, there are significant impediments to a robust recovery.” The economy expanded less than forecast in the fourth quarter as consumers curbed spending and government agencies cut back. Gross domestic product, the value of all goods and services produced, climbed at a 2.8 percent annual pace following a 1.8 percent gain in the prior quarter, Commerce Department figures showed today in Washington. “Monetary policy has done and will continue to do its part in supporting the recovery -- but it is not all-powerful,” Dudley said. “Other complementary policy actions in housing, fiscal policy and structural adjustment or rebalancing of the economy will be essential if we are to achieve the best available recovery.”

GDP Q4 Advance Estimate Is 2.8%: Better Than Q3 But Below Expectations - The Advance Estimate for Q4 GDP came in at 2.8%, which is an improvement over the 1.8% Third Estimate for Q3 GDP, but below the general consensus. (Note: GDP for Q3 was initially put at 2.5%, with subsequent downward revisions to 2.0% and finally 1.8%). Here is an excerpt from the Bureau of Economic Analysis news release: The increase in real GDP in the fourth quarter reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, residential fixed investment, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.   [Full ReleaseThe consensus was for 3.2%. The 54 economists who responded to the January Wall Street Journal survey forecast 3.1% (average) 3.2% (median), with the single most frequent estimate (mode) of 3.5% Here is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. To be more precise, what the lower half of the chart shows is the percent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product.

GDP Reattains Pre-Recession Peak - This morning the Bureau of Economic Analysis released its first estimate for 2011 GDP.   It showed national output for the first time surpassing the pre-recession peak, which occurred in the last quarter of 2007.    (See chart below, at the bottom.) Given that the economy hit its trough in mid-2009, the long slow climb since then has been disappointing.   The outcome turns out to have been somewhat worse than the conventional wisdom that sharp declines tend to be followed by sharp recoveries.   On the other hand, the outcome turns out to have been better than the Reinhart-Rogoff thesis that when the cause of a recession is a financial crisis, the recovery tends to take many years.  To be sure, the housing market has yet to recover and households are still painstakingly rebuilding their battered balance sheets.   But is this the complete explanation for the disappointing state of the economy — the origins of the crisis in a housing bubble and financial collapse? The first point to note is that the biggest single reason why the level of GDP over the last three years has been lower than most people forecast in January 2009 has nothing to do with overly optimistic forecasts in January 2009 of the rate of growth looking forward, nor with how good Obama’s policy proposals were, nor with how effective the Republicans turned out to be at blocking them.  The BEA subsequently revised the GDP statistics substantially downward, and now reports that the real growth rate of the economy in the last quarter of the Bush Administration, instead of negative 3.8% per annum as reported that January, was in fact negative 8.9% per annum! The trough of the V was far deeper than was realized at the time.

U.S. Recovery Slowly Gained Speed in Late ’11, Data Show -  The American economy picked up a little steam last quarter, with output growing at an annualized rate of 2.8 percent, the Commerce Department reported Friday. The pace of growth was faster than in the third quarter, when gross domestic product expanded at an annual rate of 1.8 percent.  Even so, both  figures were below the average speed of economic expansion in the United States since World War II. Above-average growth in the quarter would have helped to make up for the destruction wrought by the Great Recession.  “At this rate, we’ll never reduce unemployment,” said Justin Wolfers, an economist at the University of Pennsylvania. “The recovery has been postponed, again.”  Still, the 2.8 percent rate is likely to be seen by many as something of a relief, given that just last summer many economists were predicting the country would soon dip back into recession. Whether this modestly brisker pace of growth will continue is unclear, however.

2011 GDP: 1.7% - That's the final, pathetic growth number for 2011.  From the just-released GDP report: Real GDP increased 1.7 percent in 2011 (that is, from the 2010 annual level to the 2011 annual level), compared with an increase of 3.0 percent in 2010.    The increase in real GDP in 2011 primarily reflected positive contributions from personal consumption expenditures (PCE), exports, and nonresidential fixed investment that were partly offset by negative contributions from state and local government spending, private inventory investment, and federal government spending.  Imports, which are a subtraction in the calculation of GDP, increased. Not exactly a barnburner.

Q4 GDP: Residential Investment now making a positive contribution - The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter centered average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy. For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue. The dashed gray line is the contribution from the change in private inventories. Residential Investment (RI) made a positive contribution to GDP in Q4 for the third consecutive quarter. Usually residential investment leads the economy, but not this time because of the huge overhang of existing inventory. The contribution from RI will probably continue to be sluggish compared to previous recoveries. Still the positive contribution is a significant story. Equipment and software investment has made a significant positive contribution to GDP for ten straight quarters (it is coincident). However the contribution from equipment and software investment in Q4 was the weakest since the recovery started. The contribution from nonresidential investment in structures was negative in Q4. Nonresidential investment in structures typically lags the recovery, however investment in energy and power has masked the ongoing weakness in office, mall and hotel investment.

Outsized Impact of Inventories on GDP Growth - For U.S. gross domestic product growth, the disappointment devil is in the details. Real GDP grew at a solid 2.8% annual rate in the fourth quarter, slightly missing 3.0% expectations, but still the best gain since second quarter of 2010. The report, however, was a big disappointment for investors and the outlook because of what hid underneath. The mix of growth suggests weakness this quarter and perhaps beyond. That’s because the bulk of GDP growth came from the inventory sector, which accounted for almost two percentage points of the top-line expansion. The amount of inventory added last quarter was the largest since the third quarter of 2010. In contrast, real final sales — GDP minus inventories — grew by only 0.8%, the weakest pace since first quarter 2011. The problem with inventory growth powering GDP is the uncertainty over what motivated the buildup. If businesses stored more supplies and finished goods in their warehouses because they see future demand growing at a solid pace, then the stockpiling can be viewed as a positive sign of business confidence and for growth going forward.

U.S. GDP: not a recession, but still not very encouraging - The Bureau of Economic Analysis reported today that U.S. real GDP grew at an annual rate of 2.8% during the fourth quarter of 2011. That's better than any of the previous 5 quarters, which tells you more about how disappointing the previous year and a half has been than it does about how great the fourth quarter was. The average historical growth rate for the U.S. economy over the last 60 years has been about 3.2%.  A key reason to be concerned about continuing below-average GDP growth is Okun's Law, which originally held that to get the unemployment rate to decline by 1 percentage point, we'd need a year of GDP growth 3% above average. Okun based that estimate on data for the U.S. economy prior to 1960, but it has held up pretty well in the half century since then, with 2.5% above-average GDP growth a better summary of the requirement based on the full sample of data now available. Using data from 1949:Q1 to 2011:Q4, here's a quarterly regression of the year-over year change in the unemployment rate on the year-over-year percent change in real GDP (Newey-West standard errors with 8 lags in parentheses):

GDP and Me - GDP growth came in of course at around 2.8%. But, what does that tell us? Not much. For example, personal consumption expenditures were weak at a 2.0% growth rate, but this is largely because Services came in a 0.2% which in turn is because Housing and Utilities Services declined by 13 Billion dollars. And, that is almost certainly due to a warm winter a lower than expected heating bills. So, what does that tell us about the direction of the economy? Essentially nothing. We can say that Housing and Utilities will likely pop back in the spring meaning that Consumption expenditures could easily grow by 2.5 – 3.0%. However, information wise that just piles nothingness on top of nothingness. It was strangely warm today, it will likely be less strangely warm tomorrow. That’s what you get from that data. Autos did well, but we knew that already. Indeed, expenditures on all goods did well. There is also a bit of handwringing over the fact that inventories contributed so much to GDP growth. But, what does this tell you. Most of this is autos. During the summer there was a major slowdown in parts from Japan. So Hondas and Toyotas started getting lean on lots. Now, they are coming back. That’s inventory adjustment. But, it tells us little about the underlying economy.

The Quiet Driver of Economic Growth: Exports - Foreign buyers purchased more than $2 trillion in goods and services, the first time exports have topped that threshold. And those exports accounted for almost 14 percent of gross domestic product, the largest share since at least 1929. Source: Bureau of Economic Analysis We usually talk about exports alongside its opposite number, imports, and since the United States buys much more than it sells – our “trade deficit” — the general impression is that foreign trade is a drag on the economy. But that tends to obscure the importance of exports, which have accounted for about 10 percent of G.D.P. over the last two decades and, since the recession, considerably more. The growth has come from all areas, but the real strength has come from what might be called the old economy: petroleum, metals, chemicals and farm goods. Much of the rise in exports is a consequence of domestic problems. The value of the dollar has declined, so that foreigners save money when they buy American. Businesses, struggling to find customers here, are focusing on foreign sales. And a boom in commodity prices, which has raised the price of life for most Americans, has produced a windfall for those who trade in commodities.

Visualizing GDP: The Consumer Is Key - The chart below is my way to visualize real GDP change since 2007. I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. My data source for this chart is the Excel file accompanying the BEA's latest GDP news release (see the links in the right column). Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product. Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa. The contribution of PCE came at 1.45 of the 2.76 real GDP. This is an improvement over the 1.24 PCE contribution to the 1.82 Q3 GDP. For a long-term view of the role of personal consumption in GDP and how it has increased over time, here is a snapshot of the PCE-to-GDP ratio since the inception of quarterly GDP in 1947.

GDP on Recession Track; Real GDP +2.8%, Misses Estimates; Inventory Replenishment Accounts for 1.9 Percentage Points; Five-Year Treasury Yield Hits Record Low - The headline real GDP number of 2.8% does not sound too bad until you dig beneath the surface. A full 1.9 percentages points of that 2.8% was inventory replenishment. Real GDP vs. a year ago is +1.6% and that is on a recession track as well. Bloomberg reports Treasury Five-Year Yield Declines to Record Low as GDP Misses Forecast Treasury five-year note yields fell to a third consecutive record low after slower-than-forecast U.S. growth added to speculation the Federal Reserve will expand asset purchases to spur economic growth. Ten-year note yields fluctuated as stockpile rebuilding accounted for 1.9 percentage points of the 2.8 percent economic expansion, sparking concern growth may be weaker than expected in the first three-months of this year. Fed Chairman Ben S. Bernanke said Jan. 25 he’s considering additional bond purchases to boost growth after the Federal Open Market Committee announced that the target lending rate would stay low through late 2014.

Real GDP Per Capita, Year-over-Year Change, and the Next Recession - For a better understanding of the historical context, here is a chart of real GDP per-capita growth since 1960. For this analysis I've chained in current dollars for the inflation adjustment. The per-capita calculation is based on the mid-month population estimates by the Bureau of Economic Analysis, which date from 1959 (hence my 1960 starting date for this chart, even though quarterly GDP has is available since 1947). The population data series is available in the FRED series POPTHM. I used quarterly population averages for the per-capita divisor. Recessions are highlighted in gray. The logarithmic vertical axis ensures that the highlighted contractions have the same relative scale.  The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. As we can see, since our 1960 starting point, the recession that began in December 2007 is associated with a deeper trough than previous contractions, which perhaps justifies its nickname as the Great Recession. In fact, at this point, 14 quarters beyond the 2007 GDP peak, real GDP per capita is as far off the all-time high as the trough that followed the recession in the early 1990s. We can also see that the recovery from the last recession had flattened out over the past three quarters, although the latest estimate is a step, albeit small, in the right direction.

GDP Report: Austerity is Holding Back the Recovery - According to the advance report on GDP released Friday morning, economic growth for the fourth quarter of 2011 was 2.8 percent, a rate of growth near the average rate of GDP growth in recent decades of roughly 2.5 percent. Average economic growth is enough to keep us from losing ground, but re-absorbing the millions of unemployed workers into productive employment will require an acceleration in GDP growth. We need a growth spurt that exceeds trend by some margin, something we haven't seen yet, and without that we are headed for a very slow recovery. Unfortunately, when the components of GDP -- consumption, investment, net exports, and government spending -- are examined, it's not clear where that spurt will come from. Households lack the income needed to support a burst in consumption, and they are in no position to support a large rise in debt-fueled consumption. We wouldn't want that in any case.  Investment has two components -- business investment and the construction of new houses.  Businesses are waiting for the outlook to improve before increasing investment. The fall in government spending reduced fourth-quarter growth by 0.93 percent; if government spending had remained constant, GDP growth would have been 3.7 percent, rather than 2.8 percent. .

The Role of Austerity - The chart here offers one of the better recent snapshots of the American economy that you will find. The blue line shows the rate at which the government — federal, state and local — has been growing or shrinking. The red line shows the same for the private sector. The brief version of the story is that the government, which helped mitigate the recession, has been a significant drag on growth for more than a year now. In 2007, both the private sector and government were growing. The government continued growing through 2008 and most of 2009, with the exception of one quarter when military spending fell. The private sector, though, began to shrink in 2008 and by late 2008, as the financial crisis took hold, it was shrinking rapidly. The government — first the Federal Reserve and the Bush administration and then, more aggressively, the Fed and the Obama administration — responded with various stimulus programs. They are the reason for the blue line’s upward spike in 2009.  The private sector began to recover in 2009. The recovery slowed in 2010 and again in 2011, as the dips in the red line show. But by the end of last year, the private sector was expanding at a healthy 4.5 percent annualized pace.

Goldman On GDP: Warns Of Q1 Weakness; Autos Added 0.3% To GDP ZeroHedge: When commenting earlier on the GDP number we noted that the sellside brigade is about to start coming out with Q1 GDP "warnings" now that inventories will likely subtract between 0.5% and 1% from growth in the current quarter. Sure enough here is Goldman with the first warning saying that "The composition of growth was slightly negative for the Q1 outlook, in our view." That's not surprising. What is is that also according to Goldman, the auto sector contributed 0.3% to the overall GDP number. Which means that ex inventories and autos (sold courtesy of NINJA loans provided by Uncle Sam as discussed extensively every month with the release of the Fed's Consumer Credit number), the US economy grew a meaningless 0.5%! And this in the quarter when the US economy was supposed to be on a tear. We are now fairly concerned that there is an outright chance of economic contraction in Q1. From Goldman: BOTTOM LINE: Q4 GDP growth slightly worse than expected. Compared to our forecasts, details showed more inventory growth, less consumer spending and less business investment.

Faster GDP Growth will be Welcome News for the White House, Despite “Ifs” and “Buts” in the Details - According to the advance estimate released today by the Bureau of Economic Analysis, U.S. real GDP growth increased to a 2.8 percent annual rate in the fourth quarter of 2011, compared to just 1.8 percent the previous quarter. It was the tenth consecutive quarter of growth since the end of the recession. Furthermore, the new data show that the economy has now solidly entered the expansion phase of the business cycle.  Expansion begins when real GDP surpasses its prerecession peak, which occurred in Q4 2007. Technically, the expansion had already begun in Q3, but by such a tiny margin (just 0.04 percent) that it was hardly enough to count. Although the GDP numbers appear to be good news for the White House as the election season heats up, there are a number of “ifs” and “buts” buried in the details. First, it is important to keep in mind that the advance estimate is based on incomplete data, most of it from early in the quarter, with the gaps filled in by extrapolation from past trends. The advance estimate is often substantially revised.  Second, we need to look at which bits of the economy are growing and which are not. Consumption contributed 1.45 percentage points of the 2.8 percent growth, even stronger than in Q3. The biggest contributor to growth, however, was investment, which contributed 2.35 percentage points to Q4 growth compared with just 0.17 in Q3. The problem is, 1.94 percentage points of that came from growth of private inventories.

Revamped Leading Index Posts Gain - The newly composed index of leading economic indicators increased less than expected in December, according to data released Thursday. The Conference Board said its leading index rose 0.4% last month after a revised 0.2% gain in November, first reported as 0.5%. The December increase was half the 0.8% increase expected by economists surveyed by Dow Jones Newswires, but the index has increased for three consecutive months, indicating a strengthening domestic economy, the report said. Earlier this month, the Conference Board announced it was revamping the leading index back to 1990. The board replaced three of the 10 components and made a minor adjustment to another component. The new index replaces real money supply with the board’s proprietary new leading credit index designed to cover financial conditions. Other changes include a measure of new orders that replaces supplier deliveries. An average of consumer expectations taken by the board and by the University of Michigan replaces the Michigan index alone. The capital goods orders component now excludes aircraft.

Financial Armageddon: Another Day of Surreality on Wall Street - OK, let's try and put this into terms that a fifth-grader (or even a Wall Street MBA) might understand.

  1. If the economy is recovering -- or even close to doing so -- why is the Federal Reserve maintaining that short-term interest rates will remain "exceptionally low" until late-2014 -- that is, below the levels that prevailed at the beginning (or even the middle) of every single recovery in the post-war era, as well as below their multi-decade median of five percent?
  2. Why are investors piling into stocks and growing increasingly bullish at a time when the Fed has essentially confirmed that their optimistic assumptions about the economy are not in synch with reality?
  3. If, as Federal Reserve Chairman Bernanke says, there is still "enormous" negative equity in U.S. housing and, as U.S. Treasury Secretary Geithner says, "housing finance is still a mess," why did homebuilding stocks today rally more than twice as much as the overall market, and why have they gained nearly 90 percent since October?
  4. And finally, if one assumes that today's developments will somehow help the economy to get back on its feet (an extremely dubious assumption in light of the experience of the past several years), why did stocks and bonds (with yields already approaching multi-year lows) end higher on the session?

17 Questions To Ask Next Time Someone Tells You The Economy Is Getting Better - Everywhere you turn these days, someone is proclaiming that the economy is improving.  Barack Obama is endlessly touting the “improvement” in the economy, the mainstream media is constantly talking about “the economic recovery” and an increasing number of Americans seem to be buying into this line of thinking.  A new NBC/Wall Street Journal poll found that 37 percent of Americans believe that the economy will improve over the next year, while only 17 percent of Americans believe that it will get worse.  But is the economy actually improving?  Not really.  At the moment things are relatively stable.  Some economic statistics are improving slightly and some continue to get even worse.  However, it is very important to keep in mind that one of the biggest reasons why things have stabilized is because the federal government is pumping more than a trillion dollars a year into the economy that it does not have.  The Obama administration is engaging in a debt binge unlike anything America has ever seen before, and yet many economic indicators are still in decline.  So what is going to happen when the federal government stops injecting gigantic waves of borrowed money into the economy?  That is a frightening thing to think about.  The best efforts of our “leaders” in Washington D.C. are not accomplishing a whole lot.  The Federal Reserve has pushed interest rates as low as they can go and the federal government is spending unprecedented amounts of money.  But even with the federal government and the Federal Reserve pushing the accelerator all the way to the floor, the economy is still not improving much at all.  Millions upon millions of Americans out there are anticipating some sort of a “great economic recovery”, and they are going to be bitterly disappointed.

Notes On Deleveraging - Krugman - The new McKinsey Global Institute report on debt and deleveraging has attracted a lot of attention, and rightly so. I have some quibbles with the way the data are presented, but they’re very useful data — and lead to some surprising conclusions. MGI presents its data like this: My preference is to leave financial-sector debt out of the picture, because it’s conceptually very different from nonfinancial debt. Think of it this way: compare two banking systems, one in which banks directly lend deposits out to customers, another in which many deposits are lent out through the interbank wholesale market, and then lent on to nonfinancial customers. The second system will show much higher financial-sector debt, and it is in some real sense more risky than the first, but the real economy isn’t more highly indebted than in the first case. In general, financial-sector debt is about the internal organization of intermediation, and it’s not the same kind of thing as when households or business run up a lot of debt. So if you take the financial-sector debt out of the total, MGI’s conclusion that the United States has experienced substantial deleveraging goes away: overall debt to GDP has been more or less flat since the end of 2008. But as I wrote yesterday, the shift of debt away from over-indebted households to a federal government that is not borrowing-constrained is a big plus; it’s setting the stage for recovery.

The Ongoing Debt Transformation - Krugman - A followup on my note about US deleveraging. It turns out that if you measure debt as a percentage of potential GDP (as estimated by the CBO) and use a stacked-area graph, you get a pretty clear picture. Here it is, using nonfinancial debt (for reasons explained in the previous post): All data from FRED. What we see here is that there was an explosion of total debt during the Bush years; since then debt has stabilized relative to potential output. But there has been a redistribution, with private debt falling while public debt rises. Arguably, this is exactly what needs to happen: the federal deficit is sustaining the economy while balance-sheet constrained private actors deleverage. (By the way, reductions in the nominal level of private debt largely reflect defaults, but the much bigger fall relative to potential GDP reflects the swing from financial deficit to financial surplus). Once balance sheets are sufficiently repaired, private demand should recover, and the federal government will no longer need deficit spending to keep the economy afloat.

Is Our Economy Healing?, by Paul Krugman - Three years after President Obama’s inauguration and two and a half years since the official end of the recession, unemployment remains painfully high.  But there are reasons to think that we’re finally on the (slow) road to better times. And we wouldn’t be on that road if Mr. Obama had given in to Republican demands that he slash spending, or the Federal Reserve had given in to Republican demands that it tighten money.  Why am I letting a bit of optimism break through the clouds? Recent economic data have been a bit better, but we’ve already had several false dawns on that front. More important, there’s evidence that the two great problems at the root of our slump — the housing bust and excessive private debt — are finally easing.  There are, of course, still big risks — above all, the risk that trouble in Europe could derail our own incipient recovery. And thereby hangs a tale — a tale told by a recent report from the McKinsey Global Institute. The report tracks progress on “deleveraging,” the process of bringing down excessive debt levels. It documents substantial progress in the United States, which it contrasts with failure to make progress in Europe. And while the report doesn’t say this explicitly, it’s pretty clear why Europe is doing worse than we are: it’s because European policy makers have been afraid of the wrong things.

How Fast, Recovery - Paul Krugman is beginning to wax Smithian. Via Mark Thoma But there are reasons to think that we’re finally on the (slow) road to better times. And we wouldn’t be on that road if Mr. Obama had given in to Republican demands that he slash spending, or the Federal Reserve had given in to Republican demands that it tighten money.Why am I letting a bit of optimism break through the clouds? Recent economic data have been a bit better… More important, there’s evidence that the two great problems at the root of our slump — the housing bust and excessive private debt — are finally easing. …A couple of things. This would actually be a great issue over which to flush out the relevant narrative. Paul sees housing prices and private debt overhang as the driving concern. I tend to think that housing prices per se, don’t matter, land prices do and that the private debt overhang is not necessarily a big deal. If we lived in a world without capital it would be. The only way to get the economy going again would be for natural borrowers to be able to meet the savings demand of natural savers. However, in a world with capital this need not be the case. Natural savers can switch from funding the consumption of natural borrowers to funding the capital investment.

America overcomes the debt crisis as Britain sinks deeper into the swamp - Britain has sunk deeper into debt. Three years after bubble burst, the UK has barely begun to tackle the crushing burden left by Gordon Brown. The contrast with the United States is frankly shocking.  US debt is already lower than Spain (363pc), France (346pc), or Italy (314pc), and may undercut Germany (278pc) before long -- given the refusal of the European Central Bank to offset fiscal contraction with monetary stimulus. One is tempted to ask what all the fuss was about in the US. The debt of financial institutions is just 40pc, compared to the UK (219pc), Japan (120pc), France (97pc), Germany (87pc) and Italy (76pc). Bank debt has dropped from $8 trillion to $6.1 trillion -- accelerated by the Lehman collapse -- as lenders rely more on old-fashioned deposits.  In hindsight, the US property boom was remarkably modest compared to what happened in Spain, or what is happening now in China now where the house price to income ratio in Beijing, Shanghai, and Shenzhen is near 18. America’s ratio peaked at 5.1 and is already back to its modern era average of three. The excesses have been unwound.

What’s Going on With Debt in U.S.? - As we reported recently a new McKinsey Global Institute report says the U.S. economy is further along the deleveraging curve than a lot of other big, rich economies One of the biggest questions hanging over the U.S. economy now is how much more deleveraging — a big word for paying off (or walking away) from debts — Americans will do before they begin borrowing and spending again. No one really knows. But one straightforward chart in the McKinsey report caught our attention: It measures debt of the four big sectors of the economy — households, finance, nonfinancial corporations and government — as a percentage of the U.S. gross domestic product. The McKinsey report was finished before the Federal Reserve released third-quarter data so we asked the number crunchers at the consulting firm to update it for us. The chart shows clearly the build up of debt heading into the bust, and the subsequent deleveraging. Overall public and private debt, by this measure, peaked at 302% of GDP in the first quarter of 2009. Since then, it has fallen to 279% as the economy has grown and some private players have lightened their debt loads.

$1 Million Dollar Prize! Can You Find Someone Who Holds the View That Steve Rattner Rants Against In the NYT? - Steve Rattner is very upset. He tells NYT readers "Debt doesn’t matter? Really? That’s the most irresponsible fiscal notion since the tax-cutting mania brought on by the advent of supply-side economics. And it’s particularly problematic right now, as Congress resumes debating whether to extend the payroll-tax reduction or enact other stimulative measures. Here’s the theory, in its most extreme configuration: To the extent that the government sells its debt to Americans (as opposed to foreigners), those obligations will disappear as aging folks who buy those Treasuries die off." Wow, I really would like to find the person who believes that government bonds will disappear when the people who own them die off. I sure hope Rattner can convince readers that this is not true. However the true statement here, that Rattner either does not understand or is trying to obscure is that the debt itself is not an inter-generational burden. Since ownership of the debt will utlimately be passed on to future generations (ignoring the portion that is held by foreigners -- which a function of the trade deficit), the debt itself is not a generational burden.

Educating Dean Baker - I have great respect for Dean Baker who, among other things, convinced Paul Krugman we were in a housing bubble. He is very smart and writes about important issues. But he has recently written two posts which contain the same elementary error.  I don't want to be rude, but the posts make me think of Robert Lucas's tirade against Christy Romer. Baker wrote Steven Rattner remains convinced that handing future generations trillions of dollars of government bonds imposes a burden on them and is very unhappy that I don't see things that way. Let's try this one more time. [skip] At some future point, everyone who owns this debt today will be dead. They will have no choice but to hand this debt on to members of the next generation, either their own heirs or someone else's.  Baker asserts that if someone owns something, he must keep it till he dies then leave it to his heirs. In fact, it is also possible to sell it and consume the proceeds. My objection to Baker's post really is just that elementary. I suppose one might argue that I have missed something. I don't think I have and explain at gruesome length after the jump.

In What Sense Does Government Debt “Burden”? - Robert Skidelsky runs through and corrects five fallacies about debt that one often hears lazily deployed in the public arena.  His third correction: …the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had. Nick Rowe had a post a couple weeks back on this same topic that might be of interest to some MMTers and Abba Lernerites.  Rowe lays out four different positions on the question of whether or in what sense the national debt imposes a burden on future generations, the first of which (it’s labeled “Abba Lerner”) sounds like it’s supposed to represent functional finance.  Rowe is ultimately dismissive of the functional finance approach, but you’ll find quite a bit of lively discussion in comments and a number of links to the ongoing debate.

Does Government Debt Impose a Burden on Future Generations/Periods/People? #12,143 - I think (after a lot of effort) that I’ve internalized Nick Rowe’s modeling of this question (follow links from here) pretty well conceptually. His answer is Yes. There have been thousands of posts and comments across the blogosphere since Nick took Krugman to task on the issue a couple of weeks ago, and Nick has been remarkably generous with his time in helping people understand his thinking. (A kudos also to Bob Murphy.) And it’s worth pointing out that Krugman hasn’t really responded to the core argument head-on. Here’s Nick’s model in brief, in my words: Government borrowing/bond issuance today — considering only its costs, not the potential up/downsides of the associated spending — propagates incentives into the future, like waves are propagated when you throw a rock in a pool. Those incentives cause the old people in every period to consume more than the young people. In each future period, parents will eat some of their kids’ lunch. Each generation consumes the same amount as they would have otherwise (because first you’re young, then you’re old, first you’re a child, then you’re a parent). But if government eventually has to tax to pay back the debt, the young people in that period are forced to consume less over their lifetimes, because they don’t get to eat their kids’ lunch.

Economic uncertainty is no excuse for inaction - Larry Summers  The year has started well for financial markets. Equities are generally up. European sovereigns have borrowed with an ease that has surprised many observers. Economic data, particularly in the US, have beaten expectations. So as President Barack Obama prepares to give his State of the Union address, and as policymakers and corporate chiefs come together in Davos, there is less alarm among the global community, though not yet a sense of relief. Indeed, anxiety about the future remains a major driver of economic performance.The news coming from financial markets is paradoxical. On the one hand interest rates remain very low throughout the industrial world. While this is partially a result of very low expected inflation, the inflation-linked bond market suggests that remarkably low levels of real interest rates will prevail for a long time. In the US, the yield on 10-year indexed bonds has fluctuated around minus 15 basis points: on an inflation-adjusted basis investors are paying the government to store their money for 10 years! In Britain, inflation-linked yields are negative going out 30 years.  Uncertainty about future growth prospects also correlates with other observations, such as the abnormally large amount of cash sitting on corporate balance sheets, the reluctance of companies to hire, and consumers’ hesitancy about big discretionary purchases of durable goods despite near-record lows in borrowing costs and low capital goods prices. All of this suggests that for the industrial world as a whole, the priority for governments must be to engender confidence that the recovery will accelerate in the US and that the downturn in Europe will be limited.

Why This Time Is Different - A while back I pointed to (and demonstrated with not very pretty pictures) Randall Wray’s rather stunning observation: every depression in American history was preceded by a large decline in nominal federal debt.  And I puzzled about why this wasn’t true of our latest little…event:  We saw a decline leading up to 2000, but federal debt was on the rise when the big bang hit. If that 90s decline was the necessary (if not sufficient) cause of the crash, why was there an eight-year delay, unlike all the other depressions in our history? Various have suggested in various ways what I’ve also presumed: that private debt carried us this time. For a while. I think this chart may make that point better than any I’ve seen (click for source):  Those earlier depressions weren’t blessed with a mortgage industry engineered to pump newly-created bank cash to anyone who asked through home- and home-equity loans (or corrupt ratings agencies that were the crux enablers of that dynamic.) The false GDP from that new private debt issuance — new money flooding the system — floated us through those years. (This is just a variation of what Steve Keen's been saying all along.) We’ve been in this woulda-been-a-depression since 2001. We just didn’t know it.

How Much Does the United States Really Owe? - America is deep in debt. But how deep? That question seems simple, yet analysts and pundits give answers that differ by trillions of dollars. Sometimes tens of trillions. That confusion arises because there are various ways to tote up America’s debts. Many observers often focus on the publicly held debt – the bonds that the Treasury has sold into financial markets. By that measure, the federal government owed a bit more than $10 trillion at the end of last fiscal year. That figure is important because it measures how much the federal government has had to rely on outside investors. For that reason, it does not include the special Treasury bonds in the Social Security Trust Fund and similar accounts owned by the federal government itself. From an accounting perspective, those bonds net to zero – a part of the government owes money to another part. But they are important to Social Security legally and politically. Some analysts use a measure that includes the trust funds, bringing the federal debt to more than $14 trillion. That’s not the only measurement disagreement. Social Security and Medicare reflect a major commitment to seniors in the years ahead, but the government hasn’t identified enough dedicated financing to pay for them. Some analysts believe these unfunded amounts should be viewed as debts as well.

U.S. Sovereign Debt Crisis: Tipping-Point Scenarios and Crash Dynamics - With the economy facing a sluggish recovery and debt and deficits soaring, it's no longer far-fetched to say that a sovereign debt crisis could occur in the United States. Econ Journal Watch and the Mercatus Center at George Mason University have undertaken this symposium to produce and disseminate a better understanding of what a sovereign debt crisis in the United States would look like and what might bring it about. This symposium was edited by Daniel Klein and Tyler Cowen, and contributors include Garett Jones, Arnold Kling, Jeffrey Rogers Hummel, Joseph Minarik, and Peter Wallison. The authors were invited to speculate on possible tipping points, associated triggers, and on crash dynamics (what happens in the crisis). The authors were encouraged to imagine possible futures, not merely as financial analysts but as political economists.

No Longer A Rumor: Obama 2013 Budget To Be Delayed - The Congressional Budget Act requires the president's budget to be sent to Congress by the first Monday in February. This year that's February 6. As of Friday night that was still the date. But something may have changed over the weekend because there's what I'll call a strong rumor that the White House is on the verge of delaying the release. No word on for how long or why. I'm guessing it will be no more than a week or so. More as soon as there's more. UPDATE: The one-week delay until February 13 has now been announced.

SOTU: The President's Economic Proposals - The president began the discussion of his economic initiatives by outlining a proposal to revive manufacturing in the US. The plan is to use tax breaks to encourage companies to locate in the US, to keep jobs at home by eliminating tax advantages for companies that move offshore, to lower corporate taxes in the US, and to appeal to the goodwill of US companies (who should do what they can do to bring jobs back to this country).He also wants to boost exports. To this end, he proposed more trade agreements (and lauded those the administration has already put into place), and he highlighted the creation of a "Trade Enforcement Unit that will be charged with investigating unfair trade practices in countries like China." Finally, the plan to revive economic growth and employment also involves more support of small businesses, e.g. tax cuts and a reduced regulatory burden, support for research and development (particularly in energy related areas), mortgage refinancing for "responsible" homeowners," an extension of the payroll tax cut, and a plan to repair crumbling infrastructure.The plan the president outlined is fine as far as it goes, but I wanted a jobs plan that was big and bold. I wanted a plan that puts immediate job creation at the forefront. However, this plan is largely tax cuts, it's piecemeal, and it's mostly directed at our long-run problems.

State of the Union 2012: Obama speech full text -

The Economics of the State of the Union Address...As an economist, I was very pleased to see the number of references to actual economic research, findings and concepts in Tuesday's State of the Union address. As someone who likes data and information accessibility, I was VERY pleased to see that there is an enhanced version of the address (with pictures and graphs and stuff!) available online.  In case you're curious, here are sources for some of the points mentioned:

Deficit Barely A Footnote In SOTU - Last night' State of the Union Address almost certainly made deficit hawks very unhappy, extremely angry and, from a policy perspective, close to suicidal. After pushing hard for so long to make the deficit the issue, it was barely a footnote in the president's hour-plus address and wasn't missed that much.It took less than an hour for the Committee for a Responsible Budget to send out a statement excoriating the White House for missing " opportunity to throw down the gauntlet to Congress on the debt and demand a large, bipartisan debt reduction plan this year." If the speech is an indication, the administration has no interest in throwing gauntlets or anything else on the budget this year. I was surprised. With Congress unwilling or unable to do much of anything on the budget, I had expected the White House to call for the House and Senate to deal with the budget and to offer to meet anytime, any place, etc. At the very least this would have put it in a good position to be critical when that didn't happen.

Obama State of the Union Address Makes Pitch for Economic Fairness - President Obama pledged on Tuesday night to use government power to balance the scale between America’s rich and the rest of the public, trying to present an election-year choice between continued leadership toward an economy “built to last” and what he called irresponsible policies of the past that caused an economic collapse.Declaring that “we’ve come too far to turn back now,” the president used his final State of the Union address before he faces the voters to showcase the extent to which he will try to contrast his core economic principles with those of his Republican rivals in a time of deep economic uncertainty. While many Americans remain disappointed with the state of the economy and the president’s handling of it, Mr. Obama nonetheless tried to bring into relief the difference between where the country was when he took over and where it is now. “The state of our union is getting stronger,” he declared in time-honored tradition. “In the last 22 months, businesses have created more than three million jobs.” He pointed to renewed hiring by American manufacturers and — borrowing the “built to last” phrase from the auto industry he helped save — he sketched out, albeit vaguely, what he called a blueprint for economic growth in which the wealthy play by the same rules as ordinary Americans.

The bipartisan side of a campaign speech - Much will be made, and properly so, of President Obama’s State of the Union address as a campaign message challenging the Republicans on fundamental questions. But before we all get to the partisan and ideological analysis, let’s look at a number of ideas Obama offered that ought, in principle, draw a lot of support from conservatives and Republicans. There is, first, his proposal for lower taxes on manufacturers. The idea that the United States needs to rebuild its manufacturing sector has wide support. Republican Rick Santorum has made it a centerpiece of his presidential campaign. Santorum would eliminate taxes on manufacturing altogether. Surely he and other Republicans can support Obama’s proposals at least to give manufacturing firms a tax cut, and advanced manufacturing firms an even bigger one. Community colleges are praised by every governor in the country, and also by most business people I have met. Obama’s idea to create stronger partnerships between community colleges and businesses is common sense.  And one of his most intriguing proposals — the details, of course, will matter — would create a strong incentive for colleges and universities to hold down tuitions. Obama would reduce funding for universities that fail to hold their tuition levels down. I first heard this idea floated by Republicans who argued that federal aid to students shouldn’t become nothing more than an incentive for institutions of higher education to hike what they charge.

Obama Proposes Mortgage Bailouts, Handouts, Copouts Exactly One Paragraph After Stating "Top to Bottom: No Bailouts, No Handouts, and No Copouts"; How the Taxpayer Ripoff Works - I found a nice Orwellian set of paragraphs smack in the middle of his speech.  And while Government can’t fix the problem on its own, responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief. That’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust. Let’s never forget: Millions of Americans who work hard and play by the rules every day deserve a Government and a financial system that do the same. It’s time to apply the same rules from top to bottom: No bailouts, no handouts, and no copouts. An America built to last insists on responsibility from everybody. While reading the first paragraph above I knew without a doubt a huge bailout proposal was coming up. Sure enough, the very next paragraph contained a massive bailout proposal and in more ways than is readily apparent at first glance. For starters "responsible homeowners" don't need mortgage relief. Secondly, $300 a month is a lot of dough so I would like to see an accounting. Finally, and most importantly, every loan that is refinanced will be paid off in full. Thus, any bank, hedge fund, mortgage provider, or GSE that is paid off on a nonperforming loan will be immediately made whole.

Obama State Of The Union Speech: Labor Leaders And Economists Unimpressed With Jobs Proposals - President Obama's emphasis on creating manufacturing jobs in his State of the Union address on Tuesday sounded just right to union leaders.  But even these most ardent supporters expressed doubts that his proposals would do much to alleviate unemployment, agreeing with economists and business leaders contacted by The Huffington Post Tuesday night that the speech offered little that would move the needle in the jobs market. "If you do exactly what he's asking for, it would make almost no difference,". Economists and business and labor leaders said after the speech that the president's proposals would not have a real impact on the jobless rate. For some, his proposals were just a reminder of how ineffectual the president's jobs plans have been through the Great Recession and nascent recovery.In contrast to what Obama said in his speech, Baker said, lower taxes abroad are not the reason why jobs are going overseas. China's cheap currency has played a much more important role in bringing manufacturing jobs to East Asia. Commenting on Obama's suggestion that cracking down on piracy in China would play a major role in creating jobs in the United States, Baker said, "It's kind of a joke." Baker was skeptical of Obama's claim that higher-paying, high-skill manufacturing jobs are bountiful in the United States and just waiting for Americans to be trained for them, he added. The fact that new manufacturing jobs generally do not pay better than the old ones is proof that not many such jobs are available, he said.

Obama Urges Tougher Laws on Financial FraudPresident Obama called on Congress Tuesday to toughen laws against securities fraud and to strengthen the ability of the Securities and Exchange Commission to punish Wall Street firms that repeatedly violate antifraud statutes.  In his State of the Union address, Mr. Obama also said he would ask the attorney general to establish a special financial crimes unit to prosecute cases of large-scale financial fraud.  It is not clear how that effort would differ from the Financial Fraud Enforcement Task Force, a cross-agency group that Mr. Obama established in November 2009. Its mission, as the White House put it then, was to “hold accountable those who helped bring about the last financial crisis and to prevent another crisis from happening.”  The two initiatives represent an attempt to give financial regulators a greater ability to police the financial markets. In addition, the proposals seek to acknowledge the continuing frustration among many Americans — exemplified by the Occupy Wall Street movement — that few financial executives have been prosecuted for their actions leading up to the crisis.

Obama urges taxing the rich, reining in Wall Street - Reuters) - President Barack Obama used his last State of the Union speech before the November election to paint himself as the champion of the middle class, by demanding higher taxes for millionaires and tight reins on Wall Street. Taking advantage of a huge national platform to make the case for his re-election, Obama on Tuesday defiantly defended his record after three years in office and laid blame for many of the country's woes at the feet of banks and what he called an out-of-touch Congress. He proposed sweeping changes in the tax code and new remedies for the U.S. housing crisis, setting as a central campaign theme a populist call for greater economic fairness. He mentioned taxes 34 times and jobs 32 times during his hour-long speech, emphasizing the two issues at the heart of this year's presidential campaign. While the biggest proposals in Obama's speech are considered unlikely to gain traction in a deeply divided Congress, the White House believes the president can tap into voters' resentment over the financial industry's abuses and Washington's dysfunction. But even as he called for a "return to American values of fair play and shared responsibility," Obama seemed to put no blame on himself for a still-fragile economic recovery and high unemployment that could trip up his re-election bid.

Tax Policy References in the State of the Union - Tax policy is a hot topic and featured prominently in tonight's State of the Union address given by President Obama, and in the Republican response delivered by Indiana Gov. Mitch Daniels. Here are the references. From the State of the Union: We should start with our tax code. Right now, companies get tax breaks for moving jobs and profits overseas. Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world. It makes no sense, and everyone knows it.So let's change it. First, if you're a business that wants to outsource jobs, you shouldn't get a tax deduction for doing it. That money should be used to cover moving expenses for companies like Master Lock that decide to bring jobs home.Second, no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas. From now on, every multinational company should have to pay a basic minimum tax. And every penny should go towards lowering taxes for companies that choose to stay here and hire here. Third, if you're an American manufacturer, you should get a bigger tax cut. If you're a high-tech manufacturer, we should double the tax deduction you get for making products here. And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers.

The zero-sum president - STATE of the Union addresses tend to be long, winding affairs, filled with a grab bag of policy ideas that will altenatively appeal to and irk people across the political spectrum. Barack Obama's latest address had plenty of sensible ideas in it: tax reform, including reductions in corporate rates; more spending and accountability on education and infrastructure investment; streamlining of the regulatory environment; and so on. He led off, however, with a call for a reshoring of manufacturing jobs seemingly calculated to cost him The Economist's endorsement. For a president whose hallmark has been soaring orations promising hope, however, Mr Obama's take on the global economy is strikingly bleak and depressing. The president was not so unreasonable as to suggest that the American economy could recapture all of its lost manufacturing jobs. Nor was he wrong to point out that countries like China have used direct subsidies, financial shenanigans and currency manipulation to give their exporters a leg up. Yet at no point did he attempt to justify the unstated assumption that what America ought really to do is develop an economy like China's—a place, recall, scarcely one-sixth as rich as America, riddled with potentially debilitating economic imbalances, and governed by an unaccountable monopoly of a communist party. Perhaps more distressing, he implied in several places that the reason to become more like China was that only by doing so could America defeat China, and others, at economics.

The mercantilist impulse, The Economist -  Matthew Ygesias, writing at Slate, is perplexed by Barack Obama's plan to "boost the economy by hindering trade". He argues that in his state-of-the-union address, the president evinced "a strikingly retrograde, self-contradictory, and confused agenda of reviving American prosperity through mercantilism".  Others also perceived a mercantilist undertone in the president's speech, and not for no reason. The president called for the creation of a new Trade Enforcement Unit, extolled the virtues of a tariff on Chinese tires, and said the country was on track to fulfill his promise, made in 2010, to double export growth by 2015. But mercantilism is about more than promoting exports. It also carries an implication of protectionism. And on this count, setting the trade complaints aside for a moment, the evidence doesn't fully support the charge. Over the past three years Mr Obama has made a number of moves that effectively facilitate trade, smoothing the way for imports as well as exports. Last year, for example, he ended a ban on Mexican trucks entering the United States—a NAFTA provision that had not been previously implemented. He also signed free-trade agreements with Colombia, Panama and South Korea, which he cited in last night's speech.

“Built to Last” — A Reaction to Obama’s State of the Union Message - Obama’s slogan for the SOTU last night, “An Economy Built to Last,” was a way of referring to one of the accomplishments of his first years: successfully reviving the auto industry, which many had said couldn’t be done without nationalizing it.   References to other accomplishments were stated more quickly, such as national security (withdrawal from Iraq, disposing of Osama bin Laden) or more obliquely, such as health care reform, financial reform, and arresting the freefall of the economy that Obama inherited in January 2009 (via fiscal stimulus and TARP - both of which are not especially popular programs). To me, the phrase “built to last” suggests that the medium-term goal is a economic growth that resembles the record expansion of the late 1990s, which was driven by expanding private sector employment, technology and exports. This would be an improvement over the economic expansion of the 2002-2007, or those of the 1960s, 70s or 80s;  they were built on easy monetary and fiscal policy and expanding government sector, and thus contained the seeds of their own destruction when inflation, debts and asset prices got out of control.

When Fact Checkers Go Bad…Very Bad - OMG…this is beyond preposterous. Politifact—the self-anointed fact checkers—grade this statement from the President speech tonight as “half-true:” “In the last 22 months, businesses have created more than three million jobs. Last year, they created the most jobs since 2005.” This is not half true or two-thirds true.  It is just true. So why, I ask you, why do they go where they go?  Because of this: In his remarks, Obama described the damage to the economy, including losing millions of jobs “before our policies were in full effect.” Then he described [sic!] the subsequent job increases, essentially taking credit for the job growth. But labor economists tell us that no mayor or governor or president deserves all the claim or all the credit for changes in employment. Really?  That’s it?  That makes the fact not a fact?  I’ve seen some very useful work by these folks, but between this and this, Politifact just can’t be trusted.  Full stop.

Obama’s State of the Union: Then and Now - President Barack Obama‘s State of the Union address Tuesday touched on topics that have been a staple of such addresses, including the economy, jobs, housing and taxes. Here’s what he had to stay on those subjects over the years.

Familiar Rhetoric, Failed Record - YouTube -  If you thought the 2012 State of the Union was very similar to President Obama's past State of the Union speeches, you were right...

Words Not Spoken in Obama State of Union Address Speak Volumes - By now, his critics, his defenders and a few in between have had their way with what the president said Tuesday in his State of the Union address. But what didn’t the president say?  This was Barack Obama’s speech, and what he left out is as revealing as what he put in it. After all, the State of the Union is a statement of priorities. On this night, the weight or importance of an issue can actually be measured in words. To our ears, there were too few about the structural changes, many of them global, shaping American competitiveness and economic well- being.  For starters, the crimped discussion of education stood out. Obama’s own Race to the Top initiative is a successful example of how the federal government has taken the lead on education policy. There is a plan afoot to expand the program to reward school districts in addition to states. It was not mentioned. More deeply, what the president didn’t address, at least not directly, was the (insufficiently appreciated) link between good schooling and social equality and mobility. Public pensions are no one’s definition of a sexy issue. But there may be no more urgent question for every government in the U.S. In California, as Steven Greenhut pointed out in a Bloomberg View op-ed article this week, compensation to police and firefighters -- including pension costs -- accounts for as much as 80 percent of the budgets of some cities and towns. The federal government itself, with its health-care and retirement responsibilities, is often described as an insurance company with a standing army. Yet this looming crisis was nowhere mentioned in Obama’s speech.

The Innovation Nation versus the Warfare-Welfare State - We like to think of ourselves as an innovation nation but our government is a warfare-welfare state. To build an economy for the 21st century we need to increase the rate of innovation and to do that we need to put innovation at the center of our national vision. Innovation, however, is not a priority of our massive federal government. Nearly two-thirds of the U.S. federal budget, $2.2 trillion annually, is spent on just the four biggest warfare and welfare programs, Medicaid, Medicare, Defense and Social Security. In contrast the National Institutes of Health, which funds medical research, spends $31 billion annually, and the National Science Foundation spends just $7 billion. That’s me writing at The Atlantic drawing on Launching the Innovation Renaissance.

Pentagon budget set to shrink next year - The Pentagon budget will shrink slightly next year for the first time since 1998, the Obama administration said Thurs­day, in an attempt to chip away at the federal deficit while reorienting the armed forces toward Asia. Under the proposal, the administration will reduce the size of the Army and Marine Corps, trim the number of fighter aircraft and ships, and seek congressional approval for another round of military base closures.  The administration will instead spend more on unmanned vehicles and Special Operations forces that can be deployed quickly and will not require large, expensive bases. The military will also largely preserve its manpower and weapons systems geared toward the Middle East. The Pentagon said it would ask Congress for $525 billion in 2013, which represents a 1 percent decrease from the current year. While the difference may sound small, it represents a new era of austerity for the Defense Department that would have been unthinkable just a few years ago, when the military was still accustomed to huge annual raises after the attacks of Sept. 11, 2001.

Romney Proposals Would Slash Nondefense Programs - Mitt Romney’s budget proposals would require cutting nondefense discretionary spending to levels not seen in decades, our new analysis finds.  Here’s the opening:Presidential candidate Mitt Romney’s proposals to cap total spending, boost defense spending, cut taxes, and balance the budget would require extraordinarily large cuts in nondefense programs.  If policymakers cut all nondefense programs by the same percentage, the cuts would measure 21 percent in 2016 and 36 percent in 2021.  If policymakers exempted Social Security from the cuts and then cut all other nondefense programs by the same percentage, the cuts would rise to 30 percent in 2016 and 54 percent in 2021.For nondefense discretionary programs, these cuts would come on top of the 17-percent cut already in law due to the discretionary funding caps of the Budget Control Act that Congress enacted last August and the automatic cuts (or “sequestration”) scheduled to start in January 2013.  Our estimates of the depth of cuts that the Romney proposals would require are consistent with what Governor Romney himself has said about the required cuts. Click here for the full report.

The Poison Pill - On 23 December 2011, the Republican party majority in the U.S. House of Representatives caved in on its opposition to President Obama and the Democratic party majority in the Senate's proposal to provide a two-month long extension for the President's payroll tax cut.  Here, the percentage that individuals must pay in their taxes that support Social Security was maintained at 4.2% through the end of February 2012, after which, the rate is set to rise back up to the 6.2% level it had been for the two decades from 1990 through 2010.  Given the political damage from the collapse of the Republican's political strategy in December 2011, it seems unlikely that the party's senior leaders will seek to oppose the President's payroll tax cut again. They might be able to get some traction by letting the payroll tax cut expire by cutting federal income (and withholding tax) rates, however that would depend upon the President and Senate Democrats to go along, which seems even more unlikely given their late-year political victory.

Boehner ‘may’ hold payroll tax cut hostage over Keystone - House Speaker John Boehner (R-OH) said on Sunday that he may block an extension of the payroll tax holiday if President Barack Obama does not approve the Keystone XL oil pipeline. “We’re going to do everything we can to make sure that this Keystone pipeline is in fact approved,” the Speaker told Fox News host Chris Wallace. “Are you saying you may link the Keystone pipeline to extending the payroll tax holiday?” Wallace asked. “We may,” Boehner admitted. “As I say, all options are on the table.” “Why not demand that if he wants the payroll tax cut, he has to approve it?” Wallace urged. “In other words, it comes with it. You want the payroll tax cut, the pipeline goes with it.” “All options are on the table,” Boehner repeated.

House Republicans target Medicare in new budget (Reuters) – Republicans in the House of Representatives will put forward a budget plan this year that will seek substantial reforms to health benefits for the elderly and make aggressive strides toward reducing deficits, a senior lawmaker said on Friday. House Budget Committee Chairman Paul Ryan said he wanted his budget plan to offer voters an alternative vision to the “cradle-to-grave welfare state” that he says Democratic President Barack Obama is promoting. The House Republican budget resolution will contain reforms to Medicare, the healthcare program for Americans 62 and over, such as providing subsidies to help recipients pay for private insurance, based on their wealth and medical needs.“We haven’t written it yet, but we’re not backing off on the kinds of reforms we’ve advocated,” Ryan told reporters at a retreat for House Republicans in Baltimore.

Republicans Demand Block Of US IMF Funding To Bail Out Europe - In an odd coincidence, we were just updating the notional amount of FX swaps that the Fed has conducted with Europe in the past week, when we noticed that the GOP has finally made it an issue to fill in the gray area void of whether or not the US will be required to fund the IMF bailout of Europe. Tangentially, the Fed's USD swaps - an indicator of dollar-denominated last resort liquidity - just hit a 2012 high of $84.5 billion, increasing by $2 billion from the $82.5 billion in the prior week which makes us scratch our heads just how is it that Europe is "getting better" if instead of declining, usage of USD swaps is increasing confirming interbank liquidity is non-existence. This merely confirms that 4 weeks after peaking at a multi-year high of $85.4 billion in the last week of December, the European liquidity situation has once again started to deteriorate. It also means that the "self-reported" to the BBA 3M USD (but it's 'declining') is and continues to be about as worthless as any data out of the NAR. Finally, it disproves that statement under oath that Bernanke made to Congress that he would not bail out Europe. Which is why we were delighted that after months of modest confusion on the topic, the Congressional Committee on Financial Services (including subcommittee chairman Ron Paul), have demanded that not only Geithner make his stance on a US-funded IMF bailout of Europe crystal clear, but that they are openly opposed to "American taxpayer dollars being used to bail out Europe...through additional contributions to the IMF."

In Search Of: Fiscal Responsibility -- Given all the talk about taxes, I wondered how the Republican candidates plans stack up on the fiscal responsibility dimension, which Jeffry Frieden and I define thus: [T]rue fiscal responsibility involves a willingness to raise sufficient tax revenue, over the longer term, to pay for the programs the government implements. Fiscal responsibility should not be equated with a small government, but rather with a commitment to pay for the government services provided. ...  ... If the nation affirms that enhancing national defense and improving health care for the poor are legitimate goals, fiscal responsibility entails raising the revenue to fund these programs, rather than borrowing for them. (Chinn and Frieden, Lost Decades, 2011, pp. 202-03.)  Here is a summary of the scoring of candidates plans by the Tax Policy Center, as reported by Cooper and Kocieniewski in the New York Times (January 18, 2012)

President Obama’s Tax Deform Agenda - For a while there, I thought President Obama was going to embrace tax reform in his State of the Union address.  Instead, following the lead of his predecessors, he offered a laundry list of new tax subsidies, bragged about some old ones, and said almost nothing about a top-to-bottom rewrite of the Tax Code. Here’s just a partial list of the targeted tax breaks Obama promoted: Tax credits for clean energy and college tuition, as well as tax cuts for small business that create jobs, domestic manufacturers, high-tech manufacturers, and companies that close overseas plants and move production back to the U.S. At the same time, he’d require individuals making more than $1 million to pay an effective income tax rate of at least 30 percent, in part by eliminating their ability to take many deductions. And, he’d use the tax code to punish companies that do business overseas, creating a new minimum levy that is supposed to assure that all multinationals pay some U.S. tax. Obama’s embrace of the tax code as a vehicle to pick winners and losers sounded more than a little discordant in a speech whose theme was “everyone gets a fair shot and plays by the same set of rules.”  Not so much in a tax code where you get special rules for the government’s favored activities.

Four Keys to a Better Tax System - Greg Mankiw - Economists who study public finance have long agreed with William E. Simon, the former Treasury secretary, who said that “the nation should have a tax system that looks like someone designed it on purpose.” Here are four principles of tax reform that most of those economists would endorse:  United States tax code is filled with deductions and exclusions that shrink the basis of taxation. The smaller base in turn requires higher tax rates to raise the revenue needed to fund government. The starting point of reform is to reverse this process.  This principle was endorsed both by President George W. Bush’s tax reform commission in 2005 and by President Obama’s deficit reduction commission in 2010. Neither report had much impact, because eliminating deductions and exclusions is politically treacherous. Yet each made a good case on the merits. Consider the deduction for mortgage interest. The policy is politically popular, but economists have long thought it has little justification. Because of this provision, among others, our tax system gives a better treatment to residential capital than it does to corporate capital. As a result, too much of the nation’s saving ends up in the form of housing rather than in business investment, where it could have increased productivity and wages.

How to Avoid Reinventing the Wheel on Tax Reform - An extensive discussion of tax reform is likely to take place over the next couple of years because it’s necessary and long overdue and because both political parties have things they hope to get out of it. Taken together, these suggest that something might actually happen.  Like many inside-Washington policy debates, much of that involving tax reform is unintelligible except to those who understand the jargon, players, history and unstated assumptions that underlie it. For those interested in following the discussion, which is likely to be protracted, my book is intended as a primer on some of the basic issues and concepts that will inevitably be part of the tax debate. One of the main points I make is that tax reform is not a new subject, and many issues likely to be in the forefront of the debate have already been pretty thoroughly analyzed in ways that are still relevant. Here’s one good example: “Blueprints for Basic Tax Reform” is perhaps the most important tax study of the postwar era. It was published 35 years ago this month – in the last weeks of the Ford administration. For many years, it was difficult to find and known only to hard-core tax experts; fortunately, the Treasury Department has made it available on its Web site.

One-Sentence Tax Reform - Richard Green writes, Let's just start by designing a code that requires that as adjusted gross income rises, the effective tax rate may not fall. That way taxpayers would be able to look at their own effective rate, and know that everyone with higher incomes would pay at least as high a rate. Here is my own one-sentence proposal: If A and B earn the same income, but A saves and B spends more, then A should not have to pay higher lifetime taxes.  Note that Green's principle sounds attractive, my principle sounds attractive, and they contradict each other. Consider A and B in my example. Because of higher saving, A's income will be higher, and according to Green this means that A should face a higher tax rate. If the tax code is focused on reducing income inequality, it will have to punish saving. If the tax code is focused on not punishing saving, it will have to enhance income inequality. (Those of us who oppose punishing saving tend to view consumption inequality is a better measure than income inequality.) I see no way to reconcile that conflict.

Why Higher Taxes Will Have to be Part of the Medium- and Long-Term Fiscal Solution - If we are going to reduce the medium- and long-deficit, new tax revenues must be part of the solution. And those taxes must be progressive and as conducive to economic growth as possible. Historical revenue levels will not be sufficient to fund the federal government in the future. We will need to control the ballooning costs of Medicare, Medicaid, and Social Security. However, because their enrollment will be growing with the aging population, additional revenue still will be needed. Past major budget agreements included both revenue increases and spending cuts because using both sides of the budget provides a sense of fairness and shared sacrifice. Americans prefer a balanced approach to spending cuts alone Interestingly, raising taxes has proved more effective at restraining spending than allowing the government to finance its outlays with deficits. Under presidents Reagan and George W. Bush, taxes fell but spending rose. Spending fell only in the 1990s, when President Clinton and Congress raised taxes. This makes sense, since raising taxes to pay for current spending makes it clear to taxpayers that there is a cost to current spending, whereas the cost of deficit financing, while real enough, are obscured by the fact that it is does not create current tax liabilities.

All 2011 unemployment insurance benefits taxable - Collecting unemployment insurance benefits? All that you received in 2011 is taxed as income. Unless you requested that federal taxes be withheld, you could be in for a big surprise when you calculate taxes owed. “People tend to believe unemployment benefits are still not taxable,” said Bob Meighan, a vice president at TurboTax. That was the case in 2009, for the first $2,400 in unemployment benefits. But that provision was not renewed by Congress. If it’s any consolation, you may find yourself in a lower tax bracket because of reduced income, even counting the unemployment benefits. And you might also be eligible for tax breaks that you didn’t qualify for before. “If you have major household changes, say you lost your job in 2011, we encourage people to take a close look at things like the earned income credit,” Internal Revenue Service spokesman Terry Lemons said. He said people should go ahead and file their taxes even if they don’t have the money to pay any taxes that are due. “There are more options there than many people realize,” he said, including installment agreements.

Why Limiting Itemized Deductions (Still) Makes Sense - It’s a proposal that has come up over and over again in President Obama’s budget, and one that I hope will come up yet again.  In my column in today’s Tax Notes (subscription-only access here), I remind readers that this is a great idea whose time has (been overdue to) come: the proposal to limit itemized deductions–to either 28 percent (the President’s version) or 15 percent (the more aggressive version suggested by CBO’s budget options volume). I like it because it’s a proposal to raise a lot of revenue (and reduce the deficit), yet by reducing a large tax expenditure in a progressive way. How much revenue would the proposal likely raise?  A lot.  I refer to CBO estimates: The CBO estimates the president’s proposal would raise $293 billion over 10 years. A more ambitious version limiting itemized deductions to a 15 percent rate, as presented in the CBO’s compendium of budget options, would raise $1.2 trillion over 10 years — in other words, equivalent to trimming overall tax expenditures [which are over $1 trillion per year] by about 10 percent through that one policy change alone.

Romney forced to reveal tax returns  - Mitt Romney will on Tuesday release his tax returns for the last two years, relenting to intense pressure from Newt Gingrich, his insurgent rival for the Republican presidential nomination. The disclosure is likely to bring unwelcome scrutiny to Mr Romney’s business background, just days after he suffered a resounding defeat at the hands of Mr Gingrich in the South Carolina primary.  That result ensures a prolonged Republican nomination contest between the two men. Now, the race is set to go on through to “Super Tuesday” on March 6, when 10 states will vote. “We made a mistake in holding off as long as we did,” Mr Romney conceded on Fox News Sunday, calling the attention paid to his tax returns over the last week a “distraction”.  “We’ll be putting our returns on the internet. People can look through them,” he said, adding that voters would see that he pays a “substantial” amount of tax. Last week he said that he paid about 15 per cent, well below top income tax rate of 35 per cent, because almost all his earnings come from investments.

Mitt Romney Tax Returns Released: Paid Just 13.9% Rate In 2010, Had Swiss Bank Account -  Republican presidential candidate Mitt Romney released tax records on Tuesday indicating he will pay $6.2 million in taxes on a total of $42.5 million in income over the years 2010 and 2011.Bowing to increasing political pressure to provide more detail about his vast wealth, the former private equity executive released tax returns indicating he and his wife, Ann, paid an effective tax rate of 13.9 percent in 2010. They expect to pay a 15.4 percent rate when they file their returns for 2011.Romney's tax rate is below that of most wage-earning Americans because most of his income, as outlined in more than 500 pages of tax documents, flows from capital gains on investments.Under the U.S. tax code, capital gains are taxed at 15 percent, compared with a top tax rate of 35 percent for wage earners. Romney released the tax returns after a week in which his chief rival for the Republican presidential nomination, former House of Representatives Speaker Newt Gingrich, questioned whether Romney was hiding information about his finances and cast him as being out of touch with most Americans.

13.9% Just Under 15% ? -- What is a small amount of money ? The extremely excellent Josh Marshall typed:  We’ve got the first report about Romney’s 2010 taxes. His effective tax rate was 13.9%, just below the 15% he estimated last week. More shortly. The tiny difference between the taxes Romney publicly guessed he roughly paid and the taxes he paid is over $450,000. One of Romney's many gaffes is saying his taxes were around 15% because, although he had earned money for speaches, he didn't earn much. Indeed he earned less than 450,000 that way. But it is a huge amount of money to earn with so little sweat.  Similarly the difference between 13.9% and 15% is more than seven times median family income. 

Romney's Taxes - Krugman - Just about what we expected. He really needs to provide earlier years, if only to clear up suspicions that he began sanitizing his portfolio in preparation for his presidential run. The right-wing apologetics now focus on the claim that Romney’s taxes aren’t really low, because we should impute the taxes that corporations effectively paid on his behalf. But there are at least two things wrong with this argument. First, $13 million of the total was carried interest, which gets taxed like capital gains but is really just commissions that receive special treatment for no good reason. No profits taxes were paid on that income; right there, a minimally defensible tax code would have levied $2.6 million more in taxes on Romney. Second, just the other day the usual suspects were calling for big cuts in corporate taxes, arguing that these taxes don’t really fall on stockholders, they fall mainly on workers and consumers. Now, suddenly, the taxes fall on stockholders after all. Interesting. Meanwhile, the Romney campaign is signalling that it’s going to try to spin this as “he pays lots of taxes”! How stupid do they think we are? Actually, don’t answer that.

Romney’s released tax return reveals 13.9% rate, holdings in foreign ‘tax havens’  - Republican presidential candidate Mitt Romney released tax records on Tuesday indicating he will pay $6.2 million in taxes on a total of $45.2 million in income over the years 2010 and 2011. Bowing to increasing political pressure to provide more detail about his vast wealth, the former private equity executive released tax returns indicating he and his wife, Ann, paid an effective tax rate of 13.9 percent in 2010. They expect to pay a 15.4 percent rate when they file their returns for 2011. Romney’s tax rate is below that of most wage-earning Americans because most of his income, as outlined in more than 500 pages of tax documents, flows from capital gains on investments.Under the U.S. tax code, capital gains are taxed at 15 percent, compared with a top tax rate of 35 percent for wage earners.

Buffett: Romney Should Pay Higher Taxes - Last week, Mitt Romney finally admitted that he pays a tax rate of 15 percent, lower than that of many middle-class families. Romney is taxed at such a low rate because, as he freely admits, all of his income comes from investments, and is thus subject to the top capital gains tax rate of 15 percent, rather than the top income tax rate of 35 percent.  However, Romney has refused to sign on to the Obama administration’s “Buffett rule,” which aims to ensure that millionaires can’t dodge taxes to the extent that they’re paying less than teachers. Today, billionaire investor Warren Buffett himself was asked about Romney’s tax rate, replying that letting millionaire investors like Romney pay such low taxes is “the wrong policy” because he makes his income by just “shoving around money”: He makes his money the same way I make my money. He makes money by moving around big bucks, not by straining his back and going to work cleaning the toilets or whatever it may be. He makes it shoving around money. I make it shoving around money. If you look at the 400 highest incomes in the United States, they average $220 million. Something like 90 of them are effectively unemployed. They have no earned income, and that number has gone up over the years. [...] Watch it:

Obama's State of the Union vs Romney's Tax Returns - Obama took the high ground in his state of the union address, where he pointedly noted the importance of applying fair tax rules to ensure that millionaires pay taxes at rates more similar to those paid by secretaries and firefighters. He wants a 30% rate on those with incomes of a million or more.  We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by,” Obama said in his address to a joint session of Congress. “Or we can restore an economy where everyone gets a fair shot, everyone does their fair share and everyone plays by the same set of rules.” Obama Says High-Earners Should Pay at least 30% of Income as Tax, Bloomberg. That would mean that Romney wouldn't enjoy the exceptionally low rate of tax he had in 2010 after Congress enacted Obama's suggested reforms. Romney released his tax returns on Tuesday. See this handy link on the New York Times at which the 2010 and 2011 returns and accompanying documents are available, including links showing where Romney earned his $528,871 in speaking fees, etc.. Romney paid only 13.9% on $21.6 million of income, benefitting enormously from the low preferential capital gains rate of 15% that he paid on his returns from his investment of capital. Romney benefitted, too, from investments in the Cayman Islands, a well-known tax haven. And he is still earning "carried interest" from Bain Capital to the tune of multiple millions a year--that's a share of the profits of a partnership he managed, treated as though it were a return on an investment of capital though it is paid for services.

Obama’s “Buffett rule” Equivalent to Raising Top Marginal Rate on Millionaires to 44% - In his State of the Union address last night, President Obama proposed the latest version of the "Buffett rule."  But he got more specific this time around.The rule would require all individuals reporting at least $1 million in income to pay an effective tax rate of no less than 30 percent.  He did not say how this would be implemented, nor did the White House release more specifics on the rule today.  For the moment, let's think about this in the context of the term with which most Americans can identify: top marginal rate.  This is the tax rate you pay on your last dollar earned.  How big of an increase to the top marginal rate is the "Buffett rule" equal to for million-dollar earners? Nine percentage points. If the rest of the tax code remained untouched, the top marginal rate would need to be raised from 35 percent to 44 percent on the average million-dollar earner (someone making $3.1 million annually, calculated using table 1.2 of IRS data) to ensure the 30 percent effective rate of the proposal.

Gingrich's 2010 Tax Return: what it does (and doesn't) tell us - Linda Beale - In last Thursday's debate, Newt Gingrich released his 2010 Gingrich Foundation tax return  and the Gingrich Joint Tax return.  See Kim Dixon & Marcus Stern, Gingrich tax return out, but much remains unseen, Reuters, Gingrich tax return details sources of income, alimony payment, L.A. Times; Jon Ward, Newt Gingrich Releases His Tax Returns, (the Gingrich press release, with links to both returns, is also accessible from a link at bottom of this brief article). The private foundation's return lists Callista Gingrich (presumably in her role as President) as having custody of the books at the Foundation's address in Washington.  It lists Newt Gingrich as the only manager who contributed more than 2% of the contributions received during the year, and another form (Schedule B) lists Gingrich Holdings as the contributor of $152,609.   The joint tax return shows income in 2010 of more than $3 million, with about $450,000 in  compensation income and about $2.5 million of Schedule E  income through his S corporations Gingrich Holdings inc  and Lubbers Agency Inc. and partnerships Draper Fisher Jurvetson Fund VIII and FLC XXXII Partnership LP.  (He apparently restructured these businesses before entering into the Republican nomination contest, perhaps foreseeing better than Mitt Romney did that voters might react to the very idea of a giant holding company through which one receives one wealth.)   The Salaries and Wages report shows that $450,000 in compensation income arising as follows:  252,500 in wages to Newt from Gingrich Holdings, Inc., and to Callista 5918 from National Shrine and 191,827 from Gingrich Productions, Inc. 

Presidential Tax Returns - This morning Mitt Romney joined Newt Gingrich and Barack Obama in the group of presidential candidates who have released their 2010 tax returns. Ron Paul and Rick Santorum have not yet released theirs. We'll have more to say about these returns later, but for now we wanted to collect them all in one place for easy side-by-side comparison.

Romney tax returns detail funds not identified in ethics forms - Some investments listed in Mitt and Ann Romney’s 2010 tax returns – including a now-closed Swiss bank account and other funds located overseas – were not explicitly disclosed in the personal financial statement the GOP presidential hopeful filed in August as part of his White House bid. The Romney campaign described the discrepancies as “trivial” but acknowledged Thursday afternoon that they are undergoing an internal review of how the investments were reported and will make “some minor technical amendments” to Romney’s financial disclosure that will not alter the overall picture of his finances. A review by the Los Angeles Times/Tribune Washington Bureau found that at least 23 funds and partnerships listed in the couple’s 2010 tax returns did not show up or were not listed in the same fashion on Romney’s most recent financial disclosure, including 11 based in low-tax foreign countries such as Bermuda, the Cayman Islands and Luxembourg.

What the Romney and Gingrich 1040s Tell Us About How We Tax The Rich - Peeking at a celebrity’s tax return is more than a little voyeuristic.  But get beyond the sheer prurience of the exercise and the Romney and Gingrich returns tell us a lot about the way those with incomes of $1 million or more are taxed, and how they structure their lives to minimize taxes. But mostly, they tell us that all those who make $1 million-a-year are not alike. And most of them are surprisingly like the rest of us, only more so.   Gingrich is typical. He made more than $3 million in 2010—mostly through distributions from an S Corporation. This allowed him to avoid double-taxation (since the S Corp is a pass-through entity that pays no tax). He also used this device to reduce his Medicare payroll tax.But of his $3.1 million in income, only about $35,000 came from investments, and the rest was taxed at ordinary income rates—much of it at the top rate of 35 percent. It is no wonder that he paid close to $1 million in income taxes–an effective rate of about 32 percent. .  Of the slightly more than 400,000 households making $1 million-plus, the vast majority make most of their income from wages or distributions from pass-throughs, and not from investments. Think entrepreneurs, doctors, lawyers, movie stars, and professional athletes.

The Concentration of Capital Gains and Dividend Income - Mitt Romney turned over his taxes yesterday, revealing that ”Unlike most Americans who earn a paycheck, Romney gets the majority of his income from investment profits, dividends and interest…Romney and his wife Ann paid an effective tax rate of 13.9 percent in 2010 and expect to pay a 15.4 percent effective tax rate when they file their returns for 2011.  Those rates are roughly in line with the effective tax rates paid by most Americans, but they are far below the top income tax rate levied against wages, which is 35 percent, because the U.S. tax code favors investment income over wage income.”  Even with this, there are still many unanswered questions. It might be useful to get some data on how concentrated dividend and capital income is among the top 1% and especially the top 0.1%, since the tax status of this income will be a political topic in 2012. Let’s look at Congressional Research Services, Changes in the Distribution of Income Among Tax Filers Between 1996 and 2006: The Role of Labor Income, Capital Income, and Tax Policy.  First thing to notice is that for the bottom 80% of Americans receive less than 1% of their income from dividends and capital gains, while it is half the income the top 0.1% receives:

Tax Distortions - The editorial page of the WSJ is at it again, torturing numbers until they confess to crimes they did not commit.  In this case, they’re claiming that Mitt Romney’s tax rate is a lot higher than the 15% he himself has acknowledged, and that his tax records confirm.  It’s a claim that requires considerable sleight of hand, as I’ll show.  But more importantly, when you actually start to look at the tax code that applies to rich folks like Gov Romney, with all their income from investments as opposed to earnings, you get a sense of just how tilted tax policy is in their favor. The Journal’s main point is this: One reason investment income is taxed at a lower rate than wage and salary income is because it is a double tax—profits are taxed once under the statutory 35% corporate tax rate and then again when they are paid out to individuals as dividends. But this is almost certainly not the case with income from private equity firms like Bain Capital, because they are invariably set up as “pass throughs,” meaning that profits face only the individual rates of the owners, not the corporate rate. What about the corporations in which the PE funds invest?  Don’t they pay the corporate rate and wouldn’t that be capitalized into their profits (which would be lower due to the corp tax)?  But that’s not how the PE guys roll.  They profit from buying and selling undervalued stock in the company, or for that matter, selling the undervalued company itself.  The corp rate doesn’t come into play in either scenario.

Talk of Taxing the Rich More Faces Political RealitiesPresident Obama1’s call for “tax fairness” and Mitt Romney2’s tax returns have catapulted the debate over tax increases on the rich to the top of the political agenda. But with even some top Democrats hesitant, the prospects of a so-called Buffett tax on high-earning households remain uncertain, if not remote, for the immediate future. What is left may be only politics, at least until after the November elections.  Democrats promised Wednesday that this time their calls for serious tax changes for the rich were serious. For two years, when their party controlled both houses of Congress and the White House, Democratic leaders failed to change the rules on “carried interest” to ensure that private equity3 titans and venture capitalists pay more than a 15 percent tax rate on fees reaped from their investor clients. Democrats hardly mentioned raising the 15 percent tax rates on dividends and capital gains, the largest reason the super-rich pay less of their income in taxes than many middle-class families.  But that was before Mr. Romney released a 2010 tax return that showed income of $21.6 million, and an effective tax rate of 13.9 percent, a rate more typical of a household earning about $80,000.

Buffett vs. Mankiw on Taxes - By inviting Debbie Bosanek, Warren Buffett’s secretary, to sit in the first lady’s box at the State of the Union address, President Obama signaled that he intends to talk about the tax rate on some investments. Mr. Obama and Mr. Buffett both argue that many investment managers pay too little tax, because the tax code treats their pay as an investment return — and thus taxes it at a much lower rate than ordinary income. Mr. Buffett has famously said that, as a result, his secretary pays a higher tax rate than he does. The tax rate on many investment gains is 15 percent, while the top tax rate on ordinary income is 35 percent. This gap goes a long way toward explaining why Mitt Romney, the Republican presidential candidate, pays a lower tax rate than many affluent Americans. N. Gregory Mankiw, a Harvard economist and former adviser to President George W. Bush who is now advising Mr. Romney, has questioned the notion that Mr. Buffett actually pays a higher tax rate than his secretary. Writing in The New York Times in 2007, Mr. Mankiw, who is a contributor to the “Economic View” column in The Times’s Sunday Business section, argued:Another piece of the puzzle is that Mr. Buffett’s tax burden is larger than it first appears, because he is a major shareholder in Berkshire Hathaway.

Bill Gates Says Higher Taxes on Wealthy is 'Justice' - President Obama urged Congress to support an income tax hike on the nation's most affluent citizens during his State of the Union address Tuesday, earning the ire of many conservatives who say the proposal is nothing short of class warfare. On Wednesday, billionaire Bill Gates called the policy something entirely different: Justice. In an interview with the BBC, the co-founder and Chairman of Microsoft said Obama's revival of the so-called "Buffett Rule" -- named after his friend, billionaire Warren Buffett, who has spoken out against a tax code he says favors the wealthiest Americans - is necessary to pay down the country's formidable budget deficit. "The United States has a huge budget deficit, so taxes are going to have to go up. I certainly agree that they should have to go up more on the rich than everyone else. That's just justice," Gates said. Obama called for tax reform that he said would ensure middle-class Americans don't pay a tax rate higher than their wealthier counterparts. The president called on eliminating several tax subsidies or deductions that he said "subsidize" millionaires and advocated small tax increases on annual incomes over $1 million.

Mitt Romney’s 2009 Tax Burden Likely Even Lower Than 2010, Experts Say - Mitt Romney's 2010 tax return is likely to serve as a flashpoint throughout the presidential campaign for critics who say the 13.9 percent effective tax rate he paid that year is unfairly low.  It appears likely his tax burden was even lower the year before. Tax experts who closely reviewed returns released Tuesday told The Huffington Post that Romney probably did not pay any taxes on his investment income in 2009.  Romney did pay some income tax in 2009. But because a good part of his income comes from a lucrative retirement package from private equity firm Bain Capital taxed at a 15 percent rate, Romney was likely able to offset his Bain income with losses from other parts of his investment portfolio, the experts said.  Ordinary investors can reduce their tax burdens through write-offs too, but those savings don't go as far for a typical middle-class worker with taxable income of $70,000, who would pay taxes at a much higher 25 percent rate. "You could look at Mitt Romney's deferred compensation as a form of retirement saving," said Gil Manzon, a tax professor at Boston College.  But the "catch," said Manzon, is while Romney pays 15 percent annually on those savings, typical investors drawing from their 401k savings pay taxes at ordinary rates -- whatever they would pay if they earned it at a job.

Romney’s Taxes Show Ridiculousness of Carried Interest Loophole - Mitt Romney released his tax returns for 2010 and an estimate for 2011 today, and I think what we can say about them is that Mitt Romney, or rather his accountant, is very good at taxes. Romney still benefits from new carried interest on his 2010 form, ten years after he left Bain Capital. One part of the form obligates Romney to perform “services” for Bain as a consequence of receiving this money, which needs to be explored more. But Kleinbard described carried interest this way: basically, carried interest refers to management fees that money managers receive for dealing with someone else’s money. That gets taxed at the capital gains rate, 15%, rather than the higher income tax rate of 35% at the top margin. To the extent that a lower capital gains tax can get justified at all, it’s as an encouragement for investment. But giving that tax break to the money manager encourages no investment at all. The money would get invested either way, as it has no bearing on the tax advantage of the investor. The money manager is just getting a break, and a giant one at that.

Romney’s Tax Plan Would Save Him Millions — But Not As Much As Gingrich’s Would - Republican Presidential candidate Mitt Romney would save $3.4 million a year — roughly 85 times the total pre-tax income of the average American citizen — if the tax plan he advocates were enacted in the year that he is seeking to be President. In fact, Romney’s policies would not only shrink what he pays to the government, they would also boost his income, and roughly double the amount of money that he can pass along to his children when he dies. On Tuesday, Romney released his 2010 tax returns and what his accountants expect he will pay to the government in 2011. Romney, whose financial disclosure form puts his net worth as high as $264 million, is one of the wealthiest people ever to run for President.  Romney does have some off-shore accounts, but it didn’t appear that those accounts have significantly lowered his taxes. In fact, all of the tax experts TIME contacted said Romney’s tax filings appeared quite normal in terms of what you would expect for a wealthy individual. Ironically, it’s Gingrich’s plan that would lower Romney’s personal tax bill the most. “If Romney was really greedy, he would drop out of the race and endorse Newt,” says Bob McIntyre, director of the liberal group Citizens For Tax Justice. Under Gingrich’s proposal, Romney would pay almost no federal income taxes, saving him nearly $6.4 million a year in 2013. Romney would also save money under the tax plan of Rick Santorum, who is also running for the Republican nomination, than under his own plan.

The Income Defense Industry is alive and well. - David Cay Johnson has spent quite a bit of his adult life studying and reporting on taxes, taxation and speaking to tax issues with regard to the roll they play in our economy as well as other important issues.  This piece at Reuters is a good read btw, as is his recent piece entitled The burden of Romney’s tax returns... To say he is not a fan of The Corporatocracy, is an understatement. He was on during the first hour of Up w/Chris show this morning and really opened my eyes about how we, the 99%, are getting screwed royally by the tax codes, tax rates and by those that eternally lobby for keeping them low for the top one percent. And, like Mittens Romney and his economic plan, the Income Defense Industry wants to change our tax codes to screw  the rest of us even more whilst lining the pockets of the rich folks, who really don’t even friggin work, even more exorbitantly. The best part of the first hour of the Hayes’ show this morning, was on tax codes, rates and the like, beginning of course with the hue and cry about why ole Mitt Romney won’t release his tax returns NOW. Chris Hayes did a good opening piece on that, which in itself, was enlightening as hell because he gives a short 5 minute class on taxation as does the rest of the roundtable group discussing the topic in the rest of the 12 minute video below

Wealth vs Income -  Recently, Noah Smith had a post on the subject of economic models titled Filling a hole or priming the pump?  It did quite a bit to restore my lack of faith in the pseudoscience of Economics, but that is more or less beside the point.  Roger Farmer, cited in the post, left a long comment that Noah hoisted up the main page.  Farmer concludes: My reading of the evidence is that consumption depends primarily on wealth rather than income. It is for that reason that I support interventions in the asset markets that try to jump-start the economy and reduce unemployment by boosting private wealth. That, in my view, is what quantitative easing has done. Ok - I'm taking on decades of economic research here, but my first question relates to: "My reading of the evidence is that consumption depends primarily on wealth rather than income." First, let's remember that wealth distribution is on the order of the top 1% owning 40% of the wealth, and the bottom 80% owning 7% of the wealth. And that 7% is not evenly distributed.  There are significant fractions of the population who have a) no wealth at all, or b) negative net worth. Either way, they are living hand to mouth.  This suggests that 1) they have unmet needs, and 2) will spend the next available dollar trying to satisfy one of them.   Let's take a look at how personal consumption expenditures track disposable income. 

For Hire: Lobbyists or the 99%? How Corporations Pay More for Lobbyists Than in Taxes - pdf - Amidst a growing federal deficit and widespread economic insecurity for most Americans, some of the largest corporations in the country have avoided paying their fair share in taxes while spending millions to lobby Congress and influence elections. This report builds on a recent report on corporate tax dodging by Citizens for Tax Justice by examining lobbying expenditure data provided by the Center for Responsive Politics. We also look at publicly available data on job creation, federal campaign contributions, and executive compensation, to understand how these corporations have been spending their cash. Key Findings:

  • • The thirty big corporations analyzed in this report paid more to lobby Congress than they paid in federal income taxes for the three years between 2008 and 2010, despite being profitable.
  • • Despite making combined profits totally $164 billion in that three-­‐year period, the 30 companies combined received tax rebates totaling nearly $11 billion.
  • • Altogether, these companies spent nearly half a billion dollars ($476 million) over three years to lobby Congress—that’s about $400,000 each day, including weekends.
  • • In the three-­‐year period beginning in 2009 through most of 2011, these large firms spent over $22 million altogether on federal campaigns.
  • • These corporations have also spent lavishly on compensation for their top executives ($706 million altogether in 2010).

Banks Weren’t Meant to Be Like This - The inherently symbiotic relationship between banks and governments recently has been reversed. In medieval times, wealthy bankers lent to kings and princes as their major customers. But now it is the banks that are needy, relying on governments for funding – capped by the post-2008 bailouts to save them from going bankrupt from their bad private-sector loans and gambles. Yet the banks now browbeat governments – not by having ready cash but by threatening to go bust and drag the economy down with them if they are not given control of public tax policy, spending and planning. The process has gone furthest in the United States. Joseph Stiglitz characterizes the Obama administration’s vast transfer of money and pubic debt to the banks as a “privatizing of gains and the socializing of losses. It is a ‘partnership’ in which one partner robs the other.” Prof. Bill Black describes banks as becoming criminogenic and innovating “control fraud.” High finance has corrupted regulatory agencies, falsified account-keeping by “mark to model” trickery, and financed the campaigns of its supporters to disable public oversight. The effect is to leave banks in control of how the economy’s allocates its credit and resources. If there is any silver lining to today’s debt crisis, it is that the present situation and trends cannot continue. So this is not only an opportunity to restructure banking; we have little choice. The urgent issue is who will control the economy: governments, or the financial sector and monopolies with which it has made an alliance.

Will the Mitt/Newt Slugfest Boost the Occupy Movement? - Lynn Parramore - The Occupy Movement brought key issues like economic inequality, Wall Street greed, and political corruption to the table. And we may have the GOP front runners to thank for keeping them there. Here’s a look at how the Battle of Newt and Mitt can help keep the OWS flame alive… Newt Gingrich’s populist messages in South Carolina dealt Mitt Romney a body blow. Newt hit the multi-millionaire on his low tax rate and his role in the oft-reviled private equity industry to leave him stumbling through debate questions and looking generally ill at ease. Getting branded as a corporate raider who pays less in taxes than your housecleaner is not a great image, to say the least. Newt leveled three sets of charges at his rival on economic issues, all of which resonate with core Occupy Wall Street concerns. The first two were key in the South Carolina primary, and the third may be important in the next phase as Newt attempts to draw Ron Paul supporters into his camp. They are:

1) Taxes (OWS concern = economic inequality)
2) Private equity (OWS concern = Wall Street predation, ruthless capitalism, senseless job destruction)
3) Federal Reserve (OWS concern = power of big banks over government)

Each of these issues, of course, is viewed through somewhat different lenses by left and right-leaning populists. For Occupiers, questions about the Federal Reserve, for example, tend to call up issues of the banking industry’s influence on government at the expense of the ordinary Americans. For many Tea Partiers, a greater concern is 1) the relationship between the Fed’s activity and the government deficit and 2) the desire of some to abandon fiat money in favor of a return to the gold standard. Newt signaled his stance in Saturday night’s victory speech: “Dr. Ron Paul, who on the issue of money and the Federal Reserve, has been right for 25 years. While I disagree with him on many other things, there’s no doubt that a lot of his critique of inflation, of flat money into the federal reserve is absolutely right, in the right direction, and its something I can support strongly.” However Newt spins them, all three issues are likely to produce robust discussions that highlight and educate the public on matters that OWS would like to have at the center of national economic debate.

George Soros on the Coming U.S. Class War -For the first time in his 60-year career, Soros, now 81, admits he is not sure what to do. “It’s very hard to know how you can be right, given the damage that was done during the boom years,” Soros says. He won’t discuss his portfolio, lest anyone think he’s talking things down to make a buck. But people who know him well say he advocates making long-term stock picks with solid companies, avoiding gold—“the ultimate bubble”—and, mainly, holding cash. He’s not even doing the one thing that you would expect from a man who knows a crippled currency when he sees one: shorting the euro, and perhaps even the U.S. dollar, to hell. Quite the reverse. He backs the beleaguered euro, publicly urging European leaders to do whatever it takes to ensure its survival. “The euro must survive because the alternative—a breakup—would cause a meltdown that Europe, the world, can’t afford.”  At times like these, survival is the most important thing,” he says, peering through his owlish glasses and brushing wisps of gray hair off his forehead. He doesn’t just mean it’s time to protect your assets. He means it’s time to stave off disaster. As he sees it, the world faces one of the most dangerous periods of modern history—a period of “evil.” Europe is confronting a descent into chaos and conflict. In America he predicts riots on the streets that will lead to a brutal clampdown that will dramatically curtail civil liberties. The global economic system could even collapse altogether.

'There will be riots on streets of America': George Soros predicts class war in U.S. as euro triggers collapse of global economy - Billionaire investor George Soros has warned the global economic system could collapse and riots on the streets of America are on the way. The 81-year-old said he’d rather survive than stay rich as the world faces an ‘evil’ period and Europe fights a ‘descent into chaos and conflict’. He has backed the euro, bought $2billion in European bonds and insisted the economic climate is similar to the 1930s Great Depression. ‘The euro must survive because the alternative - a breakup - would cause a meltdown that Europe, the world, can’t afford,’ he told Newsweek. ‘The situation is about as serious and difficult as I’ve experienced in my career. We are facing now a general retrenchment in the developed world.’

George Soros predicts riots, police state and class war for America - RT -  Billionaire investor George Soros has a new prediction for America. While it might be as dire as it gets for the financial wiz, this bet concerns more than just the value of the buck. According to Soros, there's about to be an all-out class war. “I am not here to cheer you up. The situation is about as serious and difficult as I’ve experienced in my career,” Soros tells Newsweek. “We are facing an extremely difficult time, comparable in many ways to the 1930s, the Great Depression. We are facing now a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system.” Soros goes on to compare the current state of the western world with what the Soviet Union was facing as communism crumbled. Although he would think that history would have taught the globe a thing or two about noticing trends, Soros says that, despite past events providing a perfect example of what is to come, the end of an empire seems imminent.

The Corporate State Will Be Broken - Chris Hedges - Our electoral system, already hostage to corporate money and corporate lobbyists, gasped its last two years ago. It died on Jan. 21, 2010, when the Supreme Court in Citizens United v. Federal Election Commission granted to corporations the right to spend unlimited amounts on independent political campaigns. The ruling turned politicians into corporate employees. If any politician steps out of line, dares to defy corporate demands, this ruling hands to our corporate overlords the ability to pump massive amounts of anonymous money into campaigns to make sure the wayward are defeated and silenced. Politicians like Obama are hostages. They jump when corporations say jump. They beg when corporations say beg. And if any elected official so much as murmurs anything that sounds like dissent, the Supreme Court ruling permits corporations to destroy him or her. And they do. Turn off your televisions. Ignore the Newt-Mitt-Rick-Barack reality show. It is as relevant to your life as the gossip on “Jersey Shore.” The real debate, the debate raised by the Occupy movement about inequality, corporate malfeasance, the destruction of the ecosystem, and the security and surveillance state, is the only debate that matters. You won’t hear it on the corporate-owned airwaves and cable networks, including MSNBC, which has become to the Democratic Party what Fox News is to the lunatic fringe of the Republican Party. You won’t hear it on NPR or PBS. You won’t read about it in our major newspapers. The issues that matter are being debated, however, on “Democracy Now!,” Link TV, The Real News, Occupy websites and Revolution Truth. They are being raised by journalists such as Glenn Greenwald and Matt Taibbi. You can find genuine ideas in corners of the Internet or in books by political philosophers such as Sheldon Wolin. But you have to go looking for them.

Capital Gains Taxes Are Going Up - The top tax rate on long-term capital gains is currently 15%. That’s why Mitt Romney is spending so much time talking about his tax returns. That revelation has set off a familiar debate about whether that low rate is appropriate. Often overlooked in these discussions, however, is the fact that the days of the 15% tax rate are numbered. As of this posting, it has only 342 left.  On January 1, 2013, capital gains taxes are scheduled to go up sharply: First, the 2001 and 2003 tax cuts are scheduled to expire. If that happens, the regular top rate on capital gains will rise to 20%. In addition, an obscure provision of the tax code, the limitation on itemized deductions, will return in full force. That provision, known as Pease, increases effective tax rates on high-income taxpayers by reducing the value of their itemized deductions. On net, it will add another 1.2 percentage points to the effective capital gains tax rate for high-income taxpayers. And that’s not all. The health reform legislation enacted in 2010 imposed a new tax on the net investment income of high-income taxpayers, including capital gains. That adds another 3.8 percentage points to the tax rate.

Crony Capitalism and the Entitled Class of Wall Street Financiers; Bill Moyers Interviews David Stockman, Ronald Reagan's Budget Director - David Stockman former budget director for President Reagan, appeared on Bill Moyers and presented his message about money, Wall Street financiers, and crony capitalism.  Link if Video does not play: David Stockman on Crony Capitalism Money dominates politics, distorting free markets and endangering democracy. “As a result,” Stockman says, “we have neither capitalism nor democracy. We have crony capitalism.” Stockman shares details on how the courtship of politics and high finance have turned our economy into a private club that rewards the super-rich and corporations, leaving average Americans wondering how it could happen and who’s really in charge. “We now have an entitled class of Wall Street financiers and of corporate CEOs who believe the government is there to do… whatever it takes in order to keep the game going and their stock price moving upward,” Stockman tells Moyers. Click on the above link for a full transcript.

The Washington-Wall Street Revolving Door Just Keeps Spinning Along - by Bill Moyers and Michael Winship We’ve already made our choice for the best headline of the year, so far: "Citigroup Replaces JPMorgan as White House Chief of Staff." When we saw it on the website we had to smile -- but the smile didn’t last long. There’s simply too much truth in that headline; it says a lot about how Wall Street and Washington have colluded to create the winner-take-all economy that rewards the very few at the expense of everyone elseThe story behind it is that Jack Lew is President Obama’s new chief of staff -- arguably the most powerful office in the White House that isn’t shaped like an oval. He used to work for the giant banking conglomerate Citigroup. His predecessor as chief of staff is Bill Daley, who used to work at the giant banking conglomerate JPMorgan Chase, where he was maestro of the bank’s global lobbying and chief liaison to the White House. Daley replaced Obama’s first chief of staff, Rahm Emanuel, who once worked as a rainmaker for the investment bank now known as Wasserstein & Company, where in less than three years he was paid a reported eighteen and a half million dollars.

Elite Wall Street Donations Jumped 700% in the Last 20 Years - Banks "frankly own the place," Sen. Dick Durbin famously said of Washington during the debate over financial regulation in 2010. And when it comes to total contributions for big donors, you can see what he's talking about (FIRE = the Finance, Insurance and Real Estate sector): Most of that growth is coming from the securities and investment sector, followed by real estate, Lee Drutman writes at the Sunlight Foundation, elaborating: In 1990, 412 of the 1,091 elite donors from the finance industry came from the securities and investment industry, followed by 328 from real estate; by 2010, it was 2,178 from securities and investments, followed by 1,468 from real estate. In 1990, elite donors from securities and investments contributed $6.1 million and elite donors from real estate contributed $4.6 million. In 2010 elite donors from securities and investments contributed $84.0 million, while real estate donors contributed $44.5 million." So, in a span when the financial sector's share of the economy expanded by a third, from 6% to 8.4% of GDP, donations from this particular group increased by 700%. ...

Larry and the Invisibles - Krugman - Ryan Lizza’s new piece on policymaking in the Obama administration is out. One of the documents the piece rests on is a December 2008 policy memo from Larry Summers to Obama on the size and composition of stimulus; Ryan shared it with me to get my take, and some of what I said is reflected in his article. The key thing I took away from the memo is that it does not read at all like the current story the administration gives for the inadequate size of the stimulus, which is that they knew it should be larger but had to face political reality. Instead, the memo argues that a bigger stimulus would be counterproductive in economic terms, because of the “market reaction”. That is, Summers et al were afraid of the invisible bond vigilantes. And to the extent that there is a political judgment, it’s all in the opposite direction: if the stimulus is too big, we’ll have trouble scaling it back, but if it’s too small, we can always go back to Congress for more. That was deeply naive — and I said so in real time. Now, you can still argue that politics made a bigger stimulus impossible. But that’s not at all the argument being made internally within the administration at the time.

Summers and Stimulus, by Jared Bernstein - Ryan Lizza has a great piece out on President Obama’s decision making processes though many of the toughest issues he’s faced. ... He even links to one of key economic memos, and here, on one specific point, I’d like to offer a different, and I think more accurate, angle to Lizza’s take.Throughout the article, Lizza supports the view that economic adviser Larry Summers was on the side of doing less in terms of stimulus against those of us who argued for doing more. Not so. ... Rather than discouraging the President from doing more, I recall his position as being much like he describes in the memo...:“The rule that it is better to err on the side of doing too much rather than too little should apply forcefully to the overall set of economic proposals.”I’m not saying we did enough, but I am saying Larry was among those who recognized the urgency of the Keynesian imperative...What about the charge that, as Krugman puts it:[Summers et al believed that] if the stimulus is too big, we’ll have trouble scaling it back, but if it’s too small, we can always go back to Congress for more. That was deeply naive — and I said so in real time.The reply is:And yes, Larry was wrong, as was I and many others, that it would be easier to add than subtract. In fact, the evolution of that view is at the heart of the Lizza’s trenchant analysis, which at its core is an anatomy of the level of partisanship with which we are currently stuck.

How Summers' memo hobbled Obama's stimulus plan - Dean Baker - Those still wondering why the Obama administration surrendered so quickly on the drive for stimulus and joined the deficit reduction crusade, got the smoking gun in an article by the New Yorker's Washington correspondent Ryan Lizza. Lizza revealed a 57-page memo drafted by Larry Summers, the head of the National Economic Council, in the December of 2008, the month before President Obama was inaugurated.  The memo was striking for two reasons. First, it again showed the economic projections that the administration was looking at when it drafted its stimulus package. These projections proved to be hugely overly optimistic.  They showed that even without stimulus, job loss would peak at around 5 million in the 4th quarter of 2009. They projected that the economy would then begin to add jobs at a fairly rapid pace, regaining all the lost jobs by the end of 2011. In this non-stimulus baseline scenario, the unemployment rate never rose above 9.0%, which it would hit in the winter of 2010. The other striking part of this memo is the concern with "bond market vigilantes". The memo discusses the need to focus on the medium-term deficit with the idea of reaching deficit targets by 2014. The highest deficit target listed in the memo for this year was 3.5% of GDP. The memo also includes calculations with a deficit target of 2.5% of GDP, and a balanced budget.

Summers: “Inside Job had essentially all its facts wrong” - In mid-2009, I went on a search for apologies, from the people who laid the intellectual and regulatory foundations for the financial crisis. I wondered whether and when Larry Summers, in particular, would apologize for what he did at Treasury, and I was heartened when Bill Clinton came out and said that, with hindsight, he was wrong about derivatives regulation. Then, in 2010, Inside Job came out, and demonstrated the need for the likes of Summers to be asked direct questions about their culpability on the record, on-camera. But Summers refused to be interviewed for that film, despite having known its director, Charles Ferguson, for many years. So I was very happy to see that Krishnan Guru-Murthy at least tried to ask Summers these questions earlier this week. Krishnan starts off with standard Summers-interview questions, asking him what he thinks about UK fiscal policy, and Summers gives his standard wise-man answers. But then Krishan gets steadily tougher, asking Summers about the advice he gave the president-elect in 2008, and eventually about his deregulatory tenure at Treasury. And Summers doesn’t even come close to apologizing, or admitting that he made any kind of mistake at all. Quite the opposite: he starts getting very touchy, telling Krishnan that he’s reducing complex questions to overly simplistic black-and-white narratives.

President Obama’s decision to waste (at least) $60 B - Yesterday The New Yorker’s Ryan Lizza published an analysis of President Obama’s first two years of decision-making on economic policy. Mr. Lizza also released a 57 page memo sent to President-elect Obama by Dr. Larry Summers (later NEC Director) on December 15, 2008. Mr. Lizza reports that the memo contained input from Dr. Christina Romer (later CEA chair) and Dr. Peter Orszag (later OMB Director). Together the memo and article provide insight into the formerly private thinking of President Obama and his advisors. Their approach to fiscal policy is quite different from my own, most especially the confidence they express in their estimates of the effectiveness of government spending to accelerate economic growth. Even more interesting is that given this approach to economic policy, the memo and story describe a President who chose to ignore his policy advisors and to waste tens of billions of dollars of taxpayer money so he could have an inspiring talking point and help his partisan Congressional allies get their pork. That’s disturbing even if you accept the pro-stimulus approach to fiscal policy.

Breach of Trust - Krugman - Since I just gave Larry Summers a bit of a hard time over that distressing Dec. 2008 memo to Obama, this is probably a good time to note that way back when he and Andrei Shleifer wrote an essay on the economics of leveraged buyouts (pdf) that is very worth reading now that Mitt Romney is running on the theme that his Bain experience means that he knows how to create jobs. Summers and Shleifer argued back in 1988 that buyouts are often aimed at “value redistribution” rather than “value creation”; specifically, a lot of the gains to the buyout specialists come from breaking implicit contracts with “workers, suppliers, and other corporate stakeholders.” They make one especially keen point: if it were really about adding efficiency, why do the same people lead takeovers in many industries, instead of people with specific expertise in each industry doing the job? Their answer is that these specialists are specialists in deal-breaking, not value creation. Jim Surowiecki has more about how that game is played nowadays, with an especially fruitful discussion of the Harry and David’s case. He also notes that often the result of these manipulations is to put taxpayers on the hook.

An Inconvenient Mankiw - The National Journal's Jim Tankersley has an interesting article about Mitt Romney and his economic advisors.  The gist of the article is that Greg Mankiw and Glenn Hubbard are well-respected economists, but Romney's statements on the campaign trail suggest he's not listening to them much.  Tankersley writes: This, then, is the Romney Conundrum—for conservatives, liberals, and everyone else. Even on the economy, Romney’s signature issue, it’s hard to know where his heart lies—and how he would govern in the White House. Would the former Massachusetts governor listen to his best and brightest? Or to his party base? “Romney’s got Glenn and Greg advising him, and they’re both top-notch economists,” said Keith Hennessey, who ran the National Economic Council for President George W. Bush. “But there’s more to economic policy than just economics.  Of course this isn't entirely unique to Romney - politicians often fail to follow through on politically inconvenient suggestions from economists (though the universe of what is inconvenient for a Republican primary candidate to say is pretty scary these days). The article comes to my attention from Greg Mankiw, who linked to it on his blog, without comment.  Hmmmmm...

Private Inequity - At this point, the people who run America’s private-equity funds must be ruing the day Mitt Romney decided to run for President. His fellow Republican candidates, of all people, have painted a vivid picture of private-equity firms—including Bain Capital, where he worked for fifteen years—as job-destroying vultures, who scavenge the meat from American companies and leave their carcasses by the side of the road. Not since the days of “Wall Street” and “Barbarians at the Gate” have the masters of leveraged buyouts looked quite so bad. Given the weak job market, it makes sense that the attacks have focussed on layoffs. But the real problem with leveraged-buyout firms isn’t their impact on jobs, which studies suggest isn’t that substantial one way or the other. A 2008 study of companies bought by private-equity firms found that their job growth was only about one per cent slower than at similar, public companies; there was more job destruction but also more job creation. And, while private-equity firms are not great employers in terms of wage growth, there’s not much evidence that they’re significantly worse than the rest of corporate America, which has been treating workers more stingily for about three decades.

The Hedge Fund Industry Has Kept 98% Of The Profits in Fees: Bloomberg TV invited me back on yesterday morning – the sorry results of hedge fund investors are just too incredible to be believed and so they asked to produce a chart illustrating how fees have been split. It turns out that if you calculate how much money hedge funds generated BEFORE fees from 1998-2010, and then deduct hedge fund fees (and fund of fund fees) from the gross profits (that is, in excess of treasury bills since those are the only measure of returns that are worth anything) , the clients were left with 2%. Hedge funds have been highly profitable, but unfortunately the profits haven’t made it to the investors. Anybody can do this calculation – the methodology is simple, is explained in my book (The Hedge Fund Mirage) and has not been seriously challenged by anybody. The industry kept 98%. Bloomberg presented a version of this chart on TV this morning. Hopefully the message is getting across. It’s not that there aren’t some great hedge fund managers out there – of course there are. But investors need to do a far better job of negotiating terms that allow them to share in that success

Quelle Surprise! It’s Better to Run a Private Equity Fund than Invest in One - Yves Smith - It’s perverse that it takes a Mitt Romney presidential bid to shed some long-overdue harsh light on the private equity industry.  It was not as hard as you might think to do well in the private equity business in the 1990s. Rising equity markets lift all boats, and PE is levered equity. A better test of the ability to deliver value is how they did in more difficult times. The Financial Times reports on a wee study it commissioned to look into who reaped the fruits of private equity performance. Its findings:From 2001 to 2010, US pension plans on average made 4.5 per cent a year, after fees, from their investments in private equity. In that period, the pension funds paid an average 4 per cent of invested capital each year in management fees. On top of those, private equity often collects a variety of other fees and a fifth of investment profits“Assuming a normal 20 per cent performance fee, this would amount to about 70 per cent of gross investment performance being paid in fees over the past 10 years,”   Now some readers might argue that even with fund managers feeding at the trough, 4.5% per annum returns were still better than the S&P 500, which delivered 1.7% compounded annual returns over the decade. But they are missing several things. First is that the S&P is extremely liquid and tolerates trades in size. By contrast, when you hand your money over to a PE fund, it is an expected 5 to 7 year commitment, and if the fund does badly, they will hold on to your money longer hoping a rally will allow them to unload some garbage barges at a decent price. I have no idea what rules of thumb are used to adjust returns to allow for extreme illiquidity and a lack of any control over exit timing, but in the stone ages when Goldman would value illiquid securities for estate purposes we’d apply a 20% to 40% haircut.

David Stockman Disses Private Equity Business Acumen on Dylan Ratigan Show - 01/24/2012 - Yves Smith  - By dint of news flow, we are having a private equity fest tonight. David Stockman, the former Reagan budget director, made a cogent case against the idea that being at the helm of a private equity firm has much to do with knowing how to run a business on Dylan Ratigan. I thought readers would enjoy this segment, not simply due to the content but also because Stockman is a compelling and blunt speaker.

What Is Private Equity? - Recently, a lot of the political debate has been about whether private equity—and by extension Mitt Romney—is good or bad. The argument on one side is that private equity firms are vultures who destroy firms to make money; on the other, that private equity is just capitalism at work, creates value, and creates jobs. A private equity firm is an asset management company. It creates investment funds that raise most of their money from outside investors (pension funds, insurance companies, rich people, etc.), and then manages those funds. As opposed to a mutual fund, however, instead of buying individual stocks, these funds usually make large investments either in private companies or in public companies that they “take private” (more on that in a minute). While mutual funds and most hedge funds try to make money by guessing where securities prices will go in the future, private equity funds try to make money by taking control of companies and actively managing them. (There is a bit of a spectrum here, since mutual funds and hedge funds can exercise pressure on company management and private equity funds do take minority positions, but that’s the ideal-typical distinction.) A private equity firm is just a rebranded version of what were called LBO (leveraged buyout shops) in the 1980s, before they got a bad name. The classic transaction is to take over a company by contributing a small amount of equity and borrowing a lot of money—and the debt is owed by the company, not the private equity fund.

Is Obama's 'Economic Populism' for Real? | Matt Taibbi -- There is a lot to digest in a recent series of events on the Prosecuting Wall Street front – the two biggest being Barack Obama’s decision to make New York Attorney General Eric Schneiderman the co-chair of a committee to investigate mortgage and securitization fraud, and the numerous rumors and leaks about an impending close to the foreclosure settlement saga. There is already a great debate afoot about the meaning of these two news stories, which surely are related in some form or another. Some observers worry that Schneiderman, who over the summer was building a rep as the Eliot Ness of the Wall Street fraud era, has sold out and is abandoning his hard-line stance on foreclosure in return for a splashy federal posting. Others looked at his appointment in conjunction with other recent developments – like the news that Tim Geithner won’t be kept on and Obama’s comments about a millionaire’s tax – and concluded that Barack Obama had finally gotten religion and decided to go after our corruption problem in earnest. I think it’s impossible to know what any of this means yet. There is a lot to sort out and a lot that will bear watching in the near future. Just to recap, here’s what’s at stake right now:

Murmuration - On last week's podcast, Duncan and I yakked about an important concept introduced by Nicole Foss at The Automatic Earth blog site. This concept was "the trust horizon," which outlines how legitimacy is lost in the political hierarchy. That is, people stop trusting larger institutions like the federal or state government and end up vesting their interests much closer to home. Thus, life de-centralizes and becomes more local by necessity. Your own trust horizon extends only as far as other persons, businesses, institutions, and authorities immediately around you - the banker who will meet with you face-to-face, the mayor of your small town, the local food-growers. At the same time, distant ones become impotent and ludicrous - or possibly dangerous as they flounder to re-assert their vanishing influence.   It is obvious that we are in the early stages of this process in the USA (and Europe), as giant institutions such as the Federal Reserve, the Executive branch under Mr. Obama, the US Congress (the ECB), the SEC, the Department of Justice, the Treasury Department, and other engines of management all fail in one way or another to discharge their obligations.   The people of the USA, having been let down and swindled in so many ways by the people they placed their trust in, and even freely elected, appear to be in a daze of injury. Maybe this accounts for the obsession with zombies and persons drained of blood - who yet seem to carry on normal lives (at least in TV shows). This odd condition is best defined by the familiar cry from non-zombies: "where's the outrage?"

All Together Now - Steve Randy Waldman got me thinking today.1 In an extensive follow-up piece to a previous post on complexity in finance, Steve answers objections to and elaborates on his argument that not only is opacity integral to the financial system of a complex society, it is essential. You may recall the core of his original idea:  Finance has always been complex. More precisely it has always been opaque, and complexity is a means of rationalizing opacity in societies that pretend to transparency. Opacity is absolutely essential to modern finance. It is a feature not a bug until we radically change the way we mobilize economic risk-bearing. The core purpose of status quo finance is to coax people into accepting risks that they would not, if fully informed, consent to bear. Financial systems help us overcome a collective action problem. In a world of investment projects whose costs and risks are perfectly transparent, most individuals would be frightened. Real enterprise is very risky. Further, the probability of success of any one project depends upon the degree to which other projects are simultaneously underway. A budding industrialist in an agrarian society who tries to build a car factory will fail. Her peers will be unable to supply the inputs required to make the thing work. Successful real investment does not occur via isolated projects, but in waves, forward thrusts by cohorts of optimists, most of whom crash and burn, some of whom do great things for the world and make their investors wealthy. But the winners depend upon the existence of the losers: In a world where there was no Qwest overbuilding fiber, there would have been no Amazon losing a nickel on every sale and making it up on volume. I think Steve’s analysis and critique are essentially correct. However, I am much less sanguine than he seems to be when it comes to eliminating much of the opacity and associated “kleptocracy” he finds in our current financial system. My pessimism is based on two rather sizeable barriers: human history, and human nature.

Is opacity an excuse? - Steve Randy Waldman - I’ve been getting a lot of concerned feedback from people I respect on my claim that status quo finance requires opacity and some degree of trickery in order to function. (See previous posts.) If prosperity is connected to “opaque, faintly fraudulent, financial systems”, is that an excuse for looting and predation by financial intermediaries? Won’t it be used as one?<?p>  Though it may be counterintuitive, rather than excusing misbehavior, opacity in finance implies that misbehavior of intermediaries must be policed more vigorously and punished more punitively than in a world that could be made transparent. If finance were as transparent as baseline neoclassical models suggest, there would have been no “flaw” in Alan Greenspan’s ideology, and no need to regulate markets or root out fraud. Creditors would themselves vet and monitor their financial arrangements, would assume risks in full knowledge of all potential mishaps ex ante, and could therefore be required to accept responsibility for losses ex post. There would be no need for any heavy-handed meddling by the state or vitriolic second-guessing by nasty bloggers. The harms of malinvestment would be internalized by investors who were capable of bearing the risks. When things go wrong, it would be none of the rest of our business.

Financial Markets Are the Real Barter Economy - As (mis)conceived by most economists, money (which they confute here with currency) emerged as a solution to the time problem of barter economies: my spinach is ready now, but your apples won’t be ripe for months. How can we trade? Answer: you give me money for my spinach, and I give it back to you later for your apples. That armchair-sourced fairy tale has been resoundingly debunked — that’s not how money (or even currency) emerged, and the Adam Smithian butcher/baker barter-exchange economy has never existed. Credit money — first embodied in tally marks on clay tablets — emerged and was in widespread use a couple of thousand years before coinage was invented. But the notion of barter economies lives on. The whole system of national accounts (the NIPAs), in fact, was constructed by Simon Kuznets and company in the 30s as if we lived in a barter economy — with money being merely a time-shifting convenience, and with no accounting for financial assets at all. I’d like to suggest that this barter model for the real economy results in a great deal of confusion — including (especially?) among economists — largely because the NIPAs don’t usefully model the distinction between saving wheat (which can be consumed) and “saving” money (which can’t). By “useful” I mean “conceptually tractable, subject to consideration without logical error.”

OCC’s Walsh Warns of ‘Vast Over Reaction’ in Derivatives Regulation - A U.S. banking regulator warned Tuesday against a “vast over reaction” in regulation of derivatives markets, offering a contrast to other regulators who have called for an aggressive approach to that corner of the financial system. Common criticisms of derivatives that emerged after the 2008 financial crisis are “far broader than the specific instruments or circumstances implicated,” Acting Comptroller of the Currency John Walsh said in remarks prepared for a conference in Las Vegas. The Office of the Comptroller of the Currency, which Walsh runs, supervises the large banks being forced to restructure their derivatives and trading operations as a result of the Dodd-Frank law. To critics, derivatives “are not just a sophisticated component of a bank’s product portfolio, but toxic instruments that should be pushed out of the banking system entirely,” Walsh said. “That is a vast over reaction, and it worries me that misperception could motivate redesign of the system … risk ascribed to derivatives is often many orders of magnitude greater than the reality.” By contrast, Gary Gensler, chairman of the Commodity Futures Trading Commission, has been far more critical. Gensler said derivatives, particularly credit default swaps, were central to the financial crisis and housing bubble.

The fallacy of moving the over-the-counter derivatives market to central counterparties - Big moves are afoot when it comes to regulating derivatives trade. G20 leaders, among others, were unhappy with the lack of transparency in the massive customised derivatives market (these are known as ‘over-the-counter’ or OTC derivatives). OTC derivatives are typically a contract struck bilaterally between a financial intermediary (banks, etc.) and a particular investor. Perhaps the leading reform is a drive to move OTC derivatives on to more market-like settings with a central counterparty. According to BIS surveys, notional amounts for all categories of OTC contracts currently stand at around $600 trillion (BIS 2011).  Regulators around the world are looking to regulate derivatives. This column argues, however, that current proposals for centralized counterparties are misguided. Instead of reducing risk in the notorious over-the-counter derivatives markets, they may simply shift it around. It calls for a tax on the derivative liabilities of large banks to tackle the problem at its source.

The MF Global Bankruptcy Filing: Did the Regulators Sell Out the Public for JP Morgan? - What seems fairly obvious is that the law calls for MF Global to file a Chapter 7 bankruptcy in which customers are given seniority to creditors, rather than a Chapter 11 non-broker bankruptcy in which the customer interests are not upheld.  The rationale for Chapter 11 has always seems to be contrived to favor a particular creditor bank. Prior CFTC rulings and 'Rule 190' seems to have dealt with this in the past.  Statements by various CFTC commissioners of late also seem to suggest that customers absolutely have a senior claim to any assets. Why then did the SEC, with Gary Gensler's purported assent, seem to ignore the precedent and their own rules and cut a deal in a secret meeting to favor the Banks, specifically JP Morgan? The personal involvement of Gary Gensler seems a little ambiguous based on the facts at hand, but it is obvious that the bankruptcy filing is being mishandled, and the SEC and CFTC are doing too little to represent the interests of the customers.Obviously this should be more explicitly addressed and the customers need to be relieved of this travesty of justice. 

MF Global Clients May Lose in $700 Million Bankruptcy Fight -- MF Global Holding Ltd.'s clients may be the losers no matter who wins a $700 million dispute between bankruptcy administrators in London and New York that threatens the return of money locked in customer accounts. The trustee of MF Global Inc., the New York brokerage unit, is seeking the return of money used as margin for American customers trading in Europe. It wants U.K. administrators KPMG LLP to tap into $1.2 billion it had set aside for customers with segregated accounts, which are supposed to be protected. MF Global Inc. trustee James Giddens "is prepared to use all legal avenues available to him in recovering the customer funds, including litigation," Kent Jarrell, a spokesman for Giddens, said in an e-mailed statement. If successful, the trustee's claim would significantly reduce KPMG's client money pool and lower returns for U.K. customers, said two people with knowledge of the discussions who declined to be identified because they are confidential. If KPMG wins, U.S. customers will be treated as unsecured creditors and face a lengthy wait for any payout.

IMF Warns EU Debt Crisis Could Hit U.S. Banks, Cause Funding Strains - The U.S. economy is susceptible to a range of shocks from the euro-zone crisis, including attacks on the financial sector, the International Monetary Fund warned Tuesday in its Global Financial Stability Report. While the U.S. Treasury Department has outlined trade exposure as a major risk, it has downplayed the banking sector’s vulnerability to the euro zone’s problems as “very limited.” But, the IMF said, the “potential spillovers could include direct exposures of U.S. banks to euro-area banks, or the sale of U.S. assets by European banks.” For example, it said, commercial-backed mortgage security and asset-backed security markets have been under pressure in recent months, weighed down by the volume of European asset sales. Many European banks are raising capital levels by thinning their portfolios. The banks need to bulk up to meet new financial regulations and protect against a sovereign-debt meltdown. The IMF is concerned deleveraging could cause a credit crunch in Europe that would reverberate around the globe, pulling trade and investment out of emerging and developing economies, and squeezing the U.S.

Treasury’s 2008 Financial Rescue Could Last Until 2017 - The U.S. government’s rescue of the financial system could last for five more years as the Treasury Department unwinds its investments in hundreds of banks and other companies propped up in the aftermath of the 2008 financial crisis, a government watchdog said Thursday. The Bush administration launched the financial rescue plan in the autumn of 2008 at the height of the financial crisis. At its launch, Congress authorized spending $700 billion on the bailout known as the Troubled Asset Relief Program, or TARP. The Treasury Department currently estimates that the final cost for TARP will be $68 billion. As of the end of last year, about $414 billion had been spent through 13 programs, while $278 billion had been repaid and $51 billion was still available to be spent, according to a quarterly report to Congress by the special inspector general for the TARP program. The remaining institutions in the program include 455 banks and thrifts, plus insurer American International Group Inc., General Motors and Ally Financial Inc. “TARP is not over,” said Christy Romero, the acting TARP special inspector general. “Some TARP programs last until 2017, and market volatility has slowed Treasury’s progress in unwinding its investments.” The report also found that exiting these investments could be difficult in the coming years, as financial markets remain rocky and many community banks that receive federal aid continue to struggle.

TARP pay czar caved on executive pay limits, bonuses (Reuters) – Pressure from financial institutions and Treasury officials undermined an effort to limit executive pay at seven companies rescued with taxpayer money, a new government audit showed on Tuesday. The official overseeing executive pay for bailout firms limited cash compensation and made some reductions in pay, but still approved compensation packages in the millions, the TARP (Troubled Asset Relief Program) inspector general said in the report. Former U.S. pay czar Kenneth Feinberg approved pay packages worth $5 million or more from 2009 to 2011 for 49 top earners, the report said. “Special Master Feinberg said the companies pressured him to let the companies pay executives enough to keep them from quitting, and that Treasury officials pressured him to let the companies pay executives enough to keep the companies competitive and on track to repay TARP funds,” the report said.

Morgan Stanley CEO Says Pay-Cut Complaints Would Be ‘Naive’ - Morgan Stanley (MS) Chairman and Chief Executive Officer James Gorman said employees understand why the investment bank had to cut pay, and those who don’t grasp the reasoning need to adjust their attitude. “You’re naive, read the newspaper, No. 1,” Gorman said he would tell miffed employees, speaking in an interview on Bloomberg Television. “No. 2, if you put your compensation in a one-year context to define your overall level of happiness, you have a problem which is much bigger than the job. And No. 3, if you’re really unhappy, just leave. I mean, life’s too short.”  Morgan Stanley is reducing pay for senior investment bankers and traders by an average of 20 percent to 30 percent, people with knowledge of the decision said last week. The New York-based firm is also capping immediate cash bonuses at $125,000 as it defers a greater share of awards, a person briefed on the plan said.  “The world has changed and the banking industry has gone through a fundamental change, and we have to readjust,” Gorman said  “When we come out of this and we start re-performing, obviously compensation will reflect that. Until then, we have to respect the fact that shareholders have to get paid, too.”

Bad Year for Wall St. Not Reflected in Chiefs’ Pay -Wall Street stocks and profits took a beating in 2011. But there is one corner of the Street that took a lighter hit: the compensation paid to chief executives. Three big banks disclosed on Friday what their top executives will receive in deferred stock for their work in 2011. Such stock is expected to make up most of their bonus as banks are increasingly paying employees more in deferred stock. Those awards to top bank executives are coming as lower-level employees are finding out that their own bonuses will be much smaller than a year ago. Brian Foley, a compensation expert in White Plains, said that for top executives, he would have expected “the belt to come in a few more notches” this year given the banks’ lackluster stock performance. He added that executive suite pay packages this year might further lower morale inside the banks. “A lot of people in the middle took big hits this year,” he said. “It could create some big ‘us versus them issues’ as to why the rank and file are taking a bigger hit than the senior executives.”

Where Has All The Money Gone, Part II - Finance Sector - In Part I we saw that labor's earnings have lagged far behind GDP growth.  (More on earnings stagnation here) Meanwhile, corporate profits have grown at a rate that, until recently, increased over time, and they are now at a historically high fraction of GDP. Here is a specific look at the Finance Sector. The graph shows finance sector profits as a percentage of total corporate profits - all after tax. That's a pretty impressive sweep up over time. I threw some best fit curves through the whole data set, and also though the peaks and valleys. Curves through the extremes are exponential. Along with the increased percentage we get a dramatic increase in the data spread. When lines jump around a lot, you can sometimes get clarification by looking at a long average. I tried that here with a 13 year average. A long average filters out the hash, and reveals the underlying trend. Or, I should say, trends, since there are two, with a sharp break at the beginning of 1986. A best-fit least squares trend line on the data through '85 is a near-perfect match to the average line, which barely even wiggles. We see a bit more action in the post-85 segment, but the new trend is still very clear, indeed. The earlier trend line in green is now the lower channel support line.

The Global Elite Are Hiding 18 Trillion Dollars In Offshore Banks - In recent days, the fact that Mitt Romney has millions of dollars parked down in the Cayman Islands has made headlines all over the world.  But when it comes to offshore banking, what Mitt Romney is doing is small potatoes.  The truth is that the global elite are hiding an almost unbelievable amount of money in offshore banks.  According to shocking research done by the IMF, the global elite are holding a total of 18 trillion dollars in offshore banks.  And that figure does not even count any money being held in Switzerland.  That is a staggering amount of money.  Keep in mind that U.S. GDP in 2010 was only 14.58 trillion dollars.  So why do the global elite go to such trouble to hide their money in offshore banks?  Well, there are two main reasons.  One is privacy and the other is low taxation.  Privacy is a big issue for those that are involved in illegal enterprises such as drug running, but the biggest reason why people move money into offshore banks is in order to avoid taxes.  Some set up bank accounts in foreign nations because they want to legally minimize their taxes and others set up bank accounts in foreign nations because they want to illegally avoid taxes.  You would be absolutely amazed at what some large corporations and wealthy individuals do to get out of paying taxes.  Unfortunately, the vast majority of the rest of us don't have the resources or the knowledge to play these games, so we get taxed into oblivion.

Advisors Feast on the Lehman Carcass: Bankruptcy on its Way to $2 Billion in Fees - Yves Smith - One of my buddies who must go unnamed because he is involved in the Lehman bankruptcy told me many months ago that the unwinding was going to cost over $2 billion. A new story at Bloomberg suggests that his prediction is on track. The costs of various advisors to the Lehman estate in now in excess of $1.6 billion, and it ain’t over.  But perhaps more important, my mole, who has oodles of experience on big messy international bankruptcies, was incensed at the way various advisors, in particularly Alvarez & Marsal, which is running what is left of Lehman and is the major domo, and the lead law firm, Weil Gotschal, were feeding at the trough. Bloomberg also tells us that the fees paid to A&M are now over $500 million. This of course is the sort of thing that is inherently difficult to discern from the outside, since there aren’t that many people with the experience base and the vantage to discern that. And the people who do see it are either direct beneficiaries (as in they are working for Lehman) or are representing clients who are trying to improve their recovery. The advisors to creditors are in many respects part of a criminogenic environment, since the fees and costs incurred by the Lehman advisors legitimate their charges. And if someone was high-minded enough to object, waging a quixotic war over self-serving practices is not likely to help their client or their career.

Activists Call for Breakup of Bank of America - Public Citizen, a consumer advocacy group, is calling for the breakup of Bank of America..  In a petition to Treasury4 Secretary Timothy F. Geithner5 and Ben S. Bernanke6, chairman of the Federal Reserve7 — who are the chairman and vice chairman of the Financial Stability Oversight Council, respectively — the scholars, and their fellow activists, led by Public Citizen8, argue that the bank is too big to be either governed or regulated, and represents a real risk to the financial system. They are urging Mr. Geithner and Mr. Bernanke to use their power under Dodd-Frank9 to break up the bank, in a manner somewhat reminiscent of the breakup of AT&T10 three decades ago. While a forcible break-up of Bank of America would be exactly the kind of bold move on financial regulation11 that we have not seen at all from the Obama administration, the petition does have a point. The bank is a behemoth, and if it were ever necessary to unwind it, I think we have to assume it would be something of a disaster, the Federal Deposit Insurance Corporation’s fondness 12for its new orderly liquidation authority notwithstanding.

Breaking Up Bank of America? - Speaking of too big to fail, a petition organized by Public Citizen has been sent to the Federal Reserve and Financial Stability Oversight Council (FSOC) calling for the break up of Bank of America.  The petition identifies BofA, given its size and fragility, as a threat to the US financial system.  It cites a recent NYU study that ranks the financial institution as posing the greatest systemic risk among US firms, based on capital shortfall.  Public Citizen also argues that Bank of America is simply too large and too interconnected to be regulated effectively. Micah Hauptman explains that the break up and reorganization could be carried out under the authority given to the Fed and FSOC under section 121 of the Dodd-Frank Act (if a financial institution is determined to pose a “grave threat”).  The petition argues that taking action now under section 121 is far more preferable to attempting an orderly liquidation in the midst of a crisis: If the Agencies do not use section 121 in advance of financial distress at a firm that poses a grave threat to U.S. financial stability, they risk undermining other critical Dodd-Frank Act provisions. You can read the petition here and a related letter, signed by economists, legal scholars, and various public interest groups, here.

Bank of America Poses a Grave Threat to U.S. Financial Stability - Bank of America, the second-largest bank holding company in the U.S., should be broken up and reformed, Public Citizen said in a petition sent today to the Federal Reserve and the Financial Stability Oversight Council. Regulators should to use authority granted by section 121 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to reform Bank of America into a set of smaller, simpler and safer institutions. Bank of America, which holds assets equal to roughly one-seventh of the country’s gross domestic product, is too large and complex to manage or regulate properly, the petition said. Moreover, its financial condition is poor and could deteriorate rapidly.

Unofficial Problem Bank list declines to 963 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Jan 20, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  With the FDIC back to closings and the OCC releasing its enforcement actions through mid-December 2011, the Unofficial Problem Bank List underwent several changes during the week. In all, there were seven removals and one addition, which leaves the list standing at 963 institutions with assets of $389.2 billion. A year ago, the list held 937 institutions with assets of $409.4 billion.

Yes, Virginia, Servicers Lie to Investors Too: $175 Billion in Loan Losses Not Allocated to Mortgage Backed Securities (and Another $300 Billion on the Way) - - Yves Smith - The structured credit analytics/research firm R&R Consulting released a bombshell today, and it strongly suggests that prevailing prices on non-GSE (non Freddie and Fannie) residential mortgage backed securities, which are typically referred to as “private label” are considerably overvalued.  R&R Consulting described how the reports presented to RMBS investors show losses at the loan level (which is super eye-numbing detail in the investor reports) that have NOT been allocated to the bonds: On the securities performing at December 2011, a universe of approximately $1.42 trillion, R&R estimate the amount of additional losses likely to materialize is $300 billion, with one-third concentrated in ten arranger names, including Countrywide, Morgan Stanley and JP Morgan. About 17,000 tranches, or 34% of the universe analyzed by R&R, may lose up to 83% of their remaining principal. In addition, R&R estimates that approximately $175 billion of losses already incurred on the loans have not yet been allocated to the bonds in the related transactions. Failure to allocate realized loan losses could distort the valuation of related RMBS tranches. In the course of conducting valuations on RMBS, the R&R analytics team discovered widespread, serious, repeated data discrepancies“The results were very disturbing: $175 billion of unallocated current losses and $300 billion of imminent losses,”

Is This Why They Won’t Prosecute? Top Justice Officials Represented Big Banks, Freddie, Fannie and Mers - Obama’s Department of Justice isn’t prosecuting any big fish. Indeed, the Obama administration is prosecuting fewer financial crimes than Ronald Reagan, George W. Bush, George H.W. Bush or Bill Clinton. This is true even though the big banks – such as Bank of America, Citigroup, JP Morgan and Wells Fargo – committed some fraud, but their entire business model is fraudulent. See this, this, this, this and this. The same is true of Fannie, Freddie. And even more so with Mers, where its entire purpose – from day one – was fraudulent. Here, here, here, here and here. So why haven’t the fraudsters running these chop shops been prosecuted by Attorney General Eric Holder, and the head of the DOJ’s criminal division Lanny Breuer? Reuters helps explain why today: U.S. Attorney General Eric Holder and Lanny Breuer, head of the Justice Department’s criminal division [watch this to get a sense of Breuer], were partners for years at a Washington law firm that represented a Who’s Who of big banks and other companies at the center of alleged foreclosure fraud, a Reuters inquiry shows.

$25B US mortgage deal goes to states — The nation's five largest mortgage lenders have agreed to overhaul their industry after deceptive foreclosure practices drove homeowners out of their homes, government officials said Monday. A draft settlement between the banks and U.S. states has been sent to state officials for review. Those who lost their homes to foreclosure are unlikely to get their homes back or benefit much financially from the settlement, which could be as high as $25 billion. About 750,000 Americans — about half of the households who might be eligible for assistance under the deal — will likely receive checks for about $1,800. But the agreement could reshape long-standing mortgage lending guidelines and make it easier for those at risk of foreclosure to restructure their loans. And roughly 1 million homeowners could see the size of the mortgage reduced. Five major banks — Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial — and U.S. state attorneys general could adopt the agreement within weeks, according to two officials briefed on the discussions.

Talks set out terms of US mortgage deal - FT - Banks and government negotiators have cleared a big hurdle in efforts to resolve allegations of widespread mortgage-related misdeeds, agreeing on terms for a settlement that are being circulated to the 50 US states for approval, state officials and a bank representative say. The proposed pact would potentially reduce mortgage balances and monthly payments by more than $25bn for distressed US homeowners, these five people said. The tentative agreement still must be approved by all 50 state attorneys-general, and negotiators have previously missed proposed deadlines. Participants described the proposal terms as set, meaning the states will be asked either to agree to them or decline to participate.  The amount of potential aid is contingent on state participation and would decrease significantly if big states do not sign the agreement. New York and California are among several states that have voiced concerns about the terms of the proposed deal with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. New York and California are particularly concerned with the part of the deal that would absolve the banks of civil liability for allegedly illegal mortgage-related conduct. The US Department of Housing and Urban Development declined to comment. Members of the Obama administration and a small group of state officials who negotiated the settlement terms are set to pitch the deal to Democratic state attorneys-general on Monday in Chicago. A conference call with Republican state prosecutors is scheduled for Monday night.

Obama to Use Pension Funds of Ordinary Americans to Pay for Bank Mortgage “Settlement” - Yves Smith - Obama’s latest housing market chicanery should come as no surprise. As we discuss below, he will use the State of the Union address to announce a mortgage “settlement” by Federal regulators, and at least some state attorneys general. It’s yet another gambit designed to generate a campaign talking point while making the underlying problem worse. The president seems to labor under the misapprehension that crimes by members of the elite must be swept under the rug because prosecuting them would destablize the system. What he misses is that we are well past the point where coverups will work, and they may even blow up before the November elections. If nothing else, his settlement pact has a non-trivial Constitutional problem which the Republicans, if they are smart, will use to undermine the deal and discredit the Administration. To add insult to injury, Obama is apparently going to present his belated Christmas present to the banking industry as a boon to ordinary citizens. The administration has finally woken up to the fact that the housing mess is almost certain to get worse before it gets better, and Obama must therefore be armed with better propaganda. The Miller-led talks have become a bit of an embarrassment and needed to be put out of their misery. So Team Obama and Federal banking regulators have agreed on terms and as we discussed last Friday, are upping the pressure on state attorneys general to fall into line. Since one of the cardinal rules of finance is to use other people’s money rather than your own, this provision virtually guarantees that investor-owned mortgages will be the ones to be restructured. Why is this a bad idea? The banks are NOT required to write down the second mortgages that they have on their books. This reverses the contractual hierarchy that junior lienholders take losses before senior lenders. So this deal amounts to a transfer from pension funds and other fixed income investors to the banks, at the Administration’s instigation.

Political Push Moves a Deal on Mortgages Inches Closer - About one million homeowners facing foreclosure could have their mortgage burden cut by about $20,000 each as part of a long-awaited deal taking shape among state attorneys general, federal officials and the nation’s largest mortgage servicers.  But a final agreement remained out of reach Monday despite political pressure from the White House, which had been trying to have a deal in hand that President Obama could highlight in his State of the Union address Tuesday night. The housing secretary, Shaun Donovan, met on Monday in Chicago with Democratic attorneys general to iron out the remaining details and to persuade holdouts to agree with any eventual deal. He later held a conference call with Republican attorneys general. But as he renewed his efforts, Democrats in Congress, advocacy groups like and several crucial attorneys general said the deal might be too lenient on the banks. The agreement could be worth about $25 billion, state and federal officials with knowledge of the negotiations said, with up to $17 billion of that used to reduce principal for homeowners facing foreclosure. Another portion would be set aside for homeowners who have been the victim of improper foreclosure practices, with about 750,000 families receiving about $1,800 each. But bank officials said Monday that the total amount of principal reduction and reimbursement would depend on how many states eventually sign on.

Settlement with mortgage lenders inadequate, activists say - Still, a significant number of state attorneys general and activist groups fear the pending settlement would allow banks to pay only a fraction of what is warranted and escape legal culpability for a wide range of abuses that have yet to be fully investigated. They also say too lenient a settlement would send a troubling message that the financial giants who helped create the housing bubble won’t be held accountable for their role in the bust. “The very notion that there could be a settlement with the big banks before there is an investigation of the scope of what the FBI warned was an ‘epidemic’ of fraud violates any sense of justice,” said Robert Borosage, co-director of the liberal group Campaign for America’s future.  New York’s Eric Schneiderman and attorneys general from Delaware, Nevada and other states have remained wary of the current deal and have launched their own investigations into aspects of the mortgage industry. California Attorney General Kamala Harris also backed out of the settlement talks last fall, saying the proposed settlement was “inadequate” for residents of her state. Given the massive number of foreclosures in California, her absence from a final deal would significantly shrink the penalties paid by the banks, which include JPMorgan Chase, Wells Fargo, Bank of America, Citigroup and Ally Financial.

Simon Johnson on the Proposed Foreclosure Fraud Settlement: “This is a law enforcement issue.” - Chatter increased over the weekend on a long-awaited foreclosure fraud deal between top banks and state and federal regulators, led by the Justice Department and HUD. Yves Smith provides additional details today, including a Constitutional issue over servicers providing modifications on investor-owned mortgages without their consent, a violation of the takings clause of the 5th Amendment. A meeting today in Chicago with representatives of Democratic AGs could be determinative, or a tactic to fake progress without the holdouts – New York, Delaware, California, Massachusetts, Nevada – agreeing to terms. Whatever the case, there is no doubt that we are closer to a settlement than ever before.  Late on Friday I spoke with Simon Johnson, the former chief economist of the IMF and a professor at MIT, who also writes the Baseline Scenario blog with James Kwak. Johnson has been skeptical of the foreclosure fraud settlement. A lightly edited transcript follows:

Judicial Watch Sues Obama Admin for Secret Settlement Documents With Mortgage Lenders.– Judicial Watch, the organization that investigates and fights government corruption, announced today that it filed a Freedom of Information Act (FOIA) lawsuit on January 3, 2012, against the Obama Department of Justice (DOJ) and U.S. Department of Housing and Urban Development (HUD) to obtain documents pertaining to accusations of fraud against the nation’s five largest mortgage companies and the creation of “federal accounts” to settle probes into faulty mortgage practices (Judicial Watch v. HUD and DOJ (No. 1:12-cv-0002)). The Obama administration has reportedly been engaged in settlement negotiations behind closed doors with mortgage companies that would result in at least $20 billion in payments from the nation’s major banks.Pursuant to a Judicial Watch FOIA request filed with the DOJ and HUD on May 17, 2011, Judicial Watch seeks the following records:

  • A set of government audits used to support allegations that the nation’s five largest mortgage companies of defrauding taxpayers in the handling of foreclosures on homes purchased with government-backed loans.
  • A term sheet which outlined the Obama administration’s settlement offer to the mortgage companies accused of fraud. The terms described on this document allegedly included the creation of a federal account funded by the nation’s largest mortgage firms to help distressed borrowers avoid foreclosure and settle state and federal probes into alleged faulty mortgages practices.

Obama Is on the Brink of a Settlement With the Big Banks—and Progressives Are Furious - For months, a massive federal settlement with big Wall Street banks over their role in the mortgage crisis has been in the offing. The rumored details have always given progressives heartburn: civil immunity, no investigations, inadequate help for homeowners and a small penalty for the banks. Now, on the eve President Obama’s State of the Union address—in which he plans to further advance a populist message against big money and income inequality—the deal may be here, and it’s every bit as ugly as progressives feared. The Associated Press reports that a proposed deal could be announced within weeks. Five banks—Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC)—would pay the federal government $25 billion. About $17 billion would be used to reduce the principal that some struggling homeowners owe, $5 billion more would be used for future federal and state programs and $3 billion would be used to help homeowners refinance at 5.25 percent. Civil immunity would be granted to the banks for any role in foreclosure fraud, and there would be no investigations.There are several reasons why this is could be a terrible deal. For one, the dollar amount is inadequate in relation to both the tremendous loss of wealth via mortgage fraud and the hefty balance sheets of these massive companies. Furthermore, the banks might be allowed to use investor money instead of their own funds—this makes the penalty even lower.

Critics of Mortgage Deal Press Obama, State AGs to Reject Big Bank Proposal - A long anticipated draft settlement between the nation's largest private mortgage lenders and US states has been announced, but it doesn't look good for industry critics who hoped the banking giants — Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial —would suffer full investigations and payouts equal to the damage they caused to homeowners and the overall economy. The deal would still have to be accepted by the states. Zornick writes at The Nation: Obama Is on the Brink of a Settlement With the Big Banks—and Progressives Are Furious For months, a massive federal settlement with big Wall Street banks over their role in the mortgage crisis has been in the offing. The rumored details have always given progressives heartburn: civil immunity, no investigations, inadequate help for homeowners and a small penalty for the banks. Now, on the eve President Obama’s State of the Union address—in which he plans to further advance a populist message against big money and income inequality—the deal may be here, and it’s every bit as ugly as progressives feared.

Thanks NC Readers! Tom Miller Says No Mortgage Deal Imminent -- Yves Smith  - Readers no doubt saw both on this site and elsewhere that the Obama Administration was cranking the heat up on the mortgage settlements talks, and was apparently planning to go ahead with the Federal regulators inking a pact, on the assumption they’d get enough state attorneys general to provide at least a modest fig leaf. The assumption also seemed to be that the Administration could enlist Congressmen to pressure some of the current and rumored dissident Democrat AGs to fold and join the Obama camp. That effort appears to have gotten such a large repudiation today, when the settlement terms were presented in Chicago to Democratic AGs and discussed over the phone with the Republican AGs that Tom Miller who is leading the attorney general negotiations has done a major climbdown: State Attorneys General from both parties, along with our federal partners, are today discussing the details of the progress we have made so far in settlement negotiations, including the terms we must still resolve. We have not yet reached an agreement with the nation’s five largest servicers, and we won’t reach a settlement any time this week. We will hopefully get more intelligence (or maybe just better attempts at disinformation) but I read this as an indication the deal agreed between the Federal regulators and the biggest servicers somehow came unglued. Possibilities include: someone exposed a definitional/drafting flaw (the Feds thought it meant one thing and the banks thought it meant another); someone (one of the banks?) retraded the deal; the Administration has assumed it could rely on a certain minimum number of AGs to fall in line and they regarded that minimum number as essential, and the pow wow today exposed that they are below that level.

What Do You Call a “Cornhusker Kickback” for California? - Remember the “Cornhusker Kickback“? That was the $45 million in expanded Medicaid funding Ben Nelson demanded from the Obama Administration before he’d support Health Insurance Reform. The special treatment for Nebraska gave the reform effort a tawdry feel. Yet it seems like Obama’s trying something similar in his effort to get CA’s Kamala Harris to join in his foreclosure settlement, with $10 billion in aid slated for CA’s struggling homeowners. Banks and government negotiators have cleared a big hurdle in efforts to resolve allegations of widespread mortgage-related misdeeds, agreeing on terms for a settlement that are being circulated to the 50 US states for approval, state officials and a bank representative say. The proposed pact would potentially reduce mortgage balances and monthly payments by more than $25bn for distressed US homeowners, these five people said. The amount of potential aid is contingent on state participation and would decrease significantly if big states do not sign the agreement. California borrowers would be eligible to receive more than $10bn in aid if the state were to agree to the terms, according to several people involved in the talks.

California calls $25-billion mortgage settlement 'inadequate' - Calif. Atty. Gen. Kamala D. Harris' office has called a proposed $25-billion settlement with the nation’s mortgage industry “inadequate.” "We've reviewed the details of the latest settlement proposal from the banks, and we believe it is inadequate for California,” Shum Preston, a spokesman for Harris, said in a statement. “Our state has been clear about what any multistate settlement must contain: transparency, relief going to the most distressed homeowners and meaningful enforcement that ensures accountability. At this point, this deal does not suffice for California." Many analysts consider California's participation to be key to a strong deal. Harris walked away from talks with the banks last year, saying not enough was being offered by the financial institutions for California homeowners. Since then, certain terms have been added to lure the Golden State back to the table, and Harris has opened separate inquiries into the mortgage business. The proposed $25-billion settlement would cover only mortgages held by the banks privately and exclude those from Fannie Mae and Freddie Mac.

Last chance on mortgage mess —The meeting in Chicago on Monday of state attorneys general is being touted as representing a key moment on the road to a real mortgage settlement. It’s not. In fact, most of the AGs from key states are unlikely to show up. Yet this week, and the coming weeks, are crucial because the Obama administration urgently needs to shift toward agreeing with Eric Schneiderman, New York’s attorney general, and others who insist that there must be a combined state-federal investigation of all mortgage practices.  The financial sector has been the Obama administration’s Achilles’ heel. Despite coming to power in the middle of the greatest financial crisis since the Great Depression with a broad mandate for “change,” the administration has consistently deferred to big banks and done its best to keep them in business “as is.” The Obama administration has continued to press for a small-scale settlement of the alleged abuses around mortgage practices, repeating and compounding the mistake. The White House has routinely overlooked voters’ dismay at its favoring “too big to fail” banks. But given how its electoral base is now reacting, this time may be different — because a lack of enthusiasm among Democratic voters in swing states could cost President Barack Obama reelection.

EXCLUSIVE: Obama To Announce Mortgage Crisis Unit Chaired By New York Attorney General Schneiderman - -- During his State of the Union address tonight, President Obama will announce the creation of a special unit to investigate misconduct and illegalities that contributed to both the financial collapse and the mortgage crisis. The office, part of a new Unit on Mortgage Origination and Securitization Abuses, will be chaired by Eric Schneiderman, the New York attorney general, according to a White House official. Schneiderman is an increasingly beloved figure among progressives for his criticism of a proposed settlement between the 50 state attorneys general and the five largest banks. His presence atop this new special unit could give it immediate legitimacy among those who have criticized the president for being too hesitant in going after the banks and resolving the mortgage crisis. He will be in attendance at Tuesday night's State of the Union address. "The goal of this joint investigation will be threefold: to hold accountable any institutions that violated the law; to compensate victims and help provide relief for homeowners struggling from the collapse of the housing market, caused in part by this wrongdoing; and to help us finally turn the page on this destructive period in our nation’s history," reads a White House document outlining the objectives. "This is a big achievement and something the entire progressive advocacy community wanted [with respect to] housing policy," added the White House official.

New Housing Task Force Will Zero In on Wall St. - After failing to produce any major prosecutions stemming from the housing crisis, an expanded federal task force is planning a new tack, cracking down on financial firms suspected of improperly bundling home loans into securities for investors, officials said Wednesday. The Obama administration tried to instill confidence in the effort by installing Eric T. Schneiderman, the New York state attorney general who is viewed by liberal groups as a crusader against big banks, as one of the leaders of a new unit within the Financial Fraud Enforcement Task Force. But skeptics still doubted the sincerity of the new effort. The unit, announced by President Obama1 in the State of the Union address2 on Tuesday night, while Mr. Schneiderman looked on from a prime seat behind Michelle Obama, is the latest in a string of efforts undertaken by the administration over the last three years to prosecute crimes related to the financial crisis, bolster the housing market and help homeowners who are suffering under unaffordable mortgages. Many of those efforts have met with limited success. The Financial Fraud Enforcement Task Force, created in late 2009, seemed little more than “a press release collection agency” being propped up by the Justice Department “to collect examples of investigations or prosecutions that would otherwise have been brought,”

Is Schneiderman Selling Out? Joins Federal Committee That Looks Designed to Undermine AGs Against Mortgage Settlement Deal - - Yves Smith  - New York Attorney General Eric Schneiderman has been celebrated as the progressive Great White Hope. But the danger of assuming leadership is that individual becomes a target both of attacks and of seduction. And while I’d like to think better of Schneiderman, an announcement earlier this evening has strong hallmarks of Schneiderman falling prey to the combined pressures and blandishments of the Administration and its allies. Only a sketchy bit of news has been released, with the most extensive reporting so far coming in Huffington Post which incorrectly anticipated a State of the Union announcement of the fact that Schneiderman will be co-chairing a Federal committee to investigate mortgage abuses (the story appears to have been confirmed in general terms via an announcement from Schneiderman’s office). Key details from the HuffPo story: The unit will not supersede the efforts already underway by the Department of Justice. Instead, it will operate as part of the president’s Financial Fraud Enforcement Task Force. In addition to Schneiderman, the unit will be co-chaired by Lanny Breuer, assistant attorney general at the Criminal Division of the Department of Justice, Robert Khuzami, director of enforcement at the SEC; John Walsh, a U.S. attorney in Colorado, and Tony West, assistant attorney general in the Civil Division at DOJ. So get this: this is a committee that will “investigate.” The co-chair, Lanny Breuer, along with DoJ chief Eric Holder, hail from white shoe Washington law firm Covington & Burling, which has deep ties to the financial services industry. Even if they did not work directly for clients in the mortgage business, they come from a firm known for its deep political and regulatory connections (for instance: Gene Ludwig, the Covington partner I engaged for some complicated regulatory work when I was at Sumitomo Bank, later became head of the OCC). We’ve written at length on how the OCC is such a shameless tout for the banking industry that it cannot properly be called a regulator. Similarly, the SEC has been virtually absent from the mortgage beat, no doubt because its enforcement chief, Robert Khuzami, was general counsel to the fixed income department at Deutsche Bank.

Nice Try, President Obama. Breuer and Khuzami Have to Go. And Indictments Have to Be Immediate. - President Obama, you’re right, critics of yours from the left–people like me–love the idea of NY Attorney General Eric Schneiderman chairing a “special unit to investigate misconduct and illegalities that contributed to both the financial collapse and the mortgage crisis” that would be “part of a new Unit on Mortgage Origination and Securitization Abuses.” But that’s not what you’re announcing, at least as described by Sam Stein for the HuffPo. Schneiderman isn’t chairing anything. He’s Co-Chairing. That’s a huge difference. If he’s Chair he’s in charge. If he’s Co-Chair he needs consensus. And who is he Co-Chairing with? Four people, starting with Lanny Breuer. That’s unacceptable. The reason we want Schneiderman in charge of prosecuting is because Breuer, who heads the Justice Department’s Criminal Division, hasn’t done his job. If he had pursued these prosecutions we’d have a lot more justice in this country right now than we do. Why has Breuer failed to go after the people who committed “misconduct and illegalities that contributed to both the financial collapse and the mortgage crisis”? Is it because he’s an ex- (and likely future) Covington & Burling partner? Doesn’t matter. His track record speaks for itself. There is only one reason to have him co-chair with Schneiderman, and that’s to rein Schneiderman in. Schneiderman’s also got to contend with Robert Khuzami, the SEC’s top law enforcer. Khuzami’s SEC can be called aggressive only when measured against Breuer’s Criminal Division. Having Khuzami on the committee gives the weak-enforcement lawyers two people to Schneiderman’s one. And Khuzami is deeply conflicted because he was Deutsche Bank’s CDO lawyer in 2006 and 2007, peak shadiness times.

Tom Ferguson on SOTU: New Financial Fraud Commision Could Actually Slow Down Investigations - Political scientist Tom Ferguson agreed with our dim take of the news reports last night on the formation of a “new” financial fraud commission on mortgage abuses (which is actually just part of an existing fraud commission that has done squat). He also saw the apparent co-optoins of New York’s Eric Schneiderman as an effort to rein in the attorneys general that oppose the mortgage settlement.  If you are concerned and skeptical as I am, PLEASE write or call Schneiderman’s office. While it is unlikely to derail this particular train, it does not hurt Schneiderman know that you recognize this as a likely Faustian bargain. Reader DS sent this note as an example:  Dear Atty General Schneiderman, Having admired the integrity with which you have supported the rule of lawrelated to Wall St shenanigans and the mortgage crisis, I find it deeply distressing to read the following:  I hope/trust that you will not ‘sell out’. You can call Schneiderman’s office at 800-771-7755 or send a message via this page.  To the Ferguson interview:

More Caution and Skepticism About Federal Mortgage “Investigation” - - Yves Smith - While a large number of “liberal” groups, ranging from the official Democratic party outlets (the Center for American Progress) to ones that sometimes cross swords with the Administration (MoveOn, the Working Families Party) praised the Tuesday evening announcement of mortgage “investigations” with Schneiderman co-chairing the effort, others who have been watching the mortgage legal fight closely were far more ambivalent about the creation of a new unit in an initiative …which has done pretty much nothing since its creation in 2009 (boldface mine): Attorney General Eric Holder, Treasury Secretary Tim Geithner, Housing and Urban Development (HUD) Secretary Shaun Donovan, and Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro today announced that President Barack Obama has established by Executive Order an interagency Financial Fraud Enforcement Task Force to strengthen efforts to combat financial crime. The Department of Justice will lead the task force and the Department of Treasury, HUD and the SEC will serve on the steering committee. The task force’s leadership, along with representatives from a broad range of federal agencies, regulatory authorities and inspectors general, will work with state and local partners to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, address discrimination in the lending and financial markets and recover proceeds for victims.The attorney general will convene the first meeting of the Task Force in the next 30 days. The New York Times, which has been a staunch supporter of Schneiderman when he was sticking his neck out, is taking a “yet to be convinced” stance:

Obama’s Financial Crimes Unit: Task Force’s Details Emerge - The new Financial Crimes Unit announced by President Barack Obama during Tuesday's State of the Union address will have the power to investigate mortgage fraud going back at least 10 years, according to senior officials at the Department of Justice. The new unit, however, could jeopardize the negotiations now taking place between five of the country's largest banks, the states' attorneys general and the Obama administration over mortgage fraud and wrongful foreclosures, some observers say. In a conference call with reporters on Thursday afternoon, senior officials at the Department of Justice fleshed out details of the new unit. The new unit will focus on both the origination and securitization (or packaging) of mortgage loans. The unit will also investigate loans that were sold to, and insured by, government agencies, said Justice Department officials.  The new unit "has a pretty good chance of derailing it," JPMorgan Chase CEO Jamie Dimon told CNBC on Thursday, referring to the settlement. The banks are interested in the settlement because it will protect them from future liability, according to one industry insider who agreed to speak on the condition of anonymity. If they agree to spend $25 billion to guarantee such protection, then find themselves facing the exact same cases with the new investigative unit, they no longer have an incentive to bother with the settlement.

Lanny Breuer, Task Force Leader, Doesn’t Bother Showing Up For Mortgage Fraud Press Conference - Eric Holder has come out with details on the task force.  But first, let’s look at a smoke signal.  At this press conference announcing the task force, Holder had to apologize for Lanny Breuer, Assistant Attorney General for the Criminal Division, one of the key leaders of the investigative unit. Breuer, you see, couldn’t make it to the press conference because he was traveling.  That’s how important this task force is to Breuer, so important that his travel schedule couldn’t brook interference.  Such a bureaucratic snub has been no doubt noticed by the various underlings at the DOJ and the US Attorney offices. Ok, let’s go to the substance. I am pleased to report that this Working Group has considerable Department resources behind it as it builds on activities that have been underway through the broader Task Force.  Currently, 15 attorneys, investigators, and analysts – here at Main Justice and throughout our U.S. Attorneys’ Offices – are supporting the investigative efforts that this Working Group will be focusing on going forward.  And the FBI has assigned 10 agents and analysts to work with the group immediately.  In the coming weeks, another 30 attorneys, investigators, and support staff from U.S. Attorneys’ Offices will join the Group’s work. So that’s a total of 55 people, 10 of whom are FBI agents.  Let’s do a few comparisons.  During the Savings and Loan crisis, Bill Black reminds us that there were about a thousand FBI agents working on the various cases.  That’s one hundred times the number of people working on a scandal that is about forty times larger and far more complex. To put it another way, let’s say that this scandal cost the American public $5-7 trillion in lost home equity.  That’s about $100 billion of lost home equity per person assigned to this task force. 

Attorney General Champs, Chumps, and Eric Schneiderman - A lot of news has broken in the last few days, shifting the law enforcement against Wall Street and Bailed-Out bankers landscape in profound ways, so here’s a look at the current state of play. In the Attorney General law enforcement champions category–the people David Dayen calls “Justice Democrats”–we have Delaware’s Beau Biden, who again rejected the “settlement” between bailed out banks, the Justice Department, and miscellaneous attorneys general, and California AG Kamala Harris, who did too. Note: Harris’s such a champ she had the strength to reject an obvious, and large bribe in the process. Nevada’s Catherine Cortez Masto has not, to my knowledge, reaffirmed her rejection of the “settlement”, but she’s been so fiercely law and order it’s hard to imagine her caving to the pressure to cut the banks loose. Massachusetts’s Martha Coakley doesn’t seem likely to play ball either. (I put “settlement” in quotes because it vacillates from imminent to off the table seemingly by the week, and its terms remain somewhat in flux.) If those are the champs, who are the chumps? Well, any state attorney general who isn’t willing to stand with Biden, Harris, Masto, and Coakley, as a general matter. Several have made noise, however, about taking action; a couple of weeks ago Oregon, Maryland, Kentucky, Minnesota, New Hampshire, Hawaii, Missouri, Montana and Mississippi were meeting with the “Justice Democrats” about coordinating investigations and enforcement. So that could be nine new champs, if they survive the pressure from the Obama Administration to take the deal. If you live in any of those states, please give them a call and tell them to reject the “settlement.”

Can the Schneiderman-Infused Financial Fraud Unit Prosecute Vikram Pandit? - There are two underlying structural problems with the new(ish) Federal task force on financial fraud.  One, it is the policy of the administration to protect the banking system’s basic architecture, which means the compensation structure and the existing personnel who run these large institutions.  Any real investigation into the financial collapse will inevitably lead to the collapse of this architecture.  Thus, any real investigation will be impeded when it begins to conflict the basic policy framework of the Obama administration.  And this framework is set by Obama.  It’s what he believes in.  He made this clear in his first State of the Union, when he said a priority of the administration was to ensure that “the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times.” Two, Obama personally believes in the legitimacy of the existing banking institutional framework and he strongly suspects that no crimes were committed.  He has hired a raft of people – including Jack Lew, Tim Geithner, Eric Holder, Larry Summers, and so on and so forth – who agree, and has implemented policies such as Dodd-Frank that assume as much.  His administration genuinely believes that mortgage fraud has been a top priority of theirs, as I showed this morning.  These people aren’t stupid, they aren’t without principles, and they aren’t electorally driven.  They are ideologues.  They really believe in a neoliberal political economy, where government throws money at the economy through private channels and private channels do with it whatever they think best.  As Jonathan Alter, who is as close as you can get to the administration’s emotional spokesperson, explains in a column titled “For Obama, Pro-business Populism is no Oxymoron”:

“Mortgage Fraud is a Top Priority for This Administration” - Since the President is now establishing yet another committee to look into the mortgage fraud crisis, I figured it would be useful to look into the history of the Obama and Bush administrations’ approaches to the problem of vast financial fraud.  As with most Obama government activities, it’s largely a story of policy continuity with the last administration, though the boom-bust cycle meant that there was not a huge amount of public pressure on the Bush administration to act, so their PR apparatus was less visible. In 2009, President Obama established the Financial Fraud Enforcement Network, whose purpose was “to hold accountable those who helped bring about the last financial crisis, and to prevent another crisis from happening.”  In the State of the Union, he basically re-established this network, adding a new member, Eric Schneiderman, who has been something of a thorn in the side of the administration.  My guess is that at least one reason (but not the only reason) for agreeing to this is that Schneiderman believes he needs the extra resources to investigate the mortgage crisis.  But the resources of the Federal government have proven useless because the people who are in government are uninterested in and incapable of holding financial interests accountable for their behavior.

The mortgage investigations drag on - The shape of a possible settlement with the banks over mortgage fraud has never been clearer. But neither has the fact that it’s not going to happen any time soon. And without a deal in hand, Barack Obama ended up making a different announcement in his State of the Union address: Tonight, I’m asking my Attorney General to create a special unit of federal prosecutors and leading state attorney general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans. Sam Stein has the details — but suffice to say that this is a new investigation, with no fewer than five co-chairs, which will run in parallel to the existing DoJ investigation: The unit will not supersede the efforts already underway by the Department of Justice. Instead, it will operate as part of the president’s Financial Fraud Enforcement Task Force. In addition to Schneiderman, the unit will be co-chaired by Lanny Breuer, assistant attorney general at the Criminal Division of the Department of Justice, Robert Khuzami, director of enforcement at the SEC; John Walsh, a U.S. attorney in Colorado, and Tony West, assistant attorney general in the Civil Division at DOJ. To recap: we were meant to have a settlement by now. And instead of a settlement, we’ve got yet another investigation, where the aggressive New York attorney general looks as though he’s in the minority with respect to punishing the banks for their misdeeds.

Bank of America Settlements Impede Fraud Probe, Arizona Says - -- Bank of America Corp. is impeding an investigation of its loan modification practices by negotiating settlements with borrowers who must agree to keep them secret and not criticize the bank in exchange for cash payments and loan relief, Arizona officials say. The Arizona Attorney General’s office is asking a court to block those aspects of the settlements and require the bank to turn over all the agreements. The bank denies any wrongdoing. One 2011 accord involving a borrower facing foreclosure who defaulted on a $253,142 mortgage included a $5,000 payment, plus $7,500 for legal fees, and the defaulted payments were waived and the loan was modified to a 40-year term with a 2 percent interest rate, court documents show. The terms of the original loan and the borrower’s complaint about the lender weren’t described in the documents. The borrower “will remove and delete any online statements regarding this dispute, including, without limitation, postings on Facebook, Twitter and similar websites,” and not make any statements “that defame, disparage or in any way criticize” the bank’s reputation, practices or conduct, according to documents filed in state court in Phoenix. The borrower’s name and address were redacted.

Quelle Surprise! Bank of America Accused of Blocking Arizona AG Investigation -- Yves Smith - One thing NC readers may have become attuned to, either via personal experience or some of the discussions we have had here, is how often a considerable portion of the value of a deal lies in releases (waivers of liability) or other provisions that might not seem all that important to the party signing away its rights. Bloomberg reports that the state of Arizona has told the court that Bank of American is undermining the state’s investigation of its loan modification practices. The probe comes out of a 2010 lawsuit which alleged that Countrywide misled customers about its loan modification policies. So what did Bank of America do? It apparently gave mortgage mods to some (many?) of the people who had complained to state officials and had them sign an agreement not to say anything about the deal or disparage Bank of America. Per Bloomberg: One 2011 accord involving a borrower facing foreclosure who defaulted on a $253,142 mortgage included a $5,000 payment, plus $7,500 for legal fees, and the defaulted payments were waived and the loan was modified to a 40-year term with a 2 percent interest rate, court documents show….The borrower “will remove and delete any online statements regarding this dispute, including, without limitation, postings on Facebook, Twitter and similar websites,” and not make any statements “that defame, disparage or in any way criticize” the bank’s reputation, practices or conduct, according to documents filed in state court in Phoenix….

How Bank Of America May Be Buying Silence In Arizona's Mortgage Fraud Investigation - In late 2010, Arizona launched an investigation into Bank of America, alleging that the bank misled homeowners who were seeking mortgage modifications. Arizona’s attorney general claims that Bank of America “repeatedly has deceived” borrowers looking to lower their monthly payments. According to BusinessWeek, Bank of America is fighting back by giving loan modifications to borrowers who have made complaints. The catch is that, in return for the modification, the borrower must agree to stay silent and expunge any previous criticisms of the bank from his or her public record: Bank of America Corp. is impeding an investigation of its loan modification practices by negotiating settlements with borrowers who must agree to keep them secret and not criticize the bank in exchange for cash payments and loan relief, Arizona officials say. [...]. The borrower “will remove and delete any online statements regarding this dispute, including, without limitation, postings on Facebook, Twitter and similar websites,” and not make any statements “that defame, disparage or in any way criticize” the bank’s reputation, practices or conduct, according to documents filed in state court in Phoenix.

Obama Pulls The Trigger On The January Surprise - I told you so. This was the housing policy bombshell from President Barack Obama’s State of the Union address: I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. Thunderbolt. A mass mortgage refinancing plan with a new bank tax to pay for it. Obama’s description is sketchy, but here’s how ace analyst Jaret Seiberg of Guggenheim Washington Research Group sees this new plan playing out: The President is pushing an easy-to-execute plan to let borrowers refinance mortgages regardless of LTV. This is a much bolder initiative than expected, though we emphasize that it is a legislative proposal that cannot take effect unless Congress enacts it. Were this enacted into law, this would be a mass refinancing that we believe could help more than 10 million borrowers refinance their mortgages regardless of whether their loan is backed by the government or not. Hurt by a mass refinancing would be holders of MBS that is trading above par as prepayment rates would accelerate materially. … Our concern is that a mass refinancing could permanently drive housing finance costs higher. This is a real threat as investors are likely to demand a premium if government policy materially accelerates prepayment rates. … Our view is that only borrowers who have been current on their loans for at least six months – or possibly a year – will be eligible for the program.

President to Offer Way for Easing Home Debt — The White House plans to propose legislation that could allow a few million homeowners to reduce monthly mortgage payments by refinancing their current loans into new ones guaranteed by the Federal Housing Administration. The program would broaden the availability of government-backed mortgages to include many borrowers whose loans are held by private companies and who have been unable to persuade those lenders to reduce their interest rates. Existing federal programs focus mostly on borrowers whose loans are owned by the government.  The new plan would require Congressional approval, a difficult hurdle for any legislation in the current polarized environment. Still, some Republicans have expressed support for expanding the availability of refinancing, and White House officials insisted that the plan was not an act of theater.  “I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates,” Mr. Obama said Tuesday night in his State of the Union address2. “No more red tape.  No more runaround from the banks.”

Does Obama Finally Have a Plan to Fix the Housing Mess? - Perhaps the single biggest headwind the American economy faces, rivaled only by unemployment, is the dismal housing market.  American’s biggest source of wealth has been decimated over the past six years, so it was no surprise that President Obama, in his state of the union speech, promised responsible homeowners the chance to refinance and “save more than $3,000 a year on their mortgage.” Sounds great. But what is he actually talking about? If it were that easy to put $3,000 a year into the pockets of responsible homeowners, why hasn’t the President and Congress done so already? And will this plan be any different than the government’s other, mostly failed, attempts to prop up the housing market and stimulate the economy through lower rates? The administration is keeping mum thus far on the exact details of the plan — but recent anonymously sourced reports in The New York Times and Washington Post are painting a picture of what such a plan might look like.

Big questions about Obama’s mass-refinancing plan - The ongoing housing crisis is among the biggest reasons that our economy is still in a funk, and on Tuesday, President Obama laid out a new plan to help resolve it. He wants Congress to pass a bill that would allow “every responsible homeowner” to refinance at lower interest rates, estimating that it would save every participant about $3,000 a year on their mortgage. Obama would pay for his mass-refinancing plan by levying a new fee on big financial institutions. But economists on both left and right have raised large questions about the plan. The biggest concern is how much risk taxpayers would be taking on through this approach to mass refinancing. A White House official, speaking on the condition on anonymity, indicated that the plan would be fairly broad in scope: It would not only include mortgages that the government already holds through Fannie Mae and Freddie Mac, but also to holders of loans backed by the private sector as well.  That approach could potentially help a large number of homeowners and prevent more foreclosures. But there also is the risk that we would be “transferring massive amounts of bad debt from the current holders to the government,” says Dean Baker, co-director of the left-leaning Center for Economic Policy Research. “If the government is going to guarantee refinancing in this way, then we are giving much more money to banks and investors than to homeowners,” he argues.

Treasury to pay investors triple for HAMP principal reductions - The Treasury Department will triple payments to mortgage investors for reducing borrower principal through an expanded Home Affordable Modification Program announced Friday, Officials announced several critical changes to HAMP, including an enrollment extension to Dec. 31, 2013, from its original expiration date at the end of this year. The Treasury will also require servicers to factor in second liens and other obligations in the debt-to-income ratio calculation. Previously, if a borrower's first-lien mortgage monthly payment was below 31% of the income, the borrower was deemed ineligible. Factoring other debts to the DTI evaluation will expand the pool of borrowers who could receive the assistance. To combat blight, officials said they would also expand HAMP to investors who are renting properties to tenants. Department of Housing and Urban Development Secretary Shaun Donovan said in the conference call Friday that the Treasury would make these payments to Fannie Mae and Freddie Mac if they participate in the principal reduction program. To date, the GSEs have not committed to such a program.

Expanding our efforts to help more homeowners - Treasury Notes - Today, the Administration announced important enhancements to the Making Home Affordable Program, including the Home Affordable Modification Program (HAMP), to expand the reach of the program to help additional homeowners stay in their homes and strengthen hard-hit communities. These enhancements will provide additional relief to struggling homeowners, renters, and their neighborhoods to accelerate the housing market recovery and improve our overall economy. The Administration is committed to a multi-pronged effort to support American homeowners to help heal our nation’s housing market. This includes providing refinancing opportunities for responsible homeowners, transitioning foreclosed properties into rental housing to help reduce the overhang of unsold homes, and providing states hardest hit by the foreclosure crisis with resources to develop targeted relief programs that work for their communities.

More On Principal Reduction - As I wrote the other day, reducing principal on homeowners with underwater mortgages is one important way to help them avoid foreclosure and help the economy get better faster.  It’s not for everyone—some homeowners simply bit off too much house.  But there are millions out there for whom this could work. In this regard, I like the look of a new initiative by the White House just released this afternoon.  First, they’re sharply increasing the incentives—by a factor of three—in the part of their loan modification program (HAMP) that nudges the investors that own the loans to write down the principal.  Owners of loans used to get 6-21 cents on the dollar to write down principal; now they’ll get 18-63 cents. Second, for the first time, they’re offering these incentives to loans held or insured by the GSEs (Fannie and Freddie). A big boulder in the path to principal reduction has been the reluctance of the GSEs regulator, the FHFA, to play along—i.e., to reduce principal on the loans that Fan and Fred hold or insure.  And HAMP principal reductions were off limits to the GSEs.  Well, according to the White House, they’re not off limits anymore:

Housing Help Will Run Up Against Lending Standards - Both monetary and fiscal policymakers share one mutual problem: housing’s drag on the economy. iStockPhotoThe lack of new construction is cutting economic growth and payrolls. Falling home prices are reducing household wealth, a drag on consumer confidence and spending. The ideas coming out of Washington aren’t new but mainly extensions or continuations of previous efforts to help homeowners, especially those with underwater mortgages, and to keep mortgage rates low to attract new buyers. Those past moves have helped homebuilding find a bottom, but that bottom is well below boom levels. Housing starts are less than a third of their record highs of 2006, and home prices are almost 18% below their peaks of 2007, according to Federal Housing Finance Agency data released Wednesday. Those deep holes in activity and prices are why policymakers want to help housing even more. Any expanded policy actions, however, will run up against a formidable obstacle: the New Normal in the mortgage process.

Fannie, Freddie writedowns too costly: regulator - The regulator for Fannie Mae and Freddie Mac told lawmakers that forcing the two mortgage firms to write down loan principal would require more than $100 billion in fresh taxpayer funds. In a letter sent on Friday to the Republican and Democratic leaders of a House of Representatives government oversight panel, the Federal Housing Finance Agency explained why it has long opposed principal reductions for borrowers who owe more than their homes are worth. It said it had determined that such reductions would be more costly for the two firms than allowing those troubled borrowers to default. "Principal reduction never serves the long-term interest of the taxpayer when compared to foreclosure," FHFA's acting director, Edward DeMarco, wrote in the letter to lawmakers dated January 20. About 22 percent of U.S. homes have negative equity totaling about $750 billion, according to CoreLogic."Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action," DeMarco said in the letter.

FHFA Analysis on Principal Forgiveness - The FHFA released their analysis on the effectiveness of principal reductions for Fannie and Freddie loans. The FHFA analysis showed that principal reductions would be more costly for taxpayers than other alternatives. Here is the letter: FHFA Releases Analysis on Principal Forgiveness As Loss Mitigation Tool. Here is the analysis: FHFA Analyses of Principal Forgiveness Loan ModificationsIn considering principal forgiveness, FHFA compared taxpayer losses from principal forgiveness versus principal forbearance, which is an alternate approach that the Enterprises currently undertake to fulfill their mission at a lower cost to the taxpayer. FHFA based its conclusion that principal forgiveness results in a lower net present value than principal forbearance on an analysis initially prepared in December 2010, which is attached, along with updated analyses produced in June and December 2011, which are also attached. Putting this determination in context, as of June 30, 2011, the Enterprises had nearly three million first lien mortgages with outstanding balances estimated to be greater than the value of the home, as measured using FHFA’s House Price Index. FHFA estimates that principal forgiveness for all of these mortgages would require funding of almost $100 billion to pay down mortgages to the value of the homes securing them.

Mortgage Writedowns Could Cost Taxpayers $100 Billion - Forgiving mortgage debt on Fannie Mae and Freddie Mac loans would cost the taxpayer-funded companies almost $100 billion, their regulator said. The Federal Housing Finance Agency said that as of June 30, the companies guaranteed nearly 3 million mortgages on single- family homes that are underwater, or worth less than the loans they secure. “FHFA estimates that principal forgiveness for all of these mortgages would require funding of almost $100 billion,” FHFA Acting Director Edward J. DeMarco said in a Jan. 20 letter to Representative Elijah Cummings, a Maryland Democrat who had threatened to subpoena the information. The FHFA posted the letter on its website today. Nearly 80 percent of the Fannie Mae and Freddie Mac borrowers with negative equity were current on their payments, DeMarco said. DeMarco, whose agency was created by Congress to minimize losses at Fannie Mae and Freddie Mac and is independent of President Barack Obama’s administration, has maintained that principal forgiveness would increase the size of the government’s bailout of the companies, which have cost taxpayers more than $153 billion since they were taken under government control in 2008.

LPS: 2010, 2011 Mortgage Originations have record low default rates - From LPS Applied Analytics: LPS' Mortgage Monitor Shows 2010, 2011 Originations Among Best Quality on Record - The December Mortgage Monitor report released by Lender Processing Services shows mortgage originations continued their decline from 2011’s September peak, down 10.1 percent from the month before. At the same time, those loans originated over the last two years have proven to be some of the best quality originations on record. Looking at judicial vs. non-judicial foreclosure states, LPS found that half of all loans in foreclosure in judicial states have not made a payment in more than two years. Foreclosure sale rates in non-judicial states stood at approximately four times that of judicial foreclosure states in December. According to LPS, 8.15% of mortgages were delinquent in December, unchanged from November, and down from 8.83% in December 2010. LPS reports that 4.11% of mortgages were in the foreclosure process, down from 4.16% in November, and down slightly from 4.15% in December 2010. This gives a total of 12.26% delinquent or in foreclosure. It breaks down as:

  • • 2.31 million loans less than 90 days delinquent.
  • • 1.79 million loans 90+ days delinquent.
  • • 2.07 million loans in foreclosure process.

For a total of 6.17 million loans delinquent or in foreclosure in December. This graph shows the total delinquent and in-foreclosure rates since 1995. The in-foreclosure rate was at 4.11%, down from the record high in October 2011 of 4.29%. There are still a large number of loans in this category (about 2.07 million). LPS reported that foreclosure starts were down nearly 40% in December, probably due to process issues. This graph provided by LPS Applied Analytics shows foreclosure inventories by process. The third graph shows the 90+ day default rate by vintage.

2010-2011 Originations Best Default History on Record; Delinquencies Down 25% from Highs, Foreclosure Inventory Near Peak Level - Here are a couple of interesting charts from the LPS Mortgage Monitor, January 2012 Mortgage Performance Observations report. Data as of December, 2011 Month-end. Originations Decline - Government Responsible for Most Refinance Activity - Quality of Loans Improves - Foreclosure Inventory Near Peak Level - Horrendous Performance of Loans in Foreclosure in Judicial States. The quality of recent loans has gone up and delinquencies are lower, but the rest of the data shows numerous problems. Foreclosure inventory is near record levels and more foreclosures wait in the wings. Home sales has stalled and home prices continue to decline according to Case Shiller.

Candidates unloved in FL town hit by foreclosures - At Our Daily Bread Food Pantry, the conversation often centers on real estate. Once taboo details -- home values and what people paid for their properties -- are casually discussed, and there appears to be little shame in walking away from a mortgage or fighting the bank on a foreclosure. With Florida's Republican presidential primary just days away, the talk has turned to politics. At the food pantry and throughout hard-hit Lehigh Acres, frustrations over the housing crisis and the federal government's seeming inability to help has turned into apathy at best, and rage, at worst. "They destroyed Florida," said 69-year-old Bobbie Ruggieri, a food pantry volunteer.  Once sleepy and rural, the area boomed high and hard between 2003 and 2007. The population doubled to about 65,000, mostly from service and construction workers living large off the success of the area's new housing. The fall came just as fast. By 2008, Lehigh Acres and the entire Fort Myers area had the nation's highest foreclosure rate. Currently, one in every 96 homes is in foreclosure. Here and likely elsewhere, no politician is spared the fury over the housing crunch. Experts say neither President Barack Obama nor any of the Republicans who want to challenge him in November have solutions for falling prices, depressed construction and waves of foreclosures.

Old mortgages rise from the dead, haunt homeowners - More and more, homeowners say that mortgages they thought were dead and buried are springing back to life, sometimes haunting them all the way into foreclosure. "It's the most egregious manifestation of an industry that's seriously broken," said Ira Rheingold, a lawyer who is the executive director of the National Association of Consumer Advocate. Diane Thompson, an attorney with the National Consumer Law Center, says she has defended hundreds of foreclosure cases, and in nearly all of them, the homeowner was not in default. "The record-keeping on the part of the mortgage servicers is not to be trusted." The problems grew from a lot of sloppy recordkeeping that began during the housing boom, when Wall Street built a quick-and-dirty back-office operation to process mortgages quickly so lenders could sell as many loans as possible. As the loans were later sold to investors, and then resold around the world, the back office system sidestepped crucial legal procedures. Now it's becoming clear just how dysfunctional and, according to several state attorneys general, how fraudulent the whole system was.

Mitt Romney’s Intriguing Comments on Foreclosures and Strategic Defaults - For a look at what would actually help the housing market, Nick Timiaros has some ideas. You can reduce principal across the board, you can empower investors to buy up housing and rent it back to the owners, or work out terms on new mortgages (a modern-day HOLC), and very simply, you could forgive the debt. That line of thinking picked up a champion today in none other than the struggling Presidential candidate, Mitt Romney. Read this carefully. “Yeah. It’s just tragic, isn’t it? Just tragic, just tragic,” Romney said. “We’re just so overleveraged, so much debt in our society, and some of the institutions that hold it aren’t willing to write it off and say they made a mistake, they loaned too much, we’re overextended, write those down and start over. They keep on trying to harangue and pretend what they have on their books is still what it’s worth.” “ “In some cases, if the debt is not in something you can service, it’s like you have to move on and start over away from those debts. It’s helpful if you get an institution that’s willing to work with you, but if you don’t you have no other option.”. Romney is saying that the banks have worthless debt that they need to renegotiate. They don’t want to write down the value on their books but everybody knows the books are fraudulent. If they won’t renegotiate, it’s the duty of the borrower to WALK AWAY. If you can’t pay the debt you restructure it. If the debt holder doesn’t like it they shouldn’t have made the loan in the first place.

Should the Government or the Market Set Mortgage Down Payments? A New Study - UNC's Center for Community Capital has posted a new analysis of 19.5 million mortgage loans originated between 2000 and 2008 finding that mandatory down payments of 10% would lock out nearly 40% of all creditworthy borrowers while a 20% down payment would exclude 60%.  The study finds a significantly higher exclusion rate for African American and Latino borrowers.  The authors (Roberto Quercia of UNC, Lei Ding of Wayne State University, & Carolina Reid from the Center for Responsible Lending) do find valuable default-reduction benefits of other forms of strong underwriting as the Dodd-Frank Act already requires (through the "QM" and "QRM" classifications), but signal caution about the significant access costs of government-mandated down payment levels that government regulators may be currently considering.

Paul Krugman Makes Housing Call He Will Likely Come to Regret -- Yves Smith - I wanted to take note of Paul Krugman’s current New York Times op ed, “Is Our Economy Healing?”  His current piece voices cautious optimism on the prospects for the economy based on some strengthening in various economic indicators. But astonishingly, the core of his argument rests on the outlook for the housing market:But the bubble began deflating almost six years ago; house prices are back to 2003 levels. And after a protracted slump in housing starts, America now looks seriously underprovided with houses, at least by historical standards.So why aren’t people going out and buying? Because the depressed state of the economy leaves many people who would normally be buying homes either unable to afford them or too worried about job prospects to take the risk.But the economy is depressed, in large part, because of the housing bust, which immediately suggests the possibility of a virtuous circle: an improving economy leads to a surge in home purchases, which leads to more construction, which strengthens the economy further, and so on. And if you squint hard at recent data, it looks as if something like that may be starting: home sales are up, unemployment claims are down, and builders’ confidence is rising. Implicit in his discussion is that buyers are now irrationally pessimistic, and once the economy looks stronger, housing purchases will pick up. Ahem. Let me use my rendering of a chart Krugman used in discussing oil prices in 2008:

Why Home Prices Have Much Further To Fall - There has been a deluge of articles recently about the upticks in the housing data.  Let me acknowledge that I do not dispute the improvement in the data regarding home starts, permits, pending sales, etc. The point I specifically want to address today is home prices. After the past few bloody years of price declines, and repeated calls of a housing bottom each year, 2012 proves to be no different with yet more calls for a bottom. However, why shouldn't there be? Home prices have declined, according to our NAR/Core Logic Composite Index (an average of the two), by a whopping 36%. Interest rates are at their lowest levels ever, and you can still get a low downpayment mortgage if you can qualify. (That last part is a bit tricky though). Therefore, the assumption is that, if home building is stabilizing, then it is only a function of time until home prices began to rise as well.  Not so fast. When the average American family sits down to discuss buying a home they do not discuss buying a $125,000 house. What they do discuss is what type of house they need, such as a three bedroom house with two baths, a two car garage and a yard. That is the dream part. The reality of it smacks them in the face, however, when they start reconciling their monthly budget.

Foreclosures made up 20 pct. of home sales in 3Q — Foreclosures made up a smaller slice of all U.S. homes sold in last year's third quarter, as banks delayed placing properties for sale and home sales1 slowed. Despite the decline, foreclosures2 still represented 20 percent of all homes sold in the July-September period — about four times more than at the height of the housing boom, foreclosure listing firm RealtyTrac Inc. said Thursday. Foreclosure sales include homes purchased after they received a notice of default or were repossessed by lenders. In 2005 and 2006, when housing was still flying high, foreclosures3 made up less than 5 percent of all home sales4, the firm said. They peaked in 2009 at 37.4 percent. As a portion of all homes purchased, foreclosure sales declined in the third quarter from 22 percent in the April-June period. They were down from 30 percent in the third quarter of 2010, RealtyTrac said.

Case Shiller House Price Forecasts: New Post-bubble lows Seasonally Adjusted - The Case Shiller house price indexes for November will be released next Tuesday. Here are a couple of forecasts:
• Zillow Forecast: November Case-Shiller Composite-20 Expected to Show 3.2% Decline from One Year Ago Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted, NSA) will decline by 3.2 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will show a year-over-year decline of 2.7 percent. The seasonally adjusted (SA) month-over-month change from October to November will be -0.2 percent and -0.1 percent for the 20 and 10-City Composite Home Price Index (SA), respectively.

• From RadarLogic: Home Prices Declined at an Accelerating Rate in November as Sales Increased The S&P/Case-Shiller Composite Home Price Indices for November 2011 will decline again on a month-over-month basis. This month, we expect the November 2011 10-City composite index to be about 152 and the 20-City index to be roughly 138.Below is a summary table. Case-Shiller will probably report house prices are at a new post-bubble low seasonally adjusted, but still above the NSA (Not Seasonally Adjusted) levels of March 2011.

FHFA House Price Index Rises 1.0 Percent in November - pdf - U.S. house prices rose 1.0 percent on a seasonally adjusted basis from October to November, according to the Federal Housing Finance Agency’s monthly House Price Index. The previously reported 0.2 percent decrease in October was revised downward to reflect a 0.7 percent decrease. For the 12 months ending in November, U.S. prices fell 1.8 percent. The U.S. index is 18.8 percent below its April 2007 peak and roughly the same as the February 2004 index level. The FHFA monthly index is calculated using purchase prices of houses backing mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac. For the nine census divisions, seasonally adjusted monthly price changes from October to November ranged from -0.2 percent in the Middle Atlantic division to +2.1 percent in the West South Central division. Monthly index values and appreciation rate estimates for recent periods are provided in the table and graphs on the following pages.

Housing ends year on strong note, but prices still falling - The housing market ended the year on a positive note with strong sales in December, but a glut of unsold homes will likely push prices lower through much of this year, forecasters said Friday. Sales of existing homes hit an 11-month high last month and the number of properties on the market fell to the lowest level in nearly seven years, according to the National Association of Realtors. Unseasonably warm weather may have helped boost sales, but analysts said a strengthening job market and record low mortgage rates should buoy housing in coming months. Still, they were troubled by the high level of "distressed homes" for sale, including short sales of underwater properties or sales of foreclosed properties. Nearly one-third of existing-home sales were distressed last month, according to the Realtors. In addition, one-third of Realtors said home sales fell through last month because of declined mortgage applications or appraisals that fell short of the required values. "These strong negative undercurrents in the housing market and absence of support from strong labor market conditions will continue to trim home sales in the near term,"

When Will Housing Hit Bottom? - The National Association of Realtors is (quelle surprise!) quite bullish on the future of the housing market.  Not so fast, says Lance Roberts of StreetTalk Advisors:  He sees 2012 as another year of lagging sales, considering the average household debt for Americans over the age of 16 comes to $96,229 per person. In addition, the average income before taxes is roughly $54,110 and many Americans have a debt-to-income ratio of 177.8%, making it difficult for them to qualify for a home loan. Roberts says the average median income for a family is $55,000, and the average median home sales price is $214,000. To afford such a home, the average American would have to put down 20%, or roughly $42,800. But, Roberts says that amount is nearly impossible to save, given the state of the economy and consumer debt levels. "In today's credit constrained environment due to the financial crisis which has left the major banks saddled with millions of homes that are delinquent or in foreclosure -- there is little reason to lend money to borrowers who can't meet very stringent qualification requirements," Roberts wrote

Pending Home Sales Decline in December - From the NAR: Pending Home Sales Decline in December, Remain Above a Year Ago: The Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 3.5 percent to 96.6 in December from 100.1 in November but is 5.6 percent above December 2010 when it was 91.5. The data reflects contracts but not closings. ... The PHSI in the Northeast declined 3.1 percent to 74.7 in December and is 0.8 percent below a year ago. In the Midwest the index rose 4.0 percent to 95.3 and is 13.3 percent higher than December 2010. Pending home sales in the South slipped 2.6 percent to an index of 101.1 in December but are 4.9 percent above a year ago. In the West the index fell 11.0 percent in December to 107.9 but is 3.7 percent higher than December 2010.

BIG MISS: Pending Home Sales Decline 3.5% in December: Pending home sales in December declined 3.5%, reversing a 7.3% surge in November. Economists polled by Bloomberg had expected a decline of only 1.0%. “Contract failures remain an issue, reported by one-third of Realtors over the past few months, but home buyers are not giving up,” NAR chief economist Lawrence Yun said. The index measuring pending home sales dropped to 96.6 in December, from 100.1 in November, and remains above year-ago levels, when it stood at 91.5. The data is a forward looking indicator for sales, and does not reflect the number of closings. However, new data out of the Federal Housing Finance Agency shows housing prices increased 1.0%, against forecasts for a flat reading and above the 0.7% decline seen in October. Prices increased in all regions sequentially, except for the Middle Atlantic which includes New York, New Jersey and Pennsylvania. However, prices have yet to rebound from year-ago levels, and remain, on average, 1.8% below where they were in November 2010.

Vital Signs: Pending Home Sales - The housing market is showing signs of life but slowed a touch at year end. The National Association of Realtors’ index of pending home sales, which tracks sales of previously owned homes based on contract signings, fell a seasonally adjusted 3.5% in December from the previous month. The decline partly reflects a strong November, when sales hit a 19-month high. December sales rose 5.6% from a year ago.

New Home Sales decline in December to 307,000 Annual Rate - The Census Bureau reports New Home Sales in December were at a seasonally adjusted annual rate (SAAR) of 307 thousand. This was down from a revised 314 thousand in November (revised down from 315 thousand). The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Sales of new single-family houses in December 2011 were at a seasonally adjusted annual rate of 307,000 ... This is 2.2 percent (±13.2%) below the revised November rate of 314,000 and is 7.3 percent (±16.6%) below the December 2010 estimate of 331,000. The second graph shows New Home Months of Supply. Months of supply increased to 6.1 in December.  The all time record was 12.1 months of supply in January 2009. This graph shows the three categories of inventory starting in 1973: Not Started, Under Construction, and Completed. The inventory of completed homes for sale was at 61,000 units in December. 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 December 2011 (red column), 21 thousand new homes were sold (NSA). This was the weakest December since this data has been tracked, and was below the previous record low for December of 23 thousand set in 1966 and tied in 2010. The high for December was 87 thousand in 2005.

December new-home sales dip to end worst-ever year — U.S. sales of new homes retreated in December, perhaps a fitting end to a year that saw a record low level of sales. Sales fell 2.2% in December to a seasonally adjusted annual rate of 307,000, the Commerce Department reported Thursday. The decline brings sales back to their level in October, wiping out a gain in November, when sales had risen to their highest level since April. Economists had expected a further gain in sales in December after the strong rise in November, according to a MarketWatch survey. See MarketWatch economic calendar. For all of 2011, sales of new homes fell 6.2% to a record-low level of 302,000. Sales of new homes peaked at 1.28 million in 2005. The records date back to 1963.

UH OH: 2011 Proved To Be A Worse Year For New Home Sales Than 2010: New home sales in the United States fell unexpectedly in December to an annualized rate of 307,000 units, down 2.2% from November and 7.3% below the pace in December 2010. Total units sold for the month fell to the lowest level in 11 months, at 21,000 new purchases. Economists had forecast new home sales would inch up 1.9% to an annualized rate of 321,000 units. For the full year, only 302,000 new residences sold, 6.2% below the 323,000 that moved in 2010. Yesterday, the National Association of Realtors warned that pending home sales, or those sales in contract, had declined. “Contract failures remain an issue, reported by one-third of Realtors over the past few months," NAR Chief Economist Lawrence Yun said. The supply of new homes on the market currently represents a 6.1 month inventory at the December sales pace, the lowest level in more than a year.

2011 New Home Sales Fall To Record Low, Median New Home Price At Lowest Since October 2010 - Looks like the earlier analysis that the US is slowly morphing into a second Japan just got even more confirmation. According to the Census Bureau (not NAR data, which we will hence ignore completely due to its consistent bias, error and overall worthlessness) December New Home Sales declined from 321K to a seasonally adjusted annualized rate of 307K in December, on expectations of a rise to 321K from last month's revised 315K. On a non-seasonally adjusted basis the US sold a whopping 21K homes, the lowest since January 2011, and on par with the lowest on record. What is more troubling is that according to Bloomberg, the 2011 number of 302K sales is the lowest on record. Of these 21K, 5K were not even started. So much for that housing recovery. And also confirming that there is not even a glimmer of hope for the US housing market is that the Median Price for new homes just dropped from $215,700 to $210,300, which is the lowest median price since October 2010. The chart below of pricing trends indicates all that is needed to know which way the housing market is going.

2011: Record Low New Home Sales and 'Distressing Gap' - 2011 was the worst year for new home sales since the Census Bureau started tracking sales in 1963. The three worst years were 2011, 2010, and 2009 - and 2008 is also on the worst ten list. Although sales will probably increase in 2012, this year will probably be high in the list too. The following graph shows existing home sales (left axis) and new home sales (right axis) through December. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.  Following the housing bubble and bust, the "distressing gap" appeared mostly because of 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. I expect this gap to eventually close once the number of distressed sales starts to decline. Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

Number of the Week: Dismal New Home Sales in 2011 - 2.5: The number of new single-family homes sold per 1,000 households. New home sales in 2011 hit their lowest level on record, but it’s difficult to express just how bad that is. Just 302,000 new single-family homes were sold last year, according to Commerce Department data released on Thursday. That was the smallest number of new houses sold going back to 1963 when data were first collected. Adjusting for population the figure looks even worse. There were about two and a half new homes sold for every 1,000 households in the U.S. last year. Prior to 2008 that number had fallen below five only once — in 1982. During the boom in 2005, it was above 11 new homes sold for every 1,000 households. The numbers are so low that the Commerce Department can’t even say with confidence whether sales rose or fell on a month-to-month basis. The government estimates that sales were down 2.2% in December from November, but they say the actual figure could be anywhere from an 11% increase to a 15.4% drop. Without seasonal adjustments, Commerce estimates that just 21,000 new homes were sold in the entire country last month.

Hazard Insurance With Its Own Perils - ONE of the richest and most secretive sources of profit in the mortgage1 business is coming under scrutiny. It’s about time.    Investigators are training their sights on a type of hazard insurance2 policy known as force-placed insurance, a type of policy that has driven up costs for homeowners and pushed some into foreclosure. People who buy certain mortgage securities may be getting hurt, too.  Benjamin M. Lawsky, the superintendent of the New York State Department of Financial Services3, is investigating institutions that underwrite and sell force-placed insurance. Last fall, his office began sending subpoenas4 to insurance agents and brokers. Requests for information also went out to insurance companies that write such policies.  Working his way up the chain, Mr. Lawsky’s office issued a new set of subpoenas late last week. According to a person briefed on the matter who was not authorized to discuss it, the subpoenas went to loan5 servicers that imposed force-placed insurance on borrowers, as well as to insurers affiliated with those servicers.  Among the servicers that received the subpoenas were Morgan Stanley Mortgage Capital Holdings and CitiMortgage. Insurer affiliates that received requests for information include BancOne Insurance, a unit of JPMorgan Chase, and Alpine Indemnity, an affiliate of PNC.

Is Too Much Homeownership a Good Thing? - For generations the assumption among market participants, policymakers, and the general population has been that increased homeownership is a positive for the U.S. economy. An essay out of the Richmond Fed from June 2011 poignantly questions this assumption and expands on the risks of subsidizing homeownership. Against the backdrop of the SOTU and the likely inclusion of some new housing policy, the analysis from this essay should be a helpful reminder that there is a lot that we still don’t know about the effects of homeownership and its relationship to the health of the aggregate economy. Here are a few highlights from the Fed paper:

  • The Richmond Fed essay points out several costs of homeownership which are typically ignored, including homeowners' lack of mobility, which leaves them exposed to the volatility of local economies and exacerbates problems in labor markets.
  • Another cost, perhaps even more prominent, is the misguided assumption that homeownership is always a smart investment.
  • However, the Richmond Fed essay points out there are financial benefits to renting, including “flexibility, a better-diversified portfolio of assets, and a degree of protection against local economic fluctuations.” Furthermore, a larger rental market would make the aggregate economy less exposed to housing market prices and risks. (For more information, see e21's "Renting v. Buying: New Evidence Emerges & Informs Housing Policy".)
  • After questioning basic assumptions regarding homeownership, the Fed essay examines how government subsidization created unnatural and unhealthy homeownership levels through the use of GSEs and mortgage interest tax deductions.
  • Perhaps most interesting was the essay’s assertion that the mortgage interest tax deduction does not actually increase homeownership, but “simply encourage[s] people to purchase larger homes than they were already planning to buy.”

Vital Signs: Rising Rents - The cost of renting a home in the U.S is climbing. Rents for primary residences rose 2.5% year-over-year in December, according to the government’s consumer-price index. The pace of the increase in rents has picked up since the summer. Unemployment and tight lending standards have dissuaded some potential homebuyers and spurred demand from renters.

BPP@MIT Data Show Inflation Slowing at Year-End - The charts above shows monthly and annual inflation rates from the Billion Prices Project @ MIT over the 12-month period ending at the end of December.  According to the BPP website, the index is "designed to provide real-time information on major inflation trends, not to forecast official inflation announcements. We are constantly adding new categories of goods, but we do not cover 100% of CPI goods and services. The price of services, in particular, are not easy to find online and therefore are not included in our statistics." Monthly inflation, measured by the BPP @ MIT, has been trending downward since February, and was showing slight deflationary pressures in November and December.  Similarly, BBP annual inflation has been trending downward since July and reached an eight-month low on December 21.  According to this real-time measure of inflationary trends in the U.S. economy, inflationary pressures are gradually moderating, and there is even evidence now of short-term deflation for the months of November and December.    

Consumers More Upbeat in January - U.S. consumers think the economy is doing a bit better in January, according to data released Friday. The Thomson Reuters/University of Michigan consumer sentiment index for the end of January rose to 75 from a preliminary reading of 74 for the month and 69.9 at the end of December, according to sources who have seen the report. The latest reading was better than the 74.5 expected by economists surveyed by Dow Jones Newswires. The current conditions index increased to 84.2 at the end of this month from 82.6 in early January. The expectations index advanced to 69.1 from 68.4. The sentiment and current-conditions indexes are at their highest levels since February 2011.

DOT: Vehicle Miles Driven declined 0.9% in November -- The Department of Transportation (DOT) reported:

• Travel on all roads and streets changed by -0.9% (-2.1 billion vehicle miles) for November 2011 as compared with November 2010.
• Travel for the month is estimated to be 240.9 billion vehicle miles.
• Cumulative Travel for 2011 changed by -1.4% (-38.3 billion vehicle miles).
The following graph shows the rolling 12 month total vehicle miles driven. In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.  Currently miles driven has been below the previous peak for 48 months - and still counting! And not just moving sideways ... the rolling 12 month total is still declining. The second graph shows the year-over-year change from the same month in the previous year.  This is the ninth straight month with a year-over-year decline in miles driven, although this is the smallest decline for 2011.

Vehicle Miles Driven And the Ongoing Economic Contraction - The Depart of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through November. Travel on all roads and streets changed by -0.9% (-2.1 billion vehicle miles) for November 2011 as compared with November 2010 (PDF report). Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1986. My start date is 1971 because I'm incorporating all the available data from the DOT spreadsheets.  Total Miles Driven, however, is one of those metrics that must be adjusted for population growth to provide the most revealing analysis, especially if we're trying to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. I use the FRED series CNP16OV. The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971.  Clearly, when we adjust for population growth, the Miles-Driven metric takes on a much darker look. The nominal 39-month dip that began in May 1979 grows to 61 months, slightly more than five years. The trough was a 6% decline from the previous peak.

Truck Tonnage Soars at Strongest Rate Since 1998 - For-hire truck tonnage rose 5.9 percent in 2011, the biggest year-over-year freight gain for trucking since 1998, the American Trucking Associations said Tuesday. The year ended with a surge in freight, with truck tonnage rising 6.8 percent from November and 10.5 percent from December 2010, according to the ATA. The increase in the seasonally adjusted For-Hire Truck Tonnage Index underscores the growing strength of U.S. manufacturing and domestic freight in late 2011. “While I’m not surprised that tonnage increased in December, I am surprised at the magnitude of the gain,” said ATA Chief Economist Bob Costello. The truck tonnage index was almost flat in November, rising only 0.3 percent from October. Year-over-year, truck tonnage increased 6.1 percent in November. The December tonnage surge also points to last-minute inventory restocking as holiday shopping and shipping patterns move closer to Christmas Day.

ATA Trucking Index increased sharply in December - From ATA: ATA Truck Tonnage Index Posts Largest Annual Gain in 13 Years The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index jumped 6.8% in December after rising 0.3% in November 2011. The latest gain put the SA index at 124.5 (2000=100) in December, up from the November level of 116.6. For all of 2011, tonnage rose 5.9% over the previous year – the largest annual increase since 1998. Tonnage for the last month of the year was 10.5% higher than December 2010, the largest year-over-year gain since July 1998. November tonnage was up 6.1% over the same month last year. Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The dashed line is the current level of the index. This index stalled early in 2011, but increased sharply at the end of the year. From ATA:  Trucking serves as a barometer of the U.S. economy, representing 67.2% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9 billion tons of freight in 2010. Motor carriers collected $563.4 billion, or 81.2% of total revenue earned by all transport modes.

Comparing Ceridian Diesel Fuel Index and ATA Trucking Index - Below is a graph that compares the Ceridian diesel fuel index and the ATA trucking index. The ATA index showed a sharp increase in December: ATA Truck Tonnage Index Posts Largest Annual Gain in 13 Years The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index jumped 6.8% in December after rising 0.3% in November 2011. The latest gain put the SA index at 124.5 (2000=100) in December, up from the November level of 116.6. But the Ceridian index showed only a small increase: Pulse of Commerce Index Increased 0.2 Percent in December The Ceridian-UCLA Pulse of Commerce Index® (PCI®), issued ... by the UCLA Anderson School of Management and Ceridian Corporation, rose 0.2 percent in December following the 0.1 percent increase in November and the 1.1 percent increase in October. Here is a graph comparing the two indexes. In general the two indexes move together, but there are periods when one index is strong than the other. As an example the ATA trucking index was moving sideways prior to the recession, but the Ceridian index was still increasing.

Vital Signs: Rising Business Investment - U.S. businesses increased their investments as last year ended. The Commerce Department said new orders for nondefense capital goods excluding aircraft — a proxy for how much companies spend on equipment — climbed 2.9% from November. That ended two months of declines, suggesting businesses are becoming more confident amid rising demand.

Durable Goods Orders Up 3%, Beating Expectations - The January Advance Report on December Durable Goods was released this morning by the Census Bureau. Here is the summary on new orders:  New orders for manufactured durable goods in December increased $6.2 billion or 3.0 percent to $214.5 billion, the U.S. Census Bureau announced today. This increase, up five of the last six months, followed a 4.3 percent November increase. Excluding transportation, new orders increased 2.1 percent. Excluding defense, new orders increased 3.5 percent. Transportation equipment, up two consecutive months, had the largest increase, $3.0 billion or 5.5 percent to $58.4 billion. The new orders at 3.0 percent came in better than the consensus estimate of 2.0 percent, but's own estimate was spot on at 3.0 percent. The ex-transportation number of 2.1 percent far exceeded the consensus forecast of 0.7 percent.The first chart is an overlay of durable goods new orders and the S&P 500.  An overlay with unemployment (inverted) also shows some correlation. We saw unemployment begin to deteriorate prior to the peak in durable goods orders that closely coincided with the onset of the Great Recession, but the unemployment recovery tended to lag the advance durable goods orders.  An overlay with GDP shows some disconnect in recent quarters between the recovery in new orders and the slowdown in GDP — another comparison we'll want to watch closely.

Richmond Fed: Manufacturing Activity Picks Up the Pace in January - From the Richmond Fed: Manufacturing Activity Picks Up the Pace in January; Expectations Upbeat In January, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — increased nine points to 12 from December's reading of 3. Labor market conditions at District plants strengthened in January. The manufacturing employment index moved up eight points to end at 4, and the average workweek indicator added one point to 4. Wage growth remained modest, matching its three-month average of 10. In our January survey, our contacts were more bullish about their business prospects for the next six months. The index of expected shipments increased nine points to 36, expected orders gained eleven points to finish at 32, and backlogs added eight points to 14. The capacity utilization and vendor delivery times indexes each rose nine points to finish at 11 and 20, respectively. Moreover, readings for planned capital expenditures moved up eight points to finish at 15.

Misc: Tenth District manufacturing increases, Chicago Fed National Activity Index, State Coincident indexes - Kansas City Fed: Tenth District Manufacturing Activity Rebounded in January The month-over-month composite index was 7 in January, up from revised totals of -2 in December and 4 in November. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. ... All of the regional manufacturing surveys have indicated stronger expansion in January (Empire state, Philly, Richmond and Kansas City). The Dallas Fed survey is scheduled to be released on Monday. The Chicago Fed released the national activity index (a composite index of other indicators): Index shows economic activity improved in December Led by improvements in production- and employment-related indicators, the Chicago Fed National Activity Index increased to +0.17 in December from –0.46 in November. ... The index’s three-month moving average suggests that growth in national economic activity was slightly below its historical trend. The This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. From the Philly FedThe Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for December 2011. In the past month, the indexes increased in 39 states, decreased in seven, and remained unchanged in four (Arizona, Nebraska, New York, and Wyoming) for a one-month diffusion index of 64. 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).

Is Manufacturing Really Back? - Is America in the middle of a manufacturing job revival? The latest numbers would make it seem so. The U.S. has added more net manufacturing jobs since the start of 2010 than the rest of the G7 nations put together, with only two other economies, Germany and Canada, increasing factory employment at all. The jump is due to a number of factors, including American productivity growth (which has outpaced Europe as a whole), compressed wages, and higher energy costs (which make it more costly to ship products back from locations with cheaper labor, like Asia). As the FT recently reported, from 2002-10, U.S. manufacturing unit labor costs in dollar terms fell 11 percent, compared with rises of 3 percent rise in Japan and 41 percent in Germany. Companies that are now bringing jobs back home include some of America’s largest blue chip multinationals, like Ford, GE, and United Technologies. Does this mean the end of the shrinking middle? After all, decently paid manufacturing positions were the core of the middle income jobs bracket since the 1950s; the hollowing out of the manufacturing sector is a key reason that workers in rich countries haven’t gotten a real raise since the 1970s.

The President's Failing Focus on Jobs - In his 2012 State of the Union Address, President Obama sought to "embrace manufacturing". Since the President has been in office for three years now, we thought we would take a look at how well he's done so far in embracing manufacturing, by his own terms.  Our first chart shows the seasonally-adjusted number of individuals employed in the Manufacturing and the closely-related Transportation and Warehousing industries (aka "the supply chain"), which is based upon data collected by the Bureau of Labor Statistics in its Current Employer Survey, as of 22 January 2012, from November 2007 through December 2011.  In the chart above, we've emphasized several points with bold text indicating the number of employed at various points of interest.  Here, we find that the number of individuals counted as being employed in the manufacturing and supply chain industries has fallen considerably from November 2007 through the present, with 1,583,000 fewer being employed in Manufacturing and 1,964,000 fewer being employed in Transportation and Warehousing as of December 2011. Together, these two sectors of the U.S. economy represent almost 3 out of 5 of all the jobs that have disappeared from the U.S. economy since November 2007.

Factory Jobs Obama Wants Are Unlikely to Return in Large Numbers - President Barack Obama challenged manufacturers in his State of the Union address to “ask yourselves what you can do to bring jobs back to your country.” Their answer may be: less than you think, Mr. President. Rising wages in China and new tax incentives at home won’t be enough to reverse the long-term erosion in U.S. manufacturing employment, even as some U.S. companies return production to shuttered Rust Belt plants. “We’re no longer going to be the manufacturing country that we once were,” said John Russo, co-director of the Center for Working Class Studies at Youngstown State University. Factory jobs, which have been shrinking as a share of total U.S. employment since the early 1950s, remain 2 million below their pre-recession level. Obama’s election-year plan “to bring manufacturing back” -- as well as a rival House Republican package that would reduce taxes and prune regulations -- fly in the face of structural changes that inexorably lower employment in goods-producing industries. With each year, technology allows factories to produce more goods with the same number of -- or fewer -- workers. Since the landmark 1994 North American Free Trade Agreement, U.S. factory workers also have faced increasingly vigorous competition from low-wage countries. That one-two punch drove manufacturing jobs from their 1979 peak of 19.5 million to today’s 11.8 million even as industrial output almost doubled.

Why Manufacturing Can’t Solve The Jobs Problem - Here in snowy Davos, President Obama’s latest jobs proposals — a combination of taxing outsourcing corporations and reviving U.S. manufacturing — haven’t been popular. It’s not hard to see why. Among other things, Obama’s State of the Union speech Tuesday drove home the idea that U.S. industries need more protection. “Over a thousand Americans are working today because we stopped a surge in Chinese tires,” he said in his speech. That’s all fine and good if your goal is to hold on to U.S. manufacturing jobs. But it’s not going to solve the country’s overall unemployment problem. And in the end, it may cost the American consumer more than those jobs are worth. For one thing, raising trade barriers on imported goods like tires makes tire-buying more expensive for American consumers, which, as Matthew Yglesias points out, only undermines those consumers’ ability to spend elsewhere. It also provokes countries like China to raise trade barriers on U.S. goods, which makes the job of increasing U.S. exports and export-related jobs even harder. Even if protections did save some manufacturing jobs, they wouldn’t be enough to move the needle on unemployment. It’s worth remembering that only 11% of U.S. jobs come from manufacturing, thanks to globalization, which has taken jobs abroad to lower-wage countries, and technological advances that have increased worker productivity.

MIT faculty see promise in American manufacturing - Not long ago, MIT political scientist Suzanne Berger was visiting a factory in western Massachusetts, a place that produces the plastic jugs you find in grocery stores.  Between 2004 and 2008, its revenues doubled, and its workforce did, too. Moreover, the firm has found a logical niche: Since plastic jugs are both bulky and inexpensive, it’s not economical to produce them overseas and ship them to the United States, simply to fill them with, say, milk or syrup.  “Is this just an odd little story?” Berger asks. “Actually, no.”  3,500 manufacturing companies across the United States — not just the jug-making firm in Massachusetts — doubled their revenues between 2004 and 2008. With that in mind, Berger asks, “How can we imagine enabling these firms to branch out into more innovative activities as well?” That is the kind of problem Berger and 19 of her faculty colleagues at MIT are now studying as part of a two-year Institute-wide research project called Production in the Innovation Economy (PIE), which is focused on renewing American manufacturing. The guiding premise of PIE is that the United States still produces a great deal of promising basic research and technological innovation; what is needed is a better sense of how to translate those advances into economic growth and new jobs.

Jobs Matter - Adam Gurri in a post titled Create Value, Not Jobs, writes Certainly technology can and is disrupting human labor markets–but that isn’t going to “further weaken the global economy”. It is going to increase our productivity, make it easier to provide consumers value for cheaper. It will make it hard for people replaced by machines to figure out how they can create additional value, for a time. But we need to get our priorities straight; what we want to do is help people create value. Unless giving someone a job will enable them to create more value than it costs, the existence of that job is counterproductive. Economists like to say this type of thing. Its counterintuitive, which always fun. And, it helps highlight why certain policies are in fact a bad idea. The only problem is that as a general statement, its wrong.

Jobs and the Economy in the Long Run - The longer this recession goes on the more people are going to forget that in the long run job creation doesn’t matter. Because output is below potential and employment is below the natural rate, we do care about job creation in the short run. The slower the recovery is, and it’s looking slow right now, then the more job creation matters in the medium run as well. But in the long run full employment reins, and you can only create a job by killing a job.Consider two scenarios. Capitalist A took over a company that fires half its workforce without decreasing output. Capitalist A is a dreaded jobs destroyer, and is pilloried for this (to be fair, some capitalist politicians bring this on themselves by bragging about how many jobs they’ve created). Now consider Capitalist B who took over a company that doubled its workforce and its output. He is a Real Jobs Creator, hailed as a champion of American Interests (and he wants a higher tax rate than his secretary).But if output has doubled at Capitalist B’s factory, then surely he has taken market share from his competitors, which means his competitors have most likely had to lay workers off, perhaps half of them. The fact is that direct jobs creation that we see can often be completely offset by job destruction that we don’t, and in the long run it pretty much has to be.

Weekly Unemployment Claims Up by 21,000 - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 377,000 new claims is a 21,000 increase from an upward adjustment of 4,000 for the previous week (356K, previously 352K). The less volatile and closely watched four-week moving average came in at 377,500, the eleventh week below 400K after 29 consecutive weeks above that benchmark. Here is the official statement from the Department of Labor:  In the week ending January 21, the advance figure for seasonally adjusted initial claims was 377,000, an increase of 21,000 from the previous week's revised figure of 356,000. The 4-week moving average was 377,500, a decrease of 2,500 from the previous week's revised average of 380,000.  As we can see, there's a good bit of volatility in this indicator, which is why the 4-week moving average (shown in the callouts) is a more useful number than the weekly data.

How the Big Three forgot Accounting 101— The Big Three were so driven by short-term profits that they forgot – or ignored – basic accounting practices that could have helped guard against production decisions with long-term damage, according to an award-winning study by Michigan State University and Maastricht University in the Netherlands. Essentially, the domestic automakers built far more vehicles than they needed while failing to appropriately account for the costs of excess capacity or the damage the overproduction would have on their reputations.  "I was surprised they were not following fundamental accounting practices like we teach in our introductory accounting classes," said Karen Sedatole, MSU associate professor of accounting. "They were basically fooling themselves into thinking that, by making more cars, the true cost of one car goes down. For the most part, it doesn't."

Apple, America and a Squeezed Middle Class - Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.  Why can’t that work come home? Mr. Obama asked.   The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products. Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.  A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.  “The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

Why the United States Will Never, Ever Build the iPhone - This weekend, The New York Times published a long exploration of the many reasons why Apple chooses to build its iPhones in China. The piece is indispensable reading for anybody who wants to understand why the United States has seen certain types of manufacturing all but disappear from its shores. But the article's core lesson might be tough to swallow: Apple doesn't only choose China because work is cheaper. Apple also chooses China because the factories and the workers do a better job.   There's no question that China's low wages are part of the country's appeal -- even though they've increased. According to the Times, building the iPhone stateside would add up to $65 to the cost of each device. To put that in perspective, it's about 10% of the full retail price for the cheapest iPhone 4S. Given the fat margins on Apple's products, the company could absorb that extra cost and still come away with a profit. The price of labor, though, is just one small piece of what makes China a better place to make an iPhone.  Per the Times: Factories in Asia "can scale up and down faster" and "Asian supply chains have surpassed what's in the U.S." The result is that "we can't compete at this point," the executive said.

An iPod Has Global Value. Ask the (Many) Countries That Make It. - New York Times - Who makes the Apple iPod? The company outsources the entire manufacture of the device to a number of Asian enterprises, among them Asustek, Inventec Appliances and Foxconn. But this list of companies isn’t a satisfactory answer either: They only do final assembly. What about the 451 parts that go into the iPod? Where are they made and by whom? The retail value of the 30-gigabyte video iPod that the authors examined was $299. The most expensive component in it was the hard drive, which was manufactured by Toshiba and costs about $73. The next most costly components were the display module (about $20), the video/multimedia processor chip ($8) and the controller chip ($5). They estimated that the final assembly, done in China, cost only about $4 a unit. One approach to tracing supply chain geography might be to attribute the cost of each component to the country of origin of its maker. So $73 of the cost of the iPod would be attributed to Japan since Toshiba is a Japanese company, and the $13 cost of the two chips would be attributed to the United States, since the suppliers, Broadcom and PortalPlayer, are American companies, and so on. But this method hides some of the most important details. Toshiba may be a Japanese company, but it makes most of its hard drives in the Philippines and China. So perhaps we should also allocate part of the cost of that hard drive to one of those countries. The same problem arises regarding the Broadcom chips, with most of them manufactured in Taiwan. So how can one distribute the costs of the iPod components across the countries where they are manufactured in a meaningful way?

Apple And Agglomeration - Krugman - The big Times article on Apple manufacturing was excellent, and I’ll have more to say about it when I have the time. One thing worth noting right away, however, is that the piece is in large part an essay on the economies of agglomeration (pdf, wonkish):“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.” The point is that manufacturing plants don’t exist in isolation; they benefit a lot from being part of a manufacturing cluster, with specialized suppliers and a large pool of workers with the right skills close at hand. This is the kind of stuff I emphasized in my own work on both trade and economic geography. The policy implications aren’t as clear as you might imagine. But more about that when I have time to do it right.

Apple Reports Record Sales, Profit on Massive iPhone, iPad Sales - The Cupertino, California–based company reported net profit of $13.1 billion compared to $6 billion one year ago, on sales of $46.3 billion compared to $26.7 billion last year. Wall Street analysts had been expecting sales of $38.9 billion, according to Thomson Reuters. “We’re thrilled with our outstanding results and record-breaking sales of iPhones, iPads and Macs,” Apple CEO Tim Cook said in a statement. “Apple’s momentum is incredibly strong, and we have some amazing new products in the pipeline.” Apple sold a whopping 37 million iPhones last quarter, a 128% increase compared to one year ago, and 15.4 million iPads, a 111% increase. Mac computer sales, meanwhile, increased by 26 percent to 5.2 million units.

Apple and the American economy _ Here we have a company that's been phenomenally successful, making products people love and directly creating nearly 50,000 American jobs in doing so, criticised for not locating its manufacturing operations in America, even as Americans complain to Apple about the working conditions of those doing the manufacture abroad: life in dormitories, 12-hour shifts 6 days a week, and low pay. The utility of Apple, however, is that it does provide a framework within which we can discuss the significant changes that have occurred across the global economy in recent decades. Contributing to that effort is a very nice and much talked about piece from the New York Times, which asks simply why it is that Apple's manufacturing is located in Asia.You should read that piece for yourselves, but the story, in a nutshell, is this. Apple's products are assembed in massive factory complexes in China, run by Foxxconn, which also handles the production of consumer electronics for many other large players in the industry: The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. Foxconn employs nearly 300 guards to direct foot traffic so workers are not crushed in doorway bottlenecks.

New York Times Tells Us Only Chinese Near Slave Labor Could Handle Steve Jobs’ Demands - Yves Smith - A New York Times story, “How U.S. Lost Out on iPhone Work,” uses an Obama dinner with Silicon Valley titans to frame its tale of why the US middle class should roll over and die. I am of course exaggerating for effect. But not by as much as you might think. The story by does a very good job of explaining why Asia, and China in particular, has come to dominate consumer electronics manufacture, using the iPhone as focus. The problem with using the microcosm to illustrate the macrocosm is you need to choose the right microcosm. The danger in using the iPhone example is that (as I have discussed at length in prior posts) there are quite a few industries in which the case for offshoring and outsourcing is not compelling, particularly if you allow for the increased risk of extended supply chains, as Apple itself learned in the wake of the Fukushima nuclear disaster. But even in those cases, it still has the effect of transferring income from middle level and factory workers to the top brass. Thus the iPhone/consumer electronics example will have the effect of giving other businesses a free pass. And not only that, even among computer and electronics firms, Apple was unusually demanding, and not always for good reasons. As much as Steve Jobs was revered for his fixation with design, it could interact with coming up with a final product in nasty ways. For instance, one of Mac engineers, Chris Espinosa, designed a calculator to be included with the Mac OS. Jobs liked the idea but was not pleased with the appearance. Espinosa came up with new designs in response to Jobs’ input daily, only to get more criticism. Similarly, on the first iteration of the NeXT computer, Jobs insisted that it be a perfect cube. I will spare you the details but that requirement caused all sorts of costly hassles.

Apple’s Foreign Suppliers Demonstrate Widespread Scamming and Horrific Abuse of Employees - Bill Black - Apple has released a report on working conditions in its suppliers’ factories, highlighting a form of control fraud (fraud in which the head of a company subverts it for personal gain) that criminology has identified but rarely discussed.  I write overwhelmingly about accounting control fraud because it drives our recurrent, intensifying financial crises.  The primary intended victims of accounting control frauds are the shareholders and the creditors.  Other private sector control frauds target customers (e.g., George Akerlof’s 1970 article on “lemons”), and the public (e.g., the unlawful disposal of toxic waste, illegal logging, and tax fraud). Anti-employee control frauds most commonly fall into four broad, but not mutually exclusive, categories – illegal work conditions due to violation of safety rules, violation of child labor laws, failure to pay employees’ wages and benefits, and frauds based on goods and loans provided by the employer to the employee that lock the employee into quasi-slavery.  Apple has just released a report on its suppliers that shows that anti-employee control fraud is the norm.  Remember, fraud is hidden and is often not discovered and Apple did not have an incentive to make an exhaustive investigation.  Apple calls its inquiries “audits” and it is apparent that most of its information comes from reviewing written and electronic records at its suppliers.  That is exceptionally revealing.  The suppliers know that they can defraud their employees with such impunity that they don’t even bother to get rid of records that prove their frauds. 

Apple’s mind-bogglingly greedy and evil license agreement - Over the years, I have read hundreds of license agreements, looking for little gotchas and clear descriptions of rights. But I have never, ever seen a legal document like the one Apple has attached to its new iBooks Author program. Follow-up: How Apple is sabotaging an open standard for digital books. I’ve spent years reading end user license agreements, EULAs, looking for little gotchas or just trying to figure out what the agreement allows and doesn’t allow. I have never seen a EULA as mind-bogglingly greedy and evil as Apple’s EULA for its new ebook authoring program. Dan Wineman calls it “unprecedented audacity” on Apple’s part. For people like me, who write and sell books, access to multiple markets is essential. But that’s prohibited: Apple, in this EULA, is claiming a right not just to its software, but to its software’s output. It’s akin to Microsoft trying to restrict what people can do with Word documents, or Adobe declaring that if you use Photoshop to export a JPEG, you can’t freely sell it to Getty. As far as I know, in the consumer software industry, this practice is unprecedented.Exactly: Imagine if Microsoft said you had to pay them 30% of your speaking fees if you used a PowerPoint deck in a speech.

Jobs, Jobs and Cars, by Paul Krugman - Mitch Daniels, the former Bush budget director who is now Indiana’s governor, made the Republicans’ reply to President Obama’s State of the Union address. Mr. Daniels tried to wrap his party in the mantle of the late Steve Jobs, whom he portrayed as a great job creator — which is one thing that Jobs definitely wasn’t. And if we ask why Apple has created so few American jobs, we get an insight into what is wrong with the ideology dominating much of our politics.  Mr. Daniels first berated the president for his “constant disparagement of people in business,” which happens to be a complete fabrication.. He went on: “The late Steve Jobs — what a fitting name he had — created more of them than all those stimulus dollars the president borrowed and blew.”  Clearly, anyone who reads The New York Times knows that his assertion about job creation was completely false: Apple employs very few people in this country.  A big report in The Times last Sunday laid out the facts. Although Apple is now America’s biggest U.S. corporation as measured by market value, it employs only 43,000 people in the United States, a tenth as many as General Motors employed when it was the largest American firm.

Should Americans Care About Apple’s iPhone Factory Conditions? - The New York Times is out with the second installment of its iEconomy series, which explores high-tech manufacturing in an era of globalization. Not surprisingly, Apple, America’s top technology company, is a central focus of the series. Thursday’s article focuses on working conditions at factories run by Apple’s Asian contractors, including Foxconn, which produces an estimated 40% of the world’s consumer electronics. It’s paints a grim picture, and raises questions about the effectiveness of Apple’s supplier code of conduct, which sets standards for labor issue and safety protections. Apple says that when it discovers violations, it requires improvements. But the article suggests there are limits to Apple’s influence over the sprawling factories run by its contractors. And the company has even less impact on company plants that supply its contractors. So will we see some kind of movement to boycott Apple products, akin to the campaign several years ago to pressure Nike to improve working conditions in the factories that produce its products? Seems unlikely at the moment. “You can either manufacture in comfortable, worker-friendly factories, or you can reinvent the product every year, and make it better and faster and cheaper, which requires factories that seem harsh by American standards,” an anonymous current Apple executive told the Times. “And right now, customers care more about a new iPhone than working conditions in China.”

Manufacturing, Technology, Canada and the Dollar. - This week the Ottawa Citzen published my op ed on the impact of technological growth on manufacturing: Where the jobs went.  Jim Stanford of the CAW responded with: The real job killers, also published in the Citizen.  A couple of points I would like to respond to:Jim writes: We used to pay for those deficits through a huge surplus with the U.S., but no longer: a diminished surplus with America now offsets just a fifth of our massive deficit with the rest of the world. No argument here. What, then, is the policy response to keep the dollar lower? In short, Moffatt's faith that technological growth makes everyone better off is unjustified by recent history.  I never suggested such a thing.  If you lose your job to a robot, then I would suspect more often than not you are being made worse off.  Society is wealthier, sure, but not necessarily every individual member of it. What, then, is the policy response to keep robots from "stealing" our jobs? Note that we can tell the same story about international trade as we can about technological growth, as illustrated by Building F-35s in Southey, SKBut Caterpillar's demand to cut Canadian wages in half has nothing to do with technology. It reflects power: a global company's ability to isolate and threaten workers, one factory at a time.

Chinese Manufacturing and the Auto Bailout - Krugman - Jon Cohn, in correspondence, makes an important point with regard to the big Times report on Chinese manufacturing. Since he hasn’t posted about it, I will. A lot of what that report is saying amounts to the fact that the classic logic of industrial clusters still applies very strongly — which is music to my professional ears, since that’s the sort of thing that was a central theme of my own research (pdf) for many years. Manufacturing firms often stand or fall not just on their own merits, but because they do or don’t have a surrounding cluster of related firms that are suppliers or customers, provide a ready pool of suitable labor, and so on. This, in turn, makes a case for policy to promote or preserve such clusters. Like all industrial policy arguments, this has to be applied carefully; something that could be a good idea in principle might be a very bad idea once you do the numbers, and these numbers are hard to do. But can we think of a recent example in the United States where helping to preserve an industrial cluster was an important policy consideration? Indeed we can: the auto bailout. A key argument for the bailout was that if the major US firms were allowed to go bankrupt, a whole industrial ecology would be lost with them. And the auto bailout has been a huge success, not least because it did preserve that ecology.

Machines Replacing Humans: They Shoot Horses, Don't They? - Eric Brynjolfsson and Andrew McAffee have a new Kindle instant book out, Race Against the Machine, that very nicely describes the issues related to technological unemployment. It’s well-written, content-packed, cogently argued, usefully hyperlinked, and well worth the $3.99 they’re asking. But I think there’s one crucial topic they don’t address, highlighted by the following. They deliver a quotation from Gregory Clark’s 2007 Farewell to Alms, speaking of the decline in employment of horses in England in the 19th and 20th centuries. The quotation concludes: There was always a wage at which all of those horses could have remained employed. But that wage was so low that it did not pay for their feed. The question that B&M fail to ask or answer: Why couldn’t those horses continue working for a living wage? Answer: because they couldn’t upgrade their skills (to drive trains and tractors, or whatever). They were biologically incapable of “improving” themselves in such a way that they and the new machines were “complements.” So the machines replaced them instead of complementing them. Imagine that those horses had been free to mate and have offspring at will (as opposed to the PRC-style, top-down population control imposed by breeders). They would have faced an unequivocally Malthusian situation: large numbers of horses would have starved.

The State of Our Disunion - Robert Reich - Who should have the primary strategic responsibility for making American workers globally competitive – the private sector or government? This will be a defining issue in the 2012 campaign. American business won’t and can’t lead the way to more and better jobs in the United States. First, the private sector is increasingly global, with less and less stake in America. Second, it’s driven by the necessity of creating profits, not better jobs. The National Science Foundation has just released its biennial report on global investment in science, engineering and technology. The NSF warns that the United States is quickly losing ground to Asia, especially to China. America’s share of global R&D spending is tumbling. In the decade to 2009, it dropped from 38 percent to 31 percent, while Asia’s share rose from 24 to 35 percent. One big reason: According to the NSF, American firms nearly doubled their R&D investment in Asia over these years, to over $7.5 billion. GE recently announced a $500 million expansion of its R&D facilities in China. The firm has already invested $2 billion. GE’s CEO Jeffrey Immelt chairs Obama’s council on work and competitiveness. I’d wager that as an American citizen, Immelt is concerned about working Americans. But as CEO of GE, Immelt’s job is to be concerned about GE’s shareholders. They aren’t the same.

More Lockouts as Companies Battle Unions —From the Cooper Tire factory in Findlay, Ohio, to a country club in Southern California and sugar beet processing plants in North Dakota, employers are turning to lockouts to press their unionized workers to grant concessions after contract negotiations deadlock. Even the New York City Opera locked out its orchestra and singers for more than a week before settling the dispute last Wednesday.  Many Americans know about the highly publicized lockouts in professional sports — like last year’s 130-day lockout by the National Football League and the 161-day lockout by the National Basketball Association — but lockouts, once a rarity, have been used in less visible industries as well.  “This is a sign of increased employer militancy,” said Gary Chaison, a professor of industrial relations at Clark University. “Lockouts were once so rare they were almost unheard of. Now, not only are employers increasingly on the offensive and trying to call the shots in bargaining, but they’re backing that up with action — in the form of lockouts.”

The Impact of UI Insurance: As High as Barro Suggested? - The Emergency Unemployment Compensation program created in the summer of 2008 provided for unprecedented extensions in the duration of unemployment insurance (UI) benefits. Combined with persistent high unemployment and historically long durations of unemployment during the 2008 and 2009 recession, this extension of UI has prompted renewed interest in the impact of UI benefits on job search, the duration of unemployment, and the unemployment rate. In a recent op-ed for the Wall Street Journal, Robert Barro contributed to this discussion by comparing the duration of unemployment observed in the current recession with that of 1982 and estimating how much lower the unemployment rate would have been in the summer of 2010 if it had not been for the extension of the duration of UI benefits. His conclusion, that the unemployment rate would have been 2.7 points lower in the absence of UI extensions, is based on a questionable assumption—that the severity of the 2008-09 recession could not be responsible. This paper uses multiple regression analysis to estimate the impact of extended UI benefits on the unemployment rate after controlling for the severity of the recent recession. The extension of UI is found to have a positive and significant impact on the national unemployment rate, but the impact is not as large as Barro suggests. The UI benefit extensions that have occurred between the summer of 2008 and the end of 2010 are estimated to have had a cumulative effect of raising the unemployment rate by .77 to 1.54 percentage points.

How (not) to defend entrenched inequality - John Quiggin - Although the objective facts about economic inequality, immobility and so on are far worse in the US than the EU, the political situation seems more promising. (I’m not talking primarily about electoral politics but about the nature of public debate.)  In the EU, the right has succeeded in taking a crisis caused primarily by banks (including the central bank, and bank regulators) and blaming it on government profligacy, which is then being used to push through yet more of the neoliberal policies that caused the crisis.   By contrast the success of Occupy Wall Street have changed the US debate, in ways that I think will be hard to reverse. Once the Overton window shifted enough to allow inequality and social immobility to be mentioned, the weight of evidence has been overwhelming.  This post by Tyler Cowen is an indication of how far things have moved. Cowen feels the need, not merely to dispute some aspects of the data on inequality and social mobility in the US, but to make the case that a unequal society with a static social structure isn’t so bad after all.  Cowen makes seven arguments, ranging from weak to risible. He is an able economist, and no fool, so the weakness of the case he makes reflects the difficulty of making bricks without straw. I’ll reorder his arguments from weakest to strongest and respond to them in turn.

The Sons Also Rise - Krugman - Here are the stages of inequality rationalization:

  • 1. Rising inequality? What rise in inequality?
  • 2. OK, inequality has been rising, but it doesn’t matter, because we have lots of social mobility.
  • 3. OK, we don’t have lots of social mobility. But that’s a good thing.

John Quiggin sees Tyler Cowen making the transition from #2 to #3, and does a systematic demolition job. Go read Quiggin. I’d just like to note that I saw this coming way back in 2002, when I took note of the remarkable number of “sons of” serving in high positions, and concluded that “inherited status is making a comeback.” I concluded, The official ideology of America’s elite remains one of meritocracy, just as our political leadership pretends to be populist. But that won’t last. Soon enough, our society will rediscover the importance of good breeding, and the vulgarity of talented upstarts. For years, opinion leaders have told us that it’s all about family values. And it is — but it will take a while before most people realize that they meant the value of coming from the right family. And here it comes.

What does the inequality-immobility link mean? - Tyler Cowen - Justin Wolfers writes: Predictably enough, I spent yesterday reading lefty blogs trumpeting Corak’s analysis, and right-leaning blogs who didn’t want to believe the inequality-mobility link, endorsing Winship. But both missed the bigger picture implications. Either you’re convinced by Corak that the data can be trusted, and that they show there’s a strong link between actual inequality and actual mobility.  Or you believe Winship that the data are a pretty poor proxy for what’s really happening, and so there’s actually a very strong link that’s being disguised by imperfect data. Here is Scott’s latest response, with links to various critics. As for my take, Justin is painting himself into a corner here of his own making.  Let’s step back for a moment.  I see two big and very real problems: slow income growth for many income classes and a problem with excessively high returns to finance at the very top.  (As an aside, both of these problems contain elements of both “left-wing concerns” and “right-wing concerns,” and both problems are deeper than any particular ideology can solve and they should make virtually everyone rethink their views). Those are the problems and we should try to fix them.

The efficiency case for nepotism - A firm wanting to invest in a worker, to train her and give her valuable skills, runs a risk: what if she leaves, and takes her valuable human capital elsewhere? A firm can induce its employees to stay through deferred compensation. It pays new employees less than their productivity merits, and senior employees more. The junior workers work hard and invest in themselves and the company, because they know they will get the big pay-off eventually. The senior workers are happy because they are well-renumerated. The firm is happy because it has a productive and highly trained workforce. A standard retirement age - a pre-determined time at which employer and employee agree to part ways - is one example of a fixed contract termination date. But if us geezers hold on until we are forceably removed from our offices, average productivity will decrease, average pay will increase (given existing salary structures), and firms' financial viability will be jeopardized.  What about people who would retire if they were only concerned with their own financial situation, but who keep working  because they want to help their children get established in life? It's Catch 22: the geezers can't retire, because they're paying their kids' mortgages; the kids need help paying the mortgage because there are no good jobs out there. Why? Because the geezers have them.

Mobility in America - While I still grasp for exactly how to express my thoughts on the issues of income inequality, social mobility and the meritocratic state, I’ll pass along this video. Remember that this is not a documentary or commentary but eduprop designed to Americanize a diverse culture. should also add that I can sense that a lot of my readers grope for the “point” of many of my posts. In the sense they are looking for, there isn’t one. The point is to think more about what we really mean when we talk about inequality and mobility? What are the elements of America we care about and why?  And, of particular interest to me: Was there anything fundamentally different about the American economy during the mid 20th century; or are our stylized facts about inequality and growth merely the results of the temporally overlapping effects of urbanization, feminism and the fall of Jim Crow.

Immigrants as negative externalities -- The Cato Journal’s new issue is all about immigration, and it includes an article from Gordon Hanson, who is one of the leading economists on this. Hanson repeats a claim that is common, and I think worth debating: that the fiscal externality of low-skilled immigrants should be internalized by their employers. Here is how he puts it: Another source of unequal burden sharing is that U.S. employers enjoy benefits from immigration, in terms of higher productivity for their operations, while taxpayers pay for the education and health services that immigrant households receive. Taxpayers thus subsidize employers in agriculture, construction, meatpacking, restaurants and hotels, and other sectors that have high levels of employment of low-skilled immigrant labor. A reasonable solution to the current predicament is to eliminate such subsidies by making employers internalize the fiscal cost of immigrant workers. One way of achieving internalization is to subject employers to an immigrant labor payroll tax that would fund the benefits that their immigrant employees, and their family members, receive. Such a tax would make employers bear the fiscal consequences of immigration, releasing taxpayers from the burden and perhaps easing political opposition to immigration.

How to address apparent racial disparity in bankruptcy - The article discussed in the N.Y. Times story today is heavily empirical. It is also deliberately light on the prescriptive. Bob Lawless, Dov Cohen and I did make two modest proposals: (1) that a question about race of the debtor should be included on the form for a bankruptcy petition to make it possible to confirm (or disprove) the finding that African Americans file in chapter 13 at a much higher rate than debtors of other races (about double in the data we have), and (2) that all actors in the bankruptcy system—judges, trustees, attorneys and clients—be educated about the apparent racial disparity and the possibility that subtle racial bias may be producing it. The Times certainly helped with the second one! Beyond that, we leave it to others and to each of us individually to come up with policy responses. In my view, Henry Hildebrand, a longtime chapter 13 trustee in Tennessee, got the big picture exactly right; he is quoted in the Times story as saying we should “use this study as an indication that we should be attempting to fix what has become a complex, expensive, unproductive system.” He will probably reappraise his views if he finds out that I agree with him! Those of us who participate in or study the system know that its complexity is onerous.  Three key points: Racial disparity is part of a bigger problem with the bankruptcy system, which is that complexity leads to disparate results for the similarly situated as well as additional expense. Also, judges, trustees and the U.S. Department of Justice need to be part of addressing race disparity, and they need to have race data collected in court records to do so most effectively.

Commentary: Getting ‘those people’ to straighten up and fly right - The General Assembly is back in session, thank the Lord; now, we'll have some protection against Those People. Take, for instance, the bill Republicans have introduced to require drug tests for anyone applying for unemployment checks. We certainly don't want to give taxpayers' hard-earned money to some druggie just because he's out of work. Gov. Haley's all for this idea. Last year she pointed out that half of the applicants for jobs at the Savannah River Site were being disqualified because they failed a drug test. Sure, she later had to retract her claim after learning that the actual rejection rate was only about one percent, but her main point was correct: You just can't be too careful with Those People. I know that to qualify for unemployment pay, a person must have been laid off - not fired or quit. And, yeah, I understand that while an unemployment applicant was working, he paid taxes...And that his wife and kids may go hungry unless he gets the measly $300 bucks or so a week that South Carolina doles out...Yadda, yadda... Doggone, it chaffs my soul to imagine that Those People are spending MY money to buy dope. I can just see Those People, sitting on the front stoop with their buddies, grinning, talking trash - while I'm busting my chops...

Mass Incarceration and Criminal Justice in America - A prison is a trap for catching time. Good reporting appears often about the inner life of the American prison, but the catch is that American prison life is mostly undramatic—the reported stories fail to grab us, because, for the most part, nothing happens. One day in the life of Ivan Denisovich is all you need to know about Ivan Denisovich, because the idea that anyone could live for a minute in such circumstances seems impossible; one day in the life of an American prison means much less, because the force of it is that one day typically stretches out for decades. It isn’t the horror of the time at hand but the unimaginable sameness of the time ahead that makes prisons unendurable for their inmates. The inmates on death row in Texas are called men in “timeless time,” because they alone aren’t serving time: they aren’t waiting out five years or a decade or a lifetime. The basic reality of American prisons is not that of the lock and key but that of the lock and clock. That’s why no one who has been inside a prison, if only for a day, can ever forget the feeling.

Food stamp politics - Agriculture Secretary Tom Vilsack last week responded to GOP presidential candidate New Gingrich's description of President Obama as the "food stamp President."Alan Bjerga and Jennifer Oldham at Bloomberg report: Those who get the federal assistance “are playing by the rules,” Vilsack, whose department administers food stamps, said yesterday in an interview with Bloomberg News. “There are misconceptions about this program and confusion” about recipients caused by negative portrayals by some Obama opponents, he said.  Food-stamp use has increased 46 percent since December 2008, a month before Obama took office and when the economy was shedding jobs. Total spending has more than doubled in four years to an all-time high of $75.3 billion, a level called unsustainable by Republicans including Gingrich, who has labeled Obama “the best food-stamp president in American history.”  In the article, David Greenberg at Rutgers University expresses doubt that Gingrich's talking point reflects bigotry, but notes, "he is no fool and this is going to be seen through a racial prism."  Later in the Bloomberg article, I comment about the history of bi-partisan agreement over the basic design of the Supplemental Nutrition Assistance Program (SNAP), formerly called food stamps.

Graph of the Day: Busting the Myths about Food Stamps -Last week, I commented on a terrific graph published by the Center on Budget and Policy Priorities that refuted presidential candidate Mitt Romney's false claim that the majority of federal funding for poverty prevention programs like Medicaid and food stamps (now called the Supplemental Nutrition Assistance Program, or SNAP) is wasted on "massive overhead," leaving few dollars for the intended beneficiaries. In fact, the CBPP found that the administrative expenses for these and other social programs range from less than 1 percent to just 8 percent of total costs, hardly the bureaucratic bloodsucking Romney claimed. But Romney is far from alone in his grandiose and off the mark allegations; just last week rival presidential candidate Newt Gingrich doubled down on his controversial comments tarring President Obama as a "food stamp president," who, the former House speaker proclaimed, has put more people on food stamps "than any president in American history." A recent USA Today fact check corrects that mistake: while the percentage of Americans on food stamps is at historic highs, fewer people have applied for SNAP under Obama than during George W. Bush's tenure, when 14.7 million joined the rolls. What's more, the current growth rate has been declining since the end of the recession in 2009, when there is a clear inflection point in the graph below.

The “Food Stamp Speaker” is Actually Newt Gingrich - Gingrich never tires of calling Barack Obama a food stamp President, saying that the food stamp rolls increased by the highest amount in history under this Administration. As a technical matter, this is not true. George W. Bush actually put more people on food stamps than any President in American history. As Brooks Jackson points out, the economic downturn that began in December 2007 made 4.4 million Americans newly eligible for food stamp benefits. The Obama Adminstration included increased benefit levels in the 2009 stimulus... But there’s a reason that the food stamp program, or SNAP, became a vehicle for direct benefits to poor Americans. It can be traced back to a guy named Newt Gingrich. In 1996, Gingrich succeeded as House Speaker in passing welfare “reform,” which decimated the welfare program, particularly its ability to respond during times of economic stress. ... The 1996 welfare reform made cuts to SNAP, most of which remain. But it’s still expandable during a downturn, unlike TANF. In 2010, 40% of single mothers received food stamps, while only 10% received TANF funds. And this is why SNAP costs increased by 102% during the Great Recession. In other words, without the “end of welfare as we know it,” nobody would likely have become a food stamp President.  I suppose the other option is to let the poor starve, which Gingrich must be advancing. But when he talks about “food stamp Presidents,” recognize that he’s responsible.

Who Receives Government Assistance? - Thanks to the recession, and changes in program rules, a large fraction of households receive government assistance, especially those headed by people without a four-year college degree. The three largest government safety net programs serving nonelderly households are Medicaid, unemployment insurance and the Supplemental Nutrition Assistance Program (SNAP). Together they paid out more than $600 billion in benefits during 2010 on behalf of program participants. A large number of households received these benefits. Using the results of the Census Bureau’s annual demographic survey, I classified nonelderly households by the educational attainment of the household head (I omitted the small number of households headed by people younger than age 25, because their educations might still be in progress), and calculated the fraction of them that received Medicaid, unemployment insurance and/or SNAP sometime during the years 2007 and 2010. Over a third of households with heads whose formal education was limited to a high school diploma — the most common type of household — received at least one of these types of assistance in 2010. A majority of households with heads who stopped their schooling before graduating from high school received government assistance in 2010.

As Price of Oil Soars, Users Shiver and Cross Their Fingers - “You just cross your fingers and hope that it doesn’t get too much worse,” Mr. Harris said.  Actually, it probably will — for him and the residents of the roughly eight million other American homes that use heating oil, mostly in a band from Maine to Pennsylvania.  While natural gas prices have plummeted to 10-year lows, heating oil prices have been steadily rising for years and are expected to reach record levels this winter, precipitated by higher costs for crude oil and the shutdown of several crucial refineries in the Northeast and in Europe. The Energy Department projects a price of $3.79 a gallon over the next few months, more than a dollar above the winter average for the last five years. Analysts do not expect much relief in the longer term, either, because global oil prices are expected to stay high amid political instability in the Middle East and rising demand from developing countries.  With electricity prices also down, utilities are trumpeting that bills will drop this season for customers using gas and electric heat. Con Edison announced this week that residential gas heating bills in New York were expected to drop 11.5 percent this winter, and in New Jersey, PSE&G said that it would cut February bills for residential gas customers by an average of $30.

High Rents, Low Wages and the Coming Homeless Surge - Get ready for the next big financial bubble—the growth of America’s homeless population. The biggest boon for the homeless was President Obama’s 2009 stimulus package, that appropriated $1.5 billion to the Homeless Prevention and Rapid-Re-Housing Program that temporarily aided homeless and near-homeless households. According to a report issued Wednesday by the National Alliance to End Homelessness, the program has helped more than one million impoverished individuals find housing, but it is set to end this fall. “The resources provided by [the program] have run out in many communities … and the debt and deficit at the federal level have already begun to shrink assistance available to the most vulnerable,” Nan Roman, president and CEO of NAEH, said at a news conference. “The failure to sustain this early recipe for success threatens to undermine progress now and in the future.” A separate report from the same organization released in September noted that the ranks of the nation’s homeless could swell by five percent over the next three years if no similar programs replace the program.

Evicted 101-year-old Detroit woman can't go home - The federal government now says a 101-year-old Detroit woman it promised could move back into her foreclosed home four months ago can't return because the building's unsanitary and unsafe. Texana Hollis was evicted Sept. 12 and her belongings placed outside after her 65-year-old son failed to pay property taxes linked to a reverse mortgage and the U.S. Department of Housing and Urban Development foreclosed on the home. Two days later, the department said she could return. But now, HUD said it won't let Hollis move back in because of the house's condition. She had lived there about 60 years. "Here I am, 100 years old, and don't have a home," Hollis said, rounding off her age. "Oh Lord, help me."

This Week in Poverty: An American Commitment to Children -This week, at a forum on poverty and the 2012 election, Republican pollster Jim McLaughlin said 88 percent of voters view a candidate’s position on equal opportunity for children of all races as important in deciding their vote for president. Washington Post columnist Michael Gerson commented that it was “most encouraging” that “Americans of every ideological background believe in opportunity for children. It’s a common ground commitment.”I wish I shared his confidence. I think if that commitment were truly a strong one, we would be doing much more to help the 22 percent of American children and their families—disproportionately people of color—get out of poverty. Yet too many politicians and citizens still seize on President Reagan’s old line—“We fought a war against poverty, and poverty won”—as a reason not to make substantial investments in children and families. The data, however, suggest that this take on anti-poverty legislation is a myth.

“How deserving are the poor?” - Next Wednesday night, Bryan Caplan will debate Karl Smith on that topic at GMU.  For background, here is a relevant short essay by Karl. From the perspective of “common sense morality,” the poor, in wealthy countries at least, are responsible for quite a bit of their difficulties.  I believe Bryan stresses this factor, although I am less sure how he treats common sense morality when he disagrees with it. Yet other perspectives must be brought to bear.   Yet other perspectives must be brought to bear.  There is determinism, at differing levels, ranging from “it’s tough to come from a broken home” to “lead poisoning is bad for you” to “what if the universe is a frozen four-dimensional Einsteinian/Parmenidean block of space-time?”  (Ethics does look different when you are traveling at the speed of light.) There is the view that desert simply is not very relevant for a lot of our choices.  We still may wish to aid the undeserving.  Matt Yglesias adds relevant comment.

Six Million People Are Under Correctional Supervision in the U.S.—More Than Were in Stalin’s Gulags - For a great many poor people in America, particularly poor black men, prison is a destination that braids through an ordinary life, much as high school and college do for rich white ones.  More than half of all black men without a high-school diploma go to prison at some time in their lives. Mass incarceration on a scale almost unexampled in human history is a fundamental fact of our country today—perhaps the fundamental fact, as slavery was the fundamental fact of 1850. In truth, there are more black men in the grip of the criminal-justice system—in prison, on probation, or on parole—than were in slavery then. Over all, there are now more people under “correctional supervision” in America—more than six million—than were in the Gulag Archipelago under Stalin at its height. That city of the confined and the controlled, Lockuptown, is now the second largest in the United States.

Care for Aging Inmates Puts Strain on Prisons - Prison systems in the U.S. have an aging problem, one that has nothing to do with steel bars and cement walls.  The fastest-growing population in federal and state prisons are those 55 and older, a trend that is forcing cash-strapped local governments to wrestle with the growing cost of caring for the aging inmates. Some experts are pushing states to take the controversial step of releasing certain older prisoners before their sentences are up. According to a study being released Friday by Human Rights Watch, a New York-based advocacy group, the number of state and federal prisoners 55 or over nearly quadrupled to 124,400 between 1995 and 2010, while the prison population as a whole grew by only 42%. Some legal experts cite the drug wars of the 1980s and 1990s, which sent away thousands of young men to decades-long prison sentences. In addition, tougher sentencing laws, including the abolition of parole in many states and the advent of three-strikes-you're-out laws in others, have fueled the growth in the overall prison population. "Prisons are facing a silver tsunami," . "Walk through any prison and you'll see a a surprising number of wheelchairs and walkers and portable-oxygen tanks." At current rates, a third of all prisoners will be 50 or older by 2030, according to a study to be released next month by the American Civil Liberties Union.

Subculture of Americans prepares for civilization's collapse (Reuters) - When Patty Tegeler looks out the window of her home overlooking the Appalachian Mountains in southwestern Virginia, she sees trouble on the horizon. "In an instant, anything can happen," she told Reuters. "And I firmly believe that you have to be prepared." Tegeler is among a growing subculture of Americans who refer to themselves informally as "preppers." Some are driven by a fear of imminent societal collapse, others are worried about terrorism, and many have a vague concern that an escalating series of natural disasters is leading to some type of environmental cataclysm. They are following in the footsteps of hippies in the 1960s who set up communes to separate themselves from what they saw as a materialistic society, and the survivalists in the 1990s who were hoping to escape the dictates of what they perceived as an increasingly secular and oppressive government. Preppers, though are, worried about no government. Tegeler, 57, has turned her home in rural Virginia into a "survival center," complete with a large generator, portable heaters, water tanks, and a two-year supply of freeze-dried food that her sister recently gave her as a birthday present. She says that in case of emergency, she could survive indefinitely in her home. And she thinks that emergency could come soon.

State Unemployment Rates "slightly lower" in December - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were slightly lower in December. Thirty-seven states and the District of Columbia recorded unemployment rate decreases, 3 states posted rate increases, and 10 states had no rate change, the U.S. Bureau of Labor Statistics reported today. Forty-six states registered unemployment rate decreases from a year earlier, while four states and the District of Columbia experienced increases.  Nevada continued to record the highest unemployment rate among the states, 12.6 percent in December. North Dakota again registered the lowest jobless rate, 3.3 percent ... This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). Every state has some blue - indicating no state is currently at the maximum during the recession. The states are ranked by the highest current unemployment rate. Only four states and the District of Columbia still have double digit unemployment rates. This is the fewest since early 2009. At the end of 2009, 18 states and D.C. had double digit unemployment rates.

Unemployment Drops in 46 States: Exceptions are Hawaii, Illinois, Mississippi, North Carolina - The U.S. Bureau of Labor Statistics recently reported some good news: unemployment rates have dropped in 46 states from January 2011 to January 2012. There were four exceptions:

  • Illinois, which in January 2011 enacted a 67% increase in individual income taxes and a 30% increase in its corporate income tax. While applauded by progressives at the time, the tax increases are increasingly viewed across the spectrum as having severely harmed the state's business climate.
  • Hawaii, which in 2009 raised income taxes with three new brackets. Their 11% rate on income over $200,000 is now tied for highest among the states. Unemployment rose +0.3% over the past year.
  • Mississippi, which also rose +0.3%. A tax commission in 2008 considered a number of ambitious changes (including some submitted by us) but ultimately did nothing except raise the cigarette tax.
  • North Carolina, which rose +0.1% and in 2009 raised income and sales taxes. The income tax increase expired at the end of 2010 and the sales tax increase during 2011, although Gov. Bev Perdue (D) has said she wants to re-raise the sales tax.

Indiana Imposes Tax on Workers Who Support Unions - The NYT reported that Indiana's legislature approved a measure that requires that the workers who support a union at the workplace pay for the representation of the workers who choose not to pay for the union's representation. It would have been helpful to remind readers that a union is legally obligated to represent all the workers in a bargaining unit, regardless of whether a worker has opted to join the union. This means that non-members not only get the same wages and benefits that the union gets for its members, they also are entitled to the union's protection in the event of disputes with the employer. Most states allow workers to sign contracts that require non-union members to pay for the benefits they receive from the union. The bill passed by Indiana's legislature prohibits unions and employers from signing this sort of contract. Instead, it requires unions to provide free representation to non-members.

Adviser Guilty Of Fraud Linked To Pennsylvania Swaps - CDR Financial Products Inc., a financial adviser to states and cities, and its founder, David Rubin, pleaded guilty to federal fraud and conspiracy charges last month in New York. Prosecutors accused them of rigging municipal- bond sales so taxpayers in New York and other unnamed states paid extra to raise billions for government projects. CDR faces fines of up to $100 million; Rubin faces up to 35 years in prison. Rubin's firm had clients across the United States, including Democratic-run states such as California, New Mexico, New York, and, at the time, Pennsylvania. Like other government financial contractors in those days, Rubin was a contributor to leading politicians - in his case, prominent Democrats such as then-Gov. Ed Rendell and then-Philadelphia Mayor John F. Street. Rubin served on Rendell's gubernatorial transition team. His firm advised Philadelphia on interest-rates swaps, complex financial contracts designed, for example, to let borrowers raise money at slightly lower interest rates and protect them from the risk of rising rates, in exchange for agreeing to pay banks and in- vestors compensation if rates fell. Swaps and other "derivative" financial contracts became legal for Pennsylvania towns and school districts under a law Rendell signed in 2003.

La. budget shortfall projected to be nearly $900M -- The $895 million shortfall projected for the upcoming budget year shouldn't come as a total surprise to lawmakers or Gov. Bobby Jindal's administration. At least 40 percent of the gap is tied to the use of one-time money that propped up parts of the current budget and that is expected to fall away in the new fiscal year that begins July 1, most of it used in the state's Medicaid program. Another slice of next year's shortfall is caused by tuition increases approved by lawmakers and sought by Jindal, that while helping plug some higher education holes, will also increase the cost of the state's free college tuition program. When the governor's financial architects and lawmakers crafted this year's budget, they scraped dollars from state funds earmarked for other areas and tapped into one-time available sources of federal cash to balance the spending plans. Most agencies took cuts at the beginning of the fiscal year and then earlier this year when income estimates again fell short of projections.

Legalize And Tax Marijuana? - It was several years ago during the Q&A portion of a presentation I was giving about the federal  deficit in a VERY socially and fiscally conservative suburb of Detroit that I was asked a simple and very sincere question: Why doesn't the federal government legalize heroin and crack and then tax the sales? I was stunned both by the question and by the people who were asking it. They were asking about the mechanics of how it would work, how much revenue legalization would bring in, etc. They were specifically asking about heroin and crack. And they were completely serious. Which is why this story by Anita Kumar from yesterday's The Washington Post about a Virginia delegate introducing a bill to figure out how much revenue the state would bring in if it legalized marijuana wasn't as shocking to me as it otherwise might have been. On the one hand, this is the Commonwealth of Virginia where where the sales of bottled booze are still only available in government-owned stores and religious leaders in the southern and western parts of the state likely would prefer that prohibition return. On the other hand, this is Virginia which, like most other states, has budget issues and is looking for alternative sources of revenue.

The Best States to Grow Up In - Newborn children can’t choose the states in which they grow up any more than they can choose the size of their parents’ bank accounts. But voters in every state choose how much to spend on public programs benefiting children, with telling results. The Foundation for Child Development’s new report on state-level differences in the Index of Child Well-Being – a broad quality-of-life indicator based on 25 indicators – shows enormous variation, as does another set of indicators known as Kids Count, developed by the Annie E. Casey Foundation.  In states near the top of the list, like Connecticut, New Jersey and Utah, the successes have been celebrated. States in the South and Southwest generally rank lower, with New Mexico, Mississippi, Louisiana, Nevada and Arizona at the bottom. Those, like Newt Gingrich, who believe, that less fortunate children lack a work ethic might point to regional differences in moral character. But evidence suggests that regional differences in willingness to pay taxes, sometimes called “tax morale,” are at work.

Number of children living in poverty up in Michigan, Kalamazoo County - The latest figures on child well being in Michigan show more families in the state and Kalamazoo County living in poverty. The numbers released Tuesday by the Michigan League for Human Services show that the percentage of children living in poverty jumped from 14% to 23% between 2000 and 2009. The percentage in Kalamazoo County was nearly 21% in 2009. Officials representing several groups in Kalamazoo County med on Tuesday to discuss the poverty figures and their impact on different aspects of life. Kalamazoo County Poverty Reduction Initiative Director Jeff Brown says while poverty has gone up for all groups, the most significant increase has been in poverty among children. Family Health Center President Denise Crawford says about half of all children born in Kalamazoo County last year were born into poverty, according to Medicaid figures.

Students seek food stamps for financial aid - With rising education costs, college students are looking for new ways to save. More and more students are turning to food stamps, the government program that provides money to those that cannot afford it. Since a basic meal plan at Georgia State totals up at just under $1,700 each semester, students like senior Taylor Smith say food stamps, or the Supplemental Nutrition Assistance Program, offer a more appealing alternative than meal plans. "With me being a senior and living on campus for the past four years, I honestly got tired of paying that amount of money per semester just to eat," Smith said. "I did not even know that I was applicable for food stamps until someone told me about the site and to apply to see if I would get it. Since then, I have saved a ton of money." The Department of Family and Children Services cites that the program is designed to assist low income households that do not have the resources to provide adequate food. However, many college students also qualify for the program.

Cash-strapped Detroit to lose $8.5M under state law requiring cut in income tax rate - The financially strapped City of Detroit must cut its income tax take by $8.5 million beginning July 1, effectively adding to a deficit that puts the city in peril of a takeover by a state-appointed emergency manager. Unless the Legislature steps in, a cut in the income tax rate -- from 2.5% to 2.4% for residents and from 1.25% to 1.20% for nonresidents -- will be required under a 1998 state law that was part of a deal to preserve the city's state revenue-sharing payments in return for a gradual reduction in the income tax. State Rep. Maureen Stapleton, D-Detroit, said Tuesday that the requirement is "ridiculous" and should be waived. Detroit needs to be able to control its destiny, and that includes setting its own tax rates, she said. "I certainly would hope that the Legislature ... would at least take the handcuffs off," Stapleton said. An analysis by the Citizens Research Council of Michigan, released Friday, estimates that the lost revenue to the city -- or savings to taxpayers -- would be about $8.5 million in the fiscal year that begins July 1.

On US Education: It’s the Socioeconomic Segregation, Stupid - In a piece for The Nation last week, Linda Darling-Hammond demolished most of the remaining chunks of any size within the crumbling structure of corporate education’'s most ironically-titled reform ever --No Child Left Behind. NCLB is now rubble, even though many unseen victims continue to be buried beneath its mammoth pile. Darling-Hammond, who was recruited to get Team Obama up to speed on education issues following the 2008 election, entitled her piece, "Why Is Congress Redlining Our Schools?". It should be noted that as soon as Team Obama got a lay of the edu-land in early 2009, they dismissed Darling-Hammond and brought in corporate lackey, Arne Duncan, to serve as titular head of the Education Department while the corporate foundations run the show. Now that I think about it, she might have more appropriately named her piece "Why are the White House and Congress Redlining Our Schools?”.Just as red-lining was used for many years by the FHA to maintain racial purity and avoid ethnic mixing in housing, red-lining is a good description of what is going on today in urban public education to contain and isolate children of the poor in the new chain gang charter schools.

Teachers Matter. Now What? - Last month, economists at Harvard and Columbia released the largest-ever study of teachers’ “value-added” ratings—a controversial mathematical technique that measures a teacher’s effectiveness by looking at the change in his students’ standardized test scores from one year to the next, while controlling for student demographic traits poverty and race. Raj Chetty, John Friedman, and Jonah Rockoff analyzed the test scores and family tax returns of 2.5 million Americans over a twenty-year period, from 1989 to 2009. The team concluded that students who have teachers with high value-added ratings are more likely to attend college and earn higher incomes, and are less likely to become pregnant teens. In a rare instance of edu-wonk consensus, both friends and skeptics of standardized tests are praising the study as reliable and groundbreaking. Indeed, these findings raise several interesting questions about how to evaluate and pay teachers—one of the most controversial topics in American urban politics. In his annual State of the City speech last Wednesday, New York Mayor Mike Bloomberg cited the new research as he promised annual bonuses of up to $20,000 for teachers rated “highly effective,” based partially on value-added measures and partially on principals’ judgments. In a move that befuddled many casual observers of the education debate, the New York City teachers’ union, the United Federation of Teachers, immediately opposed the proposal.

Stop the School-to-Prison Pipeline - What has come to be called the “school-to-prison pipeline” is turning too many schools into pathways to incarceration rather than opportunity. This trend has extraordinary implications for teachers and education activists. The school-to-prison pipeline begins in deep social and economic inequalities, and has taken root in the historic shortcomings of schooling in this country. The civil and human rights movements of the 1960s and ’70s spurred an effort to “rethink schools” to make them responsive to the needs of all students, their families, and communities. This rethinking included collaborative learning environments, multicultural curriculum, student-centered, experiential pedagogy—we were aiming for education as liberation. The back-to-basics backlash against that struggle has been more rigid enforcement of ever more alienating curriculum. The “zero tolerance” policies that today are the most extreme form of this punishment paradigm were originally written for the war on drugs in the early 1980s, and later applied to schools. As Annette Fuentes explains, the resulting extraordinary rates of suspension and expulsion are linked nationally to increasing police presence, checkpoints, and surveillance inside schools. As police have set up shop in schools across the country, the definition of what is a crime as opposed to a teachable moment has changed in extraordinary ways.

The True Cost of High School Dropouts — ONLY 21 states require students to attend high school until they graduate or turn 18. The proposal President Obama1 announced2 on Tuesday night in his State of the Union address3 — to make such attendance compulsory in every state — is a step in the right direction, but it would not go far enough to reduce a dropout rate that imposes a heavy cost on the entire economy, not just on those who fail to obtain a diploma.  In 1970, the United States had the world’s highest rate of high school and college graduation. Today, according to the Organization for Economic Cooperation and Development4, we’ve slipped to No. 21 in high school completion and No. 15 in college completion, as other countries surpassed us in the quality of their primary and secondary education.  Only 7 of 10 ninth graders today will get high school diplomas. A decade after the No Child Left Behind5 law mandated efforts to reduce the racial gap, about 80 percent of white and Asian students graduate from high school, compared with only 55 percent of blacks and Hispanics.

SD Unified faces another grim budget - The San Diego Unified School District is once again bracing for the worst of times. In a preliminary budget for the 2012-13 school year released Monday, Superintendent Bill Kowba has called for the elimination of 1,169 full-time jobs, including at least 821 teaching positions, to help offset a worse-case deficit of $121.5 million to next year’s $1.057 operating budget. That could result in more than 1,500 of the district’s 14,000 full- and part-time employees losing their jobs, officials said. Other cost-cutting measures include an increase in class size and cuts to nursing, the arts, campus police, school bus service and other programs.  If Brown’s tax fails, California schools face cuts of about $4.8 billion. That would force massive midyear cuts in the 2012-13 school year at a time when districts cannot layoff teachers. San Diego Unified and districts throughout the state are rejecting the governor’s advice to build optimistic budgets that assume his tax measure will pass. For planning purposes, the district is not counting on its labor unions to agree to concessions — something officials have called for since school started in September.

Kentucky Has Money for Honking Big Ark But Not Schools, Seniors, Libraries or Police - Residents of Kentucky will be ready for the flood but maybe not the future with a proposed cut-to-the-bone budget from Gov. Steve Beshear that he readily admits is "inadequate for the needs of the state's people." His budget cuts 8.4% from an already-trimmed higher education system, with other cuts to basic services like state police, juvenile justice, seniors and libraries. But it leaves in place a controversial $43 million tax break to an 800-acre creationist theme park, complete with massive replica of Noah's Ark and new $11 million highway interchange, that supporters hope will "teach the world about God’s Word and the message of salvation!" If people in Kentucky still know how to read.

Banning Books in Tucson - Outrage and disgust continue to build over the decision by the Tucson, Arizona, unified school system to ban books by Chicano and Native-American authors. The punitive action follows on the heels of the decision by state politicians to shut down Tucson highly effective ethnic studies program that focused on Mexican-American life and culture.  Over 60 percent of the students in Tucson are of Mexican descent and the program was widely regarded as an educational success. However, the program drew the ire of some Arizona whites who were offended by lessons about white oppression of Chicanos and Native-Americans.

City Controller Says Philly School District Must Cut $400,000 Per Day - City Controller Alan Butkovitz expressed serious concern Wednesday about the Philadelphia School District's continued financial viability. And he estimated that the district would have to cut $400,000 per day between now and June 30 just to erase a projected deficit of at least $61 million as it wrestles with continuing problems in matching expenses to declining revenues. "I think long-term, they are going to have to come up with real solutions," Butkovitz said in an interview addressing the district's bleak financial outlook. "Unless the School District management can provide compelling evidence to alleviate this doubt, our Independent Auditor's Report will include an explanatory paragraph to reflect our conclusion of substantial doubt [about the district's ability] to continue as a going concern." And if the district cannot explain by Friday how it will make up a projected deficit this fiscal year, Butkovitz said, he would include a warning in the district's annual financial report that could hamper the district's ability to borrow money and sell bonds.

Scratching the Surface of Obama's Education Rhetoric - In general, I was underwhelmed by the education sections of President Obama’s State of the Union address, which were long on platitudes and short on honest talk about the difficulties of implementing school reform. Most notably, the president made an odd and surprising proposal to make dropping out of high school illegal before the age of 18: We also know that when students aren’t allowed to walk away from their education, more of them walk the stage to get their diploma. So tonight, I call on every State to require that all students stay in high school until they graduate or turn 18. Obama has, thankfully, done more than his predecessor to focus attention on underperforming high schools. George W. Bush’s signature education bill, No Child Left Behind, put most of its emphasis on fourth and eighth grade test scores in just two subjects, reading and math, while Obama’s school turnaround programs include support for so-called “dropout factories,” high schools with a graduation rate of less than 60 percent. The administration has focused, however, on fostering management reform in those schools, by turning them over to charter-school chains or replacing their principals and teaching staffs. It seems to me, however—and to many innovative high school educators—that one can’t really address the drop-out crisis without making school much more engaging for low-income teenagers, whether or not they show an inclination toward making it to and through a four-year college.

Nixon Budget Cuts Impact Higher Education - Missouri’s budget director expressed frustration with the 2013 reduction in higher education funding. In his 2013 budget recommendation, Gov. Jay Nixon proposed a 15 percent cut in state appropriations to public universities. “There are reductions in this budget that we would not be recommending, and this is one of them,” said Nixon’s Budget Director Linda Luebbering. “We would prefer to have more money for higher education. This recommendation is purely around making sure the budget’s in balance.” Members of the Senate Appropriations Committee said in the past three years, more than 25 percent of cuts were to higher education funding — leaving the rate of state aid equal to what it was in 1997. Cuts to higher education funding are proportionately higher than anything else in the state government, said committee chair Kurt Schaefer. R-Columbia.

Increased Illinois higher education funding goes to pensions - Illinois’ 12 percent increase in higher education spending this year isn’t going to benefit students. Instead, the additional funding for fiscal 2012 is going into the State Universities Retirement System, or SURS, to address its underfunded pension program. “These SURS appropriations do not go to individual institutions or agencies and are not available to be used for educational purposes,” according to the footnote in a study released Monday by Illinois State University, or ISU. SURS, which is responsible for the pensions of the state's university employees, is facing an unfunded liability — how much it owes in benefits compared with how much assets it has on hand — of $17.2 billion, according to its 2011 annual report. Illinois has a total stated unfunded pension liability of $85 billion, but a 2009 study by the Northwestern University Kellogg School of Management puts the figure at as high as $219.1 billion. The study didn’t specify how much it estimates SURS’ portion to be.

Do Big-Time Sports Mean Big-Time Support for Universities? - The past year has been a busy one for big-time college sports scandals, and for public discussion around how best to tame the beast that “ate college life,” as Laura Pappano put it in a recent article. From recruiting violations and the Jerry Sandusky sex abuse scandal, to the exploitation of student athletes and adverse effects on nonathlete student grades, the barrage of media coverage has thoroughly documented the social costs of big-time college sports. So why are universities in this business at all? The seemingly obvious answer — that colleges engage in big-time sports because the money is too good to resist — is only weakly supported by annual revenue and expense data collected by the National Collegiate Athletic Association. While there can be quite a bit of arbitrariness in the accounting underlying these reports, it seems clear that at least some institutions are making money: among the 120 colleges in the Football Bowl Subdivision (F.B.S., formerly called Division I-A), about 25 percent generated $14.4 million or more in net revenues annually from their men’s athletic programs. But this is hardly the norm. In any given year, only about half of these “big time” men’s programs turn a profit (see chart below).

MIT Mints a Valuable New Form of Academic Currency - Last month the university announced, to mild fanfare, an invention that could be similarly transformative, this time for higher education itself. It's called MITx. In that small lowercase letter, a great deal is contained. MITx is the next big step in the open-educational-resources movement that MIT helped start in 2001, when it began putting its course lecture notes, videos, and exams online, where anyone in the world could use them at no cost. The project exceeded all expectations—more than 100 million unique visitors have accessed the courses so far. Meanwhile, the university experimented with using online tools to help improve the learning experience for its own students in Cambridge, Mass. Now MIT has decided to put the two together—free content and sophisticated online pedagogy­—and add a third, crucial ingredient: credentials. Beginning this spring, students will be able to take free, online courses offered through the MITx initiative. If they prove they've learned the materi­al, MITx will, for a small fee, give them a credential certifying as much.

The Crisis of Education in America: "How to Become a Serf": Educational systems now train workers to fulfill the needs of companies. A society in which people exist for the sake of companies is a society enslaved. But there's a deep problem with the notion that education should equal vocational training. To paraphrase a very famous and renowned person, man does not live by work alone. Indeed, the knowledge and skills needed to earn a living in a capitalist industrial economy are of little use in human relationships, and human relationships are the core of everyone's life. Schools devoted to vocational training provide no venue for teaching cultural differences, for trying to understand the person who lives next door or in another country. Value systems are never evaluated; alternatives are never considered. As a result, although we all live on the same planet, we do not live together. At best, we only live side by side. At worst, we live to kill each other. Education as vocational training reduces everything to ideology, our devotion to which causes us to reject the stark reality that stares us in the face, because our ideologies color the realities we see and people never get wiser than those of previous generations. People have become nothing but the monkeys of hurdy gurdy grinders, tethered to grinders' organs with tin cups in hands to be filled for the benefit of the grinders. And this is the species we refer to as sapient. What a delusion!

Federal student loan rate set to double -- Attention college students: The interest rate on federal student loans is scheduled to double this summer unless Congress acts soon. Loans taken out for the current school year carried an interest rate of 3.4%, thanks to a 2007 law that phased in rate reductions for subsidized Stafford loans to undergraduate students. But the law did not specify the rate after this year. So unless something is done, rates on new loans will revert back to 6.8% -- where they were in 2007. President Obama urged lawmakers in his State of the Union address1 Tuesday to stop this rate hike from going into effect. He also asked Congress to extend the enhanced Hope Scholarship program, which increased the maximum tax credit to $2,500. And he wants to double the number of federal work-study jobs. But it remains to be seen whether this deficit-conscious Congress will act, especially since extending the 3.4% rate would cost $5.6 billion a year, according to Mark Kantrowitz, publisher of All told, Obama's proposals would total at least $10 billion a year.

Student Loan Debt Collectors Going After Families of Seriously Ill Children - Just as an example of why you don’t settle with banks who have shown themselves to be utterly lacking in any moral follow-through or willingness to act in ways beneficial to their consumers, check out this story from Harold Pollack at The Incidental Economist. Pollack tells a tale about the financial challenges of parents who take care of their seriously ill sons and daughters. “When your kid is this sick, you will run out of money,” is the general sense that Pollack gets from talking to these families. The whole system, from the soaring insurance and treatment costs themselves, to the cost of constant stakeouts at hospitals, the parking and meal fees, and so on, moves families toward pennilessness.  And then, there’s a comment down the page: As a resident manager of David’s House, like a Ronald McDonald House, one of the saddest and most frustrating things I saw was student loan collectors that would not work with parents who had run out of forbearance time to reduce or temporarily waive student loan payments despite their medical emergencies. Even the federal government will operate this way when a student loan goes into collections. Will not work with the debtor at all. We had collection agencies tracking down parents at our facility because, of course, parents who were living there temporarily needed to make the phone number known instead of keeping it confidential.

Calstrs Earns 2.3% After Loss in Offshore Equities Tempers Gains - The California State Teachers’ Retirement System lost $7.9 billion in the last half of 2011, dragged down by non-U.S. equities, lowering its gain for the year to 2.3 percent. While the second-largest U.S. public pension, with $144.8 billion in assets, saw growth in real estate and private equity, the slide in overseas stocks capped what Chief Executive Officer Jack Ehnes called “the most precarious markets in decades.” The returns further strain Calstrs’ ability to meet long- term obligations to 856,000 members and their families. The fund had only 71 percent of the money it needs to pay benefits as of June 30, 2010, down from 78 percent a year earlier, according to a statement yesterday. Calstrs’ target for its annual return is 7.75 percent. “The focus for fiscal year 2011-2012 centers on making the portfolio more nimble in a highly dynamic investment climate,” Chief Investment Officer Christopher Ailman said in the statement. “Today’s globally interconnected markets are drivers of the big highs and lows that happen in an instant.”

CalPERS earns 1.1% on investments in 2011 - The nation's largest public pension fund, the California Public Employees' Retirement System, posted a 1.1% return on its investment portfolio in 2011, Chief Investment Officer Joseph Dear told his board. The 2011 performance was well below the estimated average annual return of 7.75% that the fund's actuaries say is needed to meet current and future obligations to its members. The $229.5-billion CalPERS provides retirement and other benefits for 1.6 million state and local government employees and their families. CalPERS' annual investment results, whose volatility has echoed that of the overall markets, have become the focal point in an ongoing debate about looming pension fund liabilities and the ability of future generations of taxpayers to continue financing them. Gov. Jerry Brown has said he wants to overhaul state and local government pension programs, but whether he and the Legislature have the political wherewithal to do so in an election year remains unclear. During the 2011 calendar year, CalPERS lost 7.95% on its public equity investments, lost 2.29% on its hedge fund investments, earned 12.38% on bonds and earned 9.92% on real estate.

CalPERS Earned 1.1% on Investments in 2011, Plan Assumptions are 7.75% - Pension plans rebounded sharply in 2009 and 2010 from the devastating losses in 2008. However they never got back to even. 2011 was another poor year, and in spite of the start to 2012 I expect this year and/or next year to suffer more losses, or alternatively the market to limp along with no gains for a number of years. In other words, pension plans are already in trouble and things are about to get worse. For example, the LA Times reports CalPERS earns 1.1% on investments in 2011 The nation's largest public pension fund, the California Public Employees' Retirement System, posted a 1.1% return on its investment portfolio in 2011, Chief Investment Officer Joseph Dear told his board. The 2011 performance was well below the estimated average annual return of 7.75% that the fund's actuaries say is needed to meet current and future obligations to its members. The $229.5-billion CalPERS provides retirement and other benefits for 1.6 million state and local government employees and their families.

Bloomberg says pension costs stressing NYC budget - New York City Mayor Michael Bloomberg said Tuesday that with an $8 billion pension bill squeezing the city's finances, state legislators should back the governor and create a new lower pension tier for future municipal and state workers. The city's pension costs have risen 500 percent from $1.5 billion in 2002 when Bloomberg took office and now comprise 12 percent of the budget, equivalent to combined operations of the police, fire and sanitation departments, he told a joint legislative budget committee. The new pension tier would save the city $30 billion over 30 years without costing current workers anything, he said. "It would raise the retirement age, exclude employee overtime from pension calculations, bring progressivity into employee pension contributions and institute shared risks and rewards that would reflect the fluctuations in the market," Bloomberg said. "It would also offer new employees the choice of a defined contribution option, with a flexibility and portability that many may find a better, fairer choice for them."

New Jersey Pension-Fund Gap Grows Even After Christie Overhaul -- New Jersey’s pension fund has only two-thirds of the assets needed to pay future benefits, and the gap widened even as Governor Chris Christie boosted employee contributions and froze raises, according to state data. The seven retirement funds covering government workers and teachers had a funded ratio of 67.5 percent as of June 30, down from 70.5 percent a year earlier, according to data released yesterday by the Division of Pensions and Benefits. The deficit swelled by $5.5 billion during the 12 months to $41.8 billion. To address chronic shortfalls, Christie in June signed bills that raised pension and health-care expenses for public workers, increased the minimum retirement age for new employees to 65 from 62 and froze cost-of-living increases. Without Christie’s changes, the deficit would have been $61.8 billion

SOCIAL SECURITY… How They Lie To Us -- The Wall Street Journal in the article Newtitlement State is unhappy with Newt Gingrich’s plan to privatize Social Security. Not only does it know that “privatization” failed when Bush offered it to the country, but they understand that most elected Republicans have distanced themselves from private-account carveouts as well.  Here's what the Journal said about Gingrich's plan The irony of Social Security is that its slow-motion solvency crisis is relatively easy to resolve—and the political system is moving toward consensus, if haltingly.... Personal Social Security accounts are desirable, but that doesn't mean it makes sense to reject compromises that reduce future liabilities. Yet Mr. Gingrich proposes no such changes in his plan, perhaps because they are politically unpopular. But such an abdication opens him up to charges that he's not serious about reform and that he has no plan to pay for the transition costs of going to personal accounts (that is, when younger workers put their money in their own accounts, rather than funding current retirees). This is so subtle and so dishonest that I thought it would be worth the time to deconstruct it.

Gallup: Most Americans were uninsured in 2011 - A recently released Gallup survey shows more American adults didn’t have health insurance coverage in 2011 than in any other year since Gallup and Healthways began to track this information in 2008. Researchers asked 1,000 American adults about their health care coverage on a monthly, quarterly and yearly basis. The overall findings were troubling. The monthly percentage of uninsured adults rose to 17.7 percent in December 2011, which equaled the month of July for the highest on record. The uninsured rate was 17 percent or higher for the majority of the 2011 calendar year. Researchers at Gallup first noticed monthly increases of uninsured Americans when they initially conducted their study in 2008. They also found percentages rising above 16 percent for the first time in February 2009 and above 17 percent for the first time in December 2010.

Universal health care proposal stalls in California Senate… Legislation to create a universal health care system in California stalled in the state Senate Thursday ahead of a key legislative deadline, signaling it will likely fail to advance this year. The so-called "Medicare for all" proposal, Senate Bill 810, fell short of the 21 votes needed to pass the upper house, by a vote of 19-15. Four moderate Democrats abstained and one joined Republicans in voting against the bill. The Assembly, meanwhile, approved several health-related bills, including measures requiring private health insurance plans to cover costs of oral chemotherapy and the treatment of mental illness and substance abuse. The apparent defeat of SB 810, which faces a Tuesday deadline for passing the Senate, was the latest setback for supporters of the single-payer movement, who have pushed the proposal multiple times in recent years. The last version to win legislative approval was vetoed by then-GOP Gov. Arnold Schwarzenegger.

The Money Traps in U.S. Health Care - Americans continue to spend more on health care than patients anywhere else. In 2009, we spent $7,960 per person, twice as much as France, which is known for providing very good health services. And for all that spending, we get very mixed results — some superb, some average, some inferior — compared with other advanced nations. Why this is true isn’t easily answered.  Health reform is supposed to control costs, but there is no simple avenue of attack. Our aging population has played a role in driving up medical costs, but Germany, Italy and Japan have much bigger percentages of elderly people while spending much less per capita on health care.  The spread of health insurance, which shields patients from price sensitivity, has played a role in driving up our spending. But almost all other advanced industrial nations cover virtually everyone, while we leave 50 million uninsured.  A recent report from the Organization for Economic Cooperation and Development, a 34-member group that includes the most advanced industrial nations, concluded that spending is high here partly because the prices charged by American doctors and hospitals are higher than they are anywhere else. The International Federation of Health Plans, in its 2010 comparative price report, documented just how large the price differential can be for a wide range of services. While it’s difficult to get data that is truly comparable from one country to another, the trends show Americans paying a lot more than people in other countries for the same services.

Health Care Thoughts: Evidence Based Medicine - Evidence based medicine is one of the center pieces of PPACA (Obamacare) and is generally viewed as THE enlightened way to practice medicine and to direct dollars more effectively. Problem is, there is a "whose ox just got gored" issue. The American Psychiatric Association is currently revising guidelines for autism spectrum diagnoses, and early research indicates some high cognition youngsters may have their diagnosis dropped or altered. This could result in an alteration or loss of services (caveat: it is very early in the process). It has been suggested over the past couple of decades the diagnosis was expanded, perhaps past the bounds of science, as parents scrambled and pleaded for help. Parents and educators are concerned. What parent can blame them?  In 2009 new recommendations were published for breast cancer treatment and there was a firestorm of criticism. Breast cancer is an emotional topic (justifiably so). We tend to associate less treatment with neglect or negligence.  But, if we are to follow evidence based medicine then we have to go with evidence.

State of the Union—Health Care Cannot Be Ignored - In almost 7000 words of text, a total of 44 words were spent on the topic, a mere 0.6% for a subject accounting for more than one-sixth of the US economy. Medicare and Medicaid received 1 mention each, in the same sentence. Health care deserves greater attention from the president in his most prominent speech of the year. Surprisingly, the Republican response wasn’t much different. In fact, just as in the State of the Union, the ACA received almost no mention at all. This absence is conspicuous. It’s not as if health care hasn’t been an important part of previous State of the Union speeches. In 2009 and 2010, more than 7% of the text was devoted to health care reform. Similarly, they were much more central to Republican responses. It can’t be that health care is no longer an issue. Even 2 years into implementation of the ACA, there are around 50 million Americans who lack insurance. Tens of millions more are underinsured. Studies have consistently found that, compared with other comparable countries, the quality of the US health care system is poor to mediocre. And don’t forget the cost. At around $2.5 trillion a year, the United States has the most expensive health care system in the world. At around 17% of our gross domestic product, it’s also consuming an increasingly unsustainable share of our economy.

Chefs, Butlers, Marble Baths: Hospitals Vie for the Affluent - The feverish patient had spent hours in a crowded emergency room. When she opened her eyes in her Manhattan hospital room last winter, she recalled later, she wondered if she could be hallucinating: “This is like the Four Seasons — where am I?” The bed linens were by Frette, Italian purveyors of high-thread-count sheets to popes and princes. The bathroom gleamed with polished marble. Huge windows displayed panoramic East River views. And in the hush of her $2,400 suite, a man in a black vest and tie proffered an elaborate menu and told her, “I’ll be your butler.” It was Greenberg 14 South, the elite wing on the new penthouse floor of NewYork-Presbyterian/Weill Cornell1 hospital. Pampering and décor to rival a grand hotel, if not a Downton Abbey, have long been the hallmark of such “amenities units,” often hidden behind closed doors at New York’s premier hospitals. But the phenomenon is escalating here and around the country, health care design specialists say, part of an international competition for wealthy patients willing to pay extra, even as the federal government cuts back hospital reimbursement in pursuit of a more universal and affordable American medical system.

Fried food heart risk 'a myth' - They say there is mounting research that it is the type of oil used, and whether or not it has been used before, that really matters.  The latest study, published in the British Medical Journal, found no association between the frequency of fried food consumption in Spain - where olive and sunflower oils are mostly used - and the incidence of serious heart disease.  However, the British Heart Foundation warned Britons not to "reach for the frying pan" yet, pointing out that the Mediterranean diet as a whole was healthier than ours.

Why is USDA planning to privatize poultry inspection? - The USDA is moving forward with a plan to privatize poultry inspection – essentially letting chicken slaughterhouses decide on their own whether or not their product is safe.  But the organization “Food and Water Watch” is claiming this program “violates the department’s legal obligation to protect consumers.”  And according to documents obtained through a FOIA request by Food and Water Watch – these private inspection programs aren’t working – as various parts of the chicken that could be toxic to consumers like bile and digestive track tissue are not being properly removed.  It’s time to stop putting corporate profits ahead of the safety of consumers.  Food safety is a part of the commons – and needs to stay that way.

Three views of ractopamine in pigs - Helena Bottemiller this week writes a thorough summary of the international trade controversies over U.S. exports of pork from pigs that have been treated with the growth promoter ractopamine hydrochloride.  This animal drug is allowed under U.S. rules, but banned in many other countries, so U.S. trade negotiators have been pressing hard to get other countries to relent and allow small residues of the drug in imported pork. Bottemiller describes the history of testing by the drug's manufacturer, Elanco, in terms that could leave a reader quite concerned: The FDA ruled that ractopamine was safe and approved it for pigs in 1999, for cattle in 2003 and turkeys in 2008. As with many drugs, the approval process relied on safety studies conducted by the drug-maker — studies that lie at the heart of the current trade dispute. Only one human study was used in the safety assessment by Elanco, and among the six healthy young men who participated, one was removed because his heart began racing and pounding abnormally, according to a detailed evaluation of the study by European food safety officials.

Bill Gates on Using His Money to Save Lives and Fix U.S. Schools, and Steve Jobs - In a wide-ranging interview with Yahoo! and ABC News, the former head of Microsoft talked about how Steve Jobs' death affected him, his fix for American schools and his annual letter, which sets the priorities for one of the most generous charitable efforts in history. With a pledge to give away 95 percent of Gates' personal wealth, the Gates Foundation claims to have granted more than $26 billion since 1994. While some of that money is devoted to improving U.S. education, roughly 75 percent goes to the poorest countries in the world, and Gates scoffs at the idea that the money would be better spent at home. "Well, the question is, are human lives of equal value?" Gates said. "For the mother whose child dies in Africa, is that somehow less important, less painful? If we can save that life -- for very little [money], is that appropriate to do? And, in fact, we know that if we do save those lives, it can reduce the population growth. It can let them be on a path to graduate from receiving aid." After the Gates Foundation's vaccination efforts in India, that nation reported only one case of polio last year. And while the foundation promises to fight on against preventable diseases, the top focus of this year's letter is agriculture and Gates' belief that without technology, farmers could never feed the world's exploding population. He calls for further research into the creation of flood-and-drought-resistant crops through genetic engineering. "It is hard to overstate how valuable it is to have all the incredible tools that are used for human disease to study plants," he writes.

The price of your soul: How the brain decides whether to ‘sell out’  - "Our experiment found that the realm of the sacred – whether it's a strong religious belief, a national identity or a code of ethics – is a distinct cognitive process," says Gregory Berns, director of the Center for Neuropolicy at Emory University and lead author of the study. The results were published in Philosophical Transactions of the Royal Society. Sacred values prompt greater activation of an area of the brain associated with rules-based, right-or-wrong thought processes, the study showed, as opposed to the regions linked to processing of costs-versus-benefits. Berns headed a team that included economists and information scientists from Emory University, a psychologist from the New School for Social Research and anthropologists from the Institute Jean Nicod in Paris, France. The research was funded by the U.S. Office of Naval Research, the Air Force Office of Scientific Research and the National Science Foundation. "We've come up with a method to start answering scientific questions about how people make decisions involving sacred values, and that has major implications if you want to better understand what influences human behavior across countries and cultures," Berns says. "We are seeing how fundamental cultural values are represented in the brain."

Evolution Is Still Happening: Beneficial Mutations in Humans - One of my all-time most popular posts on Daylight Atheism, "The Scars of Evolution", lists some of the kludges, hacks and jury-rigs left behind in the human genome, the telltale signature of evolution. The vestigial structures and design compromises still found in human bodies are tangible evidence that our species has a long evolutionary history and didn't just pop into existence ex nihilo. But a different line of evidence comes in the form of ongoing mutations in the human gene pool. Most random genetic changes are neutral, and some are harmful, but a few turn out to be positive improvements. These beneficial mutations are the raw material that may, in time, be taken up by natural selection and spread through the population. In this post, I'll list some examples of beneficial mutations that are known to exist in human beings..

Health Report: Bird Flu Threat (audio)Scientists in Europe and the US have created a highly transmissible form of the potentially deadly H5N1 bird flu virus. Laurie Garrett, a senior fellow for global health on the Council on Foreign Relations, talks about the implications of this research.

Utah Doctors Join the Occupy Movement - Taking inspiration from the Occupy movement, in late December a group of doctors and environmental groups in Salt Lake City, Utah, announced a lawsuit against the third-largest mining corporation in the world, Rio Tinto, for violating the Clean Air Act in Utah. This is likely the first time ever that physicians have sued industry for harming public health. Air pollution causes between 1,000 and 2,000 premature deaths every year in Utah. (1) Moreover, medical research in the last ten years has firmly established that air pollution causes the same broad array of diseases well known to result from first- and secondhand cigarette smoke - strokes, heart attacks, high blood pressure, virtually every kind of lung disease, neurologic diseases like Alzheimer's, Parkinson's, loss of intelligence, chromosomal damage, higher rates of diabetes, obesity, adverse birth outcomes, and various cancers such as lung cancer, breast cancer and leukemia. (2-12)

Food security: Dampened prospects - Come 2050, the UN predicts earth will be home to another 2bn people; in order to feed us all, production needs to increase by an estimated 70 per cent. That is a big task, not least since the land that humans have so long been tilling is itself facing a revolution. Agriculture, which provides a livelihood to an estimated 2.5bn people, is lagging behind population growth. To reverse that course, many experts say another “green revolution” – the yield-boosting transformation of farming in the 1960s and 1970s by the use of better science – is required, entailing superior seeds, husbandry and technology. It could include genetically modified crops, a technique that – just like nuclear power for the world’s energy needs – to its champions forms an integral part of the solution, but to its critics represents a threat to human and environmental well-being. The prospect of more starving people as staples become unaffordable has put the question of food security firmly on to the top table of global policymaking. Nicolas Sarkozy, the French president, made it a central plank of his country’s presidency last year of the Group of 20 leading industrialised and developing nations; Mexico, this year’s G20 chair, is taking up the baton. At the World Economic Forum in Davos this week, several sessions are devoted to the topic. Yet these discussions will take place against a backdrop that is not just far removed from the regularly ravaged crops of Asia and elsewhere, but is also one of commodity prices that are in retreat from the peaks of recent years. Amid fears about the health of other parts of the global economy – such as banking and public finances – food security is in danger of being overshadowed.

Bill Gates Warns Climate Change Threatens Food Security, Finds It ‘Ironic’ People Oppose His ‘Solution’: Genetic Modification - Bill Gates is one very confused billionaire philanthropist. He understands global warming is a big problem — indeed, his 2012 Foundation Letter even frets about the  grave threat it poses to food security.  But he just doesn’t want to do very much now to stop it from happening.  He love technofixes like geoengineering and, as we’ll see, genetically modified food.   Rather than investing in cost-effective emissions reduction strategies today or in renewable energy technologies that are rapidly moving down the cost curve, he explains that the reason invests so much in nuclear R&D is “The good news about nuclear is that there has hardly been any innovation.”  Seriously! His Letter includes the ominous chart at the top, and he warns of the dire consequences of climate change: Meanwhile, the threat of climate change is becoming clearer. Preliminary studies show that the rise in global temperature alone could reduce the productivity of the main crops by over 25 percent. Climate change will also increase the number of droughts and floods that can wipe out an entire season of crops. More and more people are raising familiar alarms about whether the world will be able to support itself in the future, as the population heads toward a projected 9.3 billion by 2050.

Another Terrifying Drought Paper - The conviction has been growing in me for quite some time that the really big deal about global warming is increasing frequency and severity of droughts.  If I've succeeded in convincing you of this too (or you already believed it for other reasons of your own), then you will be interested in a new paper by Wehner et al (a group of scientists at NOAA and US national labs) titled Projections of Future Drought in the Continental United States and Mexico. The full paper doesn't seem to be freely available on the Internet but  there's a press release and also conference talk slides that will give you the flavor.  Furthermore, a reader sent me a copy and I'll summarize the points that interested me here. Let me start by explaining the figure above which is really the heart of the paper.  The x-axis of the figure is time during the twentieth and twenty-first century.  The y-axis plots the fraction of the area of the US and Mexico that is in at least moderate drought (PDSI less than -2).  The red and black lines are based on two different estimates of the historical PDSI: both use the same code for generating the PDSI that NOAA uses for its regular drought monitoring but they use temperature/precipitation data series from different groups as the input to the PDSI calculation.  Then the pale grey lines represent the (corrected) PDSI from nineteen climate model runs used in the IPCC AR4 process with the A1B emissions scenario (the world is currently tracking noticeably above this scenario).  The purple line is then the average of the 19 model runs (ie all the grey lines which are too blurred together to really see well).  Because the purple line is an average of 19 simulated worlds, it has much less fluctuations in than the one real world (red/black lines).  Also, because climate models seem to systematically under-estimate drought in the twentieth century, the purple line is below the red line on average.

The Alarming Outlook for Urban Water Scarcity - When you look at the official US drought monitor map, you immediately see that many American cities may be in the wrong places for long-term water sustainability.  In particullar, note the presence of “long-term,” severe-to-extreme drought conditions across most of Georgia, Texas, Oklahoma, New Mexico, and Arizona. It’s a very sobering set of facts, especially when you consider that essentially every high-growth part of the US is experiencing significant dryness.  Here are a few facts and projections extracted from a very good summary of the issues by Jay Kimball on his blog 8020 Vision:

  • By 2020, California will face a shortfall of fresh water as great as the amount that all of its cities and towns together are consuming today.
  • By 2025, 1.8 billion people will live in conditions of absolute water scarcity, and 65 percent of the world’s population will be water stressed.
  • In the US, 21 percent of agricultural irrigation is achieved by pumping groundwater at rates that exceed the water supplies ability to recharge.
  • There are 66 golf courses in Palm Springs. On average, they each consume over a million gallons of water per day.
  • The Ogalala aquifer, which stretches across 8 states and accounts for 40 percent of water used in Texas, will decline in volume by a staggering 52 percent between 2010 and 2060.
  • Texans are probably pumping the Ogallala at about six times the rate of recharge.

Robo-Copter Will Keep Tabs on Navy’s Biofuel Plants - The Navy is hoping to one day run a huge chunk of its fleet on biofuels. So the Navy’s advanced researchers — and their partners at the U.S. Department of Agriculture — are turning to a tiny robotic helicopter to help them figure out which crop they might be able to convert into their fuel of the future. The experiment is taking place over 35,000 acres of Maui soil, on the fields of Hawaiian Commercial & Sugar, the state’s largest commercial sugar plantation.  The drone helicopter will track every temperature fluctuation and sprouting bud emerging into the Hawaiian sun. But it’s hardly certain that any of the plants will actually wind up in the engines of destroyers or F/A-18s. Yes, the Navy is betting big on alt-energy — the goal is to cut its fossil fuel usage in half by 2020. And yes, the Navy just made its biggest-ever purchase of biofuels: 450,000 gallons for $12 million, enough to power an entire aircraft carrier strike group during a demonstration voyage this summer. But half of that order went to a division of Tyson Foods, which coverts fats and waste greases into biofuels. The other half went to Solazyme, which uses algae as a means of fermenting everything from plant matter to municipal waste into fuel. In other words, neither of them is really grow-your-own.

Illegal logging and the human cost - This (video) news report looks at the human cost of an example of the tragedy of the commons - illegal logging in the south Philippines which contributed to tens of deaths from the effects of flash flooding. Ecosystems and economic prospects are damaged at the same time because of failures in environmental management.

In Mackerel's Plunder, Hints of Epic Fish Collapse - Jack mackerel, rich in oily protein, is manna to a hungry planet, a staple in Africa. Elsewhere, people eat it unaware; much of it is reduced to feed for aquaculture and pigs. It can take more than five kilograms, more than 11 pounds, of jack mackerel to raise a single kilogram of farmed salmon. Stocks have dropped from an estimated 30 million metric tons to less than a tenth of that in two decades. The world’s largest trawlers, after depleting other oceans, now head south toward the edge of Antarctica to compete for what is left. An eight-country investigation of the fishing industry in the southern Pacific by the International Consortium of Investigative Journalists shows how the fate of the jack mackerel may foretell the progressive collapse of fish stocks in all oceans. In turn, the fate of this one fish reflects a bigger picture: decades of unchecked global fishing pushed by geopolitical rivalry, greed, corruption, mismanagement and public indifference. Daniel Pauly, an eminent University of British Columbia oceanographer, sees jack mackerel in the southern Pacific as an alarming indicator. “This is the last of the buffaloes,” he said. “When they’re gone, everything will be gone.”

Carbon Dioxide Is “Driving Fish Crazy” and Threatening Their Survival, Study Finds - Rising human carbon dioxide emissions may be affecting the brains and central nervous system of sea fishes with serious consequences for their survival, an international scientific team has found. Carbon dioxide concentrations predicted to occur in the ocean by the end of this century will interfere with fishes’ ability to hear, smell, turn and evade predators, says Professor Philip Munday of the ARC Centre of Excellence for Coral Reef Studies and James Cook University.“For several years our team have been testing the performance of baby coral fishes in sea water containing higher levels of dissolved CO2 – and it is now pretty clear that they sustain significant disruption to their central nervous system, which is likely to impair their chances of survival,” Prof. Munday says. That’s from an ARC news release on a new Nature Climate Change study, “Near-future carbon dioxide levels alter fish behaviour by interfering with neurotransmitter function” (subs. req’d).The authors “report world-first evidence that high CO2 levels in sea water disrupts a key brain receptor in fish, causing marked changes in their behaviour and sensory ability.”

At least 14 billion-dollar weather disasters for the U.S. in 2011 -  The tally of billion-dollar weather disasters in the U.S. during the crazy weather year of 2011 has grown to fourteen, and may reach fifteen, NOAA's National Climatic Data Center announced last week. The fourteen billion-dollar weather disasters in 2011 easily surpass the previous record of nine such disasters, set in 2008. Since 1980, the U.S. has averaged 3.5 billion-dollar weather disasters per year. The two new billion-dollar disasters of 2011: Tropical Storm Lee, early September, 2011: Wind and flood damage across the southeast (LA, MS, AL, GA, TN) but considerably more damage from record flooding across the northeast (PA, NY, NJ, CT, VA, MD). Pennsylvania and New York were most affected. Total losses exceed $1.0 billion; 21 deaths. Rockies and Midwest Severe Weather, July 10-14, 2011: An outbreak of tornadoes, hail, and high wind caused damage east of the Rockies and across the central plains (CO, WY, IA, IL, MI, MN, OH). Total losses exceed $1.0 billion; 2 deaths. The total costs of these fourteen disasters is $55 billion, tying 2011 with 2004 for fourth place for most costly year for billion-dollar weather disasters in history. The only costlier years were 2005 (Hurricanes Katrina, Rita, and Wilma); 1988 (Midwest drought); and 2008 (Hurricanes Ike and Gustav.) NCDC says they are still analyzing the late-October snowstorm that hit New England to see if it was a billion dollar disaster. Insurance broker AON Benfield puts damages from this event at $3 billion, so it is likely that NCDC will add at least one more billion-dollar disaster to 2011's tally.

The verdict is in on climate change - When it comes to climate change, open-mindedness is the wrong approach.  I study the history of climate science, and my research has shown that the think tanks and institutes that deny the reality or severity of climate change, or promote distrust of climate science, do so out of self-interest, ideological conviction or both. Some groups, like the fossil fuel industry, have an obvious self-interest in the continued use of fossil fuels. Others fear that if we accept the reality of climate change, we will be forced to acknowledge the failures of free-market capitalism. Still others worry that if we allow the government to intervene in the marketplace to stop climate change, it will lead to further expansion of government power that will threaten our broader freedoms. But most Americans do not work for the fossil fuel industry, and most Americans accept that there is an appropriate role for government to protect human and environmental health. So why has the denial of climate change achieved so much traction?

Singapore raises sea defenses against tide of climate - A 15-km (10 mile) stretch of crisp white beach is one of the key battlegrounds in Singapore’s campaign to defend its hard-won territory against rising sea levels linked to climate change. Stone breakwaters are being enlarged on the low-lying island state’s man-made east coast and their heights raised. Barges carrying imported sand top up the beach, which is regularly breached by high tides. Singapore, the world’s second most densely populated country after Monaco, covers 715 square km (276 sq miles). It has already reclaimed large areas to expand its economy and population — boosting its land area by more than 20 percent since 1960. But the new land is now the frontline in a long-term battle against the sea.

Come hell with high water: Global warming in Bangladesh  - Earlier this month, Bangladesh’s foreign minister chided the world’s developed nations for failing to honor their pledge to help this low-lying, water-logged nation adapt to the effects of climate change. Of the $30 billion that poor countries were promised three years ago, just $2.5 billion have been disbursed. “Our achievements — social, economic, environmental — of the past decades” are at risk, Dipu Moni told the Guardian.  Bangladesh, much of which sits less than 20 feet above sea level, may be asking for the wrong thing. Clamoring for funds to mitigate the effects of a changing climate isn’t enough. If greenhouse gas emissions aren’t reversed in the next few decades, it may be impossible for some countries to adapt to global warming. Rather than rattling its cup, Bangladesh should be pounding tables in Washington, Beijing, Brussels and Delhi.  Bangladesh has the unique moral authority to convince big polluters to change their ways: it is especially vulnerable to climate change and cannot be blamed for causing it. Scientists say that a one-meter rise in sea level could inundate 17 percent of its land mass.  The regional security consequences of rendering uninhabitable this densely populated country of 158 million people would be severe. Where will Bangladeshis go? Not to India. That country has already ringed the border with barbed wire and machine guns. Australia? I don’t think so.

Weaker sun will not delay global warming: study - (Reuters) - A weaker sun over the next 90 years is not likely to significantly delay a rise in global temperature caused by greenhouse gases, a report said Monday. The study, by Britain's Meteorological Office and the university of Reading, found that the Sun's output would decrease up until 2100 but this would only lead to a fall in global temperatures of 0.08 degrees Celsius. Scientists have warned that more extreme weather is likely across the globe this century as the Earth's climate warms. The world is expected to heat up by over 2 degrees Celsius this century due to increased greenhouse gas emissions. Current global pledges to cut carbon dioxide and other greenhouse gas emissions are not seen as sufficient to stop the planet heating up beyond 2 degrees, a threshold scientists say risks an unstable climate in which weather extremes are common. "This research shows that the most likely change in the sun's output will not have a big impact on global temperatures or do much to slow the warming we expect from greenhouse gases,"

Arctic Temperatures Continue Rapid Rise as 2011 Breaks Record Set in 2010  - NASA just (19 January 2012) released data showing that last year temperatures in the Arctic rose beyond the record established in 2010 — setting a new record for 2011. News of the record Arctic temperatures follows a series of alarming developments related to the Arctic in recent months. The surface temperature anomaly for the region extending from 64N to 90N, from 1880 through 2011, in degrees Centigrade above or below the temperature during the 1951-1980 base period.  Temperatures have risen substantially since 1880 and the rate of increase has been especially rapid since the late 1970s. Source: WWF, using data from NASA. According to NASA’s Goddard Institute for Space Studies (GISS), the annual mean surface temperature (land and air) for the region north of 64oN (the Arctic Circle is at 66° 33′N) in 2011 was 2.28oC above that which characterized the 1951-1980 period.  Temperatures in the region have been rising rapidly since the late 1970s and have not dropped below the long term mean since 1992 — nearly 20 years. This year’s annual mean temperature broke the record that was just set in 2010, when the temperature was 2.11oC above 1951-1980 levels.

Sea Ice Death Spiral Driving Atlantic Water into Arctic Causing Wild Weather - Flowers are blooming in England in January more than a month early. The Vail, Colorado ski resort has  no natural snow for the first time in 30 years of operation while Homer Alaska had over 15 feet of snow by the tenth of January smashing all time records. Temperatures were strangely warm in the Dakotas with highs reaching the low seventies on Jan 5 & 6 in several towns in South Dakota, smashing records by as much as 15°F. The first 10 days of 2012 have been warmer than anytime in recorded history across portions of the Northern Plains. This was mainly due to the lack of snow cover leading to unseasonably warm high temperatures.  The average high temperature for the first 10 days in January (January 1-January 10) was warmer than previously recorded, in some instances by 6 degrees! Atmospheric circulation patterns were the most extreme on record for December measured by an index called the North Atlantic Oscillation (NAO) according to Dr. Jeff Masters. A strong positive NAO has cold air in Canada moving offshore into the Labrador Sea while the U.S and Europe are warm. A Strongly positive NAO produces a tight pressure gradient and intense storms in the north Atlantic.

Arctic Ocean freshwater bulge detected  - UK scientists have detected a huge dome of fresh water that is developing in the western Arctic Ocean.The bulge is some 8,000 cubic km in size and has risen by about 15cm since 2002. The team thinks it may be the result of strong winds whipping up a great clockwise current in the northern polar region called the Beaufort Gyre. This would force the water together, raising sea surface height, the group tells the journal Nature Geoscience."In the western Arctic, the Beaufort Gyre is driven by a permanent anti-cyclonic wind circulation. It drives the water, forcing it to pile up in the centre of gyre, and this domes the sea surface," explained lead author Dr Katharine Giles from the Centre for Polar Observation and Modelling (CPOM) at University College London. "In our data, we see the trend being biggest in the centre of the gyre and less around the edges," she told BBC News. Dr Giles and colleagues made their discovery using radar satellites belonging to theEuropean Space Agency (Esa).

Immense 'dome' of fresh water bulging atop Arctic Ocean off Alaska - Enough extra fresh water to just about fill lakes Michigan and Huron to the brim has collected in the top layers of the Arctic Ocean northeast of Alaska during the past decade, according to new research published in the journal Nature Geoscience. Enlarge This ImageCPOM scientists have discovered that the freshwater stored in the western Arctic Ocean has increased by 8,000 km3 between the mid 1990s and 2010. UCL-ESA-PVL illustration Driven largely by strong winds and an immense circular current, some 8,000 cubic kilometers of fresh water have bulged up into a widespread dome since the 1990s. "In the western Arctic, the Beaufort Gyre is driven by a permanent ... wind circulation. It drives the water, forcing it to pile up in the centre of gyre, and this domes the sea surface," lead author Katharine Giles with the Centre for Polar Observation in London, told BBC news in this detailed and graphically illustrated story.

Ending Fossil Fuel Subsidies Would Get Us Halfway to Preventing Dangerous Climate Change - The International Energy Agency has again weighed in on how to combat climate change through better energy policy. IEA chief economist Fatih Birol has told The Guardian that if the $409 billion spent globally by just 37 nations on reducing the price of fossil fuels was phased out it would cut enough carbon emissions to get us halfway to the amount needed to avoid the worst of climate change and keep global average temperature rise below 2°C. Phasing out these fossil fuel subsidies it would save 750 million tonnes of CO2 every year by 2015, up to 2.6 gigatonnes by 2035, Birol said. By way of contrast, renewable energy receives just about $66 billion in government support, globally.

Solar energy: Flower power | The Economist - SOLAR-POWER stations take up a lot of room. They need either vast arrays of photovoltaic panels, which convert sunlight directly into electricity, or of mirrors, which direct it towards a boiler, in order to raise steam and drive a generator. The space these arrays occupy could often be used for other purposes. Two researchers from the Massachusetts Institute of Technology have now devised a better and more compact way of laying out arrays of mirrors. Slightly to their chagrin, however, and somehow appropriately, they found when they had done the calculations that sunflowers had got there first.

Outrage over Dams Being Built as Part of India's Hydro Energy Scheme - In demonstrations barely reported in the media, peasants and students in the North-eastern Indian state of Assam are fighting together against a proposed gargantuan network of dams across the upper reaches of its rivers in Arunachal Pradesh, one of the world’s six most seismically active regions. The movement has gathered impressive momentum against a project that threatens devastating environmental, demographic and socio-economic impact. Blame it on the new river engineering employed by the Indian central government in the myriad tributaries of Arunachal Pradesh that converge to become the mighty Brahmaputra. The dispossessed, displaced and distressed peasantry of these sleepy villages along the national highway are now all out on the streets day and night, braving the winter cold. For they fear further devastation once the under-construction dam on Lower Subansiri, the largest tributary of the Brahmaputra, begins operating. And at present they have the crucial backing of a whole range of people - from organizations and parties to middle class elites. In fact the long-enduring anti-dam movement in Assam, mainly geared against the state’s Congress government and NHPC Limited has gained an unprecedented momentum in the past few weeks; so much so that it has brought the construction work at the project site in Gerukamukh to a complete halt.

Waste to Energy: A Great Source of Clean Energy - But is it the Correct Waste? - Converting Waste-to-Energy, and in particular MSW, are hot topics throughout the global landscape. The conversion process, which consists of a number of physical and complex chemical steps, serves a much needed civic function that at the end of the day produces potentially carbon-neutral energy in the form of electrons or fuels such as diesel, ethanol, etc. Additionally, it furthers benefits the environment by reducing the amount of landfill disposed wastes and subsequent methane emissions. The contribution of methane emissions from landfills compared to all other anthropogenic sources of methane emissions is shown below (EPA): Waste management is primarily landfills and one of the major sources of methane emissions.  This commentary does not discuss the overall Global Warming Potential (GWP) of methane emissions relative to other Greenhouse Gases (GHG).  Also, it does not discuss the complexities of the converting solid wastes to energy. This will be covered in later discussions.

Energy Tax Breaks Proposed, Despite Waning Support for Subsidies - Assisted by technological innovation and years of subsidies, the cost of wind and solar power1 has fallen sharply — so much so that the two industries say that they can sometimes deliver cleaner electricity at prices competitive with power made from fossil fuels. At the same time, wind and solar companies are telling Congress that they cannot be truly competitive and keep creating jobs without a few more years of government support. Their efforts received a boost on Thursday from President Obama, who called for a package of tax credits for renewable power as part of a broader energy plan that he outlined while on a campaign swing through Nevada and Colorado. But the lobbying by the wind and solar industries comes at a time when there is little enthusiasm for alternative-energy subsidies in Washington. Overall concerns about the deficit are making lawmakers more skeptical about any new tax breaks for business in general. And taxpayer losses of more than half a billion dollars on Solyndra, a bankrupt maker of solar modules that defaulted on a federal loan, has tarnished the image of renewable power in particular.

Geothermal Test Will Pour Water into Volcano to Make Power - Geothermal energy developers plan to pump 24 million gallons of water into the side of a dormant volcano in central Oregon this summer to demonstrate technology they hope will give a boost to a green energy sector that has yet to live up to its promise. They hope the water comes back to the surface fast enough and hot enough to create cheap, clean electricity that isn't dependent on sunny skies or stiff breezes - without shaking the earth and rattling the nerves of nearby residents. Renewable energy has been held back by cheap natural gas, weak demand for power and lack of political concern over global warming. Efforts to use the earth's heat to generate power, known as geothermal energy, have been further hampered by technical problems and worries that tapping it can cause earthquakes. Even so, the federal government, Google and other investors are interested enough to bet $43 million on the Oregon project.

Solar Yacht Sails Around the World Powered by Nothing More than the Sun - The World Future Energy Summit has recently finished in Abu Dhabi and for me one of the highlights was the Turanor, an impressive solar powered yacht designed and built by Planet Solar. It is the largest boat of its kind to ever sail and the first to ever circumnavigate the globe powered entirely by the sun. It steadily cruises at an average speed of five knots, but is capable of reaching more than double that on clear, calm, sunny days. The project was conceived by Raphaël Domjan of Switzerland as a method of demonstrating the possibilities that current solar technology holds for clean transportation. The yacht carries a huge rack of Lithium-Ion batteries capable of storing up to three days’ worth of sailing power, easily enough to allow transit to continue throughout the night, or during overcast skies. Never once in thousands of miles has the boat had to turn on its diesel back up, in fact the diesel is only on board is to satisfy the insurance companies.

Obstacles to Danish Wind Power - During howling winter weather two years ago, the thousands of windmills dotting Denmark and its coastline generated so much power that Danes had to pay other countries to take the surplus. The incident was the first of its kind, and lasted only a few hours. Low temperatures were an aggravating factor, because Denmark’s combined heat and power plants were also running full bore and generating a lot of electricity. Since then, there have been just two more instances in which the price of wind power in Denmark turned negative for a significant period of time because of excess wind, according to the national grid company, Energinet.

Coal-Fired Power Plants Closing: FirstEnergy Shutting Down 6 Sites In Ohio, Pennsylvania, Maryland - FirstEnergy Corp. said Thursday that new environmental regulations led to a decision to shut down six older, coal-fired power plants in Ohio, Pennsylvania and Maryland, affecting more than 500 employees. The plants, which are in Cleveland, Ashtabula, Oregon and Eastlake in Ohio, Adrian, Pa. and Williamsport, Md., will be retired by Sept. 1. They have generated about 10 percent of the electricity produced by FirstEnergy over the last three years, the company said. In a statement James Lash, head of the company’s generation unit, indicated that a review of the company’s coal-fired plants determined it would not be cost-effective to get the older ones into compliance with environmental regulations the U.S. Environmental Protection Agency announced in December.

Clean Energy Stunner: Renewable Power Tops Fossil Fuels for First Time - Renewable energy is surpassing fossil fuels for the first time in new power-plant investments, shaking off setbacks from the financial crisis…. Electricity from the wind, sun, waves and biomass drew $187 billion last year compared with $157 billion for natural gas, oil and coal, according to calculations by Bloomberg New Energy Finance using the latest data. Accelerating installations of solar- and wind-power plants led to lower equipment prices, making clean energy more competitive with coal. That’s the latest, amazing news from Bloomberg. Last week, Bloomberg New Energy Finance reported that renewable energy investments are projected to double over the next eight years and reach $395 billion per year.  No, that isn’t enough to stabilize emissions and control climate change, according to the International Energy Agency.  But it is still very impressive.

Firms squirm at shame of exposure over human rights and environmental contempt - Some of the world's biggest companies are in the running for an award that none of them actually wants. This Friday, two will be singled out as the biggest offenders of the year for "contempt for the environment and human rights". Six have made the shortlist – one voted for by the public, the other by the organisers of the Public Eye awards, Greenpeace and the Swiss economic justice group the Berne Declaration. Barclays Capital is described as "arguably the fastest-growing food speculator worldwide" and "contributing to sharp rises and falls that cause hunger and poverty." And Samsung is cited for allegedly failing to protect factory workers from banned and highly toxic substances. Another nominee is the Japanese energy company Tepco, which runs the Fukushima nuclear plant – it is accused of "wilful negligence" in compromising safety to reduce costs. The Swiss agrochemical giant Syngenta is shortlisted for selling Paraquat, banned in Europe, in the developing world. And the US mining corporation Freeport McMoran makes the list for allegedly running the world's largest gold and copper mine, in West Papua, "without regard for nature or people". Another contender is the Brazilian conglomerate Vale, involved in a major dam project that could have "devastating consequences" for the Amazon.

Are natural gas vehicles a good idea? - On Thursday, President Obama traveled to Las Vegas to pitch a few new energy policies — including tax breaks for firms that buy natural gas-powered trucks. T. Boone Pickens, for one, has argued that fueling vehicles with natural gas is the best way to curtail oil use. Is it? In small doses, perhaps, though it depends what the alternatives are. Fueling up cars and trucks directly with natural gas could help cut America’s reliance on crude oil. Yet some experts have cautioned that plug-in electric vehicles should play a much more pivotal role in weaning the country off oil. After all, it’s far more efficient to take natural gas, burn it to generate electricity, and power a bunch of plug-in vehicles, than it would be to fuel up cars and trucks with all that natural gas directly. (That’s because the combustion engines in cars and trucks lose waste more energy than the modern-day combined-cycle gas turbines that produce electricity.) The counterargument is that electric vehicles are expensive and hard to scale up — and they typically require a vast new charging infrastructure. That’s true. But natural-gas vehicles could face similar hurdles. A 2002 analysis in the journal Energy Policy found that natural-gas fueling stations have historically had trouble getting built precisely because they turned out to be far more costly than anticipated.

An Environmental Occupy Fracks Corporate America -- At a time when the International Energy Agency reports that we have five more years of fossil-fuel use at current levels before the planet goes into irreversible climate change, fracking has a greenhouse gas footprint larger than that of coal. And with the greatest water crisis in human history underway, fracking injects mind-numbing quantities of purposely-poisoned fresh water into the Earth. As for the trillions (repeat: trillions) of gallons of wastewater generated by the industry, getting rid of it is its own story. Fracking has also been linked to earthquakes: eleven in Ohio alone (normally not an earthquake zone) over the past year. But for once, this story isn’t about tragedy. It’s about a resistance movement that has arisen to challenge some of the most powerful corporations in history. Here you will find no handsomely funded national environmental organizations: some of them in fact have had a cozy relationship with the gas industry, embracing the industry’s line that natural gas is a “bridge” to future alternative energies. (In fact, shale gas suppresses the development of renewable energies.) While most anti-fracking activists have been responding to harms already done, New York State’s resistance has been waging a battle to keep harm at bay. Jack Ossont, a former helicopter pilot, has been active all his life in the state’s environmental and social battles. Sandra Steingraber, a biologist and scholar-in-residence at Ithaca College, terms the movementthe biggest since abolition and women’s rights in New York.” This past November, when the Heinz Foundation awarded Steingraber $100,000 for her environmental activism, she gave it to the anti-fracking community.

Obama Calls on Energy Companies to Disclose the Ingredients of Fracking Fluid - President Obama during the State of the Union address Tuesday night said his administration would require energy companies working in shale gas plays in his country to disclose the ingredients of hydraulic fracturing fluid. That's becoming something of a common practice in the United States, a country described by Texas oil magnate T. Boone Pickens as the Saudi Arabia of natural gas. Yet, advocacy groups complain the chemicals in so-called fracking fluid threaten the environment. State regulators, and most of the energy companies, counter that fracking is safe if done correctly. So was Obama's message Tuesday to the energy companies or was it a political message to shore up his environmental base?  Opponents of fracking note there've been more than 1,000 incidents of groundwater contamination tied to hydraulic fracturing and point to a video on the Internet of someone actually sparking a fireball in their kitchen sink presumably because of something tied to fracking. That's all fine and well and certainly there are some reports of livestock falling ill but is that any worse than any other practices associated with the extraction of natural resources? Is strip mining better? Oil? Coal? Natural gas is abundant and one of the cleanest forms of energy, the industry says, so what's the issue?

EIA lowers US shale gas estimate - In its 2012 Annual Energy Outlook, released on Monday, the EIA puts the amount of unproved technically recoverable shale gas resources in the US at 482 trillion cubic feet, almost 42% less than its estimate of 827 Tcf a year ago. “The decline largely reflects a decrease in the estimate for the Marcellus shale, from 410 trillion cubic feet to 141 trillion cubic feet,” the agency said in an early overview of it annual projection of energy markets through 2035. The assessment of Marcellus resources was made with more comprehensive well data available due to the vast number of wells drilled in the past couple of years. “Drilling in the Marcellus accelerated rapidly in 2010 and 2011, so that there is far more information available today than a year ago,” the overview said. The latest estimate also excludes drilling and production data prior to 2008, when shale development started ramping up. The EIA also estimates unproved technically recoverable resources of 16 Tcf for the emerging Utica shale, which sits beneath the Marcellus and is relatively under-explored.

U.S. Cuts Estimate for Marcellus Shale Gas Reserves by 66% - The U.S. Energy Department cut its estimate for natural gas reserves in the Marcellus shale formation by 66 percent, citing improved data on drilling and production. About 141 trillion cubic feet of gas can be recovered from the Marcellus shale using current technology, down from the previous estimate of 410 trillion, the department said today in its Annual Energy Outlook. About 482 trillion cubic feet can be produced from shale basins across the U.S., down 42 percent from 827 trillion in last year’s outlook. “Drilling in the Marcellus accelerated rapidly in 2010 and 2011, so that there is far more information available today than a year ago,” the department said. The estimates represent unproved technically recoverable gas. The daily rate of Marcellus production doubled during 2011. The estimated Marcellus reserves would meet U.S. gas demand for about six years, using 2010 consumption data, according to the Energy Department, down from 17 years in the previous outlook.

Vital Signs: Oil, Natural Gas Prices Diverging - Crude oil and natural gas prices are diverging. The price of a barrel of crude settled at $98.46 Friday, up 161% since the final full week of 2008, while the price of a million British thermal units of natural gas was at $2.343, down about 60%. Concerns about crude-oil supplies have mounted amid geopolitical upheaval and rising demand, while natural gas has become more abundant amid new drilling techniques.

Chesapeake Energy to slash natural gas drilling in Barnett Shale - Chesapeake Energy plans to cut its Barnett Shale drilling by half and curtail production because of the lowest natural gas prices in a decade. The Oklahoma City-based company said Monday that in the second quarter it will pare back its drilling operations to six rigs each in the Barnett, in North Texas, and the Haynesville Shale, in Louisiana and East Texas. Chesapeake has recently operated 12 rigs in the Barnett, primarily in Tarrant County, the highest-producing county in Texas. Companywide, Chesapeake plans to "immediately curtail" a half-billion cubic feet of gas production per day -- 8 percent of current production -- and could slash output by 1 billion cubic feet a day "if conditions warrant." Chesapeake plans only $900 million in capital expenditures this year for areas that produce only natural gas, 70 percent less than its $3.1 billion outlay last year.

Chesapeake Energy's shift of focus seen as good for Ohio - Chesapeake Energy is cutting its production of natural gas and shifting its resources toward areas rich in oil and natural-gas liquids, such as propane. The move will likely maintain, or even expand, investment in Ohio's Utica shale. The Oklahoma-based company is making the move in response to the lowest natural gas prices in a decade. “We have committed to cut our dry gas drilling to bare minimum levels that are likely to be maintained until expected drilling economics on dry gas plays return to levels competitive with expected returns in Chesapeake's lineup of liquids-rich plays, which we believe is the best in the industry,” said Aubrey McClendon, Chesapeake's CEO, in a statement. As one of the largest natural-gas producers, Chesapeake Energy's announcement may help alter the market dynamics that have led to low gas prices. Gas supply has continued to rise, while the sluggish economy and mild winter have led to flat demand.

With Gas so Cheap and Well Drilling Down, Why is Gas Production so High? - Natural gas prices have declined to below $3.00/mcf, levels not seen for years, yet the EIA posted the highest gas production ever in October, 2011. U.S. gas production is growing despite annual well completion rates that are half that at the peak of the drilling boom in 2008, when gas price topped $12.00/mcf. Proponents of shale gas as a “game changer” suggest that, despite the well-known high decline rates of shale gas wells, their productivity is sufficient to grow production with far fewer wells at historically low prices. Others, such as Arthur Berman, claim that shale gas plays require much higher prices to be economic. The answer may lie in the gas produced in association with oil drilling, which is near all time historical highs.Figure 1 illustrates the annual number of gas wells and gas production documented by the EIA. Although drilling is still well above 1990’s levels, it is only half that of the all time record drilling levels reached in 2008.U.S. natural gas production has reached production levels of 4.6 percent above the previous 1973 peak, and nearly 16% above the recent 2001 peak. While some of this increase is likely due to delayed tie-ins from the 2008 drilling boom, and some due to the high initial productivities of shale gas wells, these are not likely the whole story.

Super-Fracking and the Next Shale Gale - The shale gas and oil production is the energy story of the last decades; the technological advances of hydraulic fracturing (fracking in the recent vernacular) its chief sub-text. But, as when you‚‘ve read the first part of Stieg Larsson‚‘s ‘The Girl With…‚’ trilogy, or any good thriller series, you are left wondering what drama is coming next. Well the technological ingenuity of the American ‘authors‚’ of fracking does not disappoint. Part II—Super-fracking—already has the markets abuzz with anticipation. If the great shale revolution is to translate into the economic game-changer, however, politicians will need to start debunking the fracking angst being peddled by, what one UK energy minister recently tagged, the “environmental Taliban”1. It was innovative American frack production enhancement procedures that ignited the shale bonanza. But the race is now on for the next generation super-fracking techniques able to release further huge quantities of oil and gas at an even more commercially viable cost.

Poland Gives Green Light to Massive Fracking Efforts - There is perhaps no more controversial energy source after nuclear than “hydraulic fracturing,” or “fracking,” of subterranean shale deposits containing pockets of natural gas. While the process can liberate previously unusable sources of natural gas, political, environmental and scientific concerns have risen along with production, as evidence mounts that fracking is responsible for everything from polluting subterranean aquifers to causing regional earthquakes. On 18 January 166 members of Bulgaria’s Narodno Sabranie (National Assembly) 240 parliamentarians voted to impose an indefinite ban on shale gas exploration and extraction in Bulgaria using hydraulic fracturing or other similar technology. Six National Assembly members voted in favor of the practice, along with three abstentions. Poland has taken a different tack, noting that thanks to fracking of natural gas shale deposits, in 2009 the United States became the world's largest gas producer, overtaking Russia and driving down prices. The day after the contentious Bulgarian vote Polish Treasury Minister Mikolaj Budzanowski told reporters that Polish companies with permits to explore for shale gas in the country must intensify drilling to start production of the fuel by 2014 or 2015, with Polish companies each drilling 12 wells and performing 12 hydraulic fracking operations annually.

Petrobras Design New GTL Process to Create Cheap Oil from Natural Gas - U.S. innovation, technology and willingness to share it, has created an abundance of natural gas for the U. S. and will impact the rest of the world in the coming years.  There is also a great deal of natural gas that is ignored, where pipe-lining to market is impractical or uneconomic.  The price differential of cheap gas and expensive oil also provides a major incentive to recover exploration risk capital when gas is found and oil is not. Petrobras, the Brazilian based petroleum firm is reported to have qualified and approved a new technology to convert natural gas to synthetic crude oil.  “The [Petrobras] test program has produced some extremely positive results and has shown the plant can be robust, with the operational availability (the percent of time a unit would operate) expected of large scale commercial facilities. We can now progress our plans in conjunction with clients throughout the world to develop commercial scale modular gas to liquid plants.”

Environmental Politics: Keystone XL Rejected Until After the Election - The decision by President Obama to reject the Keystone XL pipeline designed to bring Canadian oil to US Gulf Coast refineries was a surprise to no one.   Officially, the State Department said it rejected the project because the Republicans in Congress imposed a deadline of 60 days for review and decision on the project that was insufficient to allow consideration of the issues.  The rejection letter also invited the project sponsors to re-file their application—after the election! All sides can score points on the issue while doing what they perceive as no lasting damage. For business this is business as usual, large project developers are accustomed to delays, posturing and political extortion. The business calculus is not whether this is still a good project, it is the trade-off between the sunk cost and the to-go cost answer compared to the alternative uses of both financial and political capital. For the special interest advocates on all sides and the media it is a feeding frenzy of bombast and bluster, green versus brown, 1% who want to remain profitable in their oil business versus the 99% who need their oil products but decry how much it costs.

Canada's oil: What goes around - Soon after President Obama chose to delay a U.S. decision last year on a proposed Alberta-to-Texas oil pipeline called Keystone XL, Stephen Harper, Canada's prime minister, warned that his country would not be left at the altar. "This does underscore the necessity of Canada making sure that we're able to access Asian markets for our energy products," he said. The threat was clear: If the United States did not want oil from Alberta's dirty tar sands, Canada would build a pipeline to the Pacific and ship the stuff to Asia. There, says Enbridge, the firm behind the project, each barrel might fetch $20 more (counting shipping) than in America. On Jan. 18, Obama rejected Keystone XL. New calls for Canada to look west will surely follow. Yet Canada's domestic opponents to the Northern Gateway pipeline, linking Edmonton, Alberta, with the port of Kitimat, British Columbia, seem to be copying the campaign against Keystone XL. Two years ago, 55 of Canada's American Indian tribes (called First Nations) signed a declaration rejecting the project.

The Keystone – China connection is overblown - When President Obama rejected the Keystone oil sands pipeline expansion last week, critics immediately sounded the China alarm. “If we don’t build this pipeline … that oil is going to get shipped out to the Pacific Ocean and will be sold to the Chinese,” said House Speaker John Boehner, echoing statements from pipeline supporters on both ides of the isle. Yet experts say the situation is more complicated than that.In an effort to diversify its export base and sell to growing markets, Canada has been looking to build a pipeline to its West Coast long before the Keystone controversy even began. And actually laying a pipeline to the West Coast will be just as hard as building one through the United States. “It’s not a question of either or,” said Sarah Ladislaw, an energy analyst at the Center for Strategic and International Studies. “That [talk] is just politically convenient.”

Wealth creation - Here's my suggestion for how to become rich: buy low and sell high. It's a strategy that works for individuals, and can work for the entire nation as well. If you can figure out a way to find resources whose value in their current use is not very great-- in other words, if you buy low-- and redeploy them somewhere else where their value is much greater-- in other words, sell high-- then you will not only add to your personal wealth, you will be creating new wealth for society as a whole. The process of allocating resources to their most efficient use is the heart of what drives economic growth.  Let me give a concrete example of what I'm talking about. On Friday, you could buy a barrel of light, sweet crude oil produced in North Dakota for less than $81. On that same day, oil refiners in Port Arthur on the coast of Texas were paying around $110 to import a similar grade of oil produced in Nigeria. That's $30 worth of incentive to you to try to figure out a way to transport oil from North Dakota to Port Arthur in order to replace a barrel of imported Nigerian oil with Williston sweet. As a nation, if we could divert some of the resources we are currently devoting to pay for oil imported from Nigeria, and use them instead to enable the Port Arthur refinery to get its oil from North Dakota, we will become richer.

Waxman: GOP ‘so stupid’ to include Keystone pipeline in payroll tax package - A senior Democrat on the payroll tax conference panel had some strong words Thursday for Republicans hoping to attach Keystone pipeline language to the package. “That is so stupid, already, for them to be pushing the Keystone pipeline issue in this bill, in this conference,” Rep. Henry Waxman told reporters . “The pipeline issue is one that the Republicans are obsessing over.” The California Democrat suggested that a provision forcing approval of the pipeline would alienate the Democrats on the panel and kill any shot at a bipartisan deal. “Many of us believe that that pipeline will lock us into a 50 to 100 years of dependence on the dirtiest source of oil,” said Waxman, the senior Democrat on the House Energy and Commerce Committee. He characterized the GOP’s Keystone provision as a “special interest earmark” with no business on the tax bill.

Rejecting the Keystone Pipeline: An Act of Insanity - From Robert Samuelson in the Washington Post:  "President Obama’s rejection of the Keystone XL pipeline from Canada to the Gulf of Mexico is an act of national insanity. It isn’t often that a president makes a decision that has no redeeming virtues and — beyond the symbolism — won’t even advance the goals of the groups that demanded it. All it tells us is that Obama is so obsessed with his reelection that, through some sort of political calculus, he believes that placating his environmental supporters will improve his chances. Aside from the political and public relations victory, environmentalists won’t get much. Stopping the pipeline won’t halt the development of tar sands, to which the Canadian government is committed; therefore, there will be little effect on global-warming emissions. Indeed, Obama’s decision might add to them. If Canada builds a pipeline from Alberta to the Pacific for export to Asia, moving all that oil across the ocean by tanker will create extra emissions. There will also be the risk of added spills."

Railroads: The Unlikely Green Alternative to the Keystone Pipeline - President Obama’s decision last week to kill the Keystone XL Pipeline that would carry oil from Canada to the U.S. was cheered by some environmental activists like Robert Redford. But many mainstream commentators reacted with dismay. A Washington Post editorial called the decision wrong on the substance of the question. And a columnist for the same newspaper described it more hyperbolically as “an act of national insanity.” The argument for the pipeline is not only that it would give the U.S. a secure source of oil with low transportation costs, create jobs and help our close ally Canada, but also that the alternative is actually worse from an environmental point of view. Canada is still going to produce its oil, and the U.S. is still going to need energy. Without the pipeline, Canada will have to try to sell some of its oil to China, which means building a pipeline to the Canadian West Coast. And we will buy more from the Middle East or somewhere else. The overall result: more oil shipped longer distances and greater chances of an oil spill. Whichever side is right in this argument, one beneficiary is clear: Railroads. Quite simply, some of the oil that would have been moved through the pipeline will now have to go by tanker car. If oil is more expensive or less available in some places, that will encourage the use of low-sulfur coal. Either way, it means more hauling business for the Big Rails, especially Burlington Northern, now owned by Warren Buffett’s company Berkshire Hathaway.

Buffett’s Burlington Northern Among Winners From Keystone Denial - Warren Buffett’s Burlington Northern Santa Fe LLC is among U.S. and Canadian railroads that stand to benefit from the Obama administration’s decision to reject TransCanada Corp. (TRP)’s Keystone XL oil pipeline permit. With modest expansion, railroads can handle all new oil produced in western Canada through 2030, according to an analysis of the Keystone proposal by the U.S. State Department. “Whatever people bring to us, we’re ready to haul,” Krista York-Wooley, a spokeswoman for Burlington Northern, a unit of Buffett’s Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A), said in an interview. If Keystone XL “doesn’t happen, we’re here to haul.” The State Department denied TransCanada a permit on Jan. 18, saying there was not enough time to study the proposal by Feb. 21, a deadline Congress imposed on President Barack Obama. Calgary-based TransCanada has said it intends to re-apply with a route that avoids an environmentally sensitive region of Nebraska, something the Obama administration encouraged. The rail option, though costlier, would lessen the environmental impact, such as a loss of wetlands and agricultural productivity, compared to the pipeline, according to the State Department analysis. Greenhouse gas emmissions, however, would be worse.

Saudi Arabia. Nigeria. Venezuela. Canada?  - Is our neighbor to the north becoming a jingoistic petro-state? It’s well known that America’s dependence on foreign oil forces us to partner with some pretty unsavory regimes. Take, for instance, the country that provides by far the largest share of our petroleum imports. Its regime, in thrall to big oil interests, has grown increasingly bellicose, labeling environmental activists “radicals” and “terrorists” and is considering a crackdown on nonprofits that oppose its policies. It blames political dissent on the influence of “foreigners,” while steamrolling domestic opposition to oil projects bankrolled entirely by overseas investors. Meanwhile, its skyrocketing oil exports have sent the value of its currency soaring, enriching energy industry barons but crippling other sectors of its economy. Yes, Canada is becoming a jingoistic petro-state. OK, so our friendly northern neighbor isn’t exactly Saudi Arabia or Venezuela. But neither is it the verdant progressive utopia once viewed as a haven by American liberals fed up with George W. Bush. These days Canada has a Dubya of its own. And judging by a flurry of negative press from around the world—the latest: Archbishop Desmond Tutu and other African leaders are taking out newspaper ads accusing Canada of contributing to famine and drought on the continent—it seems anti-Canadianism could be the new anti-Americanism.

Flush With Oil From Alberta, Canada Prepares For Inevitable U.S. Invasion —It’s a subject the Canadian military high command doesn’t like to discuss, but one that’s taken on an increasing sense of urgency since the discovery of massive oil reserves in the Alberta tar sands: how to defend Canada from imminent U.S. invasion.  A highly-placed military source in the Harper government, speaking off the record, confirmed that Canada is actively preparing for an American attack. “Look, we can all see the pattern here: if a country has significant oil reserves, the United States will find a pretext to invade. Iraq, Libya—frankly, it’s either us or Iran next,” he said. “We don’t know if the pretext will be our treatment of First Peoples, Tim Horton’s entry into the New England market, or the preemptive fight to free the world from another Justin Bieber, but believe me: the Yanks are coming,” the official added. A U.S. State Department spokesperson, Edward Voreck, would neither confirm nor deny that the U.S. had plans to invade, but he did express concerns about the state of democracy in Canada. “The recent tainted elections of [Prime Minister Stephen] Harper and [Toronto Mayor Rob] Ford – the former by the discovery that the Conservative leader was in fact made entirely of copper tubing, the latter by excessive amounts of hot dog grease – show that the peace-loving citizens of Canada are suffering under the jack boot of totalitarian regimes that do not represent their best interests.” “If the Canadian people ask us, the United States has a moral obligation to intervene and preserve freedom in this God-forsaken, backwards part of the world that just happens to be rich in natural resources,” Voreck added.

Obama calls for offshore oil drilling and clean energy - In a broad appeal to U.S. voters, President Obama said Tuesday that he will open more than 75% of potential offshore oil and gas resources to exploration and, at the same time, produce enough clean energy on public land to power 3 million homes,  During his election-year State of the Union address, Obama said the nation is rapidly boosting its oil production but, with just 2% of the world's oil reserves, it needs to look at other energy sources. He said he will "take every possible action to safely develop" natural gas while requiring companies that drill on public lands to disclose the chemicals they use. FOLLOW: Green House on Twitter His comments on energy, a lengthy part of his speech, aimed to deflect criticism he received last week from many Republicans for rejecting the Keystone XL pipeline, which would have carried oil sands from Alberta, Canada to Gulf Coast refineries. He also defended his record on clean energy development, obliquely referring to the half-billion dollar federal loan guarantee to now bankrupt solar manufacturer Solyndra. "Some technologies don't pan out; some companies fail," "But I will not walk away from the promise of clean energy.... I will not cede the wind or solar or battery industry to China or Germany because we refuse to make the same commitment here." He called on Congress to pass clean energy tax credits.

Oil Fields Gushing in the U.S - Federal forecasters are expected to confirm on Monday what the energy industry already knows: Oil production is surging in the U.S. The U.S. Energy Information Administration is likely to raise by a substantial amount its existing estimate that U.S. oil production will grow by 550,000 barrels per day by 2020, to just over six million barrels daily. The forecast will include new production data from developing oil fields, including the Bakken shale area in North Dakota, which could hold as much of 4.3 billion barrels of recoverable oil. North Dakota’s output of oil and related liquids topped 500,000 barrels per day in November, meaning that the state pumped more oil than Ecuador. In fact, U.S. oil production grew faster than in any other country over the last three years and will continue to surge as drillers move away from natural gas due to a growing gas glut, experts say. The glut has sent natural-gas prices to a 10-year low.The three oil giants will post billions more in profits than they did in the fourth quarter of 2010, thanks to higher oil prices.

EIA estimates California Monterey to have four times the technically recoverable oil of the North Dakota Bakken oil field = EIA US Review of Emerging Resources: US Shale Gas and Shale Oil Plays, July 2011 (105 pages) The Monterey/Santos oil field in California is estimated to four times the technically recoverable oil as the Bakken Oil Field in North Dakota. The Monterey field is also estimated to have 500 billion barrels of oil in place The Bakken oil field oil in place estimates range from 271 billion to 503 billion barrels (average estimate of 413 billion barrels). Harold Hamm (billionaire owner of Continental oil) estimates the Bakken oil field will produce six times (24 billion barrels) the oil of the EIA estimate. Harold Hamm also believes that the San Joaquin Monterey California fields are the next big horizontal drilling play.

Is the U.S. Quietly Weaning Itself Off Foreign Oil? - The United States isn't breaking its reliance on foreign oil any time in the near future, but over the next couple of decades, we will be importing much less oil for two simple reasons. We're drilling more crude, and we're driving more efficient cars. In 2010, the United States imported 49% of its petroleum supplies. By 2035, the country will be importing just 36%, according to the U.S. Energy Information Administration's 2012 Annual Energy Outlook. While it's always healthy to be skeptical of long-term economic predictions, there are few positive trends pointing to a decrease in oil imports. Onshore oil production is expected to continue its boom, from 5.5 million barrels of oil a day in 2010 up to 6.7 million in 2020. It's predicted to drop after then, settling around 6.1 million in 2035. Both those production figures are higher than the EIA's previous estimates. On top of the extra domestic oil, the EIA says we'll be using the equivalent of an additional million barrels a day of biofuels, further cutting our need for imports.

Nation will be more energy independent by 2035 -The nation will be more energy independent in the future as it boosts its production of oil, natural gas and renewable power such as solar and wind, the U.S. government predicted Monday. Domestic crude oil production is expected to jump more than 20% in the coming decade, from 5.5 million barrels per day in 2010 to 6.7 million barrels per day in 2020 -- a level not seen since 1994, according to an annual forecast released by the U.S. Energy Information Administration. Much of that growth comes from tight oil, which is forced from shale rock in North Dakota's Bakken area. Also, U.S. production of natural gas is projected to increase so much that it will exceed consumption early in the next decade. Renewables will take off, too, accounting for 16% of the U.S. electric supply in 2025 -- up from 10% today. As a result, the U.S. will import less energy. Net imports will account for 13% of total energy consumption in 2035, down from 22% in 2010. The report comes within a week of the Obama administration's rejection of the 1,700-mile Keystone XL pipeline, which would have carried tar sands from Alberta, Canada, through seven U.S. states to Gulf Coast refineries

Where Is U.S. Oil Production Going? - The Energy Information Administration (EIA) has certainly changed its tune since I wrote a post with this same title on March 6, 2011. At that time the EIA predicted that domestic crude oil production would decline last year and this year, but a new forecast indicates that oil production will grow and grow until 2020. Domestic crude oil production has increased over the past few years, reversing a decline that began in 1986. U.S. crude oil production increased from 5.1 million barrels per day in 2007 to 5.5 million barrels per day in 2010. Over the next 10 years, continued development of tight oil, in combination with the ongoing development of offshore resources in the Gulf of Mexico, pushes domestic crude oil production in the Reference case to 6.7 million barrels per day in 2020, a level not seen since 1994. Even with a projected decline after 2020, U.S. crude oil production remains above 6.1 million barrels per day through 2035.  How should we evaluate the EIA's forecast? One way to evaluate it is to look at this "all liquds" chart from the early AEO 2012 release. Although we are not out of January yet, I feel comfortable nominating this forecast for the Wildly Optimistic Future Estimate Prize (the WOFE, or "Woofy"), which is an award I just made up.

SCO: China gets jump on U.S. for Brazil’s oil — Off the coast of Rio de Janeiro — below a mile of water and two miles of shifting rock, sand and salt — is an ultradeep sea of oil that could turn Brazil into the world’s fourth-largest oil producer, behind Russia, Saudi Arabia and the United States. The country’s state-controlled oil company, Petrobras, expects to pump 4.9 million barrels a day from the country’s oil fields by 2020, with 40 percent of that coming from the seabed. One and a half million barrels will be bound for export markets. The United States wants it, but China is getting it. Less than a month after President Obama visited Brazil in March to make a pitch for oil, Brazilian President Dilma Rousseff was off to Beijing to sign oil contracts with two huge state-owned Chinese companies. The deals are part of a growing oil relationship between the two countries that, thanks to a series of billion-dollar agreements, is giving China greater influence over Brazil’s oil frontier.

No oil for old countries - I THINK my colleague is right to take some encouragement from the latest Energy Information Agency outlook. As one would expect to occur amid a period of sustained, high oil prices, American oil consumption has fallen from 2005 while its production has risen. That, in turn, has led to a decline in the quantity of oil imports (though not necessarily or consistently in the value of imports, given the volatility in oil prices). A better balance between oil production and consumption is likely to be an important part of the process of adjusting America's total current account balance. And given the havoc dear oil has wrought on the American economy in recent years, a better production balance is economically useful. Less consumption will mean less of a blow to demand when prices soar, and greater production will mean an American windfall that could conceivably help offset any decline in household spending. It's difficult to get too excited about the figures, however, for a couple of reasons. The EIA does not project sustained drops in consumption of the sort seen since 2005; indeed, consumption in 2035 is expected to be more or less where it was in the early 2000s, when prices were quite a bit lower. And while I suppose it's nice that CO2 emissions are expected to grow at a slower pace between 2010 and 2035 than they did between 1990 and 2005, a forecast of essentially no improvement in American emissions over the period is nonetheless quite depressing.

Oil prices, exhaustible resources, and economic growth (James Hamilton) PDF - Abstract: This chapter explores details behind the phenomenal increase in global crude oil production over the last century and a half and the implications if that trend should be reversed. I document that a key feature of the growth in production has been exploitation of new geographic areas rather than application of better technology to existing sources, and suggest that the end of that era could come soon. The economic dislocations that historically followed temporary oil supply disruptions are reviewed, and the possible implications of that experience for what the transition era could look like are explored.

Everything You Know About Peak Oil Is Wrong - We’ve been warned before. Four decades ago this year, five scientists from the Massachusetts Institute of Technology published an influential set of predictions regarding the sustainability of human progress. Titled Limits to Growth, their report suggested the world was heading toward economic collapse as it exhausted the natural resources, such as oil and copper, required for economic production. The report forecast that the world would run out of new gold in 2001 and petroleum by 2022, at the latest. Over the intervening years, the threat of “peak oil” has stayed with us—the date when global petroleum production was to reach its supposed maximum, afterward and evermore to decline as dwindling reserves were tapped out. And the exhaustion of the world’s oil reserves was just the start. A host of other critical natural resources, from phosphorus to uranium, have been declared peaking or already peaked. Forty years later, however, rereading Limits to Growth invokes a growing sense of irony. Far from being depleted, worldwide reserves of minerals continue to climb. New technologies suggest the dawn of U.S. energy independence. The biggest concern isn’t that the planet is running out of resources—it’s having too many for the planet’s own good.

Oil supply limits and the continuing financial crisis - Energy - scribd

European Union Moves Closer to Imposing Tough Sanctions on Iran— The European Union moved closer to imposing a phased oil embargo on Iran and some form of narrow sanctions against dealing with Iran’s central bank, European and French diplomats said on Friday. Officials hope to announce a final plan at a foreign ministers meeting in Brussels on Monday. But senior French officials are concerned that these measures, even in combination with sanctions on financial transactions with Iran announced by Washington, will not be strong enough to push the Iranian government into serious, substantive negotiations on its nuclear program, which the West says is aimed at producing weapons. French officials say that the effort to increase pressure on Tehran is a crucial element in a “dual track” strategy — inflicting pain through sanctions in order to prompt substantive negotiations to halt Iran’s enrichment of uranium, as the United Nations Security Council has demanded. But even accelerated sanctions are hard to put into effect and slow to work, while Iran is changing the game by moving more of its enrichment centrifuges into deep tunnels inside mountains, where they will be much harder to attack militarily.

EU slaps oil embargo on Iran - The EU agreed an embargo on Iran’s oil exports Monday as well as financial sanctions as the West ramped up pressure on Tehran’s suspect nuclear drive to press it to return to the negotiating table. “This is an important decision. It will be a major strengthening of the sanctions applied on Iran,” said British Foreign Secretary William Hague. “It is absolutely right to do this in view of Iran’s continued breach of UN Security Council resolutions and refusal to come to meaningful negotiations on the nuclear programme,” he added. After weeks of tough talks on the timing and terms of a ban on Iranian crude, ambassadors of the 27 EU nations reached a political agreement in early morning meetings held as foreign ministers converged on Brussels for a day of talks. The ministers, who also agreed to toughen sanctions against Syria’s top military brass, will formally announce the measures against Iran later Monday.

Iranian Currency Crashes 80 Percent in One Month - The Iranian "rial" currency sank again Monday after the European Union slapped sanctions on oil imports, leaving the rial 80 percent below its level last month. Iran’s semi-official Mehr news agency said that the Islamic Republic’s central bank would peg the dollar at 14,200 rials even though it takes nearly twice as many rials to buy a dollar in the street. The rate in December was 10,700 rials to the dollar. New sanctions, announced last month by President Barack Obama and which the European Union announced Monday it would put into effect, have crippled the local currency and threaten to throw the economy into a tailspin. Western powers are hoping economic pressure can convince Iran to halt its unsupervised nuclear development and enrichment of high-grade uranium, a key ingredient for a nuclear weapon. Iran last month responded to the plunge by prohibiting currency trading outside of banks and official exchange offices and banning the possession of foreign currencies.

Can Iran Survive Now That Europe Has Also Agreed to Boycott Its Oil? - The European Union threatened Iran on Monday with cutting off petroleum imports into the 27 EU member states, and announced sanctions on Iranian banks and some port and other companies.Iran sells 18 percent of its petroleum to Europe, and Greece, Italy and Spain are particularly dependent on it. Europe also sells Iran nearly $12 billion a year in goods, which likely will cease, since there will be no way for Iran to pay for these goods. Some in Europe worry that the muscular anti-Iran policy of the UK, France and Germany in northern Europe will worsen the economic crisis of southern Mediterranean countries such as Greece. Others think that Iran’s nuclear enrichment program is still primitive and that allegations that Iran is seeking a nuclear warhead are hype. About 60% of Iran’s petroleum now goes to Asian countries, especially China, India, South Korea and Japan. China and India have no announced plans to reduce purchases of Iranian crude, and South Korea says it will seek an exemption from the US so as to continue to import. Japan says it plans only very slowly to reduce imports from Iran. Iran and India have just reached an agreement whereby some trade with Iran will be in rupees, to sidestep US sanctions. Indian firms are considering whether to fill the $8 billion gap in exports to Iran left by the Western sanctions (many do not want to be cut off from also exporting to the US, as they would be if third party sanctions were applied to them).

Iran Embargo May Speed Refinery Closures - The European Union’s embargo on Iranian oil threatens to accelerate refinery closures in Europe, the head of Italy’s refiners’ lobby said.  “Asian countries not applying the embargo could buy the Iranian oil at a discount and sell cheap refined products back to us. “Italy already risks the closure of five refineries and at a European level we’re talking about 70 possible shut downs.”  The European Union this week agreed to ban oil imports from Iran starting in July as part of measures to target financing for the country’s nuclear program. The policy comes as refiners fight overcapacity and falling fuel demand. Petroplus Holdings AG, which has five plants across Europe, yesterday declared insolvency after banks called in loans.  While refiners will replace Iranian imports with Saudi Arabian and Russian oil from the Urals, De Simone says he is concerned Asian refiners will use cheap Iranian crude to undercut competitors.  “The Iranians will have to unload their production somewhere and I’m sure they’ll find buyers,” he said. “The last thing we need is more unfair competition. Either we do something at a European level or we risk a precipitous end similar to Petroplus’s for many European refineries.”

Iran Said to Seek Yen Oil Payment From India Amid Tighter Global Sanctions - Iran has asked India to pay for oil partly in yen as the two nations seek an agreement on how to maintain trade amid tightening global sanctions, according to three people with knowledge of the matter. At talks in Tehran last week, India proposed to pay its second-biggest oil supplier in rupees through a bank account in the South Asian nation, said the people, declining to be identified because the information is confidential. Iranian officials sought partial payment in yen because they’re concerned that they may not get sufficient value from the rupee, which isn’t fully convertible, according to the people. The nations have struggled to preserve $9.5 billion in annual crude trade after the Reserve Bank of India dismantled a mechanism used to settle payments in euros and dollars in December 2010. Transactions are currently routed through Turkiye Halk Bankasi AS (HALKB), based in Ankara, which has told Indian refiners it may no longer be able to act as an intermediary, four people with knowledge of the matter said Jan. 10. European Union foreign ministers agreed to ban oil imports from Iran starting July 1 as part of measures to ratchet up the pressure on the Persian Gulf nation’s nuclear program, Dutch Foreign Minister Uri Rosenthal said in Brussels today.

India abandons US dollar to purchase Iranian oil - RT News Video - Every year India spends $12 billion on purchasing oil from Iran, but now it is using gold instead of dollars. India might not be alone; China has suggested it would jump on board with India. New Delhi and Beijing account for 40 percent of the Iranian oil exports. Priya Sridhar gives us her report.

The Petrodollar, Iran, and Gold—What You Need to Know -- Rumors are swirling that India and Iran are at the negotiating table right now, hammering out a deal to trade oil for gold. Why does that matter, you ask? Only because it strikes at the heart of both the value of the US dollar and today's high-tension standoff with Iran.The short version of the story is that a 1970s deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on the all-important oil trade the US dollar slowly but surely became the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar's value up, up, and away. In addition, countries stored their excess US dollars savings in US Treasuries, giving the US government a vast pool of credit from which to draw.

Global Oil Demand - Despite Iran’s saber rattling, the price of oil hasn’t soared. The price of a barrel of Brent has been hovering around $110 since last summer. That’s even after President Barack Obama signed a bill imposing tougher sanctions on Iran at the end of last year. The price didn’t go up after the Iranians publicly threatened to close the Strait of Hormuz and warned Saudi Arabia not to fill any expected gap in oil demand when the world stops buying Iranian crude. If it weren’t for all the saber rattling, the price of oil would probably be falling. Oil Market Intelligence just released the latest data for global oil demand through December. It is weak. While the 12-month average rose to a record high of 89.3 million barrels per day (mbd) last year, the growth rate fell to 1.1% y/y. That’s down from a recent peak of 3.4% during January 2011, and the weakest since April 2010. Demand is especially weak among the Old World countries of the US, Western Europe, and Japan--where crude oil usage has slipped back down in recent months to the 2009 recession low. On the other hand, demand in the New World rose to a record high of 51.5mbd last year, exceeding Old World demand by 36%. The growth rate of the former was 2.8% last year versus a decline of 1.2% for the latter.

Iran Turns Embargo Tables: To Pass Law Halting All Crude Exports To Europe - In what is likely a long overdue move, Iran has finally decided to give Europe a harsh lesson in game theory. Instead of letting Euro-area politicians score brownie points at its expense by threatening to halt imports and cut off the Iranian economy, the Iranian government will instead propose a bill calling for an immediate halt to oil deliveries to Europe. The move, with most reports citing the Iranian news agency Mehr, has come about in response to the EU agreement to impose sanctions against Iran, which were announced earlier this week. And why not? After all if Europe is indeed serious, sooner or later Iran will be cut off but in the meantime experience significant policy uncertainty, which is precisely what the flipflops on the ground need. The one thing that Europe, however is forgetting, is that all that whopping 0.8 Mb/d in imports will simply find a new buyer.Quickly.

IMF: Halt in Iran Oil Could Push Crude up 30 pct - The International Monetary Fund warned on Wednesday that global crude prices could rise as much as 30 percent if Iran halts oil exports as a result of U.S. and European Union sanctions. If Iran halts exports to countries without offsets from other sources it would likely trigger an "initial" oil price jump of 20 to 30 percent, or about $20 to $30 a barrel, the IMF said in its first public comment on a possible Iranian oil supply disruption. The IMF4 highlighted the risks of rising tensions over Iran sanctions in a note on Wednesday sent to deputies from G205 countries who met in Mexico6 City last week. The price impact caused by a cut in Iranian exports could be exacerbated by below average oil stocks in many countries, the result of tight oil market conditions through much of last year, the IMF said. The fund's comments add pressure to the Obama administration as it struggles to find a way to get countries to reduce shipments of Iranian oil without pushing prices higher ahead of the November U.S. presidential election.

Sheikhs fall in love with renminbi - China and Qatar have been taking virtually opposite positions apropos events in Libya and Syria. Yet, they do not seem to be deterred by this little difference and are bonding in a big way in economic cooperation to mutual benefit. Chinese Prime Minister Wen Jiabao, who visited Doha last week, disclosed at a press conference on Friday: a) China proposes to invest in the manufacturing of ''downstream oil products, which are most urgently needed by Qatar''; b) China and Qatar signed an agreement to jointly build a refinery in Taizhou, Zheijiang, in China; c) Chinese companies propose to participate in infrastructure projects in Qatar; and d) China and Qatar are discussing a "long-term, stable and comprehensive cooperative partnership" in natural gas. Then, Wen quietly dropped a bombshell. He revealed "one more important point" as if it were an afterthought. He said: In order to address investment issues, we [China and Qatar] need financial support. Therefore, we reached another agreement, a cooperation agreement linking finance with investment. Qatar also proposed the use of local currency in trade settlement and even a specific ratio. I think this proposal can be studied. The short point is, the renminbi, the "people's currency" also known as the yuan, is appearing in Doha. The China-United Arab Emirates (UAE) currency swap deal which was signed during Wen's visit to Abu Dhabi last week already brings the yuan to the Emirates.

Roubini Sees ‘Significant’ 2012 Slowdown in Chinese Economy - China’s economy will slow in 2012, prompting policy makers to reduce interest rates and loosen lending restrictions, said Nouriel Roubini, the economist who predicted the 2008 financial crisis. “It’s going to be a significant growth slowdown this year,” Roubini, co-founder of Roubini Global Economics LLC, said in a Bloomberg TV interview today. “Housing is deflating. Export growth is slowing down. If they don’t do something -- stimulus in monetary and fiscal credit -- the risk is that the growth will slow down well below 8 percent.” China’s gross domestic product increased 9.2 percent last year, matching the slowest pace since 2002, as the housing market cooled and the European debt crisis eroded export demand. The central bank cut the amount banks must keep in reserve last month for the first time in three years, and the government has allowed its five biggest banks to boost first-quarter lending and may relax capital requirements, people with knowledge of the matter said this week.

China Set for Goldilocks Landing? - In the Chinese Zodiac, China is now entering the Year of the Water Dragon, marking a year of transition, uncertainty and change.  This autumn, the 18th National Congress of the Communist Party will elect the new Central Committee and Politburo Standing Committee members. Current President Hu Jintao and Premier Wen Jiabao are due to step down from the Standing Committee to make way for the new generation of leaders, from amongst whom the new Chinese president and premier will be appointed in March 2013. In the Year of the Dragon, China – which is now the world's second largest economy – is also facing considerable economic uncertainty. There’s clear evidence that Chinese economic growth momentum has moderated during the second half of 2011. The eurozone, still a major market for Chinese exports, is already sliding into recession, while the momentum of U.S. economic recovery, although encouraging in recent months, remains moderate at best. Latest GDP growth data released for Q4 2011 showed that Chinese GDP growth had moderated to a pace of 8.9 percent year-on-year, the slowest in ten quarters. This reflects various factors, including weakening EU demand for Chinese exports, as well as the impact of significantly tighter monetary policy in order to curb inflation pressures.

China's housing market is set for a hard landing - The numbers are grim: China's property bubble is heading for a spectacular burst, and its effect on the country's economy will be widespread. The Chinese government's announcement last week that growth for 2011 slowed only slightly to a still impressive 9.2% was greeted enthusiastically by the world's stock markets. Investors also remain buoyant on China's future. They appear to be buying the official line that the gigantic property price bubble is gradually and smoothly deflating, posing little risk to an engine that's so crucial to the future of global trade. But the math tells a different story. The housing frenzy has driven prices so high, so fast, that a crash on the scale of the real estate collapse in Japan in the 1990s is a virtual certainty. And China's already exaggerated official growth rate could take a pounding, all the way to the zone of the unthinkable, into the low single-digits.

How China's Boom Caused The Financial Crisis - Since the 2008 financial crisis, Wall Street has been the perpetual whipping boy for the ensuing recession that has rocked the global economy. In the United States, Manhattan bankers relied too heavily on subprime mortgages, the story goes, sparking the crisis -- in bureaucratic jargon, what is dubbed a "regulatory oversight failure." In Europe, the debt crisis -- which struck again1 last week when the credit-rating agency Standard & Poor's stripped France of its AAA rating -- is often blamed on the fact that eurozone governments maintained outsized debt-to-GDP ratios, thereby breaking the rules laid down in the Stability and Growth Pact they signed when they joined the currency union.  U.S. President Barack Obama has laid the blame2 at the feet of Wall Street "fat-cat bankers," and he finds himself in the company3 of Federal Reserve Chairman Ben Bernanke. Even Republican presidential hopeful Mitt Romney criticized4 Wall Street for "leverag[ing] itself far beyond historic and prudent levels" in his 2010 book, blaming its "greed" for contributing to the crisis. The concept of runaway European profligacy, epitomized by 35-hour work weeks and gold-plated pension programs, is also firmly lodged in the popular imagination.

On building debt  - Michael Pettis - Before starting on the subject of debt I wanted to make a quick reference to something sent to me by Charles Horner, a senior fellow at the Hudson Institute.  I am glad to say that the overinvestment thesis is much more widely acknowledged today than it was even two or three years ago, but one myth, I think, is that most of the overinvestment excesses in China are concentrated in the real estate sector.  I have always argued that it is infrastructure where the most amount of investment has been wasted. Its impossible to prove one way or the other, but Horner sent me a paper in the Oxford Review of Economic Policy, by Oxford’s Bent Flyvbjerg, with the rather alarming title “Survival of the unfittest: why the worst infrastructure gets built—and what we can do about it”, which suggests why we need to be so worried about infrastructure spending in China – aide from the fact that the numbers are simply huge. It is not a very happy paper in general, but I am pretty sure that many people who read it probably had a thought similar to mine: if infrastructure spending can be so seriously mismanaged in relatively transparent systems with greater political accountability, what might happen in a country with a huge infrastructure boom stretching over decades, much less transparency, and very little political accountability?  Isn’t the potential for waste vast? Who knows, but it seems that Beijing is increasingly worried about that possibility.  Here is an article from this week’s Caijing:

Chinese soothsayer sees economic storms ahead - On the first day of every lunar new year, scores of minor government officials, businessmen and ordinary peasant farmers congregate at a small Buddhist temple in the hills outside the eastern Chinese city of Suzhou. They come to consult the resident “master”, the abbot of the increasingly wealthy and popular temple who has made a name for himself as an unnervingly accurate soothsayer. As the Chinese world bid farewell to the year of the rabbit and entered the year of the black water dragon on Monday, I went to ask this oracle what he thought was in store for the global economy and for China in the coming months. The dragon is the only mythical beast of the 12 animals in the Chinese zodiac and is supposed to bring unpredictability and change. But the master’s forecast for the European economy was predictably gloomy and his outlook for the US was not much better. “The global economic war is not yet over and there are more storms coming for the US and Europe – this will negatively affect Chinese imports and exports alike,” he said. China’s domestic economy was likely to be worse than last year and quite a few export-oriented factories would go bust, he offered. But the country would not experience a crisis in its financial sector this year, the master confidently predicted.

One billion workers - CHINA'S working-age population fell last year as a proportion of the total, according to figures released by the National Bureau of Statistics last week. Chinese aged 15-64 represented 74.4% of the population in 2011, compared with 74.5% the year before. The statistic prompted one or two stories speculating about the end of cheap China. But how useful is this ratio as a guide to wage pressures? Note, first of all, that China's working-age population is NOT yet falling in absolute terms. Judging by the NBS figures, it increased by about 3.45m in 2011. In fact, China's working-age population numbered over 1 billion (74.4% of 1,347,350,000) in 2011 for the first time. China's dependency ratio (the number of Chinese not of working age as a percentage of those who are) is still low, compared with its past or its peers. It was lower in 2011 than in any recent year except 2010. It was also lower than the ratio in all but five countries, according to UN figures. This is largely because China's one-child policy restricts the number of young dependants a family can add.

China Narrows Gap On US As Favored Investment Destination - The U.S. remained the favored destination for businesses that are expanding internationally in 2011, but China narrowed the gap significantly. The United Nations Conference on Trade and Development Tuesday reported that businesses invested $1.5 trillion overseas in 2011, a 17% increase on the previous year despite growing economic uncertainty and the turmoil in global financial markets. UNCTAD said inflows of foreign direct investment into developing and transition economies hit a record high of $755 billion. It expects a modest further increase in global flows to $1.6 trillion this year, although it said the outlook was subject to "significant risks and uncertainties' given "the debt crisis in developed countries, the uncertainties surrounding the future of the euro, and rising financial market turbulence." Following three years of decline, foreign investment in developed economies rose strongly in 2011, by 18% to $753 trillion. However, FDI into the U.S. fell by 7.7%. But at $210.7 billion, that left the U.S. as the largest recipient of FDI, a position it has long held. China was the second largest recipient, attracting $124 billion in FDI, up 8.1% from 2010. Adding the $78.4 billion that flowed into Hong Kong, FDI into Greater China was just $8 billion less than in the U.S.

How Obama's Tough Talk Plays in China - President Obama took a new swipe at China’s economic policies in his State of the Union speech on Tuesday, and leaders here are unlikely to be surprised. China’s rulers know that Mr. Obama faces a tough re-election battle, and they know that he must address his opponents’ repeated claims that he has failed to stand up to Beijing. But that does not mean that they like it.  Under Mr. Obama, America-watchers here say,  the White House has swung from being too accommodating to too tough, from looking weak to putting on an unneeded show of strength.  On Tuesday night, in addition to highlighting trade cases he had brought against China, the president went further, announcing “the creation of a Trade Enforcement Unit that will be charged with investigating unfair trading practices in countries like China.” China’s leadership respects the president, those following Chinese-American relations here say, and appreciates the difficulties Washington faces on almost every front. But analysts say the Chinese find very little constancy in the relationship, and that unsettles them. Ratcheting up American talk toward China another notch, they say, may just reinforce that.

Forget China, 'System D' Is World's Second Largest Economy (Infographic) A recent article at Foreign Policy noted that the $10 trillion global black market is now the world’s fastest growing economy, and that in 2009, the OECD concluded that half the world’s workers (almost 1.8 billion people) were employed in the shadow economy. By 2020, the OECD predicts the shadow economy will employ two-thirds of the world’s workers. This new economy even has a name: ‘System D’.  According to an IMF economic study, black market, also called the shadow, underground, informal, or parallel economy, "includes not only illegal activities but also unreported income from the production of legal goods and services, either from monetary or barter transactions. Hence, the shadow economy comprises all economic activities that would generally be taxable were they reported to the tax authorities."

Are China and India converging? - Both China and India have attracted global attention for rapid growth, but their growth patterns are very different (Rajan 2006, Pack 2008, Bosworth and Maertens 2010). China took the conventional route of manufacturing-led growth and is recognised as a global leader in manufactured exports. India followed the unconventional route of service-led growth and has acquired a global reputation for service exports. Are their growth patterns converging? Is China catching up in services? Is India catching up in manufacturing? Or has hysteresis kept their growth patterns different?

Capital controls are not beggar thy neighbour - Emerging markets have fallen victim to unstable capital flows in the wake of the financial crisis. In an attempt to mitigate the accompanying asset bubbles and exchange rate pressures that come with such volatility, a number of emerging markets resorted to capital controls. Although these actions have largely been supported by the International Monetary Fund, some policy-makers and economists have decried capital controls as protectionist measures that can cause spillovers that unduly harm other nations.  Recently-published research shows that these claims are unfounded. According to the new welfare economics of capital controls, unstable capital flows to emerging markets can be viewed as negative externalities on recipient countries. Therefore regulations on cross-border capital flows are tools to correct for market failures that can make markets work better and enhance growth, not worsen it.  According to this research, externalities are generated by capital flows because individual investors and borrowers do not know (or ignore) what the effects of their financial decisions will be on the level of financial stability in a particular nation. A better analogy than protectionism would be the case of an individual firm not incorporating its contribution to urban air pollution. Whereas in the case of pollution the polluting firm can accentuate the environmental harm done by its activity, in the case of capital flows a foreign investor might tip a nation into financial difficulties and even a financial crisis.

Who has the most wiggle room? - BOTH the International Monetary Fund and the World Bank have recently warned that if the euro-area crisis worsens it could drag the world into another deep recession. If so, emerging economies would once again be hurt by falling exports and a drying up of capital inflows. This week’s Free exchange column examines which countries have the most fiscal and monetary firepower to boost their domestic demand. The good news is that whereas most rich countries have little or no room to cut interest rates or to increase public borrowing, emerging markets as a group still have lots of monetary and fiscal firepower […] their average budget deficit last year was only 2% of GDP, against 8% in the G7 economies. And their general-government debt amounts on average to only 36% of GDP, compared with 119% of GDP in the rich world. However, some governments have much more scope to loosen policy than others. We have ranked 27 emerging economies according to their monetary manoeuvrability and fiscal flexibility (you can compare the individual indicators we used here). Our overall “wiggle-room index” offers a rough ranking of which economies are best placed to withstand another global downturn. Countries are coloured in the chart according to our assessment of their ability to ease: “green” means it is safe to let out the throttle, “red” means the brake needs to stay on.

The Brain-Drain Panic Returns - While developed countries are angst-ridden over mostly illegal immigration by unskilled workers from developing countries, a different set of concerns has surfaced in Africa, in particular, over the legal outflow of skilled, and even more importantly, highly skilled, people to developed countries. This outflow is supposedly a new and damaging “brain drain,” with rich countries actively luring away needed skills from poor countries.  This fear is misplaced. At the outset, we have to distinguish between “need” and “demand.” Yes, many African countries need skills. But they are unable to absorb them, owing to several factors associated with economic backwardness. In India in the 1950’s and 1960’s – a time when many professionals were emigrating – working conditions were deplorable. Bureaucrats decided whether we could go abroad for conferences. Heads of departments carried inordinate power. So, no surprise, many of us left. We Hindus may believe in an infinity of lifetimes, but we maximize our welfare in this one, just like everyone else. Besides, simply holding people back, even if feasible, would do little for their countries. The “brain” is not a static concept. Trapped in Kinshasa, under appalling conditions, the brain will drain away in less time than it takes to get to New York.

The world’s hunger for public goods - Public goods are the building blocks of civilisation. Economic stability is itself a public good. So are security, science, a clean environment, trust, honest administration and free speech. The list could be far longer. This matters, because it is hard to secure adequate supply. The more global the public goods the more difficult it is. Ironically, the better we have become at supplying private goods and so the richer we are, the more complex the public goods we need. Humanity’s efforts to meet that challenge could prove to be the defining story of the century. Reading the Financial Times’ series Capitalism in Crisis underlines this lesson. A central element of the debate is how to avoid extreme financial instability. Such instability is a public bad. Avoiding it is a public good. Those acting inside the market system have no incentive to supply the good or avoid the bad. What, for those unfamiliar with this terminology, is a public good? In the jargon, a public good is “non-excludable” and “non-rivalrous”. Non-excludable means that one cannot prevent non-payers from enjoying benefits. Non-rivalrous means that one person’s enjoyment is not at another person’s expense. National defence is a classic public good. If a country is made safe from attack everybody benefits, including residents who make no contribution.

Australia: US Copyright Colony or Just a Good Friend? - Collectively, we Australians can be a cowardly bunch, so scared of an unknown invader that we will sell our sovereignty for the illusion of protection. This fear is symbolised in the movie ‘Tomorrow When the War Began,’ a film of dubious quality that portrays an Australia under invasion from some shadowy Asiatic power.The foundation-stone of Australia’s defence policy is our alliance with the United States. Known as the ANZUS treaty, on paper this alliance guarantees mutual defence. In practice, the friendship is far from equal. As with their treatment of sovereign nations the world over, the Americans have no qualms about interfering in our domestic politics and local legal systems. The kind of behaviour that, if reciprocated, would swiftly end the alliance. The latest front in this meddling is the crossover between file-sharing and intellectual property. Currently, an Australian is enduring a lengthy legal battle that may see him end up as an inmate at Guantanamo Bay, or worse. Julian Assange and the Wikileaks organisation he help found shone a sterilising light on the behaviour of the US Embassy in Australia’s capital, Canberra. For his bravery Australian Prime Minister Julia Gillard, a trained lawyer, prejudiced any future legal action by prematurely labelling Assange’s actions “illegal.” She has since sacked the Attorney-General whose job it was to give legal advice on the Wikileaks matter, but the damage has been done and the comment has never been retracted.

Russia May Start Buying Australian Dollar by Next Month, Central Bank Says - Russia’s central bank may start buying the Australian dollar as a reserve currency as soon as early February, First Deputy Chairman Alexei Ulyukayev said. “We’re just about to start, everything is ready, the accounts are open and the agreements are signed,” Ulyukayev told reporters at the World Economic Forum in Davos, Switzerland. “It’ll be February, possibly at the beginning.” Russia is diversifying its international reserves, the fourth-biggest in the world, after confidence in the U.S. dollar and euro eroded. Its currency holdings were about 45 percent dollars, 43 percent euros and 9 percent pounds, with the rest in yen, Canadian dollars and the International Monetary Fund’s special drawing rights, as of June 30. “We’re not looking to seriously change” the structure of reserves, Ulyukayev said. “There are natural limits -- the low liquidity of markets for other currencies.”

Baltic Dry Plunges 42% More Than Seasonal Norm To Start The Year - Whether it is an over-abundance of ships (mis-allocation of capital) or a slowing global growth story (aggregate demand), the crash in the Baltic Dry Index has been significant to say the least. Seasonals are prevalent (and Chinese New Year impacts) but to try and clean up that perspective, we find that so far this year the Baltic Dry has fallen 42% more than its seasonal normal and is down by more than 50% since 12/30/11. Nothing to see here move along. and on a log scale, this is indeed an impressive drop...

Chart of the Day: The Baltic Dry Index - Statistics from the Office of National Statistics this morning showed that the UK went into reverse in the last quarter of 2011, when the economy shrank by 0.2% – but as the Baltic Dry Index shows, the global economy is looking even more worrying. The index – often used as a proxy for the health of the global economy as it reflects the prices charged for shipping commodities such as metals, coal or grain around the world – has fallen by 61% since October. The index was at 842 at yesterday’s close – down from its 12-month high of 2173 last October.  Nick Bullman, managing partner at risk consultant Check Risks, said the index is a good way of looking at the risks to the global economy, “as it tends to be where they hit first”.  According to Bullman, its initial collapse in October was driven primarily by a fall-off in demand from China, where declining housing prices pushed purchasing managers to cut back on orders for the raw materials whose transport the Baltic Dry Index reflects.  He said: “This collapse looks similar to the falls we saw in the Baltic Dry ahead of the recessions of the late 1970s and early 1990s – but this drop is actually steeper.”

European Banks May Soon Have To Write Down $100 Billion Worth Of Bad Shipping Loans: Yesterday, we discussed how the Baltic Dry Index (BDIY), a benchmark for shipping rates, isn't a perfect proxy for the macroeconomy. Sure, shipping rates fluctuate with global trade activity. But the correlation between rates and the economy is distorted by supply and demand dynamics within the shipping industry itself. We mentioned that tight shipping capacity during the credit-fueled boom times caused shippers to order ships like mad. However, ships can't exactly be assembled and delivered as quickly as a book shelf. This phenomenon is referred to as "long lead times." And in today's New York Times, Keith Bradsher digs deeper into the matter on the front page of the business section. Simply put, a long lead time means it takes a long time to make something. According to Bradsher's report, ships that were ordered during the years going into 2008 are just now "being delivered by the hundreds." And the negative consequences aren't limited to just idle ships and low revenue. Basil Karatzas, the chief executive of Karatzas Marine Advisors, a ship brokerage and finance advisory firm in Manhattan, estimated that European banks hold about $500 billion in shipping loans on their books and face nearly $100 billion in losses to restructure them. A sharp rebound in the economy may be able to alleviate the situation. But at this point, that seems unlikely.

Exporter Japan eyes first trade deficit in 3 decades  (Reuters) - Japan probably produced its first trade deficit last year in more than three decades as energy imports surged to cover for the loss of nuclear power following the Fukushima disaster, a major blow to an economy built on its exports prowess. For decades Japan used an exports-orientated economic policy to build up global brand names such as Toyota, Sony and Canon and a manufacturing might that was the envy of the world. Official trade figures due for release on Wednesday are expected to show that Japan swung to a deficit for the first time since 1980, as utilities purchased fossil fuels for power stations to make up for the loss of nuclear power. Economists say Japan's trade will be in deficit for the next few years as it copes with the Fukushima catastrophe that released radiation into the atmosphere and forced most nuclear power stations to shut in the face of a public outcry over safety. Trade will then return to a surplus, but long-term trends suggest the surplus will weaken anyhow. A rise in the yen to a record last year of fewer than 77 per dollar from more than 250 in 1980 is making Japanese exports increasingly uncompetitive and so encouraging manufacturers to move overseas. "Japan can continue to export goods, but if you focus exclusively on the trade balance, then the days as an exporter are ending,"

Ageing Japan faces 'chronic' trade deficit after Fukushima - Japan has racked up its first trade deficit in 31 years as the country's ageing crisis hits home and the Fukushima nuclear disaster raises dependence on imported fuel. The darkening picture has set off deep soul-searching about the sustainability of the nation's Japan's economic model, and ultimately the trajectory of its 1,010 trillion yen (£8.3 trillion) public debt. Official data to be released overnight is expected to show the country ran a deficit of about $24bn (£15.4bn) in 2011, and has been running a structural shortfall of $3bn a month since the tsunami shut down most of Japan's nuclear industry. It is a poignant moment for a once unbeatable powerhouse that built its economic miracle on exports of cars, computers, cameras and machine tools, and once seem poised to challenge America for dominance of global trade.

Japan Won't Meet Budget Goal By FY20 -- Japan won't be able to reach its goal of achieving a primary balance surplus by fiscal 2020 even if it carries out its current plan to double the sales tax rate, forecasts released by the Cabinet Office showed Tuesday. Japan's debt-ridden finances will likely show a Y16.6 trillion primary balance deficit--3.0% of gross domestic product--in the fiscal year starting April 2020, the forecasts show. The preliminary calculation is based upon the government's main economic assumption, which predicts a real growth rate of slightly more than 1.0% on average between fiscal 2011 and 2020. According to an alternative scenario in which the government implements all its planned policies, the economy will likely grow 2% or slightly higher on average. But even in this more optimistic scenario, the nation's primary balance will still show a deficit of Y8.9 trillion, or 1.4% of GDP, the forecasts showed. The document suggests that the government's current plan to hike the consumption tax rate from the current 5% to 10% by 2015 is not enough to achieve a primary balance surplus by fiscal 2020. The forecasts in the document are in line with recent remarks by Cabinet members, including Deputy Prime Minister Katsuya Okada, suggesting that further sales hikes will be necessary to fund ballooning social security costs.

Japan’s Fiscal Pressure Intensifies as Tax-Boost Plan Insufficient - Japan’s government said it will probably miss its goal of balancing the budget by 2020 even with its proposed doubling of the sales tax, underscoring the scale of the nation’s fiscal challenges. The primary budget deficit, which excludes the cost of servicing debt, will be the equivalent of 3.1 percent of gross domestic product for the year through March 2021, the Cabinet Office said in Tokyo today. Hours after the release, Prime Minister Yoshihiko Noda reiterated his call for opposition lawmakers to engage in talks on boosting the sales levy.“To balance the budget, the rate needs to rise further,” said Takuji Okubo, chief Japan economist at Societe Generale SA in Tokyo, referring to the sales-tax level. “We’ve passed the point where we can soft-land the fiscal situation. The question is how hard the landing is going to be.”

Japanese PM reshuffles cabinet to push tax hike - Japanese Prime Minister Yoshihiko Noda carried out an anticipated cabinet reshuffle last Friday in a bid to consolidate his grip on power amid continued infighting within the ruling Democratic Party of Japan (DPJ). Noda dumped Defence Minister Yasuo Ichikawa and Consumer Affairs Minister Kenji Yamaoka, both of whom are prominent supporters of the powerful DPJ faction headed by Ichiro Ozawa. At the same time, he promoted former DPJ president and foreign minister Katsuya Okada to deputy prime minister. Okada has been given the task of implementing Noda’s highly unpopular plan to double Japan’s sales tax. Noda described the new lineup as “the best and strongest to push ahead with the inevitable topic of administrative, political and tax reforms,” adding, “Mr Okada will not waver or run away from a major task. He is a politician who will produce results.” The government only announced its draft proposals for tax and social security reform on January 6. The plan involves a hike in the consumption tax rate from the present 5 percent to 8 percent in 2014 and to 10 percent in 2015. The government’s ambiguous language implies further increases in the future, with some in business circles pressing for a rate as high as 25 percent, according to the Yomiuri Shimbun.

Japan logs first trade deficit since 1980 - Japan logged its first annual trade deficit in 2011 for over 30 years as the aftermath of the March earthquake raised fuel import costs even as slowing global growth and the yen's strength hit exports, threatening to erode the country's ability to fund its huge public debt with domestic savings. Few market players expect Japan to immediately run a deficit in the current account, which includes trade and returns on the country's huge past investments abroad, as a steady inflow of profits and capital gains from overseas outweigh the trade deficit. But the trade data underscores a broader trend in which Japan's competitive edge in the global market is eroding and it is increasingly reliant on fuel imports due to the loss of nuclear power, with reactors staying closed after routine checks due to public safety fears following the March disaster. "What it means is that the time when Japan runs out of savings -- 'Sayonara net creditor country' -- that point is coming closer,"

Krugman and Duy on Japan - Paul Krugman discusses whether Japan has had two lost decades. This picture suggests that the Japanese economy was indeed depressed for about 16 years, and deeply so after the slump of the late 1990s. But it may have returned to more or less potential output on the eve of the current crisis. Just to be clear, this is not a picture of policy success; it is, in fact, a picture of enormous waste. But the condition wasn’t permanent. I think that’s about right.  But then Tim Duy raises a good question: .  On one hand, we can see this as vindication of massive deficit spending.  But is this really success?  Because on the other hand, there is no end in sight of such deficit spending.  On Japan’s 2012 budget, via the FT: For the fourth year in a row, government revenue from bond issuance is set to exceed that from all taxes.” I don’t intend to go down the “Japan’s bond market is about to collapse” path.   But what I am wondering about is Krugman’s description of the condition as not permanent. I’m no expert on Japanese public finance (although I at least do know that the net debt is much smaller than gross debt in Japan), but the FT article Duy links to certainly paints a bleak picture of the long run trends.  So I think he raises a good question in asking whether fiscal stimulus can be viewed even as a limited success (in say 2003-07) if Japan can’t maintain the stimulus forever, and can’t survive without it.

Japan's Lopsided Financial Balances - Rebecca Wilder -- Tim Duy and Paul Krugman discuss the merits and failures of Japanese policy. The sectoral snapshot of the economic financial balances shows that Japanese policy was indeed a success but also a failure. First, policy was a success, given the private sector was recuperating from the bursting of a credit and investment bubble. The chart below illustrates the 3-sector financial balances model – read Scott Fullwiler on New Economic Perspectives for a detailed description of the 3-sector financial balances model. According to this identity, the capital account plus government net saving plus private net saving must equal zero. For a given level of the capital account (Japan’s capital account has been quite stable over the years), when the private sector increases net saving, aggregate demand declines and government net saving declines. In the early 1990s, all sectors were roughly in balance. However, since then government debt surged in response to a like rise in the private sector desire to save. One could argue that the government deficits and accumulated debts were indeed required, hailing the government’s actions a policy success. However, I contend that this has been a missed policy opportunity rather than overall success.  The second chart illustrates the same financial balances model, but broken down into 4 sectors: the capital account plus government net saving plus household net saving plus corporate net saving must equal zero – household plus corporate net saving equals private net saving in the chart above.

Japan manufacturers brace for euro zone breakup: Reuters poll  - Japanese manufacturers are bracing for a possible breakup of the euro zone, according to a Reuters poll released on Monday, with 65 percent saying they see a need to prepare for the currency block's partial or complete collapse. Europe's two-year old sovereign debt crisis, which has left Greece teetering on the edge of default, has taken a heavy toll on Japanese corporate sentiment as exporters struggle with a strong yen and slower growth in China. When manufacturers were asked if they are considering changing business plans in Europe, 31 percent of those responding said they are in the process of doing so or have already made changes. Of those firms, 90 percent said they could scale back operations or have already done so. Many manufacturers were also looking to shrink operations in China and North America in favor of expanding in other Asian countries to tap demand for their goods, the survey showed. The poll, taken January 5-17, surveyed 400 big firms, of which 247 responded. The questions were part of the Reuters tankan for January, which was published on Friday. 

International Capital Flows, House Prices, and the Euro - Free Exchange’s weekly reading list includes an excellent recent paper by Jack Favilukis, David Kohn, Sydney C. Ludvigson, and Stijn Van Nieuwerburgh: “International Capital Flows and House Prices.” Lots of observers (including me) have noted the suspicious correlation between surges in international capital flows into certain countries in the early 2000s (e.g. the US, Ireland, Spain, Greece, Iceland, Australia) and simultaneous or near-simultaneous surges in house prices in those countries. This paper addresses the question of whether there is in fact a systematic relationship between capital flows into a country and house prices. Were the house price booms of the 2000s caused by international financial flows? The answer provided by this paper is no, or at least not directly. When different possible macroeconomic explanations for changes in average national house prices are considered, it turns out that by far the most important factor is the ease of bank credit. In other words, rising house prices in the 2000s (as well as their subsequent fall) probably had much more to do with the willingness of banks to lend than any other factor. When banks are happy to lend money and they relax lending standards, house prices go up. When banks reverse course, house prices go down.

Saudi says no cash from emerging economies until given more (Reuters) - Big emerging economies such as China, India and Saudi Arabia will not aid the West in its financial crisis unless they are given more influence in running the global economy, a senior figure from Saudi Arabia's ruling establishment said on Monday. "The financial crisis and great recession were born in the West, developed in the West yet hit hard throughout the world," former Saudi intelligence chief Prince Turki al-Faisal said in a speech to a business conference in Riyadh.He said this showed the need to give emerging economies more representation and more authority in global bodies such as the Group of 20 nations, a forum of the world's major industrialised countries, and the Financial Stability Board (FSB), which discusses regulation of banks and financial markets. So far, however, organisations such as the FSB "have yet to take these new realities into consideration," while the G20 is making little headway in coordinating economic policymaking around the world, he said.

Why did the ECB LTROs help? - From a money view perspective, the central issue is settlement of TARGET balances between national central banks within the Eurozone, and the key is to understand TARGET balances as a kind of interbank correspondent balance.  What I want to suggest is that the ECB's Long Term Refinance Operation can help settle the troublesome TARGET balance overhang. From time immemorial, banks have used correspondent balances as a way of economizing on reserve holding, as well as on the cost of reserve transfers.  Suppose that, over the course of a year, the payments between Bank A and Bank B net out.  Then there is no need for daily transfer of scarce reserves; daily net flow can simply be added to or subtracted from the outstanding correspondent balance.  Fundamentally, that is what TARGET balances between National Central Banks are all about. Sinn and Wollmershaeuser, in their recent paper glossed by Martin Wolf here, express concern that TARGET balances are not being used as correspondent balances but rather as a political tool, to fund capital transfers within the Eurozone.  And they call for Europe to adopt the U.S. rules for running a monetary union (p. 29), most importantly the U.S. practice of periodic settlement of outstanding balances. 

Greek Debt Talks Appear To Stall Saturday - Talks between Greece and its private sector creditors over a debt writedown plan appeared to stall Saturday as the banks' top negotiator left Athens amid signs of fresh disagreements over how much Greece would pay its bondholders in the future. Institute of International Finance chief Charles Dallara, who has been negotiating with Greek officials on the bond swap plan for the last two days, left Athens Saturday as hurdles remained over the interest rate the new bonds would pay private sector creditors. "Right now there are no talks. There will be consultations with the EU and the IMF to determine where we stand and then we'll see. It (negotiations) has again become complicated with the new demands over the coupon," said a person with direct knowledge of the talks.  Earlier, people familiar with the matter said that the IMF and Germany don't believe Greece's debt would return to sustainable levels if the average coupon on the new bonds is around 4%, pushing for a lower coupon. "We were discussing technical and legal issues having agreed in principle to an average coupon of 4%, but the IMF insists this won't be enough to bring (Greece's) debt back to sustainable levels," This is the second intervention by Germany and the IMF in debt talks in the last eight days over the coupon rate.

Dallara leaves Athens, talks to continue: sources - The representatives of Greece's private creditors have left Athens and debt swap talks will continue over the phone during the weekend, sources close to the negotiations said, adding that it was unlikely that a deal would be clinched before next week. One source said that Institute of International Finance chief Charles Dallara and Jean Lemierre, special adviser to the chairman, flew to Paris on Saturday morning after two days of talks with senior officials in Athens. "Things are complicated, we are getting closer on the numbers but there is still quite some work ahead," the source said. Athens is anxious to strike a deal before a meeting on Monday of eurozone finance ministers, just in time to set in motion the paperwork and approvals necessary to receive a new injection of aid to avoid a messy bankruptcy in March.  
Keiser Report: Sinking Ship In Credit Sea -- In this episode, Max Keiser and co-host, Stacy Herbert, discuss captains of the financial industry abandoning ship while tripping into TARP. In the second half of the show, Max talks to former oil market regulator, Chris Cook, about the imminent collapse of the oil market and about the role of Goldman Sachs, BP and passive investors in driving the price of oil.

Greek Bondholders Draw Line in the Sand - Private owners of Greek debt have made their “maximum” offer for the losses they are willing to accept, the bondholders’ lead negotiator has said, implying that any further demands could kill off a “voluntary” deal and trigger a default. One banker said Friday’s demand by official creditors, led by the International Monetary Fund, for a further interest rate cut of 50 basis points on new long-term bonds to be swapped for existing Greek debt “may have put a voluntary deal out of reach”. Mr Dallara said the IIF’s position tabled with Greek authorities on Friday night – believed to include a loss of 65-70 per cent on current Greek bonds’ long-term value – was as far as his side was likely to go. “I think it's clear we are at the limits of a voluntary deal,” Mr Dallara said, recalling that eurozone heads of state had committed to keeping the restructuring voluntary at a high-stakes EU summit in October. “It is clear to me we are at a crossroads.”

Greek Talks Hit a Snag Over Rates - Talks between Greece and its private sector creditors over restructuring its debt hit a snag over the weekend over how large an interest rate the new bonds would pay. While considerable progress has been made, Greece’s financial backers — Germany and the International Monetary Fund — have been unyielding in their insistence that the longer-term bonds that would replace the current securities must carry yields in the low 3 percent range, officials involved in the negotiations said on Sunday. Bankers and government officials say they still expect a deal to be done; Greece and its private sector creditors on Friday appeared close to a deal that would bring the yield to below 4 percent. But the continuing disagreement over the interest rate is a reminder of just how complex and politically tricky it is to restructure the debt of a euro zone economy. A debt restructuring agreement is a precondition for Greece to receive its next installment of aid from Europe and the monetary fund, 30 billion euros that the country needs to stave off bankruptcy. 

Greek debt talks stall over interest rate on bonds - Crucial talks between Greece and private creditors on debt restructuring stalled over the weekend, with a dispute over the interest rate to be paid on new bonds.  Negotiators from the International Institute for Finance representing banks and other creditors left Athens after a marathon session ended in the small hours of Saturday without a breakthrough, though talks continued by telephone.  Sources close to the dispute said there is little danger that the IIF will walk out and precipitate the first sovereign default in western Europe since the Second World War.  A deal is needed to clear the way for the next round of EU-IMF aid and ensure that Athens can meet a €14.5bn (£12bn) debt payment in March. The IIF's chief Charles Dallara said the elements of a deal were "coming into place".   Both Greece and the International Monetary Fund want to cap the rate on new bonds at 3.5pc, rising later as Greece recovers.

Greece needs sustainable debt by 2020: German finance minister (Reuters) - German Finance Minister Wolfgang Schaeuble said on Sunday the crucial factor in negotiations over a debt-swap plan for Greece was that Athens should by 2020 have a sustainable level of borrowing. "This goal must be achieved," he told German public broadcaster ARD. Chief negotiators for Greece's private creditors left Athens on Saturday without a deal on a debt-swap plan that is vital to avert a chaotic default, sources close to the talks told Reuters. A technical team stayed in the Greek capital to work on details, and negotiations will continue over the phone, but it is unlikely a deal can be clinched before a crucial meeting on Monday of euro zone finance ministers, the sources said. Asked whether a haircut of 70 percent on Greek debt would be sufficient, Schaeuble said: "It depends on the details. The negotiations are continuing."

Greek bondholders have made their best offer -- Private holders of Greek debt have made the 'maximum offer' on losses they're willing to bear, said the creditor's lead negotiator Charles Dallara, managing director of the Institute of International Finance. According to media reports, Dallara said in an interview with Greek television on Sunday that the deal put forward to Greek authorities on Friday evening, which includes losses of 65% to 70% on the value of creditors' Greek debt holdings, was likely as far as his side would go. "I think it's clear we are at the limits of a voluntary deal," said Dallara. He said he remained "hopeful and confident" of a deal to prevent a Greek default over a €14.14 billion ($18.3 billion) bond due on March 20. But the Financial Times quoted one banker as saying that Friday's demand by official creditors, led by the International Monetary Fund, for a lower coupon rate on the new bonds, means a voluntary deal may no longer be possible. Both a debt swap and new fiscal program have to be in place before Greece gets another tranche of funding from a bailout package. Dallara would not say whether he plans another trip to Athens or will attend a Brussels European finance ministers meeting on Monday

Euro Zone Finance Ministers to Rule on Glacial Greek Debt Talks (Reuters) - Euro zone finance ministers will decide on Monday what terms of a Greek debt restructuring they are ready to accept as part of a second bailout package for Athens after negotiators for private creditors said they could not improve their offer. Resolving the issue of a Greek debt swap is key to putting Athens' debt on a sustainable path and avoiding a chaotic default that could threaten the whole currency bloc. After several rounds of talks, Greece and its private creditors are converging on a deal in which private bondholders would take a real loss of 65 to 70 percent on their Greek bonds, officials close to the negotiations said.But some details of the debt restructuring, which will involve swapping existing Greek bonds for new, longer-term bonds to bring Greek debt down to a more sustainable 120 percent of GDP in 2020 from 160 percent now, are unresolved. "What I am confident of is that our offer, that was delivered to the prime minister, is the maximum offer consistent with a voluntary PSI deal," Institute of International Finance chief Charles Dallara, who is negotiating on behalf of banks and insurers holding Greek debt, told Antenna TV on Sunday.

Euro zone ministers reject private bondholders' Greece offer - Euro zone finance ministers Monday rejected as insufficient an offer made by private bondholders to help restructure Greece's debts, sending negotiators back to the drawing board and raising the threat of Greek default. At a meeting in Brussels, ministers said they could not accept bondholders' demands for a coupon of four percent on new, longer-dated bonds that are expected be issued in exchange for their existing Greek holdings. Greece says it is not prepared to pay a coupon of more than 3.5 percent, and euro zone finance ministers effectively backed the Greek government's position at Monday's meeting, a position that the International Monetary Fund also supports.The aim of the restructuring is to reduce Greece's debts by around 100 billion euros ($129 billion), cutting them from 160 percent of GDP to 120 percent by 2020, a level EU and IMF officials think will be more manageable for the growth-less Greek economy. Negotiations over what's called 'private sector involvement' (PSI) have been going on for nearly seven months without a concrete breakthrough. Failure to reach a deal by March, when Athens must repay 14.5 billion euros of maturing debt, could result in a disorderly default.

Eurogroup rejects PSI deal - The Eurogroup meeting in Brussels heard Finance Minister Evangelos Venizelos' presentation of the PSI deal agreed with the private bondholders' chief negotiator Charles Dallara in Athens before the latter walked out of the talks on Saturday. "We told him [Venizelos] to continue the negotiation [with Dallara] until the interest rate comes down below 4 percent", Eurogroup chairman Jean-Claude Juncker told a news conference in Brussels late on Monday. Juncker was referring to the average interest rate (annual coupon) of the new 30-year bonds that will be issued to bondholders after the haircut of 50 percent on the face value of their portfolio. The PSI bond swap was a precondition for a second EU-IMF bailout worth 130bn euros agreed at the EU summit of October 26. Venizelos had agreed with Dallara to a rate of 4.25 percent before Athens was told that the EU would not accept anything above 3.5 percent during a euro working group teleconference with PSI negotiators on Saturday.

S&P says likely to declare Greece in default (Reuters) - Standard & Poor's will likely downgrade Greece's ratings to "selective default" when the country concludes its debt restructuring, but that will not necessarily destroy the credibility of the European Union, an official with the ratings agency said on Tuesday. "It's not a given that Greece's default would have a domino effect in the euro zone," John Chambers, the chairman of S&P's sovereign rating committee, said in an event organized by Blooomberg Link.

Euro could collapse in 24 hours if a member leaves, warns Athens - The on-going efforts by Eurozone countries to secure a deal between Greece and its bondholders continue today. The talks in Brussels continued into the early hours of this morning. However there is still no sign of a deal. European Finance Ministers have today urged Greece to prepare new budget cuts soon and conclude their negotiations within days. The Euro has slipped from a 3-week peak after the Ministers rejected an offer by private creditors to restructure Greek debt. Finance ministers sent back the Greek debt swap offer saying the coupon demanded by bondholders was too high. Private creditors say a 4% coupon is the least they can accept if they are going to write down the nominal value of the debt they hold by a half. Yanis Varoufakis is Professor of Economics at the University of Athens. He told Breakfast here on Newstalk that he believes if any member state leaves the Euro the currency will collapse in 24 hours.

EU Ministers Resume Crisis Talks —European Union finance ministers Tuesday piled pressure on Greece and its private-sector creditors to do more to ensure that a proposed deal to restructure Greece's private-sector debt will be enough to put the country back on a firm fiscal footing.  The International Monetary Fund and the euro zone's four triple-A-rated countries-—Germany, the Netherlands, Finland and Luxembourg—are pushing for a low average interest rate on new bonds to be issued as part of the restructuring, in order to ensure the government can pay its debts in the future.But as they were heading to a meeting Tuesday, EU finance ministers also urged Greece to implement tough austerity and structural reforms and provide more written assurances to its partners that it would commit to its pledges before further aid can be released. Austrian Finance Minister Maria Fekter said she's "not pleased" with progress so far. "We're sending a very direct message to Greece that the community expects more, also in terms of structural reform," she told reporters. "We're not pleased and only when there's a written message on the table in front of us, can further assistance be discussed."  Ms. Fekter said she wanted a written pledge from Greece's political party leaders that they were all committed to implement austerity plans. Swedish Finance Minister Anders Borg also had tough remarks for Greece, saying that "when it comes to structural and fiscal reform they have not delivered."

A Greek Default: It's a-Comin'  - Talks are under way, but settlement options look a lot like—a default. Negotiations over how to shrink Greece’s unaffordable government debt make the brinkmanship over the U.S. debt ceiling last summer look simple. In the U.S., almost everyone agreed that default would be disastrous. In Greece, default is probably unavoidable. The battle is over whether it happens gently, in what is known as a “consensual restructuring,” or chaotically, in what is known as “all financial hell breaks loose.” What makes the standoff over Greece so dangerous is that the players aren’t just dug into two opposing positions, as the White House and the Tea Party were. There are multiple battle fronts—and even fighting among supposed allies. “I can only tell you the negotiations are continuing,” says Frank Vogl, a spokesman for the Institute of International Finance, which represents private creditors. “I can’t tell you whether they’ll be successful.” Unless official lenders come to the rescue, it appears likely that Greece will default on Mar. 20, because it simply doesn’t have the €14.4 billion ($18.5 billion) that it owes bondholders on that date. “It is just a matter of time before the whole house of cards falls apart,”

Greece Lines Up Portugal - Another weekend…. and we are still waiting for an outcome on Greece. The chief negotiators from Institute of International Finance (IIF) have left the country yet we still haven’t heard anything that sounds remotely like a deal. FT reports that the brinkmanship hasn’t ended but there doesn’t appear to be too much wiggle room left: Private owners of Greek debt have made their “maximum” offer for the losses they are willing to accept, the bondholders’ lead negotiator has said, implying that any further demands could kill off a “voluntary” deal and trigger a default. Charles Dallara, managing director of the Institute of International Finance, said in an interview that he remained “hopeful and quite confident” the two sides could reach a deal that would prevent a full-scale Greek default when a €14.4bn bond comes due on March 20. There are many unknowns as to whether an initial deal can be struck and even if it can whether that will be enough. Is the rumoured 65-70% loss correct? Do the hedge funds have blocking position? Will Greece need to retrospectively apply a collective action clause to get a high participation rate? CDS triggers then? What about the ECB? Will the rest of the EU agree given they have a post-deal target of debt to GDP at 120%? Will there be any corresponding legal action?

Fears Mount That Portugal Will Need a Second Bailout - Investors, economists and politicians are increasingly concerned that Portugal will need a second bailout as fears mount that it won't be able to return to markets for financing next year. While the Portuguese government's finances are covered this year as long as it abides by its bailout agreement, Portugal must regain full access to capital markets next year to help repay €9 billion ($11.64 billion) in debt coming due in September 2013. While that date is still far off, the International Monetary Fund could require Portugal to present its financing plans a full year ahead before releasing more aid, as it did with Greece. And as with Greece, the IMF may demand fresh bailout terms if it becomes clear the country won't be able to return to market in a year. Given the yields demanded by investors on Portugal's bonds, economists fear that may become the case.

Irish Journalist Hounds ECB Official Regarding Irish Taxpayer Bailout of French and German Banks - The video below is from a European Central Bank press-conference in Ireland. Journalist Vincent Browne demands that the ECB representative explain why the ECB required the Irish people to bail out a bank's uninsured creditors. The bureaucrat mouths bland reassurances, then asserts (despite all appearances to the contrary) that the question has been answered. Browne doesn't let up.

Irish house prices fell by 16.7% in 2011 - In the year to December 2011, Irish house prices at a national level, fell by 16.7%. This compares with an annual rate of decline of 15.6% in November and a decline of 10.5% recorded in the twelve months to December 2010. Residential property prices in Dublin are 55% lower than at their highest level in February 2007. The Central Statistics Office (CSO) said residential property prices fell by 1.7% in the month of December. This compares with a decline of 1.5% recorded in November and a decline of 0.5% in December of last year. In Dublin residential property prices fell by 2.4% in December and were 19.3%lower than a year ago. Dublin house prices decreased by 3.0% in the month and were 19.9% lower compared to a year earlier. Dublin apartment prices were15.6% lower when compared with the same month of 2010. The price of residential properties in the Rest of Ireland (i.e. excluding Dublin) fell by 1.1% in December compared with a decline of 0.5% in the same month of last year. Prices were 15.1% lower than in December 2010.

European Industrial Orders Continue Slide - Eurostat has produced the numbers for November industrial orders in the Eurozone and the EU as a whole. The picture continues to appear that Europe is sliding into recession, though not at a breathtaking pace.  In this particular case, the Eurozone has retrenched to the low level of September, erasing the slight improvement in October.  Meanwhile the broader EU continued to follow the Eurozone down. Here are the changes relative to 12 months ago (Nov for most cases, Oct for a few):Eastern Europe is mostly recovering, as is Ireland.  Greece and Portugal have had a terrible year.  Spain Germany and Italy don't look great either. Of course, the negative developments in the real economy are going to feed back into the financial crisis.  In a slowdown, more businesses will fail than usual, and more households will lose income or become bankrupt.  That in turn will increase the strain on bank balance sheets as they get left holding the resulting bad loans.

Hungary, Misunderstood? - On Tuesday, January 17, the European Commission launched an urgent “infringement procedure” against Hungary for violating EU treaties with its new laws. On Wednesday, January 18, Viktor Orbán dramatically appeared before the European Parliament to defend his country’s new constitutional order. Orbán’s defense could have been guessed in advance from what Fidesz government officials have been saying for weeks as they fanned out around the world to explain why they rewrote the Hungarian constitution. They claim that they have been misunderstood. In this post, I will take up the most frequent arguments that the government has made in its own defense. And, as I will show, its explanations for the new constitutional order are not credible. The main government explanations are:

1. Fidesz has a popular mandate for change and democracy requires a government to give the public what it wants.
2. Fidesz has consulted with the public about the constitution and this is the constitution that the public approved.
3. Fidesz has consulted with European agencies and they have approved, too.
4. Fidesz is replacing a communist constitution, and finally closing the chapter on the communist period.
5. Fidesz is acting on the basis of Christian principles, like other states within Europe.
6. Everything in the new constitutional order can be found in other European countries.

Sarkozy Dumps Financial Transaction Tax After Pressure From Banks - French President Nicolas Sarkozy is once again setting himself up to look like a fool, this time over his pledge to implement a tax on all financial transactions, popularly referred to as the "Tobin Tax". Just days after pledging to proceed with a tax on all financial transaction tax in France if the rest of the Europe would not go along, he walked away from the "Tobin Tax" idea completely after receiving pressure from French banks. Via Google Translate, Sarkozy waiver of the Tobin Tax by pressure from the banks, according to the German press The French government had abandoned its demand to impose a tax on financial transactions, also called Tobin Tax, after pressure from the country's largest banks, which have threatened to relocate their businesses in other territories, as confirmed by sources in the banking sector Germany's Handelsblatt. According to newspaper reports, Paris would replace the tax on financial transactions by a "tax on stock negotiations", similar to that established in the UK, after having held talks with French banks. Not only does it look like Sarkozy caved under pressure from French banks, it appears the Spanish prime minister Mariano Rajoy caved in as well.

Paris and Berlin seek to dilute bank rules - France and Germany are to call for a relaxation of global bank capital rules to prevent lending to the real economy being choked off, setting them at odds with the UK’s stricter approach to banks. A joint paper by Wolfgang Schäuble, German finance minister, and his French counterpart, François Baroin, will on Monday call for important elements of the Basel III rules to be watered down to mitigate any “negative effect” on growth. A draft of the paper seen by the Financial Times calls for special treatment for banks that own insurance companies and for a three-year delay to the mandatory deadline to disclose leverage ratios, a measure of bank borrowing and risk. The demands will delight some bankers but are likely to infuriate policymakers in London, who have been fighting hard to stop French-led attempts to dilute the Basel III accord. While the debate revolves around relatively technical regulatory issues, it is politically highly charged. British ministers complain that Paris and Berlin are going soft on their banks and attempting to cover up their more relaxed approach by stopping London from taking a tougher line.

EU Banks May Deepen Dependence on Central Bank's Unlimited Loans -- European banks, shunned by investors and each other, may borrow as much next month from the European Central Bank as they did in a record offering in December as they seek refuge from frozen funding markets. The ECB last month lent banks an unprecedented 489 billion euros ($630 billion) for three years. Analysts said they expect demand to be just as high at a second auction on Feb. 29 because the stigma associated with using the facility is dissipating and the list of what assets can be used as collateral in exchange for the loans will be extended. ECB President Mario Draghi said last week he expects demand for loans next month to be "still very high," though "probably lower than in December." "February's second three-year Long Term Refinancing Operation looks set to be extremely large," Credit Suisse Group AG analysts led by William Porter wrote in a report to clients. "The last LTRO has removed any stigma, making managements who do not exploit the value on offer arguably careless at best." The ECB is flooding the banking system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt seized up and funding from U.S. money markets dries up. Politicians, including French President Nicolas Sarkozy, are pushing the banks to use the loans, which carry an interest rate of 1 percent, to buy higher-yielding southern European sovereign debt, thereby forcing down borrowing costs in the region.

Super Broke Mario Brothers Kindly Request The ESM Be Doubled To €1 Trillion - With less than three months left until the Greek D-Day, and just over one month until the next 3-year LTRO, which will be the ECB's final chance to firewall off its banks with sufficient liquidity and brace for the worst if Greece fails to reach a consensual debt reducing exchange offer (which our colleagues in the German press don't think will be nearly enough), we finally get a glimpse of how the super broke Mario brothers really feel. According to a report in the German Spiegel, the ink is not even yet dry on the latest completely toothless EU Fiscal Draft (which will allow the €500 billion European Stability Mechanism to be enacted) and already we get the world's most insolvent hedge fund, pardon central bank, and Europe's biggest debtor demanding for more. "Italian Prime Minister Mario Monti and European Central Bank President Mario Draghi both support enlarging the capacity of Europe’s permanent financial rescue mechanism, Der Spiegel reported, without saying where it got the information. The news magazine said Monti is pushing for the European Stability Mechanism’s capacity to be doubled to 1 trillion euros ($1.29 trillion), and had made the suggestion to the German government. Der Spiegel added that Draghi supports the view that unused funds from Europe’s temporary rescue fund should be added to the ESM’s firepower when it comes into force."

Super Mario Brothers Super Denied: Schauble Tells Italy, ECB We Like You Just The Way You Are - It took a few hours for Germany to tell not only Italy, but the ECB, to shove it. Earlier we reported that the Super Broke Mario Bros came begging on Germany's footstep, kindly requesting their daily allotment be doubled. Germany has now kindly responded. From Reuters: "German Finance Minister Wolfgang Schaeuble on Sunday rejected pressure to beef up the euro zone's permanent rescue facility, saying Berlin would stick to the agreement made in December for a lending capacity of 500 billion euros ($646 billion). "We are sticking to what was agreed in December," Schaeuble told public broadcaster ARD. "In March we will check whether that is sufficient." The draft treaty establishing the European Stability Mechanism (ESM) will be discussed by euro zone finance ministers on Monday and is likely to be approved by EU leaders at their summit on Jan. 30, euro zone officials have said." As a reminder, minutes ago when we reported the first leg of this now closed transaction we said: "Poor Mario apparently fails to grasp that for Germany a plunging Euro, and thus a surging export market to offshore trading partners, is the only thing that matters now that its endogenous mercantilist import, pardon, trading partners of the past decade, the PIIGS, have no more debt capacity to buy German exports.

Italy protests spread against Monti, truckers block roads (Reuters) - Truckers blocked roads throughout Italy and taxi drivers resumed a strike on Monday as opposition mounted to fuel tax rises and economic reforms aimed at opening up competition in protected sectors including transport and pharmacies. Roads and highways from Gioia Tauro in southern Calabria to Turin in the north were hit as truckers extended a protest against rises in fuel prices that caused severe disruption in Sicily last week. The protests are set to escalate, as numerous labour categories affected by the measures, including railway workers, petrol station owners, pharmacists and lawyers have announced strikes over the next few weeks. Speaking on RAI state radio, Interior Minister Annamaria Cancellieri said authorities were following the protests "with close attention." "We cannot rule out this discontent leading to protests of a different kind," she said, in an apparent concern that the situation could get out of control.

Spain Risks Deficit Spiral as Poll Postpones Cuts - Spain’s month-old government may postpone deeper budget cuts until after a regional election in March, adding to the risk the nation misses its deficit goal for the second year. The ruling People’s Party, led by Prime Minister Mariano Rajoy, will contest an election in the southern region of Andalusia to end 30 years of Socialist rule. Spain’s 10-year bond yields have risen 10 basis points to 5.5 percent since the PP government took over on Dec. 21, increasing the rate to 359 basis points more than German bunds of similar maturity. “Rajoy doesn’t want to get burnt before the Andalusian election,” Antonio Barroso, an analyst at Eurasia and a former Spanish government pollster, said in a telephone interview. “They’re so crucial for the PP that it won’t take any kind of measure that would undermine its ratings in the region.” Rajoy needs to slice the equivalent of 3.6 percent of gross domestic product off the budget deficit this year to meet a European Union target, just as the economy may be entering its second recession in two years. Postponing steps until after the March 25 election risks undermining confidence in Spain’s ability to meet its goal, which Fitch Ratings already has “doubts” the country will reach.

IMF’s Lagarde Sounds The Alarm Over Europe - The International Monetary Fund is elevating its warnings about the risk of a global economic meltdown triggered by the euro-zone debt crisis. In a speech today in Berlin, IMF managing director Christine Lagarde says the world could see a repeat of the Great Depression if Europe doesn’t take stronger action. Without proper measures, she says, “we could easily slide into a ’1930s moment.’ A moment where trust and cooperation break down and countries turn inward. A moment, ultimately, leading to a downward spiral that could engulf the entire world.”Lagarde’s message includes appeals for more money from Europe (for its own bailout fund) and from the rest of the world (to boost the IMF’s war chest).Her latest call to action comes as the IMF prepares to downgrade its economic outlook on Tuesday and presses European nations to put more money behind fighting the crisis. The IMF told its board members last week that the 17-nation euro zone needs to double the size of its existing firewall to at least €1 trillion to guard against spreading turmoil. Other nations, including the U.S., in recent months have offered a similar message about vastly expanding the size of the firewall.

IMF's Lagarde urges action to avoid 1930s moment -- Christine Lagarde, managing director of the International Monetary Fund, said in Berlin on Monday that the global economy could slide into a "1930s moment" unless Europe deals with its debt crisis and other economic powerhouses such as the U.S. and China fulfill their responsibilities. "What we must all understand is that this is a defining moment," Lagarde said at the German Council on Foreign Relations, according to the prepared text of her speech. "It is not about saving any one country or region. It is about saving the world from a downward economic spiral. It is about avoiding a 1930s moment, in which inaction, insularity and rigid ideology combine to cause a collapse in global demand." Lagarde called for stronger growth, larger firewalls and deeper integration in the euro zone to stem the crisis after the "many false starts and half measures" seen in 2011.

IMF should stay out of the eurozone crisis  - The International Monetary Fund has earmarked 91 per cent of its definitive commitments to programmes in Europe. There is now a proposal on the table that suggests this is not enough and should be significantly increased.Would an increase in IMF funds to bail out the eurozone be justified? In particular, should non-eurozone countries participate in raising this new capital? The IMF is right, of course, to conclude that the eurozone crisis is the main risk facing the global economy right now. The world has a strong interest in the resolution of the crisis. But greater IMF involvement in specific EU programmes is not necessary, and quite possibly counterproductive.  It is not necessary because the eurozone has the financial capacity to help itself. The combined region runs a small current account surplus with the rest of the world. As a result of this, it does not depend on outside finance. It has its own central bank, which can, in theory at least, act as a lender of last resort. The eurozone operates, of course, under political and legal constraints, such as the deficit rules of the Maastricht treaty, the “no bail-out rule”, or the rules preventing the European Central Bank from funding governments. However, an outsider would be right to argue that these rules are all self-imposed, and hence reversible. The eurozone should change its rules before crawling to others, cap in hand.

S&P downgrades France's wealth fund, 3 banks  Standard & Poor's Ratings Services late Monday said it stripped France's sovereign wealth fund of its triple-A rating and lowered its long-term credit ratings on Groupe BPCE, Credit Agricole , and Societe Generale to A from A-plus. The outlook on each bank rating is stable, the firm said. S&P lowered its long-term credit rating on state-backed Caisse de Depots et Consignations, the country's sovereign wealth fund, to AA-plus from triple-A, with a negative outlook. The moves comes after S&P earlier this month cut France's sovereign credit rating from triple-A to double-A plus. S&P also affirmed its AA minus ratings on BNP Paribas and Credit Logement. The outlook on the ratings of both institutions is negative, S&P said.

Princess Merkozy Kisses Frog, Turns into Hopelessly Indebted Club Med Prince - Steen Jakobsen, chief economist for Saxo bank in Denmark, pinged me with an interesting set of comments this morning. Please consider the tale of the frog and the indebted princess. This morning I had the pleasure of being on CNBC together with a pundit from a major investment bank. He claimed that if Greece went bankrupt then no one would lend them any money and it would leave them without trading partners. I countered that this would happen anyway if we continue to ignore the losses that creditors need to take on their Greek investments. Only through a Schumpeter-like “Destruction of Capital”, after all, can we give Greece a fighting chance to survive.Why is everyone so afraid of a default? Are we supposed to believe we have banished them forever?History is full of nations going bankrupt – and in no circumstances has it ever meant a complete loss of trading, credit, etc. Quite the contrary - it's precisely the default and accompanying devaluation that often sows the seeds of a recovery.Here, according to a Wikipedia article on sovereign defaults, are a few examples of major European sovereigns that have defaulted over the years:The complete list in the above link includes a list of 39 African sovereign defaults, 26 Asian sovereign defaults, a whopping 91 European sovereign defaults, and for the Americas, a stunning 154 sovereign defaults.

IMF urges Europe to build bigger firewall around Italy and Spain - EU leaders came under pressure from the International Monetary Fund on Monday to bolster the firewall around Italy and Spain, as talks between Greece and its creditors remained in deadlock for a third week. The IMF director general, Christine Lagarde, told Brussels to drop its opposition to a bigger insurance fund, with a view to convincing world money markets that Europe has the firepower to protect vulnerable nations. The former French finance minister pointedly gave her warning in Berlin where Angela Merkel's conservative government has led opposition to providing bigger loans for the EU's bailout fund. Lagarde's speech came as a senior Greek official warned the eurozone would "dissolve" if Greece was forced out of the euro after being offered what he described as non-negotiable but unaffordable rates of interest with its creditors. Gikas Hardouvelis, who heads the economics team advising prime minister Lucas Papademos, said the EU would be abdicating its responsibility if it allowed banks, insurers and hedge funds to offset a 50% writedown of the country's debts by charging interest rates of around 4%. He said that enforcing such rates would be the same as kicking Greece out the euro, in a speech adding to tension in Brussels.

Permanent Rescue Fund Seems Nearer in Europe - European finance ministers increased pressure on Greek bondholders to take voluntary losses to ease the region’s debt crisis1 late Monday and took new steps to complete action on a new bailout fund as the International Monetary Fund2 had urged. The ministers backed efforts by Greece to keep the interest rate on newly issued bonds below 4 percent, Jean-Claude Juncker, who represents the 17 nations using the euro3 currency, told a news conference. That is below the level offered by bondholders in exchange for their current holdings of Greek debt. “The negotiations will have to be resumed on that point as we don’t have a final picture,” said Mr. Juncker, referring to the interest rate on Greek debt. At stake is the need to pare Greek debt to levels where the country can conclude a bailout with the European Union and the I.M.F. that would give it the cash it needs to repay loans coming due in March and, officials hope, allow Athens to finance its needs through 2013. Without such a package, Greece could be faced with a chaotic default that would further destabilize the rest of the euro zone.

Hungary May Need 20 Billion Euro IMF Safety Deal, Csefalvay Says - Hungary may need a financial assistance package from the International Monetary Fund worth between 15 billion euros and 20 billion euros, Economy Ministry State Secretary Zoltan Csefalvay said in a TV2 interview today. A “safety net” of that size would help Hungary cover its foreign-currency debt repayments this year and next, Csefalvay said, adding that country may obtain the aid by the end of the first quarter.

European Daily Catch: Know Your Consumers - Rebecca Wilder - Today’s European Daily Catch compares the aggregate implications of the reported January 1-point rise in French household confidence to the reported January stabilization of Italian consumer confidence. Specifically, French consumers could be ‘happier’ but that doesn’t necessarily mean they’re spending more, while Italian household confidence translates rather directly to aggregate spending patterns. Domestic demand is a large contributor to GDP growth in both Italy and France. Therefore, inferring patterns of aggregate consumption from higher frequency leading indicators, such as confidence, is important. Confidence measures lead real retail sales numbers, and real retail sales lead the quarterly real consumption patterns. Annual real retail sales growth has a reasonably high correlation with aggregate consumption (the ‘C’ of Y=C+I+G+NX) in both Italy and France, 69%; so gauging real retail sales from consumer confidence could potentially be useful. …but it’s not in France. See, with a correlation of just 38%, household confidence is a terrible coincident indicator of real retail sales and adds practically no predictive value for aggregate consumption or GDP forecasting. French consumers could be just miserable and still post relatively healthy retail sales and aggregate consumption numbers. …and it is in Italy. When Italians are depressed (not confident), they spend less.

Greece: What happens if bondholders hold out? - What happens if Greece puts forward an exchange offer which is acceptable to the Troika (the EU, ECB, and IMF), but unacceptable to bondholders — and only say half of them accept? In that event, there wouldn’t be nearly enough acceptances to be able to bail in the holdouts — and as a result, Greece would be paying out on its new bonds and would be forced to default on the old bonds which weren’t tendered. Narrowly speaking, this would be good for Greece’s fiscal situation. After all, if it’s only making coupon payments on half of its private-sector debt, that saves it a substantial interest expense. But there’s no sense in which Greece actually wants this outcome — for two reasons. Firstly, even if the ECB encouraged Greece to offer bondholders a very low coupon, it also doesn’t want Greece to be in indefinite default.  The IMF, too, has rules against lending into arrears: it won’t lend new money to countries which are in default on old loans. The most devastating effect, however, would probably be on Greek banks. The obligations of Greek banks, pretty much by definition, are less safe than the obligations of the Greek government. Deposits in Greek banks are obligations of Greek banks. And so anybody with deposits at a Greek bank would likely move those deposits somewhere much safer, like Germany. That capital flight would weaken the balance sheets of the Greek banks and force the ECB to make a hard decision about lending not to Greece itself but rather to Greece’s banks.

EU ratchets up pressure with Greek default threat - European Union officials have stepped up pressure on Greece and its creditor banks in a complex game of three-way brinkmanship, signalling that they will allow a Greek default to run its course unless both sides accept more pain. Austria's finance minister Maria Fekter said patience with Athens is exhausted. "Greece has failed its austerity targets by a wide margin. The Greeks have made decisions, but they weren't implemented. They have agreed to austerity measures, but costs haven't come down. This situation has caused great consternation," she said at a meeting of EU finance minister in Brussels. "We're sending a direct message to Greece that the community expects more. We're not pleased and only when there's a written message on the table in front of us, can further assistance be discussed," she said. The head of the European Commission's economics team Mario Buti said Brussels is prepared to allow credit default swaps (CDS) on Greek bonds to come into play if talks fail to reach a deal that gives Greece enough debt relief to claw its way back to viability. "Triggering CDS may have to be considered," he said. The comment is a clear warning to private creditors holding €206bn (£172bn) of Greek debt that the EU will not step in with fresh money to prevent a default on March 20, when Greece must make a €14.5bn debt payment.

European Central Bank Moves to Avoid Loss on Greek Bonds - European leaders have begun discussions with the European Central Bank on several options that might keep it from having to take a loss on its 55 billion-euro portfolio of Greek bonds. For months, the proposed debt restructuring deal between Greece and its private sector creditors had excluded the central bank from taking a loss on its Greek bond holdings while banks and hedge funds would have losses of 50 percent or more. Among the measures being discussed Tuesday, according to officials involved in the negotiations, is one in which the central bank would exchange Greek bonds that it currently owns for a different form of Greek government debt that would not be eligible for a loss. The talks remain fluid and could break down at any moment, said the officials, who were not authorized to speak publicly.  Also on Tuesday, European Union1 officials pressed political leaders to turn their attention to promoting growth, amid signs that a recovery will take longer than anticipated.

Hedge Funds Scramble to Unload Greek Debt - So much for that big fat Greek payday. Hedge funds that loaded up on Greek bonds in the last month — betting on a quick gain — are now scrambling to sell those holdings, fearful that European policy makers will force them to take a deep and binding haircut on the debt. But walking away from the trade may not be that easy. While the money managers had little problem snapping up the bonds from European banks eager to sell, the pool of potential buyers is drying up. Hedge funds have few options. Although talks between Greece and its bondholders have stalled, European officials are pressing for a deal by the end of this month. Under the proposed debt restructuring plan, hedge funds and other private sector creditors would have to incur losses of 50 percent or more — whether or not the bondholders agreed.

Binding Greek Deal Would Trigger Swap Payments, Millstein Says -- A deal to relieve Greece’s debt burden would trigger a global credit event if forced on the nation’s bondholders, said Jim Millstein, the U.S. Treasury Department’s former chief restructuring officer. Greek officials are seeking to reach an agreement with private creditors on a voluntary debt swap. If the government enacts legislation that compels full participation in the deal, it should trigger payouts on credit-default swaps, or CDS, that investors bought to insure against a default, Millstein said. “This will be the largest CDS event we’ve ever seen in the private market,” Millstein said at the Bloomberg Sovereign Debt Crisis Conference hosted by Bloomberg Link in New York today. “And who’s swimming naked when that tide goes out?” European finance ministers pushed Greece’s private creditors to accept bigger losses in talks that seek terms that won’t trigger the swap payments. Standard & Poor’s managing director of sovereign ratings, John Chambers, said today that the “very least” that may happen is a debt exchange that qualifies as a default by his firm’s criteria.

Lagarde presses ECB over Greek debt deal - The European Central Bank and national central banks in the eurozone should take a hit on their Greek bond holdings if a restructuring deal with private investors in Greece’s debt is “not sufficiently renegotiated”, the head of the International Monetary Fund said. “The balance between the participation of the private and the public sector is a concerning question,” Christine Lagarde said on a visit to Paris on Wednesday. The IMF has turned up the heat on European officials to take on more of the burden of filling a widening gap in Greece’s budget by pressing the European Central Bank over its €40bn in Greek bond holdings, eurozone officials have said. The ECB bought the bonds at below face value as part of a programme to prevent the collapse of Greek debt markets in 2010. It has also been accepting Greek bonds as collateral for cheap loans to teetering Greek banks. The bonds, with estimated yields in excess of 7 per cent, will provide a big return if Greece does not default and they are held to maturity. An IMF official denied that the fund was pushing any specific action on the ECB, including writing down the value of its debt or reinvesting the profits made from the bonds back into Greece.But eurozone officials involved in the discussions said the pressure to earmark potential gains to fill Greece’s financing hole was being fiercely resisted by the ECB.

Uncomfortable days for ECB -  These are uncomfortable days for owners of Greece’s government bonds. For the European Central Bank, the country’s largest bond holder, they are especially so.  With negotiations close to breaking down on “private sector involvement” in a fresh Greek bail-out, the ECB is under pressure from the International Monetary Fund and the financial industry to take a hit. The ECB faces the dilemma it always feared: might it have to take substantial losses on the estimated €35bn-€40bn it spent on Greek bonds, with potentially damaging consequences for itself and the eurozone?  The ECB started buying Greek bonds in May 2010, when the eurozone debt crisis first erupted. The objective of Jean-Claude Trichet, president, was to stabilise financial markets. The assumption was that bonds bought at market prices would be held until maturity, when the ECB would book a tidy profit. Having taken action when the private sector held back, it justifiably feels it should not have to pay a price now, said Erik Nielsen, chief economist at UniCredit. “In an emergency, the fire brigade goes in – but the deal is that it is protected.”Economists estimate that a 70 per cent “haircut” on the face value of the ECB holdings could leave a loss of more than €20bn – a significant but not disastrous sum given the size of the reserves held by the ECB and eurozone national central banks. But the ECB’s resistance to accepting losses is not just principled. Agreeing to take a loss could be viewed as providing financial assistance to Greece – and in violation of the European Union’s ban on central banks funding governments.

Banks Hoarding ECB Cash to Double Company Defaults: Euro Credit - Corporate defaults may almost double in Europe as companies struggle to refinance debt and banks hoard cash borrowed from the European Central Bank or use it to buy government bonds. Europe’s default rate may soar to 8.4 percent or more, from 4.8 percent at the end of 2011 as the recession bites and company financing dries up, according to Standard & Poor’s. Petroplus Holdings AG (PPHN) became the latest victim of the tough stance banks are adopting when the region’s biggest independent oil refiner said this week it will file for insolvency after losing access to $2.1 billion of credit lines. “It’s very challenging for anyone to raise money from lenders right now,” said Andrew Cleland-Bogle, a Frankfurt- based director at corporate finance specialist DC Advisory Partners. “Combine that with increased bank capital requirements and you can see that although banks are getting money they’re very selective when it comes to lending it. 2012 is going to be a very, very tough year.” Speculative-grade companies have to refinance about 230 billion euros ($300 billion) through 2015, according to S&P. At the same time, banks and loan funds that provided the initial funding are scrambling for capital or reaching the end of their reinvestment periods and may be unwilling to extend loans.

Less Than Two Months Ahead Of The Greek D-Day, Rogoff Says "Europe Is Clearly Not Ready For A Greek Default" - It is less than two months until the Greek March 20 D-Day past which there is no more can-kicking? Check. Creditor negotiations which are going "so well" they may collapse at any given moment, have had their deadline extended indefinitely just because, and in which hedge funds now have every option to put the country into bankruptcy? Check. You would think Europe is prepared for this contingency right? Wrong. Per Ken Rogoff (who together with Simon Johnson are two former IMF chief economists who have become some of the biggest bears in the world - what is it about not being shackled to one's salary, that allows one to speak the truth), Europe is "clearly unprepared for a Greek default", less than two months from the day when it very well may finally occur. He adds: "there's going to be an endgame to this and it's not going to be pretty.... If you are just printing money and you are not making fundamental change you either lose money and you will have to recapitalize with the ECB or you will get inflation." And it gets worse: "it's not just Greece. You are going to see other restructurings before this is over." He ends with what we have been saying since mid-2011: "Once you set the precedent then say Portugal are going to say 'hey, look how much you gave Greece. How come we don't get the same?'."

Angela Merkel casts doubt on saving Greece from financial meltdown - Angela Merkel has cast doubt for the first time on Europe's chances of saving Greece from financial meltdown and sovereign default, conceding that Europe's first ever multibillion euro bailout coupled with savage austerity was not working after a two-year crisis that has brought the single currency to the brink of unravelling. In an interview with the Guardian and five other leading European newspapers, the German chancellor also insisted – against widespread resistance elsewhere in the eurozone and in the UK – that the European court of justice (ECJ) be empowered to police public spending and budget policies of the 17 countries in the euro. She also called for the eventual creation of a European political union, with many more national powers ceded to a central government, a strengthened bicameral European parliament, and the ECJ assuming the role of Europe's supreme court. Days before the latest EU summit, which, at Merkel's insistence and evoking scant enthusiasm elsewhere, is to finalise an international treaty between eurozone governments entrenching German-style fiscal and budgetary rigour in all single currency countries, the chancellor admitted having doubts about the strategy she had pursued during the crisis. "We haven't overcome the crisis yet. Of course, there's Greece, a special case where, despite all the efforts that have been made, neither the Greeks themselves nor the international community have yet managed to stabilise the situation."

Germany Loses Its Grip - One of the things that amazes me about the European “crisis” is how symptoms of the underlying problems of the macro-economic system that is the Eurozone get confused with the actual problem. Let’s take the current situation in Greece for example: (video) So as of yesterday, the EU finance ministers , the EC and the IMF joined forces to demand that the Greek creditors take a larger hit on the countries debt forgiveness. The Institute of International Finance, that represents the creditors, said that its last offer is a 4% coupon on new bonds issued after the deal. The EU wants a better deal because the target is to get Greece down to 120% debt to GDP by 2020 and a lower rate is supposedly required to make that happen. The main reason there is so much argy-bargy about the rate is because every time someone looks at the state of the Greek economy it is worse. So basically, the EU is demanding more from creditors because their own policies have failed to turn the economy around. What makes this particular situation most interesting is that Europe has spent 2 years and literally hundreds of billions of dollars trying to avoid a Greek default, yet now they are making demands that have the potential to push the country in exactly that direction. If a new deal cannot be struck that both sides can agree on then Greece may have no choice but pursue collective action clauses on outstanding bonds written under Greek law to force private creditors to take a deal.

Berlin ready to see stronger ‘firewall’ - Germany is open to boosting the firepower of the eurozone’s rescue funds to €750bn in exchange for strict budget rules favoured by Berlin in a new fiscal compact for all members of the currency union. Berlin appeared to soften its longstanding resistance to increasing the funds only hours after the International Monetary Fund warned that the eurozone needed more money to build “a larger firewall” to prevent the crisis from spreading to its core economies. According to German and eurozone officials, Angela Merkel is prepared to let the existing European Financial Stability Facility, which has about €250bn in unused funds, run in parallel with its successor, the €500bn European Stability Mechanism, the launch of which has been brought forward to July.  In return the German chancellor wants eurozone heads of government to sign up to rules to cut budget deficits and public debt that are much tougher than those currently foreseen by eurozone governments. The most recent version of the fiscal compact would allow governments to breach deficit limits in “periods of economic downturn” – a phrase criticised by the ECB as an “escape clause” that could lead to “easy circumvention” of what are meant to be cast-iron rules.  The German offer emerged as Christine Lagarde, the IMF head who met Ms Merkel on Sunday, pressed Berlin for “a clear and credible timetable” to fold the existing EFSF into the ESM to increase its size.

Merkel: Germany does not have unlimited resources -- German Chancellor Angela Merkel said in an interview with Spanish daily El Pais on Wednesday that as much as the country supports the Europe aid and rescue umbrella, it doesn't have "unlimited" resources. In response to continued calls for Germany to put up more money to fight the crisis, she said it makes no sense to "promise more and more money, but not fight the causes of the crisis." She said Germany needs to be careful it doesn't run out of strength, which would not help Europe as a whole. She also said she does not foresee a split in Europe, but recognizes markets are clearly testing the euro zone's will to remain together. For that reason, problems must be addressed and resolved "without half measures." Merkel who is currently attending the World Economic Forum in Davos, also reportedly gave simultaneous interviews to newspapers from Italy, Poland, Britain and France.

Angela Merkel would consider a euro-zone fiscal stimulus - A RECENT survey by the French research institute IFOP found that in the eyes of the French, Angela Merkel represents those values that are commonly associated with Germans (serious, disciplined, hard-working, sincere and so on). The study, which was commissioned by the German embassy in Paris, also reported that 62% of respondents thought that France should learn from German economic and social policies—although I am not sure about the framing of that question in French. Ms Merkel herself disagrees with such stereotyping, as she reveals in a forthcoming interview with several European newspapers. However, she seems to agree that the rest of Europe should learn from Germany’s past economic policies. According to a preview of the interview (auf Deutsch) by the German Süddeutsche Zeitung, she argues that fiscal prudence, while a necessary prerequisite for more solidarity, is not enough. Troubled euro-zone countries also need to tackle reforms like improving labour market flexibility, and they must open up closed professions and businesses. This is a welcome shift of emphasis away from short-term austerity and towards medium-term fiscal prudence and growth-enhancing reform.

Lagarde, in Berlin, tells Germany — and the rest of Europe — to pay up - International Monetary Fund Managing Director Christine Lagarde warned of a “1930s moment” for the world economy if Europe does not solve its financial problems and said Germany must contribute more money to rescue efforts if a disaster is to be avoided. In a public appeal Monday at a Berlin think tank, Lagarde voiced the growing unease among IMF officials about Europe’s potential to derail the world economy. Any number of events — a messy default in Greece, a bank failure, a disruption in the region’s financial markets — could trigger global economic turmoil. To guard against such a scenario, Lagarde told the German Council on Foreign Relations that the nations using the euro — especially Germany — need to commit more money to backstop troubled governments and banks on the continent. Without such funds, Lagarde said, “we could easily slide into a 1930s moment. . . . A moment, ultimately, leading to a downward spiral that could engulf the entire world.”

Vital Signs: Rising German Bond Yields - German bond yields have risen in the past two weeks on fresh concerns about the euro-zone debt crisis. The yield on Germany’s 10-year government bonds rose to 1.999% Tuesday — up from 1.768% less than two weeks ago. Germany, one of four triple-A rated countries in the 17-nation currency bloc, is still paying far less to borrow money than a year earlier, as investors have sought a haven amid weakness elsewhere in the 17-nation currency bloc.

EU Finance Ministers Push Through ESM Treaty in Fishy Fly-by-Night Move -- Europe's most important treaty on the European Stability Mechanism (ESM), which will lead the EU into a financial dictatorship, has been pushed through by EU finance ministers late Monday evening. But the latest version of the ESM cannot be found on English and German EU websites. A link on consilium EU only leads to a 'file not found' message and the German EU website "Europa von A - Z" does not mention the ESM at all. This reminds one of the secrecy around the Federal Reserve Act, that was pushed through in 1912. Is the EU Commission now playing the same fishy game 100 years later? Media reports from last midnight only said that the ESM treaty was agreed on by EU finance ministers and mentioned January 30 as the date when the treaty will be officially signed. Significant changes have been made, a few media reported. The capital of the ESM will now be only €80 billion instead of the €700 billion proposed in the only available draft version from July 2011 (see treaty text below). The finance ministers also agreed to bring the ESM into existence one year earlier by July 2012, putting national governments under immense pressure to ratify the ESM treaty without sufficient public discussion. German state TV ZDF reported shortly after Monday midnight that the fund shall have a financing volume of €500 billion, but this figure is a moving goal post. IMF head Christine Lagarde proposed a volume of €1 trillion whereas Italian prime minister Mario Monti and Austrian finance minister Maria 'Mizzi' Fekter said later that the ESM should be upped to €750 billion. Such important changes cannot be found in publicly released EU documents anywhere on the web. The ESM will be the successor of the European Financial Stability Fund (EFSF) which lost its AAA rating a few days ago.

A New Watershed Moment In The Euro Crisis? - Up until now, the private sector has been expected to bear the burden of an imminent Greek debt restructuring by voluntarily accepting losses of 50% or more. Talk from the International Monetary Fund's Christine Lagarde about public sector involvement, however, suggests that this attitude is quickly changing. If it progresses past Lagarde alone, the realization that the public sector will have to share the burden of revitalizing Greece marks a watershed in EU leaders' crisis response.Negotiations on the current plan for private sector involvement in the restructuring are stalling in Athens. Even if they agree on a deal that would avoid a credit event (where credit default swap insurance contracts are paid out), it faces serious legal and practical hurdles. Not to mention that the deals currently on the table would not actually return Greece to debt sustainability—and consequently market access—anytime in the near future. The mere fact that public sector involvement in the debt restructuring is even being discussed marks a watershed in EU leaders' response to the crisis. While the move would entail unwelcome losses for the European Central Bank, it would also affirm EU leaders' willingness to do what's necessary to mitigate the debt problems of the periphery—and prevent them from infecting the larger eurozone.

European Loans Contracted Most on Record as Crisis Intensified - Loans to euro-area households and companies contracted the most on record in December as the sovereign debt crisis damped demand for credit and banks tightened lending. Loans to the private sector declined 0.7 percent from November, the most since records began in 1991, the European Central Bank said today. Loans grew 1 percent from a year earlier, the lowest rate since July 2010 and down from the 1.7 percent annual gain in November. “The sharp moderation in annual growth in loans to the private sector in December, particularly the appreciable monthly fall in loans to businesses, will reinforce concern that credit conditions are now increasingly tightening and posing a mounting risk to already struggling euro-zone economic activity,” said Howard Archer, chief European economist at IHS Global Insight in London. The ECB lent euro-area banks a record 489 billion euros ($640 billion) in December to ward off a funding squeeze caused by a worsening in the two-year-old debt crisis. ECB President Mario Draghi said on Jan. 19 that the three-year loans prevented a “serious funding crisis” and the benefits will become more apparent in coming months.

At Euro Talks, a Calm Arm-Twister From the U.S. —The world’s financiers and finance ministers have descended on the annual forum in Davos, Switzerland, at another perilous moment, with the sovereign debt woes in Europe sapping strength from emerging markets and threatening global growth.  Every nation’s rebound is at risk, including that of the United States — a particular concern for President Obama, who wants to trumpet the country’s renewed strength during his re-election campaign.  Lael Brainard, America’s top financial diplomat, landed Thursday in Switzerland to help coax the European negotiations along. As the Treasury under secretary for international affairs, she has the urgent task of helping to persuade the Europeans to head off a financial crisis by building a firewall to quiet the markets once and for all — and doing so without any formal role in their negotiations. It is at times an awkward role, but the stakes are enormous, not just for the United States but for preservation of the euro zone and its currency.  Ms. Brainard, 49, operates mostly behind the scenes, in private phone calls and discreet visits — 17 trips to Europe alone in the last two years.

PIMCO tells clients diversify out of euros (Reuters) - PIMCO is advising clients to diversify out of euros to protect the value of their investment holdings amid a highly uncertain outlook in the euro zone, with emerging market currencies seen as an attractive alternative in the long term. This strategy marks a shift from the conventional investment path for European money managers, who generally favour investments denominated in the currency in which they are based, thus limiting exposure to foreign exchange volatility. PIMCO is one of the largest investment managers in the world with more than $232 billion of assets managed out of Europe and more than $1.35 trillion worldwide. "As a European investor from France or Germany that has his base currency in the euro, when you don't know how the euro zone will look in five years, some kind of self-preservation is required to protect your purchasing power," Thomas Kressin, head of European foreign exchange and portfolio manager at PIMCO in Munich said in an interview on Wednesday. Kressin is responsible for managing approximately $15.2 billion in assets. "We generally advise our clients to diversify some of their money into other currencies," he said, adding the euro's recent bounce from 17-month lows against the dollar was driven mainly by a squeeze of short euro positions and some fresh money being invested at the start of the new calendar year.

JP Morgan Admits It Weighed Euro Exit - Jamie Dimon, the straight-talking chief executive of JPMorgan, has admitted the bank considered pulling out of the eurozone’s most troubled periphery on economic grounds, but ultimately opted instead to stay for the long term. “We have about $15bn exposure across the euro five,” Mr Dimon said, referring to Ireland, Portugal, Italy, Greece and Spain. “It’s largely to corporations and sovereign and some banks. But we made a decision which was largely social, and partially economic, to stay.” Mr Dimon said that the bank and its board was aware of the risks involved but added: “I hope we will still be doing business there in 50 or 75 years.” The revelation, at a debate on the future of the global economy at the World Economic Forum in Davos, comes amid intense discussion at the forum over the eurozone’s woes. Mr Dimon told the panel that he was fed up with banks and big business generally being seen as only motivated by short-term gain. “Short-term profit means nada,” he said. “If you asked me to increase profit by 50 per cent next year, I could do it. Take a little more risk.”  But that would not be in the longer term interest of customers, employees and communities as well as shareholders, he said, adding that he was making decisions now to drive the bank’s business for the next “five, 10, 15 years”.

For Greece, the Outlook Is Still Grim — Even as Greece1 tries to convince creditors that its debt-reduction efforts are on track, gloomy new International Monetary Fund2 forecasts about its long-term economy are threatening to derail talks meant to secure the nation’s next big installment of bailout funds.  The concerns, stemming from an analysis that the I.M.F. has been quietly sharing with European officials and Greece’s creditors in recent weeks, come at a crucial time for Athens.  The new Greek government is in dual-track talks with private and public sector creditors, trying to make the case that its program for reducing long-term debt is working. The government seeks to persuade private creditors to provide relief by taking some losses on their bond holdings, and to persuade its public sector lenders to release a scheduled allotment of bailout money, possibly as much as 30 billion euros ($39 billion).  Without that next payout, the nation is almost certain to default when a bond repayment of 14.4 billion euros ($18.7 billion) comes due in March.

Greek Debt Wrangle May Pull Default Trigger - Opposition to payouts on Greek credit-default swaps from European Union policy makers is softening as disputes over a voluntary debt exchange threaten to push the nation into default. Any agreement between the Greek government and the Washington-based Institute of International Finance on debt writedowns will only bind 50 percent of investors in the 206 billion euros ($270 billion) of notes being negotiated, Barclays Capital estimates. Hedge funds may resist a deal, seeking to get paid in full or compensated from insurance contracts “Politicians seem less concerned than before about CDS triggers,” . “Having a payout on Greek CDS is probably better than the alternative: a loss in market faith of the product’s ability to provide a hedge against sovereign risk.”  Officials, including former European Central Bank President Jean-Claude Trichet, have insisted that a swaps trigger was unacceptable because traders would be encouraged to bet against indebted nations and worsen the crisis. Greece said it may impose losses on investors who fail to support the debt restructuring by adding a so-called collective action clause, or CAC, into its bond documentation. That would force holdouts to accept the same terms as the majority.

Greece, creditors laboriously piece together debt deal - - Greece and its private creditors head back to the negotiating table on Saturday to put together the final pieces of a long-awaited debt swap agreement needed to avert an unruly default. After weeks of muddling through round after round of inconclusive talks, the negotiations appear to be in their final phase with both sides hoping to secure a preliminary deal before Monday's summit of euro zone leaders. The debt swap, in which private creditors are to take a 50 percent cut in the nominal value of their Greek bond holdings in exchange for cash and new bonds, is a pre-requisite for the country to secure a 130-billion-euro rescue package. Prime Minister Lucas Papademos told Reuters in an interview he expects the debt talks to be concluded within days. "We made significant progress over the last few weeks and in the last few days in particular. We are trying to conclude the discussions as quickly as possible. I am quite optimistic an agreement will be reached in the coming days," he said.

Portugal, back in the frame - Felix and Arianna want to move Davos to Patmos, but what about the Azores? Have a look at the yields on the Portuguese 3-year… … the widest flavour of paper at the short end of Portugal’s inverted curve, which now looks like this: The 3-year bond hit 21 per cent on Thursday even as fellow-peripherals as Italy and Spain were tightening considerably. It’s hard to pin this latest bout of skittishness on anything in particular. There’s the general, obvious worry that after the latest round of euro rating downgrades the bailout firewall will have to be built somewhere east of Lisbon. There was also this report (hat tip TBI) of a powerful Portuguese lobbying group warning of an imminent credit crunch, but we’re not sure how much to make of it. The FT added some colour in this morning’s paper, remarking on the extent to which Portuguese 5-year yields have differed from those of its peripheral neighbors since the December announcement of the ECB’s 3-year LTROs:

Portugal Default Swaps at Record as Greece Spurs Loss Concern -- Portuguese credit-default swaps rose to a record amid concern the government may seek to copy a proposed Greek deal for private investors to take losses on their bondholdings. Credit-default swaps insuring $10 million of Portuguese sovereign debt for five years rose to an all-time high of $3.91 million in advance and $100,000 annually, according to data provider CMA at 4 p.m. in London. The cost implies a 70 percent chance the government will default in that time. A Greek accord with private bondholders that would prompt writedowns of more than 50 percent is “very close,” the European Union’s Economic and Monetary Affairs Commissioner Olli Rehn said today in Davos, Switzerland. A beneficiary of a 78 billion-euro ($103 billion) bailout, Portugal probably had public debt representing 101.6 percent of GDP last year, the fourth-highest in the EU, according to the European Commission. “It appears that Portugal may have crossed the Rubicon in the eyes of the market,” said Gary Jenkins, the director of independent credit firm Swordfish Research in London. “A negotiated settlement in Greece might become a template for Portugal in how to deal with their debt, which wouldn’t be good news for investors.”

Investors cue up Portugal as the next Greece (Reuters) - Investors are betting that after cap-in-hand Greece comes Portugal, selling off its stocks and bonds in the belief that the euro zone laggard cannot avoid a default without a second bailout. While borrowing costs have fallen for debt-ridden Spain and Italy as well as bailed-out Ireland on the back of a huge infusion of low-cost loans from the European Central Bank, Portugal's have shot up, setting it on a path towards bankruptcy. The rot really set in two weeks ago after Standard & Poor's downgraded 15 euro zone countries, putting Portugal in the "junk" category, along with Greece. That shuts it out from tapping capital markets in the foreseeable future and makes its task of meeting future debt repayments even tougher. Since then, the rise in both government bond yields and the cost of insuring debt against default has been relentless. This is the opposite of what has happened in Ireland, which was bailed out in November 2010 just six months before Portugal received a 78 billion euro bailout from international lenders. "If we look at where bond yields are for Portugal it makes it impossible for Portugal to access debt markets in 2013," said Nikolaos Panigirtzoglou, a rate strategist at JPMorgan.

The Crisis of Fake Constraints: Greek Denouement Eupdate - Unless Greece and its creditors reach a deal in the next few days, Greece has no money to pay €15 Billion or so due to its bondholders in March. From the start, this has been a crisis of fake legal and economic constraints masking very real political constraints. In 2010, Greece could have restructured its debt quicker than most sovereigns in modern memory -- or it might have been bailed out, had Europe chosen to go the route of fiscal transfers. Neither of these paths was taken because the European Central Bank was unwilling to countenance the sin of debt restructuring, but member states with money were unwilling to pay for the appearance of collective virtue. Now that the restructuring is inevitable and the virtue bill unpayable, the fake constraints are back. The ECB holds about €50 of Greek debt, which must go into the restructuring to get enough debt and cashflow relief. But the central bank would not take losses, and remains allergic to triggering credit default swaps (which is more likely to happen if it sits out). Worse, its votes might be needed to (credibly threaten to) amend Greek bonds using retrofit Collective Action Clauses. (See latest from Gulati-Zettelmeyer here.)

Exclusive: Germany wants Greece to give up budget control (Reuters) - Germany is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package, a European source told Reuters on Friday. "There are internal discussions within the Euro group and proposals, one of which comes from Germany, on how to constructively treat country aid programs that are continuously off track, whether this can simply be ignored or whether we say that's enough," the source said. The source added that under the proposals European institutions already operating in Greece should be given "certain decision-making powers" over fiscal policy. "This could be carried out even more stringently through external expertise," the source said. The Financial Times said it had obtained a copy of the proposal showing Germany wants a new euro zone "budget commissioner" to have the power to veto budget decisions taken by the Greek government if they are not in line with targets set by international lenders. "Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time," the document said. Under the German plan, Athens would only be allowed to carry out normal state spending after servicing its debt, the FT said.

The Silent Anschluss: Germany Formally Requests That Greece Hand Over Its Fiscal Independence - It was tried previously (several times) under "slightly different" circumstances, and failed. Yet when it comes to taking over a country without spilling even one drop of blood, and converting its citizens into debt slaves, Germany's Merkel may have just succeeded where so many of her predecessors failed. According to a Reuters exclusive, "Germany is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package, a European source told Reuters on Friday." Reuters add: "There are internal discussions within the Euro group and proposals, one of which comes from Germany, on how to constructively treat country aid programs that are continuously off track, whether this can simply be ignored or whether we say that's enough," the source said.' So while the great distraction that is the Charles Dallara "negotiation" with Hedge Funds continues (as its outcome is irrelevant: a Greece default is assured at this point), the real development once again was behind the scenes where Germany was cleanly and clinically taking over Greece.

Germans float direct EU control over Greek budget - Germany is proposing that debt-ridden Greece temporarily cede sovereignty over tax and spending decisions to a powerful eurozone budget commissioner before it can secure further bailouts, an official in Berlin said Saturday.The idea was quickly rejected by the European Union's executive body and the government in Athens, with the EU Commission in Brussels insisting that "executive tasks must remain the full responsibility of the Greek government, which is accountable before its citizens and its institutions." But the German official said the initiative is being discussed among the 17-nation currency bloc's finance ministers because Greece has repeatedly failed to fulfill its commitments under its current €110 billion ($145 billion) lifeline. The proposal foresees a commissioner holding a veto right against any budgetary measures and having broad surveillance ability to ensure that Greece will take proper steps to repay its debt as scheduled, the official said. The person spoke on condition of anonymity because the talks are confidential.

Vee Haf Vays Uf Making You Pay! - Anna Gelpern's Gunboat Diplomacy post pretty much sums out the leaked German term sheet on Greece. I would only note one other thing--the highly idiosyncratic use of "absolute priority." The Germans seem to have taken the language of Chapter 11 and repurposed it, with absolute priority meaning foreign unsecured creditors get paid in full before anyone else sees a cent. Of course, maybe the Germans really do know how to get blood out of a stone.  But in the meantime, I think this is best referred to as Teutonic priority. 

Fitch cuts Italy, Spain, other euro zone ratings -  (Reuters) - Fitch downgraded the sovereign credit ratings of Belgium, Cyprus, Italy, Slovenia and Spain on Friday, indicating there was a 1-in-2 chance of further cuts in the next two years. In a statement, the ratings agency said the affected countries were vulnerable in the near-term to monetary and financial shocks. "Consequently, these sovereigns do not, in Fitch's view, accrue the full benefits of the euro's reserve currency status," it said. Fitch cut Italy's rating to A-minus from A-plus; Spain to A from AA-minus; Belgium to AA from AA-plus; Slovenia to A from AA-minus and Cyprus to BBB-minus from BBB, leaving the small island nation just one notch above junk status. Ireland's rating of BBB-plus was affirmed. All of the ratings were given negative outlooks.

Euro Zone Money Supply Offers Grim News - The latest euro-zone money supply numbers make for grim reading. Annual money-supply growth, or M3, slowed to 1.6% in December from 2% in November, well below the European Central Bank‘s 4.5% target rate. Private-sector lending was at its weakest since July 2010, suggesting more economic softness ahead. The decline appears to have been driven by a steep slide in Italy, where M3 slid 4.5% from year-ago levels. Here’s more of a breakdown courtesy of Barclays Capital: household bank deposits down €29 billion from November; nonfinancial corporate deposits down €13 billion; and loans to households and nonfinancial business also fell from November.

Banks Cut Loans to France and Italy, Pile Into Bunds, Treasuries, BIS Says - International banks cut their loans to fellow lenders and governments in Italy, France and Spain in the third quarter, hoarding German, Japanese and U.S. bonds instead, data from the Bank for International Settlements show. Cross-border claims on the Italian state, mainly bonds and loans, declined by 23 percent, or $67.7 billion, in the quarter ended Sept. 30 at banks in the 24 countries for which the Basel, Switzerland-based BIS reports those data. The same measure dropped 21 percent for France and 10 percent for Spain. It also fell for emerging economies including Brazil, Mexico and Poland, while $65.3 billion went into German government debt and $77.2 billion into U.S. Treasuries, the BIS said in a statement. “Contrasting with the reduction in claims on the public sector in emerging countries, the exposure of international banks to the developed countries’ public sector increased by 4.3 percent in the third quarter,” the BIS said. “This increase was driven by claims on the public sectors of the United States, Germany and Japan.”

EU Delays Bank Bond Writedown Plan Until Debt Crisis Abates -- Michel Barnier, the European Union's financial services chief, said he'll wait until the region is "past the worst" of its fiscal crisis before unleashing proposals to write down creditors at failing banks. "We have to get past the worst of this crisis to present this proposal at the right moment," the European Commissioner said in a Bloomberg Television interview yesterday at the World Economic Forum in Davos, Switzerland. That may be in "some weeks, or rather some months." Global regulators have called for rules imposing losses on bank creditors in a bid to prevent lenders being too-big-to- fail. The Financial Stability Board said so-called bail-in systems should be put in place for all international banks. Lenders including Citigroup Inc. and Goldman Sachs Group Inc. have warned that writedowns for senior bondholders may make it more expensive for banks to attract funding.

Complexity Fetishism, the Euro Crisis and a worthy challenge for 2012: Part B - Preface: Part A of this four-part series of posts began by focusing on the problematic application of the analytic-synthetic method to socio-economic interactions. It argued that the economists’ penchant for ‘analysing’ complexity (through a process of breaking it down to its ‘constituent parts’, before synthesising the knowledge of those parts into a macro theory of the whole) delivers logically incoherent insights regarding the phenomena under study. But, remarkably, because the analysis itself is so complex (from a mathematical perspective), few can see through these models and realise their inanity. And given that the economists’ models have a great deal of utility for politicians and financiers, they become established as ‘conventional wisdom’. If I am right (that the analytic-synthetic approach of mainstream economics produces logical incoherence of untold complexity), how come so many smart economists pursue this practice, building on it fabulous careers in the best universities? Is there a conspiracy? No and no, is the simple answer. There is no conspiracy and it would be absurd to think that the economists involved knowingly indulge in theoretical subterfuge. So, what is going on? Here is what I think the answer is: Economists are, by and large, an exceptionally open-minded people, willing to countenance any proposition, however farfetched, weird or even… leftwing. All they ask for in return is that the said proposition is embedded within their models. This ‘openness’ is made all the more significant by the fact that, undoubtedly, any conceivable ‘story’ can be told by tinkering with the economists’ axioms and hypotheses.

The ECB is Plugging Holes - Rebecca Wilder - Today the ECB released its monthly data on monetary developments in the Euro area (EA), as measured by M3 and its components. The market usually focuses on the marketable assets portion of M3, M3-M2, as a representation of funding access – here’s an FT Alphaville post from last month highlighting as much. In December 2011, M3-M2 declined 0.2% over the year, its first annual decline since early 2010. What’s going on here? The ECB’s plugging holes.There’s an evolution in marketable debt that is telling a very interesting story regarding bank funding through December 2011. As each private funding market shuts down, the ECB compensates by relaxing its lending facilities and collateral rules, effectively shoring up bank liquidity. Look at the chart below: it maps out the dynamics of the components of marketable instruments in the EA, M3-M2, in levels of seasonally adjusted billion €. See Table 1 of the release, or download the data here. Since September 2011, the level of repo lending dropped 21%, or – €107 billion. Not coincidentally, the ECB started to introduce longer-term refinancing operations starting with the 1-yr in LTRO October. Holdings of debt instruments <2 years increased €40 billion, as banks use the securities for collateral under the ECB’s lending operations. The ECB is offsetting, at least partially, the crunch in private repo funding markets.

IMF Urges ECB to Expand Its Balance Sheet to Tame Crisis -- The International Monetary Fund is urging the European Central Bank to expand its balance sheet as part of a multitrillion-dollar effort to tame the euro-zone debt crisis. The IMF’s comments, made to the Group of 20 largest industrialized and developing economies, is a controversial call for stronger ECB intervention than the IMF has previously made public.The IMF has said the ECB’s role has been essential in preventing a cascade of defaults and bank failures. It has said the central bank should continue its crisis-fighting efforts of providing cheap cash to the banking system and buying the bonds of ailing euro-zone countries to keep borrowing costs down until leadership is able to boost the size of its bailout facilities.But now, it appears the IMF fears that may not be enough.“Expanded crisis management” is needed “by providing sufficient funding through expanded use of the ECB’s balance sheet and adding real resources for the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM),” the IMF said in a report to the G-20.  The ESM is the successor facility for the EFSF, having a bigger cash base and more financing flexibility.

IMF sees rising recession risk from euro credit crisis - The global economy is slowing sharply and is at far greater risk of recession than was thought just months ago, with Europe’s debt crisis creating “fertile ground” for a rapid collapse, the International Monetary Fund warned Tuesday. In a sobering trio of reports on growth, public debt and financial stability, the agency described global trade and investment as waning and depicted the world as perhaps one shock away from a serious downturn. The epicenter of the economic turmoil remains the euro zone, where political leaders have not committed the money needed to prop up weakened governments and banks, thereby threatening to create a cycle of “self-perpetuating pessimism” that could undermine the recovery, the IMF said. Whether the trigger is a government default in Greece, a bank failure or some other traumatic event, “the world could be plunged into another recession,” said Olivier Blanchard, the IMF’s economic counselor. “The world recovery, which was weak in the first place, is in danger of stalling.” The agency’s latest forecasts suggest that the process may be underway. Projected worldwide economic growth for 2012 was trimmed to 3.25 percent from the 4 percent rate projected in September. China and India, which have become major engines of global growth, are predicted to cool to around 8.2 percent and 7 percent, respectively. The IMF projects that the euro zone will fall into recession and contract by about 0.5 percent this year.

Why Europe’s crisis can’t be averted - Effectively, the unlimited swap lines have solved most of the global liquidity problems, and have prevented the otherwise very scary prospect that a liquidity run could become a self-fulfilling insolvency process. But that of course doesn’t mean that the world’s economies are all solvent. And so the question then arises: if you want to attack solvency rather than liquidity, is international cooperation (i.e., giving the IMF a massive fiscal bazooka) the best way to do so? And the answer there seems to be no. The biggest solvency problems are the problems within the Eurozone, and it is ultimately Europe’s job to get the necessary cash together if it wants to avert a series of fiscal crises. Germany and other big northern European countries are running very large trade surpluses: they can remit cash to the periphery if they have the political will to do so. And if they don’t have the political will to do so, there’s no way in which the US, China, and the rest of the world can or should step in to try to save the likes of Greece and Portugal.

Chart Of The Day: The IMF's "Downside" Case For Europe And The World - This is the scariest chart out of the IMF's World Economic Outlook report released today. Naturally it was purely included in there to emphasize the IMF's Mutual Assured Destruction point that Europe has to immediately proceed with fiscal easing (something which Germany will not agree to until it is too late, if then), or else this is what happens. And since this is Europe, and no fiscal resolution will come (but many, many, many summits are in store before the world figures this out), this is precisely the sad reality in store for Europe, and thus for the US and China, as 2012 will be the first year since the Second Great Depression in which official statistics will represent a global economic contraction. As for Europe's 4% decline relative to baseline: good luck.

IMF slashes world growth outlook as euro zone weighs (Reuters) - The euro zone debt crisis is escalating and could derail the global economic recovery, the International Monetary Fund warned on Tuesday as it called for urgent action to restore confidence. The IMF chopped its 2012 forecast for global growth to 3.3 percent from 4 percent just three months ago, saying the outlook had deteriorated in most regions. It projected world growth would strengthen to 3.9 percent in 2013. However, it warned that growth this year would come in about 2 percentage points lower if Europe let the crisis fester. "The world recovery, which was weak in the first place, is in danger of stalling," IMF chief economist Olivier Blanchard said at a news conference. "The world could be plunged into another recession" if the European crisis intensifies, he added. While the Washington-based lender said global activity was decelerating, not collapsing, it said the 17-nation euro zone would likely slip into a mild recession this year, with output contracting by about 0.5 percent. "The most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth while sustaining adjustment, containing deleveraging, and providing more liquidity and monetary accommodation," the IMF said in its latest World Economic Outlook report. The IMF maintained its 1.8 percent growth forecast for the United States in 2012, but cut its projection for Japan to 1.7 percent from 2.3 percent in September.

Eurozone takes its toll on global growth - The International Monetary Fund has revised down its growth forecast for 2012 to 3.3%, from 4% in September, and its 2013 forecast from 4.5% to 3.9%. To be fair, its earlier forecasts looked a little rosy, though the global economy grew by a very impressive 5.2% in 2010 before slowing to 3.8% in 2011. According to the IMF: "The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated."Global output is projected to expand by 3¼ percent in 2012 —a downward revision of about ¾ percentage point relative to the September 2011 World Economic Outlook (WEO). This is largely because the euro area economy is now expected to go into a mild recession in 2012 as a result of the rise in sovereign yields, the effects of bank deleveraging on the real economy, and the impact of additional fiscal consolidation."It predicts that Britain will grow by 0.6% in 2012, a downward revision from 1.6% in September. There will be a debate over this: "In the near term, sufficient fiscal adjustment is in motion in most advanced economies. Countries should let automatic stabilizers operate freely for as long as they can readily finance higher deficits. Among those countries, those with very low interest rates or other factors that create adequate fiscal space, including some in the euro area, should reconsider the pace of near-term fiscal consolidation." The update is here.

When Downside Scenarios for the Economy Play Out - Even the best economic forecasters acknowledge that making projections around potential turning points in the economy can be particularly difficult. The economists at the International Monetary Fund can take some credit today for making one good projection on Europe — though it’s not a pretty one. The IMF, which downgraded its global economic outlook today, says it now expects (as its base case) that the euro-area economy will see a mild recession in 2012 (a contraction of 0.5%). That, it turns out, was roughly the IMF’s downside scenario in its report a year ago (when its base case was for slow growth in 2012). The IMF blamed higher government bond yields in Europe, the effects of bank deleveraging on the economy and more budget-cutting for the slower 2012 growth proving true. IMF economists, we’ve learned over the years, tend to include a healthy dose of optimism in their baseline projections when there’s still some hope for a better outcome. That may be one reason to worry about this year’s downside scenario. It figures that euro-area economic output could drop by 4% relative to the baseline — in other words, a far more serious recession — under worse conditions. (That would pull down growth in the rest of the world, too.)

The IMF's latest forecast: Perverse austerity - THE International Monetary Fund sharply lowered its global economic outlook today and warned that an intensified euro crisis could tip the world back into recession. Its latest forecast is for the world to grow 3.3% this year and the advanced countries 1.2%, sharply lower than it saw just four months ago. Those numbers, it warns, are predicated on a comprehensive solution to Europe’s crisis. More interesting, and disturbing, are some findings in the IMF's accompanying Fiscal Monitor. Last year was one for fiscal hawks to celebrate as fiscal consolidation proceeded apace. Throughout the advanced economies, budget deficits fell by about 1% of GDP. Only a little of that was due to the cyclical economic improvement. Most was structural, i.e. through discretionary spending cuts or tax increases. That should continue this year, led by America where, even if the payroll tax cut is extended, the structural deficit will decline by 1.4 percentage points. In the euro zone, Germany, France, Spain and Italy all managed to reduce their structural budget deficits, the latter three thanks to austerity. All are expected to reduce those deficits further this year. But this is not the good news it seems. Austerity, the IMF has found, could be making Europe’s crisis worse, rather than better.

U.K. Prime Minister Cameron rebukes euro leaders over crisis - David Cameron has delivered a firm rebuke to Germany at the World Economic Forum, calling on Berlin to contribute significantly more resources and guarantees to help solve the eurozone crisis. The British prime minister stressed on Thursday that although progress had been made, particularly with the European Central Bank’s funding of the European banking system, policymakers were still far from finding a solution to the underlying problems of the crisis. He criticised eurozone leaders for being distracted by other issues, such as the introduction of a financial transaction tax – an initiative he described as “quite simply madness”. His speech in Davos reflected British officials’ long-standing and deep frustration with Germany’s leadership of the single currency area and called for a much stronger firewall to prevent contagion within the eurozone, common European sovereign debt and for powerful countries committing to reduce their trade surpluses as much as the struggling countries seek to minimise their deficits. The sentiments chimed with many British and US delegates at the WEF who have criticised Germany for seeking to persuade other countries to “become more German” without the corollary that Germany must “become less German” by importing more and allowing its trade surpluses to shrink.

The Specter of Rapid Austerity - A highlight of the January 24th Fiscal Monitor release, concerning tightening fiscal policy:  Too rapid consolidation during 2012 could exacerbate downside risks. While deficits and debt in many advanced economies are high, the pace of consolidation projected in 2012 is considerable given the weak economic environment (see the January 2012 World Economic Outlook Update). Moreover, fiscal policy in many countries is already tighter with respect to the cycle than had been projected in the September 2011 Fiscal Monitor (Figure 3), partly because a lack of affordable additional financing is compelling some euro area economies to introduce new measures to attain existing headline deficit targets, rather than allowing the automatic stabilizers to operate.  Further declines in cyclically adjusted deficits could be undesirable not only from a growth perspective, but possibly from a market perspective as well. While smaller deficits and debt ratios do lead to lower borrowing costs, other things equal, advanced economies with faster output growth are also currently benefiting from lower spreads (Figure 4). This likely reflects in part concerns about the feasibility of fiscal consolidation and solvency in an environment of very weak growth. Thus, further tightening during a downturn could exacerbate rather than alleviate market tensions through its negative impact on growth.

UK: Into Recession - So much for expansionary fiscal contraction in the UK. Not that that’s a surprise. The UK Office of National Statistics has just released preliminary estimates for real GDP growth in 2011Q4. The 0.8% contraction (q/q SAAR) was large than consensus [1], and in fact larger than the 0.6% decline forecasted by Deutsche Bank on 1/18. Figure 1 illustrates the fact that a year and a half after the election of a coalition government bent on a path of austerity, the UK economy is likely to be entering a new recession (not that growth was so great even before the dip). In my view, this is pretty much the nail in the coffin that an expansionary fiscal contraction will occur, even in a relatively small, open economy with a flexible exchange rate (see JEC/Republicans for an exposition, and this post for a critique).

Britain's Net Debt Hits Record £1.0 Trillion - Britain's state borrowing fell by more than expected last month but not by enough to prevent its net debt from reaching a record high £1.0 trillion ($1.55 trillion), official data showed Tuesday. Public sector net borrowing excluding the government's interventions in the financial sector hit £13.7 billion in December, the Office for National Statistics (ONS) said in a statement. That undershot market expectations for £14.9 billion, according to analysts polled by Dow Jones Newswires, and compared with net borrowing of £15.9 billion in December 2010. Net borrowing fell as the government's taxation revenues increased at a faster pace than expenditure, according to the ONS. However the data showed net debt excluding the temporary effects of financial interventions hit £1.0 trillion in December and public sector net debt as a percentage of gross domestic product (GDP) rose to 64.2 percent, both the highest levels since comparable records began in 1993.

UK Growth reveals a major macroeconomic policy error - The first estimate of UK growth in the last quarter of 2011 was negative. As these updated NIESR charts show, no other UK recovery has stalled in this way. Of course very little is ever certain, but we can be pretty sure that growth would have been significantly better if the current government had not imposed severe additional austerity measures beginning in 2010. (This is the counterfactual that matters, and just looking at GDP components can be a misleading way at getting at this for reasons I discussed here.) Of course growth might have been better too if the Euro crisis had not happened, but this government had no control over the Euro crisis, while it does decide fiscal policy.     I do not have anything very new to say about this, in part because many people predicted growth would be harmed before the policy was introduced. (See, for example, this letter from 80 economists published during the 2010 election campaign.) What was the reason for this major macroeconomic policy error? For some I think it was a political calculation that it would be advantageous to get as much of the cuts out of the way early, well before the next general election. However I think others in the coalition were genuinely spooked by events in Greece and elsewhere. Unfortunately the key difference between economies in the Eurozone and those with their own central bank was not appreciated.

Is there an austerity curve? - I’m intrigued by Duncan’s idea of an austerity curve. - the idea that: cutting government spending up to a certain point leads to lower deficits but beyond a certain point, the impact of lower growth and higher unemployment means that deficits get worse as the government cuts more. If you support the Labour party’s position of supporting small cuts but not large ones, you have to believe something like this*. It seems to me that this is only possible if the multiplier varies with the size of cuts. For small cuts, the (negative) multiplier must be sufficiently small that GDP doesn’t fall so much that tax revenues fall and benefit spending rises by more than the initial cuts. But for larger cuts, the multiplier gets bigger, and so big austerity backfires. To fix ideas, let’s say that a one percentage point drop in GDP leads to the deficit rising by 0.7 percentage points (pdf) of GDP. It follows that for an austerity curve to have the shape Duncan suggests, the multiplier must be less than 1.4 (1/0.7) for small cuts, but more for large ones.

Paying cash in hand is ‘diddling the country’, says HMRC’s Dave Hartnett - People who pay cash in hand to tradesmen are “diddling” the economy and diverting money from hospitals and schools, the country’s most senior taxman, Dave Hartnett, has warned.  In an interview with The Daily Telegraph, Mr Hartnett says that householders have a duty to ensure that other people do not evade paying their share of tax.  Paying a builder or cleaner in cash, allowing them to evade VAT or income tax, will result in even deeper government cuts to public services, he says. People who contribute to the cash economy cannot then complain about austerity measures, he adds.

Companies paid £1,800 to meet ministers at networking events - Companies have been paying up to £1,800 a head to meet ministers, senior government advisers and MPs at a series of networking events previously banned by the Cabinet Office. The chief secretary to the Treasury, Danny Alexander, policing minister, Nick Herbert, and climate change minister, Lord Taylor, have all addressed the exclusive invite-only events, organised by a networking business called the Chemistry Club, and usually hosted at the high-end Sartoria restaurant in Mayfair, London. Senior MPs from backbench committees have also attended the events, as have senior civil servants and special advisers from the Treasury, Home Office, Ministry of Defence, Department of Energy and Climate Change and other key departments. Among the public sector employees to have attended the networking evenings is Ben Moxham, David Cameron's special adviser for energy and the environment and a former employee of BP, who was at an event on climate change in November.

BOE’s Posen: U.K. Unemployment to Rise as Unproductive Sectors Shed Jobs - Unemployment in the U.K. is likely to rise over the next couple of years as unproductive sectors of the economy shed jobs, Bank of England policy maker Adam Posen said Monday. Posen said in a speech at Nottingham Business School that weak productivity growth in the U.K., which has puzzled policy makers on the BOE’s rate-setting Monetary Policy Committee, may be explained by labor hoarding in certain sections of the economy. A forthcoming paper by BOE staff will explain this phenomenon in more detail, he said. Posen said productivity growth in many parts of the economy has recovered to its prerecession trend, but some sectors, which he dubbed “dawdlers,” have held on to workers even as output has plunged, leading to a sharp fall in U.K. productivity overall. Those sectors include finance and insurance, academia, and transport. “If market discipline hits the dawdlers, then most of the productivity puzzle goes away. It seems to me reasonable that’s what’s going to happen,” Posen said. He added a “shakeout” of jobs in unproductive sectors seems likely, which will push up unemployment in the short term but aid the economy in the long term as labor and capital shift toward more productive industries.

'Hire and fire' has destroyed Britain's jobs economy - These days we tend to talk about the divisions in Europe as one between net creditors and debtors. In reality this is just a sideshow. There is a much more fundamental gulf, hinted at by Angela Merkel in her Davos speech yesterday: between countries with organised industrial training systems such as Germany, the Netherlands, Belgium, Scandinavia, Austria and Switzerland – all currently with jobless rates of between 3% and 7% – and those with much higher rates of unemployment, often in double digits, in peripheral Europe. The issue pits Anglo-Saxon precepts of free market regulation against the Germanic "Rhineland" system of managed capitalism, with modern apprenticeship systems built on a long-term compact between labour and employers. In the years before and immediately after the euro's birth in 1999, the peripheral countries of the European monetary union (Emu) often followed Anglo-Saxon principles by liberalising parts of notoriously inflexible labour markets. "Hire and fire" became the motto. Initially this seemed to work. But as debt market conditions worsened and growth stalled after the 2007-08 financial crisis, Emu's periphery has been left seriously exposed by the failure to replace unproductive regulations with new mechanisms to generate jobs.

Drivers face chronic fuel shortages and soaring petrol prices as one of the UK's biggest refineries goes bankrupt - Motorists face chronic fuel shortages and soaring prices at the pumps after one of Britain’s biggest fuel refineries went bankrupt, petrol retailers have warned. Forecourt bosses and MPs said there was a risk of parts of the South East ‘grinding to a halt’ amid reports production had stopped at the Coryton refinery, which supplies around a fifth of the fuel in the region and 10 per cent of the UK’s supplies. The closure of the giant Essex refinery also threatens to push up pump prices as supplies diminish. The warning came as the refinery’s Swiss parent company Petroplus said talks with its lenders had broken down and that up to 1,000 UK jobs could be lost. Petrol retailers warned Treasury minister Danny Alexander in a face-to-face meeting that the financial crisis at the Coryton refinery in Essex - one of the UK’s biggest suppliers of fuel - would cause chaos at the forecourts if it ceased production, the Mail can disclose.

The Greater Depression - Krugman - One thing everyone always says is that while this Lesser Depression may be bad, it’s nothing like the Great Depression. But this is in part an America-centered view: we had a very bad Great Depression, and have done better than many other countries this time around. As Jonathan Portes at Not the Treasury View points out, the ongoing slump in Britain is now longer and deeper than the slump in the 1930s (the figure shows how far real GDP was below its previous peak in various British recessions; the red line is 1930-34, the black line the current slump): I believe that when I began criticizing the Cameron government’s push for austerity, some right-leaning British papers demanded that I shut up. But the original critique of austerity is holding up pretty well, if you ask me.

The British Economy Is Now Doing Worse than it Did in the Great Depression - This many months after the start of the Great Depression, the British economy was rapidly converging back to its pre-depression level of production under Chancellor of the Exchequer Neville Chamberlain's policy of using stimulative policies to restore the price level to its pre-Great Depression trajectory. By contrast, the Cameron-Osborne policies of expansion-through-austerity have produced a flatline for real GDP, and the odds are high that British real GDP is headed down again. In less than a year, if current forecasts come true, the Cameron-Osborne Depression will not be the worst depression in Britain since the Great Depression, but the worst depression in Britain… probably ever. That is quite an accomplishment. As Phillip Inman of the Guardian puts it: the UK's plan for recovery from the financial crisis was based on a full-throttle recovery in 2012... consumer confidence, business investment and general spending would converge to send the economy on a trajectory of above-average growth... the lack of investment will perplex ministers. They have done what the right-wing economists told them to do and moved out of the way – the theory being that public sector spending and investment was ‘crowding out’ the private sector... It did not work: “Spain is showing the way with its austerity-driven recession. Where the weak tread, we [in Britain] look keen to follow...”

UK: Worse than the Depression? - On their blogs, Paul Krugman and Brad DeLong have both reproduced this graph (from here): and cited it as evidence that the UK economy is now worse than the Great Depression.  I haven't been following the UK situation closely, but I'm instinctively inclined to agree with their criticisms of the Cameron government's austerity policies. Having said that, I think the graph (and implied interpretation) is a little unfair because of how Britain's experience during the interwar period differed significantly from that of the US.  While the US economy went pretty suddenly from the "roaring 20's" to the depression, the UK economy was already in bad shape throughout the 1920's, which I believe can be primarily attributed to the attempt to resume the gold standard at the pre-war parity and the 1930's was just a further deterioration of an already dismal situation.

Austerity Memories - Krugman - A further thought on the observation that Britain’s slump has now gone on longer than the slump in the 1930s: it’s worth remembering the rapturous reception the Cameron austerity program received here, not just from the right, but from centrists. Here’s David Broder: Cameron and his partners in the coalition have pushed ahead boldly, brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession. Heh heh, silly economists. Broder went on to urge Obama, after his salutary midterm defeat, to “do a Cameron” and agree to sharp cuts in the welfare state. It’s kind of remarkable how none of the Very Serious People even considered the possibility that people like me might be, well, right.

MPs to discuss sale of Parliament - MPs will tomorrow discuss selling the Palace of Westminster amid concerns over its long-term future. Subsidence caused by work on Parliament's underground car park and the construction of new Tube tunnels have led to cracks appearing in walls around the Houses of Commons and Lords, with Big Ben's bell tower leaning 18in at its peak. There are even fears the building could sink into the Thames.

The UK economy needs a shower of money in the high street - It works like this. You get De La Rue to print £14bn of banknotes, roughly the amount extracted from high-street spending in extra VAT this year. You send a fleet of vans to transfer the money to Northolt and other regional airports. You load it into squadrons of RAF helicopters and, in full view of television cameras, scatter it over shopping streets the length and breadth of the land. The notes are designed to disintegrate within six months and can be banked only by registered firms. Those finding them must spend them fast on goods and services. "Helicopter money", once a satirical monetarist metaphor, suffers only one serious objection as a cure for a nation suffering from collapsed demand. It is vulgar and undignified. It seems tacky, populist, messy, a smart-alec suggestion not fit for consideration by ministers, bankers or economists. Helicopter money is precisely what the government has for three years been dropping into bank vaults, to the tune of some £850bn in cash, loans and guarantees. Ministers pleaded with bankers to lend it on to firms in the high street, but the banks preferred to keep it for themselves, to cover their gambling debts and bonuses. Dropping the stuff from helicopters is more effective since it does what it says on the tin: it instantly unleashes demand. It is an emergency blood transfusion straight into the veins of the economy, through high-street tills, job recruitment, restocking, warehouses and order books. It does not pass through the constricted arteries of bank managers.Davos by the Numbers - Reuters graphic

Billionaires Occupy Davos as 0.01% Bemoan Inequality =Ukrainian billionaire Victor Pinchuk wants to talk about income inequality. So does Irish billionaire Denis O’Brien and Indian billionaire Vikas Oberoi.  The three are among a contingent of at least 70 billionaires who are joining more than 2,500 business and political leaders at the World Economic Forum’s annual meeting in Davos, Switzerland, this week, according to a list of attendees and promotional materials obtained by Bloomberg News. A half-dozen of the richest participants, interviewed in advance of the conference, say economic disparity needs to be addressed.  “Many who will be in Davos are the people being blamed for economic inequalities,” Oberoi, 42, chairman of Oberoi Realty Ltd. (OBER), India’s second-biggest real estate developer by market value, said in an interview earlier this month by mobile phone from his car in Mumbai. “I hope it’s not just about glamour and people having a big party.”

Occupy Protesters Build Igloos in Switzerland to Protest Economic Summit - The eviction of Occupy Wall Street from Zuccotti Park in November left protesters without the physical birthplace of the movement around which to rally, and put something of a chill on the endeavor. In Switzerland, protesters of the World Economic Forum have made the movement even chillier. In preparation for the economic summit of world leaders, which begins on Wednesday in Davos-Klosters, Switzerland — where daytime temperatures have hovered around 23 degrees Fahrenheit and dipped to around 10 degrees at night with a dusting of snow — protesters are carving out igloos from the packed powder. The plan to build a small igloo village near the Congress Center building, where nearly 3,000 representatives from more than 100 countries are expected, launched on Saturday. Calling for others to join them, the “Occupy WEF” group states the goals of constructing the igloo village on its Web site:

Davos Attendees Confront a New Wave of Anger - — A year ago at the World Economic Forum here, Jamie Dimon, the chief executive of JPMorgan Chase, lashed out at what he saw as unfair criticism of the world’s financial wizards. “I just think this constant refrain, ‘bankers, bankers, bankers’ — it’s just a really unproductive and unfair way of treating people,” he said. “People should just stop doing that.” After several years of financial crisis, during which the word banker had become a catchall epithet for the undeserving rich, the global economy appeared to be on the mend. Perhaps the bankers, and the other millionaires and billionaires, could wear their pinstripes with pride again and get back to business as usual. Yet even as Mr. Dimon was speaking, a new wave of anger was welling up, one that, over the last year, would shake up old assumptions about the ultrarich, the middle class and the growing gulf that separates them. Today, the gap between the haves and the have-nots is no longer just a rallying cry to incite anticapitalist advocates. It has become a mainstream issue, debated openly in arenas where the primacy of laissez-faire capitalism used to be taken for granted and where talk of inequality used to be derided as class warfare.

Davos shocked to hear that poor people exist - Ok, I exaggerate. But that’s my cynical first impression after finding the following diagram in the briefing book for the gathering of the good and the great at the World Economic Forum in Davos, Switzerland. (Click for a larger size.)  As you can see “Severe income disparity” is #1 on the Top 5 risks list this year, after having failed to make the short list for the preceding 5 years. Now it’s not as though the attendees of Davos were completely inattentive to the economic plight of the less fortunate all this time. “Economic disparities” was on last year’s laundry list of risks and was featured prominently in the executive summary of 2011′s report. But the urgency has been ratcheted up quite a bit this year. Compare 2011′s anodyne language: the benefits of globalization seem unevenly spread – a minority is seen to have harvested a disproportionate amount of the fruits. Although growth of the new champions is rebalancing economic power between countries, there is evidence that economic disparity within countries is growing. with this year’s: Dystopia, the opposite of a utopia, describes a place where life is full of hardship and devoid of hope. Analysis of linkages across various global risks reveals a constellation of fiscal, demographic and societal risks signalling a dystopian future for much of humanity. The interplay among these risks could result in a world where a large youth population contends with chronic, high levels of unemployment, while concurrently, the largest population of retirees in history becomes dependent upon already heavily indebted governments. Both young and old could face an income gap, as well as a skills gap so wide as to threaten social and political stability.

Why Davos is ignoring Occupy - If you’re Europe, and your struggling people are called “Greeks”, and your rich people are called “Germans”, then the World Economic Forum will spend pretty much limitless amounts of time and effort on attempts to understand the dynamics between the two and (doomed) plans to try to prevent it from turning into a fully-blown crisis. On the other hand, if you’re a country — the USA, say — and your struggling people call themselves “the 99%” while your rich people are called “Davos delegates”, then your fundamental asymmetries will be studiously ignored — and, indeed, encouraged.

At Davos, Why Is No One Talking About the Poor? - Anti-globalization protests so disrupted the WEF in 2001 that its organizers had to relocate the event to New York the following year. The anti-globalization movement even erected its own conference, the World Social Forum, in Porto Alegre, Brazil, to serve as a populist counterweight to the elite Davos powwow. By 2002, Porto Alegre had drawn in 50,000 people, triple the number from the previous year. Even the Economist conceded that, in light of popular backlash, the march toward globalization could yet be reversed: As I scurried from panel to panel at Davos this year, I realized just how dramatically the outlook on globalization has changed since those years. No doubt, the topic of globalization is as hot as ever at the WEF. But on the question of what to do about it, the answers have changed. What’s missing in the WEF discussions is the perspective of the poor.  Unfair trade practices and poor working conditions in the developing world, issues that dominated the WEF agenda a decade ago, haven’t been raised at all. Instead, the conversation is acutely focused on the plight of the Western worker and his dwindling pension plan.

Davos 2012: Working to prevent a "lost generation" - Preventing a "lost generation" of workers unable to get jobs is one of the world economy's biggest problems, according to delegates at the World Economic Forum. One university professor said the US, the world's largest economy, is experiencing an "unemployment crisis". Countries in the West are experiencing high levels of youth unemployment. "People will accept austerity if we also talk about growth," Danish Prime Minister Helle Thorning-Schmidt said. The region is struggling with a sovereign debt crisis, which has badly affected economic growth as governments have implemented tough spending cuts. Data this month showed unemployment in the eurozone was at a record high in November, at 10.3%. There were 16.3 million people in the bloc out of work. Spain, for example, has the highest unemployment rate in Europe, at 22.9%. "It is also very important that we remember people are willing to make sacrifices, but not be sacrificed,"

Davos – an exercise in denial not solutions - Most of the failed political leaders and their corporate mates are in Switzerland at the moment, presumably wining and dining in fine style and pontificating about what the rest of this need to do next. The sheer preposterousness of the World Economic Forum in Davos is astounding. There remains a denial by the leaders of what has to be done. They seem insistent that the failed neo-liberal paradigm should remain intact. Apparently, calls for reforms just reflect an unrealistic nostalgia for the past. It is apparently nostalgic (meaning nonsensical) for us to long for the days when nations delivered full employment, real wages growth in line with productivity, and declining inequality. This accusation of nostalgic longing is the way the elites are avoiding facing the facts that their economic model based upon self-regulating markets has failed and will never deliver on its promises. We need a new approach that recognises the capacities and options available to a currency-issuing national government. This is not a nostalgic longing for an unchanged world. Rather it is a realisation that the macroeconomic fundamentals of a currency-issuing national state have not changed, notwithstanding the challenges that globalisation presents.

Smack Down at Davos: Merkel and Soros Spar on the Euro’s Future In a rambling speech, Merkel, as you’d expect, defended the German-led euro zone strategy for tackling the debt crisis. Fiscal reform was making progress, she said, the resources were in place to back up debt-ridden economies, and most of all, Europeans stand together in their commitment to the common currency. Tougher rules on public finances, and tougher methods of enforcing them, were on the way. There is a new focus on stimulating growth and creating jobs. These things take time, she said, and pleaded for patience.  In a sharp counterpoint to Merkel’s confidence, Soros earlier in the day unleashed a doom-and-gloom assessment of Merkel’s debt-crisis policy, and Europe’s faltering economies. German insistence on harsh austerity measures “will push Europe into a deflationary debt spiral,” in which sinking growth makes stabilizing debt levels more difficult. European leaders, fearful of committing financial resources to shore up the monetary union, continue to take too little action too late. With borrowing costs for the debt-ridden nations still high, euro zone policies relegate them “to the status of third world countries.” Rather than bringing Europe together, the euro is tearing Europe apart. Merkel’s strategy “will generate both economic and political tensions that could destroy the European Union.” Can we get two more divergent views? The sad truth is that Merkel offered no new ideas in her Davos address, leaving the crowd somewhat disappointed. Much of what she said we’ve all heard before, and none of it has done much to bolster confidence in the euro or Europe. Soros may be an alarmist – maybe purposely so, to shake Europe’s leaders from their continued delusions – but he’s spot on in arguing that a euro zone where a large chunk of its people are condemned to declining living standards and feeble economic prospects is not a viable one.

Are George Soros, The IMF And The World Bank Purposely Trying To Scare The Living Daylights Out Of Us? - Over the past couple of weeks, George Soros, the IMF and the World Bank have all issued incredibly chilling warnings about the possibility of an impending economic collapse.  Considering the power and the influence that Soros, the IMF and the World Bank all have over the global financial system, this is very alarming.  So are they purposely trying to scare the living daylights out of us?  Soros is even warning of riots in the streets of America.  Unfortunately, way too often top global leaders say something in public because they want to "push" events in a certain direction.  Do George Soros and officials at the IMF and World Bank hope to prevent a worldwide financial collapse by making these statements, or are other agendas at work?  We may never know.  But one thing is for sure - many of the top financial officials in the world are using language that is downright "apocalyptic", and that is not a good sign for the rest of 2012.

THE SEEDS OF DYSTOPIA: Roubini & Co. Scare The Crap Out Of Davos: An uplifting post-lunch session at Davos entitled GLOBAL RISKS 2012: THE SEEDS OF DYSTOPIA...  Professor Nouriel Roubini's on the panel, along with the head of Amnesty International and a few other non-profit organizations. Some key points made by the panelists:

  • Two of the panelists confessed that they had to look up the word "dystopia" when they heard the title of the session. It means the opposite of utopia.
  • Roubini thinks the term accurately describes today's world
  • Social unrest, Roubini says, is tied directly to economic uncertainty
  • What is connecting everyone in the world these days, continues Roubini, is economic and financial insecurity, the rise of income and wealth inequality, challenges from poverty, unemployment effects of financial crisis. 
  • Freakouts about debt loads, moreover, are leading to budget cuts — which, in europe, at least, are making the recession worse.
  • 225 million people worldwide are unemployed
  • 1 in 3 people on the planet are poor or unemployed
  • 1% of the world's families own 40% of the wealth
  • Wages as a percent of GDP are at an all-time low