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

Saturday, January 14, 2012

week ending Jan 14

Fed's Balance Sheet Contracts Modestly In Week - The Fed's asset holdings in the week ended Jan. 11 declined to $2.902 trillion, from $2.920 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities fell to $1.651 trillion on Wednesday from $1.663 trillion. The central bank's holdings of mortgage-backed securities increased to $840.27 billion from $837.74 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 $8.63 billion Wednesday, down from $8.98 billion a week earlier. Commercial banks borrowed $8 million from the discount window, following no activity a week earlier. U.S. government securities held in custody on behalf of foreign official accounts was $3.390 trillion, down from $3.402 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts declined to $2.663 trillion from $2.671 trillion in the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances -- January 12, 2012 

Fed Watch: QE3 or Not? -  Last week - before the most recent employment report - the Wall Street Journal offered up the odds of another round of quantitative easing: “Primary dealers,” those 21 lucky banks that answered the Old Bridge Troll’s questions correctly and were granted the right to do business directly with the Fed, see QE3 coming and don’t see the Fed raising rates for at least two years.That’s according to the results of a new survey of primary dealers by the New York Fed. Primary dealers, on average, assign a 45% chance of a Fed interest-rate increase in the second quarter of 2014. Before that, the chances of a rate increase are never higher than 15%.  High expectations are not a surprise given the propensity of some officials to make remarks like these from New York Federal Reserve President William Dudley: However, because the outlook for unemployment is unacceptably high relative to our dual mandate and the outlook for inflation is moderate, I believe it is also appropriate to continue to evaluate whether we could provide additional accommodation in a manner that produces more benefits than costs, regardless of whether action in housing is undertaken or not. It's no secret some Fed officials have been looking into additional purchases of mortgage-backed assets to support the economy via the housing market. And once they started talking about it, market participants began to assume it was imminent. Moreover, the idea of additional easing popped up in the most recent minutes:

If more QE, Evans says $600b - In what I believe is the 1st time a Fed member has quantified the size of potentially more QE, the ultra dove Evans says it could be $600b, in what would likely be in the MBS space, in a Q&A after a speech. Evans dissented in the past few FOMC meetings in 2011 in that he wanted more QE. He however doesn’t vote in 2012 but there will still be plenty of doves on the committee to follow thru. As I wrote earlier today, further artificially suppressing the level of interest rates is not the solution to a deleveraging cycle, time and debt paydown/writedown is. However, central bankers and politicians don’t have the luxury of time and thus patience and it’s why QE will continue to be their preferred answer. At some point they’ll realize it doesn’t work but how much damage will have already been done to the value of paper currencies and resultant inflation before they do?

Interview Excerpts: Fed’s Williams on Further Stimulus, 2012 Outlook and More - In his first press interview since taking office, San Francisco Fed President John Williams told the Wall Street Journal’s Jon Hilsenrath that additional monetary easing might be needed if inflation proves to be as muted as he expects. Excerpts from his comments are below: data have been coming in, generally, better than expected. I actually don’t think this represents a significant change in the medium-term outlook. Some of the factors that have made growth look a little bit stronger in the fourth quarter, to somewhere between 3% and 3.5% for real GDP growth, really reflect some bounce back from weak growth in earlier quarters and reflect some temporary factors. Growth in the first half of (2011) was weaker than expected in large part because of temporary factors. What we’re seeing — these good numbers in the fourth quarter — is also partly temporary factors boosting growth. Over the whole year, for 2011, real GDP growth is probably around 1.75%, which is at or slightly below my estimate of trend growth, which is not that good. Going forward into 2012, I see growth as basically staying around 2.25%. I still see modest growth this year, picking up a little bit in 2013 to somewhat above trend. If you look at the unemployment rate, now around 8.5%, with our forecast for growth in 2012 I don’t think the unemployment rate is going to come down much. Even at the end of 2013, I still see the unemployment rate around 8%.

Williams says Fed must use all tools, joblessness a "calamity" (Reuters) - The Federal Reserve will do all it can to support a "notably weak" U.S. economic recovery and bring down unemployment from its "shockingly" high level, a top Fed official said on Tuesday. If inflation falls as expected, San Francisco Fed President John Williams told reporters after a speech in Vancouver, Wash., there is a "strong argument for going to, I think, purchasing more mortgage backed securities down the road." Williams also warned of the potential threat from Europe's ongoing debt crisis, which he said leaders are working to address. "But, if they fail, all bets are off." Williams said he is hopeful policymakers will resolve the problems in Europe, where several countries are struggling to pay their debts, putting a strain on European banks that hold government bonds and raising the specter of a dissolution of the region's shared currency. But even without a shock from Europe, Williams said, the United States is in for a period of slow growth that could use help from the central bank. Williams painted a picture of continuing economic weakness, forecasting economic growth this year at 2.5 percent and 3 percent next year, a pace he said is too slow to take a big bite out of unemployment. The jobless rate, which registered 8.5 percent in December, will stay above 8 percent well into next year, ending 2014 at around 7 percent, he predicted, calling the situation a "national calamity."

Fed's Evans Says Modest Pickup in Economy Warrants Easing - -- Federal Reserve Bank of Chicago President Charles Evans said signs of improvement in the economy are modest and the central bank should push forward with “substantial” monetary stimulus. “The somewhat firmer tone of recent economic data suggest some welcome traction, but the data are not strong enough, or uniform enough, to assert that momentum for growth is building,” Evans said. “The data shows only modest improvement in growth to rates that are near or just somewhat above the economy’s longer- run potential.” Fed policy makers are divided on whether more steps will be needed to bolster an expanding U.S. economy. The unemployment rate fell to 8.5 percent in December, the lowest in nearly three years, according to the Labor Department. Even with the gains, little headway has been made in recovering the 8.75 million jobs lost as a result of the recession that ended in June 2009.

Fed Officials Split on Easing as They Prepare Rate Forecast…Federal Reserve officials disagreed on the need for more easing amid signs of improvement in the economy that may shape the interest-rate forecasts they will reveal for the first time this month.  Chicago Fed President Charles Evans in a speech yesterday said economic growth is modest and called for “substantial” accommodation. During the past week, New York Fed President William Dudley, Boston’s Eric Rosengren and San Francisco’s John Williams have also backed consideration of a third round of bond buying.  The calls preceded release of the Fed’s Beige Book report on regional economies, which indicated the expansion improved last month in most of the U.S. on increased holiday retail sales, demand for services and oil and gas extraction. Other data in the past week showed the unemployment rate dropped to the lowest level in nearly three years and consumer credit jumped.

Gross Says Next U.S. Quantitative Easing May Be $500 Billion - Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the Federal Reserve may embark on as much as $500 billion of quantitative easing in the second half. The Fed’s purchases of U.S. debt mean that yields on 10- year bonds will probably remain “relatively stable” at about 1.9 percent throughout 2012, Gross said in a televised interview with Bloomberg HT news channel broadcast today. U.S. economic growth may slow to 1 percent in the second half of the year, Gross said.

Lacker Sees Some Fed Actions as ‘Dangerous’ -- Federal Reserve Bank of Richmond President Jeffrey Lacker Wednesday called investments in private assets a "dangerous" aspect of the central bank's policies, and cautioned it could put Fed independence at risk.  "When we make a loan and sterilize that by selling U.S. Treasury securities to make room in our portfolio, we are doing fiscal policy--we're essentially selling Treasury securities and investing the proceeds," Lacker said on CNBC. "That's why it is a dangerous aspect of our policy."  Lacker's comments follow by a day a Fed report showing the central bank turned a $76.9 billion profit over to the U.S. Treasury last year. Preliminary unaudited results released by the central bank Tuesday showed the Fed had net income of $78.9 billion in 2011.  Though it is earning more and turning more over to the Treasury, the Fed also is taking on more risk. The value of its portfolio of securities, loans and other assets, which has surged to $2.9 trillion from $875 billion before the crisis, could fall. .  Lacker said the Fed had gone beyond what it needs to do to control inflation.

Fed's Plosser: may need to raise rates before mid-2013 - (Reuters) - The U.S. Federal Reserve may need to raise interest rates before the middle of 2013, despite the central bank's repeated forecasts that it expected to keep rates ultra low until at least then, a top official said on Wednesday. Philadelphia Federal Reserve President Charles Plosser said that while the U.S. unemployment rate is improving, the Fed needs to monitor inflation very carefully and "proceed with caution as to the degree of monetary accommodation we supply to the economy."First, given my outlook, I believe economic conditions may require the Fed to raise rates before mid-2013. Second, monetary policy should be contingent on the economic environment and not on the calendar," Plosser, who is not a voter on the Fed's policy-setting committee this year, said in prepared remarks to an economics seminar.In response to a deep recession and financial crisis, the Fed late in 2008 slashed interest rates to near zero and has since bought $2.3 trillion in long-term securities to spur growth and keep the economy afloat.In statements after its last four policy meetings, the Fed said it expected to keep rates ultra low until at least mid-2013. The comments from Plosser, an inflation hawk, show there is still robust debate within the Fed over its very easy monetary policy stance.

NY Fed in new move to sell AIG assets - The Federal Reserve Bank of New York is making a fresh attempt to sell several billion dollars of mortgage-related securities it acquired in the controversial 2008 rescue of AIG, the insurance group. People familiar with the matter said the New York Fed had received an approach for about $7bn of the $20.5bn of residential mortgage-backed securities housed in Maiden Lane II, a special purpose vehicle set up by to acquire then-toxic assets from AIG. The Fed has struggled to extricate itself from the legacy assets. It first rejected a $15.7bn bid from AIG to buy them back in March last year and opted for an auction. But it suspended the process in June after a round of bidding that saw only 36 of 73 securities on offer reach a satisfactory price. AIG, which has recovered since its near-collapse in 2008, has wanted to deploy spare cash to buy back the assets. At the time of its rejected bid, Robert Benmosche, chief executive, accused the Fed of having “just increased the degree of difficulty for our company to live up to its obligation to pay back the American taxpayers”. The insurance company declined to comment on whether it was planning to make a fresh bid for the assets, although one person familiar with the situation suggested it was not.

Kocherlakota Shines Light on Mechanics of Fed Meetings - When Ben Bernanke took command of the Federal Reserve, the former academic was widely reported to have brought a more free-wheeling, open debate to monetary policy meetings, in a break from Alan Greenspan‘s tightly controlled discussions. But according to one central bank official, Federal Open Market Committee proceedings may be a bit more scripted and slow-moving than many understand. So says Minneapolis Fed President Narayana Kocherlakota, in a question-and-answer session posted on its website Wednesday. At the FOMC meetings, each member is allowed two formal speaking opportunities, one for the economy, the other on monetary policy, the official said. But it’s hardly an off-the-cuff affair, he notes. “Many members speak from prepared remarks, so there is relatively little give-and-take that occurs during the meeting,” Kocherlakota said. He described a “time delay” in the debate: “For instance, if a member said something at the April meeting, I may head back to Minneapolis and do some more analysis of my own and then perhaps share a differing perspective at the June meeting.”

Bullard: Government Should Leave Economic Stimulus to Fed - The Federal Reserve‘s ability to generate stimulus even when interest rates are at 0% negates the need for the government to step in an provide additional stimulus to the economy, a top central banker said Friday. Federal Reserve Bank of St. Louis President James Bullard argued in a paper he was to present that his observation was mostly theoretical in nature. He declined to offer an evaluation of the spending and taxation decisions made by political leaders since the start of the financial crisis. Bullard instead argued the crisis and resulting recession has shown the Fed can still offer plenty of stimulus on its own even when it can’t cut its traditional policy tool, the overnight fed funds rate, any further. He was referring to the various balance sheet actions undertaken by the central bank, which have bought Treasury and mortgage bonds in a bid to push up overall economic activity.

Bernanke Doubles Down on Fed Mortgage Bet - Ben S. Bernanke is signaling his willingness to double down on a three-year bet that’s failed to revive housing, showing the extent of the Federal Reserve chairman’s effort to wrest a recovery from the deepest recession. Since the Fed started buying $1.25 trillion of mortgage bonds in January 2009, the value of U.S. housing has fallen 4.1 percent, and is down 32 percent from its 2006 peak, according to an S&P/Case-Shiller index. The central bank is poised to buy about $200 billion this year, or more than 20 percent of new loans, as it reinvests debt that’s being paid off. Some Fed officials have said they may support additional purchases that Barclays Capital estimates could total as much as $750 billion. Even as Bernanke and fellow U.S. central bankers consider expanding their efforts, they are acknowledging their inability to turn around the housing market without help from the rest of the government. Bernanke underscored the importance of residential real estate, which represents 15 percent of the economy, in a study he sent to Congress last week that said ending the slump is necessary for a broader recovery. “They’re definitely frustrated and disappointed,”. “I’m sure they would have anticipated they would have gotten more bang for their buck.”

So They're Useless Then -If this really is the Fed's view, then they're saying that monetary policy is generally going to be utterly useless in fighting recessions as they won't be willing to do anything. Time to rewrite all the textbooks. As in, instead of the usual "fiscal policy is less likely to be useful during recessions due to lags in recognition, implementation, and impact" claptrap, we should have "monetary policy is unlikely to be useful during recessions due to the fact that modern central bankers are sociopaths whose only concerns are inflation and the economic wellbeing of the creditor class."

Why Bernanke has Failed, and Will Continue to Fail - To understand why Federal Reserve Chairman Ben Bernanke's efforts to restart economic "growth" have failed so completely and miserably, we need to compare the present with the end of the Great Depression. There is a wealth of irony in the Chairman's supposed expertise on the Great Depression, as his policies have backfired on "fixing" the Great Recession. Rather than "fix" the economic malaise by re-inflating the credit-boom bubble, he has only increased the systemic vulnerability to a much greater crash. This is akin to an "expert" on World War I recommending a bigger, stronger more costly Maginot Line as the "solution" to military vulnerability. In the Great Depression, excessive speculation built on systemic fraud and embezzlement led to the implosion of a vast credit bubble. The "solution" touted then and now by saviors of the Status Quo was to "save" the financial sector and debtors by substituting Federal spending (with the money being borrowed via the full faith and credit of the U.S.A.) for collapsing private borrowing and spending. This "solution" failed because it refused to address the real problem, which was over-indebtedness in service of mal-investment. People lost faith in the system for good reason--it was fraudulent and opaque, and thus mispriced risk. If you can't price risk or assets, then it's insane to either borrow or invest.

Fed’s Steps Toward Transparency May Hinder Effort - According to minutes of their last meeting, Fed policy makers will begin releasing quarterly forecasts for the federal funds rate starting Jan. 25. [The central bank's policy-making body is the Federal Open Market Committee, which includes permanent and rotating chiefs from the regional Federal Reserve banks. The federal funds rate, while technically the rate that banks charge one another in overnight dealings, effectively sets the target for short-term U.S. interest rates.] This may seem incremental given that the Fed already publishes forecasts for growth and inflation, but the new disclosures will also include the range of where FOMC members project the official policy rate will be over the next several years and when the members expect to make the first official increase in their target for the fed funds rate. Additionally, the Fed will publish members’ forecasts for the “appropriate” policy rate over the longer run after the current business cycle has concluded–in other words, the fed funds rate they believe will result in an economy that is neither overheating nor experiencing subpar growth. While increased transparency is seemingly a favorable development, it could actually interfere with the objectives of the committee and add to the challenges of providing continued policy accommodation and easy financial conditions.

The unprecedented behaviour of the central banks - In economic policy nowadays, the unthinkable suddenly becomes the inevitable, without pausing for long in the realm of the improbable. (See this piece in The Economist.) Nowhere has this been more true than in central banking, where the recent huge expansion in the size of balance sheets would have seemed inconceivable as recently as 4 years ago. Markets have not only accepted this use of the printing press with equanimity, they have become increasingly dependent upon it. Most economists are also very relaxed about it, frequently describing it either as  inconsequential, or even as entirely irrelevant. But how can a policy intervention which has underwritten the liquidity of the entire western banking system be described as irrelevant? I do not share the alarmist view that an explosion in central bank liabilities must inevitably lead to higher inflation. That basic monetarist link has already been shown to be invalid, at least over short periods, and at least when a liquidity trap is in operation. However, the recent use of central bank balance sheets has been so unusual and potentially so profound that the underlying economics deserves much more careful examination than it has been receiving lately. I intend to do this in a series of blogs in coming weeks. In this, the first in the series, I will ask how we reached the current predicament.

The Liquidity Trap may soon be over – Mankiw - About a decade ago, I wrote a paper on monetary policy in the 1990s (published in this book). I estimated the following simple formula for setting the federal funds rate: Federal funds rate = 8.5 + 1.4 (Core inflation - Unemployment). Here "core inflation" is the CPI inflation rate over the previous 12 months excluding food and energy, and "unemployment" is the seasonally-adjusted unemployment rate. The parameters in this formula were chosen to offer the best fit for data from the 1990s.  You can think of this equation as a version of a Taylor rule. Eddy Elfenbein has recently replotted this equation.  Here it is: The interest rate recommended by the equation is the blue line, and the actual rate from the Fed is the red line. Not surprisingly, the rule recommended a deeply negative federal funds rate during the recent severe recession.  Of course, that is impossible, which is why the Fed took various extraordinary steps to get the economy going.  But note that the rule is now moving back toward zero.  As Eddy points out, "At the current inflation rate, the unemployment rate needs to drop to 8.3% from the current 8.5% for the model to signal positive rates. We’re getting close."

Is the liquidity trap almost over? -- LIQUIDITY traps: we can't stop talking about them. Since late 2008, the nominal interest rate target suggested by most standard monetary policy rules has been negative, leaving the American economy in a liquidity trap. Eddy Elfenbein recently ran a monetary policy rule devised by Greg Mankiw through the data and found that an exit from the trap might be closer than many think. The rule is: Federal funds rate = 8.5 + 1.4 (Core inflation – Unemployment)  And when run against the data it produces: At this rate, it seems, the recommended policy rate will be positive in no time. Maybe. The recent, steep increase is unlikely to continue. Core inflation is expected to level off and might well decline in 2012. The recent decline in unemployment is also unlikely to continue. Labour force departures have overstated the health of the labour market as captured in the unemployment rate, and if the job market continues to strengthen, then rising labour force participation will prevent a too-rapid drop in the unemployment rate. The rule might recommend a positive rate by the end of the year (2% core inflation and an 8% unemployment rate would just about do it), but it's far from certain that it will.

Are We Almost Out of the Liquidity Trap? (Wonkish) Krugman - Aha. Greg Mankiw tells us that when you apply the coefficients for his suggested simple Taylor rule (a rule for setting the Fed funds rate), it shows the desired rate closing in on zero from below, suggesting that the end of the liquidity trap may be near. Three responses, in decreasing order of triviality. First, Greg’s estimate was from the 1990s; I re-estimated the same kind of rule in 2010, and got somewhat different coefficients; here’s what the picture looks like with the updated numbers: Not so close to exit from the liquidity trap, is it? Next, as Ryan Avent says, it’s far from clear that the numbers will actually move us closer to the crossover point in the near future. Core inflation, after rising for much of 2011, seems to be heading back down; unemployment may not fall much even if job creation is pretty good, because discouraged workers will come back into the work force. But the main point is that using historical estimates of the Taylor rule is not a good way either to predict Fed policy or to recommend Fed policy at this point in our history.

On Trading Central Tendency - It’s been about a week since the Federal Reserve announced its new policy of providing information to the public regarding the direction of US interest rates. The new policy is not, generally, a surprise. The Wall Street Journal’s Jon Hilsenrath told us something was coming weeks ago. I've been pondering whether this is a positive or a negative development. I’ve concluded that this step by the Fed will backfire and will  prove to be a mistake. It’s tough to argue against a policy of more disclosure by the Fed. The members are a secretive bunch to begin with. Most people have a level of distrust of the Fed. More information about what they are doing and why, would be helpful. However, I believe the decision to provide more info has nothing to do with the Fed wanting to be more open and lovable. The Fed has taken this step in an effort to make its current policy decisions more effective.  I think any policy of the Federal Reserve should be designed to stand the test of time. It must be effective in all anticipated future conditions. The move by the Fed may well achieve the desired short-term objectives. Businesses, investors and individuals will have a greater degree of certainty regarding the future direction and timing of changes in interest rates. On balance, the additional information should have mildly positive consequences on new capital investments by companies, the process of capital formation in the markets, and it might allow individuals to make better long-term investment choices. What’s not to like?

The Fed Is Financing the ECB's Support For European Banks - Perry Mehrling will probably be blogging on this soon, but I cannot resist getting this news out now. I asked Perry if the Fed was doing what it did for a period following the Sept. 2008 crisis, taking on ECB assets onto its balance sheet. The answer from him was yes, and this is a recent development, only a month old. He pulled it up on his android: as of Jan. 5 the Fed had acquired $99.8 billion in ECB assets, all within the past month. This is not small change. I suspect what is going on is that the European banks are really struggling to adopt to the Basel III capital requirements in the continuing recessionary environment in Europe. Given the threat they face on sovereign debt, and the ECB wanting to limit its support for the sovereign debtors directly, it has been pumping money into the banks to keep them afloat. But this has become such a difficult enterprise, they have drawn on the old facility with the Fed that was renewed some time ago. Perry may disagree, but it looks to me that this is what lies behind this very striking and important recent development.

Treasuries Update: Operation Twist and the 30-Year Fixed Rate Mortgage - The Federal Reserve officially announced Operation Twist on September 21 with the stated purpose of lowering longer-term interest rates. The yield on the 10-year note had been below 2.00% 5 of the 9 days prior to the much-rumored announcement, closed at a new low of 1.88% on the day of the announcement and reached the historic closing low of 1.72 the next day, September 22. What has the 10-year note done since the "Twist" announcement? The interim high daily close was 2.42 on October 27. The interim closing low was the 1.82 on December 19th. Since that time, the 10-year has danced around the 2.00 level with the latest close at 1.94. Here is a snapshot of selected yields and the 130-year fixed mortgage since the inception of Operation Twist.  The weekly Freddie Mac update released today shows the 30-year fixed rate mortgage at the historic low of 3.89%. The goal of Operation Twist to lower long-term rates appears to have had an impact on mortgage rates.

For most-hurting Americans, Fed remedies limited - In the most difficult economy in a generation, middle-income and poor Americans are hurting the worst. Congress is tied in knots, barely able to pass even the most basic measures to help. That has put pressure on the one arm of government with the power and the flexibility to try to boost ordinary Americans’ fortunes: the Federal Reserve. But the limited policies the Fed has at its disposal mostly put money in the hands of the affluent, at least through their direct effects. The affluent, in turn, are less likely than most to spend that money in the wider economy. That may be a key reason that a series of dramatic steps by the central bank has not done more to raise living standards for American workers. The Fed's bond purchases have pushed up the stock market, in which the wealthy are much more heavily invested than the poor and the middle class. The bond purchases also have helped lower mortgage rates, and the affluent are more likely to buy a home — and have bigger homes to refinance — than those of lesser means. At the same time, Fed bond purchases tend to weaken the dollar, driving up the cost of imported oil — and the poor spend a higher proportion of their incomes on gasoline than the rich.

Why QE3 Won't Help "Average Joe" - Let's remember that the goal of both the QE programs and Operation Twist was to suppress interest rates on the longer end of the yield curve in a bet, which has failed to this point, to revive housing.  Those programs did, however, drive a speculative frenzy as money flooded into the financial markets.  As you can see by the chart above the actual implementation of QE1 and QE2 actually kept mortgage rates elevated as money flowed from bonds, suppressing prices and increasing yields, into stocks.   When QE was not in effect and there was no support for the stock market money flowed back into bonds suppressing yields.  The only effective program so far has been the most recent aberration of manipulation which has been dubbed "Operation Twist".  However, even after more than $2 Trillion of infusions into the system housing is still in the doldrums as it is plagued by problems other than just trying to get interest rates low enough to entice people to buy a home.  The housing market is still flooded with excess inventory and prices that are still higher than long term norms.  The massive shadow inventory of homes that are in delinquent status have yet to be dealt with and the plethora of lawsuits against the major banks for foreclosure fraud and misrepresentation have clogged the progress of dealing with the problems.  Furthermore, high unemployment, excess consumer debt and leverage and tighter lending standards are suppressing individuals ability to qualify for either refinancing or purchases of a home even if interest rates were at zero.

Why the Fed Needs to Talk More About Housing - In this issue of The Institutional Risk Analyst, we argue that the Fed should be talking about housing and doing so more often. But FRBNY President Bill Dudley and Moody's economist Mark Zandi need to give credit in their speeches to former FDIC Chairman Sheila Bair. Chairman Bair years ago described most of the policy steps for which Dudley and others now claim authorship. Does anyone at the Fed understand the term plagiarism? The lack of progress in dealing with the housing sector is a national scandal and one reason among many that President Barack Obama does not deserve another four years in office. There is a cost to doing nothing about the housing crisis, as Laurie Goodman at Amherst Securities has noted repeatedly. This cost is borne by the tens of millions of American households that are unable to refinance their mortgages.  The Wall Street Journal is badly wrong when they criticize the Fed for speaking up on housing. The real crime is that Dudley, Chairman Ben Bernanke and other Fed officials did not listen to Sheila Bair three years ago, when she and other officials at FDIC were calling for more aggressive policy approaches to dealing with foreclosures. Instead the large banks and their partners in crime in Washington, Fannie Mae and Freddie Mac, have formed a political and financial cartel to prevent American home owners from refinancing their mortgages, effectively thwarting Fed policy efforts to reflate the economy.

Pimco Doubles Down On All In Bet Fed Will Monetize MBS - When back in December we observed that Pimco's Total Return Fund (which contrary to rumors actually closed the year at $244 billion, or $4 billion more than in the beginning) had a $60 billion margin "cash" position, the proceeds of which were used to purchase a near record $103 billion in Mortgage Backed Securities we thought this is about as far as Bill Gross would go betting the ranch on QE3, and specifically that kind of QE3 that assumes at least a big portion is used to buys MBS (the same instrument that SocGen believes, along with gold, will benefit the most from an imminent QE3 announcement). It turns out we were wrong, and in December the fund doubled down on its QE3 all in bet, by "borrowing" even more cash, or a record $78 billion, using the proceeds to buy even more MBS, as well as Treasurys, which hit a combined 31% of the TRF's holdings. In other words, between MBS and USTs, Pimco holds a whopping 79% of total, mostly in very long duration exposure. In fact, this combination of long duration and pre-QE exposure has not been seen at PIMCO since late 2008, early 2009, meaning that as many banks have been suggesting, Gross is convinced that the Fed will announce if not outright QE3 this January, then at least intimate it is coming.

Transcripts show Fed wanted housing slowdown - The US Federal Reserve fretted about a slowdown in housing in 2006, but never considered the possibility that it could cause a financial crisis, according to complete transcripts of that year’s meetings. Almost every Fed policymaker concluded that weaker housing would cause a slowdown in consumption and investment, but expected that to offset strength elsewhere in the economy, leading to continued growth overall. “Housing is the crucial issue. To get a soft landing, we need some cooling in housing,” said Ben Bernanke, Fed chairman, in his summing up of the economic situation in March 2006. “I think we are unlikely to see growth being derailed by the housing market.” The transcripts, released on Thursday, highlight the failure of the Fed – one matched by most other central banks, commentators and economists around the world – to spot dangers to the financial system from subprime mortgage lending. That complacency set the stage for the devastating crisis that began in the summer of 2007. Throughout 2006, Fed officials were aware that a sharp slowdown in house building and sales was under way.  Indeed, a number of Fed officials saw the housing slowdown as welcome news that would help resolve a potential threat to the economy.

Fed 2006 Transcript Highlights: Riding Housing Roller Coaster With Eyes Shut - Federal Reserve Chairman Ben Bernanke and most of his colleagues showed little concern when house prices started to decline in 2006, predicting “a soft landing” in the then-strong U.S. economy, transcripts from the central bank released Thursday show. Bernanke, who took over from Alan Greenspan as Fed chairman in February 2006, is cautious in making forecasts about housing and the wider economy. But, together with then New York Fed chief Timothy Geither, he believes the slowdown in housing is healthy and likely to end well.Few central bank officials look overly worried just a few months before the storm hit, leading to the worst recession since the Great Depression. There are exceptions, however. At the May 2006 meeting, for example, Fed Governor Susan Bies brings the discussion back to housing and her growing worries about mortgages. At the following meeting in June, Janet Yellen, the Fed vice chairwoman who headed the San Francisco Fed in 2006, appears to be the most concerned about housing. The transcripts, available on the Fed’s website, provide full details of Fed officials’ individual views during the eight Federal Open Market Committee Meetings, with the traditional five-year lag (the minutes, released three weeks after FOMC meetings, only give a summary.) Highlights of the transcripts include:

Bubble Memories - Krugman - Hahahaheehee! The Fed transcripts from 2006 show a lot of laughter and an incredible amount of complacency, with people mainly worried about inflation rather than the coming recession. Brad DeLong digs up a contemporaneous column of mine in which I knew better; here’s more from Mark Thoma. In truth, I did not foresee the scale of the catastrophe; I was thinking mainly of the direct impact of a housing bust on investment spending, with only a nod to possible effects on consumer demand, and no sense at all of how fragile the financial system was. But I was a lot closer to understanding the real risks than, apparently, anyone at the Fed. Two puzzling things: first, the housing bubble was the clearest thing I’ve ever seen in my professional life. How could they ignore even the possibility of a severe bust? Second, some of the same people you read in these transcripts dismissing risks to the real economy and worrying wrongly about inflation are still making policy pronouncements, in which they … dismiss risks to the real economy and worry wrongly about inflation.

Fed Transcripts – Why Was Congress in the Dark During the Crafting of Dodd-Frank? -The latest release of the Federal Reserve’s Open Market Committee transcripts is a doozy. Binyamin Appelbaum read through the transcripts and wrote a great article on what he found. The people on the FOMC straight up did not understand the economy, and that becomes very obvious when you parse their nonchalance through the pivotal year of 2006. That’s true as far as it goes, but there’s a political angle here as well. My question is, why don’t we have the transcript for 2007? Or 2008? Or beyond that? Why didn’t Congress have the evidence that Bernanke was an incompetent central banker when he was up for reconfirmation in late 2009? Why didn’t Congress know any of what was revealed yesterday while it was tasked with rewriting the rules governing our entire financial architecture?!? It might have been useful to know that the Fed was staffed by an inept, embarrassing group of fools fiddling over inflation while Rome was being set ablaze. I wrote a piece on this back in May of 2011:There’s an easy way, however, for the Federal Reserve to lose its aura of undemocratic secrecy. It could release transcripts of its Federal Open Market Committee meetings within one year — or be compelled to do so with a congressional subpoena.

Fed Turns Over $77 Billion In Profits to the Treasury — The Federal Reserve said on Tuesday that it contributed $76.9 billion in profits to the Treasury Department last year, slightly less than its record 2010 transfer but much more than in any other previous year.  The Fed is required by law to turn over its profits to the Treasury each year, a highly lucrative byproduct of the central bank’s continuing campaign to stimulate economic growth.  Almost 97 percent of the Fed’s income was generated by interest payments on its investment portfolio, including $2.5 trillion in Treasury securities and mortgage-backed securities, which it has amassed in an effort to decrease borrowing costs for businesses and consumers by reducing long-term interest rates.  Through those purchases, the central bank has become the largest single investor in federal debt and securities issued by the government-owned mortgage finance companies Fannie Mae and Freddie Mac. As a consequence, most of the money flowing into the Fed’s coffers comes from taxpayers.

Fed handed $76.9 billion to Treasury in 2011 - The Federal Reserve transferred $76.9 billion in earnings to the U.S. Treasury during 2011, the central bank announced Tuesday. The transfer is slightly less than the record $79.3 billion transferred in 2010. The Fed said it earned $83.6 billion in interest income from its massive portfolio of securities, which includes Treasury debt and mortgage securities. The Fed has been buying assets as part of a quantitative-easing program, an unconventional monetary policy designed to lower long-term interest rates and boost economic growth. The transfers in the past two years are about twice the pre-quantitative-easing levels. Under Fed policy, residual Fed earnings are distributed to Treasury after covering expenses. The remittances to the Treasury are made weekly.

Testing the Limits of Fed Power - “I am sure that the Fed would not appreciate a white paper from Congress outlining how to think about and execute monetary policy.” There’s nothing like an ongoing crisis to hash out the desirable limits of Federal Reserve power. The danger for the Fed, in testing those limits in the interests of serving its mandates of economic growth and inflation control, is if the test sparks a backlash that shoves the Fed back behind the starting point. The quote above is from Sen. Orrin Hatch (R.-Utah), ranking member of the Senate Finance Committee. What’s got the senator’s ire up is the recent white paper the U.S. central bank issued with Fed staff recommendations about what to do about the housing mess that’s still at the center of a struggling, albeit slowly growing, economy.  The Fed has taken unusual and expansionary measures to fight first the systemic financial collapse and then the resulting recession (the preferred phrase is ‘extraordinary measures’) and the Congress has periodically groused about overreach, the Fed’s subpar regulatory role before the crisis and related matters. The white paper on housing is just the latest salvo in the Fed-Congress dance of contentiousness that’s been going on since the financial crisis sprung upon us full force in 2008.

The Real Problem with the $29 Trillion Bailout of Wall Street - I previously summarized research that two of my graduate students, James Felkerson and Nicola Matthews, are conducting on the Fed’s bailout. Using data that the Fed was forced to release, they demonstrated that the cumulative total lent and spent on assets by the Fed was over $29 trillion. (See the first paper here: Their estimate was larger than previously reported because others have focused on loans, and in some cases, guarantees, outstanding at a point in time. The Fed’s own estimate is $1.5 trillion (loans outstanding), while Bloomberg’s number was $7.7 trillion (including commitments that were promised but never used). To be sure, using methodology similar to that of Felkerson and Matthews, the GAO had obtained an estimate of $26 trillion for the cumulative total. In coming weeks and months we will release a lot more analysis of this data. Although we were very clear in our presentation, casual readers as well as many reporters from the media wrongly interpreted our results as a measure of the Fed’s exposure to risk. Chairman Bernanke’s memo emphasized that the Fed’s total exposure never exceeded more than $1.5 trillion—and since there is no way that it ever would have realized anything close to 100% loss on its loans, the real risk of loss was only a tiny fraction of that.

Answers: Taking IOR to Zero - I want to thank all the commenters on my last post — at Angry Bear, at Asymptosis, and at Mike Norman’s blog. You’ve provided me with exactly the education I hoped to achieve. Here’s hoping others benefited similarly. I asked: what would happen if the the Fed cut the interest rate on reserves from its current .25% to zero. I was not suggesting it should be done. I simply wanted to understand what would happen if that one variable changed. I want to summarize the conclusions I’ve come to based on all the discussion.  I won’t link to all the excellent comments that brought me to this. (Though I do want to highlight the Angry Bear comment by Bad Tux beginning “At 0% IOR”. It arguably explains things better than I do here, and at significantly less length.)  First, the market monetarists responses. Scott Sumner said (in comments a while back on his blog, which I linked from my original post): It could be slightly expansionary, or if accompanied by other moves, wildly expansionary. I’m presuming he says “slightly expansionary” based on the theory Mark Thoma gives us in a November 17 post that Cameron was nice enough to link to on Angry Bear: it would slightly lower the incentive for banks to hold cash rather than loaning it out, and more loans would help to spur the economy

Monetary policy: Keeping a lid on it - AS I wrote on Saturday, the economics strongly suggests that a relatively small increase in inflation would have a significantly positive impact on the economy and on labour markets, and this therefore means that a focus on the constraints facing the Fed would be a good use of economist time and energy. Tim Duy responds that there isn't any mystery to the nature of the constraint: The disconnect between the unemployment and inflation forecasts is clear. The Fed has a dual mandate, and, according to its forecasts, it cannot meet both of the mandates in the near to medium terms under the expected policy path. So a choice needs to be made. And the Fed has chosen to focus on meeting the inflation side of the mandate (note, headline PCE inflation in the long-run, which is why I focused on that measure in a piece last week).  In a liquidity trap, there is an explicit trade off between inflation and unemployment. The only way to reduce the real interest rate is via inflation, since the nominal interest rate can't go below zero. If the labour-market-clearing real interest rate is below -2% and the central bank is unwilling to allow inflation above 2%, then the economy is stuck. It is still possible to generate expected future inflation by reducing the current price level relative to the future price level, but that's problematic, for two reasons. First, deflation occurs slowly and is unpleasant and may well worsen the problem of household indebtedness. And secondly, the Fed isn't likely to tolerate deflation any more than it's willing to tolerate inflation above 2%.

Fed Watch: Ultimately, It's About the Inflation Target - Ryan Avent reports from Chicago on the willingness to believe the Fed is powerless to produce additional inflation: Why is Mr Hall—why are so many economists—willing to conclude that the Fed is helpless rather than just excessively cautious? I don't get it; it seems to me that very smart economists have all but concluded that the Fed's unwillingness to allow inflation to rise is the primary cause of sustained, high unemployment. And yet...this is not the message resounding through macro sessions. Instead, there are interesting but perhaps irrelevant attempts to model the funny dynamics of a macro challenge that actually boils down to the political economy constraints (or intellectual constraints) facing the central bank. Let's focus our attention on that, for heaven's sake. Avent is correct. It does seem that most economists believe that at the zero bound, allowing inflation expectations to rise is an effective - perhaps the only effective - mechanism for the central bank to accelerate activity. Moreover, if, as Avent says, we believe the Fed can prevent deflationary expectations, then they can certainly create inflationary expectations. The fact that they don't would then be something of a mystery, as certainly we don't see Federal Reserve Chairman Ben Bernanke as intellectually deficient on this issue. He can clearly do the math as well as anyone.

The Upper Bound in the Fed's Head: Inflation - Continuing with one of my current hobbyhorses: Ryan Avent reports on the American Economic Association meeting, with special attention to a presentation by Robert Hall: Monetary policy: The zero lower bound in our minds |Mr Hall argued that: A little more inflation would have a hugely beneficial impact on labour markets, And a reasonable central bank would therefore generate more inflation, And the Federal Reserve as currently constituted is, in his estimation, very reasonable; therefore The Federal Reserve must not be able to influence the inflation rate. … Why is Mr Hall—why are so many economists—willing to conclude that the Fed is helpless rather than just excessively cautious? I don’t get it; it seems to me that very smart economists have all but concluded that the Fed’s unwillingness to allow inflation to rise is the primary cause of sustained, high unemployment. …a macro challenge that actually boils down to the political economy constraints (or intellectual constraints) facing the central bank. . I, of course, am less charitable, and impute other motives. Hat tip to David Beckworth, whose feelings I fully understand: I found the whole affair so depressing that I wasn’t able to drag myself to many sessions.

Fed Watch: More on the Output Gap - Hoisted from the comments from my last piece, Steve notes: In an interview with Bloomberg last week, Bullard explicitly said he expected the economy to follow a new output trend out of the base of the recession rather than a recovery to a trend from the previous peak. The written media didn't pick up on these quotes; rather they focused his comments that explicit inflation targeting is near. I missed that interview, but found it here. And yes, St. Louis Federal Reserve President James Bullard does say that estimates of the output gap are too high and will be revised downward. He does not aim to return to the pre-recession trend of output growth and is instead ready to manage the economy along the new path. Bullard does admit, however, that he has gotten little traction for his view. On the other end of the spectrum, San Francisco Federal Reserve President John Williams offers an interview to the Wall Street Journal, and sounds dovish even after the most recent employment report: Mr. Williams wrote that the report didn't fundamentally alter his views on the economy. "My view of it is inflation is going to be for a sustained period below target," he said. "Unemployment is going to be sustained above a reasonable estimate of the natural rate of unemployment, which is closer to 6.5% than the 8.5% that we have now. That does make an argument that we should have more stimulus."

Fed Watch: Output Gaps and Inflation - Regarding, again, the size of the output gap, this remark is found in the most recent Fed minutes: However, a couple of participants noted that the rate of inflation over the past year had not fallen as much as would be expected if the gap in resource utilization were large, suggesting that the level of potential output was lower than some current estimates. I think this has less to do with the size of the output gap and more to do with downward nominal wage rigidities. Note that wages are still rising, although the pace of wage growth for production and nonsupervisory workers is still falling: Perhaps a better example is the relatively new series, wages for all workers: Overall private wage growth bottomed out in 2009 and held around 1.75%, perhaps just beginning to rise in recent months.Despite very high unemployment and underemployment, wage growth is still positive. It tends to be very difficult to induce workers to take wages cuts (think also how the newly unemployed will resist taking new jobs with a substantially lower pay), which in-turn helps put a downside to inflation. In other words, one would expect the relationship between the output gap (or, similarly, high unemployment) and inflation to flatten as inflation rates fall toward zero. This is also covered by Paul Krugman here and here.

Inflation and Fiscal Policy - Ryan Avent writes A common argument at this point in the discussion is that the Fed is recusing itself from the business of macroeconomic stabilisation and fiscal policy should therefore be used to bring down unemployment. The inflation constraint prevents this, however. The realization that the Fed moves last is important and I am confident that this is what Ryan is getting at. However, in the interest of deep understanding its important to point that this is not – in fact  – true. There is – practically at least, possibility theoretically – no limit on the ability of the fiscal authorities to bring down unemployment regardless of the Fed’s inflation target. You face two second order responses, one that will tend to increase unemployment, the other to lower it. The first, is this: If government workers are less productive than private workers. And, if enough private workers are drawn out of private employment into government employment then total output can fall. The second, is that as long as effective labor elasticity is not negative a decline in the real wage will cause labor supply to fall. Falls in labor supply mechanically reduce the unemployment rate.

Why Economists are Rooting for Inflation - In most people’s minds inflation is up there with unemployment as one of the main ills you don’t want an economy to come down with. But in fact a growing number of economists are arguing that rising prices are exactly what we need to cure our the current economic maladies. It may not be the best answer, but it could be the easiest one to achieve. The latest economists to get on the inflation bandwagon are Menzie Chinn of the University of Wisconsin-Madison and Jeffry Frieden, who teaches international monetary policy at Harvard. The two professors, who wrote a book about the financial crisis called Lost Decades that was published in September, and who recently penned an article for Foreign Policy magazine, argue that the reason recoveries after financial crises are painfully slow is that credit shocks stymie everyone. Banks stop making loans in order to heal. Consumers use extra cash to pay down debts. And governments lapse into gridlock as politicians argue over who should take the hit for their countries’ debts: taxpayers, government workers or the poor. But Chinn and Frieden argue there is a way to heal banks, borrowers and the government at the same time: Higher prices.

Inflation, Slack, and Fed Credibility - Dallas Fed Staff Paper - It is generally agreed that slack has some impact on inflation. There is much less agreement on what form the relationship takes and whether it is stable enough to reliably help predict inflation. This analysis focuses on the Great Moderation period. We find that slack (as measured by the unemployment rate) and changes in slack are negatively correlated with changes in inflation and also deviations of inflation from long-forward inflation expectations. These relationships could have been exploited to produce forecasts of trimmed mean PCE inflation more accurate than rule-of-thumb forecasts. Forecasts of trimmed mean PCE inflation also serve well as predictions of GDP inflation and headline PCE inflation. Our analysis suggests that currently high levels of slack should hold inflation below two percent over 2012.

Using Policy Intervention to Identify Financial Stress - Fed Working Papers This paper describes the construction of a financial stress index. This stress index differs from other indexes in that it incorporates the co-movement and volatility of financial series as well as the levels of the series. Our index also uses past experience more than others to guide the assessment about which characteristics of the data suggest financial stress exists. In addition to describing the construction of our financial stress index, we spend some time discussing issues relevant to the general construction of stress indexes. Full paper (318 KB PDF)

Current economic conditions - The latest U.S. economic indicators have taken a favorable turn. A variety of data suggest an improving labor market. For example, new claims for unemployment insurance continue to exhibit a steady decline. And on Friday the Bureau of Labor Statistics reported that seasonally adjusted nonfarm payroll employment increased by 200,000 in December, bringing the average monthly gain for the year to 136,000. The December strength was confirmed by estimates of an increase of 176,000 jobs reported by the separate BLS survey of households and 325,000 according to ADP's direct payroll calculations. Even so, we'd need 30 more months just like December to get the number of workers on nonfarm payrolls back up to where it was on January 2008, let alone to catch up with population growth over what by then would have been 6-1/2 years. One of the surprising things about 2011 was that the unemployment rate has now fallen by 1.5 percentage points from its peak, despite the relatively weak growth in employment and GDP since the recession ended. The key explanation appears to be a declining labor force participation rate, which can't be read as an encouraging development.

Fed's Beige Book: Economic activity increased at "modest to moderate" pace - Fed's Beige Book: Contact reports from the twelve Federal Reserve Districts suggest that national economic activity expanded at a modest to moderate pace during the reporting period of late November through the end of December. Seven Districts characterized growth as modest; of the remaining five, New York and Chicago noted a pickup in the pace of growth, Dallas and San Francisco reported moderate growth, and Richmond indicated that activity flattened or improved slightly. Compared with prior summaries, the reports on balance suggest ongoing improvement in economic conditions in recent months, with most Districts highlighting more favorable conditions than identified in reports from the late spring through early fall. Consumer spending picked up in most Districts, reflecting significant gains in holiday retail sales compared with last year's season, and activity in the travel and tourism sector expanded in most areas....Upward price pressures and price increases remained quite limited for most categories of final goods and services, as the effects of prior increases in the costs of selected inputs have eased.

Midwest Economy Update - Chicago Fed - A summary of economic conditions in the Seventh District from the latest release of the Beige Book:

• Overall conditions: Economic activity in the Seventh District picked up in late November and December. Seventh District business contacts were generally optimistic about the economic outlook for 2012, but many also expressed concern about potential weakness in demand from abroad, particularly from China and Europe.
• Consumer spending: Compared to last year’s holiday season, store traffic volumes were up significantly in December. Auto sales also increased since the last reporting period.
• Business Spending: Business spending was steady in late November and December and inventory levels were reported to be generally in-line with sales.
• Construction and Real Estate: Construction activity was subdued in late November and early December, but there was some improvement in overall real estate conditions as multi-family construction remained an area of strength and nonresidential construction increased moderately.
• Manufacturing: Manufacturing production growth increased in late November and December. Demand for heavy equipment remained strong and auto production increased over the reporting period. In the steel sector, inventories at service centers remain near desired levels.

Some Good Economic News, but Will It Last? - Laura D’Andrea Tyson - In recent weeks, a series of encouraging reports on the United States economy, culminating in the December employment report, has provided tantalizing evidence that the recovery is strengthening. But it’s too early to celebrate. Both 2010 and 2011 started with good economic news and forecasts of a strong growth rebound but proved to be disappointing. Despite recent signs of strength, most forecasts for 2012 predict that growth will fall short of 2.5 percent, the rate required to absorb anticipated increments to the labor force, and that’s assuming Congress extends the payroll tax cut and unemployment benefits through the year. Right now, it looks as though the United States economy will continue to recover at a moderate pace in 2012. But there are considerable downside risks that could cause growth to falter. The central problem remains inadequate aggregate demand – both at home and around the world. The shortfall in demand is reflected in unutilized resources, notably unemployed and underemployed workers and idle plant and machinery. The level of output in the United States is now higher than it was in the fourth quarter of 2007 but still far below the level that could be produced if existing resources were fully utilized. A recent Treasury estimate puts the gap between actual and potential output at more than 7 percent – or more than $1 trillion of goods and services.

Drags On Economy 'More Serious' Than Thought: Lacker - The US economy will grow modestly this year, but the difficulties posed by unemployment, housing and Europe's debt crisis are "more serious than we thought," Richmond Fed President Jeffrey Lacker told CNBC Wednesday. Lacker, who becomes a voting member of the Fed's policy committee this year and is known as an inflation hawk, said GDP growth was in the 1-1.75 percent range last year and will increase to 2-2.5 percent this year. "I think we'll make more progress on unemployment, but it's likely to be slow," he said in a live interview. "We're seeing a decline in participation" as frustrated job seekers drop out of the labor force. Another problem is that there is a "labor market mismatch" in which companies have a hard time finding skilled workers, Lacker said. Real estate also remains a drag on growth with "the housing market being flat on its back," Lacker said. Europe's financial crisis still threatens US banks, he said, not because of exposure to European debt but because money market mutual funds have invested in Europe's short-term debt securities. "The major vulnerability of our financial system has to do with involvement of money market funds. Until we fix the structure there, we're vulnerable to flights."

Crunch Time For The Business Cycle - If there's one corner of the economy that concerns me more than others, it's the recent trend in disposable personal income (DPI). As I discussed last month with the update of the November data, the falling pace of annual growth is starting to look troubling on this front.  DPI is a crucial factor generally for the consumption-dependent U.S. economy. Any one month isn't all that important, but the trend is another matter. As the authors of Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends advise, DPI is "the amount of money consumers have available to spend after paying income taxes." As a result, The rate of change in disposable income offers insight into the balance sheet of the consumer. As income increases, spending should follow and economic growth should be healthy. Decreasing incomes are signs of potential recessions.Analysts expecting a new recession in 2012 are still in the minority, but they're a persistent lot, as I noted yesterday. One of the stronger arguments for worrying surely resides with the diminishing growth rate of DPI. The annual change was a modest 2.4% as of November, the latest update. A year earlier, in November 2010, DPI was advancing twice as fast at a 4.8% pace on a year-over-year basis. Other than during the Great Recession and its aftermath in 2008 and 2009, the current rate is near the lowest levels on record, which starts in 1959. Not a good sign for looking to the year ahead.

The Great Debate About Recession Risk Rolls On - The economy appears to be on the mend, but the great debate about recession risk in 2012 is in no danger of fading. The labor market may be reviving, but that’s not enough—at least not yet—to convince some analysts that the danger has passed.  Let’s start with the Economic Cycle Research Institute, which bills itself as “the world's leading authority on business cycles.” The firm continues to stand by its late-September recession forecast, There’s a robust discussion about whether a dark outlook for the U.S. economy is still warranted in the wake of what economist James Hamilton calls a “favorable turn” in the recent update of leading indicators, albeit with some considerable caveats, he adds.  In any case, ECRI’s recession call is at odds with the consensus forecast these days. Leading the charge of the optimists is the Conference Board’s Leading Economic Index, which continues to signal expansion. “November’s increase in the LEI for the U.S. was widespread among the leading indicators and continues to suggest that the risk of an economic downturn in the near term has receded,” says Ataman Ozyildirim, an economist at the consultancy. Dwaine van Vuuren of PowerStocks Investment Research also offers an “opposing view” of the recession-is-fate forecast based on analysis of nine coincident and leading economic benchmarks.

Current woes call for smart reinvention not destruction – Larry Summers - It would have been almost unimaginable five years ago that the Financial Times would convene a series of articles on “Capitalism in Crisis”. That it has done so is a reflection both of sour public opinion and distressing results on the ground in much of the industrial world.  The spread of stagnation and abnormal unemployment from Japan to the rest of the industrialised world does raise doubts about capitalism’s efficacy as a promoter of employment and rising living standards for a broad middle class. The problem is genuine. Few would confidently bet that the US or Europe will see a return to full employment, as previously defined, within the next five years. The economies of both are likely to be demand constrained for a long time.  But does this reflect an inherent flaw in capitalism or, as Keynes suggested, a “magneto” problem – like the failure of a car alternator – that can be addressed with proper fiscal and monetary policies and which will not benefit from large scale structural measures. I believe the evidence overwhelmingly supports the latter. Efforts to reform capitalism are more likely to divert from the steps needed to promote demand, than to contribute to putting people back to work. I suspect that if and when macro-economic policies are appropriately adjusted, much of the contemporary concern will fade away.

Lackluster End to 2011 Raises Worries About First Quarter - After all the hype, shoppers ended 2011 with a whimper. Thursday readings on two different sectors of the economy were disappointing. Gift-givers weren’t as generous as expected in December, and businesses were more cautious about adding to their inventories in November. The reports don’t change expectations that fourth-quarter economic growth was solid. The question is whether shoppers and businesses were losing momentum when the calendar flipped over to 2012. The miss in retail sales was vexing since the early holiday reports were so upbeat. Total sales rose only 0.1% in December; and excluding vehicles, sales fell 0.2%–the first drop since May 2010. The details were more promising, however. Shoppers were busier in November than first reported. And some of the December sales decline at gasoline stations and electronics stores reflected price cuts that will be adjusted away when retail activity is figured into real gross domestic product. As a result, the sales numbers suggest real consumer spending probably grew at an annual rate of around 2.5% last quarter. Since consumer spending accounts for the bulk of U.S. gross domestic product, that sets a floor for real GDP growth. Inventory building probably lifted it more.

The Straits of America - Nouriel Roubini -  Macroeconomic indicators for the United States have been better than expected for the last few months. Job creation has picked up. Indicators for manufacturing and services have improved moderately. Even the housing industry has shown some signs of life. And consumption growth has been relatively resilient. But, despite the favorable data, US economic growth will remain weak and below trend throughout 2012. Why is all the recent economic good news not to be believed? First, US consumers remain income-challenged, wealth-challenged, and debt-constrained. Disposable income has been growing modestly – despite real-wage stagnation – mostly as a result of tax cuts and transfer payments. This is not sustainable: eventually, transfer payments will have to be reduced and taxes raised to reduce the fiscal deficit. Recent consumption data are already weakening relative to a couple of months ago, marked by holiday retail sales that were merely passable. At the same time, US job growth is still too mediocre to make a dent in the overall unemployment rate and on labor income. The US needs to create at least 150,000 jobs per month on a consistent basis just to stabilize the unemployment rate. More than 40% of the unemployed are now long-term unemployed, which reduces their chances of ever regaining a decent job. Indeed, firms are still trying to find ways to slash labor costs.

The Perils of 2012, by Joseph E. Stiglitz - The year 2011 will be remembered as the time when many ever-optimistic Americans began to give up hope. President John F. Kennedy once said that a rising tide lifts all boats. But now, in the receding tide, Americans are beginning to see not only that those with taller masts had been lifted far higher, but also that many of the smaller boats had been dashed to pieces in their wake. In that brief moment when the rising tide was indeed rising, millions of people believed that they might have a fair chance of realizing the “American Dream.” Now those dreams, too, are receding. By 2011, the savings of those who had lost their jobs in 2008 or 2009 had been spent. Unemployment checks had run out. Headlines announcing new hiring – still not enough to keep pace with the number of those who would normally have entered the labor force – meant little to the 50 year olds with little hope of ever holding a job again. Indeed, middle-aged people who thought that they would be unemployed for a few months have now realized that they were, in fact, forcibly retired. Young people who graduated from college with tens of thousands of dollars of education debt cannot find any jobs at all. People who moved in with friends and relatives have become homeless. Houses bought during the property boom are still on the market or have been sold at a loss. More than seven million American families have lost their homes.  This year is set to be even worse.  Without growth, the debt crisis – and the euro crisis – will only worsen. And the long crisis that began with the collapse of the housing bubble in 2007 and the subsequent recession will continue. 

Fiscal Policy Having Negative Impact on Economic Growth - The National Federation of Independent Businesses has updated their small business survey for December, and once again, the small businesses identify their major problem as “poor sales.” This has gone down somewhat over time, but it still ranks as the biggest problem small businesses face, ahead of taxes, regulations and everything else. As Bill McBride writes, “In good times, small business owners usually report taxes and regulation as their biggest problems.” This is a conservative subset, after all. And they’re still worried most about the lack of demand. Government has a responsibility to fill that demand gap when times are tough, and investment, consumer spending and exports are lagging. Government becomes the demand generator of last resort in that scenario. And they are just not stepping up to the plate. The emphasis on the budget deficit, in fact, has led to a net drag from fiscal policy on the economy. Goldman Sachs (which actually does good macroeconomic analysis, if there’s one thing they know, it’s money) has released its latest chart showing how much fiscal policy is taking away from growth now and in future years. You can see the chart above.

MMT as Public Policy - First The Economist, now CNBC.  CNBC’s Senior Editor John Carney has put together a series of posts on Modern Monetary Theory at his blog.  One of Carney’s objections to MMT is this:…my biggest point of departure with the MMTers is they display a political and economic naivete when it comes to the effects of government spending. When they talk about spending it is almost always in terms of abstract aggregates, which is weird for a school of economics so focused on the specifics of monetary operations. What this means is that they miss the distortions of crony capitalism the accompanies so much government spending. I’m not sure this is a problem for MMT in particular, but you might put the point a little differently.  Fully MMT-inspired public policy would require a particular set of political and policy-making institutions.  If inflation is going to be fought through raising taxes, for example, we will need a policy-making process that is able to pull this off, and with the right timing. But having said that, after observing the process since the outbreak of the Great Recession it’s pretty clear that we don’t even have the right policy apparatus for carrying out conventional aggregate demand management.  For instance, having a robust set of automatic stabilizers in place during the crisis would have been preferable to trying to appeal to the whims of Susan Collins and Olympia Snowe (or catering to Congress’ anxiety about a thirteenth digit).

The Most Important Econoblog Post This Year: The Steve Keen/MMT Convergence - Neil Wilson has done yeoman’s duty to (perhaps) achieve a convergence that has been too-long delayed. A Double Entry View on the Keen Circuit Model. Steve Keen is, to my knowledge, the only person who is actually encoding a Godley-esque, MMT-style, accounting-based, stock-flow-consistent dynamic simulation model of how economies work. But many MMTers have been quite hostile or at least resistant to Steve’s work, based on some different concepts of endogenous/exogenous money, and — this may seem trivial but it isn’t, at least as it has played out over time — based on details of single- versus double-entry accounting.The debate has been quite acrimonious at times, and that acrimony has greatly hindered a convergence that in my eyes would be the most salutary event possible in the development of economic thinking and practice. You can read the details in Neil’s post, but in short he’s re-jiggered Steve’s accounts to make them conform better to (at least Neil’s view of) standard bank-accounting practices. I’m not qualified to evaluate his new formulation, but I am excited to read Neil’s comment on the post, replying to uber-MMTer Scott Fullwiler: We need to get all this pulled together into a coherent overall model. Steve’s up for it. I hope you are too.

A Third Way on Fiscal Policy - Courtesy of INET, here is Pavlina Tcherneva explaining her “bottom up” approach to fiscal policy. Notice the way she uses the term “trickle down” to apply also to conventional pump-priming fiscal policy (targeting growth and hoping for the right employment side-effects).  We need to move beyond the conventional options on fiscal policy, says Tcherneva; beyond a fiscal policy space marked out by aggregate demand management on one end and austerity on the other.  There’s a third approach that’s more in tune with the “original Keynesian spirit,” as she puts it:  directly employing the unemployed.  We should be targeting employment and the unemployed directly rather than trying to achieve this through the kind of bank-shot maneuver represented by conventional pump priming. You can read some of Tcherneva’s work on this issue here and here.  One-pager here.

The Great Debate©: The Job Guarantee Brouhaha  - John Carney, a senior editor at, has been writing a series of articles about the job guarantee (JG) aspect of what is known as Modern Monetary Theory(MMT). The JG is also known as the employer of last resort (ELR), a concept often associated in modern times with economist Hyman_Minsky. On December 29 Carney posted an article which has raised a vigorous response from many MMT protagonists. The specific three issues Carney raised were really presented as statements of fact as follows:

  • It’s massively inflationary.
  • It’s a bureaucratic nightmare.
  • It’s economically stagnating.

There has been a great deal of discourse in informal discussion groups on the internet, including one that we have participated in hosted by Roger Erickson.  A flavor of some of the problems that the proponents of MMT have with Carney’s three statements can be sampled in the comment stream following the article. In this article, which developed from our discussion in the Erickson group, we hope to bring together some of the salient points related to Carney’s three statements and attempt to establish some positions that address arguments against their validity.

Questions about the job guarantee-driven economy - In the last 2 years, I have been discovering this new economic paradigm called MMT. I have come to realize that it is the best system to accurately depict the current realities of the monetary system, and is very comprehensive in explaining and anticipating the economic effects of certain financial, central banking, economic policies. Recently, however, I'm beginning to discover that it seeks to change the current economic order, and proposes an entirely new economic system to what we have now. It looks alien to me, and I'm open about the possibility that I'm not seeing the entirety of what is actually being proposed (Because if I have it right, it looks very statist to me, and I completely veer way from MMT here). This comment by Mosler at pragcap is where I'm currently getting my view  of what they propose. They propose a society where everybody is guaranteed a job as a base case. It will be a basic job at a basic wage. Because everybody in the base case will have this JG job, its wage level functions as the price anchor for all other prices in the economy (not just a price floor). I.e., if everybody in the economy has a job paying ex. $8/hour, this anchors the level of aggregate demand. Demand cannot go below what this base wage allows, but it also cannot go too high because, in this base case, everybody is just earning $8/hour.

The U.S. Dollar Paper Tiger - Events in the last decade displayed a vigorous effort to defend the U.S. Dollar. The rogue nation of Iraq sold crude oil in Euros for three years, until they were liberated. Its tyrant was a scourge to be sure. Weapons of financial mass destruction seem to have replaced the traditional type, the new variety being derivatives, mortgage bonds, and even sovereign bonds from weak nations. Newer weapons from the United States feature extended hands from clearing house fronts that snatch and grab segregated private accounts, and backdoor raids of exchange traded fund precious metal. Let's not overlook the more frontal assault weapons deployed like unseating Qaddafi and capturing his gold held in foreign accounts, along with all that cash. Liberation has its benefits. The confrontation with Iran would be comical if not so dangerous. The claims have been silly in my view for years, in the perception of Iran as a serious threat to the West. They have been subjected to cut communication lines on the Persian Gulf seabed. They have been subjected to Stuxnet viruses to obstruct their nuclear refinement process, via the Siemens rear door. They have been subjected to an influx of heroin from the north, where the U.S. Military manages the Afghan situation and locale.

Foreigners Sell Record $85 Billion In Treasurys In 6 Consecutive Weeks - Time To Get Concerned? - Last week, when we pointed out what was then a record $77 billion in Treasury sales from the Fed's custody account, in addition to noting the patently obvious, namely that contrary to what one hears in the media, foreigners are offloading US paper hand over first, there was this little tidbit: "The question is what they are converting the USD into, and how much longer will the go on for: the last thing the US can afford is a wholesale dumping of its Treasurys. Because as the chart below vividly demonstrates, the traditional diagonal rise in foreign holdings of US paper has not only pleateaued, but it is in fact declining: a first in the history of the post-globalization world." Well as of today's H.4.1 update, the outflow has increased by yet another $8 billion to a new all time record of $85 billion, in 6 consecutive weeks, which is also tied for the longest consecutive period of outflows from the Fed's Custody account ever. This week's sale brings the total notional of Treasurys in the Custody account to just $2.66 trillion (down from a record $2.75 trillion) and the same as April of last year. And since the sellers are countries who have traditionally constantly recycled their trade surplus into US paper, this is quite a distrubing development..

CHART: How The Debt Limit Fight Hurt The Economy, Delayed Recovery - Last week’s surprisingly positive jobs report overshadowed another bit of good news for the economy: last November showed the biggest growth in consumer credit in 10 years. Typically that’s a sign that consumer confidence is up, banks are willing to lend, and demand is on the rise.  If you look back at recent monthly data, though, you’ll see that this particular green shoot should have poked through the ground months ago, but was stymied by the GOP’s debt ceiling hostage drama.  Take a look at the evidence: That’s a year’s worth of data. Taken in the context of the collapse of the credit bubble, it’s a pretty small blip (see the right side of image below). But it’s a pretty big hit to a fragile recovery. It was only by November that total consumer credit returned to where it had been before the standoff on Capitol Hill. Look at the graph and you’ll see that the growth we just experienced could have come in July and August in the absence of that fight.

U.S. debt is now equal to economy - The soaring national debt has reached a symbolic tipping point: It's now as big as the entire U.S. economy. The amount of money the federal government owes to its creditors, combined with IOUs to government retirement and other programs, now tops $15.23 trillion. That's roughly equal to the value of all goods and services the U.S. economy produces in one year: $15.17 trillion as of September, the latest estimate. Private projections show the economy likely grew to about $15.3 trillion by December — a level the debt is likely to surpass this month. "The 100% mark means that your entire debt is as big as everything you're producing in your country," says Steve Bell of the Bipartisan Policy Center, which has proposed cutting nearly $6 trillion in red ink over 10 years. "Clearly, that can't continue." Long-term projections suggest the debt will continue to grow faster than the economy, which would have to expand by at least 6% a year to keep pace.

Nation's debt passes grim milestone - The nation's debt has reached a symbolic milestone. With gross domestic product of roughly $15 trillion and total debt of $15.23 trillion, our total debt is now bigger than our economy, as USA Today noted Monday. What's more, the Obama administration's projections put our debt at more than $23 trillion by 2020, well in excess of the projected $22.5 trillion GDP. Analysts agree that the rising debt ratio is not good, but they can't agree on just how bad it is, and while there's at least some agreement among economists about how to fix the problem, lawmakers have no such common ground — which is one of the biggest hurdles to actually doing something about the debt dilemma. That $15 trillion figure is also a little misleading, said Bill Gale, a senior fellow at Brookings Institution and co-director of the Urban-Brookings Tax Policy Center, because it includes money owed by one government agency to another. A more important figure is net debt, which is the amount the U.S. owes investors and now hovers at around 70 percent of GDP, Gale said.

The US Debt Ceiling Theater Is Back: Think The Issue Is On Autopilot? Think Again - As Zero Hedge reported first, the US is once again, in just 5 short months (see chart), back at the debt ceiling, with just $25 million in new debt issuance dry powder, or in other words, no space of more debt absent resorting to the same "technique" last seen in late July when the Treasury plundered from government retirement accounts in order to accommodate new debt, such as yesterday's issuance of 3 Year bonds, and today's 10 Year bonds. And as The Hill reported yesterday, Obama is expected to request that Congress allow the incremental and final $1.2 trillion debt expansion (of the $2.1 trillion total) within a few days. So it is all on autopilot right? Wrong. As Bank of America explains below, it is very likely that the US will not have a debt ceiling hike for at least a few weeks, meaning that while a debt hike will ultimately come, it will very soon be all the song in dance, potentially overtaking the GOP drama, coupled with the pillaging of government retirement accounts yet again and likely leading to more rating agency action as the US debt fiasco is once again brought front and center. And the worst news is that even with $1.2 trillion in new debt capacity, the total amount is guaranteed to not last through 2013, and should tax withholdings dip as trends are already indicating on adverse year over year comps, the $1.2 trillion in new debt may be exhausted as soon as September

US Breaches Debt Ceiling Even More; Issues 10 Year Debt At Record Low Yield, Directs Surge - America may have breached its debt ceiling, but that is certainly not preventing it from issuing debt, placing another $21 billion in 10 Year bonds in a reopening, which priced 1.5 bps through the WI tail of 1.915% or at 1.90%. This is merely the latest record low yield in the history of the auction. The Bid To Cover came at 3.29: not a record, but certainly one of the top 5 highest. Oddly enough, while the Directs disappeared from yesterday's 3 Year auction, today they surged, coming at double last month's 8.4% at 17.4%, the highest since the August post-downgrade auction. Primary Dealers accounted for 44.3% with Indirects coming in at a very weak 38.3%. Still, the take home is that in the past two days, the US has raised over $50 billion in debt with no capacity, and instead is plundering from government retirement accounts, just like it did back in July 2011 at the first, but not last, debt ceiling theater. SSDD.At least we know what it takes to get new record low yields: just keep breaching the debt ceiling - guaranteed way to raise 30 Year debt at 0.00% in a few months.

U.S. Debt Approaches $15.194 Trillion Ceiling - The Treasury Department has begun maneuvers to avoid hitting the debt ceiling, as the Obama administration waits for Congress to return from the holiday break before it can raise the federal borrowing limit.The U.S. government was just a hair below the $15.194 trillion debt ceiling on Tuesday, $25 million shy of the limit Congress set last summer. President Barack Obama sent a letter to congressional leaders Thursday, saying the U.S. debt was within $100 million of the ceiling “and that further borrowing is required to meet existing commitments.” Raising the debt ceiling another $1.2 trillion is procedurally simple but politically it is much more complex. Last year, as part of the White House’s deal with Republicans to avert a potential default on the U.S. debt, both sides agreed to raise the debt ceiling $2.1 trillion, but to do it in two steps. So in August, they immediately raised the debt ceiling $900 billion. To raise the ceiling another $1.2 trillion, which is what the Treasury Department now wants to do, Congress must first have the opportunity to formally disapprove or block the increase. The vote of disapproval is expected to fail, but they need the opportunity to vote, which is something they can’t do while they are out of town.

Very Serious Scare Tactics - Krugman - As part of a longer-term project, I’ve been looking into the why and how of the dominance of austerity rhetoric over most of the past two years. One aspect is the rapturous glee with which policymakers seized on the theory of expansionary austerity, without waiting to see how well it would stand up under scrutiny (and the answer was, not well at all). Another aspect, however, is the willingness of Very Serious People to invoke apocalyptic visions based on nothing but their gut feelings — gut feelings that people with actual money on the line didn’t share. Here’s Erskine Bowles, on March 8, 2011, warning about an imminent debt crisis: This problem is going to happen, like the former chairman of the Fed said or Moody’s said, this is a problem we’re going to have to face up to. It may be two years, you know, maybe a little less, maybe a little more, but if our bankers over there in Asia begin to believe that we’re not going to be solid on our debt, that we’re not going to be able to meet our obligations, just stop and think for a minute what happens if they just stop buying our debt.  The markets will absolutely devastate us if we don’t step up to this problem. The problem is real, the solutions are painful and we have to act. Alan Simpson then weighed in and declared that it would be less than two years...

White House Formal Request Of $1.2 Trillion Debt Ceiling Increase Will Not Be Disapproved - Sorry for the double negative in the headline, but the Budget Control Act made me do it. You remember the Budget Control Act? This is the law embodying the debt ceiling increase enacted this past August. This is the same law that created the anything-but-super committee that failed in November to agree on a deficit reduction plan. The debt ceiling increase formally requested by the White House today is the third the Budget Control Act allows. The first occurred when the law was signed. The second went into effect in September when Congress failed to disapprove the request. Today's $1.2 trillion request is the third...and largest...the law allows. Congress now has 15 days to consider and, if it can muster the votes, disapprove the request. That may happen in the House but almost certainly won't happen in the Senate. But even if the Senate went along, the president could/would/will veto the resolution and, because there isn't a two-thirds vote in either house to override the veto, the debt ceiling will be raised.

Everyone Is Misreading Reinhart And Rogoff - If the rallying cry for deficit reduction rests on an intellectual framework, it would be the work of Carmen Reinhart and Ken Rogoff, whose book, This Time is Different, has been hailed for its exhaustive historical study of financial crises.  A key finding of those scholars – that economic growth slows once the ratio of debt-to-GDP exceeds 90% – has been widely cited by those calling for decreased government spending.  But those calling for deficit reduction have largely ignored a number of caveats that Reinhart and Rogoff gave with respect to their 90% threshold, and as a result many warn that the US faces the imminent danger of a Greek-like sovereign-debt crisis. Take, for example, PIMCO’s Bill Gross, who wrote the following on October 31 of last year: However, as economists Rogoff & Reinhart have shown in their historic text, This Time Is Different, sovereign debt at 80-90% of GDP acts as a barrier to growth. First of all, Reinhart and Rogoff did not write about the 90% threshold in This Time is Different; they published research about that threshold only after the book was written, in two separate articles (found here and here).  The more important problem with the claims that Gross and others have made about the 90% threshold is that they ignored Reinhart’s and Rogoff’s own words of caution with respect to the special situation of the US, and they failed to consider the limits inherent in Reinhart and Rogoff’s dataset of countries with high debt levels.

Federal Budget Deficit for the First Quarter of 2012: $320 Billion - CBO Director's Blog - The federal budget deficit was $320 billion for the first quarter of fiscal year 2012, CBO estimates in its latest Monthly Budget Review, $49 billion less than the deficit recorded in the same period in fiscal year 2011. But $26 billion of that difference resulted from shifts in the timing of certain payments because the regular payment dates fell on weekends or holidays; otherwise, the deficit would have declined by only $23 billion. Later this month, CBO will issue new budget projections—spanning the period from 2012 through 2022—in its annual Budget and Economic Outlook. Receipts in the first quarter of fiscal year 2012 totaled $554 billion, an increase of $23 billion. Most of the gains stemmed from higher corporate income taxes, which rose by $18 billion, or 51 percent.That increase occurred because tax payments rose by $6 billion and refunds fell by $13 billion. Corporate refunds were unusually high in the first quarter of fiscal year 2011 in the aftermath of the recession; this year the amount is more comparable with those of the years before the recession.Altogether, individual income and payroll tax receipts rose by $4 billion, or about 1 percent.

Fiscal Policy: Kind of a Drag - Cardiff Garcia at FT Alphaville has posted a new graph from economist Alec Phillips of Goldman Sachs: Fiscal flailing, continued The following graph shows the estimated impact of Federal, state and local policy on GDP growth. The dark shaded rectangles are Federal policy and the light shaded rectangles are state and local policy. From Garcia:  Goldman Sachs has updated this chart, which shows the projected impact of fiscal policy on GDP growth, to reflect its latest assumptions (see the previous version here): The dotted line that dips through 2012 is what would happen if, um, nothing happens — that is, no new fiscal measures are passed in 2012. The bars and the black line are Goldman’s forecast. Goldman’s assumptions include the payroll tax cut’s extension through the end of the year. Emergency unemployment benefits will also probably be extended, but the analysts expect that the maximum duration will be reduced from 99 weeks to 79 weeks..A couple of key points:
1) In addition to the assumptions about 2012, this estimate assumes that the "2001/2003 tax cuts are extended through 2013, and that automatic spending cuts do not take effect." That isn't clear at this point, and the fiscal drag in 2013 could be significantly more than shown on the graph.
2) The good news, according to this estimate from Phillips, is that the drag from state and local governments will stop mid-year 2012, and be neutral for the following 12 months. That fits with my current outlook for State and Local Governments.

Fiscal Drag - While acknowledging that we’ve got a little mo’ going in the current economy, I and others have stressed various risk factors, including Europe, oil, and fiscal drag.  Here’s a picture of the latter.  It’s the one risk, that with smarter policy, we could control…but it’s that “smarter policy” part that’s the catch (Europe’s debt problem is also amenable to policy solutions, but that’s mostly up to Germany et al).  Our policy makers remain motivated more by austerity and dysfunctional politics than by clear-eyed thinking about offsetting the fiscal drag as stimulus fades, states shed jobs, and we’re still climbing out of the hole caused by the Great Recession. BTW, note the dip in terms of lower real GDP (“current law”) this year if we fail to extend unemployment insurance benefits and the payroll tax break beyond the two months agreed to thus far.

Mistakes and Ideology - Paul Krugman -- Mark Thoma sends us to Simon Wren-Lewis on the controversy over fiscal stimulus and all that; Wren-Lewis, refreshingly, doesn’t try to make excuses for Lucas and Cochrane:Both make the same simple error. If you spend X at time t to build a bridge, aggregate demand increases by X at time t. If you raise taxes by X at time t, consumers will smooth this effect over time, so their spending at time t will fall by much less than X. Put the two together and aggregate demand rises.But surely very clever people cannot make simple errors of this kind? Perhaps there is some way to re-interpret such statements so that they make sense. They would make sense, for example, if the extra government spending was permanent. The only trouble is that both statements were made about a temporary fiscal stimulus package. Brad deLong tries very hard along these lines (see here for example), but just throws up inconsistencies. Yes indeed. A lot of people have been clutching their pearls over my (and Brad’s) simple statement that Lucas/Cochrane made simple, fail-an-undergrad-quiz-level, errors. To say that they did what they did is a “rant.” But the truth is that they did — and have refused to admit those errors, which is worse.

CBO Says the Middle Class Tax Relief and Job Creation Act Would Decrease the Deficit - On January 6th, the Congressional Budget Office scored the Middle Class Tax Relief and Job Creation Act of 2011 (H.R. 3630), adjusting for the enactment of the two-month payroll tax holiday.  In contrast with its previous scoring of the bill—which estimated a $25 billion increase to the deficit—the new analysis shows a deficit reduction of $5 billion.  However, much of the change in score is due to the enactment of H.R. 3765, the Temporary Payroll Tax Cut Continuation Act (TPTCCA) of 2011. A major part of TPTCCA is the provision increasing fees for Fannie Mae and Freddie Mac.  This amounted to a ten year spending decrease totaling $36 billion.  Since enacting the Middle Class Tax Relief and Job Creation Act would no longer have any effect on this line item, these savings were taken out of the new CBO score. Offsetting this lost spending decrease are other large spending reductions due to the proposed changes in policies such as unemployment compensation, Medicare physician payments, and other health provisions.In addition, because the Middle Class Tax Relief and Job Creation Act would only have a marginal effect of a 10-month extension of the payroll tax holiday, it would cost $100 billion rather than the $120 billion as previously scored.

GOP Will Have To Work Harder In 2012 To Get White House To Respond On The Budget - I'll have much more to say about this tomorrow when my column is published, but I thought it important to start raising a key point about this year's budget debate now: The GOP is going to have to work much harder this year to get the Obama administration to respond to it on the budget.The reason? There will be very few opportunities for congressional Republicans to force a confrontation with the White House this year on budget issues by holding anything hostage. In fact, other than the extension of the payroll tax cut that will expire at the end of February, there will be no budget-related deadlines Republicans in the House and Senate will be able to to use for leverage with the administration until fiscal 2013 begins on October 1...a month before the election.

Does America Spend More Than Next 10 Nations Combined on Defense? -- John Noonan is tired of the meme that the United States spends more on defense than the next ten nations combined and points to a fact check from WaPo’s Glenn Kessler (“President Obama and the defense budget: a factoid that falls short“) to debunk it. As the headline implies, President Obama himself reiterated this claim: “I firmly believe, and I think the American people understand, that we can keep our military strong and our nation secure with a defense budget that continues to be larger than roughly the next 10 countries combined.” This was in his speech outlining his new defense strategy. [T]he president appears to be arguing that the United States has a strong military because its budget is larger than those of the next 10 largest countries combined.  The mostly widely cited public source for this claim is the Stockholm International Peace Research Institute, whose military expenditure database suggests that the U.S. military budget is bigger than those of the next 19 countries combined. However, raw numbers can be misleading. The official Chinese figure of less than $100 billion a year is believed to be dramatically understated; SIPRI pegs it at around $100 billion. The Defense Department believes the real number for the Chinese military to be $150 billion.

How to Save the Global Economy: Cut Defense Spending - Breaking out of the current frustratingly slow growth in the developed world requires a blend of short-term stimulus and longer-term restraint. Unfortunately, in Europe and the United States, we have been following these policies in reverse -- constraining public-sector spending in the near term while doing nothing effective to prevent deficits in the future. In the United States, cuts in public-sector spending have caused the loss of 550,000 public-sector jobs -- think teachers, police, and firefighters -- since January 2009, adding to the raw unemployment numbers and removing the multiplier effect that takes place when employees spend their paychecks. The result: Despite gaining private-sector jobs every month for the past 21 months as of November, we have been badly hurt by reduced public-sector spending, which has cut jobs and economic growth. One major change that can reverse this: a substantial reduction in America's military spending. In the current fiscal year, the United States is spending upwards of $650 billion on its military, including the costs of the wars in Iraq and Afghanistan. This is far more than it spends on Medicare and, more importantly, considerably in excess of what is required for America's legitimate national security needs.

Is Buck McKeon (R-CA) A Big Spender Or Just Off Message? - This quote from House Armed Services Committee Chairman Buck McKeon (R-CA) stands out in an excellent story in yesterday's The Washington Post by Scott Wilson and Greg Jaffe on how the White House worked with the Pentagon on the military spending strategy Defense Secretary Leon Panetta announced last week: "an honest and valid strategy for national defense can’t be founded on the premise that we must do more with less or less with less.” Yes, I know this is just the chairman of an authorization committee defending his jurisdiction. And, yes, I know that McKeon is from a state that relies heavily on federal military spending. But "do more with less" and a smaller government supposedly are basic principles of the GOP these days. What is McKeon saying?

Will Obama's military cuts hurt the economy? - President Obama and Pentagon leaders late last week unveiled a new defense strategy for a smaller, more flexible military force, which the president says will prepare the nation for the threats of the future while restoring balance between the defense budget and domestic spending. The plan would cut defense spending by 10 percent over the next decade, and there are worries that this could harm our ability to recover from the recession and potentially lower long-run economic growth. How valid are these concerns? Beginning with the worry about the effect of the cuts on the recovery from the recession, anything that reduces spending on domestic goods and services will slow the economy and hurt our ability to recover. Thus, if cuts to defense spending cause the demand for goods and services to fall substantially, there would be a corresponding decline in gross domestic product (GDP), and a slower recovery.

Falling US Exports? Obama Says Merge Agencies - Ho hum, hot off the presses is yet another lacklustre just-released American trade report for the month of November. With imports on the rise (mostly due to energy) and exports on the wane, let's just say US trade performance is not going to be contributing as positively to their GDP figures in Q4 2011 as hoped. You may recall back in 2010 when Obama set a target to double US exports by 2015? Let's just say they're not moving towards that goal with any alacrity as evidenced by the latest trade figures or with the figures to date. What to do? It's probably just rearranging deck chairs on the US Titanic, but just in is word that Obama intends to (finally) merge various government agencies handling trade. Moreover, the move is calculated to receive Republican support by reducing a sprawling network of agencies:  The Commerce Department would cease to exist after the consolidation of trade agencies that President Barack Obama is seeking, a White House budget official said on Friday. It would create a new yet-to-be-named department focused on exports, Parts of the Commerce Department that are unrelated to trade and businesses, like the National Oceanic and Atmospheric Administration, would be moved to other government agencies, he told reporters. The U.S. Trade Representative would remain a cabinet-level position and the head of the Small Business Administration would also be made a cabinet post,

Obama seeks to revamp government, focus on exports -- President Barack Obama asked Congress on Friday for broad powers to overhaul the U.S. government and untangle what he called an "outdated bureaucratic maze" that makes it hard for U.S. businesses to sell their goods abroad. Obama said he wanted to consolidate six trade and business agencies into a single export body to help the United States better compete in a 21st century economy and modernize a government he said had grown too complex. The move could help inoculate him against charges from Republicans hoping to unseat him in November that he is a feckless liberal who has presided over one of the largest expansions of the U.S. government in history. Ronald Reagan, an idol of conservative Republicans, was the last U.S. president who had the authority to reorganize the government in a similar fashion. But Obama must contend with some Democrats who worry that merging the agencies will backfire and some Republicans who are unwilling to give the president wider powers. Analysts were skeptical that Congress would approve Obama's request in an election year.

Dems Warn GOP: Don't Strangle Recovery By Screwing With Payroll Tax - Top Democrats pulled a little stunt Friday morning, when they tried to upend the House’s pro forma session to confer about and debate the payroll tax cut.  But in their remarks to the press afterward, they parlayed today’s positive jobs figures into a serious political warning to the GOP: Don’t threaten the recovery by playing games with the economy. In essence, today’s positive economic news raised the stakes of the payroll tax cut fight — if Republicans can’t get their act together and the tax cut lapses, it will muffle the recovery just as it’s finally starting to turn economist’s heads. Republican rank and file members are still steamed that House GOP leaders caved and passed a temporary payroll tax cut extension. But it’s unclear whether they’ll allow that anger to drive their party toward brinkmanship over a full year extension of the payroll tax cut, or whether they’ll accede to political reality and allow the payroll tax cut to be renewed in February without a huge fight over extraneous policy riders, and if or how to pay for it. Dems put them on notice today that if they muck this up, they’ll be held accountable for the economic consequences.

The Payroll Tax: Same Problem, New Year - The White House opened 2012 with deputy press secretary Josh Earnest saying a full extension of the payroll-tax cuts through 2012 was the last “must-do” item left on the president’s congressional agenda heading into November’s election. The conference committee is appointed and will convene when the House returns on January 17th, and much of the political banter will revolve around how to off-set the costs of a payroll-tax extension. However, both liberals and conservatives are starting to question the greater meaning of reducing payroll-tax revenue which is designed with the specific purpose of funding Social Security and the lack of wisdom behind such a reduction. By having to redirect billions from general revenue to cover 2011’s shortfall from Obama’s use of a payroll-tax holiday, the connection which has kept Social Security from simply being a government program to redistribute wealth has been severed. This is a crucial link that has always tied what a worker puts in to social security with what he is ultimately able to collect, rather than devolving the system in one giant hand out. With Obama pushing for another extension, liberals and conservatives are both beginning to question the greater meaning behind the payroll-tax extension, especially given concern the payroll-tax “holiday” could turn become permanent.

What's Really at Stake in the Payroll Tax Fight - Next month, Congress will once again face the question of how to extend a temporary payroll tax cut that has been in effect for the past year. Republicans tried their best to duck that debate—and with good reason. As long as the issue is framed in terms of how to extend the payroll tax cut, they are unlikely to prevail. And if they lose, what is supposed to be a “temporary” extension could turn out to provide a significant precedent for a long-term shift in the progressivity of the American tax system. A few weeks ago, House Republicans grudgingly accepted a two-month extension of the 2011 payroll tax cut, which temporarily reduced the tax rate from 6.2% to 4.2%. In tactical terms, this was widely portrayed as a victory for President Obama and his Democratic allies. The controversy and its resolution helped change Obama’s image “from compromiser in chief to determined voice of economic populism,” according to one press report. Another claimed that “House Republicans were forced to make humiliating concessions to Democrats over the extension of a payroll tax holiday and unemployment benefits, dinging the party’s tax-cutting brand.”

The Art of Bargaining, So Lost Upon Washington - Almost everyone agrees about one thing these days: Congress is malfunctioning. To help our representatives escape from their current morass, I suggest that they read “An Essay on Bargaining,” The article’s primary theme is that the key to success in many bargaining situations is the ability to commit to a future course of action. ..This ability to commit can help solve games in which the two players must choose between strategies: either they cooperate or they “defect” ... They are much better off if they both cooperate, but there is always a temptation to defect..., scoring a big win at the other player’s expense. When this game is played repeatedly, a natural — and often successful — strategy is called tit for tat. You begin by cooperating, hoping for the best. If the other side cooperates, too, all is good. But if it defects, you retaliate. And once the retaliating starts, it is hard to stop. When I asked a former Republican senate staff member to explain why so many qualified Obama administration nominees were being denied confirmation hearings, he told me, “We are tatting.”  Clearly, we must find a way to avoid this escalation of retaliation.

IRS proposes new innocent spouse procedures - In a press release IR 2012-3 (Jan. 5, 2012), the IRS has issued Notice 2012-8 announcing a new revenue procedure updating Rev. Proc. 2003-61. The IRS describes the effect of the procedure as follows. This proposed update to Rev. Proc. 2003-61 addresses the criteria used in making innocent spouse relief determinations for section 6015(f) equitable relief cases and revises the factors for granting equitable relief. The factors have been revised to ensure that requests for innocent spouse relief are granted under section 6015(f) when the facts and circumstances warrant and that, when appropriate, requests are granted in the initial stage of the administrative process. The IRS indicates that it will now take into account the other spouse's abuse and financial control in making determinations for innocent spouse relief.Review of the innocent spouse program demonstrated that when a requesting spouse has been abused by the nonrequesting spouse, the requesting spouse may not have been able to challenge the treatment of any items on the joint return, question the payment of the taxes reported as due on the joint return, or challenge the nonrequesting spouse’s assurance regarding the payment of the taxes. Review of the program also highlighted that lack of financial control may have a similar impact on the requesting spouse’s ability to satisfy joint tax liabilities.

The 'Tax Gap' -- In keeping with its apparent policy of releasing important economic reports late on Friday afternoons in the hope that no one will notice them, the Obama administration published new estimates of the so-called tax gap on Jan. 6. They deserve more attention. For many years, the Internal Revenue Service has been studying the tax gap, which is the difference between aggregate tax liabilities and revenue collected. The data just released are for the 2006 tax year and update the most recent previous data, which were for the 2001 tax year. According to the study, in 2006 Americans owed $450 billion more in federal taxes than they paid, an increase of $105 billion over 2001. The I.R.S. estimates that the compliance rate declined slightly to 83.1 percent in 2006, from 83.7 percent in 2001. In other words, people voluntarily pay only about 84 percent of the taxes they owe. The I.R.S. estimates that enforcement actions will eventually bring in some of the uncollected revenue. It says that $55 billion of the 2001 tax gap was subsequently collected and that $65 billion of the 2006 gap will be. Thus the net tax gap is a bit lower: $290 billion in 2001 and $385 billion in 2006. The ultimate compliance rate, therefore, is 86.3 percent for 2001 and 85.5 percent for 2006. Noncompliance primarily takes the form of unreported income rather than taking unjustified deductions, exemptions and such. The bulk of unreported income is among unincorporated businesses, which can much more easily hide income from the I.R.S. than workers who primarily earn wages from which their employers withhold taxes.

The "Tax Gap," Reporting, and Withholding - At the New York Times blog, economist Bruce Bartlett reviews IRS data indicating that Americans pay about 83.1 percent of the federal taxes they owe (the number rises to 85.5 percent after IRS enforcement actions). That leaves a "tax gap" of $385 billion, in 2006. He makes the case that information reporting (1099 forms and employer reporting) and withholding make a big difference. In areas the require both reporting and withholding (wages and salaries), only about 1 percent of income ($11 billion) goes unreported. For items that require information reporting but not withholding (pensions, Social Security and unemployment benefits, interest, and dividends), about 8 percent ($12 billion) goes unreported. For items that involve little or no information reporting (small business income, rents and royalties, etc.), the IRS estimates that 56 percent ($120 billion) goes unreported. Bartlett argues that this is reason to spend more on enforcement but I'm not so convinced. After all, the IRS's 84,000 employers were able to boost collections by only 2.4 percent, or $65 billion. Those were probably the easier enforcement cases, so it's hard to say significantly increasing the IRS's army of tax collectors would bring in a big chunk of uncollected taxes. (The IRS budget is about $13 billion a year.)

How budget cuts can increase the deficit - The Internal Revenue Service got hit with a 2.5 percent budget cut for 2012, paring back money for tax enforcement even as tax compliance has gotten worse. The agency got $300 million less than in the previous year — including $193 million less for tax enforcement.The IRS estimates that every additional dollar spent on enforcement brings in about $4 to $5 dollars of additional revenue, which would mean that the 2012 budget could lose taxpayers anywhere from $772 million to $965 million — more than twice what it originally saved through the cuts to enforcement. As a result, the recent IRS budget cuts would actually be contributing to the deficit, according to Nina Olson, who runs an independent watchdog for taxpayer advocacy within the IRS. According to Olson’s latest report to Congress, the budget cuts combined with the IRS’ growing workload have become “the most serious problem facing U.S. taxpayers.” The report explains: The IRS does not have enough resources to handle its current workload. The lack of adequate funding for the IRS causes multiple problems. Taxpayers calling the IRS with tax-law questions often cannot get through, creating considerable frustration and potentially reducing compliance. Compliant taxpayers whose refunds are held up or who are audited do not receive timely responses to their phone calls and correspondence. The IRS lacks the resources to maximize revenue collection, thereby exacerbating the federal budget deficit.

Congress Should Start Minding the Tax Gap - What is most frustrating about the new figures is that they restate a simple message that isn’t new but that the current Congress has chosen to ignore.  In the areas of the tax code with substantial information reporting and withholding requirements — most notably workers’ wages, which employers report to the IRS and on which they withhold income and payroll taxes — compliance is extremely high.  But where there is no third-party information reporting or withholding, tax collections are abysmal.  Sole proprietors, a major class of small businesses, report less than half of their income to the IRS. In fact, under-reported business income is the single largest source of the tax gap, amounting to fully $122 billion in 2006 alone. The IRS’s new estimate of the “tax gap,” its first in six years, shows that taxpayers failed to pay $450 billion in federal taxes on time in 2006, $385 billion of which they never paid.  That’s real money (more than Medicare cost that year, as the graph shows), particularly for a country facing wrenching choices on how much to raise taxes on honest taxpayers and to cut Medicare, health and science research, education, and other vital priorities in order to rein in long-term deficits.

Time to junk income taxes? - This is America’s 100th year for individual income tax, a system as out of touch with our era as digital music is with the hand-cranked Victrola music players of 1912. It is also the 26th year of the Reagan-era reform for both personal and corporate tax, a grand design now buried under special-interest favors. With U.S. elections in November, and the George W. Bush tax cuts due to expire at the end of 2012, it’s time for a debate that goes beyond ginning up anger over taxes and the superficial issue of tax rates. It’s time to consider whether to get rid of income taxes, personal and corporate. What are the strengths and weaknesses of our current system? Should we tax individual and corporate income — or something else? We need to think about it. Whatever systems we consider, we should weigh up what it takes to raise the necessary revenue along with such other attributes as minimal compliance cost, leakage and economic distortion. Times change. Tax systems must change with them or else their lubricating effect turns to sand, wearing down the gears of commerce.

The Conservative Case for a Wealth Tax - Reforming the income-tax system is commonly seen as the principal way to reduce inequality. But any attempt to impose higher marginal tax rates on even moderately high income earners—as President Obama wants for families earning more than $200,000 per year—can lead to losses in economic efficiency and even to losses in sorely needed government revenue if high earners work less or seek out more loopholes and tax shelters. The basic problem is that defining "income" becomes progressively more difficult as income and wealth rise. Straight wage income is relatively easy to define and tax for middle-income earners—through payroll taxes for Social Security or through the personal income tax. But wealthy people live much more off returns from their asset holdings. They receive capital gains, stock options, interest and dividends; and carried interest for owners of hedge funds that, to avoid double taxation, are taxed at lower rates than wage income. They may receive imputed rental income from multiple homes and major consumer durables such as automobiles, art collections or yachts, which the federal income tax misses altogether.  In order to have a fairer tax system, we should implement a new federal wealth tax in addition to the federal income tax. Unlike the current income tax, the wealth tax would not rely on how income is defined. Rather, it would require that households list all their domestic and foreign assets on in the relevant tax year. With a large exemption of $3 million that effectively excludes more than 95% of the population, a moderate flat tax—say 3%, on wealth so defined—could then be imposed.

Buffett Challenges Republicans on Donations, Time Says - Billionaire Warren Buffett will match voluntary contributions by congressional Republicans to the U.S. government, he told Time magazine.  Buffett, who has said the tax system favors the rich, made his offer after Republicans, including U.S. Representative Michelle Bachmann, suggested he donate his fortune to the government.  “If we go to a contribution system, I’ll match the total contribution made by all Republican members of Congress and I’ll even go 3-for-1 with McConnell,” Buffett said of Senate Minority Leader Mitch McConnell, the Kentucky Republican, in an interview with the magazine.

Corporatism and taxes - Corporatism is the term used to describe a economic and governmental approach that favors large entities over people, including adopting rules and regulations to suit the regulated entities, tilting legislation to protect corporate entities that might otherwise be considered to be causing harm to the public good, and allowing access to public fora and public representatives in ways that ensures that corporate voices are heard, whether or not those opposing them are heard. Corporatism in tax policy has resulted in highly favorable readings of the reorganization provisions--for example, current IRS regulatory approaches proclaim that even losses can be recognized in corporate reorgs, going against well-settled understandings of the operation of the corporate reorganization provisions, and the Code and regulations permit a vastly expanded range of flexible transactions, especially of spins under section 355 and of A reorgs (a mere 40% equity consideration now 'counts' as sufficient to provide tax-free reorganization status).

CRS reports on repatriation tax holiday impact - Shortly before the Christmas holiday, CRS released a report on the possibility of a second repatriation tax holiday for multinational corporations. Download Marples and Gravelle. tax cuts on repatriation earnings as economic stimulus. an economic analysis. 122011.c The holiday has been pushed by various commentators who support reducing corporate taxation based on the argument that lower tax, and repatriated earnings, will result in greater investment in domestic business expansion and more US jobs.  Our experience with the 2004 repatriation holiday was not impressive. Much of the repatriated funds were diverted to share buybacks and not used to increase investments or increase jobs. IN fact, many companies that repatriated the most money engaged in heavy firings of workers. Hewlett Packard was notable, with large layoffs accompanying significant repatriated cash. To repeat that experiment at a time when US companies have even more cash socked away in the US and abroad would merely reward those companies that decided to bet on (and lobby heavily for) a second repatriation holiday that would amount to a huge cut in their taxes--like having the best of a territorial tax system at the same time that they get all the benefits (foreign tax credits, active financing exception, etc.) of the current worldwide tax regime.

Guest Post: Does a lower Corporate Tax burden increase private investment? - The efficacy of taxation in promoting or discouraging economic growth remains a hotbed of disparate perspectives on the part of economists and policymakers alike. Some politicians insist that more incentives for private investors — lower taxes on corporate profits — will lead to faster and better-balanced growth. According to a New York Times/CBS News poll in May 2011, a majority of Americans believe that increased corporate taxes “would discourage American companies from creating jobs.” The assumed mechanism for spurring economic growth and job creation is new private or business investment, incentivized by lowering the corporate tax burden. The following graph displays a comparison of net private investment as a percent of GDP against corporate tax receipts as a percent of GDP … for the post-war period 1950 - 2008. The data is sourced from the Department of Commerce, Bureau of Economic Analysis (BEA), as follows:
GDP – NIPA table 1.1.5 here
Corporate tax receipts – NIPA table 3.2 here
Net business investment – NIPA table 5.2.5 here

Got money offshore? IRS starts new amnesty program - If you’ve got money stashed in overseas accounts that you’ve failed to report to the Internal Revenue Service, the tax agency wants to give you another chance to come forward. The IRS said Monday that it’s launching a third voluntary disclosure program — and this one has no deadline. Like the IRS’s two previous voluntary disclosure programs, taxpayers who come forward to report their overseas accounts face lower penalties than they would pay if the IRS catches them, and they avoid the risk of prosecution. Under the new program, there’s a 27.5% penalty, up from 25% in the 2011 program, on the highest aggregate balance in a taxpayer’s overseas accounts in the eight years before disclosure. But those whose overseas account balances did not top $75,000 in any year face a lower penalty of 12.5%. Like the previous program, some taxpayers are eligible for an even lower penalty rate of 5%. Taxpayers also owe back taxes and interest.

GOP class warfare: Make the middle class pay -For viewers of Saturday night’s Republican presidential candidate debate, drawing distinctions between the leading candidates wasn’t hard.  But on one topic they are as alike as genetically modified peas in a pod. In an era in which Americans are paying historically low taxes and the government faces huge budget deficits, they are all fervently determined to give the richest Americans another huge tax break. The Citizens for Tax Justice have crunched the numbers, and they are remarkable. The cost of the tax plans proposed by Republican presidential candidates would range from $6.6 trillion to $18 trillion over a decade. The share of tax cuts going to the richest one percent of Americans under these plans would range from over a third to almost half. The average tax cuts received by the richest one percent would be up to 270 times as large as the average tax cut received by middle-income Americans. The figures  are staggering. Here’s a quick breakdown of how the richest one percent of Americans would stand to benefit under the different plans.

  • Newt Gingrich: An average tax cut of $391,330
  • Rick Perry: An average tax cut of $272,730
  • Mitt Romney: An average tax cut of $126,450
  • Rick Santorum: An average tax cut of $217,500

Ron Paul’s tax plan isn’t detailed enough to make the same analysis, but he has proposed repealing the federal income tax altogether, which, ideologically speaking, makes him a clear fellow traveler with the rest of his colleagues

Ron Paul Challenges Liberals - or Maybe Not - Matt Stoller, the former Senior Policy Advisor to Rep. Alan Grayson and a fellow at the Roosevelt Institute has a couple of very interesting articles posted at Naked Capitalism,  Why Ron Paul Challenges Liberals, and the follow-up, Naked Capitalism, “A Home for All Sorts of Bircher Nonsense”. These are thought-provoking, in many ways insightful, and strike me as required reading, for a variety of reasons, including some valuable historical insights.  However, one thought they provoke from me is that the main thesis is spectacularly wrong-headed.  Stollar talks about what a great ally Paul's staff was, when working on certain issues.  I should say, "when working against certain issues" or things, like war and the unfettered evil workings of the Federal Reserve.  The correct vocabulary is worth emphasizing.  Liberals and Libertarians may find common ground in what they are against, but it is quite unlikely that they will ever find anything substantial that they both are for.  Stollar says, "Liberalism doesn’t really exist much within the Democratic Party so much anymore."  This is an important thought, but he doesn't pursue it, and as he goes on seems to conflate Democrats with Liberals, as suits his convenience.  In the final paragraph of the first post he refers to: "a completely hollow liberal intellectual apparatus arguing for increasing the power of corporations through the Federal government to enact their agenda."  Seriously, WTF?  I have absolutely no idea what the hell that is supposed to mean.

Businessmen and Economics - Krugman - A brief thought on something I’ll try to expand on later. Leaving aside all the questions about what Mitt Romney did or didn’t do at Bain — and about his self-aggrandizing double standard — there’s an even broader question: why does anyone believe that success in business qualified someone to make economic policy? For the fact is that running a business is nothing at all like making macro policy. The key point about macroeconomics is the pervasiveness of feedback loops due to the fact that workers are also consumers. No business sells a large fraction of its output to its own workers; even very small countries sell around two-thirds of their output to themselves, because that much is non-tradable services. This makes a huge difference. A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods. Nothing in business experience prepares one for the paradox of thrift, or even the inflationary impact of increases in the money supply (which is real when the economy isn’t in a liquidity trap.) The idea that what America needs now is an executive type is just foolish.

America Isn’t a Corporation, by Paul Krugman - . This is an idea that has been widely accepted. And it’s the main plank of Mitt Romney’s case that he should be president: In effect, he is asserting that what we need to fix our ailing economy is someone who has been successful in business.  In so doing, he has, of course, invited close scrutiny of his business career. And it turns out that there is at least a whiff of Gordon Gekko in his time at Bain Capital, a private equity firm; he was a buyer and seller of businesses, often to the detriment of their employees, rather than someone who ran companies for the long haul. But there’s a deeper problem in the whole notion that what this nation needs is a successful businessman as president: America is not, in fact, a corporation. Making good economic policy isn’t at all like maximizing corporate profits. And businessmen — even great businessmen — do not, in general, have any special insights into what it takes to achieve economic recovery.  Why isn’t a national economy like a corporation? For one thing, there’s no simple bottom line. For another, the economy is vastly more complex than even the largest private company.  Most relevant for our current situation, however, is the point that even giant corporations sell the great bulk of what they produce to other people, not to their own employees — whereas even small countries sell most of what they produce to themselves, and big countries like America are overwhelmingly their own main customers.

Arms Dealer Obama Will Win by Default - Barack Obama will be re-elected not as a vindication of his policies but because the Republicans are incapable of providing a reasonable challenge to his flawed performance. On the central issue of our time—reigning in the greed of the multinational corporations, led by the financial sector and the defense industry—a Republican presidential victor, with the possible exception of the now-sidelined Ron Paul, would do far less to challenge the kleptocracy of corporate-dominated governance. Not only has Obama been a savior of the banking conglomerates that so generously financed his campaign, but he also has proved to be equally as solicitous of the needs of the military-industrial complex. He entered his re-election year by signing a $662 billion defense authorization bill that strips away some of our most fundamental liberties and keeps military spending at Cold War levels, and by approving a $60 billion arms deal with Saudi Arabia. Those two actions represent an obvious contradiction, since the attack on American soil that kept defense spending so high in the post-9/11 decade was carried out by 15 Saudis and four other men directed by Osama bin Laden, a wealthy Saudi primarily using funding from his native land. Now Saudi Arabia is to be protected as a holdout against the democratic impulse of the Arab Spring because it is our ally against Iran, a nation that had nothing to do with 9/11.

Bill Black: More Proof of Obama Policy of Covering Up for Elite Financial Criminals --- The New York Times published a column by its leading financial experts, Gretchen Morgenson and Louise Story, on November 22, 2011 which contains a spectacular charge against the Obama administration’s financial regulatory leaders. I have waited for the rebuttal, but it is now clear that the administration does not contest the charge.  The specific example that prompted the NYT article (“Financial Finger-Pointing Turns to Regulators”) was a civil action against a former executive of IndyMac. IndyMac was supposed to be regulated by the Office of Thrift Supervision (OTS). OTS was the worst of the federal financial regulators – which is a large statement. It was so bad that the Dodd-Frank Act killed it. I used to work for OTS. One of the things I did to make myself unemployable during the S&L debacle was to testify before Congress against the head of our agency, Danny Wall, and our head of supervision, Darrell Dochow. Wall resigned in disgrace and Dochow was demoted and sent back to run the obscure office he had once run in Seattle. Ms. Story and Ms. Morgenson’s column discusses how an IndyMac manager is defending himself against suit by arguing that Dochow told him to file false financial statements. OTS’ senior leaders knew from my book exactly what they were getting when they promoted Dochow and made him the top (anti) regulator for all the top S&L originators of fraudulent liar’s loans.

Italy now backs a financial transactions tax - Linda Beale - Germany and France are already on board in support of a financial transactions tax, and one outcome of the meeting of Italy's new leadership with Chancelor Merkel is that Italy is on board. See AP, Italy Backs Financial Transactions Tax, A financial transaction tax has several advantages especially relevant in this post-financial crisis period. It raises additional revenues in very small increments on financial trades. That is not likely to have a negative impact on trades, but is likely to raise much needed revenues for starving educational systems, transportation systems and other important government programs.  Further, to the extent it does act as a disincentive to financial transactions, that, too, accomplishes a public good. It remains to be seen whether the US can pull its dysfunctional government together enough to make reasonable decisions about such options as a financial transactions tax. First, we have far too many far too well paid and far too well connected lobbyists roaming the halls of Congress and influencing votes in favor of the big financial institutions' perspectives. Second, the far right's emphasis on a version of "free markets" that fails to understand nuances of externalities, biases and framing issues leaves no room for recognition of the many negative aspects of unregulated marketplaces.

Two cheers for financial innovation - Protests against Wall Street and the U.S. financial system are hanging over an annual gathering of economists and social scientists in Chicago. Yale economist Robert Shiller offered two cheers for capitalist finance, saying that while the U.S. free market system has contributed to higher living standards, the vehemence of the recent public outcry points to a need for greater democratization. This is how he put it in a speech: Occupy Wall Street … was something that in some sense you could see coming. I think we have increasing concerns about inequality, which is getting worse, about the distribution of power. But rather than throw the financial system out, Shiller called for tinkering. Financial institutions and structures such as insurance or mortgage securitization have a role in improving social and human welfare, Shiller argued. U.S. economic success is due to a financial system that has evolved over centuries and helped improve the quality of life, he added.  A shortcoming of the Occupy Wall Street movement is that it doesn’t accept those contributions, he said.

On the Capture of Economists - At its annual meeting this week, the American Economic Association adopted a new set of ethical guidelines requiring economists to disclose funding sources and other potential conflicts of interest when they publish papers, and urging them to do the same when they make public comments. The aim: Combat the perception that academic economists have been captured by the industries they study. Judging from a presentation by Luigi Zingales, a professor at the University of Chicago's Booth School of Business, the economics profession has its work cut out for it. Economists, he notes, face pressures similar to those that have led to capture of regulators by the industries they're supposed to regulate. Academics often depend on the business community for the data they need to do their research, for the consulting gigs and board appointments that pad their salaries and for the contributions that keep their departments running. Also, in order to publish the papers that make their careers, they commonly face the scrutiny of editors who themselves are positively disposed toward the interests of business. As a small test, Zingales looked at the 150 most-downloaded papers that had been done on executive pay. He found that papers supporting high pay for top executives were 55 percent more likely to be published in prestigious economic journals. They were also much more likely to be cited in other papers.

How Wall Street Turned a Crisis Into a Cartel - Almost 65 years ago, in 1947, the U.S. government sued 17 leading Wall Street investment banks, charging them with effectively colluding in violation of antitrust laws. In its complaint -- which was front-page news at the time - -- the Justice Department alleged that these firms had created “an integrated, overall conspiracy and combination” starting in 1915 “and in continuous operation thereafter, by which” they developed a system “to eliminate competition and monopolize ‘the cream of the business’ of investment banking.” The U.S. argued that the top Wall Street investment banks - - including Morgan Stanley (MS) (the lead defendant) and Goldman Sachs - had created a cartel by which, among other things, it set the prices charged for underwriting securities and for providing mergers-and-acquisitions advice, while boxing out weaker competitors from breaking into the top tier of the business and getting their fair share of the fees. The government argued that the big firms placed their partners on their clients’ boards of directors, putting them in the best possible position to know when a piece of business was coming down the pike and to make sure that any competitors were given a very hard time should they dare to try to win it. The government was spot on: The investment-banking business was then a cartel where the biggest and most powerful firms controlled the market and then set the prices for their services, leaving customers with few viable choices for much needed capital, advice or trading counterparties. The same argument can be made today.

Japan and Canada warn on Volcker rule impact -  Foreign governments and asset managers are mounting a last-ditch push against the US Volcker rule, worried that the proposed ban on proprietary trading could exacerbate a liquidity crunch. Japanese and Canadian regulators have warned the US government that the rule, which is due to be finalised within weeks and put into force in July, could harm world markets by preventing or deterring US banks such as Goldman Sachs from trading. The Volcker rule is designed to prohibit most “prop trading” by banks, where institutions take positions for their own accounts, but Wall Street has argued that the restrictions will also hamper “market making”, where a bank stands between a buyer and seller of securities. Jun Mizuguchi, assistant commissioner for international affairs at Japan’s Financial Services Agency, said: “We are afraid that US financial institutions may refrain from trading” Japanese government bonds. In a letter to US regulators, the Canadian Office of the Superintendent of Financial Institutions said the rule could “undermine the liquidity of government debt markets outside of the US”. European bankers and traders have sounded similar warnings about the potential effect of the Volcker rule on the $13tn eurozone government debt market.

Refusing To Take Yes For An Answer On Bank Reform - Simon Johnson - The debate over megabanks and – in the aftermath of the 2008 financial crisis – how to deal with all the problems associated with “too big to fail” in the financial sector has not been easy for many politicians.  The problems and potential real solutions do not map readily into the standard left vs. right divide in American politics. The left generally wants the state to do more, and these days most of the right usually wants the state to do much less.  But in this space regulators are “captured”, meaning that too many of them are effectively working to promote the interests of the big banks rather than to limit the dangers to the rest of us – so “more regulation” does not make much sense.  And these big banks have a strong incentive to get even bigger – it’s their size that gives them economic and political power.  If you leave these banks to their own devices, they will become even bigger and blow themselves up at greater cost to ordinary citizens (see Western Europe for details).  So “no regulation” is also not an appealing

Bazookas, Bailouts and Fiscal Policy - As a result of the financial crisis, economic policy both in Europe and the US has been driven by announcements of plans that involved large sums of funding provided by governments to support the economy (the "bazooka" approach). It was first in the US with TARP (Troubled asset relief program) and in Europe with the EFSF (European Financial Stability Facility). In both cases we are talking about plans that amount to hundreds of billions of dollars (or euros). Many will only remember the headline figure and will associate the number to the actual cost paid by the government (and ultimately by the tax payer). But what are the facts? Regarding TARP, the CBO (congressional budget office) regularly updates on their estimated cost to the US tax payers. Their last figures suggest that out of the original $700 billion, only $428 billion were disbursed. Most of these funds took the form of loans or investments, some of which have been paid back with a profit for the government. The estimated cost for the tax payer today is about $34 billion, a large number but far from the $700 billion that made the headlines. Most of the losses come from AIG and funds given to car manufacturers. A precise picture of the losses is below. Click on it for a larger image or you can also go directly to the source.

GAO Goes After Administration “TARP Made Money” Claim -- Yves Smith - I don’t know how many times we’ve gone after the “TARP made a profit” bunk, but that topic requires an annoying amount of vigilance (the latest shill was Austan Gooslbee a mere week ago). This story is a messaging version of three card monte: look at the things that don’t involve the big subsidies, such as continued super low interest rates (a massive tax on savers) or QE (the Fed keeps insisting it won’t take credit losses, when it plans to sell its holdings when the economy strengthens, which means when interest rates are higher….which guarantees interest rate losses). Oh, and the “made a profit” claim also implies the government got a good deal, when the warrants were massively underpriced.  But now, we have the GAO, in bureaucratese, going after Treasury for dubious public presentation of TARP projected results. In simple form, Treasury cherry picks. It includes programs which are successful and excludes costs of ones that are iffy, like AIG. Here is the key section:Although Treasury regularly reports on the cost of TARP programs and has enhanced such reporting over time, GAO’s analysis of Treasury press releases about specific programs indicate that information about estimated lifetime costs and income are included only when programs are expected to result in lifetime income. For example, Treasury issued a press release for its bank investment programs, including CPP [Capital Purchase Program], and noted that the programs would result in lifetime income, or profit. However, press releases for investments in AIG, a program that is anticipated to result in a lifetime cost to Treasury, did not include program-specific cost information. Although press releases for programs expected to result in a cost to Treasury provide useful transaction information, they exclude lifetime, program-specific cost estimates.

Promises that proved ultimately empty  - More than three years after taking the world to the brink of economic meltdown, banks remain heavily troubled. Instead of the rebound from losses that would normally have taken hold, they are now confronted with a rumbling debt crisis in Europe. The crisis of legitimacy in capitalism has meanwhile spread since 2008, just as Occupy Wall Street has expanded from its original focus on bail-outs and bankers’ pay to a global reference point for the grievances of the “99 per cent”. Yet it was within banks where the crisis emerged and where its heart still lies. Their troubles go beyond the financial. In the 1990s and 2000s, banks became a leading force in western economies. Their share of gross domestic product rose sharply; Wall Street banks such as Goldman Sachs extended their reach across Europe and Asia; the boundaries between commercial and investment banking were eroded, and bankers were highly rewarded and even regarded as glamorous. Today, they are resented for holding taxpayers hostage by having become “too big to fail”. Many argue that banks have drifted from their basic social function – to encourage growth by making loans, underwriting securities and advising companies – into a self-interested drive to make money by any means possible. The hostile mood is exacerbated by the pay practices that grew up on Wall Street and in the City of London following deregulation in the 1970s and 1980s – the habit of half-mimicking the old partnership structures by paying investment bankers and traders large bonuses. Big financial institutions managed to absorb the gains from trading and risk-taking while socialising their losses.

Encouraging the Right Kind of Greed Among Banks - The financial markets need regulation the way a nuclear-power plant needs a cooling agent for its radioactive fuel rods. If safety rules are enforced and the heat of the rods is properly controlled, the result can be clean, abundant energy. But if that cooling process is neglected, there could be a meltdown.  Similarly, capital requirements are the cooling agent of risk-taking in the economy. And just as nuclear fuel will always be reactive, people will always be greedy. We need to enforce rules to balance natural greed with capital requirements so that greed can create productive risk-taking and competition -- not short-term extraction. Here are five possible ways to do that.  Make Swaps Public: In Las Vegas, you need to have actual money to gamble -- your own money -- and if you lose, you pay. But since 2000, banks, industries and consumers have been free to take on system-threatening levels of debt (to the point of financial meltdown) without facing any requirement to risk a significant amount of their own money. And while consumer risk- taking was curbed by the 2008 financial crisis, U.S. banks continue to use America’s deposits insured by the Federal Deposit Insurance Corporation to fund their mad, bonus-seeking speculation.

US regulators eye new futures rules - US financial regulators have raised the idea of extending investor safeguards proposed for certain derivatives to the futures markets as they probe missing customer funds at bankrupt broker MF Global. Investors in cleared swaps – a form of derivatives contract negotiated between two traders where the risk of one party defaulting is shifted to a clearing house – are set to receive stronger protection than futures traders in a vote by the Commodity Futures Trading Commission on Wednesday. But two commissioners on the five-member body are now questioning the fairness of that approach and are opening the debate as to whether the same rules should apply to both swaps and futures, a move likely to provoke a backlash from the industry. The issue has gained increase relevance after $1.2bn in funds of futures customers vanished in the wake of MF Global’s collapse in October. Jill Sommers, the CFTC commissioner leading the investigation into the MF Global’s missing funds, told the Financial Times she was concerned about having different rules for the two types of investor: “Last year at this time I was concerned about whatever we were doing for swaps bleeding into futures, and the costs that would be associated with that for futures”.

Opacity Protection: Vikram Pandit rolls out a ‘new way to measure risk’ - In a column in the Financial Times, Citigroup CEO Vikram Pandit rolls out a 'new way to measure risk' and strengthen the financial system. He observes that bank capital ratios are not very informative as there are a number of assumptions that go into calculating the risk-weightings of the assets.  To provide additional information, he suggests using a benchmark portfolio and then drawing inferences to Citigroup and other financial institutions. The last time the financial markets relied on a benchmark portfolio was for rating structured finance securities.  The rating agencies used a benchmark portfolio of mortgages.  We know how their reliance on this benchmark mortgage portfolio turned out. The lesson from that debacle is the importance of assessing the actual exposures and not some artificial benchmark.

Appointment Clears the Way for Consumer Agency to Act - Payday lenders, money transfer agencies, credit bureaus and debt collectors, take notice: the Consumer Financial Protection Bureau1 is coming after you, and quickly.  The recess appointment2 of Richard Cordray3 on Wednesday as director of the consumer bureau finally gives the fledgling agency the legal standing to supervise those types of financial enterprises, something it has lacked since the bureau was created with the signing of the Dodd-Frank financial regulation4 act in July 2010. Although the Dodd-Frank law authorized the consumer agency to regulate the so-called nonbank financial companies, which previously had little supervision, the law was purposely written such that the bureau could not invoke its powers until it had a director. The bureau had taken responsibility for existing regulations on consumer products at banks and thrifts, it was not able to write new regulations for banking products like mortgages and credit cards until it had a permanent leader.

Obama’s Consumer Financial-Protection Trump Card: Simon Johnson - The biggest news for the Republican presidential-nomination race last week wasn’t the outcome of the Iowa caucuses but the recess appointment of Richard Cordray to head the Consumer Financial Protection Bureau.  Iowa The president, of course, can’t make an issue out of too- big-to-fail banks because his administration has helped to solidify their grip on the financial system. The 2010 Dodd-Frank financial-reform law effectively failed to limit lenders’ size, freeing the biggest institutions to grow ever larger. Fortunately for Obama, it doesn’t appear that Romney has any objection to “anything goes” in terms of bank size, and isn’t likely to try to make too-big-to-fail an election issue.  Obama will also be reluctant to raise the matter of campaign contributions by bank executives and the political influence that gives them. Both he and Romney are likely to garner roughly equal amounts of cash from the people who run, or benefit from, large financial companies.  But Obama can fight on other grounds, including the issue of consumer protection, by arguing that the pre-Dodd-Frank regime allowed ill treatment or outright abuse of customers by some financial-services firms -- and that the bureau will provide essential safeguards. Cordray’s nomination had been blocked by Republican senators; now Obama can claim he refused to take no for an answer.

JPM Chase Quietly Halts Suits Over Consumer Debts - JPMorgan Chase & Co. has quietly ceased filing lawsuits to collect consumer debts around the nation, dismissing in-house attorneys and virtually shutting down a collections machine that as recently as nine months ago was racking up hundreds of millions of dollars in monthly judgments. A sampling of court records in the major cities in five states shows that Chase collection suits have virtually disappeared. In a sixth state, Illinois, contract attorneys continue to file small-dollar cases, though at a reduced rate. It is unclear whether Chase has stopped pursuing collection on many claims nationwide, or if intends to pursue the debts in some other fashion. The bank has not explained its apparent moratorium and declined comment. Chase's halt does, however, follow scattered defeats in state courts and a whistle-blower's allegation that it falsely overstated the balances of thousands of delinquent accounts it sold to a third party. Former Chase employees and debt collection experts insist that the bank would not have abruptly retreated from its collections efforts in the absence of trouble.

What happened at Chase’s credit-card collections arm? - Jeff Horwitz has an astonishing story about Chase’s credit-card collections efforts, which look as though they’re riddled with sloppy record-keeping and even possible fraud. Consider Dade County, for instance, in Florida: Chase was filing claims at the rate of 640 per month in January. And then, after April — nothing. There were a lot of layoffs in New York, too: In a sign that Chase acted with urgency, numerous regional collections teams were fired in mid-2011 at the order of the New York bank’s headquarters, according to people familiar with the events. “Nobody told anybody anything. It was very traumatic,” says a former Chase attorney who asked to remain anonymous because of a nondisclosure agreement. “I think there were investigations by the [Office of the Comptroller of the Currency] and other government entities. If we’re not there, we can’t be interviewed.” Now every bank has a choice when it comes to defaulted debts — it can chase those claims itself, or sell them on to a collections agency. While collections agencies often get the amount owed wrong, no one really stopped to ask whether banks themselves might not know how much they were owed. But that seems to have been the case here: Chase was selling faulty claims to collections agencies, and I’m sure those agencies didn’t suspect for a minute that the amounts owed were often incorrect.

Credit Card Firms: They Don’t Just Steal From Cardholders - Matt Taibbi - It's a complex tale, but the gist of it is that the credit-card companies invoked arcane provisions of operating contracts with the merchant, and unilaterally "fined" the restaurant for enormous sums of money without proving any of the charges. Some of that money was actually debited from the merchants' account before they managed to close it.   When a restaurant opens for business, it signs service contracts with middleman firms that allow them to accept charges from Visa and MasterCards. These middleman firms process the charges on behalf of the issuing cards, and also debit the accounts of merchants for things like debit fees. The problem is that when merchants like these restaurant owners in Utah sign their service contracts, they also have to agree to a series of draconian security rules, under which they are automatically liable to the card companies if the card companies suspect fraud or lax security procedures.

Will US courts take aim at credit-card interchange? - Dan Freed has an amazing story today about credit-card interchange fees — the ones that weren’t touched at all by the Durbin amendment in the Dodd-Frank bill. But it turns out that the courts might yet prove even tougher than Congress: various suits working their way through the legal system could end up costing the banks hundreds of billions of dollars in settlement costs — plus a reduction of interchange fees to something approaching international norms.The threat here is very real: Visa has already put more than $4 billion in a litigation escrow account, and the card companies’ potential liabilities are much smaller than those of the big banks. Deutsche Bank analyst Bryan Keane says that total damages “could total a couple of hundred billion dollars”, and that’s backed up by some back-of-the-envelope math: JPMorgan’s 10-K gives no specific numbers regarding its exposure, but notes that, “based on publicly available estimates, Visa and MasterCard branded payment cards generated approximately $40 billion of interchange fees industry-wide in 2009.” Those numbers cited by JPMorgan would appear to point the way to a very large settlement, since the case covers eight years and counting — from 2004 through the present

Romney Bain and GS Technologies - in October 1993, Bain Capital, co-founded by Mitt Romney, became majority shareholder in a steel mill that had been operating since 1888. It was a gamble. The old mill, renamed GS Technologies, [skip] a federal government insurance agency had to pony up $44 million to bail out the company's underfunded pension plan.Nevertheless, Bain and its partners decided to buy the mill for $75 million. Bain put up about $8 million to gain majority control of the company, renamed GS Technologies Inc. GE Capital, former Armco executives and Leggett & Platt, a major customer for the mill's wire rods, chipped in the rest of the equity.[skip] Bain got its money back quickly. The new company issued $125 million in bonds and paid Bain a $36.1 million dividend in 1994."What ?!$" you ask. Bain put in $ 8 million and took out $ 36.1 million one year later ? If that isn't looting what is ?

Forbes: Regulators and Trustees Suppressing Details on MF Global - I seem to recall predicting this coverup when the MF Global scandal broke at the end of October. Eventually the regulators and financiers will spin a story and it might stick together. But there is also a possibility that it may come unhinged, and the coverup, not the theft of funds itself, will bring down careers and institutions.  And the scandal is much wider than MF Global and their unfortunate customers. This is not the sort of thing that those in positions of stewardship might wish to see come uncorked in an uncontrolled manner. This ongoing farce with the financial sector should send a chill down the spines of all retail investors and the public.  It is good to see a respectable media publication like Forbes being so forthright in its ongoing coverage of the scandal, when the propensity to dismiss fraud and cheerlead the financier's agenda is the primary impulse of much of the financial press and mainstream media.

Farmers Sue Jon Corzine Over Missing Millions - Montana farmers have filed a class action suit against former New Jersey governor Jon Corzine, charging that the failed financial firm run by Corzine stole millions from their accounts to pay off its spiraling debts, and that Corzine's "single-minded obsession" with making MF Global a big player on Wall Street led to the firm's collapse.  MF Global's clients included 38,000 wheat farmers, cattle ranchers and others who "hedged" their crop prices by placing millions in MF Global accounts. Those accounts were supposed to be "segregated and secure," according to the federal suit, meaning MF Global could not draw on those funds.  The lawsuit, filed on behalf of all 38,000 customers, alleges that when MF Global made a series of bad investments -- notably in European debt -- it began "siphoning funds withdrawn from segregated client accounts" to cover its debts. "This is a suit by the real victims of MF Global,". "The missing funds were not investments in MF Global, or loans to MF Global, but rather the customer's own money as collateral to guaranty their contracts. They were not to be used by others – let alone their own broker – to speculate on risky and exotic securities."

MF Global May Not Be Able to Pay Clients Back: Trustee - Former customers of MF Global Holdings' collapsed brokerage were disappointed to hear on Thursday that the trustee hunting for funds missing from their accounts has no immediate plans to transfer more money to them. More than 250 customers met in New York on Thursday with James Giddens, the trustee in charge of liquidating the brokerage and returning money to customers, for an update on the status of his investigation into what may be $1.2 billion missing from their accounts. Giddens and his team of lawyers said they may not be able to make another mass transfer of funds above the roughly $3.8 billion they have already paid out. That figure represents about 72 percent of the total money held in customer accounts when the firm went under, leaving many customers still thousands or millions of dollars out of pocket. "At this point we're not in a position to do another bulk transfer," said James Kobak, a attorney for the trustee. "That situation might change as we get through the claims process. It would also depend on our ability to recover additional assets." Customers are being asked to submit claim forms for their missing funds by the end of this month.

How JP Morgan And George Soros Ended Up With MF Global Customer Money - Now that Congress has allowed the U.S. national debt to grow bigger than the American economy, it won't be long until the American public suffers the consequences by losing most of its savings to inflation. Figures for last year show the national debt officially exceeded 100% of the nation's gross domestic product (GDP). According to government figures, the national debt stood at $15.23 trillion at the close of 2011, compared to a GDP of $15.18 trillion. "The 100% mark means that your entire debt is as big as everything you're producing in your country,"  "Clearly, that can't continue." Government overspending has grown the federal debt at an alarming rate. As recently as 2010, the Congressional Budget Office (CBO) had projected this milestone would not be reached until 2020. "Congress is doing everything it can to make sure the national debt grows," . "Republicans want more tax breaks for the rich while they appease the middle class by considering extending the payroll tax cuts and unemployment benefits. The Democrats want to hire voters as government employees, a la Greece, to not only expand their base, but prove that big government can indeed be friendly. It's sickening."

Goldman Bids for Bad Bonds - Goldman Sachs Group Inc. recently approached the Federal Reserve Bank of New York and offered to buy a multibillion-dollar bundle of risky mortgage bonds that the Fed acquired in the 2008 bailout of American International Group Inc., according to people familiar with the matter. The New York Fed responded by quietly canvassing a few securities dealers for bids on the bonds Goldman wanted to purchase, seeking competing offers to determine whether Goldman's offer represented the best value for the bonds, the people said. But the effort, intended to be discreet, rattled the market for subprime-mortgage debt on Thursday when some market participants learned the New York Fed was considering additional sales of bonds from the portfolio known as Maiden Lane II. An index that tracks prices of subprime-mortgage bonds fell 2% on Thursday afternoon to about 47 cents on the dollar. The index had risen nearly 10% earlier this month.  The bonds that Goldman sought to buy represented roughly a third of a mortgage portfolio with an unpaid principal balance of almost $20 billion, the people said. It couldn't be determined how much Goldman offered, but the bonds in Maiden Lane II had an average fair value of roughly 47 cents on the dollar at the end of September, suggesting Goldman could have been willing to pay about $3 billion.

SEC wants banks to say more on European debt exposure - The Securities and Exchange Commission has urged banks to publish more details about their exposure to European sovereign debt, a factor in the recent bankruptcy of the futures brokerage MF Global Holdings Ltd . In guidance issued on Friday, the regulator's Division of Corporation Finance said disclosures by publicly-traded financial institutions have been "inconsistent in both substance and presentation." It said this could make it harder for investors to discern how much risk the banks are taking, both individually and relative to each other, and how the exposures will affect operating results or financial health. The SEC urged that banks reveal direct and indirect exposures "separately by country, segregated between sovereign and non-sovereign exposures." It said they should also provide more details on hedging, through such instruments as credit default swaps, and sums they might need to raise if forced to close out their positions

JPMorgan could lose $5 billion from PIIGS exposure: report - (Reuters) - JPMorgan Chase & Co (JPM.N) could lose up to $5 billion from its exposure to Portugal, Ireland, Italy, Greece and Spain, Chief Executive Jamie Dimon said in an interview with Class CNBC, carried in Italian newspaper Milano Finanza on Saturday.Dimon said the bank was exposed to the five countries (PIIGS) to the tune of around $15 billion. "We fear we could lose up to $5 billion ... We hope the worst won't happen, but even if it did happen, I wouldn't be pulling my hair out," he said. Dimon said Europe was the worst problem for the banking sector. "But the EU and euro are solid even if the states will have to be financially responsible and do all they can to develop common social policies," he said. Dimon said the recent extraordinary liquidity measures taken by the European Central Bank had been a good move. "Banks will have to have more capital and sell assets, but at least they have liquidity," he said.

Wall Street Weighs Pay Limits for Junior Bankers - Wall Street’s biggest firms, facing a slump in investment-banking revenue, are considering freezing compensation levels for some junior bankers, according to people familiar with the deliberations.  Credit Suisse is likely to suspend its practice, an industry norm, of boosting pay automatically each year for analysts, associates and vice presidents within the investment- banking division, a person with direct knowledge of the decision said. While those employees will get their regular annual salary increases, bonuses probably will be lowered to keep total pay flat from a year earlier, said the person, who requested anonymity because the plan isn’t public.  Goldman Sachs and JPMorgan Chase & Co. are being watched by competitors for signs the companies are planning similar moves, said people at four other firms. Cutting pay can be perilous if your rivals don’t because it’s easier for junior bankers to defect, draining a future generation of talent. Wall Street firms may make the change en masse only if one or more of their biggest rivals act first, the people said.  “There’s always the risk that people may go across the street for a better deal,”

Wall Street Prepares for Sharp Pay Cut - As banks prepare to report fourth-quarter results and make final bonus decisions for 2011, total compensation is likely to be the lowest since 2008, when the financial crisis destroyed some firms and left many survivors on government life support. While still lofty compared to the rest of the US, pay for some Wall Street workers will be the lowest in years, at a time when critics have been lashing out at what they deem excessive finance-industry compensation. At Goldman Sachs, many of the roughly 400 partners can expect to see their 2011 pay cut at least in half from 2010, according to people familiar with the situation. Pay for some employees in the New York company's fixed-income trading business will shrink by 60%, with some workers getting no bonus, these people said. Morgan Stanley is expected to shrink bonuses for some investment bankers and traders by 30% to 40% from 2010, said people familiar with the matter. Pay worries have been mounting up and down Wall Street for months amid lower trading revenue, languid deal-making, new regulations and anxiety about the global economy. Other pressures include weak financial-company stock prices and sour public sentiment that culminated in the Occupy Wall Street encampment in New York.

A Paradox of Smaller Wall Street Paychecks - Is Wall Street cutting bonuses enough? That is a question worth considering amid chatter that investment banking bonuses are expected to be the lowest they have been since 2008 amid lackluster profits. Few people outside the industry are shedding tears. The average Goldman Sachs employee was paid $292,397 in the first nine months of 2011, down about 21 percent from the same period in 2010, when the average payout was $370,056. That is of course, an average, and includes the salaries of those on the lower scales, like support staff. Each Goldman partner is still expected to take home at least $3 million; in previous years, payouts twice that amount were considered common for the top echelon. While the total compensation reported by big banks in their 2011 results may be lower, keep an eye on another, and perhaps more important, yardstick that is likely to increase at some firms: the compensation-to-revenue ratio.

Now US Bankers Are Planning To Sue Or Walk If Bonuses Are Too Low: It's already happening in the U.K. and now here in the U.S. a growing group of bankers are planning to sue their employers or walk away if they don't receive bigger bonuses, according to the New York Post. For example, brokerage execs at Jeffries Group have threatened to walk away from the firm if bonuses aren't on par with the Street. However, that could be a bit tricky. Last month, an internal memo from Jeffries CEO Richard Handler about their year-end bonus essentially stated that if employees leave the firm within the next year, they have to pay Jeffries back the portion of their year-end bonus received in cash. Meanwhile, other major financial firms are hoarding their bonus pools ahead of anticipated complaints from employees, the Post's report said. From the Post: “The really successful battles come before the pie is cut up, when you convince the boss to move the knife and give you a wider slice,” “ If you’re good and you make them money, they’ll do almost anything to keep you.”

Human Nature and a Volatile Stock Market - In 2011, the S. & P. 500 finished the year where it started. (To be precise, it fell 0.003 per cent.) But it was anything but a placid year in the stock market. Instead, there was extraordinary tumult throughout 2011, with a series of sharp rallies and brutal selloffs, the biggest of which sent the market down seventeen per cent in a couple of weeks. Ordinary investors, who have watched the value of their 401(k)s yo-yo seemingly at random, have been left feeling understandably dazed and confused as they head into the new year.  Traders and professional money managers don’t seem to have any real clue about what’s going to happen, either. You might think that volatility would allow people with superior information and market sense to get ahead. But last year money managers did a very poor job of playing the market. According to estimates made by Goldman Sachs, as of the last week in December seventy-two per cent of core large-cap mutual funds had underperformed their market indexes. The average stock-market mutual fund was down almost three per cent for the year. And hedge-fund managers, who are supposed to thrive on volatility, did even worse, with hedge funds that focus on stocks falling more than seven per cent.

Gen Y: Post Traumatic Stock Syndrome - The Generation Yers - now in their twenties and early thirties - want absolutely nothing to do with the stock market. In their early teens, they watched their parents get destroyed by the dot com bubble, Enron, Worldcom, and then the World Trade Center attack just to put a cherry on top. Then, in college, they came home to visit their folks and found foreclosure notices tacked to the door, watched their mothers and fathers and uncles and aunts declare bankruptcy, lose their 401(k) savings and end up walking away from houses to live in rentals.During the brief stint that Generation Y has been conscious of the adult world and the embryonic fluid of finance that succors it, they've seen nothing but death and dismemberment emanate from Wall Street. It should come as absolutely no shock to you at all that 30% of this generation has just told a survey they would NEVER invest in the market.

Retail Investors Shun Speculation and Stuff Money under the Mattress; Is this a Contrary Indicator? - Via Press TrimTabs says "Retail Investors Shun Speculation and Stuff Money under the Mattress" – TrimTabs Investment Research said today that in the first 11 months of 2011, investors poured eight times more money into checking and savings accounts as they did into stock and bond mutual funds and exchange-traded funds. “The Fed is doing almost everything in its power to entice investors to speculate in overpriced asset markets,” said TrimTabs Executive Vice President David Santschi. “But retail investors aren’t taking the bait.” In a research note, TrimTabs explained that $889 billion poured into checking and savings accounts in the first 11 months of 2011 (complete data for December 2011 is not available). This inflow was more than eight times greater than the $109 billion that flowed into stock and bond mutual funds and ETFs. “It’s remarkable that inflows into checking and savings accounts outstripped inflows into stock and bond mutual funds and ETFs in each of the first 11 months of 2011,” said Santschi. Santschi added that in the latest three months from September 2011 through November 2011, the $139 billion inflow into checking and savings accounts was almost 13 times higher than the $11 billion inflow into stock and bond mutual funds and ETFs.

US corporate creditworthiness falls, says S&P - The creditworthiness of US corporate borrowers has fallen sharply in the past three decades as companies have taken on more debt to boost returns to shareholders, according to a report from Standard & Poor’s.  The number of triple A-rated non-financial US companies has dropped to four from 61 in 1981, while groups with “junk” ratings now account for more than half the companies S&P rates in the US, up from 24 per cent 30 years ago.  “Fallen angels”, or investment-grade companies that have been downgraded to junk, have contributed only a small part to the shift in US corporate ratings. The main reason for the change has been a surge in newly rated junk companies. More than half first-time debt issuers have had junk ratings every year since 1992, with 2001 being the only exception, S&P said.

Why do corporations hold so much cash? - Karl has been blogging about Apple’s large cash holdings for some time now. His point is that management is taking advantage of shareholders by holding too much cash instead of paying dividends. My initial reaction when he first blogged this was “no way”. Then after the second or third post on it I had been converted to a “maybe”. Karl isn’t alone in arguing that cash holdings are too high, and Apple isn’t alone in guilt; there is a good bit of literature arguing corporations hold too much cash and trying to explain why. While the agency problem may not explain excess cash holdings overall, I do think it is at least one possible explanation, and that it may apply for some firms, especially Apple.One uncontroversial fact is that cash holdings have been going up over time for firms. There are several explanations for why, and Karl’s agency problem is just one. For instance, one theory is that taxes provide firms with incentives to hold cash, and another is that there are frictions in access to capital markets so firms should hold more cash when shocks become more likely.  A 2006 NBER working paper from Bates, Kahle, and Stulz provides a good overview and some interesting empirical insights. Here is how they summarize the literature on Karl’s agency problem theory of cash holdings:

As Romney Advances, Private Equity Becomes Part of the Debate - The titans of private equity1 have long feared this moment. As Mitt Romney has established himself as the front-runner for the Republican nomination, not only has his record at Bain Capital come under intense scrutiny and withering attacks — but so has the private equity industry. Mr. Romney’s opponents are the loudest, accusing such firms of carving up companies and cutting jobs. Newt Gingrich said over the weekend that Bain looted companies and fired employees, and Rick Perry on Tuesday called private equity firms “vultures.” An anti-Romney documentary calls him a “predatory corporate raider.” The attacks have unnerved many buyout executives — especially those who have long used their fortunes to support the Republican Party. As Mr. Romney’s rivals have sought to turn the primaries into a referendum on his business career, the private equity industry finds itself under fire from those it thought were friends.  “We were bracing ourselves for this, but we’re not even in the general election yet,” said a senior private equity executive who spoke on the condition of anonymity. “Expect more pain.”

Are Private Equity Firms Evil Doers? - The NYT had an article discussing whether private equity firms are good or bad for the economy. The piece failed to focus on the real issues. The focus of the piece is whether private equity increases or decreases the number of jobs in the firms it controls. This is not really a good measure of whether the industry is good or bad for the economy. If private equity firms were successful in making companies more efficient and lowering prices to consumers, then it could lead to more jobs in the economy, even if there were fewer workers directly employed in the firms under its control. However private equity firms do not profit just by making firms more efficient. Private equity also profits by financial engineering. For example, it is standard practice for private equity firms to load their firms with debt. This means that interest payments, which are tax deductible, are substituted for dividend payments, which are not tax deductible. Private equity companies also often force firms into bankruptcy to offload debt. This can often include pension obligations, which are then taken over by the Pension Benefit Guarantee Corporation. Insofar as private equity companies are drawing their profit from this sort of financial engineering, it is not providing a benefit to the economy. In fact, it is a direct drain on the productive economy.

BlackRock's Surprising Reach into the US Economy - While attention has been focused on the activities of that great vampire squid, Goldman Sachs, investment firm BlackRock has been quietly taking over the American economy. In a presentation scheduled for 2:30 pm on Saturday, January 7 at the Labor and Employment Relations Association meetings at the Palmer House in Chicago, Professor Gerald Davis of the University of Michigan’s Ross School of Business documents the extensive reach of BlackRock. Aided by the growth of defined contribution pension plans and abetted by the weakness of other financial services firms, notably Barclay’s, during the financial crisis, BlackRock catapulted into first place in 2011 among the top holders of large blocks of shares of publicly-traded companies in the US. With $3.5 trillion in assets under management that they invest on behalf of their clients, the company has become the world’s largest investor. BlackRock manages assets for institutions such as pension funds and mutual funds, and its iShares business is popular with both retail investors and hedge funds who delegate all proxy votes for their iShares to BlackRock. Among Professor Davis’ startling findings:

  • Ownership of US corporations is no longer highly dispersed.
  • In 2011 BlackRock held a 5% stake in 1,803 US listed companies. This is almost triple second place Fidelity’s 677 companies and more than triple third place Vanguard’s 524 companies.
  • As a result of changes in the nature of equity markets – the growth of exchange traded funds (ETFs) and the decline in the number of new firms going public (IPOs) –  the number of publicly-traded corporations has dropped by half since 1997 to about 4,300 listed US companies in 2011.
  • Under new proxy rules adopted by the SEC in August 2010 that allow long-term shareholders’ that own at least 3% of a company’s shares to nominate directors, BlackRock will likely be eligible to nominate directors at well over half of all publicly-traded corporations in the US by 2013.

Why the Economy Is Still Such a Mess: Banks Won’t Give Loans to Small Businesses - Nobody will be surprised to learn that the past few years have been tough for small business. They’ve been tough for everyone, after all. But interesting research finalized in December from economists at the Federal Reserve Bank of Boston indicates that the interplay of small business and the banking crisis may have played a special role in the recession. In particular, a tightening of credit standards during the high point of the fiscal crunch seems to have disproportionately impacted small firms and is continuing to hold them back during the recession. Politicians gushing over small businesses is such a cliché that it’s easy to tune out talk of the importance of small firms. According to the Census Bureau, as of 2008-09 about one-half of all jobs were with firms with fewer than 500 employees, and one-half of those were with firms with fewer than 100 workers. Fully 10 percent of workers were employed by tiny business with fewer than 10 employees. And small-scale operations are unusual in several respects. Most notably, they don’t have access to the conventional financial-market tools of a big company. For aggressively growing startups, that means gaining the financing they need from the special world of venture capital. But for the hum-drum small businesses that make up such a large share of American economic life—the kind of firms that are trying to get by and earn a profit, but don’t necessarily aspire to world domination—that means relying on bank loans for funding needs.

Duke Says Fed Working on Improving Bank Supervision - Federal Reserve Governor Elizabeth Duke Friday sought to reassure small banks worried about growing regulation and tougher examination, saying the Fed is boosting its efforts to improve supervision. Duke said the central bank repeatedly hears that fear of examiner criticism is one of the reasons banks hesitate to lend to small businesses. "We take these concerns seriously," she told a meeting of California bankers in Santa Barbara. "In response, we are actively communicating with examiners and have stepped up examiner training to ensure that supervision in the field is consistent with policy," she added. Small banks and credit unions say they have been burdened with too much scrutiny as a result of the 2010 Dodd-Frank financial overhaul law and other regulatory changes. They argue this enhanced regulation is unfair, given that small, community-based lenders aren't seen as a primary factor in the 2008 financial crisis. Duke said that while the new regulations are directed at the largest institutions, whose failure would pose the greatest risk to the financial system, the changes are so sweeping they've led some analysts to question whether the overall weight of regulation poses a threat to the future of the community bank model.

Bank of America Prepares Emergency Plans at Fed Behest, May Need to Amputate on Geographic Basis -  Yves Smith - As we’ve said repeatedly, despite bank executives braying about the need to be bigger to compete or to gain efficiencies, the evidence runs completely the other way. Every study on bank efficiency in the US has found that once banks hit a certain size level (the most commonly found one seems to be ~$5 billion in assets) banks exhibit a slightly positive cost curve, which means they are more, not less, costly to run. Any economies of scale are probably offset by diseconomies of scope.  So why do bank executives sell and act on a patently phony story? Aside from the fact that doing deals is much more fun than managing a business, the BIG reason is CEO pay is highly correlated with the size of the bank, measured in total assets.  So no one should cry at the prospect that Bank of America might have to shrink to if it continues to be in financial and litigation hot water. Those of you who have been in the financial services industry will recall that it was built out of mergers of large regional banks: NCNB (North Carolina National Bank, later Nationsbank) ate First Union, Bank of America, Fleet, and of course, Countrywide and Merrill. The Wall Street Journal has gotten some details about “emergency moves” the Charlotte bank would take if it condition worsens. What is striking is that it did not contemplate a sale or spinoff of Merrill Lynch, which is the operation which makes it most difficult to resolve. Instead, it would issue a tracking stock as a way to raise money.  In other words, even for a bank developing scenarios on how to cope with serious financial trouble, the priority is to raise dough quickly rather than reconfigure the business into something tidier. Even if still not TBTF, it would be less costly to rescue. But, predictably, the priorities of management and their enablers, the regulators, is to prefer quick fixes to badly needed surgery.

Unofficial Problem Bank list declines to 970 institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Jan 6, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  At year-end 2011, the Unofficial Problem Bank List included 970 institutions with assets of $391.2. Changes since December 23rd include 11 removals and eight additions. At year-end 2010, the list included 935 institutions with assets of $412.4 billion. During December 2011, changes included 10 additions, eight action terminations, seven unassisted mergers, three voluntary liquidations, and two failures. It was the six consecutive month that the total number of institutions on the list declined.

Offices: The Rent Rollover Problem - From the WSJ: Trouble Is Brewing for Office Market [M]any [office] owners who have been able to keep their heads above water are being undone by tenant contractions and the expiration of five-year leases that were signed at the peak of the boom. Rents in most markets are still well below what they were in 2007, with the drop in some areas as much as 26%, according to data firm Reis Inc. Because of the weak market, landlords with empty space or expiring leases also have to spend large amounts on incentives to attract tenants, like free rent and interior work. Defaults and foreclosures are rising. The delinquency rate of office loans that were securitized hit 9% in December, up from 7.4% in June.As these older leases expire, the tenants are demanding lower rents - or they are moving. Since some of these owners are barely "keeping their heads above water" with the old lease rates, lower rents or higher vacancies are leading to more defaults.  Even with a little improvement in the economy there is still more pain to come for commercial real estate, especially for offices and malls.

Treasury emails outline Countrywide’s mortgage crisis - As Bank of America Corp. finalized plans to buy the ailing Countrywide Financial Corp., government officials traded emails about the mortgage lender's troubles, rumors that regulators had a hand in the deal, and the housing market's role in the looming recession. The newly released messages between U.S. Treasury Department officials span the turbulent months between August 2007, when Bank of America first invested in Countrywide, and January 2008, when the Charlotte bank announced plans to buy the nation's biggest mortgage lender. The nearly 40 pages of emails, obtained by the Charlotte Observer after a public-records request, provide a real-time look at the crisis unfolding a year before the financial meltdown. Subject lines warn of Countrywide bankruptcy rumors. Analysts discuss an imminent mortgage-market collapse. And the Treasury's communications staffers scramble to deflect questions on whether government officials pressured the bank into the deal - questions that linger today among some Bank of America shareholders and analysts.

Action on Stalled Housing Market Vital for U.S. Economic Expansion - In an unusual step, the Federal Reserve sent a white paper to congressional committees last week, urging them to look again at what ails the U.S. housing market and at possible remedies. More can be done, the Fed says, to help it revive.  Good advice. Housing is where the recession started, and it remains one of the main things holding back the recovery. Friday’s unemployment numbers -- nonfarm payrolls grew by 200,000 in December, and the jobless rate ticked down to 8.5 percent from 8.7 percent -- join other tentative signs of an improving economy, but the housing mess is mostly getting worse. There’s still a grave risk it might stop, not just delay, the expansion.  The Fed’s paper underlines the scale of the problem. The decline in U.S. house prices has wiped out a staggering $7 trillion in home equity. The ratio of housing wealth to disposable income has crashed from 140 percent at its peak to 55 percent, the lowest since the figures began to be collected in the 1950s. The number of “underwater” mortgages has grown to 12 million: More than one in five homeowners owes more than the property is worth. It’s surprising the economy is making any headway at all into a gale of this force.

Housing Policy Changes - It appears there are several major housing policy changes coming in the next two to three months, and that the overall goal will be to reduce the large backlog of seriously delinquent loans while, at the same time, not flood the housing market with distressed homes. Currently, according to LPS, there are 1.81 million loans 90+ days delinquent and an additional 2.21 million loans in the foreclosure process.
HARP Refinance: Back in October, the FHFA announced some changes to HARP to allow homeowners with GSE loans and with negative or near negative equity - and who are current on their mortgages - to refinance into lower interest rate loans. The key to this program for the lenders was that the lender was not responsible for any of the representations and warranties associated with the original loan (this is huge for the lenders).

Mortgage Settlement: It sounds like this will be announced in late January or possibly in February (if at all). Some of the details have leaked, and there will probably be some mortgage modifications that include principal reduction. It is possible that there will be a refinance program for non-GSEs borrowers with negative equity (similar to HARP), although this hasn't been announced.
REO to Rental Program: This rental program for Fannie and Freddie REO is being pushed by several agencies, and was discussed last week in the Fed white paper "The U.S. Housing Market: Current Conditions and Policy Considerations" and by NY Fed President William Dudley: Housing and the Economic Recovery This program could include bulk REO sales to investors, but might also include Fannie and Freddie renting out more REOs. (Fannie and Freddie already have a program to keep tenants in place if they foreclose on a rented property).

Calls for US taxpayers to bear housing costs - US Federal Reserve policymakers are increasingly urging fiscal authorities to consider reducing distressed borrowers’ loan balances, a politically fraught position for a central bank that has long sought to distance itself from fiscal policy. William Dudley, president of the Federal Reserve Bank of New York, said on Friday that taxpayers and mortgage bond investors should shoulder the cost of reducing borrowers’ loan principal. Sarah Bloom Raskin, a member of the Fed’s board of governors, added on Saturday that forcing leading banks to cut mortgage principal as a penalty for poor practices was an option “that should stay on the table”. The calls come as the Fed confronts dwindling options to jumpstart a weak US economic recovery that appears to be stalling because of problems in the nation’s property market. Home prices are falling, property seizures are rising, lending and refinancing remain subdued and delinquencies have barely budged more than two years after the recovery officially began in the summer of 2009. “Housing markets have shown little sign of improvement so far in this recovery,” Elizabeth Duke, one of the Fed’s five sitting governors, said last week. “This stands in sharp contrast to the important role that the housing sector has typically played in propelling economic recoveries.” Cutting interest rates, the Fed’s traditional means of boosting economic activity, is no longer effective, as borrowing rates are already set near zero.

NEW FED PLAN: Sell Foreclosed Properties To Investors To Rent Out - The Obama Administration, in conjunction with federal regulators and led by the overseer of Fannie Mae and Freddie Mac, are very close to announcing a pilot program to sell government-owned foreclosures in bulk to investors as rentals, according to administration officials. There are currently about a quarter of a million foreclosed properties on the books of Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) and millions more are coming. The foreclosure processing delays of last year created a mammoth backlog of properties yet to be processed, which are just now being re-started. One of the initiatives of this program is for the federal government to be in the position to mitigate and manage any new wave of foreclosures, sources say. Late stage delinquencies still in the pipeline number close to two million, according to a new report from Lender Processing Services. Foreclosure starts outnumber foreclosure sales by two to one, and, "the trend toward fewer loans becoming delinquent, which dominated 2010 and the first quarter of 2011, appears to have halted," according to LPS. Knowing this all too well, the Treasury Department, Federal Reserve, HUD, FDIC, Fannie Mae and Freddie Mac, with their conservator, the Federal Housing Finance Agency (FHFA) at the helm, are engaged in a collaborative effort to face this new wave of foreclosures head on and figure out a way to keep these properties from sitting heavily on the books of the government and sitting empty in the nation's neighborhoods. As the Federal Reserve alluded to in its white paper on housing last week, "A government-facilitated REO-to-rental program has the potential to help the housing market and improve loss recoveries on reo portfolios." REO's (Real Estate Owned) are bank-owned properties, or, in this case, properties owned by the GSE's and the FHA. Three Fed governors pushed for similar plans in speeches last week as well. 

Attorneys General, Frustrated With National Foreclosure Settlement, Consider Alternate Course: Attorneys general or representatives from nearly 15 states met in Washington, D.C., on Tuesday to discuss and share different enforcement options and strategies around various mortgage-related issues, according to sources familiar with the conversation. The meeting was prompted by the slow pace at which a national foreclosure settlement led by the Obama administration is progressing, and is likely to be the first in a series, said these sources. The participating attorneys general, from states including California, Nevada, Delaware, Massachusetts and New York, discussed how they could possibly join together to investigate and potentially file lawsuits against abusive mortgage lenders and servicers. Principals or representatives also attended from Hawaii, New Hampshire, Missouri, Mississippi, Maryland, Kentucky and Minnesota. "This past Tuesday, a group of like-minded Attorneys General met in D.C. to discuss ongoing and future investigations into the mortgage finance and foreclosure industries," said Delaware Deputy Attorney General Ian McConnel. "The talks weren't just about investigations," said a source with knowledge of the discussions. "They were also about the attorneys general offices feeling uninvolved in a process by which their federal colleagues have been negotiating on their behalf." The administration, along with a coalition of state law enforcement officials, is currently pursuing a settlement with big banks over their role in the practice of "robo-signing" and other alleged forms of mistreatment of struggling homeowners.

Big Defection in Attorney General Mortgage Settlement: 12 States Having Parallel Talks - Yves Smith - It seems as if the Obama administration has completely lost the plot in what was formerly called the 50 state attorney general negotiations, and that appears to have fed directly into the news today of meetings of a breakaway group interested in concrete results.  Remember that despite the successful effort of by the Feds to make the AG group the face of the effort, this drill is being quietly guided by the Administration (the DoJ, HUD, and other federal regulators are participating in the negotiations). A telling moment occurred when Iowa AG Tom Miller, the leader of the state AGs, practically fawned over then assistant Treasury secretary Michael Barr in Congressional hearings in late 2010.  When the talks started, it was clear that the Administration wanted to get the housing mess out of the headlines, based on the false premise that the use of enough cheap credit, regulatory forbearance (official speak for “extend and pretend”) plus some helpful-around-the-margins programs to distract the peasants, would allow the housing market to heal on its own.  And as we’ve pointed out repeatedly, the banks keep asking for more and more at the negotiating table. That’s a bad faith bargaining strategy, one you pursue only if you are certain the other side is desperate to get a deal done. But the whole process has looked less and less plausible as the banks keep upping their demands and Tom Miller keeps saying, month after month, that a deal is mere weeks away. But the pretense started to crack as important states exited the talks: New York, Delaware, Nevada, Massachusetts, and California. The Miller camp keeps mentioning that California may come back with no evidence to support that spin (non-developments or old news on the California front has been misrepresented more than once, a sign of desperation to keep a brave front up). But today’s leak is a biggie. A little birdie had told me a bigger group was discussing an settlement in opposition to the AG format a couple of months ago, but this is apparently the first in person meeting of a group this large. The report by Loren Berlin at Huffington Post says as many as 15 states are participating2, and Hawaii, New Hampshire, Missouri, Mississippi, Maryland, Kentucky and Minnesota joined the five states that had already abandoned the talks in pow-wow in Washington last Tuesday. So the known total of the possible breakaway group is 12, and we’ve heard past rumors of Colorado and Oregon as being not very keen with the Miller-led talks.

State prosecutors confer over US mortgages probes - More than a dozen US state attorneys-general met in Washington this week to share litigation strategies and investigative findings from their mortgage-related probes into leading US banks, people familiar with the matter said. The states, some of which have sued banks including JPMorgan Chase and Bank of America, discussed ways they could pool their resources for future mortgage-related investigations and lawsuits against large financial institutions, raising the spectre of protracted lawsuits for investors in bank stocks whose shares were hammered last year in part due to litigation fears. At least 10 state attorneys-general attended the meeting, with additional aides from other offices bringing the total number of states in attendance to 14. Many of the prosecutors also talked about their general displeasure with a potential $25bn deal currently under discussion between the Obama administration, several states and JPMorgan, BofA, Wells Fargo, Ally Financial and Citigroup to resolve allegations of mortgage-related abuses including improper home seizures. A settlement would likely impede states from launching foreclosure-related investigations involving the targeted banks, according to people familiar with its current terms. Half of the states in attendance had previously indicated their unhappiness with the terms of the still-evolving settlement, suggesting that displeasure with the deal is spreading. This unrest among state prosecutors is threatening the possibility of a mass agreement between states and banks over mortgage-related matters that was heralded early last year.

Attorneys General Discuss Mortgage Probes as Bank Talks Drag On-- About a dozen state attorneys general met this week to discuss their mortgage investigations and how they might work together as settlement talks with banks over foreclosures drag on, three people familiar with the matter said. The group included New York Attorney General Eric Schneiderman, California's Kamala Harris and Martha Coakley of Massachusetts, according to two of the people, who declined to be named because they weren't authorized to speak about the meeting. Schneiderman, Harris and Coakley are each conducting separate investigations of bank practices. The meeting occurred as state and federal officials are negotiating a settlement with the five largest mortgage servicers, including Bank of America Corp. and JPMorgan Chase & Co., that would set requirements for conducting foreclosures and provide relief to homeowners. Schneiderman, Harris and Coakley, along with Nevada Attorney General Catherine Cortez Masto and Delaware's Beau Biden, have raised concerns about any deal that protects banks from future investigations. Masto and Biden also attended the Jan. 10 meeting, according to one of the people. The five states aren't among those negotiating directly with the banks. "A number of likeminded AGs met together to discuss current and ongoing investigations into the mortgage finance and foreclosure industries in addition to prospective or future investigations that may be fruitful,"

Fed to Announce Monetary Penalties for Robo-Signing and Unsafe Practices ; Another Whitewashing Move by the SEC - The always behind-the-curve Fed seeks to fine mortgage servicers for unsafe practices and robo-signing with an amount dependent on allegedly independent review by consultants. Federal Reserve Governor Sarah Bloom Raskin on Saturday said the Fed must impose monetary penalties on banks who entered into an April agreement with regulators over how to fix problems in their mortgage servicing businesses. "The Federal Reserve and other federal regulators must impose penalties for deficiencies that resulted in unsafe and unsound practices or violations of federal law," Raskin said in remarks prepared for delivery to the Association of American Law Schools. "The Federal Reserve believes monetary sanctions in these cases are appropriate and plans to announce monetary penalties." In April, 14 mortgage servicers, including Bank of America and JPMorgan Chase entered into a settlement with the Fed, the Office of the Comptroller of the Currency and the now defunct Office of Thrift Supervision on steps that have to be taken to correct and improve their servicing practices, such as providing borrowers with a single point of contact for questions.As part of the agreement, these mortgage servicers have hired consultants to review foreclosures that took place in 2009 and 2010 to see if any were improper.

"Raskin Urges Penalties on Mortgage Servicers" - I talked to Jamie Galbraith briefly today at a session he was participating in here at the AEA meetings in Chicago -- he was a discussant on a panel talking, in part, about the problems in the financial sector that caused the crisis. More than anyone I know, Jamie has been asking why the F-word -- fraud -- is so absent from these discussion. I wasn't able to stay for his full remarks due to another commitment, but I thought about tweeting a bet that the word fraud would be used as some point during his presentation. I'm guessing he'd like this news: Raskin Urges Penalties on Mortgage Servicers, Reuters: Federal Reserve Governor Sarah Bloom Raskin on Saturday said the Fed must impose monetary penalties on banks who entered into an April agreement with regulators over how to fix problems in their mortgage servicing businesses. "The Federal Reserve and other federal regulators must impose penalties for deficiencies that resulted in unsafe and unsound practices or violations of federal law," Raskin said... "The Federal Reserve believes monetary sanctions in these cases are appropriate and plans to announce monetary penalties." Raskin did not say when the penalties will be announced.

The Fed on Mortgage Servicing - I had the privilege today of hearing Federal Reserve Board Governor Sarah Bloom Raskin speak on mortgage servicing, which is not something the Fed has previously addressed.  I strongly commend her speech to you. It's much more important for some of the other things she says: This wave of foreclosures is one of the factors hindering a rapid recovery in the economy. Traditionally, the housing sector, buoyed by low interest rates and pent-up demand, has played an important role in propelling economic recoveries.  However, six years after house prices first began to fall, the pace of the economic recovery remains slow. Nationally, house prices have fallen by nearly one-third since their peak in the first quarter of 2006, and total homeowners' equity in the United States has shrunk by more than one-half--a loss of more than $7 trillion. The drop in house prices has had far-reaching effects on families, neighborhoods, small businesses, and the economy, in part because so many American families--more than 65 percent--own their homes. The fall in house prices has caused families to cut back on their spending and has prevented them from using their home equity to fund education expenses or start small businesses. The decline in house prices has also impeded families from benefiting from the historically low level of interest rates, as perhaps only half of homeowners who could profitably refinance have the equity and creditworthiness needed to qualify for traditional refinancing.

The CFPB Just Rolled Out A Road Map For How It Will Police Mortgage Lenders - Just days after Richard Cordray slipped into the director's chair, the agency said it was ready to start cracking down on those much-maligned nonbank mortgage lenders.   Now we know exactly how they plan to do that.  The CFPB just released the guidelines that its field supervisors will use on the ground as they review originating mortgage lenders to decide whether they're in violation of any consumer protection laws. (See what you need to know about the CFPB's new mortgage rules.) From the look of the 20-plus page guidebook, they're leaving no stone unturned.  As to be expected, there's a lot of paperwork involved. Examiners are charged with combing through brokers and lenders' organizational charts, board minutes, annual reports, policies, loan applications and just about anything covered in ink that's tied to a loan document.  In addition, they'll examine computer systems, audit reports, training programs, advertisements and, most importantly, complaints from consumers

Exclusive: Angelides to lead distressed mortgage firm (Reuters) - Phil Angelides, formerly the chairman of a federal commission who led investigations into why the financial markets collapsed, is heading an investment group that hopes to "do a good thing" for America while turning a profit from the wreckage of the housing market. The startup company, of which Angelides is executive chairman, seeks to raise money from investors to purchase troubled mortgages from banks and other financial institutions in order to help keep homeowners from being foreclosed upon, according to a January 4 letter reviewed by Reuters. The company, Mortgage Resolution Partners, claims its strategy of using "legal and political leverage" to acquire the loans could generate a 20 percent annual return for investors. The company intends to purchase mortgages at a steep discount and re-work them to enable the homeowners to continue making payments, with the firm collecting the proceeds. "We just might do a good thing for America, and along the way get a great return on investment," says the letter to prospective investors. "If our hopes do not pan out, the amount wagered should be a deductible loss."

Senate Republicans Criticize Fed on Housing Advocacy - Top Federal Reserve officials came under fire on Capitol Hill on Tuesday as Republicans criticized the central bank for advocating more steps to aid the battered U.S. housing market. In a letter sent to Fed Chairman Ben Bernanke, Sen. Orrin Hatch (R., Utah) criticized a paper published by the Fed last week that called for more action to stabilize the troubled sector of the economy. The paper, an unusual step for the Fed, came as officials at the central bank have worried that millions of Americans can’t refinance their home loans and take advantage of low interest rates engineered by the central bank. However, Hatch argued that the Fed shouldn’t move so aggressively into housing policy. Publishing a paper and advocating policy positions on housing oversteps the central bank’s mandates of keeping unemployment and inflation low, wrote Hatch, the top Republican on the Senate Finance Committee.“I believe that it is important to the interests of the Federal Reserve, including the independence of monetary policy, that the Fed refrain from providing any hint of activism regarding what are clearly fiscal policy choices,” Hatch wrote. “I am sure that the Fed would not appreciate a white paper from Congress outlining how to think about and execute monetary policy.”

Why Foreclosure Prevention is Not Helpful - Bruce Judson writes, the fear of a continuing loss of wealth (which is a cushion against job loss or other economic emergencies), the fear of job loss itself, the negative effects of underwater homes, lack of forbearance for unemployment (a point the Fed particularly emphasizes), and consumers struggling to meet mortgage payments in a far more difficult environment are all dragging the economy down. He cites some recent Fed memos that argue for more foreclosure prevention. I want to try, once again, to clear up some misconceptions about modifying loans to prevent foreclosures.

  • 1. Loan modifications do not create wealth. A loan modification redistributes wealth The borrower gains and the lender loses.
  • 2. Loan modifications do not eliminate deadweight loss. Yes, foreclosures involve deadweight loss-the cost of moving and so on. But loan modifications costs servicers a lot of money to train workers to implement loan modifications according to whatever rules are set up.
  • 3. Many borrowers are not eligible for loan modifications. Many are speculators who are not living in the homes that they bought. A lot of the cost of implementing a loan modification program is determining eligibility.
  • 4. Loan modifications often go bad. Redefault rates can be in the range of 50 percent.

As I have said many times, foreclosure prevention keeps the housing crisis in front of us, rather than putting it behind us. It is an exercise in futility that is equivalent to the oil price controls of the 1970s.

The Foreclosure Crisis: A Government in Denial - The financial crisis began with the housing crisis and it will not end until we resolve housing. Government policymakers who seemingly ignore this basic fact are leading the nation to another potential catastrophe. This past week, a number of important events occurred in Washington, including important recess appointments by President Obama. However, the most noteworthy event did not make front page news: the Federal Reserve’s (apparently) unsolicited memo to the committees of Congress that oversee financial services warning of the dangers the current housing market poses for the economy. This represents an extraordinary action and underscores both the seriousness of the continuing crisis and the absence of meaningful discussion of the problem in Washington. Bernanke’s memo reviewed federal actions to date and effectively concluded that they were unlikely to solve this national tragedy. The memo concluded, in part:The challenges faced by the U.S. housing market today reflect, in part…a persistent excess supply of homes on the market; and losses arising from an often costly and inefficient foreclosure process (and from problems in the current servicing model more generally)… Absent any policies to help bridge this gap, the adjustment process will take longer…pushing house prices lower and thereby prolonging the downward pressure on the wealth of current homeowners and the resultant drag on the economy at large.

By promoting mortgage refinancing, Obama could win big - Hubbard is an advocate for using Fannie Mae and Freddie Mac to set off a nationwide wave of mortgage refinancing. In a paper co-authored with Columbia economist Christopher Mayer, Hubbard estimates that more than 75 percent of the homeowners with 30-year mortgages backed by Fannie or Freddie are paying interest rates higher than 5 percent. But for the past two years, interest rates have been closer to 4 percent. That means tens of millions of Americans are paying more than they need to every single month. Some of these homeowners have good reason to resist refinancing. They plan to move soon, or they lied on their initial mortgage application. Some have been scared off of new financial products by the events of the past few years. But many simply don’t follow the month-to-month gyrations of interest rates. Others are deterred by conditions set down by Fannie and Freddie — although those have been substantially eased over the past few months, albeit with little fanfare. Those homeowners represent one of the president’s few remaining opportunities to help a substantial number of Americans. That’s because a major push on refinancing is one of the few policies the Obama administration could accomplish without the help of Congress.

Justice Calls for Foreclosure Mediation Support - The Justice Department's project on access to justice has issued a report summarizing current research on state foreclosure mediation programs, calling for more funding and support.  The report offers an excellent summary of the best available research on foreclosure mediation programs, including the very successful Philadelphia and Connecticut programs, that have participation rates as high as 60% to 70% of defendants, and whose participants achieve settlements keeping them in their home in as much as half of the cases.  The industry, led by federal bank regulator OCC and housing finance regulator FHFA, is promoting the idea that all foreclosures are hopeless, homeowners are using state law solely for the purpose of delay, and that massive foreclosures are inevitable, that most judicial foreclosures just result in default judgments, so let's get on with it.  The empirical evidence from states where adequate resources are applied, and mortgage companies are compelled to evaluate each and every homeowner with an income and a desire to pay, belies this myth.  Justice now joins the Federal Reserve in advocating for fewer, not more, foreclosures.

Fannie Mae unveils new forbearance program for unemployed « HousingWire: Fannie Mae will require mortgage servicers to install a new program providing forbearance relief to unemployed borrowers beginning March 1, according to guidance released Wednesday. Servicers will be able to provide up to six months of relief without getting approval from the government-sponsored enterprise. Special consideration can be given to borrowers who require up to 12 months of forbearance. According to the GSE, the program "simplifies and streamlines the use of forbearance options" by providing specific guidelines. Freddie Mac will begin offering 12-month forbearance plans on Feb. 1. GSE servicers provided more than 7,000 forbearance plans in the third quarter, down from 8,000 the prior three months, according to the Federal Housing Finance Agency. Forbearance offers peaked in the second quarter of 2010 at around 20,000. Delinquent borrowers and others on the verge of default are eligible for the program, however second homes and investment properties will not be considered. Servicers must determine that a borrower has less than 12 months worth of mortgage payments in reserves and has monthly housing expenses above 31% of their income before extending a forbearance plan.

From East and West, Foreclosure Horror Stories - THE authorities have fallen silent lately about a possible settlement over foreclosure abuses at big mortgage servicing companies.  The talks began in earnest last March, and people keep whispering that a deal is nigh. But last week, a spokesman for Shaun Donovan, the secretary of Housing and Urban Development and a lead negotiator, said that there was nothing new to report.  That’s probably not a terrible thing.  Why strike a deal — one that would, say, shield banks from new litigation over toxic loans, flawed securitizations and the mess at MERS, the registry that has made such a jumble of land records — without knowing what happened?  So it’s nice to know some attorneys general are taking matters into their own hands. One is Martha Coakley of Massachusetts, whose lawsuits against big banks have unearthed important details about dubious mortgage practices.  Another is Catherine Cortez Masto of Nevada. She filed a case against Morgan Stanley that was settled last year, generating as much as $40 million in monetary relief for borrowers. She also participated in a suit against Wells Fargo that resulted in $45 million in principal forgiveness for Nevadans. And she has a case pending against Bank of America.

Foreclosure Timelines and Mortgage Delinquency: More Evidence from Bankruptcy - At the end of a lively session yesterday at Duke Law School featuring Professor Stephen Ware of University of Kansas Law School, there was a brief discussion of whether shorter foreclosure timelines and clearer rules would promote more workouts of delinquent mortgages. The aforementioned paper about bankrupt homeowners suggests that the opposite might actually be the case: among homeowners in bankruptcy, longer foreclosure timelines in their home states were associated with a lower probability of foreclosure initiation while shorter timelines were associated with a higher probability of foreclosure initiation. This finding comes with caveats about the models, the limits of the data, and the timing of data collection (early 2007). Yet, as is stated toward the end (p. 312), "Notwithstanding the limits of our models, these results are consistent with the view that state foreclosure laws that impose greater expense on lenders and servicers - as longer foreclosure timelines do - deter foreclosures and may encourage workouts."

Why Mortgage Refinancing Is Not a Zero-Sum Game - NY Fed - In a recent speech, New York Fed President William Dudley called for actions “to see refinancing made broadly available on streamlined terms and with moderate fees to all prime conforming borrowers who are current on their payments.” This blog post explains how such a move could help stabilize the housing market and support economic growth. It also explains why mortgage refinancing is not—as some argue—a zero-sum game in which the benefits to one group are exactly offset by the costs to another.    For homeowners with fixed-rate mortgages—the vast majority of U.S. mortgage borrowers—the reduction in monthly payments takes place when the homeowner refinances the existing mortgage into a new mortgage at the lower prevailing mortgage interest rate.     When borrowers refinance and free up cash to spend, there will be an offset on overall economic activity as mortgage bonds are prepaid and investors in those bonds need to find alternative investments at precisely those times when other bonds are likely to offer a lower yield, reducing the investors’ income.   But we will argue that the offset is only partial. Why? There are two reasons. First, many mortgage bonds are held by government or foreign investors whose spending on U.S. goods and services does not depend to any significant degree on their income from the mortgage bonds. Moreover, the share of mortgage bonds held by such investors has increased. Second, the remaining, domestically based private investors are likely to cut back their spending much less than the borrowers raise theirs.

Hatchet Job by Florida Inspector General to Justify Firing of Two Lawyers for Foreclosure Fraud Investigations - Yves Smith - The usual stereotype of corruption on the US state level is that, depending on the day, Louisiana or Mississippi tops the list. But the cesspool created by the widening foreclosure crisis in Florida puts anything in kudzu-land to shame. The object lesson is a statement issued by the Florida Office of the Inspector General concerning its decision not to investigate the firing (or more accurately, resignation under duress) of two lawyers in the attorneys general’s office, June Clarkson and Theresa Edwards, who believe they were canned for political reasons, namely, for being too aggressive in investigating foreclosure abuses. Note that these firings came shortly after they received exemplary performance reviews.  As we will discuss further, this astonishingly shoddy document tries to bury the matter by publishing write-ups of long complaints by the parties immediately involved in the firing (Associate AG Richard Lawson, Assistant AGs Trish Conners and Carlos Muniz) and by one of the parties targeted, namely, a letter from Lender Processing Services. Regular readers of this blog will know LPS is engaged in questionable conduct and has been the subject of investigations by the US Trustee’s office, a branch of the Department of Justice. It is currently the target of a wide-ranging lawsuit by the Nevada State attorney general Catherine Cortez Masto, an investigation by the FDIC, has signed a consent decree with the OCC for questionable conduct, and is subject of private lawsuits, including one joined by the Chapter 13 trustees as a class, for impermissible legal fee sharing. (We’ve also described how LPS lied in SEC filings).

More on Corruption in the Florida Attorney General’s Office: Staff Intervenes to Help Lender Processing Services When it is the Target of a Fraud Investigation - Yves Smith - As hedge fund manager David Einhorn says regarding situations that don’t pass the smell test, “No matter how bad you think it is, it’s worse.” Abigail Field’s post on how the Florida attorney general’s office befriends foreclosure fraudsters is an important, if nausea-inducing read. One of the striking sections that makes the extent of the corruption clear is a snippet toward the end. It show how the AG’s office acted to help Lender Processing Services do damage control, when it had LPS under investigation for foreclosure frauds. Field points out that the investigation of LPS was launched under the previous AG, Bill McCollum, and is supposedly still active: Field goes through the current AG Pam Bondi’s fraudster-favoring conduct, which is less surprising than it ought to be, since the AG’s Economic Crimes Division has a proud history of being more in bed with probable criminals than against them. Here Field relies on the report of a former seven year staffer in the AG’s office, attorney Andrew Spark, who wrote after Bondi took office about the long standing considerable obstacles to serving the public interest, such as the all too predictable revolving door (with former employees going to foreclosure mills). While Spark made it clear that he was not a supporter of the aggressive Clarkson/Edwards position (these were the two employees we wrote about yesterday who were fired under suspicious circumstances), he nevertheless presents damning evidence in the section of his letter titled “Powerful interests have influence.” Field refers to this letter in her discussion:

Big Banks Face Inquiry Over Home Insurance - A New York State financial services agency is investigating several large banks to see whether they fraudulently steered homeowners into overpriced insurance policies. The investigation centers on so-called force-placed insurance that has become increasingly common since the downturn of the housing market began and homeowners had trouble keeping up with payments on their home insurance.  JPMorgan Chase, Bank of America, Citigroup and Wells Fargo are among the major companies involved in the inquiry by the office of Benjamin M. Lawsky, the superintendent of New York State’s Department of Financial Services, according to a person briefed on the investigation who asked to remain unidentified because the matter was private.  Mr. Lawsky’s office issued 31 subpoenas or other legal notices related to the case in early October, just as the state’s insurance and banking departments were merged under his new agency. His office has already turned up instances where mortgage servicing units at large banks steered distressed homeowners into insurance policies up to 10 times as costly as the homeowners’ original plans.

Truth-In-Mortgage DocumentsLegislation needed in every state:  The Truth-In-Mortgage Documents Act
1. On every Mortgage Assignment, and every Missing or Lost Assignment Affidavit, filed in the Official Records of any county in this State, or filed in any Court in this State, each signer, including any witness or notary, must sign his or her own name, regardless of any authorization by any individual or entity to sign any other name.
2. On every Mortgage Assignment, and every Missing or Lost Assignment Affidavit, filed in the Official Records of any county in this State, or filed in any Court in this State, each signer, including any witness or notary, must set forth his or her actual job title, and the name of his or her actual employer, regardless of any authorization by any individual or entity to state any other job title or employer.

3. On every Mortgage Assignment, and every Missing or Lost Assignment Affidavit filed in the Official Records of any county in this State, or filed in any Court in this State, each signer, including any witness, must set forth his or her actual work address at the time of the signing, regardless of any authorization by any individual or entity to state any other address.
4. On every Mortgage Assignment filed in the Official Records of any county in this State, or filed in any Court in this State, the effective date of the Assignment must be plainly and exactly set forth by day, month and year. .
5. On every Mortgage Assignment, and every Missing or Lost Assignment Affidavit, filed in the Official Records of any county in this State, or filed in any Court in this State, each signer, including any witness or notary, must sign his or her own name, using a full signature stating first and last name, and may not use initials or abbreviations or marks, regardless of any authorization by any individual or entity to sign using initials, abbreviations or marks.

Foreclosure filings hit four-year low in 2011 (Reuters) - The number of U.S. homes that received a foreclosure filing fell to a four-year low in 2011 as a slowdown in processing hit the market, RealtyTrac said in a report on Thursday. Foreclosure filings, which include default notices, scheduled auctions and bank repossessions, slid by 34 percent in 2011, the lowest level since 2007, just as the housing market was starting to crumble. RealtyTrac said there were filings on 1,887,777 homes last year. Bank seizures of homes fell to 804,423 from 1,050,500 in 2010, also marking the lowest level in four years. "A big part that is inflating the size of the decrease is a continuing extended foreclosure process," said Daren Blomquist, director of marketing communications at RealtyTrac. "Especially in some states, we have a dysfunctional foreclosure process that is bogging down foreclosures, but more importantly, it's bogging down and hampering the housing recovery." Foreclosure activity slowed following claims in 2010 that lenders had relied on "robo-signing" where documents were signed without a review of the case files.

Delays help push foreclosure rate to lowest since pre-recession  - About 1.9 million homes entered the foreclosure process in 2011, the lowest level since 2007 when the recession began, according to a report Thursday by the foreclosure listing firm RealtyTrac Inc. The firm cautioned that the decline does not necessarily indicate that the housing market is getting better, as many foreclosures have been delayed due to confusion over documentation and legal issues involved in the process. There have also been problems with the way some lenders were handling foreclosures. Specifically, signing off on home foreclosures without first verifying documents — a practice referred to as "robo-signing." Many of the nation's largest banks reacted by temporarily ceasing all foreclosures, re-filing previously filed foreclosure cases and revisiting pending cases to prevent errors. "Foreclosures were in full delay mode in 2011, resulting in a dramatic drop in foreclosure activity for the year," RealtyTrac CEO Brandon Moore said in a statement. The listing firm anticipates that 2012's foreclosure rate will be higher than last year's, but will remain below the peak of 2010.

RealtyTrac: Bank seizures of homes fell to four year low in 2011 due to process issues - From RealtyTrac: 2011 Year-End Foreclosure Market Report: Foreclosures on the Retreat RealtyTrac® ... today released its Year-End 2011 U.S. Foreclosure Market Report™, which shows a total of 2,698,967 foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 1,887,777 U.S. properties in 2011, a decrease of 34 percent in total properties from 2010. Foreclosure activity in 2011 was 33 percent below the 2009 total and 19 percent below the 2008 total.  “Foreclosures were in full delay mode in 2011, resulting in a dramatic drop in foreclosure activity for the year,” said Brandon Moore, chief executive officer of RealtyTrac. “The lack of clarity regarding many of the documentation and legal issues plaguing the foreclosure industry means that we are continuing to see a highly dysfunctional foreclosure process that is inefficiently dealing with delinquent mortgages — particularly in states with a judicial foreclosure process." From Reuters: Foreclosure filings hit four-year low in 2011 Bank seizures of homes fell to 804,423 from 1,050,500 in 2010, also marking the lowest level in four years..This is close to Tom Lawler's estimate of the number of completed foreclosure sales using data from Hope Now.  Earlier this week I argued foreclosure activity would increase in 2012:  My guess is the policy changes will all be announced in the next few months, and that foreclosure activity will increase significantly. Some portion of these REO will be sold in bulk to investors and rented, so it is difficult to tell how many REOs will come on the market.

Homes lost to foreclosure top 4 million -- Foreclosure filings and repossessions fell to their lowest level since 2007 last year. Total filings, including default notices and bank repossessions were down 33% for the year to 2.7 million, according to RealtyTrac, the online marketer of foreclosed properties. One in every 69 homes had at least one foreclosure filing during the year, while 804,000 homes were repossessed. That's a significant improvement from the peaks reached in 2010 -- when 1.05 million homes were repossessed -- and the lowest levels seen since 2007. More than 4 million homes have been lost to foreclosure over the past five years. While the declines seem like good news for the housing market, where a flood of foreclosed homes has depressed home prices, much of it is due to processing delays caused by fall-out from the "robo-signing" scandal that broke in late 2010. During the year, banks spent more time making sure paperwork was legal and proper, creating a backlog in the foreclosure pipeline. As a result, the average time it took to process a foreclosure climbed to 348 days during the fourth quarter, up from 305 days a year earlier.

RealtyTrac: Home seizures may jump 25% this year - Banks may seize more than 1 million U.S. homes this year after legal scrutiny of their foreclosure practices slowed actions against delinquent property owners in 2011, RealtyTrac said. About 1.89 million properties received notices of default, auction or repossession last year, down 34 percent from 2010 and the lowest number since 2007, the data seller said Thursday. One in 69 U.S. households received a filing. While the seizure process has been "highly dysfunctional," there were "strong signs in the second half of 2011 that lenders are finally beginning to push through some of the delayed foreclosures in select local markets," RealtyTrac Chief Executive Officer Brandon Moore said in the statement. The number of home repossessions is likely to rise about 25 percent from the more than 804,000 properties seized last year as lenders resume foreclosure actions, Daren Blomquist, a spokesman for RealtyTrac, said. Settlement talks are continuing with state attorneys general over documentation flaws, known as robosigning, that surfaced in October 2010.

Foreclosure Nation: 2012 Could Bring Wave of Foreclosures - A report today from foreclosure listing firm RealtyTrac Inc. shows that 2011 showed the lowest number of homes entering the foreclosure in four years. As Reuters reports: Foreclosure filings, which include default notices, scheduled auctions and bank repossessions, slid by 34 percent in 2011, the lowest level since 2007, just as the housing market was starting to crumble. RealtyTrac said there were filings on 1,887,777 homes last year.Yet 2012 does not present a rosy scenario for many homeowners, as the Associated Press reports: The listing firm anticipates that 2012's foreclosure rate will be higher than last year's, but will remain below the peak of 2010. High unemployment, a sluggish housing market and falling home values remain major factors in homeowners falling behind on their mortgage payments. Many borrowers also have simply stopped paying their mortgage because they owe more on the mortgage than the home is worth.A report from the Los Angeles Times also presents a sad picture: California and other states are likely to see an enormous wave of long-delayed foreclosure action in the coming year as banks deal more aggressively with 3.5 million seriously delinquent mortgages

Foreclosures and Short Sale percentages for a few areas - There are only a few areas where the MLS breaks down monthly sales by foreclosure, short sales and conventional (non-distressed) sale. I've been tracking the Sacramento market to watch for changes in the mix over time. (here was my post earlier this week: Distressed House Sales using Sacramento Data) Economist Tom Lawler sent me the following today for a few other areas:  "The below table is based on reports from local realtor associations/boards based on MLS data, which may not be fully and completely accurate. Note that (1) for most of the areas, the distressed share of sales is down from last December, though in many cases it remains quite elevated; and (2) the short-sales share of sales increased in all areas – in some cases by quite a bit – while the foreclosure-sales share fell in all areas, in a few cases by a boatload, especially Phoenix." The table is a percentage of total sales.  Short sales are up in all areas, and foreclosures are down. It appears that the total percent of distressed sales is declining too - although this could be related to the foreclosure process issues. At some point, the number and percent of distressed sales should start to decline significantly.

Record Low Mortgage Rates compared to Refinance Index - From Freddie Mac: Mortgage Rates Continue Trend of Record-Breaking Lows Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing mortgage rates easing to new all-time record lows for all products covered in the survey ... The average for the 30-year fixed mortgage rate has been below 4.00 percent for six consecutive weeks....30-year fixed-rate mortgage (FRM) averaged 3.89 percent with an average 0.7 point for the week ending January 12, 2012, down from last week when it averaged 3.91 percent. Last year at this time, the 30-year FRM averaged 4.71 percent. This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.  The Freddie Mac survey started in 1971. Mortgage rates are currently at the record low for the last 40 years. It usually takes around a 50 bps decline from the previous mortgage rate low to get a huge refinance boom - and rates might not fall that far - 30 year conforming mortgage rates were at 4.23% in October 2010, so a 50 bps drop would be 3.73%.

More Housing Forecasts - Last week I posted some housing forecasts from Wells Fargo, Goldman Sachs and Fannie Mae: Some Housing Forecasts. Here are two more forecasts ... From Merrill Lynch on Housing "It is too early to get bullish" We expect single family housing starts to be little changed in 2012 relative to 2011. This will continue the sideways movement which began in 2009 after single family housing starts plunged 80% from the peak... The good news is that builders have been successful at reducing inventory, bringing new supply to 6 months. This means that any increase in demand will warrant a new housing start. If the economy recovers more quickly this year than we assume, single family housing starts will receive a boost. And real estate consultant John Burns is forecasting an increase to 359 thousand new home sales in 2012 (from around 300 thousand in 2011), and for total starts to increase to 717 thousand from around 600 thousand in 2011 (this includes a significant increase in multifamily starts). And comments from homebuilders Lennar and Toll Brothers: Lennar Says High Rents Helped Home Orders Increase 20% Toll Brothers: NYC Best Home Market in ’12

Increased Real House Price Volatility Signals Break from Great Moderation- FRB Dallas  The findings are derived from the Federal Reserve Bank of Dallas’ new database of international house prices, assembled from available national sources for 19 OECD countries on a quarterly basis from first quarter 1975 to fourth quarter 2010.[2] The house price index selected for each country was chosen to be comparable to the Federal Housing Finance Agency quarterly U.S. house price index for existing single-family houses (formerly the Office of Federal Housing Enterprise Oversight index).[3] Each nominal index is expressed in real terms (adjusted for inflation), using the applicable country’s personal consumption expenditure (PCE) deflator.  The developed-country index of real house prices aggregates the 19 country indexes, each weighted relative to that nation’s 2005 GDP. Similarly, a weighted, average real GDP is calculated for the group. U.S. figures are separately investigated.[4] House price and GDP growth rates for the aggregated 19 OECD countries and the U.S. are computed on a quarter-over-quarter, annualized basis (Chart 1). U.S. recessions, as designated by the National Bureau of Economic Research (NBER), are identified and appear to indicate that OECD-19 and U.S. downturns tend to be highly correlated.

CoreLogic: House Price Index declined 1.4% in November - Notes: This CoreLogic Home Price Index report is for November. The Case-Shiller index released in late December was for October. Case-Shiller is currently the most followed house price index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average of September, October and November (November weighted the most) and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® November Home Price Index Shows Fourth Consecutive Monthly Decline CoreLogic released its November Home Price Index (HPI®) report ... which shows that home prices in the U.S. decreased 1.4 percent on a month-over-month basis, the fourth consecutive monthly decline. According to the CoreLogic HPI, national home prices, including distressed sales, also declined by 4.3 percent on a year-over-year basis in November 2011 compared to November 2010. This follows a decline of 3.7 percent in October 2011 compared to October 2010. Excluding distressed sales, year-over-year prices declined by 0.6 percent in November 2011 compared to November 2010 and by 1.6 percent in October 2011 compared to October 2010. This graph shows the national CoreLogic HPI data since 1976. The index was down 1.4% in November, and is down 4.3% over the last year. The index is off 32.8% from the peak - and up just 1.2% from the March 2011 low.

LPS: House Price Index Shows 0.8 Percent decline in October - The LPS HPI is a repeat sales index that uses public disclosure by county recorders or loan origination data for purchase loans (if the sales price isn't disclosed).  From LPS: LPS Home Price Index Shows U.S. Home Prices Declined 0.8 Percent to Late 2002 Levels in October; Early Data Suggest 0.5 Percent Drop in November Likely The LPS HPI national average home price for transactions during October 2011 was $200,000 – a decline of 0.8 percent during the month relative to September, reaching a price level not seen since October of 2002. This is the fifth consecutive month of decreases in prices. The partial data available for November suggests more moderation of price declines to approximately 0.5 percent. Figure 1: "Prices have fallen since autumn 2008 with brief interruptions each spring. Prices have not been at the current level since October 2002." The October national average price is down 2.7 percent from the average price at the beginning of the year.  The LPS index is already showing a new post-bubble low, and it appears all of the price indexes will show new post-bubble lows later this year - or early in 2012.

9.8 Million Shadow Inventory Says Housing Market is a Long Way From the Bottom - “Shadow inventory,” the number of homes that are either in foreclosure or are likely to end up in foreclosure, creates substantial but hidden pressure on housing prices and potential losses to banks and investors. This is a critical figure for policymakers and financial services industry executives, since if the number is manageable, that means waiting for the market to digest the overhang might not be such a terrible option.  Yet estimates of shadow inventory, and even the definition of what constitutes shadow inventory property, vary widely. For example, the Wall Street Journal published a article, “How Many Homes Are In Trouble?” where values varied from 1.6 million (CoreLogic), to “about 3 million” (Barclays Capital), to 4 million (LPS Applied Analytic), to 4.3 million (Capital Economics), to LPS Applied Analytics, to between 8.2 million and 10.3 million (Laurie Goodman, Amherst Securities).  Why do these numbers vary so much? Even though CoreLogic is generally considered to have one of the best databases of loans, its estimates of loan performance and odds of default are based on credit scores, which is a badly lagging indicator.  I have a large database of my own, and am familiar with housing and mortgage information sources. I’ve come up with my own tally of shadow inventory and have also tried to analyze — OK — take a stab at – what I call “shadow liability,” meaning the amount of money taxpayers, investors, banks, will be lose if those homes are liquidated. Assumptions using those terms are also in the attached spreadsheet. My analysis comes up with a total close to that of Goodman’s range, 9.8 million using a narrower definition than Goodman’s of what constitutes shadow inventory.

As Home Prices Fall, Borrowers Walk Away - Strategic defaults like the one contemplated by Martin are on the rise. A survey last year found that roughly three out of 10 mortgage defaults in 2010 were by homeowners who could afford to make their payments, up from 22 percent in 2009. "It's a looming problem that's in the shadows," . "It's very worrisome to mortgage lenders." Researchers point to a number of forces that are driving borrowers to walk away from their mortgages. At the top of the list is the estimated 12 million homes that are underwater, meaning the owners owe more than they are worth. Until recently, borrowers like Martin and many industry analysts held out hope that a housing recovery would reverse the rising tide of "negative equity." But after stabilizing this summer, home prices began falling again, dropping 7.5 percent in the third quarter alone and leaving more homeowners underwater. Even if prices stabilize this year, millions of underwater borrowers face a long wait before they can sell their homes without having to write a big check to their lender to cover the shortfall. Economists at Goldman Sachs recently forecast that after bottoming in 2013 house prices won't recover their 2006 peak until 2023. (No, that's not a typo.)

Underwater Homeowners May Swim Freely - Prevailing wisdom has it that homeowners who owe more on their mortgages than their houses are worth -- known as being "underwater" -- are forced to stay put because the property is too difficult to sell. So people who would otherwise relocate -- say, to find a job -- are "tethered to their homes [1]." It's a theory touted by prominent New York Times columnist Thomas Friedman [2], Harvard economist Lawrence Katz [3], and regularly makes appearances in the media [4]. But according to economist Sam Schulhofer-Wohl at the Federal Reserve Bank of Minneapolis, they've all got it backwards: underwater homeowners are actually more likely to move. In a forthcoming paper, he argues that the main source of empirical evidence for the established view is flawed, because it ignores a substantial number of movers. Evidence for the tethered-to-their-homes thesis comes largely out of a paper from the National Bureau of Economics Research (NBER). The paper analyzed a national sample of homes by U.S. Census Bureau called the American Housing Survey. Since 1985, Census Bureau interviewers have tracked over 60,000 housing units across the country, returning every two years to record who lives there. If the Census records a house as occupied by its owner, then two years later there are four possibilities: the house is occupied by the same owner, a different owner, a renter, or nobody (the house is vacant.)

Still Plenty of Room for House Prices to Fall Globally, IMF Economist Says   - There’s still plenty of room for house prices to fall in major economies across the globe, including critical nations such as Spain and Italy, despite prices already being in the doldrums, according to an International Monetary Fund senior economist’s calculations.  Loungani said there are many factors driving house prices that make predicting their movements difficult to determine definitively. But if one looks at two indicators that many economists regularly use — the ratios of house prices to income and to rent — there’s a good indication that in many cases, there’s downward space. “If these two ratios are above their historical averages, economic theory suggests that declines in house prices may still be in the offing,” Loungani says in an IMF blog post. Looking at 20 major industrialized economies, “For all but a handful of countries, these ratios remain above, and in many cases well above, their historical averages, signaling that there may be room to fall,” he said.

Las Vegas home sales set record  -Institutional and private investors contributed to a record year for Las Vegas home sales in 2011, but prices are being held down by cautious appraisers and the high number of foreclosure sales, real estate brokers and analysts said Monday. A total of 48,186 single-family homes and condos were sold in Las Vegas last year, topping the previous record of 46,879 set in 2009, the Greater Las Vegas Association of Realtors reported Monday. Roughly half of all sales were cash-only transactions, while 46.8 percent were real estate-owned, or bank-owned properties returning to the market after foreclosure. Another 26.6 percent were short sales, or lender-approved sales for less than the principal mortgage balance. What was good news for Realtors selling existing homes was bad news for builders and developers last year, as new-home sales plummeted from nearly 39,000 in 2006 to fewer than 4,000 in 2011, the lowest level since Home Builders Research began tracking the market in 1988. And there was a grim statistic for anyone selling a home: The median price of a single-family home declined to $120,000 in December, down 9.1 percent from the same month a year ago.

Residential Construction Employment: First increase since 2005 - The graph below shows the number of total construction payroll jobs in the U.S. including both residential and non-residential since 1969. Construction employment increased by 17 thousand jobs in December, and is now down 2.18 million jobs from the peak in April 2006.  Total construction employment increased by 46 thousand jobs in 2011. This was the first increase for construction employment since 2006, and the first increase for residential construction employment since 2005. Unfortunately this graph is a combination of both residential and non-residential construction employment. The BLS only started breaking out residential construction employment fairly recently (residential specialty trade contractors in 2001).  Usually residential investment (and residential construction) lead the economy out of recession, and non-residential construction usually lags the economy. Because this graph is a blend, it masks the usual pickup in residential construction following previous recessions. Of course there was no pickup for residential construction this time because of the large excess supply of vacant homes.

Reis: Regional Mall Vacancy Rate declines slightly - From the WSJ: For Malls, Occupancy Firms Up U.S. malls and shopping centers experienced a slight improvement in occupancy during the fourth quarter ... But data service Reis Inc. cautioned that any recovery remains precarious ... "It's too soon to pronounce a turnaround at this point,"  Malls in the top 80 U.S. markets posted an average vacancy rate of 9.2% in the quarter, down from the 11-year high of 9.4% in the third quarter, according to Reis, which began tracking [regional] mall data in 2000. ... vacancy [for strip malls] remained at 11% ...Retail landlords also have been helped by a virtual shutdown in new store construction, meaning they face less competition for tenants. Only 4.5 million square feet of shopping-center space opened in 2010, the lowest figure in 31 years, according to Reis. Last year was slightly higher, with only 4.9 million square feet being delivered.  The vacancy rate for regional malls is just below the record set last quarter, and the vacancy rate for strip malls is just below the record set in 1990. It is still very ugly for malls ... but the good news is new construction is at very low levels.

US consumer borrowing jumps in November - US consumer borrowing rose by far more than analysts had expected in November as Americans opened their wallets for cars and other purchases amid signs of an improving economy.Consumer credit surged by $20.4bn – the biggest jump since November 2001 – to $2.48tn, the Federal Reserve said. That was well above economists’ median estimate of $7bn and nearly twice the high end of estimates of $11.6bn.“This is a positive for the US economy,” . “It tallies with consumer confidence surveys and suggests Americans are feeling more confident about job creation and their personal income situations.” Consumers’ willingness to spend has risen as recent data have drawn an brightening picture of the economic recovery. Employers added 200,000 jobs in December and the unemployment rate ticked down to 8.5 per cent, the lowest in nearly three years, in line with recent indications from declining claims for jobless benefits. Sentiment surveys have recorded rising confidence, and retailers enjoyed record sales on Black Friday, the official start of the end-of-year shopping season. “This [credit] number is unexpectedly big, and it might go some way to explaining the slowdown in retail sales in December. Possibly, shoppers had maxed out credit in November,”

Consumer Credit Surged in November - U.S. consumer borrowing rose by the most in a decade during November, surging 10% with Americans pulling out their credit cards as the holiday shopping season got rolling. The level of consumer credit outstanding increased by $20.37 billion to $2.478 trillion, the Federal Reserve said Monday. Economists surveyed by Dow Jones Newswires had forecast an $8.0 billion increase. In percentage terms, the increase was the biggest since October 2001 and a big driver of the gain was revolving credit, which includes credit-card debt. It increased by $5.60 billion to $798.27 billion. Nonrevolving credit also surged, rising $14.78 billion to $1.679 trillion. The increase was fueled by federal government, a category that includes student loans and has been increasing a lot over the past year–a sign high joblessness in the U.S. has led many people to go back to school. The consumer-credit report doesn’t include numbers on home mortgages and other real-estate secured loans. But the Fed data are important for the clues to behavior by consumers, whose spending helps propel the economy.

U.S. Consumer Credit Rises by Most in Decade - Consumer borrowing in the U.S. surged in November by the most in 10 years, showing households are optimistic enough to take on debt and banks are willing to lend. Credit increased by $20.4 billion, the biggest jump since November 2001, to $2.48 trillion, Federal Reserve figures showed today in Washington. The advance was almost twice as big as the highest forecast of 31 economists surveyed by Bloomberg News.  Increasing borrowing signals a drop in unemployment (USURTOT) is giving households the courage to take advantage of holiday discounts, buy cars and finance higher education. At the same time, dependence on credit means the job market has yet to improve enough to provide the incomes needed to sustain consumer purchases, which account for about 70 percent of the economy.  “Consumers are feeling more confident and making more big- ticket purchases,” said Richard DeKaser, who projected credit would climb by $11.6 billion, the highest estimate in the Bloomberg survey. “The debt pay downs of previous years are now allowing consumers to borrow a bit more freely.”

What is the Relationship Between Credit Cards and Mortgage Delinquency? - Previously I mentioned this new paper on homeowners in bankruptcy in the American Bankruptcy Law Journal. The central goal of the paper was to investigate what makes homeowners more or less likely to have mortgage troubles as they head into bankruptcy. One of the notable findings is that, across all the models, credit access had a significant effect on keeping mortgages current and avoiding foreclosure initiation (specifics listed pp. 302-304). But why? The study cannot say for sure, so the discussion section (pp. 308-10) explores several hypotheses.  Maybe those with continued access to credit cards had better credit histories and were in a stronger relative financial position. Perhaps credit cards filled in other financial gaps so that a debtor could keep a mortgage current.   After all, a quarter of filers who missed mortgage payments specifically reported using credit card cash advances as a method of catching up in the two years prior to filing.  \ But other studies connect the dots differently.  For example, some researchers have examined the circumstances under which homeowners prioritize credit card bills over mortgage payments, increasing the likelihood of delinquency. And, before the financial crisis, some authors raised concerns that homeowners put homes at risk by using cash-out refinancing to pay credit card debt. 

Retail Sales increased 0.1% in December - On a monthly basis, retail sales were up 0.1% from November to December (seasonally adjusted, after revisions), and sales were up 6.5% from December 2010. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for December, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $400.6 billion, an increase of 0.1 percent (±0.5%)* from the previous month and 6.5 percent (±0.7%) above December 2010. Sales for November were revised up from a 0.2% increase to 0.4%. Retail sales excluding autos decreased 0.2% in December. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 20.4% from the bottom, and now 5.9% above the pre-recession peak (not inflation adjusted) The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 6.1% on a YoY basis (6.5% for all retail sales). Retail sales ex-gasoline increase 0.3% in December. This was well below the consensus forecast for retail sales of a 0.4% increase in December, and a 0.4% increase ex-auto.

U.S. retail sales rise scant 0.1% in December - Sales at U.S. retailers increased 0.1% in December, the government said Thursday, in a report that bucked expectations of stronger sales during the holiday period. “Apparently, all those reports of a robust holiday shopping season were made by people too much into the holiday spirits as retail sales did not surge in December,”  Electronics were touted as one of the strongest sectors for holiday shopping. But the Commerce Department’s data showed a 3.9% monthly decline at electronic stores. Sales at online retailers, another supposed holiday hotspot, fell 0.4%. Sales at the nation’s malls were lower in December. Sales at general merchandise stores fell 0.8%, including a 0.2% decrease at department stores. Excluding a 1.5% rise in motor vehicles sales, retail sales for the month fell 0.2% — much weaker than the 0.3% gain expected.

Retail Sales: A Disappointing 0.1% in December - The Retail Sales Report released this morning shows that retail sales in December were up 0.1% month-over-month (but the Census Bureau notes that the statistical confidence range is ±0.5%). That was well below the consensus forecast of 0.4% and's own expectation of 0.5%. The more positive year-over-year change was 6.5%. The first chart shows the complete series from 1992, when the U.S. Census Bureau began tracking the data. I've highlighted recessions and the approximate range of two major economic episodes. The Tech Crash that began in the spring of 2000 had relatively little impact on consumption. The Financial Crisis of 2008 has had a major impact. After the cliff-dive of the Great Recession, the recovery in retail sales has taken us (in nominal terms) 5.9% above the November 2007 pre-recession peak.  Here is the same chart with two trendlines added. These are linear regressions computed with the Excel Growth function.  The green trendline is a regression through the entire data series. The latest sales figure is 5.7% below the green line end point.  The blue line is a regression through the end of 2007 and extrapolated to the present. Thus, the blue line excludes the impact of the Financial Crisis. The latest sales figure is 16.0% below the blue line end point.

Sears Noose Tightens As CIT Leaves Company Cold With No Vendor Financing - Two weeks ago, when we first announced the catastrophic earnings preannouncement by Sears we noted that we were stunned "that as part of its preannouncement, Sears has decided it would be prudent to provide an update on its credit facility status as well as availability. As a reminder to anyone and everyone - there is no more sure way of committing corporate suicide than openly inviting the bear raid which always appears whenever the words "revolving credit facility" and "availability" appear in the same press release. Just recall MF Global. And here, as there, we expect shorting to death to commence in 5...4...3..." Subsequently, when the company was downgraded to triple hooks S&P we said that "Accounts Receivable about to become one big perpetition charge off", the implication naturally being that the company is about to lose its vendor financing - which for retailers is the last step before outright default. Sure enough, the WSJ reports that this is precisely what happened.

NPD: US holiday electronics sales drop 5.9 percent  - U.S. sales of consumer electronics fell 5.9 percent this past holiday season, as smartphones cannibalize sales of standalone gadgets like cameras, camcorders and GPS navigation devices. The NPD Group reported Sunday that electronics sales, including TVs and PCs, totaled $9.5 billion in the five weeks ending Dec. 24. Camcorder sales plunged 43 percent, and sales of digital picture frames fell 38 percent. GPS units slumped 33 percent. PC and TV sales slipped just 4 percent, bolstered by sales of TVs bigger than 50 inches. Cell phone sales are not included in the report. The figures were released as the consumer electronics industry gathered in Las Vegas for its annual trade show, the largest in the Americas and one of the largest in the world, and jibe with some retail numbers released last week.

Demographic Headwinds: The Decline of Peak Spenders - Demographer Harry Dent was recently a featured guest on Bloomberg TV in an interview that was promoted with the frightening tease "S&P 500 to Fall 30-50% in 2012." See the video clip below for the complete interview.  The rationale for Dent's grim forecast is primarily based on the demographics of the peak spending years, an age cohort he refers to in the interview as ages 46 to 50. If we use the Census bureau five-year data groupings, the cohort in question is Age 45-49 (which is the range Dent normally refers to in his publications). A search on "demand curves" at Dent's website produces a link to a fascinating PDF file illustrating the life-cycle buying habits of households by the age of the head of household for about 240 different product categories. If you spend a few minutes looking over these pages, you'll quickly grasp the significance of demographics for spending patterns and why the 45-49 cohort earns the reputation of peak spenders.  Let's first have a look at the Bloomberg interview, and then let's study a graph of the Census Bureau historical and forecast data for the peak-spending cohort population in the US from 1980 to 2050.

Consumer Sentiment Starts New Year Stronger - U.S. consumers started the New Year feeling more hopeful about the economy, according to data released Friday. The Thomson Reuters/University of Michigan consumer sentiment index for early January increased to 74.0 from a reading of 69.9 at the end of December and a preliminary December reading of 67.7, according to sources who have seen the report. The latest reading was much better than the 72.0 expected by economists surveyed by Dow Jones Newswires.The current conditions index rose to 82.6 from 79.6 in late December. The expectations index jumped to 68.4 from 63.6. The top-line sentiment and expectations indexes are at their highest levels since May. The current conditions is at its highest since February. Consumer sentiment has been improving since it took a dive in the summer after the debt-ceiling fight and the subsequent downgrade of U.S. government debt.

Consumer Sentiment increases in January - The preliminary January Reuters / University of Michigan consumer sentiment index increased to 74.0, up from the December reading of 69.9. Most of the recent sharp decline was event due to the debt ceiling debate, and sentiment has rebounded as expected. Now it is all about jobs, wages - and gasoline prices.  Sentiment is still fairly weak, although above the consensus forecast of 71.5.

Financial Sector Not The Only One Hit By A European Collapse - It’s obvious to anyone that a financial crisis in Europe would be bad for the American economy. However, most of the coverage surrounds the difficulties for U.S. banks and other holders of European debt. A new chart from the San Francisco Fed helps refocus the concern towards the broader economy. A whopping 22% of U.S. exports go to Europe, which is even more than we send to Canada. If Europeans become suddenly unable to buy American goods because the Euro’s value plummets, our domestic economy could take a significant hit.

U.S. Factories Could Suffer From Dollar’s Appeal - Being a safe haven can be a drag. The euro zone remains the albatross around the global economy’s neck. Any hint about default, a euro-zone break up or banking collapse sends skittish investors into the secure embrace of the U.S. dollar. The latest example came Monday when press comments by a Czech central banker about Greece possibly leaving the euro zone triggered a plunge in the euro to a 15-month low against the dollar. (The euro rebounded only after it was made clear that the comments weren’t official policy thinking.) Until European leaders put a credible and long-lasting solution to the euro zone’s debt problem in place, chances are high that the dollar will be stronger than it might otherwise trade. A strong dollar may enhance the U.S.’s sense of pride. But it will be a headwind for U.S. manufacturing. That isn’t because a weak euro will cut U.S. exports to Europe. The euro zone is in recession and won’t be buying much from any nation. The challenge will come in emerging markets that have the money and pent-up demand for foreign-made goods.

Rail Traffic Plummets -9.3% to Start 2012 - Rail traffic has remained very strong in recent months despite concerns over recession. This week’s data doesn’t alter the trend, but is certainly an alarming decline that is worth keeping a close eye on. Overall intermodal traffic was down -9.3% while carloads declined -3.7%. This index has been somewhat volatile as of late and clearly one week doesn’t make a trend, but rail has served as a superb harbinger of recession over the last few cycles….More from the AAR: “The Association of American Railroads (AAR) today reported a decrease in weekly rail traffic for the week ending January 7, 2012, with U.S. railroads originating 274,862 carloads, down 3.7 percent compared with the same week last year. Intermodal volume for the week totaled 193,812 trailers and containers, down 9.3 percent compared with the same week last year. Five of the 20 carload commodity groups posted increases compared with the same week in 2011, with metallic ores, up 29.2 percent, having the greatest gain. The groups showing a decrease in weekly traffic included: grain, down 20 percent; farm products excluding grain, down 18.5 percent, and iron and steel scrap, down 17 percent. Weekly carload volume on Eastern railroads was down 13.8 percent compared with the same week last year. In the West, weekly carload volume was up 2.7 percent compared with the same week in 2011. For the first week of 2011, U.S. railroads reported cumulative volume of 274,862 carloads, down 3.7 percent from last year, and 193,812 trailers and containers, down 9.3 percent from last year.”

Ceridian-UCLA: Diesel Fuel index increased 0.2% in December - This is the UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: Pulse of Commerce Index Increased 0.2 Percent in December The Ceridian-UCLA Pulse of Commerce Index® (PCI®) rose 0.2 percent in December following the 0.1 percent increase in November and the 1.1 percent increase in October.  Although December’s news is positive, the combined effect of the three consecutive positive months was not enough to offset the weakness of trucking last summer and the PCI in December 2011 is 1.2 percent below its June 2011 level....Based on the latest PCI data, the forecast for December Industrial Production is a 0.29 percent increase when the government estimate is released on January 18.This graph shows the index since January 2000. This index declined sharply in late summer and has only partially rebounded over the last three months. Mostly this index moved sideways in 2011 (down 0.7% from December 2010).

Ceridian Fuel Index Positive for Third Month but "Too Small to Make Up for Lost Ground Last Six Months" - Inquiring minds are digging into the Ceridian-UCLA Pulse of Commerce Fuel Index for December 2011 report released today. The Ceridian-UCLA Pulse of Commerce Index® rose 0.2 percent in December following the 0.1 percent increase in November and the 1.1 percent increase in October. Unfortunately, the combined effect of the three consecutive positive months was not enough to offset the weakness of trucking last summer and the PCI in December 2011 is 1.2 percent below its June 2011 level and 0.7 percent below its level a year ago in December 2010.  Here is a video with Chief PCI® economist, Ed Leamer, on the December results. Ceridian fuel usage is diesel fuel for truckers. Ceridian Index vs. Retail Sales. That divergence between trucking fuel usage and retail sales is about to resolve to the downside for retail sales.

Trade Deficit increased in November to $47.8 Billion - The Department of Commerce reports: Total November exports of $177.8 billion and imports of $225.6 billion resulted in a goods and services deficit of $47.8 billion, up from $43.3 billion in October, revised. November exports were $1.5 billion less than October exports of $179.4 billion. November imports were $2.9 billion more than October imports of $222.6 billion. The trade deficit was above the consensus forecast of $45.0 billion. The first graph shows the monthly U.S. exports and imports in dollars through November 2011. Exports decreased and imports increased in November. Imports had been mostly moving sideways for the past six months (seasonally adjusted). Exports are well above the pre-recession peak and up 10% compared to November 2010; imports are up about 13% compared to November 2010. The second graph shows the U.S. trade deficit, with and without petroleum, through November. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil averaged $102.50 per barrel in November. The trade deficit with China declined slightly to $27 billion.  Exports to eurozone countries declined 6.9% in November. And the trade deficit with the European Union widened to $9.7 billion from $7.2 billion in November 2010.

Wholesale Inventories Rose Just Slightly in November - U.S. wholesale inventories increased only slightly in November, a sign companies might have had some misgivings about the strength of demand as the holiday shopping season progressed. The inventories of U.S. wholesalers increased by 0.1% to a seasonally adjusted $468.88 billion, the Commerce Department said Tuesday. Sales were solid, rising 0.6% to $407.90 billion. But the tiny inventory increase came far below expectations — economists surveyed by Dow Jones Newswires had forecast a 0.6% increase. It suggested businesses were uncertain about spending and reluctant to load up too much on goods in the event demand turned out to be not so robust. Wholesalers hold about 30% of all business inventories in the U.S., with manufacturers and retailers making up the rest. The small gain in November wholesale inventories followed a 1.2% surge in October inventories.

Small-Business Sentiment Improves - Small-business-owner confidence increased again in December, according to data released Tuesday. The National Federation of Independent Business‘s small-business optimism index rose 1.8 points to 93.8 last month from 92.0 in November. It was the fourth consecutive increase. Despite the recent gains, “the level of the index is consistent with weak growth,” said the NFIB which also pointed out the index is close to recessionary readings. “About half of the gain was due to reduced concerns about business conditions 6 months ahead and improved expectations for real sales gains,” said the NFIB report. The subindex of expected business conditions in the next six months rose 4 percentage points to -8% in December, and the expected higher real sales subindex increased increased 5 points to 9%.

NFIB: Small Business Optimism Index increases in December - From the National Federation of Independent Business (NFIB): Small Business Confidence Inches Upward: While Economic Winter Continues, It Appears to be Getting Warmer For the second consecutive month, small-business optimism rose 1.8 points, according to the National Federation of Independent Business (NFIB) Optimism Index; the small but notable gain settled the December reading at 93.8. This represents the fourth monthly increase since September, suggesting that the rising trend might stick. However, a comparative look at early 2011 shows the Index rising in the early part of the year, only to decline in March and April. The first graph shows the small business optimism index since 1986. The index increased to 93.8 in December from 92.0 in November. This is the fourth increase in a row after declining for six consecutive months. The second graph shows the net hiring plans for the next three months. Hiring plans declined slightly in December, but the trend is up.  According to NFIB: “Unfortunately, December’s jobs numbers fizzled, with the net change in employment per firm turning negative again; small businesses lost an average .15 workers per firm. ... The good news is that the number of owners cutting jobs has ‘normalized’.

Fox News host cheers ‘positive’ job losses - In a Sunday evening segment, Fox News business reporter Brenda Buttner suggested that the loss of public sector jobs — which have come largely out of cities, counties, school districts and states — is actually “a positive” development for the U.S. economy. “Government is a little bit losing jobs, and that’s something that we see as a positive because we want government to lose jobs to get more in-line with the private sector,” she explained during an appearance on America’s News Headquarters. She didn’t elaborate on what that actually means — bringing government “more in-line with the private sector” — but her analysis that public sector job losses are “a positive” would strike most economists as quite wrong.

More on the Celebration Over December’s Job Report - Economists tend not to be very good at economics. We know this because almost none of them were able to see the $8 trillion housing bubble that was driving the economy from 2002 to 2007. This was an oversight of astonishing importance, sort of like a physicist not noticing gravity. Their failure to understand the economy has led to enormous misreporting of the December jobs data. There are two basic problems. They fail to accurately put the job growth numbers in the context of the economic downturn and they badly misread the December data leading them to overstate the true growth path we are now on. Taking the two in turn, the reports were full of the good news that the economy had created 200,000 jobs and the unemployment rate had dropped to 8.5 percent. Creating 200,000 jobs is undoubtedly better than creating 100,000 jobs and much better than creating no jobs at all, but is this good?From December of 1995 to December of 1999 the economy generated more than 250,000 jobs a month, and that was starting from an unemployment rate of under 6.0 percent. We expect more rapid job growth following a steep downturn like the one we saw in 2007-2009.

Prime Age Men Crawling Back to WorkMy favored employment indicator is the employment-population ratio for working-age men (25-54): The last couple of months have seen an uptick in this and the ratio can be seen to have been very, very, gradually recovering since the end of the last recession (which was officially in June 2009). At this pace, we will return to the pre-recession level some time in the late 2030s. I jest not: However, looking at the longer term history: What is overwhelmingly more likely is that the ratio will not recover to the pre-recession level before a new shock arrives and knocks it lower yet. I continue to be amazed that this data - together with its causes and implications - are not at the center of our economic-political discussions. The importance of hard work and self-discipline has been a central value of western culture for many centuries (if not millenia). One in five working age men are no longer working (or not in any way that society is able to measure at least) and as far as I can see there is little or no hope of a fundamental reversion in this trend. We are going to have to either a) change the situation in the economy, or b) undergo a massive values shift to give honor and meaning to men who don't work, or c) experience a major crisis.

Some Deep Wonkery on Moving Seasonality - The BLS noted something a little unusual in the jobs report data from yesterday, and it got me thinking about how seasonal employment patterns are evolving over time. There was a 42,000 spike in the number of couriers/messengers last month, and the Bureau pointed out “that seasonal hiring was particularly strong in December. This may reflect increased online purchasing during the holiday season.” Now, the data come adjusted for seasonal effects, meaning that since we expect more delivery people to be hired in the December, the Bureau subtracts what we’d expect in terms of seasonal hires, leaving any gains (or losses) above (or below) that to counted as net new jobs. But what if a lot more people start shopping online instead of in stores?  In that case, you’d want to crank up the seasonal factor for messengers and probably take down the one for retailers (i.e., since retailers are making fewer seasonal hires under this scenario, you’d want to be careful not to over-adjust by subtracting too many December jobs from the brick-and-mortar establishments).

Here Come the Jobs! (But How's the Pay?) Between now and November, middle class Americans are going to hear an enormous amount of bragging about job creation. Mitt Romney will tout his role in the creation of Staples, The Sports Authority and Domino's, three firms that he says created 100,000 jobs. Barack Obama will say 2.9 million jobs have been created since March 2010, and highlight a surge of 140,000 new private sector jobs in November. The central question for middle class Americans, however, is: What quality of job is being created? The November job surge, for example, occurred primarily in retail, leisure and hospitality, sectors known for low wages. The other high-growth areas were professional services and health care, where higher education is a central determinant of income. Manufacturing and construction, one of the few areas left in the American economy where members of the middle class without elite educational pedigrees can find strong wages, were moribund. The following chart from the Bureau of Labor Statistics breaks down the numbers.

Men at Work - EconomPic - The NY Post details:  Since the US economic recovery started in mid-2009, a whopping 97 percent of the new jobs — all but 43,000 of 1.4 million positions created — have gone to the guys, according to data released yesterday by the National Women’s Law Center, which analyzed jobs data between June 2009 and December 2011. By my calculation, using figures from the BLS, the numbers are even more striking. Since June 2009, women have lost ~750 thousand jobs while men have gained ~1.5 million. Since the bottom in BLS data (December 2009), men have gained 93% of all new jobs (2.62 million of the 2.82 million). It is important to note that men have simply regained employment they had lost, as the recovery still puts job losses by men above women since the beginning of the recession.

Making It In America - Across America, many factory floors look radically different than they did 20 years ago: far fewer people, far more high-tech machines, and entirely different demands on the workers who remain. The still-unfolding story of manufacturing’s transformation is, in many respects, that of our economic age. It’s a story with much good news for the nation as a whole. In the past decade, the flow of goods emerging from U.S. factories has risen by about a third. Factory employment has fallen by roughly the same fraction. The story of Standard Motor Products, a 92-year-old, family-run manufacturer based in Queens, sheds light on both phenomena. It’s a story of hustle, ingenuity, competitive success, and promise for America’s economy. It also illuminates why the jobs crisis will be so difficult to solve.

Jobs report shows more in U.S. working full time - More Americans are moving from part-time to full-time jobs, adding to evidence a strengthening labor market will bolster household confidence and spending. The number of people putting in a full week rose to 113.8 million in December, the most since February 2009, the Labor Department's monthly employment report showed. At the same time, 8.1 million worked fewer hours because they couldn't find a full-time job, the least since January 2009. "It's what will traditionally happen when the job market overall is beginning to improve," . While the jobless rate fell 0.5 percentage point over the past three months, going from 9 percent to 8.5 percent, the underemployment rate, which includes part-time employees who'd prefer a full-time job, dropped by 1.2 percentage points to reach 15.2 percent.

America’s incredible shrinking labour force - One of the great constants in the world economy in the past few decades has been the consistently strong growth in the US labour force. This has given American economic performance a demographic head start compared with other developed countries. Not only has it been the main factor ensuring that US GDP growth has remained well above that in Europe, it has also injected flexibility and dynamism into the US economy. But all of that is now at risk. The US labour force suddenly stopped growing in 2008, and has been falling slightly ever since. As a result of this sudden disappearance of growth in the labour force, the unemployment rate has fallen by 1.5 percentage points in the past two years. But it is doubtful whether this represents a genuine tightening in the labour market. More likely, the underlying growth in the labour force has been disguised by the fact that potential workers have been discouraged from remaining in the labour market by the shortage of job opportunities. Without this shrinkage in the labour force, the unemployment rate would have risen to more than 11 per cent by now. It is urgent to fix this problem before the labour market atrophies, as it did in Europe in the 1980s.

Jobs figures may not rescue Obama - Asked about the decline from 8.7 per cent to 8.5 per cent in December, Mitt Romney, his most likely challenger, replied: “The president is going to try to take responsibility for things getting better. It’s like the rooster trying to take responsibility for the sun rising. He didn’t do it.” For a president who has spent the past three years saying it was not his fault things got so bad in the first place, it must be a blessed relief to have his tormentors agree, and see their most potent line of attack temporarily neutralised. The trouble for Mr Obama is that the slide in unemployment has come too soon, is unlikely to be sustained and is probably not the economic variable that voters truly care about anyway. The one unequivocal bit of good news for the president is that the US created 200,000 jobs in December. The monthly numbers are volatile but there is enough of a trend to be confident that the economy has rallied after a dismal summer, is growing, and – barring further catastrophe in the eurozone – will probably continue to add jobs through Mr Obama’s election year. The decline in the unemployment rate is much more ambiguous. Compared with August, employment has increased by more than 1m, while the labour force has only grown by 200,000 – hence the decline in the unemployment rate from its recent peak of 9.1 per cent.

The costs of unemployment – again - One of the extraordinary things that arose in a recent discussion about whether employment guarantees are better than leaving workers unemployed was the assumption that the costs of unemployment are relatively low compared to having workers engaged in activities of varying degrees of productivity. Some of the discussion suggested that there were “microeconomic” costs involved in having to manage employment guarantee programs (bureaucracy, supervision, etc) which would negate the value of any such program. I last visited this issue in some detail in this blog – The daily losses from unemployment. In terms of estimates, not much has changed in the US economy over the last 2 years. The daily losses in income alone are enormous. One of the strong empirical results that emerge from the Great Depression is that the job relief programs that the various governments implemented to try to attenuate the massive rise in unemployment were very beneficial. At that time, it was realised that having workers locked out of the production process because there were not enough private jobs being generated was not only irrational in terms of lost income but also caused society additional problems, such as rising crime rates. The single most rational thing a government could do was to ensure that there were enough jobs to match the available labour force.

Secret Reason for Strong December Economy and Employment - Econintersect: Our research department has just reviewed a video of a press conference last week which was poorly attended, at least by the MSM (main stream media). This press conference revealed why business activity and employment were both stronger than expected in December. We call this discovery a secret because it was on nobody's radar screen just a month ago. Furthermore, the expanded business activity at the end of 2011 can be expected to be repeated in coming years and to occur earlier in the year in the future, peaking at the end of the third quarter. Just what has dramatically changed for the business and economic prospects of the U.S., and probably the entire world, can be learned in just a few minutes with the following video. Yes, Christmas has been privatized and the economy is booming because of the new additional wealth for job creators. Further research has uncovered a corporate video that gives a lot more insight into how this amazing success story has been accomplished.

BLS: Job Openings "unchanged" in November - From the BLS: Job Openings and Labor Turnover Summary The number of job openings in November was 3.2 million, unchanged from October. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in November was 1.0 million higher than in July 2009 (the most recent trough for the series). The number of job openings has increased 30 percent since the end of the recession in June 2009. The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for November, the most recent employment report was for December. Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. Jobs openings declined slightly in November, but the number of job openings (yellow) has generally been trending up, and are up about 7% year-over-year compared to November 2010.

Vital Signs: Still More Than 4 Job Seekers Per Opening- U.S. job seekers gained a slight edge in November. The number of unemployed people per job opening fell to 4.21 from 4.27 in the previous month. The level of job openings per worker has improved steadily since the recession ended in June 2009, reflecting a stronger labor market, but it’s still far from the prerecession level of 1.8 workers per job opening.

Unemployment claims tick up again -- Just as the jobs recovery seemed to be picking up, the number of Americans filing for first-time unemployment claims rose more than expected last week. The Labor Department reported Thursday that 399,000 people filed for initial jobless benefits, up 24,000 from the week before. That's awfully close to the 400,000 level economists often say is too high to bring the unemployment rate1 down substantially. But it's too early to start worrying just yet. The encouraging news brought by last week jobs report2 is not off the table, economists say. "This can be a wonky period for claims," "So let's give this a few weeks to see how it plays out." The initial claims numbers are adjusted for seasonal trends, but economists still had expected a slight tick up last week due to temporary holiday jobs ending.

Jobless Claims Rise As Retail Sales Slow - There are two ways to interpret today’s economic updates on weekly jobless claims and retail sales for December. If you’re inclined to see a recession coming, a view that appeals to some analysts, the numbers du jour offer some marginally stronger support for expecting trouble. But the latest reports are hardly game changers and so it’s not obvious that a moderately optimistic outlook is suddenly indefensible.  Let’s begin with jobless claims, which rose a hefty 24,000 last week to a seasonally adjusted 399,000—the highest since late-November. The latest jump brings us just under the psychologically distressing benchmark of 400k. Suddenly there’s a new question of whether the progress in recent weeks was another head fake? You can’t dismiss anything these days, but thinking that we're doomed (again) is still premature.The standard caveat is worth repeating: jobless claims data is quite noisy in the short term and so drawing hard-and-fast conclusions from one report is risky. Far more important is the trend for this leading indicator, including its four-week moving average, which remains near its lowest level for new claims since the recession was formerly declared over as of mid-2009.

Number of the Week: Applying for Unemployment Benefits - 450,000: The likely threshold of new claims for unemployment benefits, above which the economy is likely losing jobs and below which it is adding jobs. The unemployed are more likely to apply for government benefits than they used to be, and it’s changing how economists use reports of new jobless claims as a gauge of labor-market health. An economic rule of thumb that generally held through the recessions of the1970s, 80s and 90s was that when new weekly claims for unemployment benefits rose above 400,000, the economy was cutting jobs and when claims were below that level, jobs were being added. Indeed, in the latest survey of economists by the Wall Street Journal, most respondents still put the threshold at the 400,000 level. But new claims spent much of 2010 and 2011 above 400,000 even as the economy steadily added jobs. Recent research by the St. Louis Fed put the threshold since 2008 at 450,000, and noted that the level actually moves around over time. An analysis by Zach Pandl of Goldman Sachs noted similar results. Pandl showed that the relationship of claims to the change in employment fluctuates during the course of the business cycle.

Few part-timers, but more are working multiple jobs - Hooray! There are fewer of you working part time.  Boo! More of you are working multiple jobs.  The job market continues to be a mixed bag for millions of workers across the country.  On a positive note, when workers are able to clock in more than 35 hours a week after being forced to take fewer hours because of the tough economy, that’s good news for the economy and for employees. The Bureau of Labor Statistics (BLS) reported that the number of part-time workers in the United States working reduced hours because they couldn’t get full-time work or had their hours reduced by their employers, declined by 371,000 to 8.1 million in December.  It’s unclear, however, whether this latest government data on part-timers is a light at the end of the crummy labor market tunnel, or continued murkiness. The agency doesn’t track whether those individuals ended up with full-time gigs, or lost their part-time jobs. "It could be that some people working part time involuntarily had their hours restored to full time or it could also be that they became unemployed,” said Jim Borbely, an economist for the BLS.

Where Do the Long Term Jobless Go? Not Into Jobs. (See: My Dad) On the surface, the best news in last week’s generally positive employment data was the big fall in the number of “discouraged workers”—folks who want work but have stopped looking because they don’t see any jobs. From December 2010 to December 2011, that fell by 373,000, a big 28 percent year over year drop. Figuring out what exactly this means is no simple thing. All the old cliches about statistics are doubly true about labor force data. If you’re looking for work, you’re “unemployed.” If you’ve stopped looking, you’re “discouraged.” But if you haven’t looked in the last year at all, you’re no longer “discouraged.” You’e not counted in the labor force. So what happened to all those discouraged workers? Did they find jobs? Or drop out of the labor force altogether? Since December, 2010, the labor force participation rate has crept down by 3/10 of a percentage point, going from 64.3 percent of the population to 64.0 percent. That sounds like a small number, but it adds up to a lot of workers: if the labor participation rate had stayed the same, 815,000 more Americans would be working. Derek Thompson at The Atlantic has already pointed out the falling participation ratio. Thompson thinks (or hopes?) that as the economy improves the participation rate is likely to go up. Or, says Thompson, the long-term unemployed who’ve fallen out of the workforce will represent a kind of permanent shadow-group of people neither working nor counted as unemployed.

Fundamental and Mathematical Case for Structurally High Unemployment for a Decade; Shrinking Job Opportunities and the Jobs Gap; The Real Employment Situation - Since 2008 I have been stating the US would have "Structurally High Unemployment for a Decade". Indeed, based on historical trends in labor force growth, the expected unemployment rate for the number of jobs created during the recovery would be well north of 11%. Yet, the unemployment rate is currently an artificially "low" 8.5% (not that 8.5% is anything to brag about).  To show how difficult it will be to bring that rate down, let's take a look at job growth (or losses), for the last three decades (numbers in thousands). Bear in mind those tables are from the BLS establishment survey data while the unemployment rate is based off a phone survey. Nonetheless, with sufficient time (and BLS revisions), the results merge. According to Fed chairman Ben Bernanke it currently takes about 125,000 jobs a month to hold the unemployment rate steady, down from about 150,000 in 2000. The only reason unemployment rate has dropped recently is because BLS surveys say the number is negative (a shrinking labor force).  Based on historical data and Bernanke's estimates, one would have expected the unemployment rate to have risen during 2010 and peaked mid-2011. Instead, the unemployment rate fell from 10 to 8.5.

Structurally impaired jobs vs. non-impaired jobs - Here is some text from the post: One way to look at the US job market is to break it up into two components: jobs generated by structurally “impaired” and “non-impaired” sectors. Credit Suisse defines structurally impaired sectors to “include real estate related industries, finance, manufacturing, and the state and local government sector.” These are the sectors that at least in part rode the “bubble” economy wave. Many of these jobs were credit dependent, with growth beyond what the economy could sustain naturally. The chart below shows the job creation and loss of the two components. The structurally impaired sector jobs created during the period of over-capacity growth simply never returned.  The sectors were highly credit dependent and with all the deleveraging taking place, the jobs are not likely to come back any time soon… On the other hand job growth of the non-impaired sectors has almost returned to the pre-crisis levels. Could it be that 2011 is what macroeconomic recovery looks like, minus the remaining structural problems?  Hat tip goes to FT Alphaville for the pointer, and here is my earlier post on the disaggregated aggregate demand.

Hollowing out - I think there is a misguided tendancy to declare the American job market afflicted by just one problem or another; either current problems are cyclical or their structural, for instance. In fact, America's employment shortfall is very well explained by its growth shortfall. Now, it's possible that structural unemployment problems are constraining growth, though this is more difficult to show than you might think. But growth, when it occurs, seems to be generating employment more or less as we'd expect. Beneath these macro dynamics, however, there are lots of interesting things going on, some of which are a part of long-term trends. I'll just give you one quick example, which sheds some interesting light on the December employment report that came out on Friday. The American workforce, by many accounts, has been polarising. Middle-skill jobs in manufacturing and many business services have been disappearing thanks to automation and international competition, but low- and high-skill employment is increasing. Highly skilled workers have done best, low-skill workers have done poorly, and those in middle-skill employment have done very, very poorly, even as the job market has improved over the past year. So, in the year to December, employment among workers without a high-school degree rose by 126,000. Employment for workers with a college degree rose by just over 1m jobs. For those with just a high-school diploma, however, employment fell by 551,000.

Obama to launch initiative to create 110,000 unpaid summer jobs - President Obama on Thursday will unveil a summer-jobs initiative that the White House says is already on track to create 180,000 “work opportunities” in the private sector in 2012. That is the number of opportunities, which includes mentoring and unpaid internships, that companies have told the administration they are willing to create. Some 70,000 jobs are paid, the White House says. The initiative was hatched after Congress failed to approve a $1.5 billion summer-jobs fund that President Obama had been seeking as part of the American Jobs Act. “Today’s announcement is the latest in a series of executive actions the Obama administration is taking to strengthen the economy and move the country forward because we can’t wait for Congress to act,” a White House statement reads. In 60 days, the administration plans to create a jobs bank in order to facilitate more hiring of youth for summer jobs.

Obama to Propose Tax Breaks for Job Repatriations - President Barack Obama said he will propose new tax incentives to encourage businesses to "bring jobs home," a move that could sharpen differences with Republicans in an election year. Mr. Obama also said Wednesday he would suggest eliminating "tax breaks for companies that move jobs overseas." Administration officials said details won't be released until the president issues his proposed budget next month.  In past years, most of the administration's plans to limit tax breaks for multinationals have stalled amid opposition from businesses and Republicans. Tax experts said the proposals could include new investment subsidies such as more-generous depreciation, lower tax rates for income derived from innovation produced in the U.S. or expanded breaks for domestic research or manufacturing. But Republicans now appear unlikely to embrace anything short of a fundamental overhaul of the U.S. tax code, which they blame for hurting American businesses at home and abroad.

When It Comes to China, Manufacturing Workers and Goldman Sachs Have Opposite Interests - This point would have been worth making in an NYT article on Treasury Secretary Timothy Geithner's trip to China. The article notes that Geithner will likely try to prod China to raise the value of its currency against the dollar. It also reports that: "American corporations in industries like telecommunications and financial services have increasingly complained that China continues to restrict their access to domestic markets, despite pledges of openness when China joined the World Trade Organization a decade ago." Insofar as Geithner makes a priority of pushing for increased market access for the financial and telecommunications industry it will almost certainly mean less progress on raising the value of the yuan against the dollar. This means that if Geithner succeeds in getting concessions from China on market access for financial and telecommunications firms, it will likely be at the expense of achieving more progress on lowering the dollar against the yuan. This would mean in effect that he will have placed the interest of these industries ahead of the interest of U.S. manufacturing workers, since we could potentially gain millions of manufacturing jobs from a lower valued dollar.

A Shrinking Military Budget May Take Neighbors With It — Military spending has transformed the faded farmlands of northern Virginia into a land of glass-block office parks, oversize homes and sleek cars. Average household incomes there are among the highest in the United States.  The wellspring of this prosperity is not just the Defense Department’s vast payroll, nor just the fat profit margins of its contractors. It is also the Pentagon’s unmatched record in developing technologies with broad public benefits — like the Internet, jet engines and satellite navigation — and then encouraging private companies to reap the rewards.  And as the Pentagon confronts the prospect of cutting its budget by about 10 percent over the next decade, even some people who do not count themselves among its traditional allies warn that the potential impact on scientific innovation is being overlooked. Spending less on military research, they say, could reduce the economy’s long-term growth.  “If catalyzing innovation is going to be an important part of our economic strategy, then we better be careful how we handle” the military budget, said Daniel Sarewitz, director of the Consortium for Science, Policy and Outcomes at Arizona State University. “I’d like to see a lot less weapons and a lot less focus on them, but it’s not all about that.”

This Ripe Moment - The narcolepsy of the long Yuletide draws to a close and the world reawakens to its self-spun web of mutually reinforcing fiascos. Just before the holiday, a sense of futility darkened the European banking landscape as cascading sovereign default looked more and more inevitable. It was halted by a bazooka-caliber currency swap Ponzi that allowed the European Central Bank to pretend it had a $700-billion bag of sugar-plums to hand out to more than 200 banks there. That gambit will only keep up the appearance of normality for a couple of months, until the late winter bond rollover provokes a new crisis stage.   Likewise, in the USA, some pressure-cooked December employment statistics gave the false impression of a brightening jobs picture, but no major news network dared to glance behind the curtain at the short-term holiday hires, the uncounted long-term jobless, the ones who don't show up at the government offices anymore, the ones who stopped getting checks, the legions of the hopeless. A nation that can't call 'bullshit' on its own lies deserves all the suffering that might rain down upon it, and that's exactly where we are heading as things economic morph into things political.     How quaint the current Republican jousting tournament will seem in a few months when real violence rides in on the zephyrs of springtime. Each new primary is like the unloading of a Ringling Brothers clown car. There is an inverse relationship between the seriousness of these times and the laughable personalities vying for a place in history. Are they running for high office or auditioning for the role of Parson Weems in a new Lifetime Network TV mini-series? Are you charmed by their absurd casual clothing? Comforted by their know-nothing jabber about the "game-changer" of shale oil and their sincere doubts about the climate change "story?" Is it morally satisfying to know that one or another of these candidates won't drink a beer? (They'd make good Ayatollahs.) In what sort of Creationist parthenogenetic incubator are such pietistic idiots hatched? What these sanctimonious pricks don't realize they are doing is destroying the very legitimacy of the idea that we're capable of governing ourselves per se.

Americans and Innumeracy - First, are people “naturally innumerate”?  Consider their knowledge of politically relevant numbers.  Citrin and I show that citizens of many countries overestimate the percent of the population who is foreign-born.  Indeed, people tend to overestimate the proportion of the population that belongs to most minority groups (blacks, Latinos, gays, Jews, people on welfare, etc.).  And many Americans get specific policy details wrong: how many people pay the estate tax and the proportion of the budget spent on foreign aid, for example.  And some other things too. But, on average, Americans are pretty accurate in their estimates of average income.  Eric Lawrence and I have also found that they are fairly accurate in their estimates of the percent of the population with college degrees and in their estimates of the unemployment rate.  Stephen Ansolabehere, Marc Meredith, and Erik Snowberg also find that their estimates of gas prices are pretty accurate.In short, innumeracy is not a “natural” state.  The extent of innumeracy varies, depending on what numbers you’re asking people to estimate.

New study shows women get punished for seeking raises - The notion that business women don’t ask for a salary increase or high positions more often then their male counterparts has been proven untrue, according to a report from the Catalyst institute. In fact, the study revealed that there was no major difference between the number of men and women who lobbied for a bump in pay or a higher job — the difference was that men were far more likely to be fully rewarded for their persistence. But while men who asked for raises or promotions were more likely to get them than men who didn’t, perversely women who asked for similar considerations were less likely to receive them than women who never spoke up.

In Europe, a Longer Perspective on Unemployment Benefits - While Americans discuss the duration of unemployment benefits in terms of weeks, Europeans discuss them in terms of months and, sometimes, years. A few countries even pay unemployment benefits indefinitely, in some circumstances.Unemployment insurance offers funds, for a limited eligibility period (in the United States, now up to 99 weeks) to “covered” people who lost their jobs and have not yet been unable to find and start a new job. In last week’s post, I showed that the United States, for at least 50 years, has never offered unemployment benefits for so long as it does now. For the 50 years prior to December 2008, the maximum unemployment benefit period was 72 weeks during the 1992 recession. In the severe 1981-82 recession, the benefit period was much less, 55 weeks. This historical perspective may indicate that 99 weeks is long enough, or maybe even too long. However, international comparisons tell the opposite story. The chart from 2009 Congressional testimony by Gary Burtless below compares the maximum duration of unemployment insurance benefits in 21 nations of the Organization for Economic Cooperation and Development, as of 2005, measured in months. The United States had the shortest duration of the 21 countries, six months. By 2009, when Mr. Burtless testified, the United States had increased its benefit period and would increase it still after that; he did not have 2009 data on the other countries.

Should unemployment benefits come with strings attached? - In recent months, Congressional Republicans have proposed that any new extension of unemployment benefits come with strict conditions. In December, for instance, the payroll tax cut bill passed by the GOP House would have denied unemployment insurance to laid-off workers who didn’t have a high school diploma — unless those workers agreed to enroll in a GED program. That idea never made it into law, but it’s likely to resurface when Congress comes back to debate a year-long extension of the payroll tax cut. The main moral complaint about the proposal, offered up by Timothy Noah here, is that it’s unfair to deny benefits to people who have held down jobs for years or decades, essentially paid their unemployment taxes, and then got laid off — all because they never finished high school in the first place. But there’s also a pressing practical concern, explored in this new paper from the Center and Budget and Policy Priorities. Thanks to recent budget cuts, adult-education classes are already under extreme duress and have long waiting lists. Forcing even more people to enroll would only worsen the situation.  As Robert Greenstein notes, career, adult, and technical education courses currently receive 15 percent less funding, in real terms, than they did in 2008 — due in part to recent spending cuts by Congress. In one recent survey, some 160,000 people were on waiting lists for adult-education programs and 72 percent of programs around the country had queues. So there’s a high chance that under the GOP proposal many newly laid-off workers without high-school diplomas wouldn’t even be able to find space in an education course. And that means they’d simply be denied benefits altogether.

Everyone’s Got a Right to Their Own Opinions… …but not to their own facts. When Republican presidential candidate Mitt Romney asserted that federal low-income programs are administered so inefficiently that “very little of the money that’s actually needed by those that really need help, those that can’t care for themselves, actually reaches them,” my colleagues at the CBPP got to work on this graph. It shows that “federal administrative costs range from less than 1 percent to 8 percent of total federal program spending.  Combined federal and state administrative costs range from 1 percent to 10 percent of total federal- and state-funded program spending.” Gov Romney is singing from the same playbook as Rep Paul Ryan along with a litany of conservatives whose goal for years has been for the Federal gov’t to shed the responsibility for Medicaid, food stamps (SNAP), low-income housing, and so on.  Once you “block grant” these functions to the states, it’s easier to cut them.  And remember, this is from a candidate (and the same is true for the House R’s budget) that wants to cut taxes deeply for the richest households. So he’s launching his attack based on inefficient administration—the claim that most of the dollars don’t reach the clients.  Trouble is, the facts got in the way.

The "I" In Union - At a time when unions are floundering and popular sentiment toward organized labor is at an all-time low of 45 percent, one workers’ organization is thriving. The Freelancers’ Union, a nonprofit organization based in a trendy Brooklyn neighborhood, has more than 80,000 members in New York and 150,000 members in other states. In the seven years it has existed, the Freelancers’ Union has opened its own fully owned, for-profit insurance company, The Freelancers’ Insurance Company, and has put in place a retirement plan for independent workers. The organization hosts networking events and political canvassing; raises money for politicians who advocate for freelancers’ rights; lobbies at the state government level for legislative change; and even offers its members “corporate discounts” on gyms, Zipcars, and hotels. It is now the seventh largest union in New York State.The FU’s efforts to accrue new members have been aggressive. Lodged between advertisements for skincare gurus and community colleges in the New York City subway, its advertisements are ubiquitous. Hip, even Obamanescent, their slogans combine squishy ideals of teamwork, justice, and co-operation—”Organize and Mobilize”; “Working for the Radical Notion of Fairness”—with a Generation Y self-centeredness: “There’s an I in Union.” The target demographic of these ads is the penurious creative class—the educated, diverse, gay-friendly subjects of business guru Richard Florida’s The Rise of the Creative Class. The concerns they convey, and the lifestyle they advertise, are tailored for those who do not partake in the suit-wearing, office-working, boss-having side of American life.

Define Rich V: Looking at the historical labor economy - We are taking a little side trip in this series of defining rich based on the prior tax rate schedules but, this post is keeping with the process of looking at history for markers as to the definition of rich.  In our local city there is another textile mill going to the grave. We have lost a couple of huge mills to fire in the last decade.  The local paper did an article on this mill known as the French Worsted Mill. The article in the paper talked about a Mr. Bacon. He worked in the mill in 1956 along with 700 to 800 other residents. The job was not as a machine tool maker (the mill as most had their own machine shop) or a special machine operator that required special skill. He was a laborer. The tasks mentioned were stuffing waste wool into burlap sacks or “picking up the yarn” or fetching parts from the machine shop. We're talking menial labor tasks.  For this work Mr. Bacon was paid $1.80 per hour. The minimum wage was $1.00 per hour. At some point he was earning $80 per week for 40 hours work. This is $4160 per year. With this income Mr. Bacon was able to put himself through college and became a teacher in the local school system. It was not just any old college he went to. It was Providence College with a tuition of $500 per year. Yes, a private college that cost only 1/8th of his annual income.  Mr. Bacon's story with this mill is the proof that the 2 parties are not talking about a fantasy time in our history. It did exist. Here's the problem though with both of their directions. I'm just going to list them.

America’s Unlevel Field, by Paul Krugman - Americans are much more likely than citizens of other nations to believe that they live in a meritocracy. But this self-image is a fantasy: as a report in The Times last week pointed out, America actually stands out as the advanced country in which it matters most who your parents were, the country in which those born on one of society’s lower rungs have the least chance of climbing to the top or even to the middle.  And if you ask why America is more class-bound in practice than the rest of the Western world, a large part of the reason is that our government falls down on the job of creating equal opportunity.  The failure starts early: in America, the holes in the social safety net mean that both low-income mothers and their children are all too likely to suffer from poor nutrition and receive inadequate health care. It continues once children reach school age, where they encounter a system in which the affluent send their kids to good, well-financed public schools or, if they choose, to private schools, while less-advantaged children get a far worse education.  Once they reach college age, those who come from disadvantaged backgrounds are far less likely to go to college — and vastly less likely to go to a top-tier school — than those luckier in their parentage. At the most selective, “Tier 1” schools, 74 percent of the entering class comes from the quarter of households that have the highest “socioeconomic status”; only 3 percent comes from the bottom quarter.

White House’s Krueger Warns of Shrinking Middle Class - The White House’s top economist on Thursday said income inequality in the United States has reached the point where the “middle class has shrunk” and it is “causing an unhealthy division in opportunities, and is a threat to our economic growth,” according to prepared remarks. Alan Krueger, a labor economist who chairs the White House’s Council of Economic Advisers, said in a speech to the Center for American Progress that “restoring a greater degree of fairness to the U.S. job market would be good for business, good for the economy, and good for the country.”  Mr. Krueger steered clear of any reference to the campaign trail debate during his prepared remarks. Rather, he based his speech mostly on research and statistics, finding that U.S. income distribution since World War II has shown income distribution growing together for most everyone in the first three decades after the war. But in the subsequent three decades, earnings grew more for the wealthy and less for the low-income, he said, in part because of a variety of tax and economic changes, such as the impact of computers and automation.

Regional Misery Distribution - Apropos of the latest Archdruid report, I went in search of some data on the geographic distribution of long-term income growth in the US.  So far, the most useful thing I found is this Brookings Institute interactive map.  It's not exactly what I'm looking for but the above shows the change in median household income 2000-2010 by metropolitan area. That's a pretty bleak looking map isn't it?  There's hardly anywhere in the country that ordinary folks improved their lot over the last decade.  Still - some places are worse than others with the midwest and upper south and Florida being hardest hit.  Across these areas, median income declined 15-25%: that's a really dramatic change in material standard of living.  It's also worth noting that it's even worse than it looks in the sense that the blue circles are on a quite different scale than the red circles. I also made the same map for 2000-2007 to see how much of this is due to the housing bust:  You can see that the pain in the midwest was already severe (and was going on well before 2000) but was considerably worsened by the recession (check the difference in map scale).  The pain in California and Florida is largely since the housing bust.

Rising Share of Americans See Conflict Between Rich and Poor - Pew - The Occupy Wall Street movement no longer occupies Wall Street, but the issue of class conflict has captured a growing share of the national consciousness. A new Pew Research Center survey of 2,048 adults finds that about two-thirds of the public (66%) believes there are “very strong” or “strong” conflicts between the rich and the poor—an increase of 19 percentage points since 2009. Not only have perceptions of class conflict grown more prevalent; so, too, has the belief that these disputes are intense. According to the new survey, three-in-ten Americans (30%) say there are “very strong conflicts” between poor people and rich people. That is double the proportion that offered a similar view in July 2009 and the largest share expressing this opinion since the question was first asked in 1987. As a result, in the public’s evaluations of divisions within American society, conflicts between rich and poor now rank ahead of three other potential sources of group tension—between immigrants and the native born; between blacks and whites; and between young and old. Back in 2009, more survey respondents said there were strong conflicts between immigrants and the native born than said the same about the rich and the poor.1

In an OWS Era, Americans Are Much More Aware of Class Tension - It looks like Occupy Wall Street's message has resonated even after Zuccotti Park cleared out. A new Pew Research Center survey reveals that two-thirds of the public believes there are “very strong” or “strong” conflicts between America's rich and poor—a number that's up 19 percentage points since 2009. According to the survey, income inequality now trumps tensions arising from race or immigration—popular answers only a few years before.  Younger people, women, Democrats and African Americans are the most likely to sense class warfare. But the group receiving the most dramatic wakeup call? White people; the number of whites who saw class as a dividing factor increased by 22 percent. That makes sense—people who normally enjoy a higher societal status are more likely to experience a loss of that status, leaving them more attuned to post-recession class tension. It's clear that the economic downturn, and pushback in the form of the Occupy movement, have introduced concepts like "wealth gap" and "income inequality" into the popular lexicon. But what's interesting is that we still believe this chasm is temporary. While 46 percent of us believe that most rich people “are wealthy mainly because they know the right people or were born into wealthy families,” nearly as many think they've earned it. Forty-three percent say wealthy people became rich “mainly because of their own hard work, ambition or education,” results that have stayed virtually the same since 2008. The implication here is that, yeah, there's a clash between rich and poor, but there's still a chance to pull ourselves up by our bootstraps, too.

Survey Finds Rising Perception of Class Tension Conflict between rich and poor now eclipses racial strain and friction between immigrants and the native-born as the greatest source of tension in American society, according to a survey released Wednesday.  About two-thirds of Americans now believe there are “strong conflicts” between rich and poor in the United States, a survey by the Pew Research Center found, a sign that the message of income inequality brandished by the Occupy Wall Street movement and pressed by Democrats may be seeping into the national consciousness.  The result was about a 50 percent increase from a survey in 2009, when anger over the financial industry’s role in the recession was festering. In that survey, 47 percent of those polled said there were strong conflicts between classes.

The Biggest Story of Our Time - Bill Moyers: The growth of inequality in this country is the biggest story of our time. The "have-nots" now have less than they ever did. The "have-it-alls" now have more than they ever did. Since 1979, 40 percent of the growth of income has gone to one percent of the population. This is changing us radically. You go back to the last part of the 19th century, the first gilded age. We're living in the second gilded age. The first gilded age, the industrial revolution, released enormous wealth at the top and excruciating misery at the bottom. It took the populist movement, the progressive movement, finally leading into the New Deal and the Fair Deal, before we began to correct those imbalances.

Opportunity in America: The Disadvantages Start at Conception - A growing body of evidence suggests that the United States, far from being the land of opportunity celebrated in our history and our literature, is instead a country where class matters after all, where upward mobility is constrained, especially among those born into the bottom ranks.  What could be done to improve the upward mobility chances of less advantaged children?  First, it would help if more parents were ready to take on the most important responsibility any adult normally assumes, which is the decision to have a child. Unfortunately, for far too many teens and young adults, this is not a carefully planned decision. Second, low-income children enter school far behind their more advantaged peers in vocabulary and learning-related behaviors such as the ability to sit still or follow directions. High-quality early-education programs can compensate for some of these deficits, but too few children are enrolled and too few programs are high quality. These  These trajectories can be changed in part by putting better teachers in the classroom, setting higher standards and expecting students and parents to be full partners in this effort. Third, no one should graduate from school without the specific skills needed by today’s employers. Not everyone is going to benefit from a traditional four-year college degree. But more career and technical education, on-the-job training or community college programs could produce a more highly skilled work force.

How Inequality Damages Economies - Looking back at Irving Kristol's 1980 essay "Some Personal Reflections on Economic Well-Being and Income Distribution," as Foreign Affairs recently did, provides a useful intellectual lens from the past to focus the economic conversation today. Kristol argued that economic inequality was "but one manifestation of how nineteenth-century ideologies -- and most especially the socialist ideologies -- have so decisively shaped modern social science." Moreover, he wrote, income distribution does not really change over time so it is, as a subject for study, inconsequential. Fortunately, economists failed to take his advice; recent studies of inequality reveal the limitation of Kristol's historical perspective. Kristol narrowly focused on one long spell of stable and relatively even distribution. But a careful look at the varying levels of inequality in different countries demonstrates just how much societal divides in wealth really matter. Countries with high inequality are far more likely to fall into financial crisis and far less likely to sustain economic growth.

Why Is Inequality Higher in America? - The Linz and Stepan article that I linked last week suggests that we need to look to comparative politics rather than Americanist political science in order to understand the sources of American inequality. the preoccupation of many Americanists with America’s distinctive governmental institutions—Congress, the presidency, the Supreme Court—obscures this inequality and what it means for the US political system. It thus seems to us that Americanists’ ability to analyze American politics would be enhanced by locating these problems in a larger, comparative context. Such a reconceptualization of American politics could help to broaden our discipline and enhance the quality of its generalizing theories. To bolster this broad argument, they argue that the unusually large number of veto players in the US political system is a major cause of inequality.

Be Vewy, Vewy Quiet - Krugman - Andy Rosenthal gets a bit of a laugh out of Mitt Romney’s insistence that the only reason anyone would talk about inequality is the “politics of envy”, and that if the subject is discussed at all, it should only be in “quiet rooms”. Indeed. Because there’s no way anyone who isn’t motivated by envy could be interested in and possibly concerned about this: Trickle-down economics has now become shut-your-trap economics.

This Week in Poverty: TANF Is Broken - Nation readers know the record-setting levels of poverty in America today: nearly one in six citizens below the official poverty line of $22,300 for a family of four, including one of five kids. African-American and Hispanic children are even worse off, with poverty rates of 40 percent and 37 percent, respectively. More than one in three Americans are struggling on incomes below twice the poverty threshold—roughly $45,000 for a family of four. In 2011, The Nation kept the plight of the poor and near-poor front and center. When Congress debated budget cuts in the abstract, The Nation showed their real human costs; when Representatives voted against the interests of their districts, The Nation held them accountable; and when decimated state and local budgets hit poor people with a vengeance, The Nation told their stories. Finally, if you didn’t catch the year-end Occupy the Safety Net issue, check it out, you will get a clear picture of the state of the welfare system—food stamps, housing, TANF and more—it sure ain’t the hammock Congressman Paul Ryan says it is. In 2012, will post This Week in Poverty every Friday morning as part of its continuing coverage of an issue editor Katrina vanden Heuvel calls “the shame of our nation.” The blog will track the vital statistics that are too often ignored; provide updates on legislative efforts at the national, state, and local levels; report on the battles activists are fighting in their communities; summarize cutting-edge ideas, studies, and proposals offered by antipoverty experts and organizations; find opportunities for action, highlight programs that are working, flag must-read articles, bust myths, list quotes of the week, and more.

Poverty in America likely to get worse, report finds - Millions of Americans will be forced into poverty in the coming years even as the US hauls itself out of the longest and deepest recession since the second world war. A study from Indiana University, released on Wednesday, says the number of Americans living below the poverty line surged by 27% since the beginning of what it calls the "Great Recession" in 2006, driving 10 million more people into poverty. The report warns that the numbers will continue to rise, because although the recession is technically over, its continued impact on cuts to welfare budgets and the quality of new, often poorly paid, jobs can be expected to force many more people in to poverty. It is also difficult for those already under water to get back up again. "Poverty in America is remarkably widespread," concludes the study, At Risk: America's Poor During and After the Great Recession. "The number of people living in poverty is increasing and is expected to increase further, despite the recovery." The white paper, drafted by the university's school of public and environmental affairs, which is among the best ranked schools of its kind in the US, says that six years ago, 36.5 million Americans fell below the poverty line. By 2010, the number of people living in poverty rose to 46.2 million and continued to grow over the past year.

Soul kitchen - They stand in line so patiently, you'd never know some of them haven't eaten since yesterday. The line's so long it winds from the soup kitchen door along the wall and around the corner to the back, then curves down the alley and out to the street on the side. And no matter how hard the wind blows or how heavy the rain falls, they wait politely. By the end of the day, a thousand of them will have stood here. The crowd is a mix of those who are somewhat poor to those who are desperately so. Some are homeless and have to scrounge every meal, while others are just short on their assistance at some point each month and need a little help. But once in line the distinctions are blurred. They're just hungry people waiting for a meal.

White-Collar Workers Join Crowd Straining Food Banks - After losing her job as a consultant for nonprofits, Martha Heassler and her husband, a graphic artist, no longer had money for their daughter’s college education, new clothing or groceries. “We’re waiting for my husband’s paycheck, and we probably have less than $200 to our name,” . She now makes weekly trips to the Open Door Food Pantry in Gloucester, Massachusetts, to pick up bags of food that include meat, eggs, yogurt and vegetables. “Without the network of food pantries around us, I don’t know how we would have eaten,” said Heassler, who holds a bachelor’s degree in English literature. As the sluggish economy idles more middle-class individuals and families, their donations to food banks and soup kitchens have evaporated, hitting the nonprofits from both ends. “We’re seeing many faces from the middle class who had been donors who now need support from our food bank,”

Occupants told to leave Las Vegas homeless encampment - Las Vegas police visited the encampment early Monday. Citing sanitation issues, they handed out fliers telling the scores of campers that they are trespassing and need to move along so the area can be cleaned later this week. Those who refuse can be cited or arrested, though police said later Monday they don't plan to do either. Regional officials in recent weeks have kept a wary eye on the encampment, the largest they have seen go up in the lot in years. Tents and other makeshift shelters line the boundaries of the empty lot at the edge of Las Vegas's homeless corridor, where people gather to be near shelters that serve free meals. The number of people living on the streets in and around the area more than tripled since 2009, according to a January 2011 homeless count.

Squatters in Texas Town Use Arcane Law to Claim Vacant Homes - Imagine coming back from an extended stay away from home only to find someone has set up shop in your house, claiming it now belongs to them. That’s just what’s happened in dozens of cases in Tarrant County, Texas, where the District Attorney says crooks are trying to use a decades old law to conduct a new scam. “It's just people trying to get something for nothing,” says Tarrant County DA Joe Shannon. The problem first came to Shannon’s attention this year, when police agencies started calling about strange but similar cases. One of them involved Joe Brunner, the head of a homeowners association in Arlington, Texas. His neighbor had been in Houston for months getting chemotherapy when the HOA’s security detail called Brunner saying someone else was in the home. When Brunner contacted the man living inside, the man claimed he now owned the home. But that wasn’t all. “There was a large dumpster in the driveway,” says Brunner. “He filled it up with items from the house.” Brunner called the police. When they arrived, the squatter showed them a document claiming something called “adverse possession.”

Social graph analysis reveals criminal conspiracy of slumlords - OrgNet, a data-mining consultancy, describes how it mined the social graph of the interlocking, every changing owners of several slum-buildings to show that they were all in a criminal conspiracy to avoid having to do the legally required maintenance necessary to keeping their buildings habitable and safe.  Figure 6 shows the complete conspiracy. It was now obvious that properties exchanged hands not as independent and valid real estate investments but as a conspiracy to avoid fixing the building violations. The green links represent borrowed money flowing into the buildings through new mortgages. As time went on, and the buildings appreciated in value during a real estate boom -- loans from the mortgage company allowed the owners to "strip mine" the equity from the buildings. This is a common slumlord modus operandi -- they suck money out of a building rather than put money back in for maintenance. ...The city attorney combined the network analysis, along with the city's own extensive investigation and was able to get a conviction of key family members. Later, all of one building's tenants filed a civil suit using much of the same evidence and won a sufficient award to allow all of them to move out into decent housing. Several tenants used a part of their award to start businesses.

Video: Private Sector Gets Job Skills; Public Gets Bill - When companies are deciding where to build new facilities or whether to expand in places where they already have factories or offices, states compete to shower them with incentives like tax breaks and help buying land. Increasingly, companies have come to expect that state and local governments will pay for job training, too. For Sunday’s paper, I wrote about a $1 million customized training program that North Carolina designed for the benefit of Caterpillar, Inc., the global industrial equipment maker. The company opened a new plant in Winston-Salem in November, and the state is paying to train nearly 400 workers who will make axles for mining trucks. North Carolina is also spending about $1.5 million to train workers for a new Honda Aircraft plant in Greensboro. About 163 workers went through training at Guilford Technical Community College in various areas including jet assembly and electrical system installation in the hopes of securing a job. Because Honda delayed the opening of its production lines, some of those workers, like Kent McDaniel, featured in this report from the video journalists at Purple States, decided to seek work elsewhere. Others, like Linda Merritt, stuck it out and are now working at Honda.

Florida Legislation Paves Ground for Water Privatization - Recent moves by Tampa Mayor Buckhorn and state Rep. Dana Young (R-FL) have some residents fearing privatization of the state's water is on the way. Buckhorn and Young have a bill pending in legislature, HB 639, that would transfer public drinking water and reclaimed wastewater from being a public resource to being owned by the utility company. In a time of increased attention to water scarcity, part of Young's goal, to use reclaimed wastewater instead of potable drinking water for lawn sprinklers, appears laudable. Yet, as The Tampa Tribune reports: Critics say Buckhorn's proposal is the first step toward privatizing the state's water supply. They also say the proposal could turn the state's water cycle – from well to city supply and back – into a one-way street should utilities and other big users sell their wastewater instead of returning it to the environment. "When that water is taken out of the aquifer, it could end up in China or Timbuktu or anywhere," said Charles Van Zant, a Republican state representative from Keystone Heights in Clay County. "Day by day by day this will destroy the Florida aquifer."

Do Public-Private Partnerships Build Roads More Quickly Or At A Lower Cost? - CBO Director's Blog - Currently, the federal government and state and local governments face calls for more and better highways but confront budgetary constraints in providing them. Some analysts have suggested that public-private partnerships might supply at least a portion of that capacity by providing additional financing for road projects and improving the efficiency of a highway’s construction and operation over the life of the road. A CBO study, which was prepared at the request of the Chairman of the Senate Budget Committee, focuses on the following questions:

  • What are public-private partnerships and how often are they used?
  • Does private financing increase the resources available to build, operate, and maintain roads?
  • Do public-private partnerships build roads more quickly or at a lower cost?

States Attempt to Instill 'Work Ethic' by Rolling Back Child Labor Protections - It’s been a long time since the engines of American industry were driven by tiny fingers. So when Newt Gingrich recently proclaimed, “Young people ought to learn how to work,” and suggested that children could develop a strong work ethic by working as janitors in their own schools, many Americans probably missed the throwback to the early twentieth century, when hundreds of thousands of children toiled in factories. But after decades of campaigns against youth exploitation, the right is rekindling vestiges of the sweatshop era with legislation aimed at rolling back child labor laws.   Maine Republicans sought to ease protections for young workers with amicably named legislation to “Enhance Access to the Workplace for Minors.”  Meanwhile, Wisconsin’s legislature, following a vicious battle with unions over protections for collective-bargaining rights, repealed regulations on the hours that 16- and 17-year-olds could work during the school week and breaks. In Missouri, Republican State Senator Jane Cunningham proposed removing restrictions on hiring kids under age 14 and on the hours and times of day that teens can work.

The Next Immigration Challenge - THE immigration crisis that has roiled American politics for decades has faded into history. Illegal immigration is shrinking to a trickle, if that, and will likely never return to the peak levels of 2000. Just as important, immigrants who arrived in the 1990s and settled here are assimilating in remarkable and unexpected ways.  Taken together, these developments, and the demographic future they foreshadow, require bold changes in our approach to both legal and illegal immigration. Put simply, we must shift from an immigration policy, with its emphasis on keeping newcomers out, to an immigrant policy, with an emphasis on encouraging migrants and their children to integrate into our social fabric. “Show me your papers” should be replaced with “Welcome to English class.”  The most startling evidence of the falloff is the effective disappearance of illegal border crossers from Mexico, with some experts estimating the net number of new Mexicans settling in the United States at zero. The size of the illegal-immigrant population peaked in 2007, with about 58 percent of it of Mexican origin, according to the Pew Hispanic Center; since 2008, that population has shrunk by roughly 200,000 a year. Illegal immigrants from Asia and other parts of the globe have similarly dwindled in numbers.

Divided Loyalties - Black public intellectuals have, save a few exceptions, failed us in the age of Obama. The debate about race, racial inequality, and black politics has been largely polarized into two camps, either for or against the president. The few that attempt to provide more nuanced analyses of contemporary racial politics are mostly marginalized or ignored.  So Dawson’s proposal is refreshing because for the most part it, rightly, ignores Obama. And it is inspired in thinking through the transformative possibilities of a progressive black politics at a time when Occupy Wall Street has focused national political discourse on inequality.  I agree with Dawson’s analysis of the problem and much of his call to action, especially the urgent need to rebuild a radical and vibrant black politics around pragmatic utopias that acknowledge things as they are and imagine the society we want to create. And I can’t help but be struck by how Dawson’s vision—of a transformative black politics that challenges white supremacy and capitalism—resonates with one the late Manning Marable long articulated.

Vital Signs: Slowing Cuts in State, Local Government Jobs - Job cuts in state and local government have ebbed. State and local governments — from big cities to rural school districts — cut 14,000 workers in December 2011, compared with 24,000 that were cut in the month of December 2010. With tax growth sluggish and budgets still tight, the government sector will continue to be a weak point in the job market, but its drag on employment has eased.

Monday Map: Sales Tax Rates by Zip Code - Today's map shows combined state and local sales tax rates for each zip code in the United States. Click on the map to enlarge it.

State lawmakers open session facing $2 billion budget shortfall -- The Florida Legislature convenes Tuesday for an unusual and unpredictable 60-day session that will be dominated by two highly partisan subjects: the redrawing of political districts and yet another round of budget-cutting. As lawmakers pack their bags for the next two months, they are adding sweaters and heavy coats to ward off the biting chill of a January in North Florida. The Constitution requires that a reapportionment session must begin in January, not in March as it usually does. Beyond redistricting and the budget, legislators are expected to search anew for a way to curb rampant fraud in the state’s no-fault car insurance system; debate the creation of three new casino gambling resorts; and consider applying the sales tax to online consumer purchases of books, clothing and other items. Gov. Rick Scott wants legislators to find another $1 billion for public schools, even in a year when they must close a projected budget shortfall of up to $2 billion.

Illinois Seen Paying Quadruple 10-Year Average Rate -- Illinois faces borrowing costs more than quadruple its 10-year average in a sale of $800 million of bonds after it became the lowest-rated U.S. state because of unpaid bills and the worst-funded pension system. Illinois state and local general-obligation bonds yielded 182 basis points more than top-rated debt yesterday, according to data compiled by Bloomberg. That's more than four times the 10-year average of 43 basis points and about triple the 66 points over five years. A basis point is 0.01 percentage point. Moody's Investors Service cut $32 billion of Illinois debt one level on Jan. 6 to A2, the sixth-highest rating and a step lower than California. Moody's cited "chronic" late bill payments and unfunded retirement obligations. The pension has assets to cover only 45 percent of projected liabilities, the least of any state, according to a study by Bloomberg Rankings. "Investors are going to demand a discount because of the major liabilities and pension fund that need to be addressed,"

Virginia Bill to Consider Establishing a State-Owned Bank - A Virginia lawmaker is urging his colleagues in Richmond to consider creating a state-owned bank that would use deposits from residents and state agencies to lend to local businesses and stimulate economic growth. The Washington Business Journal reported Wednesday that Del. Bob Marshall, a Republican, introduced legislation this week to study the viability of opening a bank that would be modeled after Bank of North Dakota, the only state-owned bank in the country. The idea of creating a state-owned bank has been gaining traction in a number of state legislatures of late. Lawmakers in California, Massachusetts, Oregon, Hawaii and several other states all introduced bills last year that sought to establish a state-owned bank or study the idea of creating one and it is expected that similar bills will be reintroduced early this year when state legislatures convene. In introducing bills last year, most lawmakers said that state-owned banks could pick up the slack from traditional banks that have scaled back their lending in the wake of the financial crisis. A state-owned bank could also help states close budget shortfalls because, if it is modeled after the Bank of North Dakota, all profits would be returned to state coffers.

California Cash Deficit Widens to $2.5 Billion From Estimate in First Half - California tax collections since the fiscal year began in July have fallen short of the budget estimate by $2.5 billion, the state controller’s office said. Revenue fell $1.4 billion below expectations in December alone, Controller John Chiang said in a statement today. The revenue shortfall since the start of the fiscal year had declined to $1 billion by the end of November. Chiang also said that revenue in December came in $165 million below what Governor Jerry Brown projected in his latest spending plan, unveiled Jan. 5. “While we saw positive numbers in November, December’s totals failed to meet even the latest revenue projections,” Chiang said in a statement. “Coupled with higher spending tied to unrealized cost savings, these latest revenue figures create growing concern that legislative action may be needed in the near future to ensure that the state can meet its payment obligations.”

California's High Speed Rail Derails - The head of California's High Speed Rail project has resigned.  You would think that a multi-billion dollar, 30 year project would offer some intellectual challenges for its leader but "Roelof van Ark, chief executive officer of the California High-Speed Rail Authority, announced this afternoon that he is quitting, the latest setback for the state's beleaguered campaign to build a nearly $100 billion rail network in California." What is going on?  We know that California and the Federal Government both have large fiscal deficits and this may be part of the issue but what happened to the momentum?  As a guy who flies to Northern California often, and who has traveled on a Chinese Bullet train,  I haven't supported this train.  I figure that for political reasons that it will stop too often between San Fran, LA and San Diego and thus never achieve the MPH that it has promised.   I assume that its ridership will be too low to cover the enormous fixed cost of constructing it.  I know that HSR has a smaller carbon footprint than air travel but what would have to be the value per ton of GHG emissions for HSR to be a wise investment?  In the absence of Federal subsidies, how will California finance this train?   $100 billion dollars in a state with 35 million people works out to $3,000 for each man, woman and child.   Are we willing to pay that average cost? 

Oakland plans to send 1,500 pink slips out -- There are a lot of anxious city worker in Oakland. They just got word that hundreds of pink slips are going out next week. The layoffs are the result of a sudden loss of money from Sacramento. When these 1,500 plus layoff notices start going out next week, we're told it will be the largest number ever sent out by this city at one time. When the actual layoffs occur, it will be more like several hundred, but there's no doubt this process will be painful for all involved. "It's devastating for this organization," said Oakland city administrator Deanna Santa. Santa confirmed for ABC7 more than half her city's employees will receive layoff notices, starting next week, that's more than 1,500 pink slips in all. "We have a workforce that will be reduced in a very short period of time without the normal engagement process that this city has put in place in the past," said Santana. Still, Santana said it has to be done after the California Supreme Court's decision supporting the disbanding of redevelopment agencies. Union leaders say the huge number of notices is heavy-handed and unnecessary.

Downs and Ups of Driving in Los Angeles - The southwest border of Beverly Hills runs along Whitworth Drive. In some ways, it is impossible to distinguish where that city ends and this sprawling one begins. The houses are not drastically different and the lawns are manicured on both sides of the road.  Oh, but that road.  Drive west on Whitworth and the car rides like a luxury sedan. Drive east and it is more like a covered wagon bouncing across a pockmarked prairie.  There are no snowstorms here. The swings in the weather might make those from heartier parts of the country scoff. But there are potholes aplenty. Indeed, on some major streets, every downpour seems to bring another jarring rut.  Late last year, the mayor floated a plan to spend $750 million over the next several years to fix roughly 1,500 miles of streets, far more than the city has been able to do in the past several decades. But members of the City Council have voiced skepticism over the plan, which they said would cost too much money.

Rural schools struggle to keep buses running - There are no sidewalks, bike lanes or public transportation in Forks of Salmon, a tiny, forest-shrouded community deep in the mountains of Siskiyou County. For seven of the 10 students at Forks of Salmon Elementary School, getting to class means taking a 45-minute school bus ride on 18 miles of a narrow, two-lane road that twists and turns with the Salmon River. Until this month, most of the $32,000 the school spends each year to bus students was covered by the state. But now, Forks of Salmon and other rural school districts are grappling with how to keep their buses running. Last week, Gov. Jerry Brown proposed eliminating school transportation funding [PDF] next year, just weeks after announcing trigger cuts that wiped out $248 million for buses this year. California does not require school districts to provide home-to-school transportation, except for certain special education students and those who are severely disabled or orthopedically impaired; less than 16 percent of students statewide ride school buses. But ridership is significantly higher in many rural areas, where sparsely populated, sprawling communities necessitate bus service, officials say.

Chicago Public Schools report more homeless students - Officials with Chicago Public Schools say the number of homeless students has increased compared with last year. The Chicago Sun-Times reports that there were more than 10,660 homeless students at the beginning of the school year. That's nearly 1,500 more than the same point in the previous school year. Last year the school ended with a record 15,580 students who were homeless. Nicole Amling is the director of public policy at the Chicago Alliance to End Homelessness. She says many families are becoming homeless for the first time because they've lost housing. Others are having a difficult time finding work. The National Center on Family Homelessness reports that 57,000 Illinois children were homeless in 2010. That's up from 30,636 in 2006.

Monterey County sees a rise in homeless students, a need for resources - Tiffany DeGama says her 14-year-old son has had odds stacked against him for most of his life. Moving from motel to motel in Salinas, DeGama, her son and her mother found themselves in the company of drug addicts and prostitutes, surrounded by domestic violence and poverty. The volatile, impoverished environment to which DeGama's son was exposed has affected him emotionally, psychologically and academically, she said. DeGama and her family escaped the "motel trap" about two years ago. But for the majority of her son's childhood, he was counted among homeless students in Monterey County, a group whose numbers are on the rise. As of the 2010-11 school year, the latest for which data are available, Monterey County had 3,587 homeless students ranging in age from pre-schoolers to seniors in high school, according to the California Department of Education. That number is based on the 2001 No Child Left Behind McKinney-Vento Homeless Act's definition. Under that definition, children and teens are considered homeless if they live in a motel, hotel or shelter, on the streets, or if their families are living with a friend, relative or someone else because they lost their home or cannot afford housing.

Number of homeless students in Central Florida nears 10,000 as DCF issues call to action - The number of homeless students in Orange, Osceola and Seminole counties has ballooned 79 percent since January 2009. And officials project that, by summer, more than 10,000 school-age children across the three counties will have been homeless at some point during the year, many of them for months on end. The news came Friday amid a "call to action" by the Florida Department of Children and Families, which hopes to enlist Central Florida businesses, charities, churches and individuals to help homeless children and their parents.Under pressure since the broadcast of two CBS "60 Minutes" segments focusing on the region's large number of homeless families, the department held a three-hour forum at First Baptist Church of Orlando that was part rally, part status report, part warning that the problem will get worse before it gets better.

Homelessness on the rise in Twin Cities schools - Like many of Edison High School’s homeless and highly mobile students, senior Shayla Perry’s* story is full of twists and turns, long bus rides, new neighborhoods and schools full of strangers. It started Shayla’s freshman year. After a fire destroyed her family’s Chicago home (and all of Shayla’s stuff, including her eighth grade graduation dress), Shayla moved to Apple Valley and started at Rosemount High. At first, the family stayed with her brother, but it’s hard to live in someone else’s home and it’s hard having someone else live in yours, so the family moved to a shelter in Eagan, and a bus drove Shayla back and forth to Rosemount. Then there was the place in North Minneapolis, with a different brother’s girlfriend, and a cab that always dropped Shayla off late to school. Before freshman year was up, her family was in St. Paul, and Shayla started at Como High School, then North Minneapolis where a tornado knocked her house crooked and as a bonus destroyed the belongings she and her family had scattered throughout homes in the neighborhood

The depressing toll of the Great Recession - In late 2009, as the unemployment rate in San Joaquin County, California, reached 18 percent and one in twelve homes were being foreclosed, two high school students in the town of Ripon, population 15,000, committed suicide within two months of each other. Over the next eighteen months, sixteen more teenagers around the county took their own lives, a not-uncommon occurrence that public health researchers refer to as “suicide contagion.” Years of declining budgets had cut the number of counselors, nurses and psychologists in county schools, impairing the ability of individual districts to handle the needs of grieving students, parents and communities on their own. So school officials in cities like Ripon, Stockton, Lodi and Linden turned to each other for help. The spirit of cooperation helped the team fashion an effective crisis response and ease the pain of some survivors,. But, by definition, it came too late, he said. “We’re doing everything we can to partner and develop these mutual aid plans,’’ Love said. “But we’re still band-aiding. When you’re doing crisis work, you’re at the back end. The tragedy is that we don’t have the resources early in the process.”

Why Is Congress Redlining Our Schools? - Redlining was the once-common practice in which banks would draw a red line on a map—often along a natural barrier like a highway or river—to designate neighborhoods where they would not invest. Today a new form of redlining is emerging. If passed, the long-awaited Senate bill to reauthorize the Elementary and Secondary Education Act (ESEA) would build a bigger highway between low-performing schools serving high-need students—the so-called “bottom 5 percent”—and all other schools. Tragically, the proposed plan would weaken schools in the most vulnerable communities and further entrench the problems—concentrated poverty, segregation and lack of human and fiscal resources—that underlie their failure. Although the current draft of the law scales back some of the worst overreaches of No Child Left Behind, the sanctions for failing to make “adequate yearly progress” that have threatened all schools under NCLB are now focused solely on the 5 percent of schools designated as lowest-performing by the states. As we have learned in warm-up exercises offered by the Obama administration’s Race to the Top initiative, these schools will nearly always be the ones serving the poorest students and the greatest numbers of new immigrants. In many states they will represent a growing number of apartheid schools populated almost entirely by low-income African-American and Latino students in our increasingly race- and class-segregated system.

The US schools with their own police - More and more US schools have police patrolling the corridors. Pupils are being arrested for throwing paper planes and failing to pick up crumbs from the canteen floor. Why is the state criminalizing normal childhood behavior?  Each day, hundreds of schoolchildren appear before courts in Texas charged with offences such as swearing, misbehaving on the school bus or getting in to a punch-up in the playground. Children have been arrested for possessing cigarettes, wearing "inappropriate" clothes and being late for school. In 2010, the police gave close to 300,000 "Class C misdemeanour" tickets to children as young as six in Texas for offences in and out of school, which result in fines, community service and even prison time. What was once handled with a telling-off by the teacher or a call to parents can now result in arrest and a record that may cost a young person a place in college or a job years later.

Forced Military Testing in America's Schools - The invasion of student privacy associated with military testing in U.S. high schools has been well documented by mainstream media sources, like USA Today  and NPR Radio. The practice of mandatory testing, however, continues largely unnoticed. The Armed Services Vocational Aptitude Battery, or ASVAB is the military's entrance exam that is given to fresh recruits to determine their aptitude for various military occupations. The test is also used as a recruiting tool in 12,000 high schools across the country. The 3 hour test is used by military recruiting services to gain sensitive, personal information on more than 660,000 high school students across the country every year, the vast majority of whom are under the age of 18. Students typically are given the test at school without parental knowledge or consent. The school-based ASVAB Career Exploration Program is among the military's most effective recruiting tools. In roughly 11,000 high schools where the ASVAB is administered, students are strongly encouraged to take the test for its alleged value as a career exploration tool, but in more than 1,000 schools, according to information received from the U.S. Military Entrance Processing Command through a Freedom of Information Act request, tens of thousands of students are required to take it.  It is a particularly egregious violation of civil liberties that has been going on almost entirely unnoticed since the late 1960's. 

Here's A Look At America's Achievement Gap In Education -- Factors of culture and demography obviously play a huge rule in these results. Parents who are education-minded tend to be have the same priorities in the voting booth. That accounts for the general trend that Northeastern States spend the most on education and tend to graduate the most. The "achievement gap" between white and black students also plays a huge role in explaining why mostly-white Utah graduates more students with less money than the District of Columbia. If spending alone created better outcomes for minority students, Washington D.C. would be doing better than Mississippi - the opposite is true. And yet, demography isn't everything either. Alaska, bolstered by oil revenues spends lavishly for such a rural state on education. And yet its student population ranks very low on graduation rates compared to demographically similar states like Idaho.

Just Try Harder - “We try harder” proved a famously effective advertising slogan. Effort is important. Good incentives can elicit greater effort. But incentives sometimes backfire. And too much emphasis on them can lead to the presumption that all our failures result primarily from lack of willpower. One commenter on my last blog post asserted that the economy would recover if middle-class people “would work harder, spend less, kill their televisions, stop drinking alcohol, stop eating sugary fat foods, exercise an hour a day and stop letting their rotten little brats run wild.” Good suggestions, in my opinion, but not substitutes for better economic policies. Do people work harder if their pay is linked to specific measures of performance? Sometimes. But the psychologist Paul Marciano summarizes a number of reasons that  carrots and sticks often fail, including the resentment workers feel when their performance has been mismeasured. The debate over performance pay for teachers raises fears that it will overemphasize standardized test scores or undermine collaboration among teachers, hurting students more than helping them. As the compelling “Freakonomics” documentary shows, experimental efforts to improve student performance by paying them for high grades have shown only small positive effects so far. Some of the most poignant moments in the film capture a student who says he will try harder but fails.

Open Models (part 1) - A few days ago I posted about how riled up I was to see the Heritage Foundation publish a study about teacher pay which was obviously politically motivated. In the comment section a skeptical reader challenged me on a few things. He had some great points, and I’d love to address them all, but today I will only address the most important one, namely: …the criticism about this particular study could be leveled to any study funded by any think tank, from the lowly ones, to the more prestigious ones, which have near-academic status (e.g. Brookings or Hoover). But indeed, most social scientists have a political bias. Piketty advised Segolene Goyal. Does it invalidate his study on inequality in America? Rogoff is a republican. Should one dismiss his work on debit crises? I think the best reaction is not to dismiss any study, or any author for that sake, on the basis of their political opinion, even if we dislike their pre-made tweets (which may have been prepared by editors that have nothing to do with the authors, by the way). Instead, the paper should be judged on its own merit. Even if we know we’ll disagree, a good paper can sharpen and challenge our prior convictions.Agreed! Let’s judge papers on their own merits. However, how can we do that well?

Ignorance Is Bliss -- You can't make this stuff up. —The less people know about important complex issues such as the economy, energy consumption and the environment, the more they want to avoid becoming well-informed, according to new research published by the American Psychological Association.  And the more urgent the issue, the more people want to remain unaware, according to a paper published online (pdf) in APA’s Journal of Personality and Social Psychology®. “These studies were designed to help understand the so-called ‘ignorance is bliss’ approach to social issues,” said author Steven Shepherd, a graduate student with the University of Waterloo in Ontario. “The findings can assist educators in addressing significant barriers to getting people involved and engaged in social issues.”  You can regard this post as an adjunct to my important essay The Optimist's Brain. That article noted that humans normally deflect or bury unwanted, pessimistic (albeit realistic) inputs. What level of ignorance are we dealing with here?

College-Educated Workers Gaining Jobs, High School Grads Losing Them - In December, workers with bachelor’s degrees or other postsecondary educations gained jobs. On the other hand, the number of workers with high school diplomas or less who were employed fell. Here are the numbers: Workers with at least some higher education have been doing better than high school grads for a while now, too. Over the last year, an additional 1,068,000 bachelor’s degree recipients have found work, for example, while the number of employed workers with no more than a high school diploma fell by 551,000. Interestingly, though, the least-skilled workers have also added jobs over the last year. The number of high school dropouts who had jobs rose by 126,000 from December 2010 to December 2011:

Getting a Degree: Less Rigor, More Value - There are reasons to believe that college has become easier over the last few decades. And yet during the same time period, the market value of a college degree has risen. Why? I’ve been puzzling over this question for the last few weeks, particularly since so many readers have felt ripped off by their increasingly expensive college educations. And indeed, by many measures, the typical college education does not seem nearly as demanding as it was a generation ago. Students spend less time studying and don’t need to work as hard or learn as much to get an A. In the past, college was also less accessible to students who went to bad high schools, were poor, had learning disabilities or were otherwise underprepared for higher education. Today more of these less advantaged students are being funneled into college, even though many colleges are still unprepared to catch them up to speed.  For all these reasons, it would seem that having a college degree has become less special or elite in the job market. And yet the return on investment on a college degree has risen dramatically — even beyond the job gains demonstrated by latest Labor Department report. Here’s a chart showing the ratio of wages for college grads compared to those whose highest education is a high school diploma:

Do College Grads Earn Less Now Than 40 Years Ago? - On Wednesday I wrote about how a college degree has gotten more economically valuable in the last few decades. A number of readers wrote in asking whether the numbers might be skewed by incomes at the very top. After all, the top 1 percent has received huge raises in the last few decades, and that group is mostly college-educated. The second chart I ran — showing that the typical worker whose highest degree is a bachelor’s earns 5.3 percent more today than in 1994 — referred to medians, not averages. That means the outliers at the tippy top should not have had much effect on the numbers. But there is actually another way in which the numbers are skewed upward: a much smaller share of working-age men, whatever their level of education, is working today than in past decades. That means the pay of the “median” college-graduate worker is less representative of the total population of college-educated Americans than was the case in the past. By using the median wage for workers, rather than median wage for the full population, we’re only looking at what’s happened to the earnings of the most successful college graduates today, versus the vast majority of graduates in the past.

Some Lenders to Students Face Greater U.S. Scrutiny — The Consumer Financial Protection Bureau is stepping up its scrutiny of nontraditional lenders to students at profit-making colleges and trade schools that have high rates of default, the newly appointed director of the bureau said Thursday.  The director, Richard Cordray, compared the practices of some parts of the student loan business to those of the subprime mortgage lending machine that contributed to the financial crisis. “We’re seeing some of the schools anticipating as much as a 50 percent default rate on their students, yet they’re making those loans anyway,” Mr. Cordray said at a news briefing.  “We will be looking closely at those loans. We will be looking closely at the tactics by which they are marketed and making sure that the law is being followed,” he said.

Iowa National Guard Cuts Tuition Assistance 40% - People join the National Guard with the expectation that their education will be paid for. You've seen the ads and heard the line, "If you join the national guard you can get up to 100% tuition assistance." Due to budget cuts, the Iowa National Guard's tuition assistance has gone from 90% down to 50%. One Guardsman told me it's absurd. Corey Duckett wanted to serve his country, but what sold him on joining the army national guard in 2007 was the benefit of having his college paid for. "That is what I signed up for. It's in my contract actually," said Duckett.

There Are 5,000 Janitors in the U.S. with PhDs - There are 18,000 parking lot attendants in the U.S. with college degrees. There are 5,000 janitors in the U.S. with PhDs. In all, some 17 million college-educated Americans have jobs that don't require their level of education. Why?  The data comes from a the Bureau of Labor Statistics, and can be seen here in handy, depressing chart form:  At the Chronicle, where the above chart was posted, Richard Vedder argues that maybe we place too much importance on higher education, citing a new study by the National Bureau of Economic Research:This week an extraordinarily interesting new study was posted on the Web site of America's most prestigious economic-research organization, the National Bureau of Economic Research. Three highly regarded economists (one of whom has won the Nobel Prize in Economic Science) have produced "Estimating Marginal Returns in Education," Working Paper 16474 of the NBER. After very sophisticated and elaborate analysis, the authors conclude "In general, marginal and average returns to college are not the same." (p. 28)

Almonte sees 'death spiral' in municipal pensions, immediate spending cuts, revenue hikes needed - Almonte recalls sitting down with mayors in the mid-1990s in his auditor's office, listening to their budget worries and then directing their attention to his worry: Local, underfunded pensions. Who listened? Who did anything? Just about no one, he recalled. Now the "death spiral" is spinning and every city and town is circling downward and they are all headed for a fiscal face plant unless drastic, painful action is taken, Almonte says. In September the Auditor General's office released a report about the condition of local pension and OPEB plans. It said, in part, "Due to economic conditions and reductions in state aid, municipalities are even further stressed to make annual required contributions and funded ratios have continued to decline; thereby leaving some of these plans in perilous condition. The collective unfunded liability for locally administered pension plans has increased $200 million from amounts reported in our March 2010 report to $2.1 billion.

Glum stock forecast could hike San Francisco workers' pension costs - The City could be facing an additional $60 million annually in employee pension contributions, due to the unpredictability of the stock market. On Dec. 14, San Francisco’s Retirement Board voted 3-2 to reduce forecasts of annual investment returns from 7.75 to 7.5 percent — a small drop in expectations that translates to tens of millions more in contributions from The City and its employees to be phased in over three years. However, the board cannot seem to come to terms on how to best predict the future. Pension costs have exploded in recent years, prompting voters in November to pass Proposition C, which is aimed at reducing The City’s costs by obligating employees to contribute more of a share to the fund. If The City was forced to pay more as a result of drab stock market projections, it could be a burden that results in deeper annual deficits, more budget cuts and larger employee contributions.

San Francisco's tab for public pensions may jump to $80M - San Francisco’s pension bill will increase by tens of millions of dollars. The San Francisco Retirement Board was scheduled on Wednesday to reconsider a controversial decision made last month to lower its projected rate of return on its pension fund investments from 7.75 percent to 7.50 percent. But the board ended up leaving the rate at 7.50. That means The City’s pension contribution and those of city workers will increase more than expected. The board will phase in the new rate over three years. The City’s pension bill could increase to $80 million in three years, beginning at $25 million next fiscal year, according to board member Victor Makras.

401(k) Plans May Be a Better Deal for Low Wage Workers Than We Thought - Tax-deferred 401(k) plans may be a better deal for low-income workers than economists thought, according to new research by my Tax Policy Center colleague Eric Toder and Urban Institute senior research associate Karen Smith.While high-income workers may get a bigger tax break from their 401(k)s, they also face a short-term trade-off. That’s because their employers tend to offset their contributions to these plans by paying them less in wages. But Eric and Karen found while lower-wage workers get less of a tax benefit than their higher-paid colleagues, their wages fall by much less for every dollar their employer contributes to their retirement plan. Until now, economists assumed salaries of low-wage workers fully offset employer payments to their (k) plans. But Eric and Karen found that may not be true for lower-wage workers. Thus, while they enjoy both their employer’s contribution and a modest tax reduction, their employer doesn’t reduce their cash wages to fully offset those benefits. Bottom line: Total pre-tax compensation for low-wage workers who participate in 401(k)s increases while it remains about the same for those making more money, who get all their benefits from tax-savings.

Raising the Ages of Eligibility for Medicare and Social Security - CBO Director's Blog - Raising the ages at which people can begin to collect Medicare and Social Security benefits would be one way to lower federal outlays, raise revenues, and reduce long-term fiscal imbalances. A CBO issue brief released today reviews how ages of eligibility affect beneficiaries under current law and how delaying eligibility would affect beneficiaries, the federal budget, and the economy. (CBO has explored this issue in other publications, most recently in March 2011 in Reducing the Deficit: Spending and Revenue Options.) Raising any of the ages of eligibility would cause some people to work longer, thereby increasing the size of the workforce and the economy. Although the magnitude of those effects is difficult to predict, CBO estimates that:

  • Raising Social Security’s early eligibility age to 64 or the full retirement age to 70 would, in the long term, boost the size of the workforce and the economy by slightly more than 1 percent.
  • Raising Medicare’s eligibility age to 67 would also boost the size of the workforce and the economy, but by a much smaller amount.

As USA grays, elder abuse risk and need for shelters grow   - They're weak, physically or mentally disabled or both, and often at the mercy of people they depend on the most: relatives and caretakers. They're the nation's fast-growing elderly population, and many are prime targets for abuse — physical, financial, sexual or emotional. Concern among the elderly and their advocates is mounting as the number of seniors soars and more of them live longer. "There is a genuine recognition by those who are concerned by the abuse of elders that there need to be appropriate safe houses for them to get them out of immediate harm's way," says Sally Hurme, AARP's senior project manager in education and outreach. "Nationally, we've been aware of the need for elder abuse shelters, but they've been slow in coming into fruition."

Spending Growth on Medicare, Medicaid Slows as Budgets Are Cut - Spending on the U.S. government’s two big public health programs slowed in 2010 yet outlays still rose more than twice as fast as private health insurance expenditures because of the flagging economy, a federal report said. The U.S. and states combined to spend $401 billion on Medicaid, the health program for the poor, an increase of 7.2 percent. Outlays for Medicare, the federal health program for the elderly and disabled, rose 5 percent to $525 billion. Spending on coverage from insurers such as UnitedHealth Group Inc. totaled $848.7 billion, an increase of 2.4 percent. Consumer spending on health care declined because of losses in private insurance coverage, lower household incomes and financial uncertainty about the future, according to the report from the U.S. Centers for Medicare and Medicaid Services

Slow Growth In Health Spending And Utilization Continues - An extraordinary slowing of the growth in use of health care goods and services contributed to a second year of slow health spending growth in 2010, federal analysts reported in the January issue of Health Affairs. Persistently high unemployment, a substantial loss of private health insurance coverage, lower median household income, and the burden of increased cost sharing led people to forgo care or seek less expensive treatment options. As a result, growth in national health spending remained low in 2010, following a similar and historically low rate of growth in 2009, according to analysts at the Centers for Medicare and Medicaid Services (CMS). Health spending grew 3.9 percent, only 0.1 percentage point faster than in 2009. Total health spending for 2010 reached $2.6 trillion, or $8,402 per person. The rates of health spending growth in 2009 and 2010 marked the two slowest rates in the fifty-one-year history of the National Health Expenditure Accounts.  “Even though the recession officially ended in 2009, its impact on the health sector appears to have continued into 2010,” according to the article.  “[The recession’s impact] was a little more dramatic in 2010 because of a large decline in personal health care spending,” says CMS economist Anne Martin, the article’s lead author.  “Medical goods and services are generally viewed as necessities, but the recession led consumers to be a lot more cautious about utilizing them.”

SLIDESHOW: The history of health-care costs -Think of the National Health Expenditure report as a State of the Union address for health policy wonks. The annual assessment from the Center for Medicare Services lays out the highs and lows of the year in health care spending. The report includes spending on federal programs, such Medicare and Medicaid, alongside all the health care costs of American households and businesses. The Obama administration has just published this year’s report and, on the surface, there’s a lot to celebrate. After years of outstripping the rest of the economy, health care costs are now growing at the exact same rate as the rest of the gross domestic product. Over the past two years, in fact, health care costs have grown more slowly than any other point in the past five decades, according to the report, parts of which are published in the journal Health Affairs. They rose 3.8 percent in 2009 and 3.9 percent in 2010:

Who Fires Whom? -  Krugman - Aaron Carroll has an excellent analysis of Mitt Romney’s faux pas on firing people. No, Romney didn’t actually say that he enjoys firing people — but what he really did say, that competition works in health care because you can fire your insurance company, was actually worse. Carroll: The real issue, unfortunately, is that very, very few people have the luxury that Gov. Romney is endorsing. Let’s say that you are self-employed, and lucky enough to have found a company to provide you with health insurance. Then, let’s say you develop cancer. You suddenly find out that your insurance company stinks. So you fire them, right? Of course not. You’re screwed. Now you have a pre-existing condition. There’s not an insurance company out there that wants to cover you. So you don’t fire them. You scream, and curse, and cry, but you’re stuck. Only healthy people have the luxury of picking and choosing. Let’s also not forget that most people don’t find out that they’re not getting “good service” until they’re sick. Healthy people don’t make much use of their insurance, so they don’t know how bad it is. They only find out after they’re ill, and then it’s too late. It’s only fun to fire the insurance company if you’re sure you can go to another company to get what you need. Almost no one can.

Drugmakers Boost Prices, Despite Political Risks - One thing big drug companies generally aren't keen on is being the focus of a hot political debate. In case you've forgotten, the administration made a talking point out of insurance giant WellPoint's planned 39 percent increase in rates for some policies in California back in 2010. But this year drugmakers are being downright impolitic, according to an analysis by Evans. The biggest companies raised list prices for brand-name drugs an average of 4.5 percent this month, when new prices typically kick in. Back in Jan. 2008, the same companies raised prices an average of 2.8 percent. Leading the price-increase pack this time around is AstraZeneca, maker of cholesterol-fighter Crestor and heartburn remedy Nexium. This month the company raised list prices for its medicines in the U.S. by 9.5 percent, according Evans. The price for a month's supply of Crestor increased 8 percent. Nexium went up 6 percent, and the price for Atacand, a blood pressure remedy, rose 15 percent. Novartis raised prices 8.5 percent, and Pfizer hiked them 7 percent. Sanfoi-Aventis registered the smallest increase at 0.4 percent.

To ban contraception to married couples too? - In the New Yorker comes this note lost in the shuffle of the NH primary. I sense a pervasive theme of bigger government interference:Since Ronald Reagan, Republican Presidents (and Presidential nominees) have been committed to overturning Roe v. Wade, the Supreme Court’s abortion-rights landmark from 1973. But as the debates last weekend in New Hampshire suggested, the G.O.P. appears to have taken a more extreme step in terms of rolling back the Constitutional right to privacy. Since the first time Mitt Romney ran for President, four years ago, he’s been on record reversing his previous support for abortion rights. However, when pressed by George Stephanopoulos in the debate Saturday night, Romney went beyond mere opposition to Roe. He said he thought Griswold v. Connecticut, the 1965 case that first made explicit the right to privacy, was also wrong. “I don’t believe they decided that correctly,” Romney said. In this, the front-runner was eagerly seconded by Rick Santorum, who said the Justices “created through a penumbra of rights a new right to privacy that was not in the Constitution.” In Griswold, the Court ruled that a Connecticut law banning the sale of contraceptives, even to married couples, was unconstitutional.

Research Bought, Then Paid For - THROUGH the National Institutes of Health, American taxpayers have long supported research directed at understanding and treating human disease. Since 2009, the results of that research have been available free of charge on the National Library of Medicine’s Web site, allowing the public (patients and physicians, students and teachers) to read about the discoveries their tax dollars paid for.  But a bill introduced in the House of Representatives last month threatens to cripple this site. The Research Works Act would forbid the N.I.H. to require, as it now does, that its grantees provide copies of the papers they publish in peer-reviewed journals to the library. If the bill passes, to read the results of federally funded research, most Americans would have to buy access to individual articles at a cost of $15 or $30 apiece. In other words, taxpayers who already paid for the research would have to pay again to read the results.  This is the latest salvo in a continuing battle between the publishers of biomedical research journals like Cell, Science and The New England Journal of Medicine, which are seeking to protect a valuable franchise, and researchers, librarians and patient advocacy groups seeking to provide open access to publicly funded research.

America's Mental Health Industry Is a Threat to Our Sanity -- The majority of psychiatrists, psychologists and other mental health professionals “go along to get along” and maintain a status quo that includes drug company corruption, pseudoscientific research and a “standard of care” that is routinely damaging and occasionally kills young children. If that sounds hyperbolic, then you probably have not heard of Rebecca Riley, and how the highest levels of psychiatry described her treatment as “appropriate and within responsible professional standards.” When Rebecca Riley was 28 months old, based primarily on the complaints of her mother that she was “hyper” and had difficulty sleeping, psychiatrist Kayoko Kifuji, at the Tufts-New England Medical Center in Boston, Massachusetts, diagnosed Rebecca with attention deficit hyperactivity disorder (ADHD). Kifuji prescribed clonidine, a hypertensive drug with significant sedating properties, a drug Kifuji also prescribed to Rebecca’s older sister and brother. The goal of the Riley parents—obvious to many in their community and later to juries—was to attain psychiatric diagnoses for their children that would qualify them for disability payments and to sedate their children making them easy to manage. By the time Rebecca was three years old, again based mainly on parental complaints, Kifuji had given Rebecca an additional diagnosis of bipolar disorder and prescribed two additional heavily sedating drugs, the antipsychotic Seroquel and the anticonvulsant Depakote. At the age of four, Rebecca was dead.

Totally drug-resistant TB emerges in India - Physicians in India have identified a form of incurable tuberculosis there, raising further concerns over increasing drug resistance to the disease1. Although reports call this latest form a “new entity”, researchers suggest that it is instead another development in a long-standing problem.The discovery makes India the third country in which a completely drug-resistant form of the disease has emerged, following cases documented in Italy in 20072 and Iran in 20093. However, data on the disease, dubbed totally drug-resistant tuberculosis (TDR-TB), are sparse, and official accounts may not provide an adequate indication of its prevalence. Giovanni Migliori, director of the World Health Organization (WHO) Collaborating Centre for Tuberculosis and Lung Diseases in Tradate, Italy, suggests that TDR-TB is a deadlier iteration of the highly resistant forms of TB that have been increasingly reported over the past decade.

Really? The Claim: Grief Can Cause a Heart Attack - The emotional pain of losing a loved one can take a toll on the heart, at least metaphorically. But can it trigger an actual heart attack? In a large new study, scientists have confirmed what the medical world has long suspected: The so-called broken-heart syndrome is real. The study, published on Monday in Circulation: Journal of the American Heart Association, found that a person’s heart attack risk is 21 times higher than normal the day after a loved one dies. Over time the risk of an attack declines, but it remains elevated within that first month. In the first week after a loved one’s death, for example, the risk was six times higher than normal, said Elizabeth Mostofsky, the lead author of the paper and a postdoctoral research fellow at Beth Israel Deaconess Medical Center in Boston.

Don’t Hold the Salt: Attempts to Curb Sodium Intake Are Misguided - The government and specifically the Food and Drug Administration (FDA) have been mulling over legislation that would regulate the amount of salt used and served by restaurants, following a recommendation by the Institute of Medicine (IOM) in 2010. Now, being a physician and being against sodium reduction is like being a member of PETA and entering the Nathan's hot dog eating contest-and winning. It is generally frowned upon. In addition to pursuing this regulatory intervention, the government, along with several medical professional societies, recently launched the Million Hearts initiative. This program, paid in part with tax dollars, aims to reduce heart attacks in the U.S. by one million. But the ends do not always justify the means, no matter how noble and good the intentions. A main goal of that program is to reduce sodium consumption by 20 percent. This mandate might be debatable if the evidence between current amounts of sodium consumption and an increased risk of morbidity and mortality was incontrovertible. It is not. It remains at present inconclusive.

We’re Eating Less Meat. Why? - Americans eat more meat than any other population in the world; about one-sixth of the total, though we’re less than one-twentieth of the population. But that’s changing. Until recently, almost everyone considered their dinner plate naked without a big old hunk of meat on it. (You remember “Beef: It’s What’s for Dinner,” of course. How could you forget?) And we could afford it: our production methods and the denial of their true costs have kept meat cheap beyond all credibility. (American hamburger is arguably the cheapest convenience food there is.) This, in part, is why we spend a smaller percentage of our money on food than any other country, and much of that goes toward the roughly half-pound of meat each of us eats, on average, every day. But that’s changing, and considering the fairly steady climb in meat consumption over the last half-century, you might say the numbers are plummeting. The department of agriculture projects that our meat and poultry consumption will fall again this year, to about 12.2 percent less in 2012 than it was in 2007. Beef consumption has been in decline for about 20 years; the drop in chicken is even more dramatic, over the last five years or so; pork also has been steadily slipping for about five years.

Coke: Fungicide Found in Orange Juice -- Cola-Cola Co. said it found an unapproved fungicide in orange juice made by Coke and its competitors, and alerted federal regulators that some Brazilian growers had sprayed trees with the substance. The beverage giant, which makes Simply Orange and Minute Maid, wouldn't say which brands had shown the fungicide. Both brands contain juice from Brazil. The Food and Drug Administration said Monday an unnamed juice company had detected low levels of the fungicide in "its and competitors currently marketed finished products." Those products include some that were on store shelves, according to a person familiar with the matter.  Coca-Cola's disclosure came after the FDA gave more details about how it is testing to block or remove any potentially contaminated orange juice from the U.S. market.  The agency said it is testing orange juice sold in supermarkets for the potentially harmful fungicide.  The Environmental Protection Agency said consumption of orange juice with the fungicide at the low levels that have been reported doesn't raise safety concerns.

Organic v. Monsanto - More than 270,000 organic farmers are taking on corporate agriculture giant Monsanto in a lawsuit filed March 30. Led by the Organic Seed Growers and Trade Association, the family farmers are fighting for the right to keep a portion of the world food supply organic—and preemptively protecting themselves from accusations of stealing genetically modified seeds that drift on to their pristine crop fields. Consumers are powerful. For more than a decade, a cultural shift has seen shoppers renounce the faster-fatter-bigger-cheaper mindset of factory farms, exposéd in the 2008 documentary Food, Inc. From heirloom tomatoes to heritage chickens, we want our food slow, sustainable, and local—healthy for the earth, healthy for animals, and healthy for our bodies. But with patented seeds infiltrating the environment so fully, organic itself is at risk. Monsanto’s widely used Genuity® Roundup Ready® canola seed has already turned heirloom canola oil into an extinct species. The suing farmers are seeking to prevent similar contamination of organic corn, soybeans, and a host of other crops. What’s more, they’re seeking to prevent Monsanto from accusing them of unlawfully using the very seeds they’re trying to avoid.

WikiLeaks: US targets EU over GM crops - The US embassy in Paris advised Washington to start a military-style trade war against any Euroxpean Union country which opposed genetically modified (GM) crops, newly released WikiLeaks cables show. In response to moves by France to ban a Monsanto GM corn variety in late 2007, the ambassador, Craig Stapleton, a friend and business partner of former US president George Bush, asked Washington to penalise the EU and particularly countries which did not support the use of GM crops. "Country team Paris recommends that we calibrate a target retaliation list that causes some pain across the EU since this is a collective responsibility, but that also focuses in part on the worst culprits. "The list should be measured rather than vicious and must be sustainable over the long term, since we should not expect an early victory. Moving to retaliation will make clear that the current path has real costs to EU interests and could help strengthen European pro-biotech voices,"

The Very Real Danger of Genetically Modified Foods - Chinese researchers have found small pieces of ribonucleic acid (RNA) in the blood and organs of humans who eat rice. The Nanjing University-based team showed that this genetic material will bind to proteins in human liver cells and influence the uptake of cholesterol from the blood. The type of RNA in question is called microRNA, due to its small size. MicroRNAs have been studied extensively since their discovery ten years ago, and have been linked to human diseases including cancer, Alzheimer's, and diabetes. The Chinese research provides the first example of ingested plant microRNA surviving digestion and influencing human cell function. Should the research survive scientific scrutiny, it could prove a game changer in many fields. It would mean that we're eating not just vitamins, protein, and fuel, but information as well. That knowledge could deepen our understanding of cross-species communication, co-evolution, and predator-prey relationships. It could illuminate new mechanisms for some metabolic disorders and perhaps explain how some herbal medicines function. And it reveals a pathway by which genetically modified (GM) foods might influence human health.. "There is no need to test the safety of DNA introduced into GM crops. DNA (and resulting RNA) is present in almost all foods," Monsanto's website reads. "DNA is non-toxic and the presence of DNA, in and of itself, presents no hazard." The Chinese RNA study threatens to blast a major hole in that claim. It means that DNA can code for microRNA, which can, in fact, be hazardous.

Monsanto's GMO Corn Approved, 45,000 Comments in Opposition - As previously reported, while people were de-stressing and enjoying their much needed time off during the holidays, the United States Department of Agriculture announced its approval of Monsanto’s ‘drought tolerant’ genetically engineered corn. The decision to give the green light to Monsanto regarding their GE corn didn’t seem too difficult for the Obama Administration, despite receiving nearly 45,000 public comments voicing opposition and only 23 comments in favor since comments opened. Prepare to see this new GE corn unleashed into the environment as well as the American food supply. The news comes after experiments with the seeds were conducted in five African nations, funded by the Bill & Melinda Gates Foundation. Monsanto’s drought-resistant corn seeds were given to African farmers facing drought conditions, replacing traditional and sustainable farming with Monsanto’s GMO crops. Bill Gates himself has purchased 500,000 Monsanto stocks as of August 2010, and has heavy ties with Monsanto and even genetically modified mosquitoes which could be released in Florida early next year.

Fearful of Genetically-Modified Crops? You’re Too Late - Frankenfood! It's the evil-sounding name given to genetically modified crops by organic enthusiasts fearful that altering nature's design will result in irreparable damage to either the environment or our bodies. And there is a good chance that they're right. The fight against GM crops has been intensifying of late, with the USDA approving modified alfalfa early this year, despite protests from big organic (which might be less worried about the potential risks and mostly worried about their organic certification). Because a cow that eats GM alfalfa is no longer organic, no matter how it was raised, and GM alfalfa has the extra ability to spread like kudzu--even to places where it's not supposed to be, like an adjacent field of original-gene alfalfa. But these fights should not give the impression that we are about to step over a precipice into a world full of GM crops. We did that in 1996. See this chart from the USDA:That's right. Nearly 100% of all soybeans grown in the U.S. are genetically modified to resist weed-killers that used to also kill the soybeans along with the weeds. And Bt cotton and corn--which have had genes from a soil bacterium Bacillus thuringiensis jammed inside them to help them resist insects--both comprise about three-quarters of all the acreage of that crop.

Leaked documents reveal US diplomats actually work for Monsanto - Biotech giant Monsanto has been genetically modifying the world's food supply and subsequently breeding environmental devastation for years, but leaked documents now reveal that Monsanto has also deeply infiltrated the United States government. With leaked reports revealing how U.S. diplomats are actually working for Monsanto to push their agenda along with other key government officials, Monsanto's grasp on international politics has never been clearer. Amazingly, the information reveals that the massive corporation is also intensely involved in the passing and regulations concerning the very GM ingredients they are responsible for. In fact, the information released by WikiLeaks reveals just how much power Monsanto has thanks to key positions within the United States government and elsewhere. Not only was it exposed that the U.S. is threatening nations who oppose Monsanto with military-style trade wars, but that many U.S. diplomats actually work directly for Monsanto.

Stop all GM research in the public sector - Coalition for a GM-Free India demands immediate stopping of all public sector transgenic research and an independent enquiry and action against fraudulent scientists.  2011 ends with a big blot to the Indian scientific community, as was the case in 2010 too. The much-hyped public sector Bt cotton lines (Bikaneri Narma Bt variety and NHH-44 Bt hybrid) touted as the "first indigenous public sector-bred GM crop in India" developed by Central Institute for Cotton Research, Nagpur (CICR) and University of Agricultural Sciences, Dharwad (UAS) along with Indian Agricultural Research Institute (IARI) is actually found to have a Bt gene originally patented by Monsanto. The ICAR had to withdraw the production of these 'indigenous' GM cotton seeds, based on this development. In effect the Indian biotechnologists, supported with enormous amounts of taxpayers' money doing research on developing indigenous "biotechnology products" have misled the nation by passing off the Monsanto technology as their own, the Coalition for a GM-Free India stated. The Coalition demanded that the Government stop all transgenic research in the public sector immediately, setup a high-level independent inquiry into the current case as well as all other research projects. It also demanded that this issue be seen as an act of corruption and fraud and severe deterrent action be taken against all the institutions and scientists involved.

Vatican Condemns Monsanto Genetically Modified Crops as “New Form of Slavery” - In an interview with the magazine L’Osservatore Romano on January 5, a prominent member of the Vatican spoke out against genetically modified crops. Cardinal Peter Turkson said that genetically modified crops are a “new form of slavery,” and went on to discuss the impact that they have on both the environment and the economy. Regardless of religious association, anyone speaking out against genetically modified should be listened to. As a prominent leader of the Catholic people, Cardinal Turkson has the ability to inform millions worldwide regarding the negative effects of genetically modified food. Even farmers have risen up against Monsanto and genetically modified seeds, with Monsanto forcing thousands of farmers into debt worldwide. In India, Monsanto has ruined the lives of so many farmers that the prevalence of their suicide has led to a large farming area to be titled the ‘suicide belt of India’. Some have even blamed Monsanto for the recent bird and fish deaths, claiming that the poison coming from their factories may have poisoned animals worldwide. Monsanto’s destruction isn’t limited to the environment, however.

Fracking Moratorium Urged as Doctors Call for Health Study -- The U.S. should declare a moratorium on hydraulic fracturing for natural gas in populated areas until the health effects are better understood, doctors said at a conference on the drilling process.  Gas producers should set up a foundation to finance studies on fracking and independent research is also needed, said Jerome Paulson, a pediatrician at George Washington University School of Medicine in Washington. Top independent producers include Chesapeake Energy Corp. and Devon Energy Corp., both of Oklahoma City, and Encana Corp. of Calgary, according to Bloomberg Industries. "We've got to push the pause button, and maybe we've got to push the stop button" on fracking, said Adam Law, an endocrinologist at Weill Cornell Medical College in New York, in an interview at a conference in Arlington, Virginia, that's the first to examine criteria for studying the process.

Doctors Call for Fracking Moratorium -  Yves Smith - Wow, this bit of news is amazing, in both a good and bad way. Just to mention one fracking contaminant, benzene is a particularly nasty carcinogen (not that this Bloomberg article mentions it, but it is the sort of thing that too often gets into water tables thanks to fracking). The fact that fracking is seen as a big enough public health risk to rally the normally apolitical medical profession (at least as far as measures ex health care reform are concerned) to call for intervention is striking. From Bloomberg:The U.S. should declare a moratorium on hydraulic fracturing for natural gas in populated areas until the health effects are better understood, doctors said at a conference on the drilling process. Gas producers should set up a foundation to finance studies on fracking and independent research is also needed, said Jerome Paulson, a pediatrician at George Washington University School of Medicine in Washington… “We’ve got to push the pause button, and maybe we’ve got to push the stop button,” A moratorium on fracking pending more research “would be reasonable,” said Paulson, who heads the Mid-Atlantic Center for Children’s Health and the Environment in Washington, in an interview. A top scientist at the U.S. Center for Disease Control and Prevention said last week that fluids used in hydraulic fracturing contain “potentially hazardous chemical classes.” The compounds include petroleum distillates, volatile organic compounds and glycol ethers, said Christopher Portier, director of the CDC’s National Center for Environmental Health.

Multiple Routes of Pesticide Exposure for Honey Bees Living Near Agricultural Fields - Populations of honey bees and other pollinators have declined worldwide in recent years. A variety of stressors have been implicated as potential causes, including agricultural pesticides. Neonicotinoid insecticides, which are widely used and highly toxic to honey bees, have been found in previous analyses of honey bee pollen and comb material. However, the routes of exposure have remained largely undefined. We used LC/MS-MS to analyze samples of honey bees, pollen stored in the hive and several potential exposure routes associated with plantings of neonicotinoid treated maize. Our results demonstrate that bees are exposed to these compounds and several other agricultural pesticides in several ways throughout the foraging period. During spring, extremely high levels of clothianidin and thiamethoxam were found in planter exhaust material produced during the planting of treated maize seed. We also found neonicotinoids in the soil of each field we sampled, including unplanted fields. Plants visited by foraging bees (dandelions) growing near these fields were found to contain neonicotinoids as well. This indicates deposition of neonicotinoids on the flowers, uptake by the root system, or both. Dead bees collected near hive entrances during the spring sampling period were found to contain clothianidin as well, although whether exposure was oral (consuming pollen) or by contact (soil/planter dust) is unclear. We also detected the insecticide clothianidin in pollen collected by bees and stored in the hive. When maize plants in our field reached anthesis, maize pollen from treated seed was found to contain clothianidin and other pesticides; and honey bees in our study readily collected maize pollen.

A New Threat to Honey Bees, the Parasitic Phorid Fly Apocephalus borealis: Honey bee colonies are subject to numerous pathogens and parasites. Interaction among multiple pathogens and parasites is the proposed cause for Colony Collapse Disorder (CCD), a syndrome characterized by worker bees abandoning their hive. Here we provide the first documentation that the phorid fly Apocephalus borealis, previously known to parasitize bumble bees, also infects and eventually kills honey bees and may pose an emerging threat to North American apiculture. Parasitized honey bees show hive abandonment behavior, leaving their hives at night and dying shortly thereafter. On average, seven days later up to 13 phorid larvae emerge from each dead bee and pupate away from the bee. Using DNA barcoding, we confirmed that phorids that emerged from honey bees and bumble bees were the same species. Microarray analyses of honey bees from infected hives revealed that these bees are often infected with deformed wing virus and Nosema ceranae. Larvae and adult phorids also tested positive for these pathogens, implicating the fly as a potential vector or reservoir of these honey bee pathogens. Phorid parasitism may affect hive viability since 77% of sites sampled in the San Francisco Bay Area were infected by the fly and microarray analyses detected phorids in commercial hives in South Dakota and California's Central Valley. Understanding details of phorid infection may shed light on similar hive abandonment behaviors seen in CCD.

Global Hunger Index Tells Stories of Progress and Stagnation in Sub-Saharan Africa Nourishing the Planet The International Food Policy Research Institute’s (IFPRI) recently released Global Hunger Index 2011 contains a wealth of information about the state of hunger across the developing world. Combining measures of undernourishment, underweight children, and child mortality, the study creates a picture of the severity of hunger on a nation-by-nation basis. The measure is designed to help policymakers focus attention on the regions that need it most. According to the latest report, South Asia and sub-Saharan Africa have the highest levels of hunger, and progress over the last 20 years in these regions has been uneven. Ghana was the only country in sub-Saharan Africa among the 10 best performers in improving their Global Hunger Index (GHI) score since ranking began in 1990. As rated by the index, Ghana has reduced the scale of hunger within its borders by 59 percent. IFPRI attributes this success to sustained investments in agriculture, rural development, education, and health, specifically immunizations. For his efforts on these fronts, former president John Kufuor was awarded the 2011 World Food Prize.

Corn Is Now Too Precious For Ethanol Subsidies - And they said it couldn’t be done: a $20 billion a year tax credit for ethanol has ended in the United States. Sometimes the American political system does work, even when losing the subsidy directly hurts Iowa farmers in an election year. As detailed in a New York Times article by Robert Pear, “After Three Decades, Tax Credit for Ethanol Expires,” after 30 years, a subsidy provided by the United States expired. At an annual cost of about $20 billion, it lasted for 30 years thanks to countless presidential candidates talking up support while on the stump in Iowa. But times change. And as noted by Dean C. Taylor, a former president of the Iowa Corn Growers Association, “We are in a fairly prosperous period for agriculture,” so those subsidies are no longer required. This “prosperous period for agriculture” is as a result of demand from China, India and other emerging nations for corn grown in the United States. In addition, according to Pear’s New York Times piece, “Nearly 40% of the U.S. corn crop goes to ethanol and byproducts, including animal feed.”

Thieves Seek Restaurants’ Used Fryer Oil -  Companies that collect used cooking grease from restaurants across the country have turned to all forms of sleuthing in recent years. Private investigators. Surveillance cameras. Rigged alarms. And still, containers full of used fryer oil are slipping through their fingers.  For years, restaurants had to pay companies to haul away the old grease, which was used mostly in animal feed. Some gave it away to local gearheads, who used it to make biodiesel for their converted car engines.  But with a demand for biofuel rising, fryer oil now trades on a booming commodities market, commanding around 40 cents per pound, about four times what it sold for 10 years ago. That makes it a tempting target for thieves, especially in hard times.

Companies Face Fines for Not Using Unavailable Biofuel -   When the companies that supply motor fuel close the books on 2011, they will pay about $6.8 million in penalties to the Treasury because they failed to mix a special type of biofuel into their gasoline and diesel as required by law. But there was none to be had. Outside a handful of laboratories and workshops, the ingredient, cellulosic biofuel, does not exist.  In 2012, the oil1 companies expect to pay even higher penalties for failing to blend in the fuel, which is made from wood chips or the inedible parts of plants like corncobs. Refiners were required to blend 6.6 million gallons into gasoline and diesel in 2011 and face a quota of 8.65 million gallons this year.

Congressional recess means the end of three decades of US tariffs on imported ethanol - For the first time in more than three decades of generous US government subsidies for the domestic ethanol industry, coupled with a steep tariff on imports, the United States market will be open to imported ethanol as of January 1st, 2012, without protectionist measures. Today’s adjournment of the 112th Congress means both the US$0,54 per gallon tax on imported ethanol and a corresponding tax credit of US$0,45 per gallon for blenders, the VEETC (Volumetric Ethanol Excise Tax Credit), will expire as expected on December 31st. “With Congress in recess, there are no opportunities for further attempts to prolong the tax credit or the tariff, so we can confidently say these support mechanisms will be gone at the end of 2011,” said the Washington Representative for the Brazilian Sugarcane Industry Association (UNICA), Leticia Phillips. This means that in 2012, the world’s largest fuel consuming market will be open to imports of less costly and more efficient ethanol, including sugarcane ethanol produced in Brazil, recognized since 2010 by the US Environmental Protection Agency (EPA) as an advanced biofuel because of its verified reduction of up to 90% in greenhouse gas emissions compared to gasoline.

Loss of ethanol subsidy boosts gasoline prices a little, E85 prices a lot - ‎ The basic math is pretty simple: most gasoline in the U.S. has about 10 percent ethanol, so the the 45 cents/gallon VEETC subsidy reduced the price of gasoline about 4.5 cents. The subsidy expired at the end of 2011, so one reason gasoline prices have gone up a few cents since New Year’s Day comes from the loss of the subsidy. (World crude oil prices are up a bit, too.)Normally, a subsidy would be shared by producers and consumers, so the loss of a subsidy would be shared. But the Renewable Fuels Standard quantity mandate protects producers from taking a hit. The main effect here is that the consumers’ mandated purchases of ethanol will no longer be subsidized by taxpayers, and therefore the price rises.But lest you gasoline consumers feel too bad, consider the plight of the drivers relying on E85, a blend of 85 percent ethanol and only 15 percent gasoline. The math here is simple, too: 85 percent of 45 cents meant that E85 was receiving about a 38 cents/gallon subsidy, and now that subsidy is gone.

Jeff Masters: Remarkably dry and warm winter due to record extreme jet stream configuration - Flowers are sprouting in January in New Hampshire, the Sierra Mountains in California are nearly snow-free, and lakes in much of Michigan still have not frozen. It's 2012, and the new year is ringing in another ridiculously wacky winter for the U.S. In Fargo, North Dakota yesterday, the mercury soared to 55 °F, breaking a 1908 record for warmest January day in recorded history. More than 99% of North Dakota had no snow on the ground this morning, and over 95% of the country that normally has snow at this time of year had below-average snow cover. High temperatures in Nebraska yesterday were in the 60s, more than 30 °F above average. Storm activity has been almost nil over the past week over the entire U.S., with the jet stream bottled up far to the north in Canada. It has been remarkable to look at the radar display day after day and see virtually no echoes, and it is very likely that this has been the driest first week of January in U.S. recorded history. Portions of northern New England, the Upper Midwest, and the mountains of the Western U.S. that are normally under a foot of more of snow by now have no snow, or just a dusting of less than an inch. Approximately half of the U.S. had temperatures at least 5 °F above average during the month of December, with portions of North Dakota and Minnesota seeing temperatures 9 °F above average. The strangely warm and dry start to winter is not limited to the U.S. -- all of continental Europe experienced well above-average temperatures during December.

Water Risk in Supply Chains Draws Investor Scrutiny - Jonas Kron is worried about water. The investment adviser at Trillium Asset Management, a $900 million fund manager that focuses on environmentally sustainable investment, fears the world’s dwindling supply of fresh water is hurting the companies he has invested in. For most of the year, Kron has led a shareholder challenge to J. M. Smucker, the strawberry jam maker that also owns Folgers coffee. Kron says the company hasn't demonstrated it's prepared for the market changes that are sure to come as climate change reduces the size of the world’s coffee growing area. The conversation has been difficult in part because corporate leaders still seem unaware they need to factor water risk into their financial projections, says Kron. "We're not talking about charity here," says Kron. "These are investors seeking to have the company address the risks in its supply chain." Most companies act as if the water they have today will be there tomorrow, says Brooke Barton, who runs water programs at Ceres, an environmental group in Boston that worked with Trillium and others to create an online checklist aimed at helping investors and companies assess efforts to manage water risk. With the world’s population expected to grow to 10 billion by the end of the century from 7 billion today, and the need for fresh water increasing twice as fast as a larger middle class emerges in the developing world, the competition for scarce water resources is unprecedented. "Water is something that should be keeping CEOs up at night,"

2011 was Texas' driest year on record - The National Weather Service says 2011 was Texas' driest year on record as well as its second hottest.The agency said Friday the average rainfall for the drought-stricken state last year was 14.88 inches. The previous driest average total was in 1917 with 14.99 inches. The weather service says 2011's average temperature was 67.2 degrees. Texas' warmest year on record was in 1921 with an average temperature of 67.5 degrees. Last year Texas suffered its worst single-year drought, its largest agricultural losses and the hottest summer in U.S. history. From June through August, Texas averaged 86.8 degrees, beating out Oklahoma's 85.2 degrees in 1934. The current drought started in fall 2010. Forecasters say it is expected to drag on at least through June.

Current European Drought Map - I found the above map via the European Drought Center, but the map itself is hosted at the EC Joint Research Center Institute for Environment and Sustainability. The map is for Sunday 8th January 2012 and represents departure of soil moisture from normal conditions for that time and place. It is not a PDSI map: instead the -4 to 4 values are the number of standard deviations away from the 1990-2006 conditions (at each particular place and time of year).  This is a relatively recent baseline and as such these anomaly figures will not be able to detect much global warming signal.  In any case, it appears that Spain, and much of Italy, Greece, Eastern Europe are exceptionally dry for this time of year, while most of northern Europe is exceptionally wet.  Apparently rainfall is inversely correlated with the 10 year sovereign bond yield! There is also a forecast map for Jan 16th 2012 (ie next week):

The desertification of China: Few people think of China as a desert nation, yet it is among the world's largest. More than 27%, or 2.5 million square kilometers, of the country comprises useless sand (just 7% of Chinese land feeds about a quarter of the world's population). A Ministry of Science and Technology task force says desertification costs China about $2-3 billion annually, while 800 km of railway and thousands of kilometers of roads are blocked by sedimentation. An estimated 110 million people suffer firsthand from the impacts of desertification and, by official reports, another 2,500 sq km turns to desert each year. This is nothing new, of course. In the 4th century B.C. Chinese philosopher Mencius (Mengzi) wrote about desertification and its human causes, including tree-cutting and overgrazing. Experts argue over the reasons and consequences, but all agree that Chinese deserts are on the move. Sand from the distant Gobi threatens even Beijing, which some scientists say could be silted over within a few years. Dunes forming just 70 km from the capital may be drifting south at 20-25 km a year. Conservative estimates say 3 km a year. And despite massive spending on land reclamation and replanting, China is falling behind. In the northwest, where the biggest problems lie, desertification has escalated from 1,560 sq km annually in the 1970s to 2,100-2,400 sq km in the 1990s. According to many environmentalists, Beijing has been largely content to issue proclamations about student-supported tree-planting rather than tackle complicated land issues.

China’s newest 5 year plan - and how it could change the world! - China has long experimented with trying to control the weather, and even have a government department devoted to it - the Beijing Weather Modification Office. The newly released 2011 - 2015 plan aims to increase rainfall across the country by 10%. This “weather intervention” would bring an extra 230 billion cubic meters of precipitation per year via “cloud seeding” - the injection of silver iodide particles into the atmosphere which can be done through rockets or planes.  The goal is to increase food production, particularly in drought prone regions. Although population growth in China is very low, incomes are rising fast and the demand for grains and other foodstuffs continues to increase. According to China Daily, they have already had some success - in 2010 a major drought in central and eastern China led to an artificial precipitation effort that was purported to increase rainfall by 17 percent. If this intervention in nature is successful, the implications for world food production could be staggering. If the technology is able to be replicated in drought prone countries then causing rainfall to increase crop production would surely be more cost-effective than providing aid. Food prices would fall and many countries might be able to lift their living standards significantly.

8 Mighty Rivers Run Dry From Overuse - The Indus is the primary source of freshwater for most of Pakistan, a fast-growing nation of more than 170 million people. Waters from the Indus are drawn for household and industrial use, and support about 90 percent of the agriculture in the arid country. The Indus is one of the great rivers of the world, but it is now so exploited that it no longer flows into the ocean at the Port of Karachi. Instead, in the words of New York Times writer Steven Solomon, the Indus is "dribbling to a meager end. . . Its once-fertile delta of rice paddies and fisheries has shriveled up." The lower Indus had been a lush ecosystem, supporting artisanal fishers and providing habitat to diverse species, including the critically endangered Indus River dolphin. Choked off from its water supply, Karachi is plagued by increasingly brazen water thieves and riots over scarcity. Many in the water-stressed delta blame wealthy landowners upstream for taking water out of the river. As National Geographic News recently reported, tensions have been running high with neighboring India, which is home to the glaciers that feed the river, and which is planning more large-scale diversions.

Climate-Related Severe Weather Made 2011 Costliest Year on Record: Reports - Though it would be impossible to calculate the full financial cost of a rapidly warming world or asign perfect blame to the cause of any one specific weather event, that should not keep - and has not kept - some assessors of risk to try. And though private insurance companies in the United States have remained "eerily" quiet on the subject of climate change, their counterparts in Europe have been looking more closely at some of the data. Live Insurance News, an online insurance industry publication, reports: 2011 has become widely recognized in the insurance industry as the costliest year in recent history in regards to natural disasters. While estimates varying regarding the total cost of disasters, Munich Re, a reinsurance and risk modeling organization, claims that 2011 generated more than $380 billion in worldwide insured losses, only a third of which was paid by insurance companies. The disasters have caused the global insurance industry to raise prices, but Munich Re suggests that the pricing surge may be due to climate change. Though Munich RE is a German company, it maintains a US group and included US weather events in its 2011 analysis. Science News cited some of these statistics in their report yesterday:

Jeff Masters: Extreme temperatures of 2011: 7 national all-time heat records; 1 cold record - The year 2011 was the tenth warmest year on record for the globe, but the warmest year on record when a La Niña event was present (Ricky Rood has a discussion of this in his lastest post). Seven nations and one territory broke all-time hottest temperature records. This is a far cry from 2010 (which tied for the warmest year on record), when twenty nations (plus one UK territory) set all-time hottest temperature records. One all-time coldest temperature record was set in 2011; this was the first time since 2009 one of these records was set. The all-time cold record occurred in Zambia, which ironically also set an all-time hottest temperature record in 2011. Here, then, are the most most notable extreme temperatures globally in 2011, courtesy of weather records researcher Maximiliano Herrera:

  • Hottest temperature in the world in 2011: 53.3 °C (127.9 °F) in Mitrabah, Kuwait, August 3
  • Coldest temperature in the world in 2011: -80.2 °C (-112.4 °F) at Dome Fuji, Antarctica, September 18

  • Hottest temperature in the Southern Hemisphere: 49.4 °C (120.9 °F) at Roebourne, Australia, on December 21

  • Coldest temperature in the Northern Hemisphere: -67.2 °C (-89 °F) at Summit, Greenland, March 18. This is also the coldest March temperature ever recorded in the Northern Hemisphere.

  • Hottest undisputed 24-hour minimum temperature in world history: A minimum temperature of 41.7 °C (107 °F) measured at Khasab Airport in Oman on June 27

Court’s Latest Stay of Clean Air Regulations Shows the Best can be the Enemy of the Good - On December 30, The U.S. Court of Appeals for Washington, D.C. stayed implementation of the Environmental Protection Agency’s proposed Cross-State Air Pollution Rule (CSAPR), which was to take effect on January 1, 2012. The EPA maintains that CSAPR would save 13,000 to 34,000 premature deaths annually, as well as lead to improvements in visibility in national and state parks, and increased protection for sensitive ecosystems including Adirondack lakes and Appalachian streams, coastal waters and estuaries, and forests. The stay was the latest in a long series of setbacks to EPA efforts to regulate a family of air pollutants from coal-fired power plants and other sources, including sulfur dioxide (SO2), oxides of nitrogen (NOx), ozone, and fine particulates. There were two possible ways out of the situation. One would be to limit interstate trading in a way that recognized geographic diversity. Traders reacted negatively to that approach. Breaking the market into segments “restricts the purpose of trading.” The other alternative would be to persuade Congress to amend the Clean Air Act yet again in a way that would legalize the kind of broad interstate trading that seemed to work so well from 1995 to 2008. Urged on by the Environmental Markets Association, Senators Tom Carper (D-Del.) and Lamar Alexander (R-Tenn.) introduced a bill, S 2995, that would give the EPA explicit authority to establish an interstate trading program for SO2, NOx and mercury. Unfortunately, in a political atmosphere where many legislators see any kind of environmental regulation as a third-rail hazard, the bill went nowhere.

Beijing’s air: like standing downwind from a forest fire - Drawing the curtains had no visible effect on the amount of light coming through the window. I could not see the buildings on the other side of the road because the grey fog of pollution was so thick. A quick visit to the US embassy’s Twitter page, which posts hourly readings of Beijing’s pollution levels, confirmed what my eyes and nose had already told me. The reading was “Beyond Index,” off the charts, seven times worse than US standards for acceptable air quality. Beijing airport shut down, so poor was the visibility. For perspective, one way an American could breathe air like Beijing’s 20 million citizens were breathing all morning would be to stand downwind from a forest fire. Have you taken our China quiz yet? Test your knowledge of China Everybody who lives here could see and feel how bad it was, but the Beijing Municipal Environmental Monitoring Center was saying on its website that the air quality was “good.” That will soon change, the government has promised. By the end of this month Beijing will become the first Chinese city to publish hourly official data revealing the level of minute particles smaller than 2.5 microns, which is what the US embassy does.

Global warming caused by greenhouse gases delays natural patterns of glaciation - Unprecedented levels of greenhouse gases in the Earth's atmosphere are disrupting normal patterns of glaciation, according to a study co-authored by a University of Florida researcher and published online Jan. 8 in Nature Geoscience. "Ice sheets like those in western Antarctica are already destabilized by global warming," said Channell. "When they eventually slough off and become a part of the ocean's volume, it will have a dramatic effect on sea level." Ice sheets will continue to melt until the next phase of cooling begins in earnest.

Climate Change and Sea Level Rise: “An Emerging Hockey Stick”  - Since we have such an active community of armchair oceanographers and spreadsheet Glaciologists here, I thought it would be useful to speak to the real thing, the people who actually spend time on the ocean, on the ice sheets, do the measurements, and come back to share that knowledge with us. I had just that opportunity at the American Geophysical conference in December. I spoke to Josh Willis, Oceanographer with NASA at the Jet Propulsion Lab. Josh is one of best known young ocean scientists on the planet. He pointed me to the recent Kemp et al study of tidal marshes on the US East coast, which has produced a long record of sea level over the last 2000 years, complete with a very Hockey-stickish uptick during the last 200 or so.

Rising seas from global warming would hit hard in South Florida - A sea-level rise of just a few inches will bring flooding to South Florida cities, contaminate sources of drinking water and lead to sharp increases in utility bills over the next 20 or 30 years, according a study released Wednesday by Florida Atlantic University. The study found that projected sea level increases of 3 to 6 inches by 2030, due to global warming, could overwhelm flood-control systems that in many areas are more than 50 years old. The authors provided a list of steps to be taken in the coming decades, from moving drinking-water wells inland to installing more pump stations, that could help the region cope with the higher water."Unprecedented sea level rise and other climate change impacts are likely to result in serious threats to the water supply, increased risks of flooding, hurricane damage, huge infrastructure investments and other consequences both known and unknown at this time," states the study, conducted by researchers at the university's Charles E. Schmidt College of Science and College of Engineering and Computer Science.Global warming causes sea levels to rise because water expands as it increases in temperature and because glaciers melt. In the past century, sea levels have risen 4.8 to 8.8 inches, largely due to global warming, according to the Environmental Protection Agency.

What’s the probability that man-made global warming will lead to disastrous climate change? - What’s the chance that if we continue with business-as-usual, man-made global warming will lead to disastrous climate change? It isn’t zero. It isn’t one. What is epsilon?


  • The End-Permian mass extinction event was the worst in Earth’s history and was caused by rift volcanism and coincident burning of coal (Earth’s greatest mass extinction caused by coal: study).
  • Humans are changing atmospheric and ocean chemistry faster than at any time Earth’s history, releasing sequestered carbon some orders of magnitude faster than the Siberian trap eruption. (Rate of ocean acidification the fastest in 65 million years).
  • Earthlike planets are capable of supporting multicellular life for a relatively small fraction of their existence (Peter Ward).
  • Humans have already caused irreversible changes to ocean chemistry that force a transition to anoxic oceans dominated by microbes: (Jeremy Jackson; fast forward to 36:49, “Three scenarios of global behavior and consequences”).


  • Probability that humans have already destroyed the biosphere in which the species evolved: 100%.
  • Probability that humans can survive the Under a Green Sky scenario in bio-domes for some millions of years, until biodiversity recovers: 0%.
  • Probability of extinction of all complex multicellular life by human destruction of the biosphere: 90%.
  • Probability of extinction of human species within a few centuries: arbitrarily close to 100%.

How Likely Is a Runaway Greenhouse Effect on Earth?  - Planetary geologists think there is good evidence that Venus was the victim of a runaway greenhouse effect which turned the planet into the boiling hell we see today. A similar catastrophe is almost certain to strike Earth in about 2 billion years, as the Sun increases in luminosity. But that raises an important question: is it possible that we could trigger a runaway greenhouse effect ourselves by adding carbon dioxide to the atmosphere? According to the climate scientist James Hansen, that's a distinct possibility. A couple of years ago, he wrote: "If we burn all reserves of oil, gas, and coal, there's a substantial chance that we will initiate the runaway greenhouse. If we also burn the tar sands and tar shale, I believe the Venus syndrome is a dead certainty."

The Runaway Greenhouse Effect – James Hansen - videos

Global Economy Could Endure Disaster For a Week - The global economy could withstand widespread disruption from a natural disaster or attack by militants for only a week as governments and businesses are not sufficiently prepared to deal with unexpected events, a report by a respected think-tank said. Events such as the 2010 volcanic ash cloud, which grounded flights in Europe, Japan's earthquake and tsunami and Thailand's floods last year, have showed that key sectors and businesses can be severely affected if disruption to production or transport goes on for more than a week. "One week seems to be the maximum tolerance of the 'just-in-time' global economy," said the report by Chatham House, the London-based policy institute for international affairs. The current fragile state of the world's economy leaves it particularly vulnerable to unforeseen shocks. Up to 30 percent of developed countries' gross domestic product could be directly threatened by crises, especially in the manufacturing and tourism sectors, according to the think-tank. It is estimated that the 2003 outbreak of severe acute respiratory syndrome (SARS) in Asia cost businesses $60 billion, or about 2 percent of east Asian GDP, the report said. After the Japanese tsunami and nuclear crisis in March last year, global industrial production declined by 1.1 percent the following month, according to the World Bank.

An Arctic methane worst-case scenario - Let’s suppose that the Arctic started to degas methane 100 times faster than it is today. I just made that number up trying to come up with a blow-the-doors-off surprise, something like the ozone hole. We ran the numbers to get an idea of how the climate impact of an Arctic Methane Nasty Surprise would stack up to that from Business-as-Usual rising CO2 Walter et al (2007) says that Arctic lakes are 10% of natural global emissions, or about 5% of total emissions. I believe that was considered to be remarkably high at the time but let’s take it as a given, and representing the Arctic as a whole. If the number of lakes or their bubbling intensity suddenly increased by a factor of 100, and it persisted this way for 100 years, it would come to about 200 Gton of carbon emission, which is on the same scale as our entire fossil fuel emission so far (300 Gton C), or roughly the amount of traditional reserves of natural gas (although I’m not sure where estimates are since fracking) or petroleum. It would be a whopper of a surprise.  Scaling Walter’s Arctic lake emission rates up by a factor of 100 would increase the overall emission rate, natural and anthropogenic, by about a factor of 5 from where it is today. The weak leverage is because the high latitudes are a small source today relative to tropical wetlands and anthropogenic sources, so they have to grow a lot before they make much difference to the sum of all sources.

Semiletov and Shakhova explain concerns over Arctic methane (thaw point for subsea methane proves to be below zero) -The methane researchers who disturbed our rest and inspired immediate, pre-communication debunking by Andrew Revkin, Semiletov and Shakhova, now explain their concerns to him based on the recent findings: We would first note that we have never stated that the reason for the currently observed methane emissions were due to recent climate change. In fact, we explained in detail the mechanism of subsea permafrost destabilization as a result of inundation with seawater thousands of years ago. We have been working in this scientific field and this region for a decade. We understand its complexity more than anyone.  . Last spring, we extracted a 53-meter long core sample from the East Siberian Arctic Shelf, to validate our conclusions about the current state of subsea permafrost. We found that the temperatures of the sediments were from 1.2 to 0.6 degrees below zero, Celsius, yet they were completely thawed. The model in the Dmitrenko paper [link] assumed a thaw point of zero degrees. Our observations show that the cornerstone assumption taken in their modeling was wrong.

Call for Arctic geoengineering as soon as possible - It's the most urgent call for geoengineering yet: begin cooling the Arctic by 2013 or face runaway global warming. But the warning – from a voice on the scientific fringe – may be premature, according to experts contacted by New Scientist. John Nissen, a former software engineer who has become alarmed at the possibility of reaching a climate "tipping point" argued for Arctic geoengineering as soon as possible in a poster presentation at the American Geophysical Union meeting in San Francisco last week. "We've got to pull out all the stops to prevent a runaway situation," Nissen says. He suggests using stratospheric aerosols to cool the surface and subsurface below, or increasing the reflectance of low-level clouds by pumping a fine spray of salt water into them.Although Nissen's opinion is not in the scientific mainstream, he has the backing of a leading expert on sea ice, Peter Wadhams of the University of Cambridge, who recently suggested that the Arctic ocean may be ice-free at the end of each summer from 2015 onwards. Wadhams says that accelerating climate change in the Arctic has forced him to abandon his scepticism about geoengineering. "One has to consider doing something," he says.

RealClimate Is Alarmed by Arctic Methane, Should You Be? - RealClimate Commenter:  Methane alarmism will not be dissuaded by any reasonable means. But nice try David. ;) Response [by geophysicist David Archer]: Well, to be honest, sometimes I do get spooked myself. There is a lot of carbon up there. David. PS: On further reflection, I don’t think I want to be fighting being alarmed about methane bubbles in the Arctic. I am alarmed too, but perhaps I’m alarmed for a longer time frame than some. David] Whether or not you should be alarmed by Arctic methane depends on your definition of “alarmed.”  And it depends on how much you follow the other areas of climate science, many of which are, for me, considerably more “alarming” Concern about methane emissions has risen in recent years because methane levels have been risen in recent years after a decade of little growth and because there have been reports of massive methane plumes of the Arctic coast and because the carbon-rich permafrost is thawing. Fortunately, the best NOAA analysis “suggests we have not yet activated strong climate feedbacks from permafrost and CH4 hydrates,” a finding Climate Progress first reported 3 years ago. But much more rapid ice loss in the Arctic than expected, accompanied by rapid permafrost warming, has convinced leading experts now say that frozen carbon is likely to start being released at a large-scale in the next few decades –  some of it in the form of methane, a far more potent greenhouse gas than CO2 — causing 2.5 times the warming of deforestation.  That would complicate any efforts by humanity to reduce emissions and avert multiple, simultaneous catastrophes (see below).  This largely unmodeled amplifying carbon-cycle feedback is, obviously, worrisome and even alarming.

One problem with fuel efficiency standards - Broken record time, incentive-based environmental policy can be superior to environmental standards: In the race to claim ever-higher fuel-economy numbers and keep up with government regulations, automakers are rolling out hybrids and electric cars aplenty at this week’s Detroit auto show. If only buyers were arriving as fast as the cars. Hybrid sales waned as gasoline prices ebbed in 2011, declining to 2.2 percent of the market from 2.4 percent a year earlier, according to the research firm LMC Automotive. Meanwhile, sales of the Nissan Leaf electric car and the Chevrolet Volt plug-in each fell short of expectations.Analysts do not expect the segment to grow significantly this year: the combination of gas prices below $4 a gallon and higher upfront costs for the cars is not attracting consumers. Regardless, the automakers have little choice but to develop and try to push more hybrids as they prepare for fuel-efficiency requirements that call for significant increases later this decade. ...

Wind power is expensive and ineffective at cutting CO2 say Civitas  - A study in the Netherlands found that turning back-up gas power stations on and off to cover spells when there is little wind actually produces more carbon than a steady supply of energy from an efficient modern gas station. The research is cited in a new report by the Civitas think tank which warns that Britain is in danger of producing more carbon dioxide (CO2) than necessary if the grid relies too much on wind. Wind turbines only produce energy around 30 per cent of the time. When the wind is not blowing - or even blowing too fast as in the recent storms - other sources of electricity have to be used, mostly gas and coal. However it takes a surge of electricity to power up the fossil fuel stations every time they are needed, meaning more carbon emissions are released. “You keep having to switch these gas fired power stations on and off, whereas if you just have highly efficient modern gas turbines and let it run all the time, it will use less gas,”

BP Closes its Solar Business After 40 Years - After 40 years, BP exits its solar business in the face of fierce competition. Are they to blame? If "BP" is short for Beyond Petroleum, it will have to change its name to just "P" now after it officially shut down its solar business last month, a key division in its quest to develop cleaner sources of energy. After 40 years, the final decision to shut the door on solar mostly comes from the impossible competition faced from China. With the growth of Chinese manufacturing, a global surplus of panels and the subsequent collapse in prices, many solar companies have similarly been forced out of business over the last year. "The continuing global economic challenges have significantly impacted the solar industry, making it difficult to sustain long term returns for the company, despite our best efforts," BP said in an internal letter to staff. “Over the last six months we have realized that we simply can't make any money from solar,” a spokesman added.

How the Sunflower can Revolutionize Solar Power Plants - Concentrated Solar Power (CSP) plants are probably the most technologically advanced and efficient form of generating solar energy on a large scale. Current designs of CSP plants position the heliostat mirrors in an expanding formation, placing the mirror behind in the gap between the two mirrors in front, rather like seats in a cinema. Whilst this pattern reflects a high proportion of sunlight, it is highly inefficient resulting in higher-than-necessary shadowing throughout the day. The petals of a sunflower are arranged in a special spiral pattern commonly found in nature and known as a Fermat Spiral, a design that has fascinated mathematicians for centuries. Each petal is turned at a “magical” angle of 137 degrees with respects to its neighbour. This has allowed the “footprint” to be further reduced up to 20% of the original PS10; but even better, the spiral pattern reduces the actual number of heliostats needed and the shading they cast on one another, increasing the total efficiency of sunlight reflection. The researchers published their results in the journal Solar Energy, and have recently filed for patent protection.

China’s renewables surge outweighed by growth in coal consumption - China tripled its solar energy generating capacity last year and notched up major increases in wind and hydropower, government figures showed this week, but officials are still struggling to cap the growth in coal burning, which is the biggest source of carbon dioxide emissions in the world.The latest evidence of China’s promotion of renewable energy has been welcomed by climate activists, but they warn that the benefits are being wiped out by the surge in coal consumption. After burning an extra 95m tonnes last year, China will soon account for half the coal burned on the planet. This has alarmed state planners concerned about the impact of air pollution and climate change, but their efforts to cap the nation’s energy consumption are said to have run into resistance from local governments who fear restrictions on economic growth.

Glut Hits Natural-Gas Prices  - U.S. energy companies are pumping so much natural gas out of the ground that prices are plummeting, and the cheap gas isn't likely to evaporate anytime soon. Natural-gas prices fell 5.7% Wednesday to their lowest level in over two years—good news for people who use gas to heat homes and for companies that use it to power factories. For U.S. energy companies, however, the domestic natural-gas market is looking increasingly out of whack. Despite a 32% drop in prices last year, onshore production rose 10%, and it is expected to rise another 4% this year, according to Barclays Capital. As a result, prices are expected to remain low for at least the next couple years. Many energy companies have shifted their focus away from natural gas to more profitable oil. Still, natural gas is often a byproduct of oil drilling, and some companies are opting to burn off the gas they find because they don't have a way to transport it. For example, Goodrich Petroleum Corp.—reluctantly, it says—is flaring gas from an oil well on a ranch in South Texas because a nearby pipeline is already full.

What Do Falling Natural Gas Prices Mean for Renewables? - With a glut of shale gas on the market, natural gas prices continue to tumble in the U.S. And they’ll only fall more throughout the year. According to the U.S. Energy Information Administration, average natural gas prices on the wholesale spot market dropped another 9% in 2011, falling to the second-lowest price average since 2002. And the agency expects prices to fall substantially in 2012 due to record-high inventories of supply. In a few short years, domestic energy supply has undergone a major shift in favor of natural gas, challenging the economics of renewable energy technologies that compete directly with the resource. It’s not exactly the kind of shift that renewable energy proponents imagined. But it has helped keep electricity and heating prices low, while also shifting enthusiasm away from coal. Those are notable short-term victories — assuming renewables don’t get swept aside in the process. The picture is mixed. Although wind development has dropped off a cliff in states like Texas, in part because of low gas prices, Bloomberg New Energy Finance believes that wind will be competitive across the board with natural gas by 2016. And in utility-scale solar, large photovoltaic projects are also keeping pace with projected prices of natural gas. However, a study released earlier this month by the Massachusetts Institute of Technology modeled an energy scenario with and without shale gas, finding that renewables were indeed being negatively impacted:

Shale Bubble Inflates on Near-Record Prices for Untested Fields -- Surging prices for oil and natural- gas shales, in at least one case rising 10-fold in five weeks, are raising concern of a bubble as valuations of drilling acreage approach the peak set before the collapse of Lehman Brothers Holdings Inc. Chinese, French and Japanese energy explorers committed more than $8 billion in the past two weeks to shale-rock formations from Pennsylvania to Texas after 2011 set records for international average crude prices and U.S. gas demand. As competition among buyers intensifies, overseas investors are paying top dollar for fields where too few wells have been drilled to assess potential production, said Sven Del Pozzo, a senior equity analyst at IHS Inc. Marubeni Corp., the Japanese commodity trader, last week agreed to pay as much as $25,000 an acre for a stake in Hunt Oil Co.’s Eagle Ford shale property in Texas. The price, which includes future drilling costs, exceeds the $21,000 an acre Marathon Oil Corp. paid last year for nearby prospects owned by KKR & Co.’s Hilcorp Resources Holdings LP. In the Utica shale of Ohio and Pennsylvania, deal prices jumped 10-fold in five weeks to almost $15,000 an acre, according to IHS figures. “I don’t feel confident that the prices being paid now are justified,”

Hydrofracking industry bigs gave state politicians thousands of dollars - In pushing for state approval of hydrofracking, the natural gas industry has pumped $1.34 million into the coffers of New York politicians and their parties, a new study revealed. The donations were sprinkled around over the last four years as lawmakers and state officials debated whether to allow the controversial drilling process, formally known as hydraulic fracturing, in the gas-rich Marcellus Shale formation upstate, Common Cause New York said in its report. “Hydraulic fracturing has raised environmental questions, and now financial ones, about the influence of the natural gas industry over state lawmakers and public policy,” said Common Cause Executive Director Susan Lerner. “New Yorkers need to be assured that such a controversial issue will be decided based on merit, not money,” Lerner added. Common Cause’s study included not only gas drillers and producers, but some public utilities — including Con Edison and National Grid — that have stakes in gas distribution networks, Lerner said. The bulk of gas industry donations — some 75% — went to candidates for state legislature, including $448,359 given to Republican state Senate candidates and their campaign organizations.

Super Fracking Goes Deeper to Pump Up Natural Gas Production - As regulators and environmentalists study whether hydraulic fracturing can damage the environment, industry scientists are studying ways to create longer, deeper cracks in the earth to release more oil and natural gas. Energy companies are focused on boosting production and lowering costs associated with so-called fracking, a technique that uses high-pressure injections of water, sand and chemicals to break apart petroleum-saturated rock. The more thoroughly the rock is cracked, the more oil and gas will flow from each well. The world’s largest oilfield service providers are leading the search for new technologies, with some companies focused on splintering the rock into a web of tiny fissures, and others seeking to create larger crevices in the richest zones. “I want to crack the rock across as much of the reservoir as I can,”

Ohio quakes probably triggered by waste disposal well, say seismologists -- Earthquakes that have shaken an area just outside Youngstown, Ohio in the last nine months—including a substantial one on New Year’s Eve—are likely linked to a disposal well for injecting wastewater used in the hydraulic fracturing process, say seismologists at Columbia University’s Lamont-Doherty Earth Observatory who were called in to study the quakes. Ohio Gov. John Kasich has shut down the injection well and put four other proposed wells on hold. In the meantime, steps have been taken to ease pressure in the well to avert further rumblings.  The concern comes as natural gas drilling in shale formations that underlie much of the Northeast grows. To extract the gas, a mix of water, sand and chemicals is pumped under high pressure into shale rocks, in a process called hydraulic fracturing, or fracking. Once the gas has been removed, wastewater is either recycled or trucked off-site and injected deep underground. As the pressurized water seeps through cracks deep below ground, it can sometimes cause earthquakes on ancient fault lines.

Federal regulators say Ohio nuclear reactor safe despite not knowing cause of concrete cracks - Federal inspectors are convinced that a nuclear reactor along Lake Erie is safe to operate even though they said Thursday it is not clear why small cracks appeared in a concrete shell that protects the plant. The NRC allowed FirstEnergy Corp.'s Davis-Besse nuclear plant to begin producing electricity again in early December, less than two months after the first cracks were found. The plant was shut down for maintenance in October when crews discovered a 30-foot hairline crack in the outer concrete wall that's designed to protect the reactor from anything that might hit it from outside, such as storm debris or an airplane. More cracks were found soon after near the bottom of the 224-foot tall shield structure, leading to closer inspections that found cracks close to the top of the wall.

As Fukushima cleanup begins, long-term impacts are weighed - Following the nuclear disaster at Chernobyl 25 years ago, the Soviet government chose long-term evacuation over extensive decontamination; as a result, the plants and animals near Chernobyl inhabit an environment that is both largely devoid of humans and severely contaminated by radioactive fallout. The meltdown last March of three nuclear reactors at the Fukushima Daiichi nuclear power plant in Japan also contaminated large areas of farmland and forests, albeit not as severely or extensively as at Chernobyl. But lacking land for resettlement and facing public outrage over the accident, the Japanese government has chosen a very different path, embarking on a decontamination effort of unprecedented scale. Beginning this month, at least 1,000 square kilometers of land — much of it forest and farms — will be cleaned up as workers power-spray buildings, scrape soil off fields, and remove fallen leaves and undergrowth from woods near houses. The goal is to make all of Fukushima livable again. But as scientists, engineers, and ordinary residents begin this massive task, they face the possibility that their efforts will create new environmental problems in direct proportion to their success in remediating the radioactive contamination.

Locals call BP's feel-good Gulf ads 'propaganda' - — Nearly 20 months after its massive Gulf of Mexico oil spill — and just as Americans focus on New Orleans, host of the college football championship game — BP is pushing a slick nationwide public relations campaign to persuade Americans that the Gulf region has recovered.  BP PLC's rosy picture of the Gulf, complete with sparkling beaches, booming businesses, smiling fishermen and waters bursting with seafood, seems a bit too rosy to many people who live there. Even if the British oil giant's campaign helps promote the Gulf as a place where Americans should have no fear to visit and spend their money, some dismiss it as "BP propaganda." The PR blitz is part of the company's multibillion dollar response to the Gulf oil spill that started after the BP-leased Deepwater Horizon drilling rig exploded off the coast of Louisiana on April 20, 2010, killing 11 workers and leading to the release of more than 200 million gallons (760 million liters) of oil. As engineers struggled to cap the out-of-control well, it turned into the largest offshore oil spill in U.S. history. Now, BP is touting evidence that the Gulf's ecology has not been severely damaged by the spill and highlighting improving economic signs.

Dauphin Island fish show up with lesions, BP oil spill link questioned – More than half the fish caught Monday by Press-Register reporters in the surf off Dauphin Island had bloody red lesions on their bodies. Fishing along an uninhabited portion of the barrier island during a trip to survey beaches for tarballs, the newspaper caught 21 fish, 14 of them with lesions. Of those fish, eight had lesions a quarter of an inch across or smaller, while 6 had much larger blemishes. Most of the fish were whiting, a small species common to the surf zone throughout the Gulf of Mexico. Whiting grow to about 2 pounds and are ubiquitous in the surf year round, commonly found inside the first sand bar near breaking waves. A 12-pound black drum also exhibited lesions. Scientists contacted by the newspaper noted that whiting spend their lives close to shore in the area most affected by the Gulf oil spill. Buried mats of oil persist in the surf zone along the Mississippi and Alabama coasts and tarballs remain common on the beach.

Oil Is More Toxic Than We Thought, Study Finds -- Bad news for the Gulf of Mexico: a study released this week sheds new light on the toxicity of oil in aquatic environments, and shows that environmental impact studies currently in use may be inadequate…. The key finding involved the embryos of Pacific herring that spawn in the [San Francisco Bay, which was hit by an oil spill in 2007]. The fish embryos absorbed the oil and then, when exposed to UV rays in sunlight, physically disintegrated. This is called phototoxicity, and has not previously been taken into account when talking about oil spills. Photos from a UC Davis/NOAA study show the effects of phototoxicity in Pacific herring embryos. After the BP oil disaster, I wrote about the toxicity of oil (see “BP’s dispersants are toxic — but not as toxic as dispersed oil“).  Turns out oil is even more toxic than we thought, as a new study from the UC Davis Bodega Marine Laboratory in collaboration with NOAA finds.

Nigeria’s oil disasters are met by silence - In 2010 the world watched in horror as the Gulf of Mexico filled with 5m barrels of oil from an undersea leak.  Shocking images of uncontrolled spillage erupting from the ocean floor travelled around the world for weeks, sparking a media frenzy, a range of stern governmental responses and a huge amount of public outrage. Last month, on the other side of the Atlantic, the oil giant Royal Dutch Shell's operation caused from 1m to 2m gallons of oil to spill into the ocean off the coast of Nigeria, also as the result of an industrial accident. It was the worst spill in Nigeria in 13 years in a part of that country where the oil and gas industry has been despoiling the environment for more than 50 years, on a scale that dwarfs the Deepwater Horizon spill in the Gulf of Mexico by a wide margin. Shell claims it has completely cleaned up the mess, but villages counterclaim the oil has been washing up on their coastline. The world's media seem to be uninterested in checking the facts. You may wonder where the outrage against Shell is? To say that it is nonexistent except for a few responses from the environmental community would be an understatement. The simple fact is that Shell and its "sisters" in the West African oil patches are rarely scrutinised except in the most egregious cases – which this one surely is – and the world seems to simply expect that the people of Nigeria should live with these sorts of occurrences because they unfortunately lack the political and media clout to do otherwise.

Radicals working against oilsands, Ottawa says - Environmental and other "radical groups" are trying to block trade and undermine Canada's economy, Natural Resources Minister Joe Oliver said Monday. Oliver's comments came one day before federal regulatory hearings begin on whether to approve Enbridge's Northern Gateway pipeline, which would deliver crude from Alberta's oilsands to Kitimat, B.C., for shipment to Asia. More than 4,300 people have signed up to address the proposed pipeline over the next 18 months. "Unfortunately, there are environmental and other radical groups that would seek to block this opportunity to diversify our trade," Oliver said in an open letter. "Their goal is to stop any major project no matter what the cost to Canadian families in lost jobs and economic growth. No forestry. No mining. No oil. No gas. No more hydro-electric dams." Oliver says the groups "threaten to hijack our regulatory system to achieve their radical ideological agenda," stack the hearings with people to delay or kill "good projects," attract "jet-setting" celebrities and use funding from "foreign special interest groups."

Harper warns pipeline hearings could be 'hijacked' - Prime Minister Stephen Harper says his government will look into measures to prevent the approval process for energy projects from being "hijacked" by opponents of the developments. Harper told journalists Friday he's heard concerns expressed about the use of foreign money by interveners opposed to an oilsands pipeline proposed for northern B.C. by Calgary-based Enbridge. The prime minister said the government is prepared to review how public consultations are conducted to ensure they don’t get overloaded for the purpose of slowing down the process. He said Canada must have hearings that reach decisions in a reasonable amount of time and that can't be unduly influenced.

Business groups, Republicans launch onslaught on president over Keystone - The nation’s most powerful business groups are dialing up the political pressure on the White House to approve the Keystone XL pipeline. December’s payroll-tax-cut deal gives the administration 60 days to approve or reject TransCanada Corp.’s pipeline to bring oil from Alberta’s tar sands projects to Gulf Coast refineries. U.S. Chamber of Commerce President Tom Donohue plans to highlight the pipeline in his closely watched annual speech Thursday on the state of American business. “Keystone — and energy as a whole — will be a major element of Tom’s speech tomorrow,” a spokesman for the business group said Wednesday.

GOP Seeks to Pass Keystone Pipeline Without Obama -Congressional Republicans, who are urging President Obama to back the Canada-to-Texas Keystone XL oil pipeline, are now working on plans to take the reins of approval from the hands of the president should the White House say no.  North Dakota Senator John Hoeven, whose state is counting on the pipeline to help move its newfound bounty of shale oil, is drafting legislation that would see Congress give the green light to the project by using its constitutional powers to regulate commerce with foreign nations, an aide told Reuters.  After delaying the project past the November 2012 election, Obama was compelled by Congress to decide by Feb. 21 on whether to approve the pipeline that would sharply boost the flow of oil from Canada's oil sands.  Should Obama reject the project, Senate Republicans would look at a bill that would force the go-ahead so work could begin on the $7 billion pipeline, save for a portion going through Nebraska, where the state government continues work on an alternate route, said Ryan Bernstein, an energy adviser to Hoeven.

Keystone Pipeline debate heats up - Canadian ambassador Gary Doer has a straightforward analysis of whether TransCanada will win the Obama administration’s approval to build and operate an enormous pipeline to transport oil from Alberta to the Texas coast. “If it’s made on merit, we’re confident,” Doer said in an interview. “If it’s made on noise, it’s unpredictable.” Foes of the project — which has become a test of how President Obama balances environmental considerations against economic and energy supply concerns — will try to turn up the noise Sunday with a rally around the White House. Unemployed workers who support the 1,700-mile Keystone XL pipeline are planning to counter with a blitz of media interviews over the weekend. The Dec. 31 target date for a final decision is drawing closer, and it is unclear whether the State Department, which is in charge of the approval process, will meet it.

TransCanada steps up Keystone PR campaign — TransCanada Corp. TRP-T has stepped up its publicity campaign for the politically charged Keystone XL pipeline, releasing a detailed breakdown of where the $7-billion project would create 20,000 jobs in the United States, if approved. The project requires presidential approval but Keystone is a major challenge for the Obama administration in an election year because of opposition from environmental groups. TransCanada has argued for months that the Keystone XL pipeline from Alberta to the Gulf Coast is vital to the United States because it will provide energy security and much-needed jobs. The Calgary-based company says Keystone XL would create 13,000 construction jobs and 7,000 manufacturing jobs. TransCanada says it has contracts with over 50 suppliers across the country, some of them in important political battlegrounds for this year's elections.

U.S. Republicans push to 'OK' Keystone pipeline — U.S. Congressional Republicans, who are urging President Barack Obama to back the Canada-to-Texas Keystone XL oil pipeline, are now working on plans to take the reins of approval from the hands of the president should the White House say no. North Dakota Senator John Hoeven, whose state is counting on the pipeline to help move its newfound bounty of shale oil, is drafting legislation that would see Congress give the green light to the project by using its constitutional powers to regulate commerce with foreign nations, an aide said. After delaying the project past the November 2012 election, Obama was compelled by Congress to decide by Feb. 21 on whether to approve the pipeline that would sharply boost the flow of oil from Canada's oilsands. Should Obama reject the project, Senate Republicans would look at a bill that would force the go-ahead so work could begin on the $7-billion pipeline, save for a portion going through Nebraska, where the state government continues work on an alternate route, said Ryan Bernstein, an energy adviser to Hoeven

The expert's report that damns the northern gateway pipeline - The Northern Gateway Pipeline will explosively increase the scale of oil sands production at a level not in the national interest, says David Hughes, one of Canada's foremost energy analysts.  By tripling oil sands production rates above 2010 levels, the project will "compromise the long term energy security interests of Canadians, as well as their environmental interests," charges Hughes.  The proposed pipeline, designed to ferry bitumen to Asian markets, will also liquidate a non-renewable resource at prices that will likely seem like a bargain down the road says Hughes in a 30-page report titled "The Northern Gateway Pipeline." The top-notch analyst also points out that Enbridge, Gateway's proponent, has made up its own oil sands growth forecasts, which it has provided to the National Energy Board to justify the project.

Oil and Natural Gas Prices Move Even Further Apart -In 2010, I wrote a series of posts documenting how oil and natural prices had decoupled from each other (see here and here). For many years, oil prices (as measured in $ per barrel) were typically 6 to 12 times natural gas prices (as measured in $ per MMBtu). That ratio blew out to around 20 in 2009 and again in 2010, a severe break with historical trends. At the time, that seemed like an enormous disparity between the two prices. In retrospect, we hadn’t seem anything yet. As of yesterday, the ratio stood at more than 33: A barrel of oil has roughly 6 times the energy content of a MMBtu of natural gas. If the fuels were perfect substitutes, oil prices would thus tend to be about 6 times natural gas prices. In practice, however, the ease of using oil for making gasoline means that oil is more valuable. So oil has usually traded higher. But the current ratio is unprecedented. Each Btu of oil is now worth about five times as much as each Btu of natural gas. Thanks to a torrent of new supply, natural gas prices are down at $3.00 per MMBtu even as oil (as measured by the WTI price) has risen back above the $100 per barrel mark.

Shale Gas Production Is NOT Profitable At The Current Price - Shale gas drilling and production in the United States is ramping up like there's no tomorrow. Natural gas is going for $3.01 per MCF ($MMBTU, Henry Hub future). The average well-head price in 2010 was $4.48/MCF. Through the first 10 months of 2011, it was $4.04. It is impossible make a profit producing shale gas at that price. Let me spell that out for you. I-M-P-O-S-S-I-B-L-E Consider the situation. The natural gas market is out of balance. There is a glut (over-supply) of natural gas, which is driving down the price, although demand is rising somewhat due low prices. Now, you would think that producers would pull back on production to bring the market back into balance. But no! The shale gas operators keep drilling, which drives down the price, which makes it even more unprofitable to sell shale gas. This alone ought to tell you there's something fishy going on.

Nigeria Fuel Strike Brings Country To A Halt - A general strike in Nigeria over the elimination of a fuel subsidy has brought the country to a standstill. Shops, offices, schools and petrol stations around the country closed on the first day of an indefinite strike. In Lagos and other cities, thousands marched against the removal of the subsidy, which has doubled fuel costs. Police fired on protesters in Kano in the north, reportedly killing two and wounding many. Another demonstrator died in a clash with police in Lagos. President Goodluck Jonathan has said the subsidy was economically unsustainable.

Norway Makes Its Second Huge Oil Discovery In The Past Year: Norway's Statoil said Monday it has discovered a large oil reserve in the Barents Sea, its second major oil find in the Arctic region in less than a year. The state-controlled oil company said a well drilled in the Havis prospect in the Barents Sea proved both oil and gas at an estimated volume of between 200 million and 300 million barrels of recoverable oil equivalents. Last April, Statoil said it had discovered between 150 million and 250 million recoverable barrels of oil equivalents in the nearby Skrugard prospect. The company has received a huge boost to its reserves in the past year. In August, it announced the biggest find in the Norwegian continental shelf in 30 years with a massive discovery of 500 million to 1.2 billion barrels of oil in the North Sea. The company's shares rose by 1.2 percent to 157.3 Norwegian kroner ($26.0) in early trading Monday. "Havis is our second high impact oil discovery in the Barents Sea in nine months," Statoil CEO Helge Lund said. "The discovery's volume and reservoir properties make it Skrugard's twin. Skrugard and Havis open up a new petroleum province in the North." Statoil has been exploring in the Barents Sea for more than 30 years and said the find proves that persistence and long-term thinking bear fruit.

Western oil firms remain as US exits Iraq - While the US military has formally ended its occupation of Iraq, some of the largest western oil companies, ExxonMobil, BP and Shell, remain. On November 27, 38 months after Royal Dutch Shell announced its pursuit of a massive gas deal in southern Iraq, the oil giant had its contract signed for a $17bn flared gas deal. Three days later, the US-based energy firm Emerson submitted a bid for a contract to operate at Iraq's giant Zubair oil field, which reportedly holds some eight million barrels of oil. Earlier this year, Emerson was awarded a contract to provide crude oil metering systems and other technology for a new oil terminal in Basra, currently under construction in the Persian Gulf, and the company is installing control systems in the power stations in Hilla and Kerbala. Iraq's supergiant Rumaila oil field is already being developed by BP, and the other supergiant reserve, Majnoon oil field, is being developed by Royal Dutch Shell. Both fields are in southern Iraq.According to the US Energy Information Administration (EIA), Iraq's oil reserves of 112 billion barrels ranks second in the world, only behind Saudi Arabia. The EIA also estimates that up to 90 per cent of the country remains unexplored, due to decades of US-led wars and economic sanctions.

What Is Keeping OPEC Up At Night? - For OPEC life should be good! Oil prices are trading over $100 a barrel an their production is at a three year high and the money is rolling in. Life should be good. Should it not? Well the truth is that OPEC is going through a lot of sleepless nights and it doesn't really have anything to do with Iran but it has a lot to do with the unconventional oil and gas production. You see OPEC's desire to produce as much oil as they can has little to do with Iran or even high oil prices. In fact it may be their desire to hang onto precious market share as unconventional energy sources are starting to cut into their current and future economic prospects . Whether you are talking about tar Canadian oil sands or shale gas and oil production is making life for OPEC's monopoly look less solid . Not only will OPEC matter less but the competition from these new sources of energy may create more tension in an already unhappy population as many OPEC governments rely on oil money to run their governments and to stay in power. Obviously after he tumultuous year that we have just seen with the Arab Spring of discontent spreading through major OPEC producers the prospect of having as much sway over global oil prices should make them all think about a new way of doing business.

Chris Cook: Naked Oil - All is not as it appears in the global oil markets, which in my view have become entirely dysfunctional and no longer fit for its purpose. I believe that the market price is about to collapse as it did in 2008 and that this will mark the end of an era in which the market has been run by and on behalf of trading and financial intermediaries. In this post I forecast the imminent death of the crude oil market, and I identify the killers; the re-birth of the global market in crude oil in new form will be the subject of another post.  I see real demand – as opposed to financial demand and stock-piling, such as in the copper market – declining in 2012 as the financial crisis continues at best, and deepens at worst, particularly in the EU. Stocks are low because bank financing of stock is disappearing as banks retrench, and it makes no sense for traders to hold stocks if forward prices are lower than today’s price. As for supplies, US crude oil production is probably higher, and consumption lower, than widely appreciated. Elsewhere, there is plenty of oil available now that much of the Dark Inventory has been liquidated, and this liquidation was probably why in November 2011 we saw the highest Saudi monthly deliveries in 30 years.

Fear and Loathing in the Financial Markets – What Happens to the Economy When the Oil Bubble Bursts? - In what follows I will draw on Chris Cook’s post on this site the other day to argue that, if he is correct (and I think he may be), judgment day is just around the corner for the profiteers. Soon they will have to learn that you cannot financial engineer your way to profitability forever, especially when the rest of the economy is withering. Who knows, this may even inspire what has come to be called the 1% to focus their attention on the problems that have arisen in the global economy in recent months – for they have been truly burying their heads in the sand for the past three years. Chris Cook argues that financial investors have fled into commodities and inflated a bubble which they are using to keep their margins up. While one is tempted to reach for the gun shouting “speculation!” one should be more careful. According to Cook, this is not the cynical, greed-fuelled speculation that led to the pre-2008 housing bubble. No, this something altogether different. This is a bubble mainly based on fear. But such makes it no less ominous. First a run through of the structure of the modern oil market as Cook portrays it.

This Chart Shows Why Oil Is Unlikely To Fall Below $70 - In its coverage of the debate over Iranian oil sanctions, Der Spiegel created this chart (H/T Robert Sinn) showing the different oil prices major OPEC governments need to break even on their oil investments.  Obviously, OPEC nations have a strong incentive to see oil prices above their breakeven prices.

Saudi Oil Output Nearing Capacity Limit - Top oil exporter Saudi Arabia is nearing its comfortable operational production limits and may struggle to do much to make up for shortages that arise from new sanctions imposed on Iran by the West, Gulf-based sources said. The kingdom, now pumping just under record rates of 10 million barrels per day, has poured billions of dollars into its vast oil fields, which on paper should ensure it has the ability to ramp up to 12.5 million bpd. Long-standing oil policy by Riyadh, the heavyweight in the Organization of the Petroleum Exporting Countries (OPEC), sets aside some 1.5 million bpd as protective spare capacity. But industry sources said pumping anywhere near the declared production capacity might involve extracting heavy crudes the market might not want. It would also be difficult to sustain higher rates for lengthy periods. "There is very little unused capacity in the Gulf," said an oil official in the region. "Saudi Arabia could comfortably manage an extra 500,000 barrels a day or so and, if pushed, could go up to 11 million (barrels a day)." A steady rate beyond 10 million bpd would offer immediate relief to world oil markets, but it would take the kingdom's production to untested levels.

Heinberg, Kunstler, Foss, Orlov & Chomsky on A Public Affair - Energy Bulletin: Richard Heinberg joins James Howard Kunstler, Nicole Foss, Dmitri Orlov and Noam Chomsky in a panel discussion. The discussion begins after the news bulletin and lead-in music (about 7:00 into the audio)

The Peak Oil Crisis: Gasoline in 2012 - In recent days there has been much discussion in the press about what might happen to gasoline prices in the coming year. Cognizant of the fact that retail gasoline is currently running nearly 30 cents per gallon higher than it was in January 2008 the year when prices topped out at a national average of $4.11 and that gasoline futures have risen by 30 cents a gallon in the last few weeks, there is reason for concern. Typical of the stories is one from the Los Angeles Times that quotes Tom Kloza, long-time chief analyst for the Oil Price Information Service and the go-to guy when one needs numbers and forecasts on gasoline prices. Kloza notes that for the last decade gasoline futures prices, which ultimately determine pump prices, have risen from an autumn low to a spring high by an average of 83 percent. During these years, the annual winter-spring price surge has varied anywhere from 52 to 169 percent making higher prices by summer a fairly sure bet. This year the 2011 low for gasoline on the NY futures market likely will turn out to have been $2.44 a gallon on November 25. If one does the arithmetic using the average price jump of 83 percent, futures prices could be expected to top out in the vicinity of $4.46 a gallon next spring. Adding in the additional 60 cents to get the gasoline taxed and to the nozzle of your pump, we could theoretically be paying a national average on the order of $5.00 a gallon before the 4th of July. This of course assumes that nothing bad happens in the Middle East that restricts or seriously threatens the flow of oil exports and sends prices much higher.

How Will Peak Oil Fare In 2012 - The returns are in and we now know that world price of a barrel of oil averaged $111 in 2011. This was up 14 percent from last year and well above the previous high of $100 set in 2008. The average barrel of oil that we bought last year cost $15 more than the year before. Here in America, we burn about 6.7 billion barrels of the stuff each year. Therefore, our collective oil bill for 2011 was about $100 billion higher for the same amount of energy that we burned in 2010. This $100 billion created few new jobs here in the USA. Much of it went overseas and into the coffers of people who don't like us very much. The peak oil story changed little last year. Global oil production hung in around 88 million barrels a day (b/d) despite the Libyan uprising which took nearly 1.6 million b/d out of production for several months. For much of last year global oil production was below consumption resulting in a gradual drawdown of world reserves. With OECD stockpiles of about 2.6 billion barrels, plus the new reserves being accumulated in China, a slight shortfall in production is not a problem for the time being.

Population: The Elephant in the Room; Peak Oil Implications on Population Growth; What Level of Human Population is Sustainable? "In the last 200 years the population of our planet has grown exponentially, at a rate of 1.9% per year. If it continued at this rate, with the population doubling every 40 years, by 2600 we would all be standing literally shoulder to shoulder." says Professor Stephen Hawking as reported by Edward Morgan in Looking at the New Demography. Suffice to say the rate of population growth will not continue, and Morgan makes the case we are already in stage 5 of The Demographic Transition Model. Whereas Morgan presents a relatively benign view of things, even wondering if there are ways to reverse stage 5 decline, Paul Chefurka in Population: The Elephant in the Room sees things quite differently, primarily because of oil usage.  It is becoming clearer every day, as crises like global warming, water, soil and food depletion, biodiversity loss and the degradation of our oceans constantly worsen, that the human situation is not sustainable. Bringing about a sustainable balance between ourselves and the planet we depend on will require us, in very short order, to reduce our population, our level of activity, or both. One of the questions that comes up repeatedly in discussions of population is, "What level of human population is sustainable?" Oil first entered general use around 1900 when the global population was about 1.6 billion. Since then the population has quadrupled. When we look at oil production overlaid on the population growth curve we can see a very suggestive correspondence:

The Faustian Bargain has Enabled an Unsustainable Economic System, but Not for Much Longer - The Faustian bargain goes something like this: Thanks to the discovery and exploitation of fossil fuels, humans (really just a small minority of them) are able to live richer lives today than even the queens and kings of yore could have dreamed of. Furthermore, we’ve used some of those finite resources to increase food supplies and to expand the human population, which provides the economic system with both more workers and more consumers, a necessity to keep the economy growing under our current economic model. The world’s population increased from 1.6 billion in 1900 to 7 billion today, and we add about 80 million more each year. Humans have quickly become the most numerous megafauna on the planet. The other side of the bargain, the side hidden from view and never mentioned in economics texts is this: At some undetermined time in the future, one that creeps ever closer, this economic system, fed by energy and other resources at ever increasing rates at one end and spewing out waste products at rates that cannot be absorbed by Earth’s ecosystems at the other, is unsustainable. What that means is simple enough: Industrial society as we know it cannot go on as it has forever—not even close.

Iran Starts Uranium Enrichment at Fordo Mountain Facility - Iran has started to enrich uranium at its Fordo production facility, the official Kayhan newspaper reported without saying where it got the information. Iran will soon have a ceremony to open the site officially, the newspaper reported, citing the head of the Iranian Atomic Energy Organization, Fereydoun Abbasi. The Iranian nuclear chief was cited yesterday by Mehr News as saying that the underground facility “will start operating in the near future.”The existence of the Fordo plant, built into the side of a mountain near the Muslim holy city of Qom, south of Tehran, was disclosed in September 2009, heightening concern among the U.S. and its allies who say Iran’s activities may be a cover for the development of atomic weapons. The Persian Gulf country has rejected the allegation, saying it needs nuclear technology to secure energy for its growing population.  Iran has pressed ahead with its nuclear program even as international pressure increases to prevent the Islamic republic from building an atomic weapon.

Iran Has Ability to Block Strait of Hormuz, U.S. General Dempsey Tells CBS - Iran has the ability to block the Strait of Hormuz “for a period of time,” and the U.S. would take action to reopen it, Joint Chiefs of Staff chairman General Martin Dempsey said. “They’ve invested in capabilities that could, in fact, for a period of time block the Strait of Hormuz,” Dempsey said in an interview airing today on the CBS “Face the Nation” program. “We’ve invested in capabilities to ensure that if that happens, we can defeat that.” Should Iran try to close Hormuz, the U.S. “would take action and reopen” the waterway, said Dempsey, President Barack Obama’s top military adviser.  Dempsey suggested that curbing Iran’s nuclear work by bombing its facilities would be difficult. “I’d rather not discuss the degree of difficulty and in any way encourage them to read anything into that,” Dempsey said. “My responsibility is to encourage the right degree of planning, to understand the risks associated with any kind of military option.”

Hormuz Bypass Oil Pipeline Delayed as Iranian Tensions Mount - A pipeline that would allow oil from the United Arab Emirates to bypass the Strait of Hormuz separating it from Iran has been delayed because of construction difficulties, two people with knowledge of the matter said. As many as 270 construction issues have pushed back the completion date, said the two people, declining to be identified because they’re not allowed to speak publicly on the matter. The $3.3 billion project won’t be ready until at least April, one of them said. Abu Dhabi, holder of most of the U.A.E.’s oil reserves, had planned to start exports in January 2011 through the pipeline to a port outside the strait, Dieter Blauberg, the project’s former director, said in May 2009. The 1.5 million barrel-a-day link would ensure the U.A.E. can export crude without risking a blockade at Hormuz, where fully laden tankers exit the Persian Gulf with one-fifth of the world’s traded oil. The chance that Iran might try to close the waterway has intensified as Europe prepares to follow tougher U.S. sanctions on the country. “That pipeline would carry pretty much all of Abu Dhabi’s oil,” Robin Mills, an analyst at Manaar Energy Consulting in Dubai, said Jan. 5. “It’s a critical bit of infrastructure, and it is remarkable it hasn’t been completed.”

Exclusive: West readies oil plan in case of Iran crisis (Reuters) - Western powers this week readied a contingency plan to tap a record volume from emergency stockpiles to replace nearly all the Gulf oil that would be lost if Iran blocks the Strait of Hormuz, industry sources and diplomats told Reuters. They said senior executives of the International Energy Agency (IEA), which advises 28 oil consuming countries, discussed on Thursday an existing plan to release up to 14 million barrels per day (bpd) of government-owned oil stored in the United States, Europe, Japan and other importers. Action on this scale would be more than five times the size of the biggest release in the agency's history -- made in response to Iraq's 1990 invasion of Kuwait. The maximum release, some 10 million bpd of crude and about 4 million bpd of refined products, could be sustained during the first month of any coordinated action, the plan says. "This would form a necessary and sensible response to a closure of the strait,". "It wouldn't take long to put in place if it was required ... and would be unlikely to prove controversial amongst the (IEA) membership." A spokesman for the IEA confirmed that the Paris-based agency has an existing contingency plan that outlines a maximum stock release capability of 14 million bpd for a month.

Obama Ready to Strike to Stop Iran: Ex-Adviser -  No one should doubt that President Barack Obama is prepared to use military force to prevent Iran from acquiring a nuclear weapon if sanctions and diplomacy fail, the president’s former special assistant on Iran said.  Obama has “made it very clear” that he regards a nuclear- armed Iran as so great a threat to international security that “the Iranians should never think that there’s a reluctance to use the force” to stop them, Dennis Ross, who served two years on Obama’s National Security Council and a year as Secretary of State Hillary Clinton’s special adviser on Iran, said in an interview yesterday.  “There are consequences if you act militarily, and there’s big consequences if you don’t act,” said Ross, who in a two- hour interview at the Bloomberg Washington office laid out a detailed argument against those who say Obama would sooner “contain” a nuclear-armed Iran than strike militarily.  The administration considers the risks of permitting a nuclear-armed Iran to be greater than the risks of military action, said Ross, who last month rejoined the Washington Institute for Near East Policy, a research group.

Iran Says Work at Fortified Uranium Enrichment Site Is Supervised by IAEA - Iran said that all activities at a fortified nuclear site, where it began enriching uranium drawing U.S. condemnation, are under the permanent supervision of the International Atomic Energy Agency.  Fordo “was declared more than two years ago and since then the agency has continuously monitored all the activities,” Ali Asghar Soltanieh, Iran’s delegate to the IAEA, told the state- run Press TV news channel. “Every step we have taken so far and will take in the future has been and will be under IAEA containment and surveillance.”  Iran has started the production of uranium enriched up to 20 percent in the Fordo Fuel Enrichment Plant near the holy city of Qom, International Atomic Energy Agency spokesman Gill Tudor said in an e-mail yesterday. “All nuclear material in the facility remains under the agency’s containment and surveillance.” The start of enrichment activities at the Fordo facility, which is built into the side of a mountain south of Tehran, the capital, has aroused Western ire and may accelerate the imposition of tighter sanctions on the country.

PBS’s Dishonest Iran Edit - As if tensions between the United States and Iran weren't high enough, here's PBS NewsHour anchor Margaret Warner (1/9/12):The Iranian government insists that its nuclear activities are for peaceful energy purposes only, an assertion disputed by the U.S. and its allies. On CBS yesterday, Secretary of Defense Leon Panetta repeated international demands that Iran stop enriching uranium. PANETTA: But we know that they're trying to develop a nuclear capability, and that's what concerns us. And our red line to Iran is, do not develop a nuclear weapon. That's a red line for us. They need to know that, if they take that step, that they're going to get stopped.The way that's presented you'd think that the United States has evidence that Iran is pursuing a weapon. Leon Panetta's soundbite is from his appearance on Face The Nation on Sunday. But the NewsHour removed one key phrase; right before Panetta says, "But we know," he said this: Are they trying to develop a nuclear weapon? No.

Year-Over-Year Gasoline and Petroleum Usage Charts

Reducing Petroleum Consumption from Transportation - MIT Professor Christopher Knittel has a new paper on the potential for the United States to reduce petroleum consumption. From the paper's abstract: The United States consumed more petroleum-based liquid fuel per capita than any other OECD-high-income country-- 30 percent more than the second-highest country (Canada) and 40 percent more than the third-highest (Luxemburg). This paper examines the main channels through which reductions in U.S. oil consumption might take place: (a) increased fuel economy of existing vehicles, (b) increased use of non-petroleum-based low-carbon fuels, (c) alternatives to the internal combustion engine, and (d) reduced vehicles miles traveled. I then discuss how the policies for reducing petroleum consumption used in the US compare with the standard economics prescription for using a Pigouvian tax to deal with externalities. Taking into account that energy taxes are a political hot button in the United States, and also considering some evidence that consumers may not correctly value fuel economy, I offer some thoughts about the margins on which policy aimed at reducing petroleum consumption would have the largest impact on economic efficiency.  Knittel begins by noting that fuel taxes differ tremendously across OECD countries.

SocGen Lays It Out: "EU Iran Embargo: Brent $125-150. Straits Of Hormuz Shut: $150-200" - Previously we heard Pimco's thoughts on the matter of an Iranian escalation with "Pimco's 4 "Iran Invasion" Oil Price Scenarios: From $140 To "Doomsday"", now it is the turn of SocGen's Michael Wittner to take a more nuanced approach adapting to the times, with an analysis of what happens under two scenarios - 1) a full blown EU embargo (which contrary to what some may think is coming far sooner than generally expected), and the logical aftermath: 2) a complete closure of the Straits. The forecast is as follows: 1) "Scenario 1: EU enacts a full ban on 0.6 Mb/d of imports of Iranian crude. In this scenario, we would expect Brent crude prices to surge into the $125-150 range." 2) "Scenario 2: Iran shuts down the Straits of Hormuz, disrupting 15 Mb/d of crude flows. In this scenario, we would expect Brent prices to spike into the $150-200 range for a limited time period." The consequences of even just scenario 1 is rather dramatic: while the adverse impact on the US economy will be substantial, it would be the debt-funded wealth transfer out of Europe into Saudi Arabia that would be the most notable aftermath. And if there is one thing an already austere Europe will be crippled by, is the price of a gallon of gas entering the double digits. And then there are the considerations of who benefits from an Iranian supply deterioration: because Europe's loss is someone else's gain. And with 1.5 million of the 2.4 Mb/d in output already going to Asia (China, India, Japan and South Korea) it is pretty clear that China will be more than glad to take away all the production that Europe decides it does not need

Russia, Iran Proceed With Bilateral Trade, Drop Dollar; Russian Warships Park In Syria; Iran Accelerates Nuclear Enrichment - For anyone wondering how the abandonment of the dollar reserve status would look like we have a Hollow Men reference: not with a bang, but a whimper... Or in this case a whole series of bilateral agreements that quietly seeks to remove the US currency as an intermediate. Such as these: "World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", and now this: "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says." And ironically, the proposal to dump the greenback did not come from Iran. Per Bloomberg: "Iran and Russia replaced the U.S. dollar with their national currencies in bilateral trade, Iran’s state-run Fars news agency reported, citing Seyed Reza Sajjadi, the Iranian ambassador in Moscow. The proposal to switch to the ruble and the rial was raised by Russian President Dmitry Medvedev at a meeting with his Iranian counterpart, Mahmoud Ahmadinejad, in Astana, Kazakhstan, of the Shanghai Cooperation Organization, the ambassador said." Is Iran gradually becoming the poster child of an energy rich country that just says no to the dollar: "Iran has replaced the dollar in its oil trade with India, China and Japan, Fars reported." Next thing you know China, Russia and Japan will engage in bilateral trade agreements with the Eurozone in exchange for purchasing European or EFSF (which at last check are now forced to give 30% guaranatees) bonds, and bypassing dollars completely. But yes, aside from everyone else, virtually everyone (footnote 1) is still using the dollar as currency of global exchange.

American, British, Israeli and Iranian Warships Sailing Towards Confrontation - The U.S. and Israel are conducting their largest-ever joint warfare exercises near Iran. And see this. England is sending its most advanced ship – the HMS Daring – to the region. Only days after finishing its last wargames in the Strait of Hormuz, Iran has announced another set of wargames in February. Looking behind the headlines:

U.S. Sends Top Iranian Leader a Warning on Strait Threat - The Obama administration is relying on a secret channel of communication to warn Iran1’s supreme leader, Ayatollah Ali Khamenei, that closing the Strait of Hormuz2 is a “red line” that would provoke an American response, according to United States government officials.  The officials declined to describe the unusual contact between the two governments, and whether there had been an Iranian reply. Senior Obama administration officials have said publicly that Iran would cross a “red line” if it made good on recent threats to close the strait, a strategically crucial waterway connecting the Persian Gulf to the Gulf of Oman, where 16 million barrels of oil — about a fifth of the world’s daily oil trade — flow through every day.  Gen. Martin E. Dempsey, the chairman of the Joint Chiefs of Staff, said this past weekend that the United States would “take action and reopen the strait,” which could be accomplished only by military means, including minesweepers, warship escorts and potentially airstrikes. Defense Secretary Leon E. Panetta told troops in Texas on Thursday that the United States would not tolerate Iran’s closing of the strait.  The secret communications channel was chosen to underscore privately to Iran the depth of American concern about rising tensions over the strait, where American naval officials say their biggest fear is that an overzealous Revolutionary Guards naval captain could do something provocative on his own, setting off a larger crisis.

Iran: Oh, No; Not Again - Chris Martenson - In each of the years 2008, 2009, and 2010, significant worries emerged that Western nations might attack Iran. Here again in 2012, similar concerns are once again at the surface. Why revisit this topic again? Simply because if actions against Iran trigger a shutdown of the Strait of Hormuz, through which 40% of the world's daily sea-borne oil passes, oil prices will spike, the world's teetering economy will slump, and the arrival of the next financial emergency will be hastened. Even if the strait remains open but Iran is blocked from being an oil exporter for a period of time, it bears mentioning that Iran is the third largest exporter of oil in the world after Saudi Arabia and Russia. Once again, I am deeply confused as to the timing of the perception of an Iranian threat, right now at this critical moment of economic weakness. The very last thing the world economies need is a vastly increased price for oil, which is precisely what a war with Iran will deliver.

Oil rises above $113 on Iran tension (Reuters) - Oil rose to above $113 a barrel on Tuesday as tension over Iran's nuclear programme and unrest in Nigeria outweighed persistent concerns about the strength of Europe's economy. Iran has begun enriching uranium deep inside a mountain and has sentenced an American to death for spying, angering the West and undermining expectations that diplomacy could avert further sanctions or even war. Brent crude rose $1.03 a barrel to $113.48 a barrel by 1500 GMT, following a decline of 61 cents on Monday. U.S. crude was up $1.69 to $103.00. "On balance the bulls seem to be winning, despite the strong dollar, weak demand in the euro zone and a mild winter in the northern hemisphere," said Christopher Bellew, a broker at Jefferies Bache. U.S. crude traded at a discount of $10.52 to Brent CL-LCO1=R, narrowing by around $1 from Friday. Analysts and brokers cited relatively positive sentiment about the U.S. economy and weak demand in Europe as among the possible factors for Brent's narrower premium. The tension over Iran's nuclear programme, which Tehran insists is for peaceful purposes, have included threats by Iran to shut the Strait of Hormuz, the world's most important oil export route.

Kingdom vows to ensure oil market stability -The Council of Ministers on Monday reviewed global oil market developments and reiterated Saudi Arabia’s commitment to ensure international market stability in terms of balancing demand and supply and prices. The Cabinet, chaired by Custodian of the Two Holy Mosques King Abdullah, said the Kingdom viewed oil embargoes imposed by certain countries (on Iran) as their internal matters. It also stressed that the Kingdom’s oil sales are done purely on a commercial basis through deals reached by Saudi oil companies and foreign firms that purchase Saudi oil.

Energy Wars 2012 - The Three Top Hot Spots of Potential Conflict in the Geo-Energy Era - Welcome to an edgy world where a single incident at an energy “chokepoint” could set a region aflame, provoking bloody encounters, boosting oil prices, and putting the global economy at risk. With energy demand on the rise and sources of supply dwindling, we are, in fact, entering a new epoch -- the Geo-Energy Era -- in which disputes over vital resources will dominate world affairs. In 2012 and beyond, energy and conflict will be bound ever more tightly together, lending increasing importance to the key geographical flashpoints in our resource-constrained world. Take the Strait of Hormuz, already making headlines and shaking energy markets as 2012 begins. Connecting the Persian Gulf and the Indian Ocean, it lacks imposing geographical features like the Rock of Gibraltar or the Golden Gate Bridge. In an energy-conscious world, however, it may possess greater strategic significance than any passageway on the planet. Every day, according to the U.S. Department of Energy, tankers carrying some 17 million barrels of oil -- representing 20% of the world’s daily supply -- pass through this vital artery. So last month, when a senior Iranian official threatened to block the strait in response to Washington’s tough new economic sanctions, oil prices instantly soared. While the U.S. military has vowed to keep the strait open, doubts about the safety of future oil shipments and worries about a potentially unending, nerve-jangling crisis involving Washington, Tehran, and Tel Aviv have energy experts predicting high oil prices for months to come, meaning further woes for a slowing global economy.

Doomsday Clock moves to five minutes to midnight - It is five minutes to midnight. Two years ago, it appeared that world leaders might address the truly global threats that we face. In many cases, that trend has not continued or been reversed. For that reason, the Bulletin of the Atomic Scientists is moving the clock hand one minute closer to midnight, back to its time in 2007. 

How a self-sufficient America could go it alone - I think it was Madeleine Albright who first called the US the indispensable nation. After more than a decade of relative decline the description still broadly holds. Even as the challenge from rising states obliges the US to abandon the hegemonic ambitions of the early years of George W. Bush’s presidency, it remains the only power with real global reach.  For all its present problems, the US starts with the immense advantage of being the richest and most stable of the great powers. Geographically it is the most secure – unless one imagines it might one day be invaded by Mexico or Canada. It is rich in natural resources. New technology in oil and gas extraction has transformed the energy industry. The US is heading for self-sufficiency in energy and, by some accounts, could become a significant net exporter. Unfair as it might seem given its record on carbon emissions, it is much less vulnerable than say, China or India, to the depredations of climate change. Some of the other advantages were set out recently in a paper prepared by Uri Dadush of the Carnegie Endowment as part of the US National Intelligence Council’s Global Trends 2030 project. To take a few: America’s high per capita income reflects high productivity, the single best measure of competitiveness; with 5 per cent of the world’s population, the US accounts for 28 per cent of all patent applications; it has 40 per cent of the world’s top universities; an open, innovative and flexible society leaves it uniquely placed to benefit from technological advances. Oh, and it has a great demographic profile.

Euro crisis, Brent oil edition - Courtesy of Olivier Jakob at Petromatrix, FT Alphaville presents the price of front-month Brent oil futures expressed in euro terms: That would be echoes of the 2008 record oil price. This time, only for Europe. As Jakob notes: There is currently not one day where we do not publish the chart of Brent in Euro/bbl and this is because we do think that the record prices for oil in Euro/bbl will be the next leg of the European crisis. The current record oil prices for European consumers will morph into a new energy crisis for Europe and it will hit both consumer sentiment and disposable income right at the time when austerity measures will kick in.  The combination of the Iranian premium and of the Dollar premium will be a kiss of death for European oil demand but also for European global consumption. Because of the Iranian risk premium the correlations between the price of oil and the Euro/Dollar have totally broken down, but the oil correlations to the S&P500 are still extremely high. If we were running with the same Euro/Dollar correlations as in October, Brent today will be priced at 96.00 $/bbl ie at a 17 $/bbl discount to current levels.

The West Blinks - Iran Embargo Likely To Be Delayed By Six Months - And so the escalation ends, if only for the time being, as Iran chalks a (Pyrrhic?) victory.  Why? Because the world slowly realized that the potential surge in oil prices would tip a world already on the verge of a recession even deeper into economic contraction. Not rocket science, but certainly something the US president apparently has been unable to comprehend, especially if hoping that he would merely transfer exports from Iran to his close ally Saudi Arabia which would cement its European market monopoly even further. Or, perhaps, someone just explained to Obama that Embargo in January + QE3 in March = No Reelection... In other news, crude is now dumping.

EU Iran Oil Embargo Over Nuclear Work Said Likely to Be Delayed Six Months - A European Union embargo on imports of Iranian (OPCRIRAN) oil will probably be delayed for six months to let countries such as Greece, Italy and Spain find alternative supplies, two EU officials with knowledge of the talks said. The embargo, which would need to be accepted by the 27- nation bloc’s foreign ministers on Jan. 23, is also likely to include an exemption for Italy, so crude can be sold to pay off debts to Rome-based Eni SpA (ENI), Italy’s largest oil company, according to the officials, who declined to be identified because the talks are private.  A ban on petrochemical products would start sooner, about three months after EU ministers agree to the measure, one official said yesterday. Once a decision is made, member states would be barred from concluding new oil contracts with Iran or renewing those that are due to expire, while existing deals will be terminated within six months, according to a second diplomat today. Long-term contracts constitute the bulk of Europe’s purchases of Iranian oil.  Phasing in the European embargo would satisfy the concern of nations most dependent on Iranian crude, including Italy, Greece and Spain, the first EU official said. Those three nations accounted for 68.5 percent of EU imports from Iran in 2010, according to European Commission data.

Oil Prices  - I have been generally bearish on (Brent) oil prices for the last few months on the reasoning that the situation in Europe had to get worse before it got better.  I am becoming less certain about the direction of prices in early 2012. One factor in my shifting stance is an emerging sense that the ECB really is doing all manner of strange and creative things to ensure that major European financial institutions don't fail (which they very likely would do if left entirely to their own devices).  The auction in 3 year LTROs in December was a landmark, and now comes this fascinating FT Alphaville piece.  It's hard to find a suitable excerpt and you should read the whole thing but the essence is that banks in Europe can now issue bonds that are never marketed to the public and then turn them over as collateral to borrow from the ECB.  This considerably stretches the traditional definition of the role of the lender of last resort. This suggests to me that Europe is moving to a Japan style solution in which large numbers of zombie banks are kept afloat by the authorities (for fear of the disaster were they to collapse) and gradually earn their way out of trouble but in the meantime inhibit the economy by their very cautious lending.  Combining that with fiscal austerity all round suggests a long grinding stagnation in Europe.  Still, that is a very different thing than an abrupt crisis, and in particular need not be associated with a large crash in European oil demand.

Geithner Seeks China’s Support on Iran - U.S. Treasury Secretary Timothy F. Geithner will urge Asia’s two biggest economies to cut Iranian oil imports and seek to narrow differences with China on trade and currency disputes on a visit to Beijing and Tokyo this week.  Geithner arrives in Beijing today to meet with Chinese Vice Premier Wang Qishan and will hold talks with Premier Wen Jiabao, Vice President Xi Jinping and Vice Premier Li Keqiang tomorrow. In Japan, he is due to meet with Prime Minister Yoshihiko Noda and Finance Minister Jun Azumi on Jan. 12.  Geithner is likely to encounter resistance in China, which disagrees with U.S. assertions that its currency is undervalued and is sparring with the Obama administration over trade in goods from chicken to steel. At the same time, he may seek to avert a public split at a time when a likely European slide to recession is already clouding the global economic outlook.  “These are the world’s second- and third-largest economies and the two biggest holders of Treasury bills,” said Stephen Myrow, a U.S. Treasury official during the administration of George W. Bush and now managing director of ACG Analytics Inc., a Washington investment research firm. “These are relationships that need to be continually nurtured.”

China Snubs Geithner on Iran Oil, Japan to Cut - U.S. Treasury Secretary Timothy F. Geithner’s efforts to tighten economic sanctions on Iran over its nuclear program won backing from Japan a day after China rejected limiting oil imports from the country.  “We want to take concrete steps to reduce our share in an orderly way as soon as possible,” Finance Minister Jun Azumi said at a press conference in Tokyo today after discussions with his U.S. counterpart. “The world cannot tolerate nuclear development.”  Geithner’s meetings were part of a trip to Asia’s two largest economies aimed at building support for tighter Iranian economic sanctions after international monitors detected an acceleration in the nation’s nuclear development program. China, which counts Iran as one of its top petroleum suppliers, yesterday snubbed the U.S., with a vice foreign minister saying his nation “opposes imposing pressure and sanctions.”  Crude for February delivery climbed 49 cents, or 0.5 percent, to $101.36 a barrel in electronic trading on the New York Mercantile Exchange as of 5:00 p.m. Tokyo time.

China Gets Cheaper Iran Oil as U.S. Pays Tab for Hormuz Patrols - China stands to be the biggest beneficiary of U.S. and European plans for sanctions on Iran’s oil sales in an effort to pressure the regime to abandon its nuclear program. As European Union members negotiate an Iranian oil embargo and the U.S. begins work on imposing sanctions to complicate global payments for Iranian oil, Chinese refiners already may be taking advantage of the mounting pressure. China is demanding discounts and better terms on Iranian crude, oil analysts and sanctions advocates said in interviews.  “The sanctions against Iran strengthen the Chinese hand at the negotiating table,” Chinese refiners are likely to win discounts on Iranian crude contracts as buyers from other nations halt or reduce their purchases of Iranian oil to avoid being penalized by U.S. and European sanctions, he said. At the same time, the U.S. is bearing most of the cost of air and sea patrols and surveillance in the Strait of Hormuz, through which transit 17 million barrels a day of crude, or 20 percent of world supplies. China, the No. 2 importer of oil after the U.S., enjoys protection for the shipping lanes without paying a cent, retired Admiral Dennis Blair, a former U.S. Director of National Intelligence, said in an interview. “Policing the region imposes a cost on us, and benefits the Chinese,” Blair said

US Imposes Sanctions on China Oil Company Over Iran Trade - The U.S. State Department has imposed sanctions on three energy trading companies for selling refined oil and gasoline to Iran, including against a Chinese company it says is Iran's largest supplier of refined petroleum.  Officials identified the three companies sanctioned Thursday as China's state-run Zhuhai Zhenrong Company, Singapore's Kuo Oil, and the United Arab Emirates' FAL Oil.  The announcement comes just days after U.S. Treasury Secretary Timothy Geithner went to China for talks aimed at persuading Chinese officials to support U.S. sanctions against Iran's oil industry.The sanctions are part of the expanded campaign by the United States, Britain and Canada to discourage foreign companies from investing in Iran's oil and gas industry. The three countries argue that the petrochemical profits help fund Iran's nuclear ambitions.

China cannot stop buying Iranian oil - It is said that the United States wants China to cooperate with it through stopping buying oil from Iran, so as to tighten sanctions against Iran. However, China has no reason to blindly follow the economic sanctions against Iran initiated by the United States, no matter which side is considered. Particularly, it is impossible for China to stop buying Iranian oil. Firstly, the economic sanctions against Iran are launched by the United States but not the U.N. The U.S. does not mean the international community. China is an independent and sovereign state and shall not follow the U.S.'s pace blindly. All economic and trade exchanges between China and Iran are legal transactions based on the international norms and have no violations of the law. Secondly, China's foreign policies focus on pursuing peace and development, hope to maintain world peace and create a good environment for the economic development of China and the world. The tightening of economic sanctions against Iran can only exacerbate the already tense situation in the Gulf region, promote a sharp increase in the risk of war and add uncertainty to the world economy shrouded in shadow of the U.S. and European sovereign debt crisis and the emerging market economy risks. As a large and responsible country in the international community, China shall not and cannot take this dangerous decision.

China: number one for Rolls-Royce - The US might be the word’s fastest growing car market – but in the luxury arena, no country can keep pace with China. Rolls-Royce, the British-based carmaker owned by German giant BMW, revealed that in 2011, for the first time ever, China over took the US as its biggest market. Of a record 3,538 car sales over the year, 31 per cent were to Chinese buyers – more than a hundred vehicles more than were bought in the US. RR’s British-based rivals are also enjoying burgeoning demand from the east. Bentley last week reported that its sales in China had doubled in 2011, while in November, Aston Martin said it expected a quarter of its sales to come from the Asia Pacific region within two years. Italian sports-car maker Lamborghini, meanwhile, told newspaper China Daily that it planned to grow its Chinese dealerships from 11 to 20 by the end of 2012.  As China’s super-wealthy grow in number and look to exhibit their wealth, the demand for ostentatious vehicles will inevitably expand. . “Demand for brands like Rolls or Ferrari are driven by strong brand awareness that can be very difficult to replicate.”

China’s party bureaucrats like high-end cars  - Even the police are driving Porsches. Chinese officials love their cars — big, fancy, expensive cars. A chocolate-colored Bentley worth $560,000 is cruising the streets of Beijing with license plates indicating it is registered to Zhongnanhai, the Communist Party headquarters. The armed police, who handle riots and crowd control, have the same model of Bentley in blue. And just in case it needs to go racing off to war, the Chinese army has a black Maserati that sells in China for $330,000."Corruption on wheels is an accurate description of this problem,"  A remnant of a decades-old party perks system, the luxe wheels are a conspicuous target of growing public outrage over the privileges of the elite.

Beijing to issue new smog data after online outcry - Beijing’s government on Friday bowed to a vocal online campaign for a change in the way air quality is measured in the Chinese capital, one of the world’s most polluted cities. Authorities said they would start publishing figures this month showing the smallest, most dangerous pollution particles in the air after considering the wishes of residents, expressed on China’s popular microblogs. The Chinese capital currently bases its air quality information on particles of 10 micrometers or larger, known as PM10, and does not take into account the smaller particulates that experts say are most harmful to human health. But authorities came under huge pressure to change the system last year when they ranked the air as only slightly polluted, despite thick smog that forced the cancellation of hundreds of flights and triggered a surge in face mask sales.

Analyst Sees ‘Significant Slowdown’ for China - Former International Monetary Fund chief economist Kenneth Rogoff says China faces a “dramatic slowdown” in the next decade as the economy adjusts to slowing global trade, worries about inflation, and a political transition. Rogoff, speaking at a seminar for Thai bankers, said the country’s rapid growth, spurred by exports and spending on infrastructure and housing, is not sustainable despite efforts to manage the economy. "You have to distinguish between [the fact] that they are doing a good job and whether they can manage things so perfectly," he said. "And I have said, and I would say again, that the odds of China having a significant growth slowdown over one of any given years [in the coming decade] is something like 10 percent." After implementing economic reforms over the past three decades, China has had roaring economic growth. Last year its economy grew more than nine percent, but is now forecast to slow to around 8.5 percent expansion in 2012. The global economic crisis and worries about Europe's debt crisis are hurting China's growth by weakening major advanced economies, which are key markets for the country's huge flow of exports.

The China Rorschach blot - TYLER COWEN grabs and posts a factoid: "construction accounts for about 13 per cent of [China]’s GDP". Wow, right? Right? That's high, isn't it? I mean in America it's, well, what do you suppose it is in America? Mr Cowen's general view of the Chinese economy tends toward a bubble diagnosis, or so his blogging would suggest. He may well be right. Certainly there are very important, non-bubbly parts of the Chinese economy. At the same time, patterns of Chinese investment seem to be totally distorted, the product of a bevy of government subsidies and regulations. But what can this one factoid, on its own, tell us? Well, for a bit of context, let's add an American comparison. In 2005, investment in structures accounted for about 9% of American GDP. That was a bubble period, you might argue. Fine, it was also about 9% of GDP in 2000 and 2001; residential construction was lower but commercial construction was higher. It's only about 5% of GDP right now, but it's also widely recognised that residential construction is depressed at unsustainably low levels.

China: Inflation and Exchange Rate Watch - Chinese inflation is decelerating [0]. This suggests that whatever further real CNY appreciation occurs is likely arise from nominal appreciation, over the near term. The news, not completely unexpected, is that inflation is falling rapidly.  Figure 1: CPI, PPI, and CPI food and nonfood y/y inflation. Source: Daily Dim Sum, China Scope Financial (January 12, 2012).  This can be taken two ways: first, the economy is cooling rapidly; second, the fiscal and monetary authorities have more scope for stimulative action should growth further slow. What are the implications for the Chinese currency’s real value? Despite the shrinkage in the Chinese trade balance, continued global rebalancing requires continuous CNY appreciation. (According to Chinese statistics, the 2011 trade surplus of USD155 billion was 14.5% smaller than the 2010 balance). The Chinese indices are available only up to November; the BIS real index is almost back to the crisis peak, when the CNY followed the USD in its rise.

China Enters The Danger Zone, SocGen Presents The Four Critical Themes - As both anecdotal, local and hard evidence of China's slowing (and potential hard landing) arrive day after day, it is clear that China's two main pillars of strength (drivers of growth), construction and exports, are weakening. As Societe Generale's Cross Asset Research group points out, China is entering the danger zone and warns that given China's local government debt burden and large ongoing deficits, a large-scale stimulus plan similar to 2008 is very unlikely, especially given a belief that Beijing has lost some control of monetary policy to the shadow banking system. In a comprehensive presentation, the French bank identifies four critical themes which provide significant stress (and opportunity): China's economic rebalancing efforts, a rapidly aging population and healthcare costs, wage inflation and concomitant automation, and pollution and energy efficiency.  Their trade preferences bias to the benefits and costs of these themes being short infrastructure/mining names and long automation/energy efficiency names.

China Banks Postponing Losses Damages Confidence, S&P Says -- Signs that Chinese lenders will postpone losses on trillions of yuan of loans made to local governments may undermine investor confidence in the banking sector, Standard & Poor’s said today. The country’s regulator may permit banks to reschedule loans to local government financing vehicles, which would be a “backward step” and threaten a decade of increasing transparency, according to an e-mailed report from the ratings company today. “Such a policy change, if it materializes, could undermine the Chinese banking sector in the long run despite its possible short-term relief,” Liao Qiang, a Beijing-based director of financial institution ratings for S&P, said in a conference call after the report was released. Thousands of local governments borrowed money to fund building projects central to economic stimulus steps started in November 2008. Financing companies enable provinces, cities, counties and townships to bypass rules barring direct bond sales. Local governments had debt totaling 10.7 trillion yuan ($1.69 trillion) as of the end of 2010, according to a June national audit. “Refinancing risks for heavily leveraged financing platforms are looming large,”

China Stocks Rise Most in 3 Months on Loan, Money Data - China’s stocks rose the most in three months after new lending and money supply exceeded estimates in December, boosting speculation the government is relaxing monetary policies to bolster economic growth. Chinese new loans totaled 640.5 billion yuan ($101 billion) last month, the highest amount since April, the People’s Bank of China said yesterday. That exceeded the estimates of all 18 economists surveyed by Bloomberg. M2, a measure of money supply, rose 13.6 percent, the fastest pace since July, it said. That compared with the 12.9 percent median of 18 estimates.  Premier Wen Jiabao called for measures to boost confidence in the nation’s stock market, the Shanghai Securities News reported today, citing his comments at the National Financial Work meeting. He urged reforming initial public offerings and improving companies’ dividend payouts, according to the report.  Central bank governor Zhou Xiaochuan said yesterday the nation must be ready to combat possible shocks from Europe’s debt crisis and an uncertain U.S. economic outlook. China cut the reserve requirement for the first time since 2008 on Nov. 30 as Europe’s debt crisis eroded demand for its exports.

China's Imports Decelerate Sharply, While Its Trade Surplus Widens To $16.5 Billion: — China's import growth decelerated sharply in December in a new sign the world's second-largest economy is slowing. The customs agency said Tuesday that December imports rose 11.8 percent over a year ago, down from November's 22.1 percent gain. Exports rose 13.4 percent, down only marginally from the previous month's rate. The country's politically sensitive global trade surplus widened to $16.5 billion. Weaker Chinese demand for imports reflects a slowdown in rapid domestic economic growth after Beijing tightened lending and investment curbs to prevent overheating. A slump in global demand for Chinese goods has prompted the government to reverse course and promise measures to shore up growth.

The Crisis We Didn't Have - Matt Yglesias points out correctly today that during the aughts there were a lot of economists who thought that America's trade deficit was unsustainable and would shortly lead to a major financial crisis of some kind. So the questions they were asking revolved around things like how long it would take for the value of the dollar to correct, whether we'd be better off with a quick crash and recovery or a long, slow slog back to balance, and so forth. Either way, though, a crisis like this would have fundamentally required American consumption to decrease until we got our affairs back in order. In the event, though, that's not the crisis we had. Our trade deficit may have played a role in what ended up happening, but basically it was just a huge housing/debt bubble that exploded, leaving balance sheets in tatters: Precisely because lots of smart people foresaw the occurrence of that crisis, and because that crisis really seemed very likely, and since a crisis certainly did happen a diverse array of smart people have just sort of trundled along acting as if the crisis we're facing is that crisis. That's why [they think] long-term fiscal austerity is important and why there was no "holy crap the economy's falling apart, let's forget about comprehensive reform of the health, energy, and education sectors" moment back in 2009.

KYRGYZSTAN: China Expanding Influence, One Student at a Time - (EurasiaNet) - Among its Central Asian neighbours, China these days is more often feared than loved. This attitude is perhaps most apparent in Kyrgyzstan, where despite an overwhelming dependence on Chinese imports, Chinese-owned malls and mining pits have been the subject of attacks in recent years; nationalist editorials in the local press play on fears of the Middle Kingdom. But all the negative press isn't deterring Beijing's efforts to win friends and promote Chinese culture in the region. A cornerstone of China's cultural diplomacy is Confucius Institutes at both Bishkek Humanities University and the Kyrgyz National University. Established in 2007 and 2008 respectively, the Beijing- funded institutes have infused their host universities with a Chinese flavour, paying for instructors and tailor-made course books that help some 3,000 local students grapple with the tonal challenges of the Chinese language.

China attaches importance to Africa's concerns, interests: FM -  (Xinhua) -- China will, as always, attach importance to Africa's concerns and interests, visiting Chinese Foreign Minister Yang Jiechi said here on Thursday. "We will support African countries in their efforts to independently resolve African issues, seek balanced economic and social development and uphold their own legitimate rights and interests in international affairs through unity," Yang said. "We will make even greater contribution to peace and development in Africa and to the common development of China and Africa." Yang said that African countries share a stronger wish to strengthen cooperation with China, and have proposed to broaden the scope, increase the scale and upgrade the level of our cooperation. This will go a long way in boosting China-Africa cooperation. Yang arrived here on Wednesday on a three-day visit to Namibia, the third leg of his three-nation African tour, which also took him to Cote d' Ivoire and Niger.

The IMF and US African Command (AFRICOM) Join Hands in the Plunder of the African Continent: On a recent trip to West Africa, the newly appointed managing director of the International Monetary Fund, Christine Lagarde ordered the governments of Nigeria, Guinea, Cameroon, Ghana and Chad to relinquish vital fuel subsidies. Much to the dismay of the population of these nations, the prices of fuel and transport have near tripled over night without notice, causing widespread violence on the streets of the Nigerian capital of Abuja and its economic center, Lagos. Much like the IMF induced riots in Indonesia during the 1997 Asian Financial Crisis, public discontent in Nigeria is channelled towards an incompetent and self-serving domestic elite, compliant to the interests of fraudulent foreign institutions. Although Nigeria holds the most proven oil reserves in Africa behind Libya, it’s people are now expected to pay a fee closer to what the average American pays for the cost of fuel, an exorbitant sum in contrast to its regional neighbours. Alternatively, other oil producing nations such as Venezuela, Kuwait and Saudi Arabia offer their populations fuel for as little as $0.12 USD per gallon. While Lagos has one of Africa’s highest concentration of billionaires, the vast majority of the population struggle daily on less than $2.00 USD. Amid a staggering 47% youth unemployment rate and thousands of annual deaths related to preventable diseases, the IMF has pulled the rug out from under a nation where safe drinking water is a luxury to around 80% of it’s populace.

Emerging markets’ golden age is at an end - It wasn’t supposed to happen this way. The biggest surprise for equity investors in 2011 was not the weakness of the crisis-ravaged European markets but the carnage in the stock markets of the emerging economies. Brazil, Russia, India and China did worse than Portugal, Italy, Ireland, Greece and Spain. As a group, they were down 26 per cent in US dollar terms versus a decline of 23 per cent for the bad boys of the eurozone.  While the developed economies have been struggling to generate growth momentum, the emerging economies have had the opposite problem. Super-easy monetary and fiscal policy has led to real estate bubbles, capacity constraints and labour shortages. In 2011, governments moved to quell the inflationary pressures even at the cost of stock market sell-offs and weaker growth.  Now that the effects of the tightening are increasingly visible, relaxation of policy cannot be far away. In a conventional cycle, this would mark the end of the bear phase and usher in the next emerging markets boom.  However, there are reasons to believe this is not a conventional cycle. The golden age of emerging market investment may already be over.

Nomura Cuts S. Korea's Growth Outlook For 2012 - The South Korean economy is expected to lose steam sharply this year as the eurozone debt turmoil is feared to result in a deeper global economic slump, Nomura said. In its outlook for South Korea, the global investment bank predicted Asia's fourth-largest economy to expand 3 percent in 2012 from a year earlier, a drastic downgrade from a forecast of 5 percent made at the end of 2010. Nomura's projection is much lower than the South Korean government's prediction of a 3.7 percent expansion, according to South Korean (Yonhap) News Agency. "With global economic growth expected to slow to 3.2 percent from 3.7 percent, South Korea will inevitably see its growth slow," Kwon Young-sun, a senior economist at Nomura International, told reporters in Seoul. The impact from the European sovereign debt crisis and China's weaker growth will likely make a dent in South Korea's exports and domestic demand, he said.

The Japan Story - Dean Baker - Eamonn Fingleton started a debate on Japan's slump or lack thereof with a Sunday review piece in the NYT. This has since been joined by Paul Krugman and others. Since I have been asked by a number of people what I thought, I will weigh in with my own two cents. First I agree with Fingleton that the description of Japan as a basket case is way off the mark. While GDP growth has been weak, its productivity growth has been better than the average in the OECD. The fact that its productivity growth has exceeded its GDP growth is explained by both the aging of the population, leading to a decline in the size of its labor force and also the reduction in the number of hours worked per year by the average worker. Neither of these seems to be obviously bad, although it is almost certainly the case that Japan still suffers from some hidden unemployment (mostly among women) in addition to its relatively low official unemployment (@ 4.0 percent). Fingleton probably does go overboard in a few areas. First, Shadowstats is not a credible source. Second, the measure of electricity use that he sees as a main determinant of living standards is likely distorted by the fact that Japan was starting from a very low base whereas the U.S. was starting from a very high base. But there is an area in which Fingleton may actually understate his case.

Debt Trap Looms in Convertibles Due After 25% Sensex Plunge - Indian companies with a record $5.3 billion of convertible bonds due this year may see borrowing costs more than quadruple after the worst performance among the world’s 10 biggest stock markets.  Reliance Communications Ltd., Suzlon Energy Ltd. (SUEL) and Tata Steel Ltd. (TATA), sold a third of the total debt, according to data compiled by Bloomberg. Their shares are trading as much as 88 percent below the bond conversion prices. Should they choose to issue debt that can’t be converted into equity to meet repayments, companies will face an average yield of 6.92 percent on dollar-denominated bonds, a HSBC Holdings Plc index shows, compared with 1.55 percent on convertible notes, according to Barclays Capital data.  “Companies are heading into a debt trap,”  “Companies have no option but to repay the debt.” Cash levels for Indian borrowers relative to their interest commitments fell to a five-year low after the central bank raised interest rates a record 13 times since March 2010 to combat inflation and as operating profits declined, Standard & Poor’s Indian unit Crisil Ltd. (CRISIL) said in a report this month. Corporate earnings will probably post the biggest drop in three years in the financial year ending March, according to analysts’ estimates compiled by Bloomberg.

Growing Wealth Divide Puts Globalization At Risk (Reuters) - A backlash against rising inequality - evident from the Occupy movement to the Arab Spring - risks derailing the advance of globalization and represents a threat to economies worldwide, according to the World Economic Forum. Severe income disparity and precarious government finances rank as the biggest economic threats facing the world, according to the group's 2012 Global Risks report released on Wednesday. The 60-page analysis of 50 risks over the next decade precedes the World Economic Forum's (WEF) annual meeting in two weeks' time in the Swiss ski resort of Davos, and paints a bleak picture of an increasingly uncertain world. Over the past four decades, Davos, which brings together politicians, central bankers and business leaders, has become a byword for globalization. Now confidence about the steady gains from the onward march of the global marketplace is faltering. Rising youth unemployment, a retirement crisis among pensioners dependent on debt-burdened states and a yawning wealth gap have sown the "seeds of dystopia," according to the report, based on a survey of 469 experts and industry leaders. For the first time in generations, people no longer believe their children will grow up to have a better standard of living.

Leaderless Global Governance - The world economy is entering a new phase, in which achieving global cooperation will become increasingly difficult. The United States and the European Union, now burdened by high debt and low growth – and therefore preoccupied with domestic concerns – are no longer able to set global rules and expect others to fall into line. Compounding this trend, rising powers such as China and India place great value on national sovereignty and non-interference in domestic affairs. This makes them unwilling to submit to international rules (or to demand that others comply with such rules) – and thus unlikely to invest in multilateral institutions, as the US did in the aftermath of World War II.  Economic policies come in roughly four variants. At one extreme are domestic policies that create no (or very few) spillovers across national borders. Education policies, for example, require no international agreement and can be safely left to domestic policymakers. At the other extreme are policies that implicate the “global commons”: the outcome for each country is determined not by domestic policies, but by (the sum total of) other countries’ policies. Greenhouse-gas emissions are the archetypal case. In such policy domains, there is a strong case for establishing binding global rules, since each country, left to its own devices, has an interest in neglecting its share of the upkeep of the global commons. Failure to reach global agreement would condemn all to collective disaster. Between the extremes are two other types of policies that create spillovers, but that need to be treated differently.

Does the Current Account Still Matter? - The title is the same as that of Maury Obstfeld's Ely Lecture, delivered Jan 6 at the AEA meetings in Chicago.  The empirical context of the lecture was financial globalization.  The question was whether financial flows are now so efficient that the current account between countries is of no more importance than the current account between states within a country (which we don't even measure).  Obstfeld's answer, "No", implies that the current account still matters.  But why does it matter?   Obstfeld makes a big point that the current account represents an intertemporal trade, where the deficit country obtains current tradeable goods in trade for future tradeable goods.  Borrowing from the future in this way may be perfectly fine, but it may also be an "important indicator of potential macro and financial stresses".  The stress he has in mind comes from the fact that, at some future point, the deficit country is going to have to come up with the promised tradeable goods, which means running a current account surplus. So far so orthodox, you say, and I agree.  What made the lecture worthy of notice is the very large amount of attention paid, in the pages between the setup and the payoff, to the gross flows, of both goods and financial assets, that lie behind the net flow measured in the current account.   Obstfeld seems to be moving in the direction of the Money View, but not yet all the way.

How much do international reserves buffer terms-of-trade shocks? - In many countries – Brazil being a prime example – terms-of-trade improvements have been accompanied by a surge in capital inflows. A number of prominent policymakers have argued that the combination of significant increases in export prices and higher capital flows has generated ‘Dutch disease’–type situations, where acute real exchange rate appreciation has resulted in the crowding out of non-commodities tradable industries. Within this picture, emerging countries’ policymakers have discussed a number of palliatives, including the imposition of controls on capital inflows, tax incentives to ailing tradable industries, and active central bank intervention in foreign-exchange markets with the concomitant accumulation of international reserves. Last year’s surge in commodity prices was a reminder, if we needed one, of the problems caused by terms-of-trade volatility in emerging economies. This column looks at the real exchange rate adjustments to commodity terms-of-trade shocks in the region exposed to the highest volatility – Latin America. It finds that active reserve management not only lowers the short-run impact of shocks, but also substantially reduces real exchange rate volatility.

Russia's Capital Flight Intensifies - Capital flight from Russia more than doubled last year amid European sovereign-debt worries and political instability at home, with almost $38 billion leaving the country in the fourth quarter alone, the largest quarterly outflows since the 2008 financial crisis. Capital flight totaled $84.2 billion in 2011 compared with $33.6 billion in 2010, according to central-bank data, far exceeding initial official forecasts and analysts' expectations. The exodus of capital has weighed on the ruble, which finished 2011 weaker by more than 5%, even as the average price for Russian oil set records.

World Economic Forum warns of economic turmoil and social upheaval - The threat of fresh economic turmoil and social upheaval could put at risk the gains produced by globalisation, the World Economic Forum said on Wednesday. In its annual assessment of the outlook for the global economy, the WEF set the scene for its meeting in Davos later this month by warning that the "seeds of dystopia" were being sown. The growing number of young people with little chance of finding a job, the increasing number of elderly people dependent on states deeply in debt and the expanding gap between rich and poor were all fuelling resentment worldwide, the forum said in its Global Risks 2012 report on Wednesday. "For the first time in generations, many people no longer believe that their children will grow up to enjoy a higher standard of living than theirs," said Lee Howell, the WEF managing director responsible for the report. "This new malaise is particularly acute in the industrialised countries that historically have been a source of great confidence and bold ideas." The survey of 469 global experts identified chronic problems with government finances and severe income inequality as the most prevalent risks over the next decade.

NY Fed’s Dudley Tapped to Lead BIS Central Bank Panel-- The head of the Federal Reserve Bank of New York has been tapped to lead the Bank for International Settlement's Committee on the Global Financial System.  Williams Dudley, who in addition to leading the Fed's most important regional arm is also the vice-chairman of the monetary policy setting Federal Open Market Committee, will replace Mark Carney, the leader of the Bank of Canada. Dudley will chair the BIS committee for a term of three years, the organization said Monday in a press release.The BIS said the committee Dudley will now lead "is a central bank forum for monitoring and examining issues relating to financial markets and systems, with a view to elaborating policy recommendations to support central banks in the fulfilment of their responsibilities for monetary and financial stability."

Has production become more fragmented? International vs domestic perspectives - Production seems more complex and fragmented today than ever before. For instance, airplanes are made of zillions of parts involving many suppliers from various countries (see eg It has also become difficult to keep track of the production of relatively more simple goods such as the Barbie doll (Feenstra 1998) or the iPhone (see Xing 2011 on this site).  As the oft-cited iPhone example illustrates, production has become increasingly fragmented across countries. This column presents recent research, however, suggesting that this trend may be reversing for manufacturing plants in the US. It shows that intermediate goods account for a decreasing fraction of output value, while industries that are closer to the final consumer contribute to an increasing share of GDP.

Bilateralism, Multilateralism, and Trade Rules - FRBSF - Since 2001, countries around the world have been working on crafting a new global pact to liberalize trade. Despite the difficulties of completing such a multilateral agreement, it remains a worthwhile goal for two reasons. First, a global pact offers cost and efficiency benefits that can’t be achieved under the kinds of agreements among smaller groups of countries that have proliferated in recent years. Second, a global agreement presents a unique opportunity to optimize the use of the world’s resources, thereby improving well-being around the world.

Alien Employers or: How I Learned to Stop Worrying and let the World Run a Current Account Surplus - Back when the Greek crisis was just breaking, I heard a news reporter ask an interesting question.  The Parthenon was in the background, communist banners were draped about, and small smokey fires burning here and there. And the reporter, standing excitedly in the middle of all this, rather earnestly asked what I thought was a very good question: Why should Germany even consider bailing out Greece?  Then, with hardly a pause, he breathlessly began to explain why. His answer went something like this... "Why?! Let me tell you why, people..." [turns head to the left] "As I look over here, I see and Audi and a BMW..." [turns head to the right] "...and as I look over there, I see a Mercedes and a Volkswagen!" [turns to camera--big light bulb flashing over his head] "Greece is an extremely important export market for Germany!" Well, as the following diagram shows, this certainly does appear to be the case (source):So as far as I can gather, what the fellow is trying to tell us is this. The Germans should forgive Greeks their debt because, well, how else are the Greeks going to continue to afford importing German-made cars? After all, it is the Greek consumer that is selflessly keeping the German autoworker employed.

IMF lowers global growth forecast as Europe struggles - THE International Monetary Fund will make a "fairly substantial" cut to its forecast for global economic growth this year, said Olivier Blanchard, the IMF's chief economist. "I can't give you a number," Mr Blanchard said at a Chicago conference. "It's going to be substantial." In September last year, the Washington-based fund lowered its forecast for global growth to 4 per cent in 2012 and warned of "severe" repercussions if Europe failed to contain its sovereign debt crisis. Overall world growth will probably be "not very far" from 3 per cent to 4 per cent, he said, adding Europe is "very close to zero at this point". The fund will publish revised forecasts on January 24 or 25 that are "consistent with reality," the IMF chief, Christine Lagarde, said.

China Import Growth Slumps, Deepens Global Risks - China’s import growth fell to a two- year low in December, underscoring a slowdown in the fastest- growing major economy that deepens risks for the global outlook. Imports (CNFRIMPY) rose 11.8 percent from a year before, less than all 21 estimates in a Bloomberg News survey of economists, a government report showed today in Beijing. The moderation caused the trade surplus to increase to $16.5 billion in the month, as exports advanced 13.4 percent in December.  Signs of domestic demand moderation bolstered forecasts for monetary easing -- spurring a gain in local stocks -- as Europe veers toward a recession and the International Monetary Fund prepares a “substantial” cut to its global growth forecast. The widening surplus may give U.S. Treasury Secretary Timothy F. Geithner ammunition to renew pressure for a stronger yuan on a visit to Beijing today.  “China will be asked to step up and shoulder more responsibility, together with the U.S., to ensure the world does not fall into a recession again,” said Liu Li-Gang, an economist in Hong Kong at Australia & New Zealand Banking Group Ltd. who previously worked at the World Bank. “If the yuan were to depreciate this year, China’s exchange-rate policy will be accused of a ‘beggar thy neighbor policy.’”

Pettis on Europe and China = An excerpt from Michael Pettis: If no trade reversal now, then when? Europe’s underlying problem is not budget deficits or even unsustainable debt. These are mainly symptoms. The real problem with Europe is the huge divergence in costs between the core and the periphery – in the past decade costs between Germany and some of the peripheral countries have diverged by anywhere from 20% to 40%. This divergence has made the latter uncompetitive and has resulted in the massive trade imbalances within Europe.. Of course if they don’t resolve this problem, the problem will be resolved for them in the form of a break-up of the euro. It doesn't appear European policymakers are addressing the imbalances at all. And on ChinaBut we would have to ask the same question of China as we would of Germany: if now is not the right time for China to run a trade deficit, when its reserves are sky high, when rebalancing the Chinese economy away from investment to consumption is more urgent than ever, when global imbalances have thrown the world into crisis, when will it ever be the right time? Not [this] year, apparently. There is developing in Beijing, I think, almost a panic about global economic prospects and the impact of the European crisis on China. This panic is going make the rebalancing process harder than ever ...

What China Can Teach Europe - FROM the outside, China often appears to be a highly centralized monolith. Unlike Europe’s cities, which have been able to preserve a certain identity and cultural distinctiveness despite the homogenizing forces of globalization, most Chinese cities suffer from a drab uniformity.  But China is more like Europe than it seems. Indeed, when it comes to economics, China is more a thin political union composed of semiautonomous cities — some with as many inhabitants as a European country — than an all-powerful centralized government that uniformly imposes its will on the whole country.  And competition among these huge cities is an important reason for China’s economic dynamism. The similar look of China’s megacities masks a rivalry as fierce as that among European countries.  China’s urban economic boom began in the late 1970s as an experiment with market reforms in China’s coastal cities. Today, cities vie ruthlessly for competitive advantage using tax breaks and other incentives that draw foreign and domestic investors. Smaller cities specialize in particular products, while larger ones flaunt their educational capacity and cultural appeal. It has led to the most rapid urban “economic miracle” in history.

China's new role in the making of Europe: powers and invites them to reconsider their diplomatic priorities. While in the aftermath of World War II the future of Europe was proactively shaped by the United States, or more precisely, by a group of American "Wise Men", China is now in a position to have an unprecedented impact on the European integration. As Beijing fully develops its immense potential and becomes the world's biggest economy in the coming decade, its capacity to influence will certainly grow. In this rapidly changing context, the leaders of the European Union and China should rethink the significance of trans-Eurasian links and open a new chapter in the relations between two of the world's most ancient civilizations. Whether the degree as well as the means of any Chinese action in Europe is compatible with the internal constraints of the world's largest developing country - and congenial with traditional Chinese principles of foreign policy - will have to be seriously discussed by Beijing's policymakers. In parallel, the realization and just evaluation of China's new ability to influence will occupy increasingly more space in European public debates and stand as an issue of political campaigns. With a mutual trade in goods and services which already reached 432 billion euros (US$548.6 billion) in 2010, the European Union and China form the second-largest economic cooperation in the world. This level of economic interdependence has been achieved in a very short period of time despite a Great Wall of mistrust separating two societies which have been evolving largely independently for millennia. As the speed of quantitative change exceeds the pace of qualitative transformation, time will certainly be needed to reduce the gap between trade and trust.

Eurozone strains increase with grim new economic data - Strains within the European Union intensified following another round of damaging data that showed a jump in the Spanish unemployment rate and a rise in the interest rate that Italy pays on its debt to unsustainable levels. Spain's jobless rate jumped to almost 23% in November, when the rate for the European Union rose to 10.3%. Italian bond yields, which act as a proxy for interest rates, reached 7.19% on further worries about the state of the economy and the government's ability to pay its bills. The grim economic news, which included a fall in retail sales across the eurozone and a surprise drop in German industrial production, sent leaders scurrying to agree further measures to shore up the euro. Italy's prime minister, Mario Monti, met the French president, Nicolas Sarkozy, in Paris to discuss a pact between eurozone countries due to be signed in March, giving Brussels oversight on debt levels and allowing it to punish countries that breach the rules. France said it was prepared to press ahead with a financial transaction tax, despite resistance from the UK and other EU members. Presidential adviser Henri Guaino said France would take a decision on the "Tobin tax" by the end of January to set an example for the rest of Europe.

Europe may avoid recession this year, IMF says (Reuters) - Europe as a whole may avoid a recession this year and there were reasons to be more upbeat about prospects for the region, South Africa's Business Day newspaper quoted International Monetary Fund head Christine Lagarde as saying. "The euro-zone scene has changed massively over the last 18 months or so ... there are reasons to be a little bit more upbeat about the prospects," she told the daily in an interview published on Monday after a visit to South Africa last week. Some analysts believe a recession is inevitable in the euro zone, where several member states have grappled with sovereign debt problems for months, triggering global risk aversion which has hit emerging markets such as South Africa the hardest. "Our assessment is that even if some of the euro-zone countries are in a recession technically for some or all of 2012, the whole of the zone might not technically be in a recession," Lagarde said. "You've got very different economies cruising at different growth rates. That is going to have an impact on the entire euro zone and might avoid recession for the euro zone at large."

Survey shows Germany already in recession: report - The German economy is already in recession, Die Welt newspaper reported Monday, citing its survey of 14 bank economists. The German economy shrank in the final three months of 2011 and the pace of the contraction will gain momentum in the first quarter of 2012, the survey showed. An economy is in recession if real gross domestic product contracts for two successive quarters. However, the contraction will remain mild, according to the survey. The economists polled don't expect the German economy to contract more than 0.5% on average, and said the economy will pick up in the course of the year. The development of the euro crisis is the greatest risk factor for the German economy, the economists said. The Federal Statistic Office is scheduled to issue 2011 gross domestic product data Wednesday.

American Exceptionalism and Euro-Bashing, Adam Davidson Style - - Yves Smith - Adam Davidson has an article in the Sunday New York Times Magazine, “The Other Reason Europe is Going Broke,” that manages the impressive feat of making you stupider than before you read it. It misrepresents most of the few facts it contains in appealing to American prejudices about our cultural, or in this case, economics superiority, to sell worker bashing.  Davidson uses the spectacle of Europe going into an economic nosedive to claim that one of the big things wrong with Europe is its spoiled workers. The piece is anchored in a glaring, fundamental misrepresentation. It argues that Americans are much better off than Europeans because we have a higher GDP per capita (more on that in due course) and asserts that that is because Europeans are not able to compete in world markets: After decades of trying, Europe as a whole still can’t quite figure out how to be flexible enough to compete in the global economy. The basis for Europe’s supposed failure compared to the supposedly more flexible and innovative US? That its trade with the rest of the world is more or less in balance. By that standard, the US is a abject failure from a competitive standpoint, since we’ve run sustained trade deficits since the early 1980s. And even though Davidson presents himself as a messenger, he clearly sides with this anti-worker paradigm: It’s a core view of U.S. business that success requires a degree of destruction. If workers can’t be fired, companies can’t drop unproductive businesses and invest in more promising new ones. If workers know they’ll get generous government benefits no matter what, so the theory goes, they’ll get lazy.

There will be shocks - THERE has been an ongoing debate over just how profligate some euro-zone economies were prior to the present debt crisis. Some, like Greece, were obviously irresponsible. For other economies, however, the case is not so clear. Paul Krugman has repeatedly pointed out that Spain was behaving as one might hope before the crash, budgeting responsibly and cutting its debt-to-GDP ratio. Others—among them my colleague—respond that Spain's seemingly sound budget relied on unsustainable capital inflows and was therefore recklessly loose. In the future, they argue, any euro-zone fiscal rules should take into account large capital inflows and require that fiscal policy tighten in response to them in order to prevent dangerous shocks. These commenters have a point; Spain's fiscal balance created a false sense of comfort unjustified by the gross capital flows facing its economy. But is it reasonable to ask fiscal policy to lean against these inflows? Can tight budgeting prevent the growth of the kinds of imbalances that led to the present European crisis?

Angela Merkel has the whip hand in an orgy of austerity -  Take the report in Saturday's Guardian which said retail sales and economic confidence were down, Italian bond yields were well above the crisis threshold of 7% and Spanish unemployment had risen to 22.9%. The response from Europe's policy elite? "Italy's prime minister, Mario Monti, met [Nicolas] Sarkozy in Paris to discuss a pact between eurozone countries to be signed in March, giving Brussels oversight on debt levels and allowing it to punish countries that breach the rules." Yes, that's right. Countries are expected to suck demand out of their economies through tax increases and spending cuts and when the slower growth that results in means the target for deficit reduction is not met, they will be punished for it. The language of S&M is also now part of the eurozone discourse. The joint letter sent last month by Sarkozy and Angela Merkel to Herman van Rompuy, president of the European Council, explaining the Franco-German plans for future governance of the single currency stressed "fiscal discipline" and the need to "detect and correct departures from sound economic and fiscal policies long before they become a threat to the stability of the euro area as a whole". There's plenty of raw material here, given a tweak or two, for a modern version of Leopold von Sacher-Masoch's Venus in Furs. "Mario, you have allowed the Italian budget deficit to rise above 3% of gross domestic product." "Yes, mistress Angela, I deserve to be punished for my lack of fiscal discipline. Please do not spare me."

UBS' Releases Most Dire Prediction To Date: Greece To Experience "Coercive" Restructuring With CDS Triggering Around March - UBS, which has been issuing ever gloomier forecasts over the past few months, with the sole intent of getting someone to bail out the European financial system, which despite the current stay of execution is increasingly more brittle (because solvency crises only get worse with time, never better), has just come out with its magnum opus. In a report released overnight, the firm's Global Rates Team has just jumped the shark, with a prediction that things in Europe are literally about to implode: "we anticipate that the crisis will deteriorate further than the stressed levels of late November. We do not believe that Greek PSI will take place in a “voluntary” fashion but instead expect coercive restructuring of Greek debt either before or soon after the March redemption, triggering CDS contracts. Greece is not likely to decide to leave the euro area in 2012, though the risks of that happening have certainly increased." And as we well know from previous UBS reports, a departure of a country from the Eurozone would lead to a mass splurge in purchases of guns, spam and gold. So is this merely a last ditch call for a bailout from someone, anyone: either Fed or ECB will do? Most likely. Because if while the general market continues to ignore Europe, and European banks are out there literally screaming the end is nigh, then the truth is surely somewhere inbetween. 

Holders Of Greek Debt To Be Asked To Accept 60% Haircut-Sources --Private investors holding Greek debt will be asked to accept an around 60% haircut as a previously agreed 50% write-down is no longer seen as sufficient due to the deteriorating Greek economy, people with direct knowledge of the matter said Monday. "The cut in terms of net present value will likely edge higher towards 60%. We still expect an agreement in January. There are reactions from bond holders but we basically have little choice," a banker involved in the talks said.

France, Germany warn Greece to make debt deal - France and Germany, the European Union’s key powers, insisted Monday that private creditors must take losses to help over-indebted Greece right its finances, but they also warned the Greek government that E.U. rescue funds will be held back unless it makes a deal soon with the increasingly nervous banks holding its debt. The stern warning, after a meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel in Berlin, underlined the high stakes in faltering talks between the Greek leader, Prime Minister Lucas Papademos, and a coterie of banks and other financial institutions holding billions of dollars in Greek debt that the government acknowledges it cannot pay in whole. Failure to reach a debt swap deal for Greece would most likely undo the rescue package concocted by E.U. governments late last year and dramatically undermine international confidence in the euro, the currency used by 17 of the 27 E.U. nations. If Greece or others among the 17 euro nations start to peel away, analysts have warned, the world economy could suffer a relapse and the entire E.U. project could be brought into doubt.

In Greece, fears that austerity is killing the economy - Deeply indebted and nearly bankrupt, this Mediterranean nation was forced to adopt tough austerity measures to slash its deficit and secure an international bailout. But as Greece’s economy slides into free fall, critics are scanning the devastated landscape here and asking a probing question: Does austerity really work? Unemployment has surged to 18.8 percent from 13.3 percent only a year ago. Overburdened public hospitals are facing acute shortages of everything from syringes to bandages because of budget cuts, with hiring freezes forcing the mothballing of operating rooms even as more unemployed are relying on the public health system. Rates of homelessness, suicide, crime and HIV cases1 from intravenous drug use are jumping. Greece has been forced to cut spending and raise taxes in the middle of a severe downturn, slashing pensions as well as state salaries, jobs and services. As public confidence has evaporated, consumer spending — the biggest driver of the economy — has plunged, generating cascading losses at private firms. The result is a dizzying economic plummet and social crisis that is bringing the cradle of Western civilization to its knees.

Feel the Expansion - Krugman - The WaPo has a heartrending story on the suffering being imposed on ordinary Greeks. So much for the doctrine of expansionary austerity. I do have a small bone to pick, however. Here’s the discussion of why such harsh austerity is being imposed: European powers, led by fiscally conservative Germany, have been insisting that Greece correct years of mismanagement by enacting swift waves of cuts and other major economic reforms to regain the confidence of investors and ensure the integrity of the euro. Slashing the deficit quickly is essential to ushering in a sustainable future, they have argued, and the resulting social pain is necessary to impress on Greek politicians and society that such excesses should never happen again. Most of that is right — but not the bit about regaining the confidence of investors — or at any rate, that’s not what it’s about these days. For it’s quite clear that at this point investor confidence is unregainable.  So now the austerity isn’t market-driven — it’s political, the pound of flesh official lenders are demanding for maintaining the trickle of cash. And it really is in large part about punishment; we’ve now seen a fairly impressive demonstration that big budget cuts in a depressed economy hardly even reduce the deficit, because they drive the economy down and tax receipts with it.

Greek Bank Deposits Fell 2% in November After October Plunge - Greek bank deposits by businesses and households fell 2 percent in November as the then Premier George Papandreou announced and then ditched a referendum on international aid, putting the country’s euro-area membership into question. Deposits dropped to 172.9 billion euros ($220.9 billion) in November from 176.4 billion euros the previous month, according to a statement released by the Bank of Greece on its website today. Deposits have declined 36.7 billion euros, or 18 percent, since December 2010. Bank of Greece (TELL) Governor George Provopoulos said on Nov. 29 that the deposit flight continued early in November after Papandreou called and then dropped plans for a referendum on the terms of an Oct. 26 second aid package for the country. Deposits stabilized after Lucas Papademos, a former vice president of the European Central Bank, replaced Papandreou on Nov. 11, he said.

Greeks Brace for More Pain as Debt Rescue Talks End -- Greece is in final negotiations to persuade investors to forgive at least half of its debt, the euro area's first large-scale restructuring, as Greeks are told to gird for more austerity if they want to keep the euro. Prime Minister Lucas Papademos expects to have an outline for the 100 billion-euro ($129 billion) plan next week, when talks on terms for a second financing deal with European Union and International Monetary Fund officials start in Athens. The deliberations need to end by March 20, when Greece must make a 14.5 billion-euro bond payment. Concern that spending cuts needed to secure the funding will hamper growth sent the yield on Greek two-year notes to a record 184.6 percent today. "Greece will receive fresh money, around 89 billion euros, so Europeans will want to see commitments," said Lefteris Farmakis, a rates strategist at Nomura International Ltd. in London. "You need some form of agreement with creditors and some reform impetus from the government." To secure funds to replace the dwindling amounts granted under a rescue package from May 2010, Papademos warned Greeks last week of economic collapse and an exit from the euro if they didn't accept short, sharp cuts in incomes and pensions.

Ex minister says Acropolis could be leased - Conservative New Democracy MP and former deputy health minister Gerasimos Giakoumatos, suggested on Monday that the Acropolis and other archaeological sites be leased to private firms in a bid to bring much-needed revenue into the debt-ridden country. In comments made to Vima FM radio station, Giakoumatos claimed that such a move would not be humiliating for Greece. “What is humiliating is that we beg for foreign funding or when a Chinese tourist in Athens finds the Acropolis closed,” he said, referring to weekend strike action by Culture Ministry employees that left museums and ancient sites closed. “Instead of cutting wages and pensions, the state could lease the Acropolis, it could lease all archaeological sites,” he said.

Greece disability list sparks welfare benefits row - A Greek government plan to categorise paedophiles and pyromaniacs as "disabled" has alarmed disability groups, who fear it could undermine their state benefits. The new code could be used "to cut the number of disabled people with a right to disability benefits", the groups' national leader, Yannis Vardakastanis, told BBC News. Indebted Greece is slashing state aid. Disabled Greeks rallied in December, demanding job and benefit protection. Mr Vardakastanis, head of the National Confederation of Disabled People, said the new code would simplify the definition of disability, limiting it to medical conditions. "Disability is if society doesn't give you what you need to be like others. We want the Greek government to really protect vulnerable groups from getting deeper into poverty, exclusion and discrimination." The new government "disability" list also includes compulsive gamblers, fetishists, exhibitionists and sado-masochists, the Associated Press news agency reports.

Greek Crisis Has Pharmacists Pleading for Aspirin as Drug Supply Dries Up - For patients and pharmacists in financially stricken Greece, even finding aspirin has turned into a headache. Mina Mavrou, who runs a pharmacy in a middle-class Athens suburb, spends hours each day pleading with drugmakers, wholesalers and colleagues to hunt down medicines for clients. Life-saving drugs such as Sanofi (SAN)’s blood-thinner Clexane and GlaxoSmithKline Plc (GSK)’s asthma inhaler Flixotide often appear as lines of crimson data on pharmacists’ computer screens, meaning the products aren’t in stock or that pharmacists can’t order as many units as they need. “When we see red, we want to cry,” Mavrou said. “The situation is worsening day by day.” The 12,000 pharmacies that dot almost every street corner in Greek cities are the damaged capillaries of a complex system for getting treatment to patients. The Panhellenic Association of Pharmacists reports shortages of almost half the country’s 500 most-used medicines. Even when drugs are available, pharmacists often must foot the bill up front, or patients simply do without.

The Greek Parents Too Poor To Care For Their Children - Greece's financial crisis has made some families so desperate they are giving up the most precious thing of all - their children. One morning a few weeks before Christmas a kindergarten teacher in Athens found a note about one of her four-year-old pupils. "I will not be coming to pick up Anna today because I cannot afford to look after her," it read. "Please take good care of her. Sorry. Her mother." In the last two months Father Antonios, a young Orthodox priest who runs a youth centre for the city's poor, has found four children on his doorstep - including a baby just days old. Another charity was approached by a couple whose twin babies were in hospital being treated for malnutrition, because the mother herself was malnourished and unable to breastfeed. Cases like this are shocking a country where family ties are strong, and failure to look after children is socially unacceptable - they feel to Greeks like stories from the Third World, rather than their own capital city.

Rise in homeless children in Ireland seeking help - Children accounted for one in seven people who accessed homeless services in Ireland over the festive period. Focus Ireland, the country's biggest homeless charity, said the number of people turning to them increased by up to 20 per cent in 2010 and nearly 40 per cent over the past 24 months. But the charity said it was particularly concerned that more youngsters than ever are requiring their help. The charity's founder, Sr. Stanislaus Kennedy, said many of those accessing services are the "new poor", people who did well during the boom years, but have since lost their jobs and houses. And she said the challenges the destitute face are even more serious now than they were in the 80s.

Ireland 'must renegotiate debt deal or face default' - Ireland will need to negotiate a fresh debt deal with Europe and the IMF if the country is not to have a default, a leading economist with Citi has said. Willem Buiter, chief economist at Citi, is predicting that Portugal and Greece will both have to restructure their debts -- effectively a default -- but Ireland can still avoid this fate if it is successful in negotiations with its international lenders. He also said that Ireland should have a second bailout plan ready when the first programme comes to an end. He said Ireland should avoid having to do any last-minute negotiations. "Ireland needs further assistance," said Mr Buiter, speaking in Dublin. He said Ireland was in "very bad fiscal shape", and a reduction in the cost of debt was needed if Ireland was to avoid restructuring its debts -- a process Greece was currently engaged in.

Alarm bells ring as banks pull out of eastern Europe - Eastern and central European countries face disappointment with capitalism on a par with their previous disillusion with communism as western European banks continue to pull back from investment in the territory. The EurActiv network reports. Up to 12 of the 16 key western banks in eastern Europe, under pressure from regulators to recapitalise, have resorted to shrinking outside their home markets to beef up capital levels. “After being disappointed by communism, these countries risk the discovery that capitalism does not bring benefits,” said Amid Faljaoui, a leading Belgian media commentator. In all, western European banks account for nearly three-quarters of all lending in central and eastern Europe, where most countries now only have one significant remaining independent bank.Many of the foreign banks that dominate the region – including UniCredit of Italy, KBC of Belgium, Commerzbank of Germany and Raiffeisen of Austria – have suffered as a result of the eurozone debt crisis.

Mafia now “Italy’s No.1 bank” as crisis bites-report (Reuters) - Organised crime has tightened its grip on the Italian economy during the economic crisis, making the Mafia the country's biggest "bank" and squeezing the life out of thousands of small firms, according to a report on Tuesday. Extortionate lending by criminal groups had become a "national emergency", said the report by anti-crime group SOS Impresa. Organised crime now generated annual turnover of about 140 billion euros ($178.89 billion) and profits of more than 100 billion euros, it added. "With 65 billion euros in liquidity, the Mafia is Italy's number one bank," said a statement from the group, which was set up in Palermo a decade ago to oppose extortion rackets against small business. Organised crime groups like the Sicilian Cosa Nostra, the Naples Camorra or the Calabrian 'Ndrangheta have long had a stranglehold on the Italian economy, generating profits equivalent to about 7 percent of national output. Extortionate lending had become an increasingly sophisticated and lucrative source of income, alongside drug trafficking, arms smuggling, prostitution, gambling and racketeering, the report said. "The classic neighbourhood or street loan shark is on the way out, giving way to organised loan-sharking that is well connected with professional circles and operates with the connivance of high-level professionals," the report said.

Europe’s $39 Trillion Pension Threat Grows - Even before the euro crisis, people were worried about Europe’s pension bomb. State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt, according to a study commissioned by the European Central Bank. The countries in the report compiled by the Research Center for Generational Contracts at Freiburg University in 2009 had almost 30 trillion euros ($39.3 trillion) of projected obligations to their existing populations. Germany accounted for 7.6 trillion euros and France 6.7 trillion euros of the liabilities, authors Christoph Mueller, Bernd Raffelhueschen and Olaf Weddige said in the report. “This is a totally unsustainable situation that quite clearly has to be reversed,” A recession threatening the world’s second-biggest economic bloc, along with efforts to reduce debt across Europe, is exacerbating the financial risks. Stable or falling birthrates, plus rising life expectancies, are adding to pressures, with the proportion of economic output devoted to spending on retirement benefits projected to rise by a quarter to 14 percent by 2060, according to the ECB report.

Europe’s Hunger pangs grow - This week in Europe begins with yet another Merkozy meeting German Chancellor Angela Merkel hosts French President Nicolas Sarkozy Monday, kicking off a week of high-level talks to lay the groundwork for a crunch EU summit on taming the eurozone crisis. The duo is at the heart of European efforts to stem the debt-driven turmoil threatening the single currency will gather in Berlin for their first monthly tete-a-tete in what is certain to be a rocky year. There have been so many of these things that it is hard to know what to expect, but the main topic of conversation is likely to be around the implementation of the “Tobin Tax”.  Probably not on the agenda, but far more important in my opinion, will be questions from Angela Merkel about what happens in the case that Sarkozy doesn’t win the next election. French President Nicolas Sarkozy is trailing socialist Francois Hollande in his bid for re-election, a danger for the euro zone that markets appear to have overlooked. Hollande “will be more hesitant to toe the hard line and may even have a hard time passing a constitutional budget amendment,” Hollande has pledged to renegotiate Europe’s “new agreement on fiscal discipline” and has called for the European Central Bank to play a larger role, including issuing a common euro bond.

Europe’s $39 Trillion Pension Threat Grows as Economies Sputter - Even before the euro crisis, people were worried about Europe’s pension bomb. State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt, according to a study commissioned by the European Central Bank. The countries in the report compiled by the Research Center for Generational Contracts at Freiburg University in 2009 had almost 30 trillion euros ($39.3 trillion) of projected obligations to their existing populations. Germany accounted for 7.6 trillion euros and France 6.7 trillion euros of the liabilities, authors Christoph Mueller, Bernd Raffelhueschen and Olaf Weddige said in the report. “This is a totally unsustainable situation that quite clearly has to be reversed,”

Unemployment in EU at "historically high level" - Unemployment in the 27-member European Union has now "reached a historically high level" at 9.8 percent, the European Commission announced here on Tuesday. Unemployment has affected most groups, but especially hard hit are the young, the low-skilled and migrants. Poverty is also on the rise in many EU countries. Young adults, children and single parents are particularly at risk, said the EU's executive body in a statement. The EU economy grew modestly in the third quarter of 2011, although not enough to stabilise employment. The growth rate was 0.3 pct quarter-on-quarter, while the annual growth rate declined from 1.7 pct to 1.4 pct. Growth forecasts for the EU were downgraded, also because the international environment became weaker

Will the euro survive 2012? - Just the fact that I’m asking this question shows how bad off the 17-nation currency actually is. As the euro zone debt crisis enters its third, uncertain year, the euro could face is biggest challenge yet. Italy’s bond yields remain unsustainably high, testing new Prime Minister Mario Monti’s pledges to reform the stagnant economy. Spain’s new government continues to cut into the national budget, even though unemployment stands at a staggering 23% and the economy is likely contracting. France is scrambling to keep its AAA credit rating. Greece, well, is Greece. The anti-euro voices in European politics are growing louder and more influential. No wonder, as The Wall Street Journal reported recently,  two global banks took steps to recreate trading systems that could handleEurope’s many original national currencies, just in case the euro collapsed. So will the citizens of Europe still be carrying euro bills in their wallets next Christmas? Or will they be replaced by marks, francs and lira?

An Exit Strategy From the Euro - Until recently, the euro seemed destined to encompass all of Europe. No longer. None of the remaining outsider European countries seems likely to embrace the common currency. Seven Eastern European countries that recently joined the European Union (Bulgaria, Czech Republic, Hungary, Latvia, Lithuania, Poland and Romania) have announced their intention to revisit their obligations to adopt the euro. Two non-euro members of the EU, the United Kingdom and Denmark, have explicit opt-out provisions from the common currency, and popular opinion has recently turned strongly against euro membership. In Sweden, which lacks a formal "opt-out" provision (but has cleverly refused to fulfill one of the requirements for membership), a November poll on whether to join the euro was overwhelmingly negative—80% no, 11% yes.   In light of the political response to the ongoing fiscal and currency crisis—which is leaning strongly toward a centralized political entity that will likely be even more unpopular than the common currency—I suggest that it would be better to reverse course and eliminate the euro.

ECB funding to Italy banks tops 200 bln eur in Dec (Reuters) - Funding from the European Central Bank to Italian lenders rose sharply to nearly 210 billion euros in December as banks in the country took advantage of an unprecedented offer of longer term ECB funds, data from the Bank of Italy showed on Monday. Reliance on ECB funding for Italian lenders has risen sharply since the end of June, when total borrowing stood at 41.3 billion euros, mirroring growing funding strains caused by the euro zone sovereign debt crisis. The ECB injected 489 billion euros at its first-ever tender of three-year funds on Dec. 21. Italian banks took 116 billion euros, securing nearly 24 percent of the total, three sources told Reuters in December. The Bank of Italy data showed that domestic banks held 160.6 billion euros in longer-term ECB funds at the end of December, more than double the 68.4 billion euros of a month earlier. By contrast, Italian lenders lowered their participation to the ECB's main refinancing operations in December, with total funding from the seven-day tenders falling just below 50 billion euros from 83.4 billion euros at the end of the previous month. At the end of November total ECB funding to Italian banks stood at 153.2 billion euros.

Vital Signs: Elevated Italian Bond Yields -  Yields on Italy’s 10-year government bonds remain firmly above 7% — a level seen as unsustainable over time. Germany and France pressed Greece and its bondholders Monday to agree on easing Greece’s debt burden. This hasn’t reassured financial markets. Investors have punished the debt of Italy, the euro zone’s third-largest economy.

Rocks And Hard Places - The European “Black Debt” crisis seems to be dragging on and on. And while we worry about that, Bruce Krasting expressed the flip-side of our fears. The end could be near. He wrote, “We could see the whole Euro experiment unwind by March. The Fed can’t really do a thing. Its hands are tied. Bernanke has already said he would not bailout the EU. If he reverses himself he will lose his credibility, and his job. (He knows that.) Tim Geithner can’t do much with what is available to him. The ESF [Exchange Stabilization Fund] has no size behind it ($105 billion). The IMF will probably do something, but the most it could bring is a few hundred billion Euros. If the ECB goes into the QE [quantitative easing] business, the rating agencies and the market will retaliate. My bottom-line is that no one has a bazooka.” (On FX) UBS AG, a Swiss financial services company with $1.4Tn in total assets as of 2010, issued a report from its Global Rates Team also giving a bleak prognosis for the future of the European Union. The team surmised, “The crisis will deteriorate further than the stressed levels of late November. We do not believe that Greek PSI [private sector involvement] will take place in a ‘voluntary’ fashion but instead expect coercive restructuring of Greek debt either before or soon after the March redemption, triggering CDS contracts. Greece is not likely to decide to leave the euro area in 2012, though the risks of that happening have certainly increased.”

Germany Sells Bills With Negative Yield for First Time Amid Crisis Concern - Bloomberg: Germany sold six-month treasury bills at a negative yield for the first time amid demand for the debt securities of Europe’s biggest economy as a haven from the sovereign debt crisis roiling the region. The government auctioned 3.9 billion euros ($4.98 billion) of securities maturing in July at an average yield of minus 0.0122 percent, the Federal Finance Agency said in an e-mailed statement today. It was the first time it sold the securities at a negative yield, Joerg Mueller, a spokesman in Frankfurt, said in a telephone interview. The Netherlands sold 107-day bills at minus 0.007 percent on Dec. 12. Some investors are prepared to pay when lending to the most creditworthy governments in exchange for the assurance of getting their capital returned as a solution to the euro-region debt crisis, which forced Greece, Ireland and Portugal to seek bailouts, eludes policy makers. Yields on three-month U.S. Treasury bills fell below zero for the first time in December 2008 after the collapse of Lehman Brothers Holdings Inc. “It just underpins how nervous the overall market is,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “There are investors out there who really worry about the return of their money. That’s why they are OK donating some of their money to Germany, just to make sure they get it back.” 

German Yields South of Zero - Investors agreed to pay the German government for the privilege of lending it money. In an auction Monday, Germany sold €3.9 billion ($4.96 billion) of six-month bills that had an average yield of negative 0.0122%, the first time on record that yields at a German debt auction moved into negative territory. This means that unlike most other short-term sovereign debt, in which investors expect to be repaid more than they lend, investors agreed to be paid slightly less. And they are willing to do that because they are so worried about the potential for big losses elsewhere.

Yes Virginia, Nominal Interests Can Be Negative - As a part of our continuing series. From CNBC Germany sold 3.9 billion euros of six-month bills at a yield of -0.0122 percent on Monday, the first auction on record with a negative yield. They go on The result underscores the safe haven appeal of German debt in the midst of the European debt crisis continues. Negative yields indicate that investors are so nervous about protecting their money that they’re willing to essentially pay an interest rate to keep it safe. This kind of phraseology irks me a bit as it makes it sound like the key issue is investor preference, but the underlying message is essentially correct.

Greek development minister says 2011 deficit to exceed target, reach 9.6 percent — Greece’s finance minister on Wednesday said talks with banks for a debt reduction deal worth €100 billion ($127 billion) are at “a very good point.” Evangelos Venizelos made the remark a day before he is due to resume talks in Athens with Charles Dallara, the head of a global banking association that is representing private bond holders.Greece is hoping to finalize the deal soon with private investors for a voluntary 50 percent reduction in the value of their Greek bond holdings — before a looming March deadline to repay €14 billion ($17.8 billion) in bonds that will come due. “Our discussions with the private sector ... have advanced and are now at a very good point,” Venizelos told an investment forum at a seaside resort near Athens. On Wednesday, Fitch Ratings said Greece’s financial troubles could still worsen the eurozone crisis if it could not work out a debt reduction deal with creditors.

Soros Says Europe's Debt Woes 'More Serious' Than 2008 Crisis -- Billionaire investor George Soros said Europe’s sovereign-debt woes are “more serious” than the financial crisis of 2008 and that the world faces the prospect of a “vicious circle” of deflation. “We have a more dangerous situation now than in 2008,” Soros, 81, said in response to a question at an event in the southern Indian city of Bangalore today. “The crisis in Europe is more serious than the crash of 2008.” Leaders in the euro region have struggled to solve the debt crisis that is now in its third year and which has clouded the outlook for the global economy. The European Central Bank has provided unprecedented cash injections to try to avert a credit crunch, while Greece, Ireland and Portugal have already been forced into bailouts.

Fitch Warns That Many European Countries May See Ratings Cut This Month: Fitch Ratings says a number of euro countries, including Italy, may see their credit ratings downgraded by one or two notches by the end of this month as they struggle to cope with the debt crisis. Fitch's head of sovereign ratings David Riley says Tuesday the agency will give its verdict on several countries by the end of January. Fitch currently has Italy, Spain, Belgium, Ireland, Slovenia and Cyprus on so-called "ratings watch negative." Much interest in the markets centers on Italy, which Riley says is the "front line" of Europe's debt crisis. "The future of the euro will be decided at the gates of Rome," says Riley.

Fitch warns that many euro countries may see ratings cut by the end of this month — A number of euro countries, including Italy, could see their credit ratings downgraded by the end of this month as they struggle to cope with too much debt and slowing economic growth, Fitch Ratings said Tuesday. Though the agency remains confident that the 17-nation eurozone will not break up over the next year, it is concerned about the weak economic outlook and is urging the European Central Bank to step up its involvement in solving the crisis, notably by buying more government bonds in the markets. Fitch’s head of sovereign ratings David Riley said the agency will give its verdict on several euro countries by the end of January. Fitch currently has Italy, Spain, Belgium, Ireland, Slovenia and Cyprus on so-called “ratings watch negative” and Riley said the reductions could be up to two notches. Much interest in the markets centers on Italy, the third-largest eurozone economy and considered too expensive to bail out. Riley says it is the “front line” of Europe’s debt crisis especially as it has to tap bond market investors heavily this year.

ECB provides unsecured funding to banks to keep them from failing  As European banks face a wall of maturing debt and no buyers, they are using a tool provided by the ECB to borrow on an unsecured basis. There really is no other choice for many institutions. Joseph Cotterill at FT/Alphaville pointed out that the ECB has loosened collateral requirements so much that it now includes private bonds:  ... we said the ECB’s decision in September to accept unlisted bank bonds — i.e., bonds that the banks could have issued purely to themselves solely in order to pledge them as collateral for central bank funding — was “potentially very significant”. The process is quite simple. The ECB can't lend on an unsecured basis, but they can take a private (unlisted) bond as collateral. A bank can issue an unsecured bond to its own subsidiary and then pledge it as collateral to borrow from the ECB.  In effect it becomes unsecured funding form the ECB.

ECB Loans Stabilize Market, Don’t Provide Much Stimulus - Data from the European Central Bank Tuesday suggests that the ECB’s latest unconventional policy measures are helping restore calm in money markets, but aren’t yet helping support the currency bloc’s worsening economy. The data, comprised of various ECB lending and deposit operations to euro-zone banks, suggest the central bank is unlikely to introduce any further new initiatives to stabilize markets at its press conference Thursday. In a sign of less market anxiety, banks’ demand for unlimited one-week loans from the ECB reached an eight-month low Tuesday, as the central bank allotted 110.923 billion euros at its weekly main refinancing operation. Demand for the ECB’s weekly loans has been falling since Dec. 21, when the ECB allotted nearly half a trillion euros in long-term loans to more than 500 euro-zone banks. “The massive three-year liquidity injection is net positive, there’s no doubt about this,”

Euro banks park record sums with ECB as debt crisis lingers - Commercial banks’ overnight deposits with the European Central Bank have hit a new record high against a background of Europe’s lingering sovereign debt woes and a confidence crisis on the interbank market, ECB data showed on Tuesday. European banks deposited 481.935 billion euros ($612 billion) overnight on Monday, up from 463.565 billion euros deposited last Friday, the ECB data suggested. Commercial banks, which are awash with funds after the ECB granted them 489 billion euros in an unprecedented three-year liquidity operation last month, prefer using the low-risk ECB facility as a safe haven rather than lending to the real sector of the economy or to each other. The European central bank’s liquidity operation was designed to shore up banks’ finances and restore confidence in the banking industry, but the lingering sovereign debt crisis in Europe prompts lenders to park their money with the ECB. The ECB pays just 0.25 percent for overnight deposits, well below the rate charged by the regulator for the loans extended to commercial banks, which are gripped with fear that heavily-indebted European governments could default on their obligations and force banks and other bondholders to take big losses.

Europe Banks Resisting Draghi Bid to Avert Credit Crunch by Hoarding Cash - Banks are hoarding the European Central Bank’s record 489 billion-euro ($625 billion) injection into the banking system, thwarting attempts by policy makers to avert a credit crunch in the region. Almost all of the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank instead of pouring into the financial system, according to estimates by Barclays Capital based on ECB data. Banks will use most of the money from the three-year loans to meet their refinancing needs for this year and next, analysts at Morgan Stanley and Royal Bank of Scotland Group Plc estimate. “It’s illusory to think that the measure will translate into credit generation,” Governments are urging European banks to keep lending to companies and individuals while requiring them to raise an additional 114.7 billion euros of core capital by June to weather a deepening sovereign-debt crisis. Instead of raising equity, most lenders across Europe have vowed to meet capital rules by trimming at least 950 billion euros from their balance sheets over the next two years, either by selling assets or not renewing credit lines, according to data compiled by Bloomberg. 

Banks deposit record amount overnight at ECB - Banks in the countries that use the euro held a record amount of money overnight at the European Central Bank in a sign of stress in the financial system from the eurozone debt crisis. The region's central bank said Tuesday that overnight deposits from Monday hit euro481.93 billion ($613.4 billion) -- beating the previous record of euro463.56 billion from the day before. The high deposits mean banks are keeping spare cash in a safe place at a low interest rate rather than lending it one another on a short-term basis. This move has sparked fears of a further credit crunch across Europe as banks become wary about lending funds for fear they will not be paid back. The deposits also reflect large amounts of cash put into the banking system by the ECB in its efforts to steady the system. An ECB offer of emergency three-year loans resulted in euro489 billion being taken up by more than 500 banks in late December.

Can financial innovations help the eurozone? -- For all that financial innovation has got itself a pretty bad name recently, there’s no shortage of people with bright ideas as to how to address the euro crisis. Robert Barro is one. He thinks the euro should be phased out entirely, and has a plan for how to do just that: Germany could create a parallel currency—a new D-Mark, pegged at 1.0 to the euro. The German government would guarantee that holders of German government bonds could convert euro securities to new-D-mark instruments on a one-to-one basis up to some designated date, perhaps two years in the future. Private German contracts expressed in euros would switch to new-D-mark claims over the same period. The transition would likely feature a period in which the euro and new D-mark circulate as parallel currencies. Other countries could follow a path toward reintroduction of their own currencies over a two-year period. For example, Italy could have a new lira at 1.0 to the euro. If all the euro-zone countries followed this course, the vanishing of the euro currency in 2014 would come to resemble the disappearance of the 11 separate European moneys in 2001.

Spain's Industrial Output Plunges 7% - Spain's industrial output plunged by 7.0 percent in November compared to a year earlier, its biggest drop in more than two years, official data showed on Wednesday. Economists have warned that Spain may have already entered a recession, with a likely contraction in the last quarter of 2011 and the first quarter of 2012. The official growth forecast for 2011 stands at 0.8 percent. The fall in production accelerated in November after a decline of 4.2 percent in October, according to Wednesday's figures. "All the industrial sectors displayed negative year-on-year rates," the institute said in a statement.The fall in production was sharpest in the consumer goods sector, at 16.3 percent. Energy fell 5.2 percent.

Spain May Need Back-Door Bailout for Regions - Prime Minister Mariano Rajoy may need to skirt Spanish law to backstop the nation’s indebted regions, mimicking the European Union’s dodging of its no- bailout rule to save Greece, Ireland and Portugal from default. “We consider the Spanish government should guarantee or take responsibility for the debt it has authorized the regions to issue,” said Albert Carreras de Odriozola, Catalonia’s deputy finance chief, in a telephone interview. “It must be possible to talk and find a mechanism.” Catalonia, Valencia, Andalusia and Madrid, which account for 60 percent of Spain’s economy, are shut out of markets as they brace to repay 9 billion euros ($11.5 billion) to lenders this year, according to data compiled by Bloomberg. Spain’s 10- year yield has risen to 5.3 percent from 5.09 percent on Dec. 30 when the government said its 2011 deficit had ballooned to a third larger than its target. Regional shortfalls drove Spain’s deficit to 8 percent of gross domestic product, breaching the 6 percent pledged to the EU. Spain’s Parliament today examines 15 billion euros of tax increases and spending cuts announced by Rajoy’s government on Dec. 30 to compensate the slippage.

Spain Banks May Need 20 Bln Euros From Taxpayers, Expansion Says - Spanish banks may be unable to generate more than 30 billion euros ($38 billion) of the estimated 50 billion euros of extra provisions needed to clean up the banking system, Expansion reported, citing unidentified people in the financial industry. While the biggest banks would be able to repair their balance sheets without help, 20 billion euros of taxpayers’ money might be needed to help smaller ones, the newspaper said.

Stop coddling Europe’s banks - After initial denials, Europe’s leaders have started to acknowledge that IMF Chief Christine Lagarde was right. Through their statements and decisions, policymakers are showing their agreement with her assessment in August 2011 at the Federal Reserve’s Jackson Hole symposium that there was an urgent need for recapitalisation of Europe’s banks (Lagarde 2011). This recognition of reality is the good news. The bad news is the EU’s bank recapitalisation is being handled in a way that will make a recovery from the Europe’s debt crisis more problematic than it needs to be. There are five concerns:

  • Incentives for deleveraging;
  • Absence of firm guidelines on dividends and executive compensation;
  • Omissions of a recession scenario and of an unweighted leverage ratio from the stress tests;
  • Inequitable burden-sharing during debt restructuring; and
  • Insufficient measures to permit an escape from the adverse feedback loop between sovereign debt and bank debt.

Is a European Tobin tax likely to be efficient? - Italy’s prime minister, Mario Monti, is the latest in a growing line of senior public figures to support the idea of a financial transaction tax - also known as a Tobin tax or Robin Hood tax. Rather than give a case for or against, this column looks at what the realistic options are and asks whether they will be better for Europe, or worse.

European Financial-Transaction Tax: ‘Loch Ness Monster’ Likely - Introduction of a European tax on purchases of stocks and bonds is looking less likely the more European leaders talk about it. The most recent advocate of the idea of a European “Tobin tax” on financial transactions is French President Nicolas Sarkozy. Facing an uphill bid for re-election at the end of April, Sarkozy said this week during a news conference with German Chancellor Angela Merkel that Europe should jump out front on this issue and introduce a financial transaction tax, regardless of global opposition to the idea. And, he said, upping the ante, if all 27 European Union members won’t back the idea, the 17-nation euro zone should go it alone. While it isn’t surprising that Sarkozy would jump on the Tobin tax bandwagon, it was a surprise to hear Merkel get behind the idea of a Tobin tax for the euro zone. Then, for a few minutes on Wednesday, it even seemed that Italian Prime Minister Mario Monti — during his turn before the cameras with Germany’s stalwart leader — was warming to the idea. But then Merkel and Monti got into the details, and the silver bullet to kill wicked financial market speculation that seemed so within reach on Monday evaporated in a gush of reality on Wednesday.

ECB upped bond purchases last week to $1.4 billion - The European Central Bank increased its purchases of government bonds last week to euro1.1 billion ($1.4 billion) as part of its efforts to fight the eurozone debt crisis. The purchases reported Monday were up from euro462 million the week before. The ECB's purchases in the secondary market are designed to hold down the borrowing costs that Spain and Italy face in bond markets. However, Italian yields remain elevated at 7.1 percent. The ECB says however that the program is limited and that it is up to governments to win lower interest rates by cutting deficits and improving growth.

UniCredit Plunge Seen Deterring EU Banks From Stock Sales --- A 45 percent drop in UniCredit SpA shares over four days after Italy's biggest bank announced a rights offer may deter European lenders from asking investors for help to meet requirements that they replenish capital. "Every bank will be trying to avoid doing a rights issue even more now," said Peter Braendle, a fund manager at Swisscanto Asset Management in Zurich. "The decline is really amazing. It doesn't send a good signal." Shares of Milan-based UniCredit closed at a 23-year low of 2.286 euros yesterday after posting an unprecedented decline since the lender set the terms of its 7.5 billion-euro ($9.6 billion) stock sale on Jan. 4. Today, the shares rose as much as 7.8 percent and were 4.5 percent higher at 2.39 euros at 10:45 a.m. in Milan. The bank is seeking buyers for new shares at a discounted price of 1.943 euros apiece. The offering, which runs through Jan. 27, was guaranteed by a group of 26 underwriters, led by Bank of America Corp. and Mediobanca SpA, which have agreed to buy any leftover stock.

Debt Downgrades to Rise ‘Substantially’ in 2012, Moody’s Says -- Corporate ratings downgrades in Europe, the Middle East and Africa will “substantially” exceed upgrades this year as the sovereign debt crisis hampers economic growth, according to Moody’s Investors Service. The ratio of downgrades to upgrades soared to nine in the last three months of 2011 from less than two in the previous three quarters, Moody’s analysts including Jean-Michel Carayon in Paris wrote in a report published today. “The current trend for corporate rating actions is strongly negative,” the analysts wrote. “We expect that downgrades will continue to substantially exceed upgrades in the coming year for both investment-grade and speculative-grade corporates.” European leaders’ inability to find a solution to the crisis that started in Greece more than two years ago increases the threat of a double-dip recession, while banks are restricting lending to shore up balance sheets, Moody’s said. Junk-rated debt default rates in 2012 will rise from less than 3 percent last year, reaching the “high single digits” if the euro area is hit by recession, the analysts wrote.

Significant chance of Italy downgrade: Fitch — Fitch Ratings agency said Tuesday that there is a “significant chance” that Italy will have its credit rating downgraded because there is no credible financial firewall in Europe. Speaking at a conference in London, Fitch’s Head of Global Sovereign Ratings David Riley said the agency will review Italy’s credit rating at the end of this month. Fitch in December placed Italy on a negative rating watch with a “heightened probability of downgrade in the near term,” along with fellow euro-zone countries Belgium, Spain, Slovenia, Ireland and Cyprus. Riley said Italy was “the front line of the crisis,” because unlike the other ‘crisis’ countries such as Portugal or Ireland, Italy is at the core of the euro zone — it has the third-largest economy and biggest bond market in the region. The future of the euro would therefore be “decided at the gates of Rome,” Riley added.

Bailed-out Portugal’s painful recession will worsen this year, central bank says — Portugal’s recession will deepen this year under the weight of austerity measures meant to reduce public debt, the bailed-out country’s central bank predicted Tuesday. Portugal is trying to free itself from a huge debt burden that forced it to ask for a €78 billion ($100 billion) financial rescue package last year to avoid bankruptcy.But the Portuguese economy, one of the frailest among the 17 countries that use the euro as its currency, is buckling under the austerity cuts and fueling investor fears about the bloc’s chances of recovery from its two-year-old sovereign debt crisis. The central bank said in a report it expects the economy to contract 3.1 percent this year. Last October, it forecast a 2.2 percent contraction in 2012.

Polish Yield Spread Doubles in 750 Million-Euro Bond Sale -- Poland faces higher borrowing costs to sell more of its euro-denominated bonds due March 2017 as Europe’s debt crisis pushes up yields. The 3.75 percent notes may be priced to yield 237 basis points more than the benchmark mid-swap rate, according to a banker involved in the deal who declined to be identified because the information is not publicly available. The government sold 1.25 billion euros ($1.6 billion) of the same bonds in March 2010 at a yield 100 basis points above mid-swaps. Poland is following Brazil, South Africa and Indonesia in tapping foreign bondholders in the busiest start to a year from developing nations. It will be the country’s first foreign sale since Oct. 27, when the government raised $2 billion of 10 1/2- year bonds, according to data compiled by Bloomberg. “We are in a difficult period for central and eastern Europe right now so it may require an extra premium to place the bond,”

Slovenia scrambles to avoid economic crash as Zoran Jankovic, leader of largest party, fails to form a government to deal with debt issues. Slovenia was on Thursday scrambling to convince international lenders that it can avoid following Hungary's footsteps, after the leader of the country's largest party failed to form a government. MPs rejected the centre-left Zoran Jankovic as new prime minister, despite calls for a new government to deal with the country's increasing debt and threats of a further cut to its sovereign debt rating. Slovenia, which was the first post-communist country to join the euro in 2007, was downgraded A1 from Aa3 in December by ratings agency Moody's. Officials fear that political uncertainty and reliance on exports to the EU will trigger a further downgrade and a steep rise in borrowing costs. The country is already being forced to borrow at rates above 7%. Jankovic, whose Positive Slovenia party gained the most votes at a snap election in December, needed the support of at least 46 out of 90 parliamentary members but only managed to gain the support of 42.The president and members of parliament now have up to 14 days to nominate new candidates with Janez Jansa, head of the centre-right Slovenian Democratic Party, the second strongest party in parliament, the most likely to win.

Europe’s $39 Trillion Pension Risk Grows as Economy Falters - Even before the euro crisis, people were worried about Europe’s pension bomb. State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt, according to a study commissioned by the European Central Bank. The countries in the report compiled by the Research Center for Generational Contracts at Freiburg University in 2009 had almost 30 trillion euros ($39.3 trillion) of projected obligations to their existing populations. Germany accounted for 7.6 trillion euros and France 6.7 trillion euros of the liabilities, authors Christoph Mueller, Bernd Raffelhueschen and Olaf Weddige said in the report. Stable or falling birthrates, plus rising life expectancies, are adding to pressures, with the proportion of economic output devoted to spending on retirement benefits projected to rise by a quarter to 14 percent by 2060, according to the ECB report. Europe has the highest proportion of people aged over 60 of any region in the world, and that is forecast to rise to almost 35 percent by 2050 from 22 percent in 2009, according to a report from the United Nations. That compares with a global estimate of 22 percent by 2050, up from 11 percent in 2009.

Europe’s Vicious Spirals - The euro crisis shows no signs of letting up. While 2011 was supposed to be the year when European leaders finally got a grip on events, the eurozone’s problems went from bad to worse. What had been a Greek crisis became a southern European crisis and then a pan-European crisis. Indeed, by the end of the year, banks and governments had begun making contingency plans for the collapse of the monetary union. None of this was inevitable. Rather, it reflected European leaders’ failure to stop a pair of vicious spirals. The first spiral ran from public debt to the banks and back to public debt. Doubts about whether governments would be able to service their debts caused borrowing costs to soar and bond prices to plummet. But, critically, these debt crises undermined confidence in Europe’s banks, which held many of the bonds in question. Unable to borrow, the banks became unable to lend. As economies then weakened, the prospects for fiscal consolidation grew dimmer. Bond prices then fell further, damaging European banks even more. The European Central Bank has now halted this vicious spiral by providing the banks with guaranteed liquidity for three years against a wide range of collateral.  Cynical observers suggest that the ECB’s real agenda is to encourage the banks to buy the crisis countries’ bonds. . But it at least prevents the debt problem from creating banking problems, which, in turn, worsen the debt problem without end.

Germans and Aliens - Krugman - The Times has an article today about Germany’s faith in austerity as the answer to depression. It’s sad reading for anyone hoping that Europe will get its act together; it’s especially galling that Germans remain so committed to belief in expansionary austerity, despite the thorough empirical debunking the notion has been given over the past year and a half (see, e.g., this IMF working paper (pdf)). But the Germans believe that their own experience shows that austerity works: they went through some tough times a decade ago, but they tightened their belts, and all was well in the end. Not that it will do any good, but it’s worth pointing out that Germany’s experience can only be generalized if we find some space aliens to trade with, fast. Why? Because the key to German economic affairs this past decade has been a truly massive shift from current account deficit to surplus: So the German demand is that everyone run a current account surplus, just like they do — something that would only be possible if we can find someone or something else to buy our exports. It remains remarkable to see with how little wisdom the world is governed.

Greek deficit to exceed target in 2011 -- Debt-crippled Greece's budget deficit is expected to hit 9.6 percent of economic output in 2011, about half a percentage point above target, the development minister admitted Wednesday.  Michalis Chryssochoidis said that an increase in the use of European Union structural development funds had contributed to lowering government overspending from 10.6 percent of gross domestic product in 2010.  "The good news is that absorption of European Union funds has exceeded all expectations," Chryssochoidis said. But Greece, which is relying on billions in rescue loans from its European partners and the International Monetary Fund to keep afloat, had pledged to cut the 2011 deficit to 9 percent of GDP.

Greek bond swap falling short - sources (Reuters) - Talks about private sector creditors paying for part of a second Greek bailout are going badly, senior European bankers said on Wednesday, raising the prospect that euro zone governments will have to increase their contribution to the aid package. "Governments are mulling an increase of their share of the burden," said one of the bankers, who is familiar with the talks. An IMF source told Reuters if the deal with private bondholders does not help reduce Greece's debt, then Europeans would have to provide more financing for the next rescue package or the IMF may be unwilling to commit more money for Athens. Banks and investment funds have been negotiating with Athens for months on a bond swap scheme to cut Greece's debt burden from 160 percent of the nation's annual output to a more manageable 120 percent by 2020. This is central to a second, 130 billion euro (107 billion pounds) bailout that international lenders have drawn up to help the country avert default. As part of these talks, banks have agreed to a "voluntary" 50 percent write-down on Greek debt holdings but have faced demands to make further concessions, a factor that has made it less attractive for some of the investors to take part on a voluntary basis. The participation rate among private sector investors is currently less than 75 percent, which means Greece's debt will be reduced by far less than expected, the source said.

Greece Bank Creditor Group Says Talks ‘Paused for Reflection’ - Talks between Greece and its creditor banks were put on hold after negotiations in Athens failed to yield an agreement. A proposal put forward by the steering committee representing financial firms has “not produced a constructive consolidated response by all parties,” the Institute of International Finance said in an e-mailed statement today. “Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.” The IIF’s Charles Dallara and Jean Lemierre had met for a second day in Athens with Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos, aiming for a deal in the euro area’s first large restructuring. The committee had offered a 50 percent nominal reduction of Greece’s sovereign bonds in private investors’ hands and as much as 100 billion ($127 billion) of debt forgiveness, the IIF said.  Greece hasn’t yet decided whether to submit legislation that could force holders of the nation’s debt to take part in a bond swap, according to a government spokesman who said his earlier remarks on the matter were misinterpreted.

Wait... Wasn't the Greek Issue Solved Already? - Greece is in big trouble. I realize that 99% of commentators have completely missed this fact. After all throughout 2011 the mainstream financial media published stories claiming that the Greek Crisis was solved. However, the reality is that Greece remains in Crisis mode. The country has only 37 billion Euros left from its first bailout package. And the second bailout package is anything but guaranteed. Indeed, as the below story reveals, the two financial backstops for Greece (the IMF and Germany) are in no place to pony up more cash. Analysis: IMF funds for Greece not assured IMF chief Christine Lagarde is warning Europe that Greece's economic prospects are deteriorating and the European Union will either have to pony up more money to rescue Athens or debt holders will have to stomach steeper losses. Unless the private sector or the EU contribute more to Greece's rescue, the International Monetary Fund will view the nation's debt load as unsustainable and may be unwilling to deliver more funds, IMF sources told Reuters as Lagarde met with Germany's and France's leaders in Europe... But talks aimed at getting private-sector creditors to shoulder a bigger part of a new Greek bailout are going badly, senior European bankers said on Wednesday, raising the prospect that euro-zone governments will have to increase their contribution.

'Time is running out': Greece teeters on edge of bankruptcy as talks to slash public debt by 100bn euros stall - Fears are rising that the credit ratings of several eurozone countries could soon be downgraded - prompting global markets to fall and the euro falling to a 16-month low. Analysts today said that ratings agency Standards & Poor was finally going to deliver the downgrades it had threatened for much of the 17-nation eurozone just over a month ago. It comes because of concerns of Europe's inability to get a grip on a debt crisis that has raged for around two years. And it is on the same day that Greece was revealed to once again be teetering on the edge of a catastrophic bankruptcy - as negotiations on a bond swap to slash its public debt by 100 billion euros stalled.

Chart of the Day: Greek workers work 48% more hours than Germans -The conventional narrative about the European debt crisis largely accepts the contention that the periphery of Europe have different work habits and these account to a large extent the economic and financial problems. Yet often time the discussion takes on such ethnocentric dimensions that sometimes it is difficult to see what is real. This chart: to the right illustrates what many will find to be counter-intuitive. The most recent data from the OECD covers 2008 and shows that in that year, Greek workers on average worked 48% more than their industrious German neighbors. The OECD data shows the average Greek worker spent 2120 hours at work compared with 1429 hours in Germany. Moreover, Greece is one of the only OECD countries in which workers were working longer in 2008 than in 1998. With 1802 hours at work, the average Italian employee spent more than 25% more time at work than the average German worker.

Why Germany is Making Money on Eurozone Fears - A few months ago, it seemed Germany’s ego couldn’t get any bigger. The country’s joblessness rate had fallen to its lowest levels since German reunification in 1990, and its small Mittelstand businesses, the backbone of the German economy, were skirting the Eurozone meltdown. Now, events in the bond markets are giving the Germans yet another reason to sing their own praises. The Bundesbank managed to auction 3.9 billion euros worth of six-month debt at a negative interest rate yesterday. That means investors, for the first time in history, were so eager to finance Germany’s debt that they paid the country to do it. The reason? For starters, rising interest in Germany’s debt is a bet against the euro. The auction came on the heels of yet another Merkozy summit in Berlin on fixing the Eurozone crisis, which, as usual, yielded nothing new. And there are more signs of stress in the Italian banking system, which threaten to bring down its economy along with the rest of Europe. Negative yields, after all, represent a flight to safety. That investors are throwing their money at Germany, even as other Eurozone countries struggle to get credit, shows just how serious the crisis has become. Banks are parking record amounts of cash with the European Central Bank rather than lending to each other, which can only serve to slow Europe’s already struggling economies. And with ratings agency Fitch threatening to downgrade Italy by end January, the flight to safety will only intensify as the pool of top-quality short-term debt shrinks.

Germany’s economic recovery stalls - Germany’s economic recovery went into reverse at the end of last year but the country still notched up 3 per cent growth in 2011 – double as fast as in the U.S. and the rest of the euro zone. Highlighting the robustness of Europe’s largest economy – even as the euro zone debt crisis escalated – the Wiesbaden-based federal statistics office reported 2011 over all had seen only a modest slowdown from the 3.7-per-cent growth seen in 2010, which was the fastest since the country’s reunification in 1990. However, Wednesday’s figures did not dispel fears that even Germany was being hit by the euro zone crisis. The statistics office estimated German gross domestic product had fallen by about a quarter of a per cent in the fourth quarter. That increased the chances of German falling into recession – defined as two quarters of contracting activity.
Last year also saw Germany’s public sector deficit fall to just 1 per cent of GDP, down from 4.3 per cent in 2010. That brought the country clearly back below the 3 per cent limit set for euro zone member states.

Germany May Be on Brink of Recession - Europe’s largest economy shrank “roughly” 0.25 percent in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said today in an unofficial estimate.  The weaker global economy and waning demand from debt- stricken euro-area neighbors have eroded German foreign sales, the main pillar of its economic expansion. Net trade contributed 0.8 percentage point to growth last year, with exports up 8.2 percent and imports gaining 7.2 percent. In 2010, exports increased 13.7 percent. “All in all, the German economy has remained relatively resilient,”  “Signs of moderation have recently emerged but we expect the German economy to remain afloat in the coming quarters, maintaining its role as the major engine of growth for the euro area.”  German growth will slow to 0.6 percent this year before recovering to 1.8 percent in 2013, the Bundesbank predicted on Dec. 19. The European Central Bank, which has cut interest rates to a record low and flooded the banking system with cash during the debt crisis, last month reduced its 2012 growth forecast for the 17-nation euro region to just 0.3 percent.

Germany is already in a recession too - As I predicted Monday, statistics have shown that the German economy has finally succumbed to the deflationary economic policy of the euro zone.  Germany showed first signs of feeling the pain from the euro zone’s debt crisis as the economy shrank in the last three month of 2011, despite outperforming its peers for main part of the year thanks to strong domestic demand and exports.Gross domestic product (GDP) grew 3.0 percent in 2011, preliminary Federal Statistics Office data showed on Wednesday, below the previous year’s growth rate of 3.7 percent — the fastest since reunification — and in line with a Reuters poll estimate. But GDP contracted by around 0.25 percent in the fourth quarter of 2011, an official from the Statistics Office added. "Germany cannot isolate itself so easily from tensions within the euro zone. In addition the export sector is facing a difficult period given the fall in global demand," said Joerg Zeuner, chief economist at VP Bank. I have been sounding the alarm bell since summer as this is something I said as early as March 2010 would eventually happen when the sovereign debt crisis became acute. Spain [and Italy]’s debt woes and Germany’s intransigence lead to double dip. That’s because Q1 will also be negative for the German economy, according to predictions from German market economists. So much for expansionary fiscal contraction.

Roach Sees ‘Relatively Contained’ Recession in Europe - Stephen Roach told Bloomberg television earlier today that he does not expect the recession in Europe to be severe. Therefore, he believes the impact on other economies, particularly in Asia that depends on Europe for external demand for exports, will be limited. Video below. Also note that this morning, we learned that factory output in the euro zone fell 0.3% in the year from November 2010, suggesting that the euro zone is indeed already in a recession now.

Vital Signs: Euro in Decline - The euro is losing ground against the U.S. dollar. Investors concerned about the euro zone’s continuing debt crisis, as well as the economic outlook for some of the bloc’s 17 member nations, sent the common currency down to $1.2706 on Wednesday. That is the euro’s lowest value against the dollar since August 2010 and far below June’s level of $1.4635.

A Graph for Mario Draghi and the ECB to Ponder - ECB President Mario Draghi thinks he is doing a swell job.  Well, maybe, but if he and the rest of the ECB governing council really want to restore robust growth in Europe they should spend some time wrapping their minds around the following figure. Now should President Draghi and the rest of the ECB governing council get stumped they can find the meaning of this figure here.  

Is There Really A German Bias at the ECB? - Following up on a post by Scott Sumner, Christian Odendahl at The Economist pushes back on my claim that there is a German bias to ECB monetary policy.  He argues that ECB monetary policy was not appropriate for Germany prior to the crisis and since then it is only been a coincidence that ECB policy seems more aligned to the needs of the German economy than the rest of the Eurozone. He therefore concludes there is no German bias at the ECB. I think both Sumner and Odendahl are wrong for several reasons.  First, they reach their conclusion by pointing to specific episodes where ECB monetary policy may have been inappropriate for Germany rather than taking a systematic view of how the ECB responds to regional economic shocks.   If one looks at how the ECB on average conducts monetary policy, then it is hard not to conclude they do so in a manner that favors Germany and the core.  Such evidence can be shown with Taylor Rules and nominal GDP (NGDP) trend graphs, but let me provide some further evidence using the figure below.  It shows for the period 1999:Q1-2011:Q3 the percent of the forecast error for the ECB refi interest rate that can be explained by shocks to the NGDP growth rates in the core and non-core regions of the Eurozone, as well as from shocks to ECB monetary policy.  In other words, this figure shows how important unexpected economic developments in the two regions were on average to changes in ECB monetary policy over this period.

ECB Loan Deal May Release $12.8 Trillion Cash, Citigroup Says - The European Central Bank’s easing of rules governing collateral may release enough assets to allow banks to borrow more than 10 trillion euros ($12.8 trillion), according to analysts at Citigroup Inc. The ECB said last month it will allow banks to use performing “credit claims,” such as bank loans, as collateral when borrowing from the central bank. There are more than 11 trillion euros of performing loans in the euro area, Citigroup’s London-based analysts led by Ronit Ghose and Kinner Lakhani wrote in a note. “Central banks will create as much liquidity as needed to backstop the European banking system,” the analysts wrote. “Banks will not run out of cash or collateral.” Concern that Europe’s sovereign debt crisis may bring down banks triggered a surge in demand for collateral to use in secured borrowing, helping push yields on Germany’s one-year notes below zero at the end of November. A gauge of the premium lenders demand to accept notes posted as collateral has fallen to 19 basis points from 137 basis points six months ago, as unsecured borrowing evaporates.

ECB Says Credit Crunch Averted; Yet ECB Overnight Deposits Again Hit Record High; Skyrocketing ECB Balance Sheet - Following a relatively tiny two-day rally in the Euro the ECB blows its horn with a statement Credit Crunch Averted The euro rose, extending its first weekly gain versus the dollar in six weeks, as Italian bonds advanced and after European Central Bank President Mario Draghi said policy makers have averted a credit shortage. The 17-nation currency climbed against all but two of its 16 major counterparts as Spanish debt also rallied as Italy prepared to sell notes today. The Dollar Index (SPX) dropped for a second day before a U.S. report forecast to show consumer confidence improved this month, reducing demand for the U.S. currency as a haven. Draghi said the central bank’s massive injection of cash into the financial system last month is beginning to flow through into credit markets. “There are tentative signs of stabilization of economic activity,” he said in Frankfurt after the ECB’s policy meeting yesterday. Policy makers kept the benchmark rate at a record low of 1 percent after two straight quarter-point reductions.  After a 5-week decline, some snapback in the Euro is to be expected. The impetus is just as likely to be the action by the ECB to hold interest rates at 1% as anything else. As for the idea a "credit crunch has been averted", please consider the Wall Street Journal report for January 13 that says ECB Overnight Deposits Again Hit Record High

Banks' overnight deposits with ECB hit record - Euro-zone banks' overnight deposits with the European Central Bank hit yet another all-time high Thursday, likely reflecting continued funding pressures in the banking sector as well as the approaching end of the reserve period. Banks deposited EUR489.906 billion with the ECB, the ECB said Friday, up somewhat from EUR470.632 billion Wednesday. The daily amount banks deposit in the ECB's overnight facility has been extremely elevated since banks in December tapped the ECB for its first-ever three-year loan for a massive amount of liquidity. ECB President Mario Draghi Thursday said the extra long-term facility has been successful at preventing a serious credit contraction in the banking sector. The ECB launched the operation to address the fact more than EUR200 billion in bank loans was coming due in the first quarter, Draghi added. Since the launch of the three-year facility, the overnight deposits have been hitting ever new highs. Some analysts have suspected that is because banks are hoarding their excess funds--a good deal of which originate from the three-year ECB loan--by channeling them back to the central bank.

Satyajit Das: Europe’s The Road to Nowhere, Part 1 – Fiscal Bondage - Financially futile, economically erroneous, politically puzzling and socially irresponsible, the December 2011 European summit was a failure. Only the attending leaders and their acolytes believe otherwise. German Chancellor Angela Merkel’s post-summit homilies about the “long run”, “running a marathon” and “more Europe” rang hollow. The proposed plan is fundamentally flawed. It made no attempt to tackle the real issues – the level of debt, how to reduce it, how to meet funding requirements or how to restore growth. Most importantly there were no new funds committed to the exercise. The centrepiece of the new plan was a commitment to a new legally enforceable “fiscal compact” requiring government budgets to be balanced or in surplus, with the annual structural deficit not to exceed 0.5% of nominal Gross Domestic Product (“GDP”).  The language was Orwellian and incomprehensible in equal measure: “Member States shall converge towards their specific reference level, according to a calendar proposed by the Commission.” Whatever the long-term merit of greater budget discipline, the compact recycles previous Treaties, which have been honoured in the breach rather than observance. Since 1999 or from the time of their entry, Euro-Zone member countries have recorded nearly 70 breaches of the existing Stability and Growth Pact, including nearly 30 occasions when budget deficits exceeding 3% of GDP were allowed because of recessions. Germany and France have been in breach on at least 6 occasions each.

Austria: a cold wind from Budapest - When a central bank governor speaks on national state radio, you can expect he has something important to say.  And so it was on Wednesday with Ewald Nowotny, the head of the Austrian central bank, who took to the airwaves to declare that while the situation in neighbouring Hungary was a “challenge” for Austrian banks they faced “no danger” from the financial situation in Budapest. A lot, of course, rests on the difference between a challenge and a danger. Nowotny’s intention was, presumably, to reassure Austrians that their banks – and their savings are safe – but to make clear that he was not underestimating the gravity of Hungary’s difficulties. “It’s no secret that Austria and Austrian banks are heavily engaged in Hungary,”  “The Austrian banks are appropriately capitalised, therefore there is no danger for the Austrian banks, but of course this is another challenge.” Hungarian exposure is certainly sizeable. According to the Bank for International Settlements, Austrian lenders’ total claims on Hungary’s households, companies and the public sector stood at $41.6 bn at the end of June. This is, worryingly, far more than for banks from any other country, including Italy, which was in second place on $23.4bn.

Hungary Update - Krugman - Over the past month or so my Princeton colleague Kim Lane Scheppele has posted several times on this blog, reporting on the anti-democratic moves of the Hungarian government. When she started, there was near-silence from the news media on the story; but that has now ended, with extensive coverage in many newspapers. And now the European Union is on the case: — Faced with what critics say is an alarming drift away from democracy by one of its members, the European Union gave the Hungarian government a final warning Wednesday that it would face the start of formal legal action by next Tuesday unless it modified a series of measures that threaten the balance of power in the country. This is really an existential challenge to the EU, which is meant to be an alliance of democracies. We’ll soon see how effective it can be at maintaining that status.

Somewhere In Europe - Lights are flashing red about Hungary. Yesterday, the European Commission issued a stern warning to Hungary. In blunt language, the EU asserted that it “reserves the right to take any steps that it deems appropriate, namely the possibility of launching infringement procedures” against Hungary for violating the basic conditions of membership in the European Union. The Commission singled out the laws crushing the independence of the central bank, the judiciary and the ombudsman for data protection as the most egregious, but indicated that it was reviewing more laws as well. The US has also indicated its serious displeasure with the course that Hungary has taken. The Secretary of State wrote a strong letter to the Hungarian Prime Minister Viktor Orbán just before the New Year and the US Ambassador to Hungary has pronounced herself to be “disappointed” with the government, so disappointed that she did not attend the gala celebration for the new constitution held at the magnificent Opera House on 2 January (with 30,000+ protestors demonstrating outside – see picture below).

European Union Gives Hungary an Ultimatum — Faced with what critics say is an alarming drift away from democracy by one of its members, the European Union1 gave the Hungarian government a final warning Wednesday that it would face the start of formal legal action by next Tuesday unless it modified a series of measures that threaten the balance of power in the country. The unprecedented warning by the European Commission, the European Union’s executive arm, came in response to the passage of a new Constitution and a number of laws at the end of last year that remove checks and balances on the government of Prime Minister Viktor Orban2 in areas like central banking, the judiciary and the media. In addition, Olli Rehn, the European Union commissioner for economic and monetary affairs, warned separately that Hungary3 faced the possible suspension of valuable European Union development assistance unless it did more to control its budget deficit.

ECB: Expect Nothing And You Won't Be Disappointed - Draghi will downplay the potential for QE. Not only will he not say they are going to increase the program, he will downplay the potential. They haven’t wanted to do QE (they don’t really believe it helps the real economy) and now they have the excuse. The auctions went well. LTRO is up and running and there is another tranche coming up in February. They will really go out of their way to demonstrate that QE or increased SMP is off the table. I think this will disappoint the market, but only mildly. The strong auctions will be enough to reduce the impact from the ECB shooting down QE expectations, but I think the market will fade on that news, if only a little. I’m not sure how the Euro will react, in theory no QE should be positive for the currency, on the other hand, the mention of QE has been positive for the Euro enough times that the FX market reaction to this specific outcome is unclear.

France Downgraded by S&P, Others Set to Follow: Reports - Standard & Poor's has downgraded France's credit rating, French TV reported Friday, while several other euro zone countries face the same fate later in the day, according to reports. Germany and the Netherlands aren't among those facing a downgrade, a senior euro zone government source told Reuters. Another source confirmed "several" countries would be hit. "Remain alert tonight when U.S. markets close," said another euro zone source. In December, S&P placed the ratings of 15 euro zone countries on credit watch negative— including those of top-rated Germany and France, the region's two biggest economies—and said "systemic stresses" were building up as credit conditions tighten in the 17-nation bloc. Since then, the European Central Bank has flooded the banking system with cheap three-year money to avert a credit crunch. At the time, the U.S.-based ratings agency said it could also downgrade the euro zone's current bailout fund, the EFSF. "The consequence (if France is downgraded) is that the EFSF cannot keep its triple-A rating,"

France confirms rating to be downgraded - The eurozone debt crisis returned with a vengeance on Friday as government officials said Standard & Poor’s, the credit rating agency, would downgrade France and Austria, two of the currency zone’s six triple A creditors, and other nations not in the top tier.  France confirmed its rating would be cut to double A plus. Austria was to be lowered to the same level, while Germany, the Netherlands, Finland and Luxembourg would keep their triple As intact, officials said. “It is not good news . . . but it is not a catastrophe,” said François Baroin, France’s finance minister. “It is not the ratings agencies that dictate the policies of France.” The news reignited fears about the fiscal sustainability of the eurozone and the knock-on effect on its rescue fund, which could now lose its own triple A rating, reducing its firepower or forcing eurozone nations to increase contributions yet again.  Financial markets slid as investors sold euros, eurozone equities and sovereign bonds, especially from Italy and Spain – the latter move pushing down yields for German Bunds and US Treasuries, held to be havens.  The expected downgrades came in lockstep with new problems for the eurozone on other fronts – debt-restructuring talks between Greece and holders of its debt broke down over how large bondholders’ losses should be, raising the spectre of a Greek default in March.

S&P Cuts Credit Ratings for Nine Euro Zone Nations - Standard & Poor's cut the credit ratings of nine European countries on Friday in a widely-anticipated move. Rumors that the downgrades were imminent had been circulating in various reports throughout the day. S&P lowered its long-term rating on Cyprus, Italy, Portugal and Spain by two notches, and cut its rating on Austria, France, Malta, Slovakia and Slovenia by one notch. "Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone," S&P said in a press release announcing the downgrade. The credit-rating agency affirmed the current long-term ratings for Belgium, Estonia, Finland, Germany, Ireland, Luxembourg and the Netherlands. In December, S&P placed the ratings of 15 euro zone countries on credit watch negative — including those of top-rated Germany and France, the region's two biggest economies — and said "systemic stresses" were building up as credit conditions tighten in the 17-nation bloc.

France goes soft-core - FRIDAY, January 13th, proved unlucky for nine euro-zone countries: they had their credit ratings cut by Standard and Poor’s (S&P) soon after the American markets closed for the week. France and Austria were stripped of their triple-A credit rating. Three smaller euro-zone countries (Malta, Slovenia and Slovakia) also suffered a one-notch downgrade. Italy and Spain had their ratings knocked down by two notches (to BBB+ and A respectively), as did Portugal and Cyprus, whose debts are now considered junk by S&P. Though grim, the news was not the blanket downgrade feared by eurocrats. In December S&P had given a warning of a possible downgrade to all euro-zone countries, bar Greece (which could fall no further) and Cyprus (which was already on the hit-list)—just days before leaders of the European Union met in Brussels to tackle the euro-zone crisis once and for all. S&P argues that their fire-fighting efforts have fallen short of what is needed, hence the downgrades. The December summit had "not produced a breakthrough of sufficient size and scope to fully address the euro zone’s financial problems,” the ratings agency said in a statement.

France Loses AAA Status as S&P Cuts Nine Euro-Zone Nations; Germany SparedFrance and Austria lost their top credit ratings in a string of downgrades that left Germany with the euro area’s only stable AAA grade as Standard & Poor’s warned that crisis-fighting efforts are still falling short.  France and Austria were cut one level to AA+ from AAA and face the risk of further reductions, the rating company said in Frankfurt late yesterday. While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative watch. Spain and Italy were also among the nine nations downgraded. The first gauge of the report’s impact will come in two days when France sells as much as 8.7 billion euros ($11 billion) in bills.  “In our view, the policy initiatives taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone,” S&P said in a statement.  The company acted at the end of a week in which signs grew that Europe’s woes may be cresting as borrowing costs fell, evidence of economic resilience emerged and the European Central Bank said it had quelled a credit crunch at banks. While France’s downgrade may make it harder for the euro region’s bailout fund to raise money in financial markets, the immediate impact on French and Italian bond yields was muted.

FRENCH DOWNGRADE: Bad News For Sarkozy, But Good News For Somebody Else: The fallout from today's ratings downgrades remains to be seen, with markets little moved. If anything, the move by Standard & Poor's to cut France's credit rating one-notch to AA+ brings a cacophonous chorus of market participants to a halt. "It will be more political than economic," Charles St.-Arnaud, Nomura's international economist and FX strategist, says. "Now that France has lost its AAA status, it will give even more power to the German chancellor in negotiations." Mr. St.-Arnaud is not alone in seeing the impact of S&P's decision as more than formality. In truth, the impact of S&P's downgrade came after the ratings agency first announced it was placing France and 14 other Eurozone nations on negative credit watch. Yields on the French 10-year hit nearly 3.400% on December 8, days after the Standard & Poor's announcement. Since then, it has moved in a band between 2.928% and 3.402% and the country has not had difficulty raising capital. But the loss of its cherished AAA rating may give German Chancellor Angela Merkel more room to dictate policy as the pair work on a plan for fiscal integration and solution for the region's debt crisis. The news also puts work on the European Financial Stability Facility by the two policy leaders in question.

S&P downgrades nine euro zone countries - (Reuters) - Standard & Poor's downgraded the credit ratings of nine euro- zone countries, stripping France and Austria of their coveted triple-A status but not EU paymaster Germany, in a Black Friday the 13th for the troubled single currency area."Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone," the U.S.-based ratings agency said in a statement. In a potentially more ominous setback, negotiations on a debt swap by private creditors seen as crucial to avert a Greek default that would rock Europe and the world economy broke up without agreement in Athens, although officials said more talks are likely next week. If Greece cannot persuade banks and insurers to accept voluntary losses on their bond holdings, a second international rescue package for the euro zone's most heavily indebted state will unravel, raising the prospect of bankruptcy in late March, when it has to redeem 14.4 billion euros in maturing debt.

S&P downgrades Europe - S&P brought its hammer down on Europe today, with nine — count ‘em — downgrades of euro zone countries. The removal of France’s triple-A has been getting most of the headlines, but for me the bigger news is the fact that Portugal has now been downgraded to junk status. Both of those moves, however, are pretty standard for ratings agencies in general and for S&P in particular: a slightly belated recognition of what has long been obvious to the rest of us. There’s one area, however, where S&P’s actions are going to have a significant and far from positive effect — and that’s the European Financial Stability Facility, or EFSF. The way that the EFSF is structured, its credit rating is particularly reliant on the ratings of the euro zone’s biggest sovereigns. Here’s how S&P put it back on December 6: Based on EFSF’s current structure, were we to lower one or more of the current ’AAA’ ratings on EFSF’s guarantor members, all else being equal, we would lower the issuer and issue ratings on EFSF to the lowest sovereign rating on members currently rated ‘AAA’. What this means is that Europe now faces a choice. On the one hand, it can restructure the EFSF so that it retains its triple-A credit rating. That would almost certainly involve shrinking the EFSF in size. Or, it can be sanguine about the EFSF downgrade and just let it happen. But that’s not a pleasant outcome either, given that everybody’s bright idea, when it comes to Europe’s sovereign bailouts, is to leverage the EFSF to some multiple of its present size. Leveraging a triple-A EFSF is hard enough; leveraging a double-A EFSF is pretty much impossible.

And then there were 4 - And then there were just 4 Euro Zone countries who retain their AAA rating, according to S&P – no doubt less in time.  Personally, I believe that the importance of the AAA rating is way overrated, particularly in the current circumstances. S&P downgraded 9 Euro Zone countries on Friday 13th, including France – don’t you just love the date/timing – pure drama. Indeed, Italy, Portugal, Cyprus and Spain were downgraded by 2 notches, with Austria, France, Malta, Slovakia and Slovenia by 1 notch – Cyprus (BB+) is also now in junk territory – so much for those Russians who used Cyprus – they will learn. In addition, S&P suggests that, in the event of a default, investors in Portuguese and/or Cyprus debt would recover between 30% – 50% of their assets, at the most.

EL-ERIAN: S&P's Downgrade Of Europe Comes With Significant 'Known Unknowns' - The chatter on Friday's downgrades of European sovereign ratings debt is all over the place - from those dismissing it as old news (especially given that S&P warned back on December 5th) to those viewing it as part of a larger and consequential transformation of the international monetary system. What follows is an attempt to provide a guide to the multi-faceted implications. It focuses on three types of consequences: (i) those that are unambiguous and already reflected, albeit not fully, in market valuations; (ii) those that are less well understood but will become clearer in the next few weeks; and (iii) those that are consequential but where the analytics are still largely unknown at present. The sovereign debt of European sovereigns was already trading at yields consistent not only with what S&P announced today, but also with more draconian downgrades - thus the view that the impact on overall yields and spreads would be contained. Yet there are some differences between signaling an action and actually taking it. First you remove residual uncertainty about the action, including timing and scale. Second, you encourage others to follow. Third, you impact the pattern of investment flows, especially those subject to guidelines and restrictions defined in terms of ratings.

Why the European downgrades matter - Perhaps more importantly, and at the risk of repeating myself, the downgrades increase the dependence of the big banks on finance from the European Central Bank – and for the economic recovery of the eurozone, that’s a very bad thing. The less that banks are able to raise funds in a normal commercial way, the more they’re dependent on a central bank, the more reluctant they are to lend to the wider economy – and given the massive dependence of the eurozone economy on finance provided by banks, that leads to a reduction of economic activity, a reinforcement of recessionary conditions… ..the downgraded Italian and French governments would be seen to be less financially capable of bailing out Italian and French banks in a crisis, so other creditors would be shouldering more risk… So even if the downgrades don’t lead to default by a nation or a bank, they make it much harder for the banks – and in a way the whole eurozone – to get off life support. …That creates a damaging negative feedback loop (less lending means asset price falls, more bankruptcies, bigger losses for banks, and even less lending by capital-constrained banks) which makes it all the harder for the eurozone to break free of its cycle of decline. And, as I said in my earlier note, the downgrades also make it harder for the eurozone to establish a proper circuit breaker – in the form of a giant bailout fund – to protect other sovereign creditors in the event that today’s impasse in Greek debt talks lead to a Greek default.

For Europe, Few Options in a Vicious Cycle of Debt - Europe has a $1 trillion problem. As difficult as the last two years have been for Europe, 2012 could be even tougher. Each week, countries will need to sell billions of dollars’ worth of bonds — a staggering $1 trillion in total — to replace existing debt and cover their current budget deficits. At any point, should banks, pensions and other big investors balk, anxiety could course through the markets, making government officials feel like they are stuck in a scary financial remake of “Groundhog Day.” Even if governments attract investors at reasonable interest rates one month, they will have to repeat the process again the next month — and signs of skittish buyers could make each sale harder to manage than the previous one. Given this vicious cycle, policy makers and investors are closely watching the debt auctions for potential weakness. On Thursday, Spain is set to sell as much as 5 billion euros ($6.3 billion) of government bonds. Italy follows on Friday with an auction of more than $9 billion.

Greece – Disagreement Everywhere, Rift in the Troika -  Yves Smith - Austerity measures are taking their daily toll on Greece. Suicides and attempted suicides have jumped by 22.5% since 2009. The unemployment rate rose to 18.2%. RTL, the largest radio network in Europe, lost 50% of its advertising revenues in Greece since the start of the crisis—and decided to leave. And now pharmacies are having difficulties obtaining medications. The pharmacy problem is an unintended consequence of the austerity measures that the bailout Troika (EU, IMF, and ECB) is imposing on Greece. To cut its healthcare budget, the government has reduced the prices that the industry can charge state-owned insurers. So wholesalers are selling their limited supply outside Greece. And state-owned insurers, whose budgets are squeezed as well, delay payments to pharmacies, which then can’t pay their wholesalers for the medications they do get. Thus, wholesalers are even less likely to sell to pharmacies—and the system breaks down. A microcosm of the current state of the Greek economy. Yet more cuts are coming. To impose them, Prime Minister Lucas Papademos even threatened private sector unions (and everyone else) with the nuclear option—disorderly default. For that whole debacle, read…. Greece’s Extortion Racket Maxed Out. But now the Troika itself is in disarray. It surfaced today at an IMF press briefing in Washington: the IMF no longer supports austerity as a guiding principle. Athens News quoted a senior IMF source, who was speaking on condition of anonymity.

Greece Creditors Break Off Debt TalksGreece’s creditor banks broke off talks after failing to agree with the government about how much money investors will lose by swapping their bonds, increasing the risk of the euro-area’s first sovereign default.  Proposals by a committee representing financial firms haven’t produced a “constructive consolidated response by all parties,” the Washington-based Institute of International Finance said in a statement today. Talks with Greece and the official sector are “paused for reflection on the benefits of a voluntary approach,” the group said.  Greek officials and the nation’s creditors agreed in October to implement a 50 percent cut in the face value of Greek debt, with a goal of reducing Greece’s borrowings to 120 percent of gross domestic product by 2020. More than two months after the accord was announced, the two sides still need to agree on the coupon and maturity of the new bonds to determine losses for investors. The IIF has aimed to implement the swap this month. “The sticking point is actually coming down to what the interest rate would be on the new bond,” If the talks fail and Greece defaults, “there will be a lot of contagion,” he said. “The ball is in their court. If you want to do something to head off what could be a disorderly process, now’s the time.”

Greek debt restructuring talks collapse - Talks over Greece’s debt restructuring collapsed on Friday, an unexpected breakdown that makes it increasingly likely Athens will become the first government of a developed country in more than 60 years to suffer a full-scale default on its debt. In a statement, lead negotiators for Greek bondholders said that the latest offer made by Athens “has not produced a constructive consolidated response” from “all parties” – a clear reference to International Monetary Fund conclusions that bondholder losses must be increased significantly or a second Greek bail-out would have to be bigger than the agreed €130bn.

This Is Not Good: Greek Creditors End Talks On Debt Swap - Greek debt restructuring talks have fallen apart, after the government and banks failed to reach an agreement about how much of a haircut investors would take on their holdings. Talks are however set to resume on January 18. In October, Greek creditors and officials had agreed to a voluntary 50% hair cut on Greek debt. But the government had recently been pushing for interest payments that would make new bonds worth less than the 50% haircut in bonds' face value. From the IIF release: "Despite the efforts of Greece’s leadership, the proposal put forward by the Steering Committee of the PCIC—which involves an unprecedented 50% nominal reduction of Greece’s sovereign bonds in private investors’ hands and up to €100 billion of debt forgiveness— has not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt and the October 26/27 Agreement. Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach." Why this matters? The debt restructuring could reduce Greece's massive €360 billion public debt burden, by nearly €100 billion. But, a breakdown in talks increases the likelihood that Greece will default on its debt by failing to meet conditions for a second bailout. Greece is looking at a €14.5 billion bond redemption in March, and officials had hoped that all debt restructuring talks would have been settled well before the deadline, to avoid paying the full amount. If these talks aren't finalized in the coming days, international lenders would have come to Greece's rescue to help it avoid default. And it's unclear if Greece will get this avalanche of money.

Fitch warns of 'cataclysmic' euro collapse - The European Central Bank should ramp up its buying of troubled euro zone debt to support Italy and prevent a "cataclysmic" collapse of the euro, David Riley, the head of sovereign ratings for Fitch, has warned.Speaking to investors as part of a European roadshow, Mr Riley said a collapse of the euro would be disastrous for the global economy, and while it is not Fitch's baseline scenario, it could happen if Italy did not find a way out of its debt problems. "The end of the euro would be cataclysmic. The euro is a reserve currency," Mr Riley said overnight. "What would that do in terms of financial and political stability?" "It is hard to believe the euro will survive if Italy does not make it through," he said, adding that while many saw Italy as too politically and economically important to be allowed to fail, "one might also argue that it is too big to rescue." The warning pushed the euro down towards a 16-month low versus the US dollar. Mr Riley urged the European Central Bank to abandon its current reluctance to scaling up its purchases of troubled euro zone debt such as Italy's and drop its resistance to the bloc's bailout fund, the EFSF, borrowing directly from it.

Public sector workers assured pensions are safe after £787m deficit - TENS of thousands of public sector workers in Staffordshire have been assured their pensions are safe – despite a black hole of more than three quarters of a billion pounds in the fund which pays them. The funding deficit means assets in the Staffordshire Pension Fund are £787 million below the amount that will actually need to be paid out to members. Official records show the market value of the fund's investments in private companies, including tobacco firms and a number of popular retailers, has fallen from £2.6 billion to £2.4 billion. But both finance leaders and unions say the deficit should not cause "undue concern" as values will inevitably fluctuate over time.

'If you don't take a job as a prostitute, we can stop your benefits' - Telegraph: A 25-year-old waitress who turned down a job providing "sexual services'' at a brothel in Berlin faces possible cuts to her unemployment benefit under laws introduced this year. Prostitution was legalised in Germany just over two years ago and brothel owners – who must pay tax and employee health insurance – were granted access to official databases of jobseekers. The waitress, an unemployed information technology professional, had said that she was willing to work in a bar at night and had worked in a cafe. She received a letter from the job centre telling her that an employer was interested in her "profile'' and that she should ring them. Only on doing so did the woman, who has not been identified for legal reasons, realise that she was calling a brothel. Under Germany's welfare reforms, any woman under 55 who has been out of work for more than a year can be forced to take an available job – including in the sex industry – or lose her unemployment benefit. Last month German unemployment rose for the 11th consecutive month to 4.5 million, taking the number out of work to its highest since reunification in 1990.

The Economist Loses the Plot With This Shallow, Pro-City Propaganda - I was surprised and disappointed when I opened my copy of The Economist on Friday morning. The magazine is running a feebly-argued propaganda piece headlined “Save the City” as its cover story. The piece vaunts the “skills” that are to be found in the City of London and seeks to persuade us that having a powerful financial sector is critical to the future health of the UK economy and that the “Square Mile” must therefore be cherished and preserved at all costs. The cover image harps back to the Blitz, as if Hitler’s Lufwaffe is once again poised to carpet bomb a key part of our heritage. Outside PR puff sheets like HBOS’s absurd “Deal Leaders” of 2005-08 and the Pravda-style advertorials inserted into newspapers and magazines to launder the images of evil dictatorships, I’ve rarely read such a farcical or misleading article. The magazine’s “Save the City” leading article is one-sided, snide, racist, xenophobic, and makes massive omissions. It doesn’t even start to acknowledge the multifarious failures of the financial sector, or the damage it has wrought on the UK economy in recent years. The article fails to mention the massive risks posed by “crony capitalism” and “regulatory capture”, including wilful blindness to fraud. Who wrote this garbage I wonder?

Bankers can wait. Targeting protesters is much more Cameron's cup of tea | George Monbiot -  The Vickers banking reforms are set for 2019. But when it comes to undermining protest ministers don't fanny about When governments seek to protect the rich from the poor, they act swiftly and decisively.  On Tuesday afternoon the House of Lords will consider a bill containing a cruel and unnecessary clause, whose purpose is to protect landlords who keep their houses empty. Under current law, if squatters move into your home (or a home that you are soon to occupy) and fail to leave the moment you ask, the police can immediately remove them. The only houses with weaker protections are those that remain empty. There are 700,000 such homes in England alone, almost half of which have been empty for a long time. They have long been a refuge for street sleepers and other homeless people. Landlords already possess civil powers to remove them, and the police can step in if squatters ignore the court orders. Last month City of London police sent a letter to the banks titled "Terrorism/extremism update for the City of London business community". It warned of the following "substantial" terrorist threats: Farc in Columbia, al-Qaida in Pakistan, and Occupy London. It advised the banks to "remain vigilant" as "suspected activists" from the Occupy movement were engaging in "hostile reconnaissance" – the sort of language that might have been used to report German spies in the second world war.


Truth 101 said...

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rjs said...

thanks, truth, this blog is meant to be used as a free resource for anyone who wants to keep on top of the areas i cover...but these are just copied links; i do most my writing on marketwatch666, and so far thats only been one day a week...

Truth 101 said...

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You do have good info.