week ending Jan 7

Fed's Balance Sheet Contracts In Latest Week (Dow Jones)- The Fed's asset holdings in the week ended Jan 4. stood at $2.920 trillion, down from $2.928 trillion reported a week earlier, the central bank said in a report released Thursday. Holdings of U.S. Treasury securities fell to $1.663 trillion on Wednesday from $1.672 trillion a week before. The central bank's holdings of mortgage-backed securities rose to $837.74 billion from $837.30 billion. Total borrowing from the Fed's discount lending window was $8.98 billion, down from $9.08 billion a week earlier, according to the report. There was no discount window borrowing by commercial banks, down from $42 million a week earlier. The Fed report showed that U.S. marketable securities held in custody on behalf of foreign official accounts was $3.402 trillion this week, down from $ 3.411 trillion the previous week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts decreased to $2.671 trillion from $2.679 trillion the previous week. Holdings of agency securities fell to $731.31 billion, from the prior week's $ 731.80 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--January 5 2012

FOMC Minutes: Agreement to provide "projections of appropriate monetary policy" in January - From the Fed: Minutes of the Federal Open Market Committee, December 13, 2011 and conference call on November 28th. Excerpts:  In their discussion of the economic situation and outlook, meeting participants agreed that the information received since their previous meeting indicated that economic activity was expanding at a moderate rate, notwithstanding some apparent slowing in global economic growth. Regarding the economic outlook, participants continued to anticipate that economic activity would expand at a moderate rate in the coming quarters and that, consequently, the unemployment rate would decline only gradually. The factors that participants cited as likely to restrain the pace of the economic expansion included an expectation that financial markets would remain unsettled until the fiscal and banking issues in the euro area were more fully addressed. Other factors that were expected to weigh on the pace of economic activity were the slowdown of economic activity abroad, fiscal tightening in the United States, high levels of uncertainty among households and businesses, the weak housing market, and household deleveraging. In assessing the economic outlook, participants judged that strains in global financial markets continued to pose significant downside risks.

Fed to Publish a Forecast of Rate Moves, Guiding Investors — The Federal Reserve will begin later this month to publish the predictions of its senior officials about their own decisions, hoping to increase its influence over economic activity by guiding investor expectations.  The change was approved at the most recent meeting of the Fed’s policy-making committee, in December, but was kept secret until Tuesday afternoon, when the Fed released an account of the meeting after a standard three-week delay.  The inaugural forecast, set for Jan. 25, will show the range of predictions made by Fed officials about the level of short-term interest rates in the fourth quarter of 2012, 2013 and 2014, although it will not list individual predictions.  It also will summarize when they expect to start raising short-term rates, which they have held near zero since late 2008. And it will describe their plans for the Fed’s investment portfolio.  According to the meeting minutes, “a number of members” of the 10-person committee “indicated that current and prospective economic conditions could well warrant additional policy accommodation, but they believed that any additional actions would be more effective if accompanied by enhanced communication.”

Fed Announcement on Communications Shift -- The minutes from the latest Federal Reserve meeting included an announcement about a shift in the central bank’s communications strategy. This is the relevant section of the release.

FOMC Decides to Focus on the Rudder, Not the Destination - The FOMC minutes from the December meeting reveal that starting this month the Fed will start publishing conditional long-term forecasts for the federal funds rate in its Summary of Economic Projections (SEP): At the conclusion of their discussion, participants decided to incorporate information about their projections of appropriate monetary policy into the SEP beginning in January. Specifically, the SEP will include information about participants' projections of the appropriate level of the target federal funds rate in the fourth quarter of the current year and the next few calendar years, and over the longer run; the SEP also will report participants' current projections of the likely timing of the first increase in the target rate given their projections of future economic conditions. So what to make of this new policy?  One view is that it provides more certainty about the future path of the target policy interest rate.  Consequently, it would easier to make long-term investment decisions and that added certainty by itself might add some stimulus to the economy.  The long-term forecast could also be used as a back-door way to provide more monetary stimulus to the economy.  The Fed could do this by lowering its long-term forecast of the target federal funds rate which could be interpreted as indicating greater than expected monetary stimulus in the future.  This, in turn, would improve the economic outlook and thereby encourage households and firms to increase their spending today.  In short, a lower forecast of the future target federal funds rates could raise current aggregate demand.

Confused about Communication about Improving Communication - Apparently the Fed do a poor job of communicating its new communications policy. David Altig tries to clear things up: In the interest of precision, by David Altig: As you may have heard, the minutes of the December 13 meeting of the Federal Open Market Committee (FOMC) contained the news that, starting with this month's meeting, committee members will be jointly publishing not only their personal projections for gross domestic product growth, unemployment, and inflation, but also the monetary policy assumptions that underlie those forecasts. In an article published earlier this week, the enhancement to these projections, known as the Summary of Economic Projections (SEP), was described in the Wall Street Journal this way (with my emphasis added): "Federal Reserve officials this month will begin detailing their plans for short-term interest rates, a move that could show that the central bank's easy-money policies will remain in place for years and give the economy a boost."I added the emphasis in both of those passages because I think the highlighted language isn't quite right. ... The minutes are pretty clear about what this information is intended to convey… and what it is not intended to convey (here too, emphasis added):...The broader point is that the new information in the SEPs, according to the minutes, is not intended to be a device for signaling the policy path that the FOMC, by official vote, intends to pursue.

Fed Watch: Still Cautious Heading Into 2012 - I have been hesitant to embrace the recent positive data flow - once bitten, twice shy perhaps. Something about the current dynamics that seems a little too familiar. Indeed, I felt something of relief when FT Alphaville came to a similar conclusion in the waning days of 2011. Cardiff Garcia reports on a Nomura research note that details a new bias in the seasonal adjustment process, noting: Up next, writes Nomura, you can expect exaggeratedly strong readings from the Chicago PMI later this month and the next ISM manufacturing survey at the start of January. I imagine it is premature to call the readings "exaggerated," but both did surprise on the upside, as much data has of late. Read the whole piece - it is worth the time.  It seems reasonable to expect, at least as a baseline - a slow "recovery" that is really more of an adjustment to what appears to be the economy's new equilibrium path, one that is decisively subpar to the pre-recession trend. I don't believe that such an adjustment is necessary, as in my view it simply reflects a shortfall of aggregate demand. That said, the longer the cyclical downturn grinds on, the more likely it is that we will indeed see a new equilibrium path. A greater percentage of the cyclical unemployment will become structural unemployment or permanent shifts in the labor force participation rate. In addition, investments will go unmade as firms hoard cash. And, increasingly, policymakers will manage policy along the new equilibrium path, forgetting entirely the pre-recession path. 

Latest Fed Transparency Move Draws Mixed Response - The Federal Reserve‘s latest move to open up the policy-making process is getting mixed reviews from economists, who are struggling to make sense of what the central bank is in fact planning to do, as well as what it can accomplish. On Tuesday, the minutes from the Fed’s December monetary policy meeting said the institution will now release its projections of its overnight fed-funds target rate, the traditional focal point of policy making. The forecasts will be made available four times a year, beginning with the Federal Open Market Committee meeting scheduled for the end of the month. The interest-rate outlook will join the projections of GDP, inflation and unemployment the Fed already releases.

Fed Primary-Dealer Survey Predicts Rate Increase in Second Quarter of 2014 - The Federal Reserve Bank of New York’s survey of primary dealers conducted before policy makers’ Dec. 13 meeting showed the firms expected the Fed to raise its benchmark interest rate during the second quarter of 2014.  Respondents saw a 45 percent chance the first rate increase would occur in the second quarter of 2014 or later, according to the results posted today on the New York Fed’s website. The median among the predictions for the timing of the first increase was the second quarter of 2014, the bank said in a statement. The Fed has kept its benchmark interest rate near zero since December 2008.  The December survey asked primary dealers the probability that central bankers would make changes to their public communications within the next year. Fed officials decided at the last meeting of the Federal Open Market Committee to start publishing their own forecasts for the central bank’s key interest rate, according to minutes of the gathering released yesterday.  “While most dealers did not expect any policy changes at the December meeting, some suggested the FOMC could change its communication strategy, and a few saw a change in the guidance on the future path of the federal funds rate as likely,”

Large Banks Uncertain about Economy, Certain about QE3 - Fed - Some of the nation's most influential financial institutions might not know what U.S. GDP growth, inflation and employment data will look like in 2012, but they do know this: no matter what, the Federal Reserve will be there to keep pumping trillions into the world's financial system.  A survey of primary dealers conducted by the Federal Reserve Bank of New York -- and released to the public Wednesday -- showed a great deal of uncertainty among the 21 large banks that act as counterparties to the Fed's open market transactions, with the survey noting the firms largely admitted their predictions for GDP growth, inflation and the unemployment rate in 2012 were slightly on the optimistic side. But by the same token, firms were nearly unanimous in believing the U.S. central bank's accommodative zero-interest rate monetary policy would last for at least 30 more months. Furthermore, the survey showed a strong belief that a new round of quantitative easing - the central bank's practice of flooding the financial system with cash by buying up illiquid securities - would occur within the year: the median view held the possibility of this happening in the next 12 months was 60 percent.

Here Is The Real Biggest News Out Of The FOMC Today - The biggest FOMC news released today was not the December minutes - there was absolutely no surprise there. The biggest news, by far, is that as we wrote a few weeks ago, the composition of the FOMC voting members changes drastically as of January 1, with Hawks Fisher, Kocherlakota and Plosser now out of the voting rotation, and replacing them will be the gaggle of ferocious doves Pianalto, Lockhart and Williams. In fact the only hawk left in the Fed as of today through the end of the year is Richmond Fed's Jeffrey Lacker who has shown substantial dovishness in the past. In other words, from a rotation of 7 and 3, the Fed is now uber-dovish by a 9 to 1 majority. So does this mean that printing is imminent? Stay tuned and find out in 3 short weeks: the January FOMC statement comes out on January 25. The only good news: Charles "the fire hydrant" Evans is finally out.

NY Fed to Release Advisory Panel Agendas, Minutes - Capping a week in which various parts of the central bank either announced or followed through on new efforts to disclose information, the Federal Reserve Bank of New York took another step along that path Thursday. The central bank’s most important regional arm announced it will start releasing agendas and meeting minutes from the host of advisory groups associated with the New York Fed. A number of those panels have little relationship to financial markets. But the ones that do include economic and monetary policy groups, as well as the Foreign Exchange Committee and others related to the plumbing of bond markets and the payment system. There could be a lot for Fed watchers to digest.

The Fed and Forward Guidance - The news from the December 13 FOMC minutes is in the very last part, following the policy decision, and relates to "forward guidance," i.e. information that comes from the FOMC about the future path for policy instruments. Here's the relevant passage in the minutes:  After the Committee's vote, participants turned to a further consideration of ways in which the Committee might enhance the clarity and transparency of its public communications. The subcommittee on communications recommended an approach for incorporating information about participants' projections of appropriate future monetary policy into the Summary of Economic Projections (SEP), which the FOMC releases four times each year. In the SEP, participants' projections for economic growth, unemployment, and inflation are conditioned on their individual assessments of the path of monetary policy that is most likely to be consistent with the Federal Reserve's statutory mandate to promote maximum employment and price stability, but information about those assessments has not been included in the SEP....Following up on the Committee's discussion of policy frameworks at its November meeting, the subcommittee on communications presented a draft statement of the Committee's longer-run goals and policy strategy. Participants generally agreed that issuing such a statement could be helpful in enhancing the transparency and accountability of monetary policy and in facilitating well-informed decisionmaking by households and businesses, and thus in enhancing the Committee's ability to promote the goals specified in its statutory mandate in the face of significant economic disturbances.

Small and Large Footprints: Reserves and the Fed - As most economists are well aware, financial institutions in the United States currently hold a very large stock of reserves - deposit accounts with the Fed. The first chart shows the stock of reserves for the last five years. Before the financial crisis, the primary role of reserves was as a means of payment among large financial institutions. Commercial banks of course have to fulfill reserve requirements, but given financial innovation that allows banks to essentially bypass the requirements, it is most useful to think of reserve requirements as irrelevant in the United States. Pre-financial crisis, a stock of $5 billion to $20 billion in reserves was sufficient to support all intraday financial payments and settlement in the United States. It is important to note that this small quantity of reserves was funding a huge quantity of daily payments. Indeed, in 2008, the average daily value of transactions on Fedwire (using reserves) was $2.7 trillion, so the intraday velocity of reserves is immense. Since the financial crisis, as can be seen in the chart, reserves have grown to the neighborhood of $1.6 trillion - more than 100 times the typical stock of reserves in the pre-crisis period. What implications does this have? The typical view was that we were in the middle of unusual circumstances requiring unusual monetary policy interventions, but that these interventions would eventually be unwound.

Central banks: Crazy aunt on the loose - THERE was a time when the Federal Reserve wouldn’t say whether it had changed interest rates. Soon it will say where it thinks rates will be years from now. Beginning with its policy meeting on January 24th-25th, Fed officials will disclose when they expect to start raising their short-term interest-rate target, which is at near-zero now, and what they expect its path to be over the coming years. Behind such radical transparency is a grim fact: at the start of a fourth successive year of extraordinarily low short-term rates and a still-moribund economy, the Fed is desperate for new ways to stimulate demand. It is not alone. Of the rich world’s four major central banks, Britain’s and Japan’s already have their policy rates stuck near zero and the fourth, the European Central Bank (ECB), is likely to get there this year. Meanwhile, the balance-sheets of all four institutions have ballooned as they expand the volume and range of assets and loans they hold (see charts). Central banks have never been comfortable with unconventional monetary policies such as verbal interest-rate commitments and quantitative easing (QE), the purchase of assets by printing money. QE is “best kept in the locker marked ‘For Emergency Use Only’”, is how Charlie Bean, the Bank of England’s deputy governor, put it in 2010.

Question for Market Monetarists and MMTers: What Happens if IOR Goes to Zero? - For the non-cognoscenti: "IOR" is interest on reserves. Banks keep money in their accounts at the Fed. In October, 2008 the Fed started paying .25% interest on those accounts. The Fed's also engaged in "quantitative easing," a.k.a. open-market purchases on steroids, creating new money and using it to buy $1.6 trillion dollars worth of bonds from banks. The money is deposited in banks' reserve accounts. The result: banks have $1.6 trillion dollars in excess reserves (in excess of what they're required to hold) sitting in their accounts at the Fed. This is the heart of the "pushing on a string" argument -- giving the banks more reserves (making their holdings more "liquid") doesn't (necessarily) increase real-economy transaction volumes (on consumption or investment), either directly through spending by the banks or via bank loans to people and businesses who will spend it. This $1.6 trillion in new money issued by the Fed is effectively stuffed in an electronic mattress. So I'm curious what would happen if the Fed no longer paid IOR. I asked Scott Sumner this a while back: He gave a somewhat less than satisfactory answer: The IOR question is a good one, and at the risk of being annoying I’m going to slightly dodge the question. I do think it would be expansionary, but it’s hard to know how much, because it’s almost inconceivable to me that it would be done by itself, without any other policy changes. It could be slightly expansionary, or if accompanied by other moves, wildly expansionary.

Fed Secretly Bailing Out Europe - Former Vice President of the Federal Reserve bank of Dallas, Gerald ODriscoll, says that the Fed is secretly bailing out Europe: O’Driscoll wrote in a Wall Street Journal editorial: America’s central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here. The Fed is using what is termed a “temporary U.S. dollar liquidity swap arrangement” with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

ECB/Fed Support for the European Banking System – 750 billion USD, and counting - One point that I have been shouting from the proverbial roof tops in my research, to partners and colleagues is that 2012 may well be the year when all major central banks will be conducting both conventional and unconventional monetary easing at the same time. I think this is a very strong testament not only to the severity of the ongoing debt crisis in the developed world, but also to the propensity of central banks to choose inflation as the desired route to recovery. We need not initially discuss whether they are deploying the proper set of policies or even whether such policies represent moral hazard or a Ponzi scheme on government debt. The main thing is to realise that this is an unprecedented global monetary experiment.  My message to investors in 2012 would then be not to underestimate this inflation bias by part of global central banks. Inflating your way out of too much debt won’t work in the long run without considerable defaults and/or economic stress (hyper inflation). Events since 2008 are ample evidence of this, but the simultaneous inclination to create inflation and debase your currency (to generate more inflation and exports) by all major central banks will continue to exert a profound effect on asset prices and the global economy.

Presenting The Exchange Stabilization Fund In 5 Parts: Is This The Real "Plunge Protection Team"?  - When it comes to the fabled President's Working Group on Capital Markets, also known as the Plunge Protection Team, the myths about the subject are certainly far greater than any underlying reality. To be sure, vast amounts of popular folkflore has been expounded into the public arena, with most of it being shot down simply due to it assuming conspiracy theories of such vast scale that the human mind is unable to grasp the complexity, and ultimately the inverse Gordian Knot makes an appearance with the claim that vast conspiracies are largely untenable simply because it is impossible to keep a secret from so many people for so long. Yet what if the secret is not a secret at all but is fully out in the open, and is only a matter of interpretation, and contextualizing? Why just 3 years ago it would appear preposterous to allege the capital markets are a ponzi and that the Fed does everything in its power to keep stocks higher. Well, what a difference three years make: now the Chairman himself in a Washington Post OpEd has admitted that the sole gauge of Fed success is the loftiness of the Russell 2000, neither unemployment nor inflation really matter now that the Fed's third mandate has been fully whipped out. Furthermore, Keynesian economics, and the entire top echelon of the educational system have also been accurately represented as a paradigm which merely perpetuates the status quo as the alternative is the realization that the whole system is a house of cards. As for the global capital markets being nothing short of a ponzi, we merely point you to the general direction of Europe, the ECB and the continent's banks, where the monetary interplay is nothing short of the world's biggest pyramid scheme.

Bernanke Tells Lawmakers More Action Needed to Fix Housing - The U.S. Federal Reserve on Wednesday called for more action to stabilize the nation’s ailing housing market, warning that failure to do so could harm the broader economy. In a 26-page white paper sent to Congress, the Fed outlined several potential ways to stabilize the housing market, many of which are already under discussion or being implemented by the Obama administration and housing regulators. “Restoring the health of the housing market is a necessary part of a broader strategy for economic recovery,” Bernanke said in a letter to the top lawmakers on the Senate Banking and House Financial Services committees. The paper noted “there is unfortunately no single solution for the problems the housing market faces,” as tight standards for mortgage lending, a 33% decline in home prices since 2007 and a huge number of vacant foreclosed homes on the market make it hard for the housing market to recover. “Continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery,” the paper said. Without action, the paper warned, “the adjustment process will take longer and incur more deadweight losses, 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.”

Fed’s Dudley: Housing and Monetary Policy Are Complements - In a speech calling for a host of policy actions to aid the housing market, a top Federal Reserve official also said Friday the central bank may have to provide more stimulus to help the economy. “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,” Federal Reserve Bank of New York President William Dudley said. He noted that as the Fed tries to aid the economy, and address the central role the weak housing market plays in impeding the recovery, the institution cannot go it alone. He said, “monetary policy and housing policy are much more complements than substitutes.”

Fed’s Bullard: Central Bank ‘Very Close’ to Adopting Inflation Target - The U.S. central bank may well get an inflation target this year, a top Federal Reserve official said Thursday. “We are very close” to tying monetary policy explicitly to some measure of overall inflation, Federal Reserve Bank of St. Louis president James Bullard said. He said the Fed may also be near making a collective statement about what level of unemployment is the natural rate, below which inflation pressures tend to rise. Bullard was interviewed Thursday on Bloomberg radio. The official isn’t currently a voting member of the monetary policy setting Federal Open Market Committee. Bullard has been skeptical of the need for additional stimulus for the economy, even as many in the markets believe the odds remain high the Fed will provide more stimulus at some point over the next year. He spoke in the wake of the release this week of the meeting minutes from the Fed’s December meeting. That document said that starting at the end of the month, the Fed will begin making public its forecasts of future Fed interest rate policy, joining the projections it already makes available on growth, employment and inflation.

Is Joblessness a Skills Problem or an FOMC Problem? - Among Lacker’s duties as President of Richmond Federal Reserve Bank is writing a message in the bank’s quarterly publication Region Focus, the third quarter edition of which I found in my mailbox yesterday. Knowing that Lacker has just become one of the most important people on the planet, I was curious to find out his thoughts at the start of his year on the FOMC. My reading of Lacker’s message in the second quarter Region Focus was not exactly an uplifting experience (see this post from October), but I try to look for glimmers of hope wherever I can find them. Sadly, Dr. Lacker’s message, entitled “Is Joblessness Now a Skills Problem?” offers nothing hopeful. Lacker begins by painting a bleak picture of the plight of the long-term unemployed. Today long-term unemployment – that is, unemployment lasting six months or longer – is at a record high. The share of unemployed Americans whose job searches have lasted this agonizingly long is 43.1 percent, a figure that is unprecedented since the Bureau of Labor Statistics began keeping records in 1948. His explanation? A growing number of observers have argued that this state of affairs is caused in significant part by a mismatch between available jobs and available workers, especially a mismatch in skills.

Senate Republicans Could Delay Fed Confirmations Over Recess Appointment Fight - President Barack Obama‘s contentious decision to use a recess appointment to install the first director of a new consumer financial agency could result in delays to Senate confirmations of two recently announced appointees to the Federal Reserve Board, two Senate Republican leadership aides said. A top GOP member of the Senate Banking Committee stopped short of saying he would personally block the confirmations of the two Fed nominees, but predicted there would be a Republican reaction to the move by Obama that could affect outstanding nominees. “Clearly, this is a very bold and extraordinary, unconstitutional move, and it’s going to provoke a reaction from Republican senators,” Sen. David Vitter (R., La.), who sits on the banking panel, said in an interview. “It brings up all sorts of possible reactions, including [delaying confirmation of] the nominations that may have otherwise have happened.”

How to Save the Global Economy: Whip Up Inflation. Now.  Recovery from a debt crisis is always painfully slow, for reasons both economic and political. Creditors need to rebuild their balance sheets and are unwilling to make potentially risky loans. Debtors need to boost savings to cover their debts and are unwilling to resume spending. At the same time, debt-ridden countries collapse into political conflict over the question of who will pay to get them out of the red: Should it be taxpayers, bankers, public workers, or investors?  A bit of inflation can help on all these fronts. So long as the debts are denominated in national currency and interest rates are kept low by monetary policy, inflation reduces the real debt burden. This is, to be sure, a forced restructuring that puts some of the onus on creditors -- but that is almost always the outcome of more explicit negotiations in any case. When most of the debts are household debts, as they are in the United States and parts of the eurozone, it is not really feasible to renegotiate millions of mortgages and consumer loans; inflation takes care of that for the whole economy. It mitigates some of the political conflict and lessens some of the economic burden.

A Call for Action: Conditional Inflation Targetting - Menzie Chinn - [We need] inflation -- just enough to reduce the debt burden to more manageable levels, which probably means in the 4 to 6 percent range for several years. The Fed could accomplish this by adopting a flexible inflation target, one pegged to the rate of unemployment. Chicago Fed President Charles Evans has proposed something very similar, a policy that would keep the Fed funds rate near zero and supplemented with other quantitative measures as long as unemployment remained above 7 percent or inflation stayed below 3 percent. Making the unemployment target explicit would also serve to constrain inflationary expectations: As the unemployment rate fell, the inflation target would fall with it.Today our highest priority should be to stimulate investment, growth, and employment. Raising the expected inflation rate will lower real interest rates and spur investment and consumption. It will also make it difficult for the de facto dollar peggers, such as China, to sustain their policies. The resulting real depreciation of the dollar would stimulate production of U.S. exports and domestic goods that compete with imports, boosting American production. The United States would get faster growth, an accelerated process of deleveraging, a quicker recovery, and a firmer foundation upon which to address long-term fiscal problems.

Menzie Chinn Explains it All for You: Demand Inflation Now!  - Whether it's Market Monetarist NGDP targeting or Menzie's recommendation of Conditional Inflation Targeting with a notably higher target, everything tells us that somewhat higher inflation is the current path to greater and more widespread long-term prosperity. Raising the expected inflation rate will lower real interest rates and spur investment and consumption. It will also make it difficult for the de facto dollar peggers, such as China, to sustain their policies. The resulting real depreciation of the dollar would stimulate production of U.S. exports and domestic goods that compete with imports, boosting American production. The United States would get faster growth, an accelerated process of deleveraging, a quicker recovery, and a firmer foundation upon which to address long-term fiscal problems. Like the market monetarist approach, Chinn's proposal is basically for an automatic stabilizer based on unemployment levels, that anchors expectations:Making the unemployment target explicit would also serve to constrain inflationary expectations: As the unemployment rate fell, the inflation target would fall with it.As I said a while back: Automatic stabilizers are the key to effective 1) policy and 2) expectation-setting. Because 1) They happen, and 2) People know they’re gonna happen. In other words: Demand Inflation Now! Up the Real Economy

Looking Forward in the New Year: Crowding Out and Hyper-Inflation Watch - Menzie Chinn - In my previous post, I cited Jeff Frieden's and my proposal for a conditional inflation target. Yet, according to several observers, we are either on the brink of crowding out due to elevated government deficits [0], or high to hyperinflation, due to monetary base expansion [1]. As has been noted, none of these outcomes have yet materialized, despite months of such warnings. [2] [3] Here, I wanted to evaluate where market expectations stand on these views. As of December 28, constant maturity yields on five and ten year Treasury bills are at an all time (post-War) low. According to the Fisherian relationship, the nominal interest rate is the sum of the ex ante real interest rate and the expected inflation rate. What do real interest rates look like? One can proxy real interest rates by examining yields on Treasury inflation protected securities (TIPS).Well, it is likely that real interest rates would be lower in the presence of smaller deficits. However, with long term real interest rates negative (and persistently so for the bulk of 2011), it’s not clear that would be such a wonderful thing if lower deficits are associated with less economic activity.

Fractional Money Multipliers - Rebecca Wilder - Money multipliers – the stock of money divided by a measure of base money (generally reserves plus currency in circulation) – are dwindling to fractions of what they used to be. FT Alphaville draws our attention to this fact on the Euro area (EA) using SocGen’s analysis. The money multiplier is a representation of how much credit is leaving the banking system via lending and growth (or inflation) enhancing monetary activities. As FT Alphaville points out, the EA M3 multiplier is just over 3/4 its average 2007-2008 level, 7.67 vs 10. But this is global!. The US M2 money multiplier is a little over 2/5 the size of its average 2007-2008 level, 4.1 vs. 9.3. By this simple measure, I’d say that the US is in worse shape than is the EA. Of note, my visual is a bit different from that in FT Alphaville. Specifically, I don’t agree with SocGen’s estimates that the EA money multiplier drops in December to roughly 6. Given that December 2011 EA base money has been published, a 6.2 M3 multiplier implies that M3 dropped by 15% in 1 month. That’s unlikely.

Foreign central banks cut US treasuries - Holdings of US Treasuries by foreign central banks has fallen by a record amount over the past four weeks according to the latest Federal Reserve data. The net $69bn drop in Treasury holdings registered at the Fed by foreign official institutions comes as benchmark yields ended 2011 near record low levels and when the US central bank is conducting Operation Twist, its $400bn programme to sell shorter-lived Treasury bonds and buy those with longer maturities. The decline in foreign holdings of Treasuries in recent weeks has not resulted in higher yields and lower prices because other investors have sought the safety of US debt. “Given where the 10-year Treasury is ending the year, it’s difficult to say the flows are a bearish move,” . The yield on 10-year notes was set to end 2011 below 1.90 per cent on Friday and the Barclays Capital index of long-dated Treasuries has rallied nearly 30 per cent this year, its best annual performance since 1995.  “While other buyers have willingly taken up the torch up to this point, it seems clear that this [foreign official flows] source of demand has waned since Operation Twist took yields to these levels and this investor base has little interest in sub-2 per cent 10-year yields,” .

Top 5 Economic Charts of 2011 - As the year draws to a close, Real Time Economics takes a look back at five of our favorite charts from the WallStreetJournal in 2011. These graphics look at the most recent year as well as the past to give us some insight into the future. Click on any image for larger version.

Smithianism and Its Discontents - Matt Yglesias pens an extremely readable version of the Smithian view on the near future of the US economy. What will this recovery look like in concrete terms? Total bank credit, which collapsed during the crisis, is growing again and will keep growing. That will make it easier for Americans to buy new cars and reverse the four years of growth in the average age of America’s passenger vehicles. Families will also invest in other kinds of durable goods—refrigerators, washing machines, etc.—that they’ve been hesitant to upgrade or replace. The housing bust, meanwhile, has been followed by an epic construction slump that’s actually left us with a shortage of homes. But every downward tick in the unemployment rate is another twentysomething moving out of his parents’ basement, stimulating a return to a more normal level of construction. Multifamily housing starts are already up 80 percent over the past year to accommodate the likely coming flood of renters, and there’ll be more to come once people have more cash in their pockets. Not everyone is convinced. Kelly Evans writes Along with nascent signs of recovery in the housing market, it is tempting to forget about 2011′s disappointments and think 2012 will be the year economists aimed not too high, but too low. Trouble is, recent history suggests it usually turns out the other way around.

I Just Got Here, but I Know Trouble When I See It — From 6 Economists, 6 Ways to Face 2012 : BELIEVE it or not, times are getting better. At least that’s what the dry statistics keep telling us. Industrial production, G.D.P.1 — the kind of figures that Washington and Wall Street sweat over — suggest that the economy is on the mend. Yet if we go beyond the Beltway and the Battery, to where most of American life is lived, the numbers don’t always add up. Yes, the Great Recession officially ended in 2009. But many millions of Americans are out of work or cannot find full-time jobs. Home prices are wobbly. The foreclosure crisis drags on. And the Occupy movement’s campaign against “the 1 percent” has underscored the ravages of income inequality2. It was, as always, a year of ups and downs in business. Washington said the nation’s AAA rating was safe, but Standard & Poor’s concluded that it wasn’t. Europe insisted that its currency was sound, but investors worry that it isn’t. Wall Street seemed perpetually on edge. After so many wild days, the American stock market ended 2011 about where it began. On this side of the Atlantic, aftershocks of the financial crisis of 2008-9 are still reverberating, though the worst has passed. Now, how Europe’s economic troubles play out may determine whether job growth here finally picks up enough to make up for all the lost ground — and whether that 401(k)3 is richer or poorer next Jan. 1.

In With The New: Part III of As Economic Growth Fails, How Do We Live?  -- Part I of this series of three articles addressed the four major challenges we now face, there dubbed "The Four Horsemen of the Economic Apocalypse": 1) Too Much Debt; 2) Resource Limits; 3) Destruction and Decay of Infrastructure; and 4) Greed.  Bottom line: this crisis is much deeper and more permanent than we've been led us to believe.  "Recovery" to former patterns of growth simply won't happen.  We must now adapt to new realities, as individuals and as a society.  Part II of this series, "Out With The Old", discussed the end of seven "Dead End" unsustainable practices that will falter and decline.  We won't pay our unpayable debts or keep impossible promises.  We can't keep importing more than we export and borrowing the difference.  Our Empire will shrink back.  Our use of fossil fuels will decline as we experience Peak Oil and Peak Coal .  We must cure Sick Care.  We will repeal laws that mandate opulence and forbid prosperity.  Finally, we will "drop the shopping" for worthless junk and refocus on the best of what it means to be human.    In this third and final article in this series, we will discuss seven new ways of living which we can adopt as economic growth fails. They are not revolutionary (revolutions never achieve their utopian visions because of something called "human nature").  Rather, they may allow us to "muddle through" the best we can right now with what we already know how to do.

PIMCO Outlook - Towards the Paranormal -  Bill Gross - How many ways can you say “it’s different this time?” There’s “abnormal,” “subnormal,” “paranormal” and of course “new normal.” Mohamed El-Erian’s awakening phrase of several years past has virtually been adopted into the lexicon these days, but now it has an almost antiquated vapor to it that reflected calmer seas in 2011 as opposed to the possibility of a perfect storm in 2012. The New Normal as PIMCO and other economists would describe it was a world of muted western growth, high unemployment and relatively orderly delevering. Now we appear to be morphing into a world with much fatter tails, bordering on bimodal. It’s as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century. Welcome to 2012.

Welcome to the Paranormal Economy: Why One Investor Says the ‘New Normal’ Is Over - Bill Gross, the prominent bond fund manager who is credited with popularizing the phrase a little more than two years ago, says he may be done using the term. What phrase does Gross prefer to describe the current state of our money affairs? The Paranormal economy. In a letter to investors that came out this week, Gross says we may be leaving The New Normal behind. Gross says he used The New Normal to describe the deleveraging, i.e. getting rid of our debts, that needed to go on in the aftermath of the financial crisis, and everything that went with it. For consumers, money that was going toward buying a new car or second house was now going to be used to pay down debt. So more frugal customers. Banks would make fewer loans, and less profit, because no one was going to trust borrowers again. Houses would lose their value, due to a lack of mortgages and a pile up of foreclosures as borrowers walked away from their home loans. Renting, too, would become part of The New Normal. So what makes Gross believe we are entering The Paranormal economy? Basically the fact that interest rates have remained low for such a long period of time, and it appears may stay that way for some time. And here comes the paranormal: Typically, low-interest rates spur more borrowing. But Gross says not so this time around. That’s because banks won’t want to make loans. Low-interest rates, not just for short-term loans but for ones that don’t have to be paid back for 5 or 10 years, will make lending unprofitable. It might make investing not all that attractive either. Why risk your money in the market when it’s not going to go anywhere.

GEAB N°60 is available! Global systemic crisis – USA 2012/2016: An insolvent and ungovernable country: As announced in previous GEABs, in this issue our team presents its anticipations on the changes in the United States for the period 2012-2016. This country, the epicentre of the global systemic crisis and pillar of the international system since 1945, will go through a particularly tragic in its history during these five years. Already insolvent it will become ungovernable bringing about, for Americans and those who depend on the United States violent and destructive economic, financial, monetary, geopolitical and social shocks. If the United States today is already very different from the "super-power" of 2006, the year the first GEAB was published, announcing the global systemic crisis and the end of the all-powerful US, the changes we anticipate for the 2012-2016 period are even more important, and will radically transform the country's institutional system, its social fabric and its economic and financial weight. In addition we also detail our recommendations on foreign currencies, gold, stock exchanges and the consequences of the United Kingdom’s marginalization within the EU (3) on the Pound, Gilts and UK debt and we set out some advice on developments of the American institutional system (4). In this public communiqué we have chosen to present an excerpt from our anticipation on the changes in the United States for the 2012-2016 period. But before addressing the American case, we wish to review the situation in Europe (5).

2012 Forecast: Bang and Whimper - On close examination, the industrial world underwent complete zombification in 2011. Its member states and their institutions are now lurching across the stage of history like so many walking dead. Whole European nations are dead, their citizens squirming around the ruined bones of failed speculative condo projects, housing estates, and luxury hotels like botfly larvae. The USA lies in complete moral ruin despite the exertions of ten thousand evangelical preachers in dusty back-road tilt-up chapels from Texas to Carolina, several new museums of Creation Science, and the shining example of former Senator Rick Santorum. Just look at how we behave, from the cloakrooms of Congress to the piercing parlors of West Hollywood to the 7-Elevens of suburban Maryland: a nation of thieves, racketeers, reality TV sluts, wannabe road warriors, light-fingered gangsta-boyz, and crybabies living in an anomie-drenched decrepitating demolition derby landscape of failure. When everybody is a zombie, whose brains are left to eat? Echo answers.... On to the predictions for 2012 then.

Goldman's Jim O'Neill: 'What Can Go Wrong, Will Go Wrong' - Jim O'Neill, Chairman of Goldman Sachs Asset Management, is out with his latest Viewpoints From The Office Of The Chairman letter.  He published his 11 predictions for 2012 back in mid-December, but he spends nearly a third of his new note dwelling on 2011. To cover his bases, he points out a few things that could potentially go wrong this year. By definition, lots of things could go wrong, possibly including a fresh rise in crude oil prices, especially if Iran plans to cause a lot of fun and games early this year. Against this, and read Roger Altman in today’s London Financial Times for an up- to-date view, the energy supply response in recent months is probably still much stronger than many people realize. I suspect that, short of a major problem in the Gulf, this is an overhyped topic – yet again. As for Europe, I shall leave much of this until coming days and weeks as there is so much out there. Of things that really can go wrong, the Greek debt restructuring strikes me as one of the most likely. As for the coming downgrades, I am not sure they will really matter much, and I would certainly suggest the generosity of the ECB’s pre-holiday 3-year LTRO (Long Term Refinancing Operation) to be much more important in keeping things afloat. Plenty more on this topic to come. His note also discusses the recent positive global economic data and addresses a recent BRIC paper authored by Goldman's Dominic Wilson.  You can read his whole letter at GSAM.

Euro Zone Isn’t Only Potential 2012 Boogey Man - For those obsessed with the euro-zone debt crisis and its impact on 2012, keep this in mind: so much else could go wrong. Here are three more to add to the list. First, U.S. consumers pull back again. U.S. households have been resilient which has lifted global producers. But future spending will depend on better job growth and incomes growing ahead of prices. If payroll gains disappoint, or energy or food costs spike again, then consumers will have to pull back on other spending. Slower demand will not only hurt U.S. companies, but also fall back on foreign producers who count America as their biggest market. Second, a U.S.-China trade war breaks out. China has slowed down. If growth drops more than expected and social unrest increases, Beijing might react by blaming U.S. regulations for the loss of work. Trade skirmishes are bad anytime, but they will be more dangerous in a year when Washington politicians will want to look tough on China. A full-blown trade war also risks higher U.S. interest rates if China slows its purchases of Treasury debt. Last but not least, fiscal policy blunders big-time. Never underestimate the ability of Washington to screw up the economy if political points can be scored.

2012 As 1937 Redux? - Why, with all the talk of America's need to get its spending under control, would radical austerity be a problem? The answer can be structured in many ways, but today we'll go with a historical lesson, circa 1937. Back in 1937, the deleveraging process was even longer and harder in every measure than it is today. By 1937, modest growth had returned, and while unemployment remained stubbornly high at just under 10 percent, that was down from a peak in 1932-33 of 25 percent. At this point, both the Fed and the Roosevelt administration—giving in to orthodoxies that still haunt US economic thought—made terrible, independent errors. FDR acceded to Treasury advisors who declared the recovery self-sustaining and pushed for spending cuts. FDR, by now in complete control of the congressional agenda after a landslide reelection in 1936, duly cut government spending by 10 percent in an effort to balance the federal budget. The Federal Reserve, meanwhile, had been rattled by recent gyrations in commodity prices, particularly in corn and wheat—crops devastated by the Midwestern Dust Bowl. Acting to tame what it saw as the threat of hyperinflation, the Fed raised interest rates sharply. Various economic schools assign different weight to these two decisions, but the overall math is devastatingly clear. By 1938, joblessness had shot back toward 15 percent, industrial production fell by 37 percent, and the worst double dip in US history had begun.

The Peltzman Effect: Why Economic Growth Has Slowed in the US Over Time - In recent years, there have been a number of studies showing that generational income mobility is particularly low in the US. To quote this 2006 study by Tom Hertz: By international standards, the United States has an unusually low level of intergenerational mobility: our parents’ income is highly predictive of our incomes as adults. Intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark. Among high-income countries for which comparable estimates are available, only the United Kingdom had a lower rate of mobility than the United States. Hertz provides this handy chart: Most of the "big government" countries that compare favorably with the US on intergenerational mobility also do pretty well on measures of entrepreneurship. The following snapshot comes from this paper by Acs and Szerb: While studies are, no doubt, imperfect, I've seen similar results before and they seem credible to me. The studies note, essentially, that the US is not, for many, the land of opportunity it is touted to be, and is now being beaten out by countries like Denmark and Canada. Big government countries, countries where Americans seem to believe people aren't motivated to get off their duff, are actually quite entrepreneurial and offer offer their citizens a lot of opportunity.

First Core Dump of 2012 - Auto Sales Seem to have ended the year strong but not quite as strong as I might have thought. I was looking for continued gain, up to 13.8M SAAR or so and it doesn’t look like we will see that. Construction ended the year completely as expected, up slightly mainly on residential multifamily. Public construction seems to have stopped falling and this is consistent with my view going forward. We should see sales tax receipts improve for state and local governments and with that a willingness to fund more projects.  Non-residential construction will probably continue to be driven by oil exploration well into 2012. The office market just doesn’t feel ready to come back. Though we might see increased hospital construction. I would have to look more into that. Oil: Kevin Drum makes the point that the global economy is energy constrained. I think that is correct and it underlies some of views about US energy policy. I don’t think we are likely to see “many" wild swings in oil prices, though. Such swings generate a huge arbitrage opportunity. To take advantage of it what you need is a place to store excess capacity. Oil – being the accommodating resource that it is – provides that naturally. We call it the ground.

US economic data sees ‘reversion to mean’ - From a Europe mired in an unresolved sovereign debt crisis and in the midst of trying to recapitalise its banking sector, all this positive US economic data is frankly just irritating. In fact it’s been so good in terms of positive employment and manufacturing metrics that the Rates & Currencies team at BofAML published a piece entitled “The USA a safe haven again” with this line in it: In the US, the correlation between strong data and the USD has flipped, where now positive US data surprises are good for the USD given European concerns. Flipping the correlation around?! All sorts of strategies break when people make ridiculous assumptions and bake them into models that happens. But anyway, the Economics team at BofAML have a few reasons why you should think twice before boarding the optimism train. First, from a note published on Thursday: With economic shocks from Japan’s tsunami and the Arab spring fading alongside a modest abatement of the uncertainty from Europe and the US, businesses have increased hiring to meet the underlying pick-up in final demand. The confluence of the employment data released for December – better ISM, stronger confidence, lower jobless claims, and better than expected ADP – is consistent with a steady improvement in the labor market… In other words, think more “recovery from shocks”, and add to that the easing off from the higher commodity prices seen at the beginning of 2011.

As Good as It Gets for the Economy? - The economy was weak in 2011, but it ended better than it started, with growth up from its lows and unemployment down from its highs. The question now is whether that progress will continue into 2012. We wish we could say yes, but unless policy makers are incredibly lucky or remarkably adept — certainly not the description that comes to mind when thinking of, say, Congress — the answer is no.  When data is released later this month, economists expect growth of around 3 percent for the last quarter of 2011, compared with 1.2 percent on average in the first three quarters. But there is little in the latest growth spurt to signal a self-reinforcing recovery going forward.  Holiday shoppers had more cash to spend because of the decline in oil prices, not a rise in wages. A drop in the jobless rate was driven by a mix of new hiring and a large number of potential workers who gave up futile job searches. Signs of life in the housing market, including more sales, were dampened by falling prices as foreclosures continued.  The way to revive sustainable growth is with more government aid to help create jobs, support demand and prevent foreclosures. As things stand now, however, Washington will provide less help, not more, in 2012.

The decline of the American empire -  The US has the world's biggest economy, the most influential culture, and the most potent military machine, with a budget that equals that of all other nations combined. It is the only power with a global project defended and supported by more aircraft carriers, Fortune 500 companies, and more successful media-tainment conglomerates than any other.  But the last decade has been problematic for the world's only superpower. America's post-Cold War optimism has given way to pessimism, forecasting a declining power and more crucially, the end of "the American era". The rise of new regional and global powers, coupled with Washington's recent war fiascos and financial crisis have worsened the outlook for the future of the US.

Leading Indicators Index Gets Overhaul - Private research group the Conference Board said Thursday that it’s putting in place some major changes in how it compiles a closely watched report that seeks to provide clues to the economy’s future direction. The release in question is the long-running monthly index of Leading Economic Indicators, which is getting its first big overhaul since 1996. The index is made up of a mix of already-announced statistics, and in a bid to make the report more reliable, the Conference Board is swapping out some of the old components and replacing them with new data points. The changes take effect in the report scheduled for release Jan. 26. “These adjustments have been designed to make the U.S. Leading Economic Index an even stronger predictor of peaks and troughs in the business cycle, while recognizing changes in the functioning and drivers of the economy in the short and medium term,” Conference Board chief economist Bart van Ark said in a press release. The firm said it will remove the M2 money supply measure and replace it with something entirely new, which it dubbed the “Leading Credit Index.” The Conference Board said the Leading Credit Index is made up financial market indicators including bond market yield curve data, interest rate swaps and data extracted from a periodic Federal Reserve survey of bank lending.

Tim Duy on the Output Gap - He writes The trend of nondruable goods spending is tracking the pre-recession trend.  So, at this point, we are seeing overall consumption supported by a rebound in durable goods spending that offsets a deterioration in the path of spending on services.  The bounce in durable goods spending will come to an end at some point, as 16 million units is likely an upper bound for auto sales.  Will service spending accelerate to compensate?  Or will we see a new normal, with a constrained consumer spending at a path and rate below those prior to the recession?  But that still is not a story that rapidly returns the economy to potential output.  These are the trends but I don’t know exactly what to make of them. For one, looking at PCE services is a nightmare because so much is housing, finance and medical care. Most of which consumers do not pay for directly and none of which is chosen on a month-by-month basis. The larger issue though has to do with why we think the economy is depressed. If you think that practically speaking the nominal interest rate is too high then is hard to see a world where autos come back to 16 million units, construction comes back to 1 million units and the economy, the Fed is accommodative and the economy is not booming.

Let's Build a Second Measure of Economic Strength - Here's a tale of two equations that represent human exchange. The first is the standard macroeconomist's recipe for an economy: Y = C+G+I+NX. It says: output equals consumption, plus government expenditure, plus investment, plus net exports. Now here's a crude approximation of what eudaimonia might look like: W = N+F+I+H+S+E+O. It says: real human welfare equals natural capital, plus financial capital, plus intellectual capital, plus human capital, plus social, emotional, and organizational capital. Not all these kinds of wealth are created equal; I'd suggest that higher-order wealth, to the right, is scarcer, stickier, more enduring, and more productive. The first equation might be said to neatly represent the industrial-age paradigm of business: the implicit question it answers is maximizing the volume of output or "product." But the second answers a very different question. It's our economy's real balance sheet.

Global financial fiasco: End of the age of US economic dominance - In the spring of 2008, the real estate bubble popped in the United States and it triggered a financial tsunami that engulfed the entire globe. This catastrophe provided an opportunity for change, change that was necessary to restructure the economic architecture of the US Despite the hefty promises made by President Obama during his election campaign, upon taking office he did the complete opposite of what was expected, or to be precise, hoped for, and succumbed, as his predecessors did, to the same interests that were responsible for the catastrophe.  Instead of seizing the opportunity, all policies implemented after 2008, were geared towards maintaining the status quo. These polices have exacerbated the magnitude of a crisis that will take effect anytime after 2012.After the 1907 panic, influential bankers agreed to establish the Federal Reserve by 1914. The Fed is a “private” central bank that controls U.S monetary policy, acts as the lender of last resort and its shareholders consists of corporate banks. In addition, it is excluded from independent audits and congressional oversight. The monetary policy of the Fed is the core factor why the US economy is currently on an unsustainable path.

New Asian Union Means The Fall Of The Dollar - One of the most frustrating issues to haunt the halls of alternative economic analysis is the threat of misrepresentative terminology. For instance, when the U.S. government decided to back the private Federal Reserve in lowering the interest rates on lending windows to European banks last month, they did not call this a bailout, even though that’s exactly what it was. The chain of financial events taking place over the past decade in Asia have been correspondingly mislabeled and misunderstood. What some economists see as total collapse is actually a new and decidedly prophetic (or engineered) transition. What some naively see as the “natural” progression of globalism, is actually a distinctly deliberate program of centralization meant to further the goals of world economic and political totalitarianism. Asia, and most especially China, is a Petri dish for elitist psychopaths. What we see as suffocating collectivism in this region of the world today is the exact social schematic intended for the West tomorrow. Call it whatever you will, but on the other side of the Pacific, like the eerie smile of a sinister clown, sits fabricated fate.

Euro could become world's leading currency: Noyer (Reuters) - The euro could become the world's leading currency in the next decade if leaders of the single-currency bloc succeed in tightening fiscal integration, European Central Bank policymaker Christian Noyer said in an article to be published in the Journal du Dimanche. European leaders struck a historic deal at an emergency summit in Brussels on December 9 to draft a new treaty for deeper economic union, in an attempt to stem the debt crisis that is threatening to cause the collapse of the single currency. The news temporarily calmed markets. But concerns quickly resurfaced as the final details of the agreement have yet to be determined and a new treaty could take up to three months to negotiate. Ratings agency Fitch has said it doubts a comprehensive solution to the crisis can be found and urged more decisive action from the ECB. "If we implement all the decisions taken at the Brussels summit we will emerge stronger," Noyer said in the article, due to be published to coincide with the 10-year anniversary of the euro on January 1.

Dream of Universal Currency Just Won't Die  - The euro zone maelstrom refuses to end. Thanks to the debt crisis, some Greek officials are contemplating dumping the common currency for the drachma. Meanwhile, Italy and Spain teeter. A decade after the shared currency was heralded as a 21st-century tool for peace and prosperity, it turns out that currency unions aren’t such a hot idea. Not so fast, though. This is undeniably a period of epic turmoil, and many economists will tell you that sovereign states need sovereign currencies—full stop. But this notion ignores a fundamental truth: Countries with their own currency may have monetary independence, but in reality—as gun battles in Libya, CDOs in the US, and tsunamis in Japan have taught us—we are only becoming more economically intertwined, regardless of what our coins look like. Step back from the current crisis to consider the long view, and currency unions—or even a single global currency—have a fair share of appeal. A universal medium of exchange could eliminate currency risk and jack up trade. It would mean speculators couldn’t short an individual country’s currency. Exporters wouldn’t have to fret over the gap between a price on a contract and the value of the payment. A single currency could halt spastic swings in prices and end conversion fees, leaving more of the pie for little stuff like R&D and employee health insurance. Oh—and it could put an end to international disputes over currency manipulation. Hello? China?

Dollar’s Demise Exaggerated as 13% Gain Since 2008 Proves Currency’s Value - Moves by the Federal Reserve to flood the world with dollars are doing little to dent the currency’s value, bolstering the appeal of U.S. assets at a time when the government needs the support of foreign investors the most. The U.S. Dollar Index (DXY) has appreciated 13 percent from a record low in March 2008 even as the Fed kept interest rates at about zero and printed cash to buy $2.3 trillion of Treasury and mortgage-related bonds, and is little changed since 1991. The International Monetary Fund said Dec. 30 that the greenback’s share of global foreign-exchange reserves rose in the third quarter by the most since 2008. That long-term stability shows America’s currency is a store of value and may help explain why the U.S. is attracting record demand for the unprecedented amount of bonds the Treasury Department is selling to finance a budget deficit exceeding $1 trillion. Even though Standard & Poor’s stripped the U.S. of its AAA rating in August, investors see the nation as a refuge from slower global economic growth and Europe’s sovereign-debt crisis. “The safe-haven function of the dollar is still alive,” “The dollar will be strong in 2012,”

U.S. Dollar & Currencies: Review and Outlook - In 2012, policy makers around the world may be driven by the realization that the theme of 2011 was not a Euro-specific crisis, but simply another stage in a global financial crisis. Central bankers may ramp up their printing presses in an effort to limit “contagion” concerns. As such, the currency markets may be the purest way to take a view on the “mania” of policy makers. Market movements may continue to be largely driven by political rhetoric, rather than company earnings announcements or economic data. We don’t believe this trend will abate over the foreseeable future, especially given the likely leadership changes throughout several G-7 nations. The primary motivating force behind politicians’ decision-making may be quite different, and more often than not, at odds with those of the broader market or sound economic fundamentals. Moreover, we have witnessed an unprecedented period of political posturing and increased polarization of views. This has only served to underpin the increased levels of market volatility experienced in 2011. Central banks of the U.S., Japan and the U.K. have shown they are most willing to put in place expansionary policies. For one, there will be a more dovish composition of Federal Open Market Committee (FOMC) voting members in 2012. Many Western and Asian policy makers have already begun to ease. From a currency perspective, we believe these dynamics will serve to benefit the currencies of commodity producing nations, while underpinning Asian economic growth.

What Is a Safe Asset? -  Rebecca Wilder - Last month, David Beckworth at Macro and Other Market Musings had some interesting thoughts on the global shortage of safe assets. His essay got me thinking about what is a safe asset? Beckworth alludes to three definitions of ‘safe’: (1) a credit being AAA-rated, (2) satisfying a certain level of liquidity to be used in repo markets (an important aspect of US credit transactions), and (3) backed by a sovereign with sufficient (and targeted) aggregate nominal income. I would agree with (2) and (3) in a broader context, but not necessarily (1). Why does a ‘safe’ asset need to be AAA? To be sure, the share of AAA sovereigns of 76 developed and developing/emerging sovereigns fell by 3% in 2011 compared to 2007. This should hardly be surprising, given the weak recoveries and leverage that exists in the developed markets. But it’s liquidity, and to a lesser extent, sovereign risk that matters, not the rating, per se. Furthermore, ‘safe’ is a matter of perspective. Liquidity is a pre-requisite for a ‘safe asset’ so that investors can purchase this asset in even the harshest of times. The United States runs the most liquid bond and currency market in the world; it can satisfy demand from flight-to-safety in times of stress. But one can think of liquidity in another manner: the ability to print fiat currency that is used to honor the debt instrument (asset). The US government issued just 8% of its external government debt position in non-dollar form. Better put: the US is a ‘safe’ assets because it’s a market large enough to satisfy broad demand and the US government is always going to be able to honor its debts. Liquidity is the most important definition of a safe asset, rather than the rating.

Peak Money Arrives - The world is running out of money. If money is credit, and credit relies on confidence, there is not enough confidence in the financial system to supply the world with the money it needs. Since the initial credit crisis struck in 2008, credit and money have been withdrawn from the system in such staggering amounts that international trade can no longer grow. The world’s central banks are playing a rear guard action by acting as lender of last resort to banks that no longer trust each other and have stopped lending in the interbank market. As liquidity flows out from the system, the rottenness that has corrupted the foundations of global finance is now exposed for all to see.  This was especially evident in the bankruptcy of MF Global. For over 100 years the futures exchanges have bragged that no customer on an exchange has lost money due to a broker-dealer’s default. No longer. This is how confidence is lost in the financial system – investors are surprised by large losses from institutions or products thought to be impregnable. When confidence in the financial system is lost, people don’t trust their money to banks nor to the financial markets. Banks in turn don’t trust their money to anybody but the safest of risks. You then have the making of a large-scale financial collapse, particularly at a time like this, when the world’s economy is heavily dependent on ever-increasing amounts of debt. Since the new debt is essential to repaying the old debt, old debts turn into a default, and as one default leads to another, an economic depression ensues. Credit becomes scarce, and so money disappears. The question is: How will this play out?

The Great Ricardian Equivalence Debate of 2011: Do Mainstream Economists Agree on Anything? - Krugman started it, in response to Lucas. Everyone piles on. Plutocracy Files has the list of links. (Plus don't miss Nick Rowe's, which includes a long comment thread.) Here's what wows me: all these world-classical economists are accusing each other of contradicting "textbook economics," and circling through extraordinary contortions in their efforts to reconcile that school of economics with some version of reality. There is no consensus. None. Every one of these folks is bought into classical assumptions, or at least into the Keynesian/classical "synthesis" that's embodied in the IS-LM model (a model that was created explicitly to render Keynes classical, i.e. without the the Keynes, and was later disavowed by its own creator, John Hicks, as nothing more than a "classroom gadget"). And they're all trying to do intergenerational macro in their heads, as a bunch of stylized and simplified thought experiments. Given that several of the world's most notable "textbook" economists can't agree on how to define what in physics would be the equivalent of angular momentum, some of us have to wonder if the whole discipline as taught today offers any useful macro-level insight or modeling utility at all.

US Closes 2011 With Record $15.22 Trillion In Debt, Officially At 100.3% Debt/GDP, $14 Billion From Breaching Debt Ceiling - While not news to Zero Hedge readers who knew about the final debt settlement of US debt about 10 days ahead of schedule, it is now official: according to the US Treasury, America has closed the books on 2011 with debt at an all time record $15,222,940,045,451.09. And, as was observed here first in all of the press, US debt to GDP is now officially over 100%, or 100.3% to be specific, a fact which the US government decided to delay exposing until the very end of the calendar year. We wonder, rhetorically, just how prominent of a talking point this historic event will be in any upcoming GOP primary debates. And yes, technically this number is greater than the debt ceiling but it excludes various accounting gimmicks. When accounting for those, the US has a debt ceiling buffer of... $14 billion, or one third the size of a typical bond auction.

The True Federal Debt - In our personal lives, we all understand that debts may take different forms. They aren’t limited only to credit cards or loans taken out from banks; they consist of various promises and financial obligations as well. These might include commitments to pay for a daughter’s wedding or a child’s graduate school education, to provide the down payment on a sibling’s house or to care for aged parents. While these debts may not show up on anyone’s formal balance sheet, families are well aware of them, and failure to live up to them can be very costly indeed. So, too, with the federal government. The national debt, which is the object of almost obsessive attention these days, is like a bank loan. It is an important part of national indebtedness, but only a small part. The vast bulk of the true debt is in the form of commitments to pay future benefits to retired federal employees, veterans, and Social Security and Medicare beneficiaries. These commitments are generally invisible because the federal government operates on a cash basis. The federal budget is concerned only with income and outgo between two points in time — from Oct. 1 to Sept. 30, the fiscal year. Promises to pay benefits in the future generally show up in the budget only when those benefits are actually paid.

Nobody Understands Debt, by Paul Krugman -  In 2011, as in 2010, America was in a technical recovery but continued to suffer from disastrously high unemployment. And through most of 2011, as in 2010, almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.  This misplaced focus said a lot about our political culture, in particular about how disconnected Congress is from the suffering of ordinary Americans. But it also revealed something else: when people in D.C. talk about deficits and debt, by and large they have no idea what they’re talking about — and the people who talk the most understand the least.  Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.  This is, however, a really bad analogy in at least two ways.  First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.  Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

US Net Investment Income - Krugman - I’ve been arguing that the nature of US debt now is not, despite appearances, all that different from debt post-World War 2, when we pretty much entirely owed the money to ourselves. Now, of course, some of the money is owed to foreigners; but as I pointed out, America has large assets abroad, not too much less than its liabilities. But wait, there’s more. American assets. often taking the form of foreign subsidiaries of US corporations, earn a higher rate of return than US liabilities — especially now, when there’s a lot of foreign money parked in Treasuries, but this was true even before the crisis. As a result, income from US-owned assets abroad — the blue line below — consistently exceeds payments on foreign-owned assets in the United States, the red line: Again, if your image is that we’re deeply in hock to foreigners, that our extravagance has condemned us to a future of debt peonage, you’re wrong.

On the burden of government debt - I didn't have time for a lengthy discussion of this issue, so will have to settle for some quick links of interest. Paul Krugman and Dean Baker argue that government debt is not as big a burden on future generations as is often argued, to which Nick Rowe and Don Boudreaux respond. I would also add that Krugman acknowledges that debt owed to foreigners, and the high marginal tax rates necessary to meet interest payments on domestic or international debt, can certainly be a burden. And Krugman does not worry much, whereas I do, about the possibility that future creditors will doubt the willingness of the U.S. to raise taxes or cut spending sufficiently to meet the interest burden, the result of which could of course prove to be a huge problem.

Is debt a burden on future generations? Depends. - Does government debt impose a burden on future generations? Paul Krugman says no. Nick Rowe says yes. But they're talking about different things. Paul Krugman asks: If we wake up in 2012 and find ourselves with $9 trillion in government debt, are we any worse off than if we wake up and find ourselves with zero government debt? Assuming that all of our government debt is held domestically (so that we don't have to slave away for foreigners), and assuming that we don't default on our debt (which causes economic disruption), the answer is "no." Some people (creditors) are better off and some are worse off, but overall it's a wash. Nick Rowe asks: If, starting now in 2012, we rack up some more debt over the next decade, will that make our descendants in 2042 worse off than they would be if we didn't rack up any more debt? And the answer, assuming the debt grows faster than GDP, is "yes." To show how this works, Rowe makes an "overlapping generations" model in which a government uses debt to give extra consumption to the older generation, then taxes the younger generation to pay back the debt. Voila! A burden is imposed on the young.. What matters is not debt, it's intertemporal choice. The important question is not how much debt we rack up, but whether we want to move consumption from the future into the present or from the present into the future. In the real world, the way we move consumption around through time is through investment. In Nick Rowe's toy model there is no investment (because all consumption goods are perishable), but in the real world, the way we move consumption into the future is by investing in productive assets, like buildings or machines or education or ideas. The way we move consumption from the future to the present is by reducing investment and consuming more today.

Understanding tax distortions and Ricardian equivalence - Krugman is writing today in his column: “Federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion.” I can only agree with this statement as long as the government is using distortionary taxes and there is no obvious reason to do so. It’s about the breakdown of Ricardian equivalence. Under distortionary taxation, debt and taxes are no longer equivalent. Barro (1979) showed that public debt should then be used to smooth out the distortions of taxation over time. However, distortionary taxes are levied for a reason: income redistribution. If governments would not be interested in redistribution of income at all, they would levy non-distortionary non-individualized lump-sum taxes instead. But for lump-sum taxes we know that Ricardian equivalence can hold.

Matt Yglesias, spilt milk, and the debt burden -- Matt Yglesias was defending Paul Krugman's recent posts on the burden of the past debt and the desirability of current deficits. I visit Matt Yglesias' house. I drink one litre of milk from his fridge. I write Matt an IOU for one litre of milk.

• 1. If Matt subsequently tears up that IOU, then I am richer and he is poorer. Taking the two of us together, in aggregate we are neither richer nor poorer if Matt tears up the IOU. Tearing up the IOU doesn't bring the milk back.
• 2. Therefore there is no aggregate cost to me and Matt of me drinking more milk from Matt's fridge and writing Matt another IOU.

1 is of course true. But 2 does not follow from 1. 2 is false. We can't do anything about the existing stock of national debt. "It's no use crying over spilt milk", even if it was spilled down my throat rather than spilled on the floor. But that doesn't mean there is no cost to spilling more milk. True, there's also a benefit, if I'm thirsty, and it's spilled down my throat rather than on the floor. But there's a cost too. If the government runs a deficit now, there is a cost to future taxpayers. Sure, there's a benefit too, depending on what the government does with the funds it borrowed. And we should compare those benefits to those future costs. But we shouldn't pretend those costs don't exist.

Debt does not matter. Spending and taxes do. - Paul Krugman makes the point that government debt matters less than most people think because in some cases we simply owe money to ourselves. He is right and what he has in mind is the notion that government debt is (in many countries) mostly held domestically. Japan is an extreme case where more than 90% of the government debt is held by its nationals but even in the US the majority of government debt is held by US citizens or institutions. For some it is debt but for others it is an asset, they cancel out from a national point of view. We can think of an extreme case where government bonds are held by all taxpayers in proportion to their income - in a way that mimics tax rates. In that case, government debt is not imposing a future burden on anyone, it simply cancels out with the assets that all investors/taxpayers have.What matters is not debt but who enjoys the spending that the government does and who pays for it. Debt is just a vehicle that can be used to transfer resources across different individuals or generations. Debt is not a problem, the problem, from a generational point of view, is the potential mismatch between spending and taxes  (even if future taxpayers are also the holders of government bonds when they are paid back).

Sad Things (Wonkish and Trivial) - Krugman - I see that some people out there don’t like me. A couple of odds and ends: John Cochrane weighs in on the Ricardian equivalence debate, sort of. I say “sort of” because he defines Ricardian equivalence as the theorem that stimulus does not work in a well-functioning economy which isn’t at all what it means to the rest of us, and certainly not what Ricardo meant (for the record, it’s the proposition that the timing of taxes doesn’t matter for consumer spending, so that temporary tax cuts don’t change spending). And then he “explains” that government spending can’t increase demand because of … Say’s Law! Which, of course, Keynesian economists have never thought of. It’s quite remarkable. And I mean that in the worst way: 80 years of hard thinking about economics, completely forgotten. Meanwhile, Powerline attacks Keynesian economics, and me, because … Keynes once said something anti-Semitic.

Understanding the Chicago Anti-Stimulus Arguments: A Response to Kantoos » Brad DeLong - Kantoos claims that I did not deal with the real arguments underlying John Cochrane's February 2009 claims that fiscal stimulus would be counterproductive: three years ago, in early 2009, when I read John Cochrane’s piece on fiscal stimulus . It is a little convoluted, unfortunately, but an interesting read nonetheless. I would have loved to read a proper response by Paul or Brad DeLong, but only found unjustified rants that had little to do with John’s arguments – if you actually read the whole piece. I thought I had. But let's try again. The problem is that I have a hard time pulling a coherent argument out of it. But I had thought that I had tried hard to deal with it, and I focused on the arguments that Cochrane had placed in the traditional places you put your main thesis--at the start and at the end:

The Nonsense Problem - Paul Krugman  - Brad DeLong does a lot of work meeting a challenge from Kantoos, who insists that neither Brad or I have done justice to John Cochrane’s arguments. And what Brad finds is … nothing that makes a bit of sense. This indicates, I think, a key problem in these debates. People like Kantoos or Tyler Cowen start from the presumption that when people with the right credentials, like Cochrane, or Jean-Claude Trichet, or Robert Lucas make strong statements, that they must have a defensible model behind their assertions. And so if someone like me or Brad says that there is no such defensible model, we must be engaged in a “rant”, treating these people unfairly. But sometimes people with impressive credentials do talk complete nonsense — and on fiscal policy in the Lesser Depression, that has been more the rule than the exception. So what purports to be a demand for fair-minded argument ends up, in practice, being a demand that we pretend to find a coherent position where none exists, that we basically invent a high-minded debate out of thin air. I understand that many people find the notion of a world in which Nobel Laureates and ECB presidents declare that 2+2=5 very unappealing, and that they wish we lived in a different and better world. But we don’t — and it’s not my job to create the illusion that we do.

Outside the Bubble, Public Investment Is Disappearing - These two stories need to get together in a room and talk:

1) Demand for US debt is really high.
2) Government (net) investment is at a 40-year low.
Notice that neither of these facts plays any noticeable role in the policy debates that dominate the US political scene.  There we’re offered a choice of competing visions between radicals who claim that current levels of government spending and investment represent the collapse of free civilization, and conservatives who seem to think that we have the share of public investment more or less right (give or take a few dollars for green energy).

Actual ARRA Spending Over the 2009-2011 Period Quite Close to CBO’s Original Estimate - CBO Director's Blog - Almost three years have passed since the enactment of the American Recovery and Reinvestment Act of 2009 (ARRA). Back in November 2009, we reported in a blog post that actual spending in fiscal year 2009 of funds provided by ARRA was about 1 percent higher than CBO’s estimate for that year. How did ARRA spending turn out over the 2009–2011 period (that is, from February 2009 through September 2011), and how do those results compare with CBO's original estimates? Key Points:

• Total ARRA spending through fiscal year 2011 totaled about $494 billion—$20 billion (4 percent) higher than CBO’s original estimate.
• Our projections were very close in many cases—particularly those for outlays of the Departments of the Treasury, Transportation, and Energy.
• The higher-than-anticipated spending resulted primarily from the costs of two programs that were noticeably affected by economic developments that differed from projections: unemployment-related benefits administered by the Department of Labor, and nutrition assistance administered by the Department of Agriculture. 
• More than two-thirds of total anticipated ARRA spending has been recorded, with expenditures peaking in 2010.

Washington Isn't Spending Too Much - Austan Goolsbee - To hear the GOP candidates tell it, spending under President Obama explains the deficit, explains America's long-run fiscal problem, and explains why new taxes cannot be tolerated. Congressional Republicans have the same outlook. The deficit is up thanks to government spending, so we must cut spending right now in every form.  Yet the long-run fiscal problem facing the country—which is real—has almost nothing to do with the reasons that the deficit is currently large or that spending is abnormally high. They are high for the same reason taxes are abnormally low: because of the economic downturn. We should debate the real issues, not try to pretend the recession never happened.The Congressional Budget Office forecast a $1.2 trillion deficit before the Obama administration even came into office. The stimulus added only around $250 billion a year, and more than one-third of that came from tax cuts, especially the tax credit in the stimulus bill's "Making Work Pay" provision. Most of the increase in the deficit during a downturn doesn't come from new policies in Washington. The deficit rises because both spending and taxes automatically adjust when the economy struggles. Unemployment insurance payments rise and more people qualify for Medicaid and food stamps. Incomes fall so people pay less taxes.

Reminder: $1.2 Trillion Spending Cut Starts A Year From Yesterday - The $1.2 trillion "sequester" spending cut that was triggered in late November when the anything-but-super committee failed to agree on a deficit reduction plan will occur on January 2, 2013. As I noted several weeks ago, 2012 is likely to be the "Year of Figuring Out How To Stop the Sequester." In the meantime...mark your calendar now.

Robert Samuelson's Incredibly Misguided View Of The Federal Budget - The Washington Post published a column by Robert Samuelson on December 30 that has been troubling me ever since it appeared in print. I'll leave it to Dean Baker and others to argue with Samuelson's take on other issues. My complaint is about this incredibly incorrect paragraph: But given an aging baby-boom population and increasingly high health costs, spending on the elderly is already crowding out other important government programs and threatening steep tax increases on working Americans. I plead guilty to making this point repeatedly. Annual spending on Social Security already exceeds defense spending; Medicare is approaching the level of “non-defense discretionary spending,” a catchall of everything from highway spending to foreign aid to education. There are several big problems with virtually everything here. First, there is no evidence that spending on the elderly is crowding out other "important" programs.  Second, saying that annual spending on Social Security "already exceeds" defense spending implies that the Pentagon should always spend more and it's somehow wrong or inappropriate when that doesn't occur. Third, the same can be said about Samuelson's statement about Medicare: The fact that it may be "approaching the level of non-defense discretionary spending" is a completely meaningless warning. Finally, what in the world does Samuelson mean when he says that spending on the elderly is "threatening steep tax increases on working Americans"? Isn't Pentagon spending and interest on the national debt just as responsible for the deficit as other programs?

'True Revolution' Ahead for US Fiscal Future: Greenspan - The United States faces a "true revolution" in the choices it will have to make to secure its fiscal future now that the welfare state has run up against a "brick wall of economic reality," former Federal Reserve Chairman Alan Greenspan said Wednesday. In an opinion piece for the Financial Times, Greenspan argued that the political landscape in the United States was more divided than ever, resulting in political paralysis as the Tea Party’s influence had created "an effective veto of new legislation before the current heavily Republican House of Representatives". The failure last year of the Super Committee — a congressional committee tasked with finding spending cuts to reduce the United States’ ballooning budget deficit — to reach a deal underscores this shift in U.S. politics, Greenspan said. "A political tsunami has emerged out of our past in the form of the Tea Party, with its ethos reminiscent of rugged individualism and self-reliance," Greenspan wrote. The Tea Party "has so altered the distribution of votes within Republican Party’s House caucus that the party’s center has moved closer to the Tea Party," he added.  “Congress, having enacted increases in entitlements without visible means of funding them, is on the brink of stalemate," Greenspan wrote. The only viable long-term solution appears to be "a shift in federal entitlements programs to defined contribution status" — programs that require employees to make a set contribution to their pensions, Greenspan said.

Obama signs defense bill, pledges to maintain legal rights of terror suspects - The Washington Post: President Obama expressed misgivings about several provisions of a sweeping defense bill he signed into law on Saturday, pledging that his administration will use broad discretion in interpreting the measure’s legal requirements to ensure that U.S. citizens suspected of terrorism are not detained indefinitely by the military. The $662 billion National Defense Authorization Act provides funding for 2012 at $27 billion less than Obama's request and $43 billion less than Congress authorized in 2011.The bill also contains several detainee provisions that civil liberties groups and human rights advocates have strongly opposed, arguing that they would allow the military greater authority to detain and interrogate U.S. citizens and non-citizens and deny them legal rights protected by the Constitution. Obama initially had threatened to veto the legislation. In a signing statement released by the White House on Saturday, Obama said he still does not agree with everything contained in the legislation. But with military funding due to expire Monday, Obama said he signed the bill after Congress made last-minute revisions at the request of the White House before approving it two weeks ago.

Obama Signs Defense Spending Law, With Notes - President Barack Obama, signing into law a $662 billion defense spending plan today, attached his own legal interpretation to several sections that the White House had contested with Congress, including a provision that requires suspected members of al-Qaeda be kept in military custody. “The fact that I support this bill as a whole does not mean I agree with everything in it,” Obama said in a signing statement appended to the measure. “In particular, I have signed this bill despite having serious reservations with certain provisions that regulate the detention, interrogation and prosecution of suspected terrorists.” The National Defense Authorization Act for Fiscal Year 2012 seeks to curb cost overruns of Lockheed Martin Corp. (LMT)’s F-35 fighter jet for the fiscal year that began Oct. 1. Lawmakers frustrated by delays and cost overruns ordered the Pentagon to make Lockheed Martin absorb costs if it exceeds a negotiated target in a forthcoming sixth F-35 production contract. The Defense Department is currently negotiating the fifth contract for the F-35. At $382 billion, it’s the Pentagon’s largest weapons program. The defense authorization law calls for spending $27 billion less than Obama sought, and $43 billion less than fiscal 2011. It also tightens sanctions on Iran by denying access to the U.S. financial system to any foreign bank that conducts business with the Central Bank of Iran.

The Worst Part of the Signing Statement: Section 1024 - As I explained here, Obama’s signing statement on the defense authorization was about what I expected. He included squishy language so as to pretend he doesn’t fully support indefinite detention. And he basically promised to ignore much of the language on presumptive military detention. But there was one part of the signing statement I (naively) didn’t expect. It’s this: Sections 1023-1025 needlessly interfere with the executive branch’s processes for reviewing the status of detainees. Going forward, consistent with congressional intent as detailed in the Conference Report, my Administration will interpret section 1024 as granting the Secretary of Defense broad discretion to determine what detainee status determinations in Afghanistan are subject to the requirements of this section. Section 1024, remember, requires the Defense Department to actually establish the provisions for status reviews that Obama has promised but not entirely delivered.

United Bases of America - U.S. military bases around the world: graphic

Panetta to Offer Strategy for Cutting Military Budget —Defense Secretary Leon E. Panetta is set this week to reveal his strategy that will guide the Pentagon in cutting hundreds of billions of dollars from its budget, and with it the Obama administration’s vision of the military that the United States needs to meet 21st-century threats, according to senior officials.  In a shift of doctrine driven by fiscal reality and a deal last summer that kept the United States from defaulting on its debts, Mr. Panetta is expected to outline plans for carefully shrinking the military — and in so doing make it clear that the Pentagon will not maintain the ability to fight two sustained ground wars at once.  Instead, he will say that the military will be large enough to fight and win one major conflict, while also being able to “spoil” a second adversary’s ambitions in another part of the world while conducting a number of other smaller operations, like providing disaster relief or enforcing a no-flight zone.

Obama to unveil austere Pentagon strategy — President Obama is scheduled to make a rare visit to the Pentagon on Thursday to unveil details of a strategic review for the U.S. military that will consolidate missions and downsize the ambitions of the armed forces as they adjust to a new era of austerity, officials said. Obama, who will be joined by Defense Secretary Leon E. Panetta and Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, will place his personal imprint on a new military strategy that Pentagon officials have been preparing for months in anticipation of the largest cuts to the defense budget since the end of the Cold War. The document will call for a greater shift toward Asia in military planning and a move away from big, expensive wars like Iraq and Afghanistan, which have dominated U.S. operations for most of the past decade, said a senior military official. In particular, the plan calls on the military to invest in weaponry to overcome efforts by potential adversaries such as China to use long-range missiles and sophisticated radar to keep U.S. forces at bay. The strategy is different from past Pentagon reviews in that it establishes clear priorities for the military, the official said, speaking on the condition of anonymity because the plan had not been publicly released.

Pentagon’s “Austerity Budget” Ignores Second-Round Trigger Cuts - The President made some brief remarks at the Pentagon during the introduction of the new “austerity” defense budget. He stressed that the US will still have the most powerful fighting force in the world, that even after the cuts the defense budget would grow over the next five years, and that the overall budget will still amount to as much as the next ten largest militaries combined. So it’s hard to make the turn, given all those facts, that this is a real sacrifice on the part of the military. And the fact that the weapons systems will stay while the personnel to manage them will get cut just re-emphasizes that. Panetta’s not even talking about cuts to the F-35, just delays in purchases. And the aircraft carrier number would stay the same. And most important to this whole strategy, the cuts announced today only incorporate those from the first half of the debt limit deal. They do not take into account the trigger. So the purpose, it seems to me, is to cry poor about the military, claim that the cuts are “painful but manageable,” so as to head off the bigger cuts mandated by the debt limit deal, and put forward a strategy of nullifying them.

Military Contractors Should Be More Concerned About 2013 And Beyond - The fact that the Obama administration’s proposed Pentagon spending reductions are not likely to be enacted in 2012 should bring little comfort to the contracting community. Even if they’re not put in place this year, reducing the military budget from current baseline levels will be hotly debated this year and be a campaign issue. This is likely to change the budget debate that has occurred since at least 2001 from how much should 2 military spending rise to which reductions are most acceptable. That’s a significant change. Without an external shock that alters this outlook such as a terrorist attack or new overseas contingency, this changed debate will last at least until a significant deficit reduction plan is adopted, and, regardless of who gets elected and which political party controls each house of Congress, it will make the Pentagon as much a part of that discussion as Medicare and Medicaid.

Continuing Resolution For DOD 2013 Is Even More Likely Because Of Obama Pentagon Changes - Not only are the Obama administration’s $450 billion-over-10-years military spending cuts not likely to be enacted before the 2012 election, but no significant deficit reductions of any kind should be expected to be enacted this year. The witches’ brew of hyper-partisan politics, the 2012 election, the influence within the GOP of it’s tea party wing and the narrow majorities in the House and Senate will combine this year to do what they did in 2011: Make a deal on any aspect of the budget impossible to achieve. More energy and effort will be expended this year on avoiding, delaying, or reducing the sequester’s military spending cuts than in developing an agreement on any additional Pentagon reductions. In addition, given the narrow majorities in both houses, the spending reductions that were outlined by Pentagon officials today will provide the representatives and senators from the congressional districts and states that would be harmed with ample opportunities to make life miserable for the Democratic and Republican leaders. As a result, a fiscal 2013 Department of Defense appropriation is now even less likely than it was before, and it wasn’t that likely to begin with. A continuing resolution that keeps Pentagon spending at or near current levels and keeps existing policy in place is the most likely outcome until at least a lame duck session.

Obama Pentagon Spending Cuts Will Change The Budget Debate Long Before They Reduce The Budget - There are five reasons why it was virtually inevitable the White House would make military spending an issue this year.

• 1. The Pentagon Has Become Increasingly Unpopular.
• 2. The President’s Focus On The Deficit Made A Close Look At The Pentagon Impossible To Avoid. This is simple math more than complex politics.
• 3. The GOP Is Already On Record In Favor Of Cutting Military Spending.
• 4. There Is Ample Hi-Level GOP Expert Opinion That Pentagon Spending Can Be Cut Without Sacrificing National Security. As Heather Hurlburt pointed out in an excellent piece today in the Huffington Post, a number of highly respected Republican military experts are on record with ideas about how the Pentagon can and should be cut. This includes Colin Powell, Robert Gates, Dov Zakheim and even Donald Rumsfeld, all of who have all offered specific plans for cutting one or more parts of the military budget.
• 5. The War In Afghanistan Is Increasingly Unpopular. The polls indicate an overwhelming preference for reducing or eliminating the spending associated with activities in Afghanistan rather than on virtually any domestic activity.

Editorial: Phantom defense cuts -Where's the peace dividend? American troops now are mostly out of Iraq. And their numbers are declining in Afghanistan, with about a third of the 98,000 troops scheduled to come home by summer. Yet, defense spending is not declining despite tough budget times and a federal deficit of $1.3 trillion for fiscal year 2011-12. This reality is obscured by supposed "cuts" being made in the Pentagon budget. Defense Secretary Leon Panetta this week will lay out the Obama administration's defense goals and budgets for the future. Reported the New York Times, "Mr. Panetta is expected to outline plans for carefully shrinking the military – and in so doing make it clear that the Pentagon will not maintain the ability to fight two sustained ground wars at once. "Instead, he will say that the military will be large enough to fight and win one major conflict, while also being able to 'spoil' a second adversary's ambitions in another part of the world" About $450 billion in cuts over the next decade generally have been agreed on by the Pentagon and the White House, the Times reported. Mr. Panetta believes that further cuts would hurt national security.But the cuts really aren't there, Christopher Preble told us; he's vice president for defense and foreign-policy studies at the libertarian Cato Institute. It's the old trick of "cutting" the baseline budget – as the baseline rises. He said the "cuts" would "put us back to 2010 – hardly a lean year as far as Pentagon spending is concerned

2011, The Year Washington Lost -- With yet another high-profile fight between Congress and the White House coming down to the wire, 2011 ended with a sense of deja vu. This time, President Barack Obama survived the cable news carnage with a two-month extension of the payroll tax cut and unemployment benefits -- a victory in political terms, but little more than a stopgap as a matter of actual policy. This has been the story on jobs legislation all year: small-bore, short-term or substantively irrelevant. On economic policy, 2011 was a lost year. Just one year ago, Obama sparked a tremendous outcry from progressives for offering up a one-year payroll tax cut and unemployment benefits extension in exchange for two years of the Bush tax cuts for the wealthy. As 2010 drew to a close, the payroll tax cut -- which provides an average of $1,000 a year to 160 million Americans -- was viewed as woefully insufficient compared to the potential job-creating revenue from new taxes on the wealthy. Those meager provisions likely prevented the economy from falling back into recession, but in the year since Obama cut that deal with congressional Republicans, economic growth has averaged a pathetic 1.2 percent. The unemployment rate has fallen from a horrific 9.8 percent to a merely terrible 8.6 percent. But much of that progress is illusory -- millions of out-of-work Americans have simply given up all hope of finding a job, a situation that isn't captured by the unemployment statistics.

Obama, Romney, Jobs - Krugman - Greg Sargent is rightly outraged by Romney’s claim that Obama is a job destroyer: Romney’s claim that two million jobs were lost under the Obama presidency is based on the idea that there’s been a net loss of jobs since he took office. In other words, Romney is taking into account the fact that the economy continued hemorraghing jobs at a furious rate after Obama took office — before Obama’s stimulus passed. But the figures show that once it became law, monthly job loss declined over time, and turned around in the spring of 2010, after which the private sector added jobs for over 20 straight months, totaling around 2.2 million of them. I think this benefits from a figure: Does this look to you like a president who “lost jobs”, or like a president who inherited an economy in free fall? You can accuse Obama of not doing enough to promote recovery — and I have (although the biggest villain here was Romney’s own party). But to claim that Obama caused the job loss is indefensible.

Eric Cantor, "60 Minutes," And Taxes - Nothing happening right now in Iowa is as important or as revealing (not to mention as entertaining) as the outburst by Eric Cantor's press secretary during a 60 Minutes interview that aired on Jan. 1. You won't find it on Politico's home page (yet), but it really happened. Scroll to the bottom of this item to watch the relevant portion (assuming you have the patience to sit through a commercial first). Here's the transcript:

Wall Street Beware: Boehner May Need To Tank Payroll Tax Extension To Keep His Job - The best way to understand why House Speaker John Boehner (R--OH) is in trouble with other House Republicans on the payroll tax extension is to refer back yet again to my experience late last February when I spoke at the first meeting of the House tea party caucus. The whole story is here for those who didn't read or don't remember it. If you're pressed for time...two of the most important things I heard at that meeting were that the tea partiers said very explicitly they didn't trust Boehner or Majority Leader Eric Cantor (R-VA), and that the biggest mistake Newt Gingrich (R-GA) made in 1995 and 1996 when he was fighting Bill Clinton on budget issues is that he gave-in too early. He would have gotten much more they said had he just held out until the very last minute. Nevertheless, in light of the anger the tea party wing of the House GOP apparently feels after Boehner's unilateral decision in late December to end the fight with the White House over the payroll tax extension, the GOP members believe the speaker caved too early. From their perspective, he/they didn't get the best possible deal.

Enjoy the payroll tax break while it lasts - Last week, after a needlessly-contentious process, Congress approved a two-month extension of the payroll tax break. As part of the agreement, a conference committee will try to come up with an agreement to extend the cut through the end of 2012. I’ve been rather pessimistic about the likelihood of success, and yesterday, the odds got worse. The Senate Republican leader announced Friday that he had chosen three of his colleagues to try to thrash out a bipartisan deal on payroll taxes, unemployment benefits and Medicare. The three Republican senators will join four Democratic senators and 13 House members on a conference committee... The newly named Republican conferees are Senators Jon Kyl of Arizona, Michael D. Crapo of Idaho and John Barrasso of Wyoming. These are three senators you’d appoint to a conference committee if you want to be destructive. Kyl, for example, was instrumental in sabotaging the super-committee process... Crapo and Barrasso, meanwhile, are two far-right senators who’ve never demonstrated any willingness to accept concessions on anything. What’s more, note that the House GOP leadership has already announced its conferees, most of whom have already said they don’t want a payroll-cut extension no matter what concessions Democrats are willing to make...

How is the U.S. tax system different? - Clive Crook reports: A new report by the Organization for Economic Cooperation and Development shows that in the middle of the last decade — i.e., after the Bush tax cuts were introduced — the U.S. income tax was about as strongly redistributive as income taxes in Canada, Denmark, Finland, the Netherlands and Sweden. You might have noticed that the CBO report on top incomes was widely quoted, but one finding got less attention: Between 1979 and 2007, “the federal individual income tax became slightly more progressive.”  [TC: note that this last sentence can mean a number of different things/] The awkward truth is that the U.S. income tax system is anomalous not because it taxes the rich lightly but because it taxes everybody else lightly.

More on Taxation and High Incomes - Looking a bit more into this question of the link between higher income tax rates and lower levels of inequality, I stumbled on this paper examining precisely this correlation from the perspective of executive pay. Check out these two figures, which appear to tell a pretty clear story.. In both the top slide and the left-hand panel in the bottom one, the negative correlations between high tax rates and executive compensation are clear.  And the right panel provides an interesting contrast—you don’t really see much of a correlation at all when it comes to middle managers.  So there does seem to be a clear inequality linkage here.On the other hand, correlation is not causation, and the statistical analysis in the article doesn’t find evidence that compensation responds to tax changes in the short run.  The authors wonder if maybe such things just take a while to evolve over time, as social norms adjust in such a way that tolerates more inequality, lower taxes on the wealthy, and the very large growth in the gap between the compensation of executives and that of the typical worker.  They hypothesize that perhaps: “social pressure prevented firms from aligning pay with tax rates mid-century, but as these norms changed, compensation packages became more flexible to adapt to tax advantages.”

Rick Santorum’s Tax Plan - With Rick Santorum surging in Iowa, it is a good time to take a look at his tax agenda. While his revenue plan has received almost no attention, it plays a  major role in his “faith, family and freedom” campaign. His playbook: lower rates for individuals and corporations, substantially cut taxes on capital, and increase the personal exemption for dependent children. The Tax Policy Center has not yet formally modeled the former Pennsylvania senator’s tax platform. However, because it cuts rates significantly but does not eliminate tax preferences—and even expands a few—it would very likely add trillions of dollars to the federal deficit.  Looked at from that prism, it is not so different from the ideas raised by most of his GOP rivals. Like other Republican tax planks, Santorum’s would benefit corporations and high-income individuals. No surprise there. But unlike his rivals, he’d also cut taxes for many families with children. Santorum is no bleeding heart, however. Even as he’d cut their taxes, he’d shred direct government spending for programs aimed at assisting these same households. As part of his plan to cut federal spending by $5 trillion over five years, he’d immediately slash many domestic programs to 2008 levels, and freeze for five years spending for social programs such as Medicaid, housing subsidies, food stamps, education, and job training.

Romney’s Tax Plan: Big Benefits for the Wealthy and Higher Deficits - A new Tax Policy Center analysis finds that Mitt Romney’s tax plan would cut taxes for millions of households but bestow most of its benefits on those with the highest incomes. At the same time, it would significantly cut corporate taxes and add hundreds of billions of dollars to the deficit. Compared to current law (assuming the Bush/Obama tax cuts expire as scheduled at the end of this year), Romney would cut taxes by $600 billion in 2015 alone. Relative to a world where those tax cuts remained in place, he would add about $180 billion to the deficit in that year. In many ways, Romney’s tax plank is a fairly mainstream Republican offering. No major tax reform. Certainly no 9-9-9-like proposal to replace the current revenue system with a consumption levy. And while Romney is proposing huge tax cuts, they are more modest than those of his rivals. Newt Gingrich’s tax package, for instance, would add $1 trillion to the deficit in 2015.  Still, a $600 billion tax cut is worthy of note.

Romney's Tax Plan--good for the wealthy, not so good for everybody else - The Tax Policy Center has done an analysis of Romney's plan for US taxation.  See The Romney Plan.  It doesn't look bad at all for the wealthy.  In adding at least $600 billion to the U.S. deficit by 2015, Romney would

• reduce the statutory corporate tax rate from 35% to 25% immediately (apparently with no need for offsets). 
• eliminate the US system of taxation of worldwide income in favor of a "territorial" tax system.  this will be especially beneficial for multinational corporations and their owners and managers, and will tend to speed up the offshoring of US manufacturing and service jobs.
• reduce the maximum individual rate from 35% to 25% immediately (apparently with no need for offsets).  This will benefit the wealthiest of the wealthy, who already enjoy a very compressed income bracket progression.
• Eliminate the estate tax.  This will benefit the wealthiest of the wealthy, who are the only ones who pay the estate tax now.
• Retain the 15% rate for capital gains.  This will benefit the wealthy, since the top of the income distribution owns most of the financial assets.
• Eliminate the capital gains tax for those with income of $200,000 or below.

Mitt Romney Plan Raises Taxes On Poor Families, Helps Millionaires: Study: Republican Mitt Romney's tax plan would increase taxes on low-income families while cutting taxes for the middle-class and the rich, according to an independent study released Thursday. On average, households making less than $20,000 would see their taxes increase by more than 60 percent, said the Tax Policy Center, a Washington research group that studied the Romney plan. Households making between $50,000 and $75,000 would get small tax cuts, averaging 2.2 percent, or about $250, the study said. People making more than $1 million would get tax cuts averaging 15 percent, or about $146,000. "Virtually everybody with a big income is getting a tax cut," said Roberton Williams, a senior fellow at the Tax Policy Center. Overall, Romney's plan would reduce tax revenues by $180 billion in 2015, adding to the federal budget deficit, the study said. Romney's campaign disputes the estimate, saying tax cuts in the plan would help improve the economy, leading to more revenue.

Competing GOP Tax proposals Graphic - An organization that is called: American Institute of Certified Tax Coaches has put up a summary graphic of the various tax proposals ofthe GOP candidates. It not only notes the major points of their plans, but what their plans would cost. It is presented in a sort of game board race layout. The Institute introduces it thusly:  The US tax code is so complexeven those who write the law don’t understand all of it. Infact, few members of Congress prepare their annual tax returnsaccording to a survey by the congressional newspaper, “The Hill.” Politicians cite the complexity of the tax code as the primary reasonleading them to turn to professionals for help. Even the Commissioner of the IRS can’t prepare his own tax returns!  So there’sno easier way for a politician to gain approval than to say thecurrent system should be eliminated.  It’s no surprise the Republican presidential candidates have come out with somewide-ranging tax proposals. Even deciphering the content ofthese plans can be a challenge, so we took it upon ourselves toidentify how the GOP hopefuls’ differ and just what is in them.

Marginalizing Ron Paul - Ron Paul is not worthy of serious consideration, according to a New York Times editorial; “Ron Paul long ago disqualified himself for the presidency by peddling claptrap proposals like abolishing the Federal Reserve, returning to the gold standard, cutting a third of the federal budget and all foreign aid and opposing the Civil Rights Act of 1964.” That last item, along with the decade-old racist comments in the newsletters Paul published, is certainly worthy of criticism. But not as an alternative to seriously engaging the substance of Paul’s current campaign—his devastating critique of crony capitalism and his equally trenchant challenge to imperial wars and the assault on our civil liberties that they engender. Paul is being denigrated as a presidential contender even though on the vital issues of the economy, war and peace, and civil liberties, he has made the most sense of the Republican candidates. And by what standard of logic is it “claptrap” for Paul to attempt to hold the Fed accountable for its destructive policies? That’s the giveaway reference to the raw nerve that his favorable prospects in the Iowa caucuses have exposed. Too much anti-Wall Street populism in the heartland can be a truly scary thing to the intellectual parasites residing in the belly of the beast that controls American capitalism. It is hypocritical that Paul is now depicted as the archenemy of non-white minorities when it was his nemesis, the Federal Reserve, that enabled the banking swindle that wiped out 53 percent of the median wealth of African-Americans and 66 percent for Latinos, according to the Pew Research Center.

Enemy Of The State - Especially to the self-selected group that comes to the Iowa Republican caucuses, Paul’s positions are pulse quickening. If you are antitax, Paul has that sentiment nailed more than any other candidate. If you are antiwar, Paul is right there with you. If you fear for your personal freedoms, Paul has you covered. And if you want a sweeping philosophy, deeply grounded in fundamental texts (Hayek, von Mises, Rothbard), Paul is your man. Nobody has a better claim to be a protest candidate. He’s the only one who has ever run for office from a third party. He’s not about passing bills; he’s about root-and-branch change. His popularity, even if it’s temporary, demonstrates that all politics isn’t necessarily local—that big ideas can exert a pull on voters, too.

Ron Paul and the Banks - Simon Johnson - We should take Ron Paul seriously. The Texas congressman had an impressive showing in the Iowa caucuses on Tuesday and his poll numbers elsewhere are resilient – he is running a strong third among Republicans nationally and is currently second in New Hampshire polling. He may well become the Republican candidate with populist momentum and energy in the weeks ahead. Mr. Paul also has a clearly articulated view on the American banking system, laid out forcefully in his 2009 book, “End the Fed.” This book and its bottom-line recommendation that the United States should return to the gold standard – and abolish the Federal Reserve System – tend to be dismissed out of hand by many. That’s a mistake, because Mr. Paul makes many sensible and well-informed points. But there is a curious disconnect between his diagnosis and his proposed cure, and this disconnect tells us a great deal about why this version of populism from the right is unlikely to make much progress in its current form.

Crowd-sourcing the revolving door - This chart of Venn Diagrams (New Year’s Day links) is a nifty visualization[1] that shows how many, many people, through the operations of Washington’s revolving door, have held high-level positions both in the Federal government and in major corporations. To take but one example, the set of all Treasury Secretaries includes Hank Paulson and Bob Rubin, which overlaps with the set of all Goldman Sachs COOs. The overlapping is pervasive. Political scientists and the rest of us have names for such cozy arrangements — oligarchy, corporatism, fascism, “crony capitalism” — but one name that doesn’t apply is democracy. On the flip, you’ll find a larger version of the chart (and a discussion of its provenance).

Americans’ Confidence in Its Leaders Hits New Low - The 2011 National Leadership Index indicates that Americans’ confidence in its leaders has hit new low points: the overall index has fallen from 101.4 in 2005 to 89.4 in this month’s survey, even below the 2008 level in the midst of the financial meltdown. (100 is the normative level of confidence.) The index is highly reliable as it is based on interviews of 1,065 Americans and conducted by the Center for Public Leadership, headed by Professor David Gergen at Harvard Kennedy School. These results are very worrisome to me, as without trust and confidence in our leaders, America cannot recover the energy and optimism required to restore its domestic economy and global leadership. The survey indicates that 77% of Americans believe the U.S. has a leadership crisis. Without better leaders, America will decline as a nation, according to 77% of those interviewed. Seventy-six percent disagree with the proposition that our country’s leaders are effective and do a good job. Among leadership categories, military and medical leaders continue to top the list, scoring at 112 and 105, respectively. At the very bottom are Congressional and Wall Street leaders, with ratings of 73 and 71, both down sharply from the upper 90’s in 2005. Business leaders fare slightly better at 87, with the White House at 84.5 and media at 84.

A Christmas Message From America's Rich - Matt Taibbi - Asked if he were willing to pay more taxes in a Nov. 30 interview with Bloomberg Television, Blackstone Group LP CEO Stephen Schwarzman spoke about lower-income U.S. families who pay no income tax. “You have to have skin in the game,” said Schwarzman, 64. “I’m not saying how much people should do. But we should all be part of the system.”This incredible statement gets right to the heart of why these people suck. Why? It's not because Schwarzman is factually wrong about lower-income people having no “skin in the game,” ignoring the fact that everyone pays sales taxes, and most everyone pays payroll taxes, and of course there are property taxes for even the lowliest subprime mortgage holders, and so on. It’s not even because Schwarzman probably himself pays close to zero in income tax – as a private equity chief, he doesn’t pay income tax but tax on carried interest, which carries a maximum 15% tax rate, half the rate of a New York City firefighter. The real issue has to do with the context of Schwarzman’s quote. The Blackstone billionaire, remember, is one of the more uniquely abhorrent, self-congratulating jerks in the entire world – a man who famously symbolized the excesses of the crisis era when, just as the rest of America was heading into a recession, he threw himself a $5 million birthday party, featuring private performances by Rod Stewart and Patti Labelle, to celebrate an IPO that made him $677 million in a matter of days (within a year, incidentally, the investors who bought that stock would lose three-fourths of their investments). Apparently, we’d all be in much better shape if the poor were as motivated as Steven Schwarzman is to make America a better place. But it seems to me that if you’re broke enough that you’re not paying any income tax, you’ve got nothing but skin in the game. You've got it all riding on how well America works.

Here Are Some Rich New Yorkers Whining About Feeling Poor - In the mood for some class rage? (Of course you are.) Gothamist points us to message board on uptight parenting forum UrbanBaby asking, "What's your hhi [household income] and do you FEEL poor, middle class, upper middle class or rich where you live. No judging.  Ha ha, "no judging." As if this discussion existed for any other purpose. (Well, judging and trolling.) For your judgmental pleasure: UrbanBaby's most harrowing tales of economic hardship and financial woe:

• $700,000 poor. NYC
• $350K, so, so, so poor. Not being dramatic or anything, really poor. We totally struggle every day. UES.... Obviously we are totally over extended. If we could get out of this mess, we would, but we can't.
• 500,000. DH spends to much so I feel poor
• 2012 will be about 400k. Fell mc. HHI is down since 2009. Live on the UWS.
• $275K, on the poor side of middle class, NYC.
• 180K Greenwich Village.  I feel like I am doing my child a disservice when she cried at age 4 because I told her we will NEVER buy a country house.
• Last year $650k. This year $375-450k depending on bonus. I know rationally we are doing well, but we still feel pinched.

A Financial Transaction Tax Could Weed Out All The Pointless Trading: In an editorial published in the Wall Street Journal (“Taxing Stock Trades Will Hurt Main Street") the authors inadvertently make the case for imposing a stock trade tax rather than opposing it. Their argument against a tax boils down to the claim that a fee of 0.25% on each trade (which is the amount a bill going through the Senate would levy) would depress stock prices 10%, which in turn would have a cataclysmic effect on our economy. But based on their own evidence the tax would not depress stock prices, and in my opinion would provide large indirect benefits. I have made a living since 1986 in high frequency trading and a tax of .25% would drive me out of business as I know it. However I have long recognized the potential benefits of such a tax, my own personal situation notwithstanding. To wit, a tax would reduce superfluous trading volume, volume which in and of itself does little for our nation’s prosperity. Dime store economists will argue that volume provides liquidity for securities markets, which I agree is an undeniable good for an economy. But at some point the marginal gain in volume doesn’t provide increased liquidity or any other benefit--it’s just churn.

"An Elegant Core of Sensible Ideas" - Colleen Murray at Treasury Notes, the blog at the US Treasury, writes: ...the current calls to repeal the Dodd-Frank Act are a significant cause of the uncertainty that responsible business leaders are seeking to avoid.  Once it is fully implemented, the Dodd-Frank Act will improve market certainty, strengthen the financial system, and help boost the economy. They are fighting against attempts to roll back financial regulation. I have no problem with that -- just wish they'd also noted that Dodd-Frank should be the beginning rather than the end of our efforts to reform the financial system. More is needed.

Report: Regulators missing a slew of Dodd-Frank deadlines - Regulators have missed roughly three-quarters of the deadlines for implementing the Dodd-Frank financial reform law through 2011, according to a new report. So far, 200 deadlines for drafting rules to implement the Wall Street overhaul have come and gone, and regulators have met only 51 of them, according to the law firm of Davis Polk. Another 200 rulemaking requirements stemming from the law still await regulatory action. All told, regulators have implemented less than a quarter of the sweeping law. Just 21.5 percent of the rulemaking requirements have resulted in finalized rules, while 38.75 percent currently have proposed rules. Another 39.75 percent of rules that ultimately will have to be implemented to make the law a reality have yet to be proposed. Regulators have spent much of the last year and a half struggling to draft huge numbers of rules implementing the new law, even as lawmakers argue over whether to expand their budgets to help address their expanded responsibilities.

Whither Volcker Rule and Other Options for Reining in Big Bad Banks - Yves Smith - Gerry Epstein of PERI speaks to the Real News Network about the out of the headlines negotiations on Volcker rule implementation as well as other ideas for bringing major banks to heel. It’s worth noting that Epstein is not aware of the fact that Occupy Wall Street’s Occupy the SEC group has a subgroup that is providing extensive comments on the Volcker (their first set was on the proposed repo exclusion).

Financial Regulation: Back to the good ol’ days of 2008 - Immediately after the GOP took the House last year, Alabama Republican and chairman of the House banking committee Spencer Bachus made the mistake of saying what he actually believes about financial regulation. “In Washington, the view is that the banks are to be regulated,” he told the Birmingham News, “and my view is that Washington and the regulators are there to serve the banks.” This view is consistent with thirty years of Republican-backed financial deregulation as well as with the conservative explanation of what went wrong in the financial crisis. And if the Republicans manage to take both elected branches of the government next year, this is likely to be the spirit in which they’ll approach the post-Dodd-Frank era.  Going forward, the Republicans’ intentions with respect to Dodd-Frank are already clear: in Congress, they have introduced repeal legislation, and every major Republican presidential candidate has pledged to repeal Dodd- Frank in its entirety. It’s fair to take them at their word.

The $18 Trillion Threat Of The Unregulated Shadow Banking System -  When you add together the assets in hedge funds, ETFs, money market mutual funds, sovereign wealth funds and family investment offices(think Soros) t he total amount of assets that are subject to oversight and regulation appears to be $18 trillion, down from $25 trillion before the 2008 meltdown. This money is what we call “the shadow banking system.” And is where the most “games” are being played using other people’s money. Risk taking, I have been warned , has moved to the “shadow banking system,” which utilize flow of funds accounts that are outside the purview of the Dodd-Frank Act, Basel III, and even the ministrations of t he Federal Reserve. None of these regulators have the obligation of overseeing the re-use of this pledged collateral, which are being supplied by asset managers to other dealers or players who “mine” this collateral for other purposes than were first intended. You want to worry about money you can’t see– and don’t know where it is located? Then, worry big-time about some $5.8 trillion of the “shadow banking” system that are in some kind of crazy-quilt daisy chain where they are pledged by some huge unregulated hedge fund or sovereign wealth fund, and then end up as collateral being used by yet another financial dealer. There’s no central collateral clearing desk or depositary– where all of these transactions can be observed. It means long term savings can be turned into short-term transactions that are part of the counter-party web of global financial markets.

Psychopaths Caused the Financial Crisis … And They Will Do It Again and Again Unless They Are Removed From Power  - Bloomberg notes: The “corporate psychopaths” at the helm of our financial institutions are to blame [for the financial crisis]. Clive R. Boddy, most recently a professor at the Nottingham Business School at Nottingham Trent University, says psychopaths are the 1 percent of “people who, perhaps due to physical factors to do with abnormal brain connectivity and chemistry” lack a “conscience, have few emotions and display an inability to have any feelings, sympathy or empathy for other people.” As a result, Boddy argues in a recent issue of the Journal of Business Ethics, such people are “extraordinarily cold, much more calculating and ruthless towards others than most people are and therefore a menace to the companies they work for and to society.” How do people with such obvious personality flaws make it to the top of seemingly successful corporations? Boddy says psychopaths take advantage of the “relative chaotic nature of the modern corporation,” including “rapid change, constant renewal” and high turnover of “key personnel.” Such circumstances allow them to ascend through a combination of “charm” and “charisma,” which makes “their behaviour invisible” and “makes them appear normal and even to be ideal leaders.”

Bring Back Boring Banks - CENTRAL bankers barely averted a financial panic before Christmas by replacing hundreds of billions of dollars of deposits fleeing European banks. But confidence in the global banking system remains dangerously low. To prevent the next panic, it’s not enough to rely on emergency actions by the Federal Reserve and the European Central Bank. Instead, governments should fully guarantee all bank deposits — and impose much tighter restrictions on risk-taking by banks. Banks should be forced to shed activities like derivatives trading that regulators cannot easily examine.  The Dodd-Frank financial reform act of 2010 did nothing to secure large deposits and very little to curtail risk-taking by banks.In fact, an overwhelming proportion of the “quick cash” in the global financial system is uninsured and prone to manic-depressive behavior, swinging unpredictably from thoughtless yield-chasing to extreme risk aversion. Much of this flighty cash finds its way into banks through lightly regulated vehicles like certificates of deposits or repurchase agreements. Money market funds, like banks, are a repository for cash, but are uninsured and largely unexamined. Relying on the Fed and other central banks to counter panics is dangerous brinkmanship. A lender of last resort ought not to be a first line of defense.

Peter Schiff interviews Ann Barnhardt (video) Farmers and ranchers have had their operating capital stolen by JP Morgan. Former CEO of Barnhardt Capital Management, Ann Barnhardt shut her firm down in the wake of MF Global's collapse to protect her customers. She calls for a general strike against the financial markets. Ouch!

Interview with Attorney James Koutoulas on the Legal Battle with MF Global and JP Morgan - MF Global has now become the 8th largest bankruptcy in history; resulting in the loss of over one billion customer funds. Jim discusses the broad importance of this case with the attorney representing 8000 affected clients regarding his legal battle with MF Global and JP Morgan.

MF Global sold assets to Goldman before collapse: sources (Reuters) - MF Global unloaded hundreds of millions of dollars' worth of securities to Goldman Sachs in the days leading up to its collapse, according to two former MF Global employees with direct knowledge of the transactions. But it did not immediately receive payment from its clearing firm and lender, JPMorgan Chase & Co , one of the sources said. The sale of securities to Goldman occurred on October 27, just days before MF Global Holdings Ltd filed for bankruptcy on October 31, the ex-employees said. One of the employees said the transaction was cleared with JPMorgan Chase. At the same time MF Global, which was run by former Goldman Sachs head Jon Corzine, was selling securities to Goldman to raise badly needed cash, the futures firm was also drawing down a $1.2 billion revolving line of credit it had with JPMorgan, according to one of the former MF Global employees. JPMorgan spokeswoman Mary Sedarat said the bank did not withold money because of the line of credit. She declined further comment on details of the transactions.

MF Global Sold Assets to Goldman While It Was Looting Their Customer Accounts - It turns out that MF Global sold hundred of millions in assets to Goldman in the last two business days before its bankruptcy. It is not clear that MF Global actually received the payment for the sale, or if the funds were held by their clearing agent and banker, JP Morgan, who knew that they were going to be bankrupt. That revolving line of credit at JPM of $1.2 Billion is about the size of the missing customer funds. I wonder if JPM withheld payment on the sale of Goldman assets, and took customer assets as collateral for the credit line. As MF Global's banker they were at the center of most if not all of these transactions.  The idea that the customer money was 'missing' is ludicrous. It would be more correct to say that the ownership of the money was disputed, and was in the hands of JP Morgan and perhaps Goldman.  These are serious offenses. But it becomes even worse if JPM afterwards sought to withhold the stolen funds and cover up the transactions, impeding an official investigation. And then their legal maneuvering afterwards to cut the customer interests in the courts is of course beneath contempt.

Yes, Virginia, Brokerage Firms Keeping Client Ripoff Provisions in Customer Agreements in the Wake of MF Global - Yves Smith - In the wake of the collapse of MF Global, and the evaporation of funds in customer accounts, even ones with no margin lending, investors big and small have become duly concerned about the safety of their funds. For those of you who are not brokerage customers, one of the big achievements of the 1930s security law reforms was their success, up until now, in putting rules in place that protected customer assets. Numerous broker/dealers have failed but their clients’ funds were recovered. Needless to say, old market hands like Jesse have reacted with alarm: One would think that the customers should be paid first out of all MF Global creditors. But I suspect that where it is possible, their loss will be subordinated to the unsecured creditors like JPM who have a powerful influence with this Trustee and the courts. The customers of consequence, like the Koch brothers, appear to have been tipped off weeks in advance.  This is the perversity of law without justice. If that happens, then nothing is safe. If a customer in cash and Treasuries can be robbed, and then be made to stand in line with unsecured creditors, then your 401(k)s are not savings but loans to the custodians of your plans.  Now may be the time to exit all arrangements not specifically guaranteed directly by the government, and bring your money home. If they steal from one unpunished, they can steal from any and all almost at will. You are not an insider, and there is no honor among thieves. You are prey.

MF Global Probe: Congress Presses Rating Firms - Congressional investigators are stepping up their inquiry into how deeply credit-rating companies examined the disastrous bet that sank MF Global Holdings Ltd. and whether the firms overlooked crucial information in their evaluations, according to people familiar with the matter.The chairman of the House Financial Services subcommittee on oversight and investigations sent letters to Moody's Corp. Chief Executive Raymond McDaniel and Standard & Poor's Ratings Services President Douglas Peterson seeking detailed information about the firms' procedures for determining MF Global's credit worthiness. The letters, sent Dec. 27 by Rep. Randy Neugebauer (R., Texas) and reviewed by The Wall Street Journal, show investigators are focusing on whether the rating firms missed signals that MF Global was making overly risky bets on European government bonds.  The letters indicate that government officials plan to delve deep into the decision-making processes at the rating companies in the months and days leading up to MF Global's demise.  The rating firms played a central role in the events that led to MF Global's sudden downfall. In late October, the firms downgraded MF Global's credit ratings amid rising concerns about the European bet, helping trigger a run on the firm that eventually led to its Oct. 31 bankruptcy filing.

MF Global Inquiry Turns to Its Primary Regulator - Federal authorities investigating the collapse of MF Global have expanded their inquiry to include the actions of the CME Group, the operator of the main exchange where the commodities brokerage firm conducted business, according to people briefed on the matter.CME, which also served as MF Global’s primary regulator, has come under heavy criticism after $1.2 billion in customer money disappeared from MF Global. The Commodity Futures Trading Commission, the government agency leading the case, is scrutinizing CME’s conduct in the days before MF Global filed for bankruptcy on Oct. 31. In particular, the commission is reviewing whether CME’s efforts to verify the safety of customer money were sufficient, the people said. CME, for its part, has said that MF Global may have intentionally produced inaccurate documents related to customer accounts. If the federal regulator finds that CME did not meet the standards of so-called self-regulatory organizations, it could fine or sanction the exchange. The commission could also revoke CME’s status as a self-regulator, though that is unlikely. Experts say it is rare for the government to hand down any manner of sanction against a self-regulatory body.

SEC: Yes, Banks WILL Still Be Able To ‘Neither Confirm Nor Deny’ Wrongdoing  - The SEC issued a statement today that's been jumped on by some outlets as a major policy change in how the agency settles complaints.  Turns out, it's mostly semantics. In the statement, SEC enforcement director Robert Khuzami said the SEC's new policy will be to drop "neither confirm nor deny" language only when a defendant has already admitted guilt in a criminal case. NCND will remain in use for settlements involving civil liability.  "This policy change does not affect our traditional 'neither admit nor deny' approach in settlements that do not involve criminal convictions or admissions of criminal law violations," he said. The goal of the change is to eliminate confusion about the language applying to cases involving parallel criminal and civil complaints. Khuzami says it will apply only to a minority of cases, and will not affect the agency's appeal of Judge Jed Rakoff's November Citigroup decision.

Bank of America severing some small-business credit lines - Bank of America Corp., under pressure to raise capital and cut risks, is severing lines of credit to some small-business owners who have used them to stay afloat. The Charlotte, N.C., bank is demanding that these customers pay off their credit line balances all at once instead of making monthly payments. If they can't pay in full, they are being offered new repayment plans for as long as five years, but with far higher interest rates than their original credit lines had. Business owners complain that BofA's credit squeeze is abrupt and could strain their small companies and even put them out of business. The credit cutoff is coming at a time when the California economy can't seem to catch a break, and bucks what the financial industry says is a new trend of easing standards on business loans. One such customer, Babak Zahabizadeh, was told in a letter that the $96,000 debt carried by his Burbank messenger service must be repaid Jan. 25. A loan officer offered multiple alternatives over the phone that Zahabizadeh called unaffordable, including paying off the debt at 12% interest over two years. That's about $4,500 a month, nearly 10 times his current interest-only payment.

More Awful PR For Bank Of America As They Start Cutting Off Credit To Mom And Pop - Apparently Bank of America has totally given up on winning hearts and minds.  Because according the L.A. Times, the embattled bank is cutting off credit to small businesses in droves — maybe even in the hundreds of thousands. Take, for instance, Babak Zahabizadeh, the owner of a Burbank, California messaging service. He was told in a letter that he needed to pay off his $96,000 loan by January 25th or (another option) he could pay it off in 2 years at a 12% interest rate. That would make his payment 10 times his current payment. Zahabizadeh said he was not notified beforehand of the changes to his loan. Bank of America, on the other hand, said they started informing affected customers as early as 2010.All that aside, this story simply looks awful. And it looks even worse in the midst of a series of recent Bank of America fails:

• There was that story about BofA harassing a little old lady about her deceased husband's debt.
• There was the $335 million they agreed to pay out to settle a Department of Justice suit against Countrywide (Countrywide was discriminating against black and Latino clients by forcing them to pay higher rates).
• And, of course, the 22 year old who protested BofA's proposed debit card fees by cutting up her card on video.

Maryland Courts Require More Proof in Debt Collection Cases, Ringing in Some Debt Collection Cheer - In many states, a creditor or debt collector can easily obtain a default judgment with just a person’s name, last known address and Social Security number, and the judgment can follow the person around for years despite that the debt was never proven. Due to a flood of uncontested debt collection cases in Maryland, its high court has just ruled that for all cases filed on or after January 20, 2012, collectors and creditors must produce actual proof that the debtor incurred the debt. This can be done by producing a copy of a signed bill or contract, or other evidence of the debt. Debt buyers also must prove they actual hold the debt through a valid purchase, a common stumbling block for collecting debt buyers. In making this decision, the Maryland Court of Appeals (which is Maryland’s high court) took into consideration that many cases end in default judgments, a problem Nationwide. The decision also evidences a distrust of those pesky (often fraudulent) affidavits. Let’s hope other states decide to follow suit and put collectors to their proof.

More Bank Chicanery: Double Charging on Escrow Fees - As we have reported repeatedly, based on independent reports from numerous consumer attorneys and investors, servicer engage in numerous form of petty larceny which they pass off as “mistakes” when caught out. The problem with this excuse is that servicers are set up to be highly routinized environments, so any reasonably widespread error is not a mistake, but policy. However, it is remarkably difficult for borrowers to get servicer internal records, even in litigation, and even then, borrowers need to incur considerable costs (as in hire an expert witness) to dispute the accuracy of the bank’s charges. Despite the general “missing in action” posture of bank regulators, one office has taken a tough stance of abuses, namely, the US Bankruptcy Trustee. A New York Post story by Catherine Curran reports that the Trustee is investigating double dipping in the New York City area by Wells Fargo and GMAC (now Ally). Borrower attorneys contend this practice is common at all servicers: Many homeowners opt to pay part of their property taxes and homeowners insurance with their mortgage every month. The funds are then put into an escrow account and used to periodically pay the taxes and insurance. But after falling behind on a few payments, troubled borrowers in Chapter 13 often find that their bank or mortgage servicer tries to collect twice on the escrow funds — once as part of the overall mortgage payment, and again as a separate “escrow shortage” charge. The average double charge is about $2,000, said forensic accountant Jay Patterson of Full Disclosure in Arkansas, who sees escrow issues in half the cases he examines.

Buy Here Pay Here Dealerships - The LA Times did a three-part series this fall on what they call "Buy Here Pay Here" car dealerships. (Here is Part One, Part Two, and Part Three). The name, which was new to me, comes from a common requirement that customers return to the lot to make their loan payments. The high-interest-rate loans are usually for aging, high-mileage vehicles to people with ragged credit. The idea of the "pay here" is to provide ample opportunity for dealers to keep track of the car's--and customer's--whereabouts and to increase the likelihood of repayment by customers. One year ago (almost to the day), Credit Slips discussed the repossession rates for auto title loans. Unlike buy here/pay here, auto title loans are not to purchase a car but require a person to pledge their car's ownership if a loan is not paid back. Adam Levitin came up with an estimated rate of 14-18% for repossession on auto title loans but emphasized how difficult it was to get such data. Surprisingly to me, the LA Times managed to get the buy here/pay here industry to not just share--but to gloat--about how this business model works. The key data: 1)  About 1 in 4 buyers default. 2) The dealerships make an average profit of 38% on each sale, more than double the profit margin of conventional retail car chains.But the sale of the car is what has helped Buy Here Pay Here dealerships largely elude regulation or enforcement activity. Most states have no special rules for these dealerships, unlike for auto title loans, which several states ban outright.

The CFPB Gets a Director - The CFPB is finally getting a Director, which enables it to exercise its full range of powers. It's good to see this Administration show some backbone. Better late than never, I guess, and Rich Cordray is a great pick. While this is a step forward, I worry that the CFPB and Director Cordray will feel that they have to walk on eggshells so as not to rile Congressional Republicans and draw continued scrutiny. There's a fine line that the CFPB will have to navigate in terms of what fights to pick--there are some fights it needs to have and some that are better to avoid to live to fight another day, but I'm happy to see this as the new problem for the CFPB.   

Obama to Make Recess Appointment of Richard Cordray to Head Consumer Financial Protection Bureau -  Yves Smith - I have not seen this hit the news wires, but got this via Lisa Epstein, in turn from Our Financial Security, which is part of the Center for American Progress, which is a heavyweight Democrat think tank. This move raises the obvious question: why didn’t Obama make a recess appointment of Elizabeth Warren, either back in the day when she was the de facto head, or after getting her out of the limelight for a bit (so that the Republicans would be less likely, as turned out to be the case, to engage in procedural gamesmanship to thwart a recess installation)? We had discusses this at the time, but the major reasons seemed to be: 1. Obama was never going to do anything that would seriously ruffle the banks, given that that they are a major source of campaign funds; 2. Even if Obama had a weak moment in which he was tempted to ignore consideration 1 (as in Warren might persuade banks that what was good for consumers might be good for them too), an Warren appointment would be over Geithner’s dead body, and Obama was and is dependent on Geithner; and 3. Having Warren run for the Scott Brown seat is useful to the Dems (the Dems lacked a really strong alternative in Mass, she pulls money from other Republican campaigns, and she is likely to become a largely non-threatening ornament).  Regardless of the motives, this move proves yet again what Obama’s real priorities are, and they ain’t you and me. Cordray was opportunistic in his anti-bank moves in Ohio and is no substitute for Warren.

No More Mr. Nice Obama - There’s a common and compelling logic to President Obama’s recess appointments today of Richard Cordray to head the Consumer Financial Protection Board and of three appointees to the National Labor Relations Board. In the case of both boards, the appointments were necessary if the boards were to function at al—the very reason that Senate Republicans had made clear their determination to appoint nobody at all to the two boards.  In December, Republicans filibustered Cordray’s nomination, stating clearly that they had nothing in particular against Cordray but were opposed to the existence of the board itself, which had come into being as part of the Dodd-Frank Financial Reform Act passed by Congress in 2010. Lacking the votes to repeal the act, Republicans chose instead to kill the board by refusing to confirm a director, without which the board could not fully, or even substantially, function.

Who is Richard Cordray, and what is he going to do? — Cordray first entered public office as a Democratic politician, serving one term as a Ohio state representative in the early 1990s before being redistricted out of office. But he rebounded to serve as treasurer and then attorney general of Ohio — and that’s where he built his reputation as one of the nation’s leading consumer advocates.  As attorney general, Cordray aggressively pursued lawsuits³ against some of the country’s biggest financial firms — including AIG, Bank of America and Fannie Mae — for misleading⁴ the state’s pension funds, ultimately securing a $700 million settlement from AIG over accounting fraud. He also led an early effort to go after so-called “foreclosure mills” that used falsified documents to speed up foreclosures on consumers, suing⁵ Ally Financial in 2010 and campaigning for big banks to slow down their own foreclosure proceedings. “We pursued many actions against foreclosure rescue scammers who were reaching into the pockets of desperate people in an effort to steal what little remained as they sought to keep their homes,” Cordray told the Senate banking committee in September.

Standing up for consumers - Richard Cordray - Today, I was appointed by President Obama to serve as the first Director of the Consumer Financial Protection Bureau. I am honored by this opportunity to continue my work on behalf of consumers. And I am energized by the responsibilities and challenges facing the Bureau. The importance of this day has less to do with me personally and much more to do with you – and the millions of individuals and families across the country who access consumer financial markets every day to participate in our economy and to pursue their dreams and aspirations. That’s because now, with a Director, the CFPB can exercise its full authorities – with respect to both banks and nonbanks – to help those markets operate fairly, transparently, and competitively.

Recess Appointments: Why Now? - On the news today that Obama will make a recess appointment to Richard Cordray to Head CFPB, Yves Smith says:Obama to Make Recess Appointment of Richard Cordray to Head Consumer Financial Protection Bureau: ...This move raises the obvious question: why didn’t Obama make a recess appointment of Elizabeth Warren...? ... I'd guess the administration would argue that the GOP hadn't yet crossed over some threshold of intransigence, this was part of a more general reelection strategy (plans to make three recess appointments to the NLRB were also announced), the political opportunity wasn't right, or something like that. But it's a good question -- why now instead of then (a question that can also be asked about Peter Diamond's nomination to the Federal reserve Board of Governors)? What it says to me is all that matters is Obama's reelection (see, for example, the pivot to deficit reduction) -- when the timing's right for that, things will happen -- but don't keep your fingers crossed otherwise. If you are unemployed and struggling, the president will try to help if it also helps him get reelected, but helping because it's the right thing to do? Not likely.

Obama Recess-Appointing Only in Dire Circumstances - I think we have found the unifying thread on the President’s recess appointments yesterday. He did not decide to make appointments on key financial regulatory positions, like OCC or FDIC or the Federal Reserve, and some worry that those nominees will now get blocked from confirmation as a result, though they are seen as uncontroversial. The President reserves the right to make those appointments later, but if he’s fed up with Senate obstructionism, why not rip the band-aid off now? The reason is pretty clear. The President is making a distinction between nominees who the various agencies can do without for a spell and nominees whose seating is crucial to the functioning of the agency. The CFPB would not have full regulatory powers without a seated director, including the ability to regulate non-bank financial institutions. Some conservatives are making the argument that a reading of the Dodd-Frank law, which birthed the CFPB, demands that said director be confirmed by the Senate, but that impression is created through the sin of omission, and while the argument may be possible colorable, it’s highly unlikely that a judge would make a distinction between a recess and a regular-order appointment in that matter. So CFPB activates its non-bank authority through the seating of Richard Cordray.

Cordray moves forward despite appointment challenges —Newly installed Consumer Financial Protection Bureau director Richard Cordray ¹laid out his agenda Thursday, vowing to press ahead despite political objections and legal questions about his status as a recess appointee. “It’s a valid appointment. I’m now the director of the bureau. . . . We now have our full authority to move forward,” Cordray said in his first public speech as the agency’s director, a day after President Obama used a recess appointment ²to bypass Republicans who had blocked Cordray’s confirmation in the Senate. “The most important thing is to keep our nose to the grindstone and keep doing our work,” Cordray said in remarks at the Brookings Institution. “We will prove our own case, both to people who represent the public and to the public at large.”  As for the legal questions about his appointment — which Obama put through in less than 10 days of congressional recess, breaking with precedent — Cordray said he would “leave the details to others.”

GE Leading Borrowers as $620 Billion Comes Due: Credit Markets - General Electric Co. and Ally Financial Inc. lead U.S companies that have $620 billion of bonds and loans coming due in 2012 as borrowing costs start to rise from record lows with the economy strengthening. GE, the world's largest maker of jet engines, faces $78.7 billion of notes maturing in 2012, the most of any U.S. company, according to data compiled by Bloomberg. Detroit-based Ally has $11.7 billion that needs to be repaid, the largest requirement of any speculative-grade issuer. Borrowers must refinance $498 billion of debt in 2013 and $505 billion in 2014, Bloomberg data show.  Detroit-based Ally has $11.7 billion that needs to be repaid, the largest requirement of any speculative-grade issuer. Borrowers must refinance $498 billion of debt in 2013 and $505 billion in 2014, Bloomberg data show.

Inside a Banker’s Mind - Isn’t it great that Occupy Wall Street is pretty much over? Though the truth is in some ways, they did us a favor. You know how a magician will gesture wildly with his left hand so you ignore what he’s doing with his right? Well, Occupy was like the magician’s left hand. We need people to ignore what’s happening in Washington—the magician’s right hand--and because people are more interested in demonstrations than the details of government, they’re overlooked what really counts. And, unlike the magician, we didn’t even have to do anything to make it happen. It’s as if the audience distracted itself. Plus, the occasional bad behavior of the Occupy folks and second-guessing the authorities shifted attention from us too. What matters, of course, is that we pull the fangs of the Dodd-Frank Act. Take the Consumer Financial Protection Bureau. If it makes good on the goal of protecting consumers—from us--it may reduce our profits. So far, though, the strategy that we and Congressional Republicans are pursuing to cripple it is working beautifully, and most people haven’t even noticed.

Did Psychopaths Take Over Wall Street Asylum? - It took a relatively obscure former British academic to propagate a theory of the financial crisis that would confirm what many people suspected all along: The “corporate psychopaths” at the helm of our financial institutions are to blame. Clive R. Boddy, most recently a professor at Nottingham Trent University, says psychopaths are the 1 percent of “people who, perhaps due to physical factors to do with abnormal brain connectivity and chemistry” lack a “conscience, have few emotions and display an inability to have any feelings, sympathy or empathy for other people.” As a result, Boddy argues in a recent issue of the Journal of Business Ethics, such people are “extraordinarily cold, much more calculating and ruthless towards others than most people are and therefore a menace to the companies they work for and to society.” How do people with such obvious personality flaws make it to the top of seemingly successful corporations? Boddy says psychopaths take advantage of the “relative chaotic nature of the modern corporation,” including “rapid change, constant renewal” and high turnover of “key personnel.” Such circumstances allow them to ascend through a combination of “charm” and “charisma,” which makes “their behaviour invisible” and “makes them appear normal and even to be ideal leaders.”

Exposing American Banks' Multi-Trillion Umbilical Cord With Europe - One of the reports making the rounds today is a previously little-known academic presentation by Princeton University economist Hyun Song Shin, given in November, titled "Global Banking Glut and Loan Risk Premium" whose conclusion as recently reported by the Washington Post is that "European banks have played a much bigger role in the U.S. economy than has been generally thought — and could do a lot more damage than expected as they pull back." Apparently the fact that in an age of peak globalization where every bank's assets are every other banks liabilities and so forth in what is an infinite daisy chain of counterparty exposure, something we have been warning about for years, it is news that the US is not immune to Europe's banks crashing and burning. The same Europe which as Bridgewater described yesterday as follows: "You've got insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks." In other words, trillions (about $3 trillion to be exact) in exposure to Europe hangs in the balance on the insolvency continent's perpetuation of a ponzi by a set of insolvent nations, backstopping their insolvent banks.

Goldman's Latest Boiler-Room Stock: America - Taibbi - It seems Jim O'Neill, the head of Goldman's Asset Management department, is predicting that the United States stock market may go up "15 to 20 percent." O'Neill apparently believes Ben Bernanke and the Federal Reserve will resort to another round of money-printing, and finally green-light the long-awaited "Qe3," or third round of "Quantitative Easing." The QE programs involve the Fed printing hundreds of billions of dollars and pumping them into the marketplace, where they ostensibly stimulate the economy (although recent experience tells us that the money mostly ends up being swallowed by the financial services industry). Anyway, Bernanke declined to go ahead with a third QE program in late 2011, but O'Neill apparently thinks we'll get it in 2012. From Bloomberg: "If QE2 doesn’t work, then we’ll get QE3," said O’Neill, who was named chairman of the money manager in September after working as the co-head of global economics research and chief currency economist at New York-based Goldman Sachs Group Inc. since 1995. There’s a "good chance" the S&P 500 will rise 15 percent to 20 percent in the next 12 months, he said. Goldman is building an impressive resume of sweepingly bullish predictions that later on, in retrospect, look more like signals to investors that they should run screaming in the opposite direction.

What will give U.S. bankers ulcers in 2012 - Despite the ongoing economic slump and warnings of burdensome new regulations, the U.S. financial system remained surprisingly robust and resilient through the end of 2011 — in no small part because of the havoc that the Euro crisis wreaked upon other countries. In 2012, the big fights over regulation at home and the Euromess abroad will continue to be front and center, and U.S. financial institutions will largely remain on the defensive. Here are three key issues that will be at stake in the early months of this year:
1) Can Europe pull back from the brink? The fate of the Eurozone will continue to be the most single important factor affecting the global economy and the U.S. financial system. For the moment, Europe doesn’t appear to be headed off a cliff. But everyone will be watching to see if the latest interventions, austerity promises and lending will be enough to restore confidence and liquidity to the continent.
2) What will happen to the most unwieldy, controversial new bank regulation? When it comes to Dodd-Frank, there’s little that concerns U.S. banks more than the Volcker Rule. It’s meant to curb speculative bets that banks make for their own benefit — known as “proprietary trading” — rather than that of their customers. But those in the finance community warn that this could make lending far more difficult.
3) Will Congress pitch another fit over the debt-ceiling and the payroll tax? In principle, both of these should be non-issues on Capitol Hill.  But the same conservative Republicans who led the backlash against these measures in 2011 can be expected to do so, to some degree, in 2012.

REPORT: RBS Axing Up To 10,000 Jobs From Its Investment Bank - Yesterday, we learned that RBS was in the process of making some major cuts to its investment banking division.  But the details were limited. Now the Financial Times' Patrick Jenkins, Sharlene Goff and Anousha Sakoui report these cuts could include slashing up to 10,000 jobs. The cuts are expected to focus on RBS’s equities business, which has failed to compete in the upper rankings of the industry. This division generated just £623m of the £5bn of revenue produced by the investment bank in the first nine months of last year. One person familiar with the bank’s plan said it was preparing to exit the cash equities business entirely and may also withdraw from equity derivatives, mergers and acquisitions advisory and shrink its structured credit and interest rates business. That would leave RBS’s investment bank – which employs 19,000 staff – barely half its current size, with remaining strengths in debt capital markets, foreign exchange and interest rates, albeit in shrunk form. Read the whole report at FT.com >

MBIA Wins Judgment Ruling Against Countrywide -- Bank of America Corp. lost a ruling in a court fight against MBIA that will help the bond insurer as it tries to recover losses on home loans made by the bank’s Countrywide Financial unit.  MBIA, which says it was duped into guaranteeing payment on Countrywide mortgage bonds, needs only to show the lender made misrepresentations about the loans backing the bonds, instead of establishing they caused the losses the insurer is seeking to recover, New York state Judge Eileen Bransten said in a decision issued today.  “No basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy,” she wrote.  The ruling is among legal disputes with bond insurers and investors that “could significantly impact” the potential costs from loans made before the collapse of the U.S. housing market in 2008, Bank of America said in a regulatory filing in August.  Defeats on such matters may add as much as $9 billion to what Bank of America owes bond insurers, according to an August estimate by hedge fund Branch Hill Capital, which has bet against the lender’s stock and has invested in MBIA.

Win for MBIA in Ruling Against Countrywide (Updated: Maybe Not Really) - Yves Smith - Bloomberg reports that Countrywide took a major setback in a suit against it by bond insurer MBIA. MBIA has alleged (quelle surprise!) that Country misrepresented the quality of loans it had MBIA guarantee. From Bloomberg: Bank of America Corp. (BAC) lost a court fight against MBIA Inc. (MBI) over the hurdles the bond insurer will have to clear in a lawsuit seeking to force the bank to buy back faulty home loans made by its Countrywide Financial unit. I’m no lawyer, but I find this ruling puzzling, and I expect Bank of America to appeal it. If you are suing someone, you not only have to establish that you did something wrong, but you also need to establish that you were damaged and come up with some sort of basis for arguing how badly you were damaged. Reader MBS Guy has read both rulings, and I will turn the mike over to him: Have read this through finally, and I would conclude it is not the victory it is made out to be.  However, here’s how I see it: with respect to MBIA’s common law and NY State Insurance Law fraud claims, the judge rules that MBIA does not need to prove that a direct causal link between the alleged misrepresentations and the loss MBIA suffered. However, the judge notes that MBIA’s burden remains quite high: (1) MBIA must prove that the misrepresentations were material to MBIA’s decision to enter the policies (and that the misrepresentations occurred), (2) that MBIA relied on the information misrepresented, (3) that it would not have issued the policy if not for the alleged misrepresentations, (4) that the alleged misrepresentations materially increased MBIA’s risk, and (5) that MBIA was damaged as a direct result of the material misrepresentations. Then MBIA must prove the amount of its damages.

JPMorgan Chase Sued For $95 Million Over Allegedly Misrepresenting Mortgage Loans - JPMorgan Chase & Co has been sued for $95 million by the trustee for securities marketed in 2005 by the former Bear Stearns Cos over alleged misrepresentations regarding the underlying mortgage loans. US Bank NA wants to force JPMorgan to buy back the mortgage loans because of alleged breaches of representations and warranties regarding the Bear Stearns Asset Backed Securities Trust 2005-4, for which it serves as trustee. It also said JPMorgan has refused to provide the underlying loan, as the trust documents require, so it can investigate the extent of the alleged breaches. The unit of US Bancorp said it made its request at the direction of a majority certificate holder in the trust. US Bank also sued Bear Stearns and its former EMC Mortgage Corp unit. JPMorgan bought Bear Stearns in 2008. A JPMorgan spokeswoman did not immediately respond to requests for comment. The lawsuit was filed on Friday in the New York State Supreme Court in Manhattan, and publicly docketed on Tuesday.

Reis: Office Vacancy Rate declines slightly in Q4 to 17.3% -- From Reuters: Office vacancies fell in Q4 as rents rose: Reis The vacancy rate dipped to 17.3 percent in the quarter from 17.4 percent in the third quarter and 17.6 percent at the end of 2010, Reis said. ... effective rents ... rose 0.5 percent ... Some 12.3 million square feet of new office space came to market last year, it said, the lowest such level in 15 years. This graph shows the office vacancy rate starting in 1991. Reis is reporting the vacancy rate declined to 17.3% in Q4, down from 17.4% in Q3. The vacancy rate was at a cycle high of 17.6% in Q3 and Q4 2010. It appears the office vacancy rate peaked in 2010 and is declining very slowly.  As Reis noted, there are very few new office buildings being built in the US, and new construction will probably stay low for several years.

The Most Important Set of Graphics You'll Find in a BIS Speech - I'm still in catch-up mode, but I keep coming back to this presentation (PDF)—four times now. It's a speech by BoJ member Masaaki Shirakawa in Tokyo on the 22nd of December last year to the Board of Councillors of Nippon Keidanren (Japan Business Federation), entitled "Globalization and population aging - challenges facing Japan." Go through the whole thing, but—most especially for U.S. readers—Chart 5. Pay especial attention to Bank Lending and Housing Prices. Then Riddle Me This, as it were: If U.S. housing prices are stable or basically plateaued overall, then there isn't a growing decline in credit quality from that sector (the way there was in Japan over the comparable period). So why is bank lending in the U.S. so low and going lower?

A New Theory of the Role of the GSEs in the Housing Bubble -- Bill Black has an interesting new take on the role of Fannie and Freddie in the housing bubble. He sees their investment in non-prime mortgages as being driven by executive compensation, rather than a fight for market share against investment bank securitization conduits or govt affordable housing policy. The government affordable housing policy point has been repeatedly debunked. Black is not, however, able to disprove the market share theory. What he does point to is that the GSE's involvement with nonprime mortgages was as whole loans kept in portfolio, rather than securitized (and also via purchases of MBS), which he says was a move to increase the short-term yield for the GSEs and thus maximize short-term executive compensation. I think this is an interesting theory, but there are a few data points necessary to make it work, and I'm skeptical that they all support Black.   He argues that Fannie and Freddie first tried to goose their returns by increasing the size of their whole loan portfolios and thus taking on massive interest rate risk. Fannie bet the wrong direction on interest rates and this resulted in the Fannie accounting scandal as it tried to cover up its losses. Freddie got the bet right, but then tried to set up a "cookie jar" to cover future losses in order to inflate future earnings. The SEC was having none of it, and forced out the CEOs and mandated accounting restatements. In the wake of these scandals, OFHEO (the GSE's regulator) made the GSEs limit their hedging activities and reduce the size of their portfolios.  

Choice words from William Black -- He writes: If one had to pick one person in the private sector most responsible for causing the global financial crisis it would be Wallison.  As I explained, he is the person, who with the aid of industry funding, who has pushed the longest and the hardest for the three “de’s.”  It was the three “de’s” combined with modern executive and professional compensation that created the intensely criminogenic environments that have caused our recurrent, intensifying crises.  He complained during the build-up to the crisis that Fannie and Freddie weren’t purchasing more affordable housing loans.  He now claims that it was Fannie and Freddie’s purchase of affordable housing loans that caused the crisis.  He ignores the massive accounting control fraud epidemics and resulting crises that his policies generate.  Upon reading that Fannie and Freddie’s controlling officers purchased the loans as part of a fraud, he asserts that the suit (which refutes his claims) proves his claims. The piece is long, but worth reading in its entirety.

How small-time house-flippers made the housing bubble much worse - An old pearl of wisdom from the Great Depression held that investors should have known it was time to sell when shoeshine boys started handing out stock tips. Until this past week, I thought of the house-flipping craze of the mid-aughts in the same light. The fact that there were enough speculative, small-time investors in house prices that A&E turned it into a reality show was surely a sign of a market out of control. But what I didn’t realize was that, unlike the shoe-shine tipsters of the ’20s, house-flippers were actually driving the price explosion. New research from the Federal Reserve Bank of New York indicates that flippers were in fact sufficiently numerous and active to make a major impact on prices, and that these facts have interesting implications for both monetary policy and bank regulation in the future.  The data let us see that the growth of house prices in the first half of the aughts was closely associated with a sharp rise in the number of people owning multiple homes. In 2000, only 20 percent of mortgages were going to multiple mortgage holders and 75 percent of those were for second houses. By 2006, 35 percent of mortgages were multiples and more than 5 percent of all loans were going to people with four or more mortgages.

Bailout concerns mounting for federal housing agency - Concerns are growing that the Federal Housing Administration will need to be bailed out by taxpayers. The agency's latest monthly outlook report revealed a spike in serious delinquencies for FHA-insured loans, posing a further threat to the agency's already depleted cash reserves. According to the report, the percentage of loans in the FHA's portfolio with three missed payments or more rose to 9.3% in November, up from 8.4% in August. In November, an independent audit of the FHA's finances found that losses from mortgage defaults had depleted the agency's reserve fund to 0.24%, or $2.6 billion, during fiscal 2011 -- well below the Congressionally-mandated 2% level. (The ratio measures the net worth of the reserve fund compared with the value of the loans FHA has insured.) In 2006, the reserve fund stood at 7%.  At the time, the agency's auditor warned that if home prices continued to drop, FHA could run through the remainder of its reserves, forcing it to either seek a bailout from the Treasury Department or further increase the premiums it charges borrowers. The FHA doesn't issue mortgages, but instead insures lenders against defaults. 

Quelle Surprise! Banks Plan to Fob off Some of the Costs of Multi-State Mortgage Settlement on Investors - Yves Smith - Never underestimate the ability of banks to find new and creative ways to steal. The latest brazen scheme comes in a report from the Financial Times on the current state of play on the so-called multi-state mortgage settlement negotiations. Readers may recall that even though a nominal settlement total of $25 billionish has been bandied about for some time, comparatively little of that is to be in cash. The bulk of the amount is to come from credits for principal modifications.  We’ve said this is patently inadequate, since the damage done by servicer driven foreclosures (something yet to be dimensioned adequately), bogus charges to investors, and damage to land records goes way beyond the amount under discussion. Catherine Masto of Nevada got somewhere between $27,000 and $57,000 per homeowner from one servicer, Saxon, which puts the amounts being discussed here to shame. And even though we took issue with how the CFBP came up with its math, it went through an exercise intended to determine how much the servicers should pay as disgorgement. The amount they should pay for damages has never been estimated, and by any logic should be considerably larger. But not only are they not going to pay enough, and not much in hard money, the banks are now trying to shift the cost of their settlement on to investors.

Fed White Paper: "The U.S. Housing Market: Current Conditions and Policy Considerations" - From the Federal Reserve: The U.S. Housing Market: Current Conditions and Policy Considerations. Excerpt on converting REO to rental units:  At the same time that housing demand has weakened, the number of homes for sale is elevated relative to historical norms, due in large part to the swollen inventory of homes held by banks, guarantors, and servicers after completion of foreclosure proceedings. These properties are often called real estate owned, or REO, properties. The combination of weak demand and elevated supply has put substantial downward pressure on house prices, and the continued flow of new REO properties--perhaps as high as 1 million properties per year in 2012 and 2013--will continue to weigh on house prices for some time. In contrast to the market for owner-occupied houses, the market for rental housing across the nation has recently strengthened somewhat. Rents have turned up in the past year, and the national vacancy rate on multifamily rental properties has dropped noticeably from its peak in late 2009. Although small investors are currently buying and converting foreclosed properties to rental units on a limited scale, larger-scale conversions have not occurred for at least three interrelated reasons.

Fed offers remedies for US housing market - The US Federal Reserve has offered policymakers about a dozen ideas on how to aid the ailing US property market, warning that if no action is taken, home prices will continue to slump and restrain the current economic recovery.The Fed’s proposals were delivered on Wednesday to the heads of the financial services committees in Congress. In a letter accompanying the report, Ben Bernanke, Fed chairman, told lawmakers that the paper’s goal was to provide legislators with a “framework for thinking about certain issues and trade-offs that policymakers might consider”. Among the ideas is forming a national strategy to facilitate the conversion of foreclosed properties into rentals; allowing banks to rent their repossessed homes rather than forcing lenders to sell them; changing the compensation structure for mortgage servicers, companies that collect payments from borrowers and pursue foreclosures in the event of a default; creating a national online registry of liens to track ownership interests; and altering existing Obama administration policies to allow for more refinancings and mortgage restructurings. Investors would suffer reduced losses, banks would save money, and more homeowners would either get to keep their homes or move into more affordable housing if the Fed’s suggestions were adopted, the central bank says. “The ongoing problems in the US housing market continue to impede the economic recovery,” the Fed said. But, it added, “there is scope for policymakers to take action ... that could ease some of the pressures afflicting the housing market”.

The Fed's Advice on the Housing Crisis - The Federal Reserve tried Wednesday to stir interest among policy makers in the problems afflicting the housing market, sending a white paper to Congress outlining suggestions for easing those problems. The paper makes two basic points: 1. There are no silver bullets. 2. It certainly would be helpful if Fannie Mae and Freddie Mac, which are controlled by the government, gave the health of the housing market greater priority than their own short-term financial condition. The Fed is concerned that the collapse of mortgage lending during the financial crisis is hardening into “a potentially long-term downshift in the supply of mortgage credit.” One reason for this, the paper says, is that Fannie and Freddie, which provide the money for most mortgage loans, are scaring lenders by aggressively seeking refunds on defaulted loans. The policy helps Fannie and Freddie “maximize their profits on old business and thus limits draws on the U.S. Treasury, but at the same time, it discourages lenders from originating new mortgages,” the paper says. In a similar vein, the paper says that Fannie and Freddie — known as government-sponsored enterprises, or G.S.E.’s — have pushed to resell foreclosed properties even when converting properties into rental units makes more sense. The paper calculates that for two-fifths of the properties owned by Fannie Mae, renting could actually reduce its losses.

Fed White Paper discusses REO-to-Rental Program, says Further Modification of HAMP Would "involve additional taxpayer funding, overriding private contract rights" - Inquiring minds are digging into a Fed white paper regarding The U.S. Housing Market: Current Conditions and Policy Considerations. Here are a couple of key snips. Broadly speaking, HAMP emphasizes modifications in which the net present value to the lender of the modification exceeds the net present value of pursuing a foreclosure. However, although policymakers might very well decide that the social costs--while obviously difficult to gauge--are great enough to justify additional loan modifications, lenders are unlikely to be willing to make such modifications on their own. Moving further in this direction is thus likely to involve additional taxpayer funding, the overriding of private contract rights, or both, which raises difficult public policy issues and tradeoffs.  REO to Rental Program Design The data cited earlier suggest that a government-facilitated REO-to-rental program has the potential to help the housing market and improve loss recoveries on REO portfolios. The FHFA released a request for information on August 10, 2011, to collect information from market participants on possible ways to accomplish this objective and received more than 4,000 responses. An interagency group in which the Federal Reserve is participating is considering issues related to the design of a program that would facilitate REO-to-rental conversions.

Ben Bernanke Offers A Game-Changing Recommendation For The Housing Industry: A white paper (via @carney) sent from Ben Bernanke to the chairs of the Senate and House committees of banking and financial services and released today is not just a subtle nudge at Congress to do something to address lingering weakness in the housing industry. For the generally tight-lipped Federal Reserve, this sounds a lot like a call to action. In the release, the Fed suggests that the government find a way to convert a significant segment of the stock of real estate owned properties (REOs)—essentially, properties held by banks or other institutions after foreclosure—into rentals. While it refrains from making specific policy recommendations, it emphasizes the importance of doing something to help bear the burden of reviving the housing industry. The challenge for policymakers is to find ways to help reconcile the existing size and mix of the housing stock and the current environment for housing finance. Fundamentally, such measures involve adapting the existing housing stock to the prevailing tight mortgage lending conditions--for example, devising policies that could help facilitate the conversion of foreclosed properties to rental properties--or supporting a housing finance regime that is less restrictive than today’s, while steering clear of the lax standards that emerged during the last decade. In fact, it goes so far at to suggest that the government could screw up the recovery if it doesn't start supporting such housing initiatives:

Ben Bernanke's Solution To The Housing Crisis: Renting Foreclosed Homes: While millions of foreclosed homes languish on the market at lower and lower prices, new data supports the idea that renting out these foreclosed homes could be the long-sought solution to the housing crisis. Rental units are leasing quickly, and the vacancy rate for apartments is at its lowest level in a decade, according to data released Thursday. In many areas, rents are rising. On Wednesday, Federal Reserve Chairman Ben Bernanke got on board, penning a 26-page white paper, arguing that now is an unusually good time to convert foreclosed properties to rental units for three reasons: demand for owner-occupied homes remains low, demand for rental properties is rising, and the problem of banks' continued hesitance to offer mortgages to everyday Americans means that the situation won't change anytime soon. The federal government's recognition of the value of renting foreclosed homes is not entirely new. In August 2011, the Federal Housing Finance Agency, the government body that oversees troubled mortgage giants Fannie Mae and Freddie Mac, requested proposals on how to implement such a program. The agency received over 4,000 responses, and is currently sorting through them as it considers how best to handle Fannie Mae and Freddie Mac's foreclosed properties. The two mortgage companies collectively own roughly half of the nation's foreclosed homes. However, the just-released white paper expands the conversation by identifying obstacles to transitioning foreclosed homes to rental units, challenges that some housing practitioners say are easily surmountable if there is the political will and financial incentive to fix them.

Quelle Surprise! Fed Sees We Have a Big Mortgage Problem - 01/05/2012 - Yves Smith - It certainly is gratifying to see the Board of Governors of the Federal Reserve, via a paper released on Wednesday, “The U.S. Housing Market: Current Conditions and Policy Considerations,” finally acknowledge that US has a mortgage/foreclosure mess that is not going to go away by virtue of QE or other efforts to goose financial asset prices. However, just as the Fed was late to see the global housing bubble (even the Economist was on to it in June 2005), so to is it behind the curve in its take on the housing problem. This paper at best constitutes a good start, when, pace Churchill, the Fed is at the end of the beginning when it really needs to be at the beginning of the end. However, before we get to the housing/mortgage market issues, we wanted to focus on a political element of the paper which may be more important that its analytical content. The Fed is openly crossing swords with the FHFA.  Although the document is studiedly neutral in its tone, it makes clear in its coded way that it regards the GSE focus on short term loss minimization as destructive (note the Fed is hardly alone in this view). The Fed argues (with some supporting data) that in a lot of cases, converting REOs to rental would be a better policy, although it bizarrely fails to consider the “own to rent” option of keeping the current borrower in place. The paper is also a bit clueless about the realities of managing rental properties.

More Housing Policy - Today Freddie Mac announced it is extending the period for forbearance for unemployed borrowers. That is probably just the beginning of a series of policy announcements. Three Fed officials discussed some possibilities today (see WSJ article below), and some sort of REO to rental program seems likely. The revamped HARP for refinancing is just ramping up. Also the servicer mortgage settlement will probably be announced in the next month or so. It will be a busy month or two for housing policy.  From Freddie Mac: Freddie Mac Now Permits Up To 12 Months Forbearance To Unemployed Borrowers Freddie Mac today announced it is giving mortgage servicers expanded authority to provide six months of forbearance to unemployed borrowers without Freddie Mac's prior approval and up to an additional six months with prior approval. From the WSJ: Three Fed Officials Urge Action to Boost Housing Top Federal Reserve officials ramped up their call for more forceful government action to fix the broken housing market ... "The ongoing weakness in housing has made it more difficult to achieve a vigorous economic recovery," William Dudley, president of the New York Fed, told a bankers' group in Iselin, N.J. "With additional housing policy interventions, we could achieve a better set of economic outcomes."

NY Fed President Dudley Crosses Swords With GSEs and Board of Governors on Housing/Mortgage Mess - Yves Smith - A speech by New York Fed president William Dudley is a bit of a surprise, in that it acknowledges the severity of the deepening mortgage crisis and sets forth some specific policy proposals. I still find these recommendations frustrating, in that they are insufficient given the severity of the problem and also fail to come to grips with widespread servicer abuses (not just servicer driven foreclosures, but also what amounts to theft from investors, via schemes such as double charging fees to borrowers and investors, inflating principal balances, reporting REO as sold months later than the transaction closed, and getting kickbacks on third party charges). But they are more serious than other ideas from senior financial officials. Specifically, the Dudley advocates principal relief via a program of “earned principal reduction” which would allow for put options for all severely underwater borrowers who stay current on their mortgages for three years. But as we will discuss, this proposal is less meaningful than it sounds. It looks at if the NY Fed is trying to provide intellectual leadership in the debate around the housing mess, which given the level of denial and kick the can down the road strategies being offered as alternatives, means this effort stands out in part by virtue of the shoddy alternatives. And this posture put it squarely at odds with the Board of Governors, whose paper published earlier this week pooh-poohs principal writedowns and specifically opposes giving broad scale principal reductions to homeowners with negative equity. One has to wonder whether the Board of Governors paper was released prior to the Dudley speech with the specific aim of undermining it. Similarly, the NY Fed is also in opposition to the GSE’s resistance to offering principal mods, as evidenced by the leak from the mortgage settlement talks, in which the GSEs refused participate in the banks’ scheme to use mods on securitized loans (which would include GSE loans) as a way to reach the settlement target for principal mods.

Fed officials push more help for housing -(Reuters) - Three top Federal Reserve officials aggressively pushed on Friday for more stimulus for the U.S. housing market, saying that other government policymakers as well as the central bank should be looking at ways to help the sector in order to speed the economic recovery. In separate speeches, the Fed officials -- William Dudley, the president of the New York Federal Reserve Bank; Fed Governor Elizabeth Duke; and Eric Rosengren, president of the Boston Fed -- warned that the fragile housing sector threatens to derail a U.S. recovery. Their remarks came even as a robust government jobs report provided fresh evidence that the recovery is gaining. The push for action came two days after the Fed entered the thorny debate over how to use the two main government-run mortgage finance firms, Fannie Mae and Freddie Mac , to turn around the housing market.

Freddie Mac Is Going To Give The Unemployed A Break On Mortgage Payments For Up To A Year: Freddie Mac announced this afternoon that it will allow unemployed Americans up to a 12-month forbearance on their mortgage payments. According to the statement, Freddie Mac will allow mortgage services to extend 6 months of forbearance without approval and up to 12 months with their approval. Freddie Mac says that 10% of delinquencies on its mortgages are tied to unemployment. The new plan takes effect February 1, 2012. Tracy Mooney, an SVP in servicing at Freddie Mac said, "These expanded forbearance periods will provide families facing prolonged periods of unemployment with a greater measure of security by giving them more time to find new employment and resolve their delinquencies. We believe this will put more families back on track to successful long-term Homeownership." The move by the federal agency comes amid increasingly populist rhetoric from the White House.

LPS on Mortgages: "Trend toward fewer loans becoming delinquent has halted" - From LPS Applied Analytics: LPS' Mortgage Monitor Shows Halt in Delinquency Drop; Foreclosure Starts Down in November The November Mortgage Monitor report released by Lender Processing Services, Inc. shows that while mortgage delinquencies at the end of November 2011 were nearly 25 percent less than the January 2010 peak, the trend toward fewer loans becoming delinquent, which dominated 2010 and the first quarter of 2011, appears to have halted. At the same time, new problem loans – those loans seriously delinquent as of the end of November that were current six months prior – have not improved significantly in the last year. According to LPS, 8.15% of mortgages were delinquent in November, up from 7.93% in October, and down from 9.02% in November 2010. LPS reports that 4.16% of mortgages were in the foreclosure process, down from the record 4.29% in October, and up from 4.08% in November 2010. This gives a total of 12.31% delinquent or in foreclosure. It breaks down as:
• 2.33 million loans less than 90 days delinquent.
• 1.81 million loans 90+ days delinquent.
• 2.21 million loans in foreclosure process.
This graph shows the total delinquent and in-foreclosure rates since 1995. The in-foreclosure rate was at 4.16%, down from the record high last month of 4.29%. There are still a large number of loans in this category (about 2.21 million). LPS reported that foreclosure starts were down nearly 30% in November, probably due to process issues.The third graph shows the pipeline ratio (90+ delinquencies and foreclosures, divided by foreclosure sales).

LPS Mortgage Monitor Shows Little Improvement in New Problem Loan Rates, First Time Delinquencies Slowly Rising Since April, Cures to Current Status Decline - The LPS' Mortgage Monitor Report Shows Halt in Delinquency Decline; Foreclosure Starts Down Nearly 30 Percent in November. Via Email ... - The November Mortgage Monitor report released by Lender Processing Services, Inc. hows that while mortgage delinquencies at the end of November 2011 were nearly 25 percent less than the January 2010 peak, the trend toward fewer loans becoming delinquent, which dominated 2010 and the first quarter of 2011, appears to have halted. At the same time, new problem loans - those loans seriously delinquent as of the end of November that were current six months prior - have not improved significantly in the last year. This degree of stagnation indicates that while the situation is not getting markedly worse, it is not improving either, and inventories of troubled loans remain significantly higher than pre-crisis levels across the board. Here are a sampling of charts from the December 2011 Mortgage Performance Observations click on any chart for sharper image

The 18 Best Mortgage Market Charts From 2011

Bank charge of the day, mortgage-payment edition - It makes sense, for lots of reasons, to make your mortgage payment on the day you get paid. Most salaried Americans, however, get paid every two weeks. Which means, to all intents and purposes, that you need to be able to make one mortgage payments out of every two paychecks. And that in turn raises an intriguing possibility: if you take half of your mortgage payment out of every paycheck, you’re going to end up making 13 mortgage payments a year. Which will pay down your mortgage faster, and could save you thousands of dollars.Enter the ever-helpful Citibank, with a product which does just that. It’s called The BiWeekly Advantage Plan®, and it’s essentially an automated mortgage payment, of half your monthly mortgage payment, which comes out of your account every two weeks. Easy. There’s even a Savings Calculator to see how much less money you might be able to end up paying. And then, of course, there’s this: There is a one-time non-refundable enrollment fee of $375 and a transaction fee of $1.50 for each draft. That’s an up-front fee of $375, plus another $39 a year, just for the privilege of making your mortgage payments every two weeks rather than every month.

Principal Write-Down Pilot Program in Massachusetts - A Boston nonprofit, Boston Community Capital, is teaming up with some financial institutions, in particular Bank of America, in a pilot program that has the effect of writing down mortgages to close to home value. BCC says it works with qualifying homeowners and banks to buy underwater homes, either in short sales or at foreclosure, and then sells them back to owners at just above current market value. The nonprofit takes the risk of making the resale and allows those buying back to use their own lender or a mortgage company that BCC works with. BCC is playing a gatekeeping role as far as who qualifies. Also, BCC may have better credibility with distressed homeowners than financial institutions such as B of A do. The pilot is supposed to test whether such a program can be run without promoting “strategic default,” according to the NPR story. Principal write-down is much needed relief to stabilize the housing market and reduce the lose-lose impact of foreclosure, so this is a pilot worth watching. A concern, however, is whether we can trust any reports that come out about it. Also, a supposed fact cited in the NPR story is unattributed and highly doubtful—that 30 percent of private home loan modifications last year involved principal write-down.

The Restatement of Property and the Road to Mortgagocracy - I recently did a string of blog posts of the Permanent Editorial Board for the UCC's Report on the enforcement of negotiable mortgage notes. I'm still planning a final installment there, but I came across another document that just floored me in showing how across another American Law Institute product that just floored me in how deeply captured and compromised part of the legal elite is.   The document in quest is section 5.4(c) from the Restatement (2d) of Property.  The Restatements are an ALI-only product (unlike the UCC, which is jointly done with NCCUSL), and they are the ALI's signature product.  They are meant to "restate" the law, meaning summarize and improve it, sort of the way Yiddish versions of Shakespeare plays were unironically advertised as farbesert un fartaytsht (improved and translated).  That is to say the restatements are meant to be positive summaries of the law, but they often have normative spins.   Section 5.4(c) appears to stand for a very simple and uncontroversial principle (pace FNMA v. Eaton), that only the obligee of a mortgage note has the right to foreclose on the note:   A mortgage may be enforced only by, or in behalf of, a person who is entitled to enforce the obligation the mortgage secures. In other words, a naked mortgage's got nothin' (are you listening AZ Supreme Court?).  But then the comments and illustration go off the deep-end.

As Winter Arrives, Occupy Protesters Shift Movement To Saving The 99 Percent’s Homes - Facing both plummeting temperatures and evictions from parks in New York City, Los Angeles, Boston, and elsewhere, Occupy protesters are shifting their actions during the winter season. They are refocusing their energy on protest actions against politicians, creative demonstrations, and tackling the nation’s foreclosure crisis. Around the country, Occupy protesters have moved homeless families into vacant homes, disrupted foreclosure auctions, and outright stopped foreclosures of families’ homes, forcing banks to renegotiate terms.  One of the most high-profile victories last month was when Occupy Atlanta protesters descended on the home of Iraq war veteran Brigitte Walker.  A few days later, Occupy Fort Lauderdale saved a family from a foreclosure as well. Occupy Our Homes worked with a coalition of local groups to move a homeless family into a home in East New York early last month. In Chicago, anti-foreclosure demonstrators and Jewish activists held a special Hannukah celebration inside of a reclaimed home. Yesterday, Occupy Kingston went door-to-door visiting with homeowners on pre-foreclosure lists, counseling them on how to negotiate with banks.  Occupy Our Homes is calling on activists everywhere to help save a family farm in Harrisburg, Pennsylvania and a home in Maui, Hawaii. You can help in both cases by making phone calls and sending faxes (instructions are at both links).

In or Out of Mortgage Trouble? A Study of Bankrupt Homeowners - This is a newly published paper in the American Bankruptcy Law Journal that I was lucky to work on with Daniel McCue and Eric Belsky at the Joint Center for Housing Studies at Harvard University. Using previously unexamined data in the 2007 Consumer Bankruptcy Project, we study what makes homeowners more or less likely to have mortgage troubles as they head into bankruptcy. Although much can be said about the econometric analysis, for now I wanted to mention quickly that the paper includes descriptive details about bankrupt homeowners (debtor-reported) such as numbers of missed mortgage payments, use of adjustable rate mortgages, mortgage broker use, mobile homes, and refinancing or home equity lines of credit. So please check it out!  

Michael Olenick: Is Shadow Housing Inventory Vastly Larger Than Widely Believed? - I believe that parasitic financial institutions have pushed the boundaries so far that they’ve put their host, the middle-class itself, at risk. One new bit of information suggests the housing front is in more perilous shape than most pundits believe.  One challenge when performing any type of analysis is that information is scattered in many different places, and even when disseminated by the government its accuracy is oftentimes questionable. We’ve already seen existing home sales for recent years revised downward from their already dismal position, with barely a yawn from the public and no accountability whatsoever from government regulators who used that information when more reliable sources existed.  I don’t understand why accurate housing data, which is supposed to be open to the public, is so hard to come by. The housing crisis arguably rises to the level of a national emergency, one we can see and fee every day as it ripples through the economy. Despite that, government-owned Fannie Mae still keeps loan-level data away from the public, it’s extremely difficult to get data from Freddie Mac, and MERS’ database remains a black hole. There is one piece of data only recently released — and, as far as I can tell, has gone unnoticed — that, if true, suggests the housing market is in such dire straits we’ve finally reached a critical mass where only radical out-of-the-box solutions will work. If this information, which comes of a highly suspect albeit well connected insider, is accurate, then extend and pretend has finally reached its natural end.

Comments on the Housing Vacancies and Homeownership Survey - This morning Dean Baker wrote about the Housing Vacancies and Homeownership Survey: Robert Samuelson Oversells the Case for Economic Optimism - [W]e are still far from making up for the overbuilding of the bubble years as indicated by the fact that the vacancy rate remains at near record levels.(There have been some questions raised about the accuracy of the Census Department's data, claiming that it overstates the number of housing units in the country. Those raising the issue fail to note that measures of housing starts do not include housing units that were created by conversion of commercial or industrial property, such as an old warehouse being turned into condos. The rehabilitation of dilapidated units would also not be included in housing start numbers.  The critics of this measure must show how the Census methodology would lead it to overstate the share of units that are vacant.) First, the main criticism of the HVS is it doesn't match the decennial Census results. The Census Bureau has acknowledged this and promised to investigate the differences. It is important to note that the HVS is benchmarked to the decennial Census, so the most recent vintage for housing inventory was benchmarked to the 2010 Census. So clearly the Census Bureau thinks that is a better estimate of the total housing inventory.

Mortgage demand fell at year-end, purchases sag (Reuters) - Demand for loans to buy homes and refinance mortgages slid in the final week of 2011, even as mortgage rates dipped, an industry group said on Wednesday. Applications for U.S. home mortgages fell 4.1 percent in the week ended December 30, weighed down by a 9.6 percent drop in purchase loan requests and a 2.5 percent decline in refinancing requests, seasonally adjusted data from the Mortgage Bankers Association showed. Average 30-year conforming mortgage rates dipped to the year's low of 4.07 percent from 4.10 percent the prior week, and well below 4.82 percent at the end of 2010. The slide to near-record-low borrowing rates has spurred more homeowners to seek refinancing, propelling that index up more than 60 percent in 2011.

Vital Signs: More Homes Going Into Contract - More homes are selling. The National Association of Realtors’ index of pending home sales rose for the second consecutive month in November. The index, a measure of existing homes that go into contract, is now at its highest level since April 2010, when sales got a boost from an expiring tax credit for home purchases.

First-time buyers lean on the bank of mom and dad Reuters: (Reuters) - Billy Lacher couldn't have purchased his split-level home in October without a little help from an increasingly popular financial institution: The Bank of Mom and Dad. The 31-year-old New York City firefighter and his wife put a 10 percent downpayment on the $285,000 three-bedroom home, but his parents provided an additional $20,000 (half as gift, half as loan). Lacher's not unusual. About a third of first-time buyers in 2011 got either a gift (26 percent) or a loan (7 percent) from their families to help finance their home purchases, down slightly from 2010, but consistent with assistance levels seen during the last decade, according to data from the National Association of Realtors (NAR). But industry observers think the level of parental generosity is even higher, with some giving children money for home purchases so far in advance of a loan application that the gift isn't disclosed to lenders, or, if they've got the resources, buying homes outright for their adult kids and setting up an after-the-fact intra-family loan agreement. In November, all-cash buys among first-timers hit a high of 13 percent,  That's up from 6 percent in 2009, when IFM first began tracking it. Cecala said that when first-time buyers buy outright, it's likely their parents who are purchasing on the children's behalf.

Van line: Calif. jumps to No. 7 U.S. destination -  Allied Van Lines’ 44th annual “Magnet States Report” says that at least by its own business patterns California is back as on the “inbound list” — states with more folks moving in than out. Moving van activity is seen by some experts as a good indication of migration for executive-level employees. These pricier relocations are often paid for by the moving workers’ employer. And Allied’s California moving patterms were by no means unique as two competitors saw similar trends. What Allied called “the biggest surprise” on its inbound leader board, was ranked No. 7th most popular destination. Note: By this same math, California was the top outbound state in 2004 and 2006 — ranked 40th from the top last year! Overall, Texas was the top destination, by Allied metrics: It had 1,556 more inbound moves than outbound — but that’s down from 1,640 in 2010. Florida was second with a net gain of 809 moves; followed by South Carolina, Colorado and Oregon. Illinois had the most net outbound losses followed by Pennsylvania, Michigan, New Jersey and New York.

The New American Dream: Rent, Don’t Buy - Call it the Big Selloff—America is headed toward a future in which fewer people own the spaces they call home. The effective homeownership rate, which excludes borrowers whose homes are underwater, stands at 62 percent, down from 69 percent in 2006, according to a 2010 report by the New York Federal Reserve.  As more people move from owning to renting, apartment vacancy rates have fallen fast, from 8 percent in 2009 to 5.6 percent in third quarter 2011. That’s pushed up rents in all markets by 2.5 percent, including apartments and single-family homes, to an average of $846 nationwide, according to Local Market Monitor, a home price forecaster. For a two-bedroom dwelling, the average rent was at $1,020 in June 2011.  Those trends are just the beginning, concludes a July report from investment bank Morgan Stanley: the United States is becoming a nation of renters and home ownership will keep falling. And that, say some experts, could be good for the country.

Reis: Apartment Vacancy Rate falls to 5.2% in Q4, Lowest since 2001 - Reis reported that the apartment vacancy rate (82 markets) fell to 5.2% in Q4 from 5.6% in Q3. The vacancy rate was at 6.6% in Q4 2010 and peaked at 8.0% at the end of 2009. From the WSJ: Apartment-Vacancy Rate Tumbles to 2001 Level The nation's apartment-vacancy rate in the fourth quarter fell to its lowest level since late 2001 ... In the fourth quarter, the vacancy rate fell to 5.2% from 6.6% a year earlier and 5.6% at the end of the third quarter, according to Reis. During the depths of the downturn, landlords had to offer incentives such as flat-screen TVs and months with no rent to attract tenants. But in the fourth quarter of 2011, landlords in 71 of the 82 of the markets that Reis follows were able to raise rents. ... Nationwide, landlords raised asking rents an average of 0.4% in the fourth quarter, to $1,064 a month. That's up from $1,026 in 2009.This graph shows the apartment vacancy rate starting in 2005. Reis is just for large cities, but this decline in vacancy rates is happening just about everywhere.

U.S. Apartment Vacancies Decline to a Decade Low of 5.2%, Rents Increase - U.S. apartment vacancies dropped to a 10-year low in the fourth quarter, allowing for rent increases that are likely to continue this year, Reis Inc. said.  The vacancy rate fell to 5.2 percent, the lowest since the end of 2001, the New York-based property research firm said in a report today. It was 5.6 percent in the previous three months and 6.6 percent a year earlier. The average monthly effective rent, or what tenants paid after landlord giveaways, climbed 2.3 percent from a year earlier to $1,009, Reis said.  Rising foreclosures and stricter mortgage-lending standards have helped make rental housing the best-performing segment of commercial real estate for the past two years. The vacancy rate has fallen for seven straight quarters from a three-decade high of 8 percent at the end of 2009, according to Reis.  “With the strong occupancy we had this year, we were really able to push rents,”

Manhattan Apartment Sales Fall 12% on Waiting - Manhattan apartment sales fell 12 percent in the fourth quarter from a year earlier as Europe’s debt crisis and sluggish U.S. job growth dimmed buyer appetites.  Purchases of condominiums and co-ops declined to 2,011 from 2,295 in the fourth quarter of 2010, The median price of units that changed hands in the final three months of 2011 climbed 1.2 percent from a year earlier, to $855,000.  “Consumers paused to see how things play out with all the information that’s coming at them right now,”  “Europe, the impasse in Washington over economic policy, the stagnant nature of the economy -- there’s a lot of conflicting economic news, and if you’re on the fence, maybe you wait a little bit.”  Financial firms globally disclosed plans in 2011 to eliminate more than 200,000 jobs as they grapple with market turmoil, fallout from Europe’s sovereign-debt crisis and concerns that U.S. economic growth will slow. Morgan Stanley told regulators last week that it may dismiss 580 employees in New York City as the bank cuts 1,600 jobs.  New York City’s unemployment rate was 8.9 percent in November, up 0.1 percentage point from the previous month and higher than the national average of 8.6 percent, the state Department of Labor said Dec. 15.

Construction Spending increased in November - This morning the Census Bureau reported that overall construction spending increased in November:  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during November 2011 was estimated at a seasonally adjusted annual rate of $807.1 billion, 1.2 percent (±1.6%)* above the revised October estimate of $797.4 billion. The November figure is 0.5 percent (±1.9%)* above the November 2010 estimate of $803.0 billion.This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 64% below the peak in early 2006, and non-residential spending is 33% below the peak in January 2008. Public construction spending is now 12% below the peak in March 2009. The second graph shows the year-over-year change in construction spending. On a year-over-year basis, both private residential and non-residential construction spending have turned positive, but public spending is now falling on a year-over-year basis as the stimulus spending ends. The year-over-year improvements in private non-residential are mostly due to energy spending (power and electric).

Construction Spending And The Housing Quagmire -Among the “good” economic news today was private residential construction spending, which rose 2% in November and 3.4% year-over-year, according to the Census Bureau, confirming similar trends in building permits and housing starts reported earlier. Construction creates lots of jobs and contributes significantly to GDP. Everyone, from the President down to local politicians, wants it to grow. It gets them reelected. But for homeowners, banks, and tax payers, these trends are costly. Today's housing market is a consequence of the credit bubble that the Greenspan Fed engineered. It sparked a speculative boom. Developers went crazy. Lenders made liar loans. Values soared. People bought houses sight-unseen to get rich. Cities and states collected taxes. Everyone was happy. When the construction bubble peaked in January 2006, housing starts hit an annual rate of 2.3 million units. But after years of overbuilding, the frenzy dried up. What was left was a housing glut. And vacant units became the root cause of the decline in home values. There were a lot of them of vacant homes: 18.8 million in 2009, according to the Census Bureau. While reasonable people may have quibbles with that number, everyone agrees that the inventory of vacant units is immense. Whether it's 18.8 million or 12 million units only changes the duration of the healing process, not the problem itself.

Regional dispersion in vacancy and unemployment - Since I happen to have handy some regional data on the help-wanted index (HWI) for the U.S., I thought it might be interesting to see whether U.S. vacancy and unemployment dynamics in a cross-section display any interesting patterns.  The regional HWI data is from the Conference Board. I explain here how the data was corrected for the recent substitution from print to electronic media in job advertising activities. That data was constructed for 36 U.S. cities.  I construct a "vacancy rate" measure by dividing the HWI by the labor force and normalizing to 10  in 1990:1. Here is what the aggregate data looks like: As one would expect, there is a strong negative correlation between vacancies and unemployment; this is the so-called Beveridge Curve. Labor economists sometimes like to gauge labor market conditions by constructing a "labor market tightness" variable--the ratio of vacancies to unemployment, or the v/u ratio. The v/u ratio plays a prominent role equilibrium unemployment theory; see Diamond, Mortensen and Pissarides. As the following diagram shows, labor-market-tightness is highly procyclical.

U.S. Container Trade Rebounding at Fastest Pace Since May as Housing Gains - U.S. imports of containerized goods rose the most in six months in November as a recovering housing market bolstered consumer demand, according to The Journal of Commerce/PIERS, which tracks volumes through ports.  Seaborne imports advanced 5 percent from a year earlier to 1.49 million 20-foot boxes, the biggest jump since May, the Newark, New Jersey-based company said in a statement today. Shipments of furniture, which account for about 10 percent of the total, gained 7 percent.  Existing home sales rose 4 percent to 4.42 million units in November, while purchases of new single-family houses gained for a third consecutive month, according to data from the National Association of Realtors and the Census Bureau. The world’s largest economy expanded 2.75 percent in the fourth quarter, its fastest pace since the three months to June 2010, according to the median of 68 economist estimates compiled by Bloomberg.

Vital Signs: Port Traffic Muted - Fewer shipping containers are arriving at West Coast ports. The number of containers unloaded at the ports of Los Angeles and Long Beach fell 3.6% in November versus a year earlier, according to the ports. Retailers have kept inventories tight amid a still-uncertain economy, leading to less demand for overseas goods.

America’s top export in 2011 was . . . fuel? -- Fuel is now the top U.S. export. The Associated Press reports that America is on pace to ship out more gasoline, diesel and jet fuel than anything else in 2011. (Aircraft, motor vehicles, vacuum tubes and telecom equipment were next on the list of top exports.) Granted, this is only for refined petroleum products — and those exports are still dwarfed by America’s much, much larger imports of crude oil. Still, it’s the first time fuel has been our top export in 21 years. So how did this happen? UC San Diego economist James Hamilton has a more in-depth analysis. Perhaps the biggest factor, he writes, is the glut of new shale oil in North Dakota. Since there’s not enough pipeline infrastructure to get all that oil down to the Gulf of Mexico for export, it’s been piling up in Cushing, Okla. That makes it cheap for refineries in the Midwest to refine it and ship it out than to simply ship the oil directly. It’s also worth noting, as energy analyst Gregor McDonald points out in comments on Hamilton’s piece, that U.S. oil consumption has declined since 2006, which means that much of the refining capacity the country added in the past decade is now geared toward exports.

Weekly Gasoline Price Update: Second Week of Price Increases - Here is my weekly gasoline chart update from Department of Energy data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump -- both regular and premium -- rose four cents over the past week, which follows a 3 cent increase the week before. Regular is now 16.8% off its 2011 interim high set in early May 2011. Premium is down 15.2%. WTIC closed today at 102.83. It is 9.7% off its 2011 interim high, which also dates from early May 2011. As the first chart below shows, the price of oil has risen significantly since the interim low in early October while gasoline prices had trended downward until the last two weeks. Has the increase in the price of oil begun finding its way to the gasoline pump? As I write this, GasBuddy.com shows no states with the average price of regular above $4.

End of ethanol subsidy will raise the price of gas - Gasoline could cost 4.5 cents a gallon more starting as early as this week, and it's not because of rising oil prices. It's because Congress declined to renew the 30-year-old federal subsidy for ethanol, letting it expire Sunday. Ethanol, denatured grain alcohol used as a proven smog-cutting ingredient, currently makes up 10% of most gasoline-based motor fuel for general use, so-called E-10. In a few areas, E-85 fuel, 85% ethanol, also is available. E-85 can be burned only by vehicles equipped for "flex fuel." How much the end of the subsidy could add to gas prices, and how soon, is yet to be seen. Ethanol blenders got a 45-cents-a-gallon tax credit, which amounts to 4.5 cents for the amount blended into each gallon of E-10 fuel.It's hard to calculate the immediate impact. Oil prices and ethanol stocks are in flux. And unknown is the impact of another move by Congress: dropping the 54-cents-per-gallon tariff on ethanol imports. Brazil is a leading global producer of ethanol made mostly from sugar cane. In the U.S., ethanol primarily is made from corn.

Why gas mileage has barely budged since 1980 - It’s sometimes suggested that American car companies have quit making more efficient cars and trucks in recent decades. But that’s not strictly true, according to MIT economist Christopher Knittel. In a new paper for the American Economic Review, building off his earlier research (PDF), Knittel calculates that automakers actually boosted vehicle fuel efficiency a whopping 60 percent between 1980 and 2006. Engine technology got better by leaps and bounds. It’s just that most of those improvements went toward making cars bigger and more powerful — and, as a result, all those advances barely increased gas mileage. Knittel notes that automakers have made a slew of striking advances on the internal combustion engine over the past few decades — from variable-speed transmissions to front-wheel drive — that have drastically increased efficiency. But automakers mainly took advantage of those breakthroughs to build larger cars and light trucks with more powerful engines. Between 1980 and 2006, the average curb weight of vehicles increased 26 percent, while horsepower rose 10 percent. Average gas mileage, by contrast, improved just 15 percent.

How Do Consumers Spend Engine Efficiency Advances? On Bigger, Faster Cars - Auto companies have made great strides in improving engine efficiency in recent decades. But those improvements haven’t done much to improve the fuel economy of America’s passenger car fleet. Instead, consumers have “spent” most of those efficiency improvements on bigger, faster cars. MIT economist Christopher Knittel has carefully quantified these tradeoffs in a recent paper in the American Economic Review (pdf; earlier ungated version here). As noted by Peter Dizikes of MIT’s News Office:  [B]etween 1980 and 2006, the average gas mileage of vehicles sold in the United States increased by slightly more than 15 percent — a relatively modest improvement. But during that time, Knittel has found, the average curb weight of those vehicles increased 26 percent, while their horsepower rose 107 percent. All factors being equal, fuel economy actually increased by 60 percent between 1980 and 2006, as Knittel shows in a new research paper, “Automobiles on Steroids,” just published in the American Economic Review. Thus if Americans today were driving cars of the same size and power that were typical in 1980, the country’s fleet of autos would have jumped from an average of about 23 miles per gallon (mpg) to roughly 37 mpg, well above the current average of around 27 mpg. Instead, Knittel says, “Most of that technological progress has gone into [compensating for] weight and horsepower.”

Vehicle Miles Driven Decline: A possible contributing factor - Earlier this week I noted that vehicle miles driven had declined in October. Most of the decline is probably due to high gasoline prices and the sluggish economy, but reader Dave sent me this article by Lisa Hymas: Driving has lost its cool for young Americans In 2008, just 31 percent of American 16-year-olds had their driver's licenses, down from 46 percent in 1983, according to a new study in the journal Traffic Injury Prevention. The numbers were down for 18-year-olds too, from 80 percent in 1983 to 65 percent in 2008, and the percentage of twenty- and thirtysomethings with driver's licenses fell as well. And even those with driver's licenses are trying to drive less; a new survey by car-sharing company Zipcar found that more than half of drivers under the age of 44 are making efforts to reduce the time they spend packed like lemmings into shiny metal boxes. The decline in driving by younger Americans is fed by many factors: the high cost of gas and insurance at a time of economic insecurity; tighter restrictions on teen drivers in many states; and roads that are more congested than ever, making driving less fun than ever. But the impact of the internet is big too. "It is possible that the availability of virtual contact through electronic means reduces the need for actual contact among young people,"

US: Personal Incomes Fall More During 'Recovery' Than During The Recession - America's longest economic recession since WWII, ended in June of 2009. The recession's end means that our economy has allegedly been in recovery mode since July of 2009, more than two and a half years.  If we are in recovery, why have American's incomes dropped more during the recovery than they did in the recession? The facts are clear.  Personal incomes fell during the recession by 3.2%.  During the recovery (since July 2009), personal incomes have fallen an additional 6.7%.  Those numbers were posted in a report by Sentier Research using numbers provided by the U.S. Census. (The RED line is the Household Income Index)  The Obama administration has been touting the "recovery" of the American economy and yet this recent data seems to demonstrate that the average household is still waiting for some of the benefits seen in the stock market.

Vital Signs: Consumers Feeling More Confident -  Consumers are feeling better about the economy. The Conference Board’s monthly index of consumer confidence rose to 64.5 in December, its highest level since April, before fears of a renewed recession arose over the summer. The survey found that consumers are both more comfortable with their current situation and more optimistic about the future.

Household Income Creeping Up - Here’s another glimmer of good news about the state of the U.S. economy: Household income is creeping up, notching a third consecutive month of gains in November. However, like all promising indicators from the recovery, this one is freighted with caveats: Although the 2.7% increase is significant, it isn’t necessarily sustainable, given economic risks at home and abroad — and perhaps more importantly, even with these gains, American households are far below their median income levels seen before the recession. Real median annual household income — that’s the figure at the middle of the middle adjusted for inflation — increased to $50,876 in November, up 2.7% from August’s $49,556, according to a report today from Sentier Research. The overall 2.7% increase since August breaks down as follows: Household incomes rose 1.1% from August to September; 0.8% from September to October, and 0.7% from October to November. (With rounding, the three figures tally to 2.7%.) “That 2.7% is a very strong rate of growth over a three-month period,” Mr. Green said. “It seems to be in accordance with a lot of other good economic reports.”

The Debtwatch Manifesto -The fundamental cause of the economic and financial crisis that began in late 2007 was lending by the finance sector that primarily financed speculation rather than investment. The private debt bubble this caused is unprecedented, probably in human history and certainly in the last century (see Figure 1). Its unwinding now is the primary cause of the sustained slump in economic growth. The recent growth in sovereign debt is a symptom of this underlying crisis, not the cause, and the current political obsession with reducing sovereign debt will exacerbate the root problem of private sector deleveraging. US private debt clearly rose faster than GDP from the end of World War II (when the debt to GDP ratio was 43%) until 2009 (when it peaked at 303%), but there is no intrinsic reason why it (or the public sector debt to GDP ratio) has to rise over time. I give a theoretical explanation elsewhere (Keen 2010), but an empirical comparison will suffice here: 1945 till 1965 were the best years of the Australian economy—with unemployment averaging 2 percent—and during that time the private debt ratio remained relatively constant at 25% of GDP (see Figure 2).

For 2012, Signs Point to Tepid Consumer Spending - American consumers are running out of tricks. As the weak economy has trudged on, they have leaned on credit cards to pay for holiday gifts, many bought at discounts. They are dipping into savings to cover spikes in gas, food and rent. They are substituting domestic vacations for international trips, squeezing more life out of their washing machines and refrigerators and switching to alternatives as meat prices have risen. That leaves little room for a big increase in spending in 2012, economists say, a shaky foundation for the most important pillar of the American economy. Even the seemingly robust holiday shopping season is raising concern. After a strong start on Thanksgiving weekend, a pronounced lull followed, causing retailers to mark down products heavily in the week before Christmas. While final numbers for the season are not in, analysts say they are worried that retailers had to eat into profits to generate high revenues. Consumer spending makes up 70 percent of the economy, so until it ignites, general growth is likely to be sluggish.

U.S. consumer in the slow lane - (Reuters) - It's up to the consumer to drive the U.S. economy and lift world growth in 2012, and the outlook is far from encouraging. Over the past three and half years, growth in U.S. consumer spending has averaged a paltry 0.2 percent adjusted for inflation, the weakest in the post-World War II period, Morgan Stanley says.While the employment picture is gradually brightening, wage growth is going in the opposite direction, keeping a lid on consumer behavior. Over the past year, pay for blue-collar workers adjusted for inflation fell 12 cents from the previous year, according to the Bureau of Labor Statistics. That was the steepest decline since the stagflationary days of 1980. Pay for all workers has fallen 16 cents this year in real terms. Consumer buying power, modest over the holiday season, remains constrained by heavy debt loads. Total U.S. household debt as a percentage of disposable personal income is down from its 2007 peak at 130 percent, but it remains well above its 1970-2000 average of 75 percent. As a result, Stephen Roach, non-executive chairman of Morgan Stanley, sees U.S. consumption remaining anemic for years to come. That will place a drag on global growth, especially in Asia, a big manufacturer of U.S. consumer goods.

A Few Quick Charts on Consumer Spending, by Tim Duy: In my last piece, I noted that excessive optimism or pessimism essentially cancelled each other out over the course of 2011 when tracking the overall economy. The same held true of consumption spending as well: Since the recession ended, consumer spending has been tracking a slightly slower growth trend than prior to the recession. Again, there looks to have been a long-lasting shock to the path of consumer spending. Interesting changes have occurred underneath the surface, however. The path of spending on services is markedly lower: This was the subject of a Wall Street Journal article last November:  Increasingly, that means service businesses find it harder to get their share of consumer spending, which is prompting many business owners to scale back. At The Wall Street Journal's CEO Council conference this month, Alan Krueger, chairman of the president's Council of Economic Advisers, highlighted the service sector's central role for jobs growth. "Services account for about half of GDP, and over half of jobs," Mr. Krueger said. "Particularly discretionary services…people have been putting off getting their cars repaired because of concerns about jobs and income growth." This is certainly something weighing on job growth. That said, consumers are not foregoing all spending.

Record Dividends in 2012 Should Help Consumers - The dividend checks are in the mail. S&P Indices reported Wednesday that dividend increases reached $50.2 billion in 2011, up sharply from the $26.5 billion reported in 2010. In addition, S&P expects dividend payments to set a new record in 2012, surpassing the old high set in mid-2008 before the financial collapse and recession caused companies to cut back on payouts. The expected increases in dividends are important to the consumer outlook because dividends have been one of the fastest-growing segments of personal income. Since the recession ended, dividend income has shot up 43%, while total personal income increased less than 10%, according to Bureau of Economic Analysis data. Wage and salary disbursements have crept up only 6.6%. The growth leader has been farm income, up almost 52%. Looked at another way, dividends comprise about 6% of personal income but they have accounted for 21% of income’s growth since June 2009.

Rail Traffic Ends the Year With Strong Gains - The Association of American Railroads (AAR) today reported gains in 2011 rail traffic compared with last year, with U.S. railroads originating 15.2 million carloads, up 2.2 percent over 2010 and up 9.7 percent over 2009. Total U.S. rail intermodal volume in 2011 was 11.9 million trailers and containers, up 5.4 percent over 2010 and up 20.4 percent over 2009. In 2011, 14 of the 20 carload commodity categories tracked by AAR saw increases on U.S. railroads compared with 2010 indicating a broad recovery across industry sectors. The largest gains were: metallic ores, up 20.5 percent or 67,631 carloads; primary metal products, up 12 percent or 56,988 carloads; and petroleum products, up 11.1 percent or 36,811 carloads.   AAR also announced gains in December 2011 rail traffic, with U.S. railroads originating 1,134,580 carloads, up 7.3 percent over December 2010, which is the largest year-over-year monthly increase since January 2011. U.S. rail intermodal originations totaled 873,390 containers and trailers, up 9.4 percent over December 2010. This is the second-highest monthly intermodal average for any December in history. During December 2011, 16 of the 20 carload commodity categories tracked by the AAR saw increases compared with December 2010.

AAR: Rail Traffic increased 7.3 percent YoY in December - The Association of American Railroads (AAR) reports carload traffic in December increased 7.3 percent compared with the same month last year, and intermodal traffic (using intermodal or shipping containers) increased 9.4 percent compared with December 2010. Total carloads for the year were 15.2 million, up 2.2% over 2010’s 14.8 million and up 9.7% over 2009’s 13.8 million. Total U.S. rail intermodal volume in 2011 was 11.9 million containers and trailers, up 5.4% over 2010’s 11.3 million units and up 20.4% over 2009’s 9.9 million units. On a seasonally adjusted basis, carloads in December were up 1.8% from last month, and intermodal in December was up 0.4% from November.This graph shows U.S. average weekly rail carloads (NSA). Rail carload traffic collapsed in November 2008, and now, 2 1/2 years into the recovery, carload traffic is still not half way back to the pre-recession levels. The second graph is for intermodal traffic (using intermodal or shipping containers): Intermodal traffic is close to the peak year in 2006. U.S. rail intermodal originations totaled 873,390 containers and trailers in December 2011, an average of 218,348 per week — up 9.4% over December 2010 and the second-highest monthly intermodal average for any December in history (behind December 2006 — see chart ...).

Vital Signs: Investment Cutback - U.S. businesses cut back on investment during the month of November. The Commerce Department said new orders for nondefense capital goods excluding aircraft — a proxy for business spending on new equipment — fell 1.2% in November from the previous month. New orders tumbled for products such as computers as well as machinery for mining and construction.

ISM Manufacturing index indicates faster expansion in December - PMI was at 53.9% in December, up from 52.7% in November. The employment index was at 55.1%, up from 51.8%, and new orders index was at 57.6%, up from 56.7%.  From the Institute for Supply Management: December 2011 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector expanded in December for the 29th consecutive month, and the overall economy grew for the 31st consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®. . "Here is a long term graph of the ISM manufacturing index. This was above expectations of 53.2%, and suggests manufacturing expanded at a faster rate in December than in November. It appears manufacturing employment expanded in December with the employment index at 55.1%. New orders were up, and prices declined.

An Encouraging Start For 2012 Economic Releases - The first major economic release of the December economic profile suggests that momentum continues to bubble. The ISM’s factory index rose 1.2 percentage points to 53.9 last month, the highest since April and an acceleration from the pace of November's gain. If the first reading on the windup to 2011 is any indication, the statistical case is a bit stronger today for expecting the economy to muddle forward, perhaps at a slightly faster clip, in the months ahead. Reviewing the ISM index with the annual change in the stock market (S&P 500) implies that equity prices will trend higher. As the chart below shows, the ISM benchmark has been turning higher recently as the S&P has remained flat on a year-over-year basis.  The bullish ISM report found support in today's other data release: construction spending for November, which rose an annualized 1.2% and is now at the highest level since June 2010. This report adds another data point to the argument that that the housing sector is finally reviving.

Manufacturing ISM Highest Since June; Expiring Business Tax Credits Explain Why; Enjoy it While You Can As US Decoupling Won't Last - The Institute for Supply Management released the December 2011 Manufacturing ISM Report On Business® "The PMI registered 53.9 percent, an increase of 1.2 percentage points from November's reading of 52.7 percent, indicating expansion in the manufacturing sector for the 29th consecutive month. The New Orders Index increased 0.9 percentage point from November to 57.6 percent, reflecting the third consecutive month of growth after three months of contraction. Looking for an explanation for the rise in December? I have one (and was aware of a likely jump in PMI in advance): 2011 Expiring Business Tax Incentives

1. 100% Bonus Depreciation
2. Self-Employment Tax Reduction –
3. Section 179d Depreciation Provisions -
4. 15 Year Straight Line Depreciation –
5. Energy Efficient Appliance Credit.

‘Tis (still) the seasonality, ISM edition - A few weeks ago we posted this chart from of the Nomura economics team: It shows the recent diverging trend between the Fed’s measure of industrial production and that of the Institute for Supply Management (ISM). The explanation Nomura gave for the divergence was that of these two indicators, only the Fed measure had been properly adjusted (earlier in 2011) to account for seasonal biases in the data that have distorted a range of indicators since late 2008. These biases exist because the computational techniques used to seasonally adjust economic data inappropriately interpreted some of the downturn in the fourth quarter of 2008 as a new seasonal trend. Nomura went on to predict that the December ISM reading, which was released yesterday and beat consensus at 53.9, would be exaggeratedly strong because of these biases. (The production level subindex, which is what Nomura shows in the graph above, was 59.9.) Well, Goldman have a new note out today analysing the same thing, estimating that both the mild winter weather in the US and these seasonal biases gave the ISM reading an artificially strong boost, probably on the order of two or three points.

Vital Signs: Improving Factory Sector - The U.S. manufacturing sector is gaining strength. The Institute for Supply Management’s monthly survey of purchasing managers found that factory activity in December hit 53.9, the highest level since June. Readings above 50 indicate expansion. But the manufacturing sector has yet to regain all the momentum it lost during the summer slowdown, and activity is down from a year ago.

U.S. Light Vehicle Sales at 13.56 million SAAR in December - Based on an estimate from Autodata Corp, light vehicle sales were at a 13.56 million SAAR in December. That is up 8.9% from December 2010, and down 0.3% from the sales rate last month (13.60 million SAAR in Nov 2011). This was at the consensus forecast of 13.6 million SAAR. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for December (red, light vehicle sales of 13.56 million SAAR from Autodata Corp).The annualized sales rate was essentially unchanged from November, and the last two months were the strongest since June 2008 excluding cash-for-clunkers. The second graph shows light vehicle sales since the BEA started keeping data in 1967.This shows the huge collapse in sales in the 2007 recession. This also shows the impact of the tsunami and supply chain issues on sales, especially in May and June.

ISM Non-Manufacturing Index indicates slightly faster expansion in December - The December ISM Non-manufacturing index was at 52.6%, up from 52.0% in November. The employment index increased in December to 49.4%, up from 48.9% in November. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: December 2011 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in December for the 25th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report..This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. This was below the consensus forecast of 53.4% and indicates slightly faster expansion in December than in November.

Survey: Small Business Owners report small decline in employment, hiring plans positive - From the National Federation of Independent Business (NFIB): NFIB Jobs Statement: No Rally in Jobs at Close of 2011, but Small Business is Cautiously Optimistic about 2012  “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’. In the past several months, reports of those cutting workers have been at the lowest levels since the recession started in December 2007. ... Over the next three months ... a seasonally adjusted net 6 percent of owners planning to create new jobs, a 1 point decline but still one of the strongest readings since September 2008.Here is a graph of the net hiring plans for the next three months since 1986.Hiring plans declined slightly in December, but the trend is up. It is no surprise that small businesses are struggling due to the high concentration of real estate related companies in the survey. This is another slightly discouraging survey before the BLS report tomorrow.

Mike Mandel on productivity and Tyler Cowen on stagnation - Last week Mike Mandel published a very interesting chart as his nominee for the chart of the year. http://innovationandgrowth.wordpress.com/  He is using the net investment data to argue that capital spending is much smaller than generally assumed. Standard thinking is that since the early 1980s capital spending has been booming and despite cyclical swings real business fixed investment has moved up to record levels as this chart of real business fixed investment as a share of GDP shows.. Maybe, if you look at this chart that divides real business fixed investment into two categories: information tech ( IT) and all other, or more traditional capital goods it demonstrates that IT has accounted for virtually all the growth in real investment since 1980 and that it share of total capital spending has been steadily increasing -- it now accounts for 45% of the total. But IT equipment has a very different life span than more traditional capital equipment. Business computers have a life span of only about 2 years and communication equipment has a similar life span. In contrast, traditional capital equipment has a much longer life span. An office building, a ware house or something like a blast furnace can be expected to have a useful life of decades.

Sinking Into The 'Great Stagnation' - “America is in disarray,” states Prof Cowen, “and our economy is failing us.” He points to the slow growth of median wages since the 1970s, the illusions of the 2000s and the absence of “new net job creation in this last decade”. Moreover, “we face a long-run fiscal crisis, driven by the increasing cost of entitlements, our reliance on debt, and our willingness to let matters slide rather than face up to paying the bills”. So far, so familiar. More novel is how Prof Cowen explains the US predicament: “the American economy has enjoyed ... low-hanging fruit since at least the 17th century, whether it be free land, ... immigrant labor, or powerful new technologies. Yet during the last 40 years, that low-hanging fruit started disappearing, and we started pretending it was still there. We have failed to recognise that we are at a technological plateau and the trees are more bare than we would like to think. That’s it. That is what has gone wrong.” The role of both cheap resources and the import of labour in past US growth is clear. But Prof Cowen adds an important point. In 1900, only 6.4 per cent of Americans graduated from high school. In the late 1960s, this ratio peaked at 80 per cent. Similarly, by 2009, 40 per cent of 18-24 year olds were already enrolled in college. Improving labour force quality has become far harder.

Shovel-Ready, Job-Creating Particle Accelerators - The NYT is right about this: you want to sell or kill a policy these days, it’s mandatory to attach the words “jobs creator” or “jobs killer” to it.  I’ve played along—always in good faith—I never asserted numbers I didn’t believe or couldn’t defend.  But as the piece points out, it’s gotten pretty ridiculous. In fact, the article overlooks the weirdest example I’ve seen of this “sell-it-with-jobs” strategy: this press release from the Energy Dept. on the new-job-creating particle accelerator: "Ground Broken for New Job-Creating Accelerator Research Facility at DOE’s Fermi National Accelerator Laboratory in Illinois” [my bold] Sounds like the Onion, right? Economist David Card, as quoted in the NYT piece, basically has this right: "It’s just a selling point. You can say anything, no matter what, creates jobs. I don’t think people should pay much attention to it.” Still, despite the fact that we’ve pretty much punted on job creation given our current politics, it is very much within the purview of public policy to help generate job growth at times like the present.   Would the policy process be better served if economists stopped making such predictions?

The Decline of the Public Good, by Robert Reich - What defines a society is a set of mutual benefits and duties embodied most visibly in public institutions — public schools, public libraries, public transportation, public hospitals, public parks, public museums, public recreation, public universities, and so on.  Public institutions are supported by all taxpayers, and are available to all. If the tax system is progressive, those who better off (and who, presumably, have benefitted from many of these same public institutions) help pay for everyone else.  “Privatiize” means pay-for-it-yourself.   Much of what’s called “public” is increasingly a private good paid for by users — ever-higher tolls on public highways and public bridges, higher tuitions at so-called public universities, higher admission fees at public parks and public museums.   Much of the rest of what’s considered “public” has become so shoddy that those who can afford to find private alternatives. As public schools deteriorate, the upper-middle class and wealthy send their kids to private ones. As public pools and playgrounds decay, they buy memberships in private tennis and swimming clubs. As public hospitals decline, they pay premium rates for private care.Gated communities and office parks now come with their own manicured lawns and walkways, security guards, and backup power systems.

Government-funded job creation works - Is high unemployment as certain as death and taxes? Of course not. But if we depend on the private sector to bring rates down, joblessness could join those two certainties. International experience shows that direct job creation by governments is one of the very few options that has succeeded at raising employment levels more than just marginally during a crisis. Nonetheless, unfounded optimism about the power of privately fueled growth underlies the latest round of interventions in Europe. The assumption that the business sector has the ability to absorb enough labor to end the unemployment crisis remains almost unquestioned. It's unreasonable to expect private enterprises to solve these problems. Full employment isn't an objective of businesses. Companies usually strive to keep staffing at a minimum — we've all heard the virtues of "lean and mean."  In contrast, direct public-service job creation programs by governments have a history of long-term positive results. Throughout the last century, the United States, Sweden, India, South Africa, Argentina, Ethiopia, South Korea, Peru, Bangladesh, Ghana, Cambodia and Chile, among others, have intermittently adopted policies that made them "employers of last resort" — a term coined by economist Hyman Minsky in the 1960s — when private sector demand wasn't sufficient.

Bain, Barack and Jobs, by Paul Krugman - Mr. Romney claims that Mr. Obama has been a job destroyer, while he was a job-creating businessman. For example, he told Fox News: “This is a president who lost ... two million jobs...” He went on to declare, of his time at the private equity firm Bain Capital, “I’m very happy in my former life; we helped create over 100,000 new jobs.” But his claims about the Obama record border on dishonesty, and his claims about his own record are well across that border. Start with the Obama record. It’s true that 1.9 million fewer Americans have jobs now than when Mr. Obama took office. But the president inherited an economy in free fall... So how much of that Obama job loss took place in, say, the first half of 2009? The answer is: more than all of it. The economy lost 3.1 million jobs between January 2009 and June 2009 and has since gained 1.2 million jobs. On the point about using current employment, consider Staples, which has more than twice as many stores now as it did back in 1999, when Mr. Romney left Bain. Can he claim credit for everything good that has happened to the company in the past 12 years? Then there’s the bit about looking only at Bain-connected companies that added jobs, ignoring those that reduced their work forces or went out of business. Hey, if pluses count but minuses don’t, everyone who spends a day playing the slot machines comes out way ahead!

What if We Focus on Boosting Employment Rather Than Growth? - video - Yves Smith - Although it is remarkably difficult to come up with decent data , from what I can tell, the Japanese bubble was considerably bigger relative to the size of its economy than the US debt binge was. Yet even though the Japanese aftermath has been remarkably protracted, and arguably worsened by a slow and cautious initial response, visitors to Japan find the country wearing its malaise remarkably well. One of the reasons may be the Japanese preoccupation with employment. Entrepreneurs are revered not for making money but for creating jobs. Japanese companies went to great lengths to keep workers, cutting senior pay to preserve manning. That was done largely for cultural reasons, since companies are seen as being like families.  But was this preoccupation also good economic policy, and might it have played a more direct role in buffering the worse effects of the bubble aftermath? In this interview, Pavlina Tcherevna argues that the way policymakers think about growth, that demand drives employment, may be backwards.

Profits and Resource Flows - The right says that taxing profits destroys the incentive to invest, and interferes with the ability of the invisible hand to direct resources to their most productive use. That's true, but only up to a point and we shouldn't fear taxing profits that are persistently (and in some cases extraordinarily) high. If an industry is making above average profits – and perhaps producing huge mega-bonuses for executives as well – that’s a signal that more resources are needed in that industry.  Thus, if there is an increase in demand for a product, prices and profits will increase and that will attract more resources to the industry. But that doesn't mean that we should accept persistently high profits. Incumbent firms do not want more competition. If more firms enter, the added competition will reduce their high incomes and these firms will do all they can to construct barriers to entry and protect their advantage. Sometimes the barriers are legal, sometimes they are economic, and sometimes the structure of the markets protects the advantages of incumbent firms without them having to do anything active to protect their market power. Thus, while short-term profits are necessary, if we see persistent above average profits that's a sign that entry into an industry is not as free as it should be.

The insider brain gain - I won't argue about net job creation here (though I think most innovation fosters it in the long run, so long as the education system prepares people for the new jobs that result). But it is exciting to see a company designed to extract some of the highest-value cognitive surplus around, and to make money both for the company and its - well, they are not exactly workers. Call them members - or even sellers of their own cognitive surplus through an exchange set up for that purpose. The story starts with yet another recent phenomenon: an increase in corporate transparency, whether companies want it or not. In the old days, most companies sold products and had specified spokespersons; more recently, many have added call centres, creating about 3.5 million jobs in the United States alone, and many more outside it. But now employees of all kinds, not just those in customer support or public relations, have an online presence. Some mention their employer; most do not. This makes most employers a little nervous. Companies seem to have become fishbowls, their contents visible to customers and strangers alike. You could say that they have a larger "surface area", composed of employees who interact with outsiders.

A Fight for Post Offices and Towns’ Souls - People over a certain age here remember what happened to Mozart.  It sat there perfectly content for years, a little community on a crooked mountain road in the southern Ozarks. Then one day they closed the post office. Now Mozart is a place on the road where only those who knew it was there would know it was there. The same thing happened with Newnata, Rushing and Cozahome.  But if the people in Fox have a say, it will not happen again, at least not here.  Along with the residents of other tiny towns across the country, from Challenge, Calif., to Economy, Ind., the people of Fox learned last summer that their post office was being studied for possible closing by the United States Postal Service. It was one of the more than 3,600 deemed by the postal authorities to have too little a workload — less than $27,500 annual revenue is one such measurement — or to be too close to another office to justify keeping open by an agency that is billions of dollars in debt and facing a steeply and steadily declining revenue stream.

Men grab most new jobs, even in retail –Men are claiming more than two-thirds of the private-sector jobs created as the economy recovers, reversing a long-running trend that came within a whisker of giving the USA its first-ever majority-female workforce. In a wrinkle that puzzles economists, one important driver of the trend is that hundreds of thousands of men are showing up in retailing, once considered a source of jobs for women. Nearly 1.28 million men gained jobs in the 12 months that ended in November, compared with 600,000 women, according to the Bureau of Labor Statistics (BLS). Although men have returned to work in greater numbers in goods-producing jobs and service-related businesses, they're not returning to still-stagnant construction industries. Instead, retailers have added 216,900 men — about five times as many as have been added by traditionally male financial services companies — vs. about 9,000 women. Also, manufacturers have added more than 250,000 men and cut 33,000 women. "It's a testament to how difficult the job market is," Moody's Analytics economist Ryan Sweet said, noting that there are still 4.5 times more unemployed people than U.S. job openings. "Men are taking jobs you wouldn't think they would."

Question #6 for 2012: Unemployment Rate - Earlier I posted Ten Economic Questions for 2012. 6) Unemployment Rate: What will the unemployment rate be in December 2012? Last year, my prediction was for the unemployment rate to still be above 9% in December 2011. As of November, the unemployment rate had fallen to 8.6%. My guess was the participation rate would increase a little in 2011, however the participation rate continued to decline, and that pushed down the unemployment rate. This is a reminder that forecasting the participation rate is critical in forecasting the unemployment rate.Say the Civilian noninstitutional population was 1 million, and 650,000 participated in the labor force. And say 600,000 were employed leaving 50,000 unemployed. Then the labor force participation rate would be 65%, and the unemployment rate would be 50,000 / 650,000 equals 7.7%. But if only 640,000 people participated in the labor force, then with the same level of employment (600,000), only 40,000 will be unemployed - and the unemployment rate would be 40,000 / 640,000 equals 6.3%.Here is a graph showing the current unemployment rate (red) and the participation rate (blue). Although I expect the participation rate to decline over the next couple of decades as the population ages, I think the participation rate will rise a little in 2012. Although I'm still looking at GDP and employment for 2012, I think the unemployment rate will be mostly unchanged in 2012.

Weekly Initial Unemployment Claims decline to 372,000 - The DOL reports: In the week ending December 31, the advance figure for seasonally adjusted initial claims was 372,000, a decrease of 15,000 from the previous week's revised figure of 387,000. The 4-week moving average was 373,250, a decrease of 3,250 from the previous week's revised average of 376,500. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week to 373,250. This is the lowest level for the 4-week average since June 2008. And here is a long term graph of weekly claims: The 4-week moving average is still falling and is now well below 400,000. This suggests fewer layoffs and more payroll jobs added in December.

Jobless Claims End 2011 at 3.5 Year Low; And ADP Reports 325K Private Job Gain in December - In another sign that the U.S. labor market is gradually improving, the Labor Department reported today that the four-week moving average for initial jobless claims fell to 380,250, the lowest level since June 2008, three and-a-half years ago (see chart above).  This marks the fifth consecutive decline in the four-week moving average, and the ninth decline in the last ten weeks.    In a separate report today, paycheck processer ADP reported that U.S. nonfarm private employment increased by 325,000 in December, another sign that the labor market was gaining momentum as the year ended. This was the largest monthly employment gain in a year, and almost twice the median consensus expectation of a 178,000 gain.

ADP: Private Employment increased 325,000 in December -- ADP reports:  Private-sector employment increased by 325,000 from November to December on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The ADP National Employment Report, created by Automatic Data Processing, Inc. (ADP®), in partnership with Macroeconomic Advisers, LLC, is derived from actual payroll data and measures the change in total nonfarm private employment each month. The estimated gain in employment from October to November was revised down slightly to 204,000 from the initially reported 206,000. This was well above the consensus forecast of an increase of 160,000 private sector jobs in December. The BLS reports on Friday, and the consensus is for an increase of 150,000 payroll jobs in December, on a seasonally adjusted (SA) basis. Government payrolls have been shrinking by about 24,000 per month this year. So this suggests around 325,000 private nonfarm payroll jobs added, minus 24,000 government workers - or around 301,000 total jobs added in December. Of course ADP hasn't been very useful in predicting the BLS report.

ADP: Job Creation Surged In December - Job creation accelerated sharply last month, according to the ADP Employment Report. U.S. nonfarm private employment rose a seasonally adjusted 325,000 in December--up dramatically from November’s 204,000 net gain. December’s advance is the strongest monthly gain in the history of this series, which dates to 2000. ADP’s estimate for job growth is coupled with news that initial jobless claims fell a healthy 15,000 last week to a seasonally adjusted 372,000, or the lowest level since May 2008. It’s starting to look like there’s a tailwind in the labor market. The recent drop in jobless claims has been anticipating as much and the forecast appears to be turning into reality. The next test is whether the ADP report finds support in tomorrow’s far-more influential jobs report from the U.S. Labor Department for December. Judging by the ADP data, there’s reason for optimism. As the chart below shows, there’s a fairly tight relationship between the ADP and Labor Department date through time. The two data series fall out of line in the short run, but the gap doesn't often linger. The fact that the latest ADP number is relatively elevated vs. the last data point from the government implies that tomorrow’s update will be favorable.

Good News On The Jobs Front? - Two pieces of data are out today in advance of tomorrow’s December jobs report that raise the tantalizing prospect that we might have turned a corner on hiring. In some respects, it won’t be surprising at all to see an uptick in hiring for December. Even with seasonal adjustments, the numbers are likely to show the impact of holiday hiring in the retail sector. Nonetheless, the numbers out today offer the thought, or at least the hope, that something more permanent is going on. We’ve been here before, of course, only to see things peter out in the end, but good news is good news. First up, there’s the monthly hiring report from payroll processing giant ADP: Private-sector companies significantly ramped up their hiring in December, according to a report issued Thursday. The private sector added a seasonally adjusted 325,000 jobs during the month, up from 204,000 in November, payroll-processing firm ADP said. In other news, the Labor Department reported a slight drop in weekly jobless claims as the overrall number once again stayed below the 400,000 level: Fewer Americans filed claims for unemployment insurance payments last week, showing the labor market is starting 2012 on better footing than a year earlier.Applications for jobless benefits decreased 15,000 in the week ended Dec. 31 to 372,000, Labor Department figures showed today

Signs of Hope on Jobs, and Some Caveats - With as dismal a run as we’ve had in the economy over the last few years, it’s tempting to start looking for the glass to be half full. After a traumatic late summer and fall, the economy showed some signs it was sputtering back with holiday sales strength and three months of steady – if uninspiring – job growth. Hopes are rising for signs of accelerating job creation in Friday’s Labor Department report, following a decline in the four-week average of new unemployment claims and a strikingly robust report of job growth from ADP, the payroll service. ADP said on Thursday that the private sector added 325,000 jobs in December, the strongest increase in a year.Without trying to knock the glass over, we have to point out that many economists consider the ADP numbers less than predictive. “Its track record is spotty (and that characterization is being polite),”  ADP often revises its numbers, and historically, December’s numbers have been subject to fairly wide swings.

Strong ADP Jobs Gain Needs Grain of Salt - The U.S. added 325,000 private-sector jobs in December, according to a report by payroll giant Automatic Data Processing and consultancy firm Macroeconomic Advisers. The number was much better than economists were expecting, and added to hopes of a strong official Labor Department report on Friday. But ADP has a mixed track record compared to the official Labor Department numbers, partly because of different methods for collecting data. Last month, ADP reported that the private sector added 206,000 jobs, but the official number from the Labor Department was a more subdued 140,000. And back in early July, ADP announced June payrolls had soared by 157,000 new slots, but the Labor Department reported a much more subdued 57,000 private jobs.

Whoa! The 10x Difference Between TrimTabs December Jobs Estimate of 38,000 New Jobs and ADP’s Estimate of 325,000 Begs an Explanation - For the second consecutive month, ADP has forecast an unusually high estimate of private job creation for the BLS payroll report. This month ADP's estimate is 325,000 jobs. Last month, and on many other occasions, ADP's estimates and the BLS reports were miles apart. Is one better than the other? While pondering that question, this month Trim Tabs has stepped up to the plate with a forecast of 38,000 jobs. Madeline Schnapp, Editor of "TrimTabs Weekly Macro Analysis" and "TrimTabs Employment NewsFlash" provided a transcript of the above video. On Tuesday, January 3rd TrimTabs released its December jobs estimate which showed the U.S. economy added only 38,000 new jobs. Today, ADP released its December jobs estimate pointing to job growth of a stunning 325,000 new jobs, almost 10 times TrimTabs estimate. In addition, the consensus estimate for the BLS report this Friday is for 150,000 jobs. Whoa! The differences between the three estimates begs the question of what is going on here? Before we answer that question, a few observations are in order. First, we challenge the notion that the BLS should be the standard bearer for job growth in the U.S. because its estimates are frequently revised, ranging from a few percent to several hundred percent. For example, in August, the BLS revised its estimate up from 0, a showing an economy on the verge of recession, to 104,000 showing an economy experiencing positive but weak economic growth. Second, the BLS and the ADP estimates are based on surveys that are incomplete when released. TrimTabs jobs estimate, on the other hand, is based on daily income tax withholdings to 130 million wage earners.

December Employment Report Preview - If you accept the idea that the final benchmarking is accurate, then the BLS approach should be viewed as an initial estimate, not the ultimate answer.  What we are all looking for is information about job growth.  There are several competing sources using different methods and with different answers.

• ADP has actual, real-time data from firms that use their services.  The firms are not completely representative of the entire universe, but it is a different and interesting source. ADP sees gains of 325K private jobs.  There is a continuing trend of losses in government jobs.
• TrimTabs looks at income tax withholding data.  The idea is that this is the best current method for determining real job growth.  They see job gains of only 38,000.
• Econonmic correlations.  Most Wall Street economists use a method that employs data from various inputs, sometimes including ADP (which I think is cheating -- you should make an independent estimate).  I use the four-week moving average of initial claims, the ISM manufacturing index, and the University of Michigan sentiment index.  I do this to embrace both job creation (running at over 2.5 million jobs per month) and job destruction (running at about 2.3 million jobs per month)..  When you know there is a problem with an input variable, you need to review the model.

December Employment Report: 200,000 Jobs, 8.5% Unemployment Rate - From the BLS:  Nonfarm payroll employment rose by 200,000 in December, and the unemployment rate, at 8.5 percent, continued to trend down, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in transportation and warehousing, retail trade, manufacturing, health care, and mining. ...The change in total nonfarm payroll employment for October was revised from +100,000 to +112,000, and the change for November was revised from +120,000 to +100,000. The following graph shows the employment population ratio, the participation rate, and the unemployment rate.The unemployment rate declined to 8.5% (red line).  The Labor Force Participation Rate was unchanged 64.0% in December (blue line). This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although some of the decline is due to the aging population. The Employment-Population ratio was unchanged at 58.5% in December (black line).  The second graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

Employment Situation - spencer - (6 charts) The employment report shows signs of an improved employment situation, but on balance it looks like more of the same. The unemployment rate fell 0.2 points to 8.5%. This continues the recent trend of a falling unemployment rate. But the drop was also driven by anther 50,000 drop in the labor force. But the increase in the headline payroll employment was 200,000, one of the largest gains this cycle. The household increase in employment eased to some 176,000, significantly smaller than over the past few months when the household survey showed well over 200,000 monthly job gains.In particular, private payrolls showed a nice improvement over the past few months. Maybe most importantly, the index of aggregate hours worked looks like it is continuing the trend established soon after it bottomed. The year over year gain in hours worked has been bouncing around 2.5% since the first quarter. Average hourly earnings continue to stagnate around 2%, modestly better than the 1.8% increase in 2010. It may be possible to say that average weekly earnings growth has bottomed, but to call it a bottom or a trend change look like a stretch to me. With such weak wage gains nominal personal income growth is likely to remain weak and in an environment of such weak income gains it is difficult to see how higher inflation can be sustained.

Employment Rate Down 0.1% to 8.5% on 200K New Jobs -  Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics: Nonfarm payroll employment rose by 200,000 in December, and the unemployment rate, at 8.5 percent, continued to trend down, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in transportation and warehousing, retail trade, manufacturing, health care, and mining.  The unemployment peak for the current cycle was 10.2% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948.  The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. The December number is 3.6% — down fractionally from last month's 3.7%. This measure gives an alternative perspective on the relative severity of economic conditions. As we readily see, this metric remains significantly higher than the peak in 1983, which came six months after the broader measure topped out at 10.8%. The next chart is an overlay of the unemployment rate and the employment-population ratio. This is the ratio of the number of employed people to the total civilian population age 16 and over.

Jobs Report, First Impressions - Employers added 200,000 jobs on net last month, while the jobless rate ticked down to 8.5%, according to this morning’s jobs report from the BLS.  That’s a bit better than what was expected, reflecting moderate but broad labor demand across almost all sectors of the private job market–the public sector continues to be a notable sore spot. All told, a solid report, with most industries adding jobs, the work week expanding a bit, and the jobless rate revealing a slow but steady trend down–see figure.  With December’s data, we now have full year 2011 numbers.  Payrolls added 1.6 million jobs last year, the best showing since 2006.  Private sector payrolls were up 1.9 million, the most jobs added in the private sector since 2005. In other words, the labor market is improving, and has a bit of trend going for it–employers remain cautious–hiring can’t be called robust–but it has been slow and steady.

Jobs Report, Second Impressions: the Good, the Bad, the Ugly -- Re the job situation:

• –Payrolls expanded in every month last year, the first time we’ve seen that for a while, adding 1.6 million jobs overall and 1.9 million in the public sector (continued public sector job loss is one of the bads).
• –Unemployment is trending down.  It peaked at 10% in Oct of 2010 and hit 8.5% last month.  However, no small part of this decline is due to people leaving the labor force (see below).
• –The underemployment rate is down 1.4 ppts from a year ago, from 16.6% to 15.2%, driven in part by the decline of almost 800,000 in the number of involuntary part timers (i.e., part-time workers who want full time jobs).
• –Job Quality: Many of the jobs we’ve added over the past year have been in low-paying sectors, like restaurants, bars, and retailers (part of the 200K gain last month, e.g., included 42,000 jobs for couriers/messengers, presumably related to holiday deliveries).  On the other hand, manufacturing’s picked up lately, up 225K over the year.
• –Labor Force Participation: This is the most notable bad we face right now. 
• –Long Term Unemployment: Still a huge problem, with over 40% of the jobless unemployed for at least half a year. 
• –Public Sector:  The state and local government sector continues to shed jobs, down about half-a-million over the last two years.  They’re cutting budgets and taking it out of their workforces, and remember, these are teachers, police, sanitation workers—folks whose work is essential to our communities (education jobs at the local level are down 190K over the past two years).
• The Ugly: That would be Congress...

Unmitigated good news on jobs - File this one under “unmitigated good news”: America’s employment situation turns out to have been rosier, at the end of 2011, than anyone had dared hope. There were 200,000 more people in work last month than there were in November, and the unemployment rate — by far the single most politically-important macroeconomic statistic — fell to 8.5%, the lowest rate in three years. All data series are noisy, of course, and we’ll surely see volatility in this one over the course of 2012. But it really does seem that there’s a bit of fire in the American belly right now, and that things are going to continue to get better over the course of this year unless and until some new crisis comes along.The cheer is spread all over this report. The broadest measure of underemployment, U-6, fell sharply to 15.2%, again a new three-year low, and down two full percentage points in two years. The unemployment figures more generally are now beginning to look as though they’re in a downward trend, rather than every good month being offset with a subsequent disappointment. Back then, it seemed like nothing could get Americans back to work: now, with political gridlock as far as the eye can see through 2012, it seems that America has got used to nothing and is has worked out how to grow anyway.

Private Payrolls Rise 212k In December - Private payrolls rose by a net 212,000 in December as the overall jobless rate fell to 8.5%, the lowest in nearly three years, the Labor Department reports. Still, the pace of job creation last month is a bit of a letdown after yesterday's stellar rise via ADP's estimate. But let's not quibble too much. Today's report is still quite respectable in the current climate. Indeed, a gain of 212,000 jobs is a decent showing after November's tepid 120,000 gain. If nothing else, today's number du jour puts more pressure on the folks who argue there's a recession in the offing.  Never say never, but economic contractions don’t have a history of arriving when the labor market is expanding at the current pace. And if job creation is strengthening, as it seems to be, pessimism about the macro trend may out of style for a stretch. Sure, there may be a recession off in the distance and next month may bring dismal news. But there's no sign of darkness in today's employment report. Job growth is hardly the only data point to consider when reviewing macro trends, but it's certainly a fair slice of the total package. And when you consider some of the other encouraging reports of late, it's tempting to see the proverbial glass as half full.

Nonfarm Payroll +200,000 ; Labor Force Drops Another 50,000 ; Those Not in Labor Force Rises by 194,000 ; Unemployment Rate 8.5%; Notes from Trim Tabs on the BLS Report -- Here is an overview of December Jobs Report, today's release.

• US Payrolls +200,000
• US Unemployment Rate Declined .2 (from revised number) to 8.5% 
• Civilian labor force fell by 50,000
• Those Not in Labor Force rose by 194,000
• Participation Rate steady at 64.0%, nearly matching a low last seen in 1984
• Actual number of Employed (by Household Survey) rose by 176,000
• Unemployment fell by 226,000 (194,000 of which comes from those dropping out of labor force)
• Civilian population rose by 143,000
• Average workweek for all employees on private nonfarm payrolls was +.1 to 34.4 hours
• The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged higher 0.1 hour to 33.7 hours in November.
• Average hourly earnings for all employees in the private sector rose by 4 cents to $23.24
• Government employment decreased by 12,000
• The private sector has only recovered 36 percent of jobs lost in the peak-to-trough period of January 2008 to February 2010.

Video: Analysis of Jobs Data - The  WSJ News Hub provides full coverage of the improving U.S. jobs picture. In December, 200,000 non-farm payrolls were added as the nation’s unemployment rate fell to 8.5%.

Something is working - It is too early to celebrate, but one can at least heave a sigh of relief after a December jobs report that shows a meaningful acceleration in employment growth. This morning, the Bureau of Labour Statistics released preliminary numbers on the American labour market in December, and the news is good. Non-farm employment rose by 200,000 jobs for the month. Private employers added 212,000 jobs, slightly offset by the continuing decline in government employment. In the 12 months through December, the American economy added 1.9m private-sector jobs—the best performance so far in this recovery. The unemployment rate dipped again, from 8.7% to 8.5%. Part of the decline was once again associated with departures from the labour force, but rising employment accounted for much of the improvement.  Payroll growth was fairly broad in nature. Construction employment rose by 17,000 in December, though very little of that was attributable to improving prospects for residential construction. Manufacturing employment rose by 23,000, all of it in durable-goods production. The American economy added 225,000 manufacturing jobs in 2011. Service-sector employment, especially in health-care industries, added substantially to growth, and there was a curious rise of 42,000 jobs for "couriers and messengers". Some of that may subsequently be revised away; it seems likely that the bureau's seasonal adjustment isn't large enough.

Jobs Strength Is There, Now Sustainability Needed - December is the traditional month of gift-giving and so it was for the labor markets. Businesses gave the gift of solid hiring to job seekers. The question is whether companies will keep up the pace in 2012. Nonfarm payrolls added a better-than-expected 200,000 slots in December, with jobs added in manufacturing, construction, and private services. The December unemployment rate fell to 8.5%. That was the second consecutive decline and took the rate down to its lowest since February 2009. A sustained pace of December-caliber job growth is needed to trigger the virtuous cycle of more income generating more demand which causes businesses to add more workers. The key word there is “sustained.”  More than 13 million workers are still unemployed and another 10 million or so are underemployed or are too discouraged to even look for work. It will take years before the labor markets approached anything close to normal employment. Worse still, 42.5% of the unemployed have been out of work for more than six months. Their absence from the workforce puts a heavy burden on the economy.

Best Jobs Report in a Long Time Leads Off the Election Season - Everyone knows what this election will be about: jobs, jobs, jobs. If so, the latest numbers from the Bureau of Labor Statistics should shake things up a little.  The headline number in the report is a relatively robust gain of 200,000 jobs in December, confirming that the jobs market is picking up after a mid-year slump. The November gain was revised downward from 120,000 reported last month to just 100,000, but that was partly offset by an upward revision of the October figure from an originally-reported 100,000 to 112,000. There was good news in the line-by-line numbers, as well. Goods-producing jobs increased by 48,000, after a decrease in November. About half of those were in manufacturing, which had been flat for most of the quarter. As has been the case all year, the private sector was healthier than government. There were 212,000 new private-sector payroll jobs, compared with a loss of 12,000 government jobs. Most of the government jobs were lost at the local level. State employment was flat, and federal non-postal jobs grew slightly. As has been true all year, the service sector accounted for the bulk of job formation, but the pattern here changed subtly as well. Transportation and retail trade gained strongly. Financial service jobs were almost unchanged. Health care, which had been almost the only job creator in some of last year’s worst months, continued to grow but it was no longer the strongest source of jobs.

Getting Better But a Long Way to Go - Friday’s jobs data confirmed that labor markets are getting better, but slowly. Payrolls expanded by 200,000, the unemployment rate fell again to 8.5%, weekly hours ticked up from 34.3 to 34.4, and hourly earnings rose by 0.2%. Of course, there is still a long, long way to go. Unemployment and underemployment both remain very high, but they’ve been moving in the right direction. After peaking at 10% in October 2009, the unemployment rate has declined by 1.5 percentage points. The U-6 measure of underemployment, meanwhile, peaked at 17.2% and now stands at 15.2%: (The U-6 measures includes the officially unemployed, marginally attached workers, and those who are working part-time but want full-time work.)

Unemployment Falls to 8.5 Percent, but Job Growth Remains Weak - The unemployment rate fell to 8.5 percent in December, the lowest level since the 8.3 percent rate reported for February of 2009, the month that Congress approved the stimulus package. The drop was driven primarily by a 0.3 percentage point decline in the unemployment rate for men to 8.0 percent. The unemployment rate for women edged up slightly to 7.9 percent. Over the last year, the gap in unemployment rates between the sexes has virtually disappeared as the unemployment rate for men fell by 1.4 percentage points, while the rate for women only dropped by 0.2 percentage points. The employment-to-population ratio (EPOP) for women has actually fallen by 0.4 percentage points over this period, while it has risen by 0.8 percentage points for men. Overall, the EPOP stands at 58.5 percent, 0.2 percentage points above its year-ago level and 0.4 percentage points above the lows hit in the summer. White men have gained much more than black men over the last year, with a 1.4 percentage point drop in their unemployment rate to 7.1 percent. For black men, the decline has been 1.1 percentage points to 15.7 percent. The unemployment rate for black women has risen by 0.9 percentage points over the year to 13.9 percent, while their EPOP has fallen 1.6 percentage points. Other news in the survey is mixed. The number of people involuntarily working part-time fell by 406,000, the third consecutive month of sharp declines. On the other side, the unemployment rate due to job leavers fell by 0.4 percentage points, suggesting workers lack confidence in their job prospects. The unemployment duration measures edged down slightly, but did not completely reverse the jump seen in October. The percentage of workers experiencing long-term hardship, a fuller measure that includes people who have left the labor force, is near 7.0 percent, roughly twice the share of workers experiencing long-term unemployment.

Massive Beat? Not So Fast - Morgan Stanley Warns 42,000 "Jobs" Bogus Due To Seasonal Quirk - Enamored with the 200,000 number? Don't be - the reason why the market has basically yawned at this BLS data is that as Morgan Stanley's David Greenlaw reports, 42,000 of the 200,000 is basically a seasonal quirk, which will be given back next month, meaning the true adjusted number is 158,000, essentially right on top of the expectation. From David Greenlaw: "some of the strength in this report should be discounted because of an seasonal quirk in the courier category of payrolls (Fed-ex, UPS, etc). Jobs in this sector jumped 42,000 in December, repeating a pattern seen in 2009 and 2010 (see attached figure). We should see a payback in next month's report."

The Soft Bigotry of Low Employment Expectations - Krugman - A brief note while in transit, about today’s jobs report. Obviously it’s better than we’ve been seeing. But we need much faster job growth; it says something about how beaten down we are that this is considered good news. Let me give two back-of-the-envelope ways to think about how inadequate 200,000 jobs a month is. First, note that there are still about 6 million fewer jobs than there were at the end of 2007 — and that we would normally have expected to have added around 5 million jobs over a four-year period. So we’re 11 million jobs down — and we need at least 100,000 jobs a month just to keep up with working-age population growth. Do the math, and you’ll see that it would take 9 or 10 years of growth at this rate to restore full employment. Alternatively, note that during the Clinton years — all 8 of them — the economy added around 230,000 jobs a month. As it did that, the unemployment rate fell about 3 1/2 percentage points — which is about what we’d need from here to get back to something that felt like full employment. Again, this suggests that we’re looking at something like a decade-long haul to have full recovery. So yes, this is better news than we’ve been having. But it’s still vastly inadequate.

Economists Take Solace (but Only a Little) in Jobs Report - Economists viewed the latest jobs numbers as at least moderately encouraging, although some of them warned, as usual, against reading too much into the results of any single month — especially December. “Things are looking a bit better,” as Morgan Stanley’s David Greenlaw and Ted Wieseman summed it up, “but, we wouldn’t get too carried away just yet.” Ian Shepherdson of High Frequency Economics was more ebullient. “We see these trends as sustainable,” he wrote. “This is the real deal for the U.S. economy, at last.” He reckoned that private companies held off hiring in the summer and fall as consumer confidence fell, but then began to hire once it became clear that spending was holding up. And the loss of government jobs was “clearly slowing,” he said. Some economists noted that a seasonal bump each December in jobs held by couriers was typically followed by layoffs in January, once all the holiday gifts were delivered. And some offered other cautionary notes and qualifiers. “The pace of job growth in recent months, while still not satisfactory compared to most past cycles, at least seems sufficient to generate enough income growth to keep consumer spending moving ahead at a moderate pace,”

Employment Reality Check: 200,000 New Jobs Is a Good Start, But Good Times May Still Be a Decade Away - Companies are hiring again. That’s the good news. The bad news is those hires might not be coming fast enough. In December, corporate America added 200,000 employees to their payrolls. That hit the magic number economists have been pointing to for months as the rate we needed to declare the current state of affairs a real recovery and not just false hopes.Is 200,000 enough? And if so, is it sustainable? The good news: The unemployment rate fell to 8.5%. That was the fourth month in a row that the jobless number has fallen, and it was the lowest level that gauge of economy has been since February 2009. The drop was also a surprise to economists, who generally thought the rate would rise. But even that good news came with some doubt. Some have questioned whether the drop in the unemployment rate is to be believed. Jim Pethokoulis, a blogger for the conservative think tank the American Enterprise Institute, tweeted shortly after the jobs number came out on Friday morning: “10.9%: The unemployment rate (u-3) if the size of the workforce was the same as when Obama took office.” His point is that while the unemployment rate is lower, so too is the size of the workforce.

Jobs Day - The headline number at 200K is decent. As always we care more about the internals.

• Construction up 17K, almost all of which was non-residential specialty trades. I am guessing this means oil and gas extraction installations.
• Manufacturing up 23K with metals and motor vehicles doing well. This is as expected.
• Non-Durables were flat. I still need to spend more time with this but from looking at the industrial production data this is where we are weak. Its not clear what’s going on here.
• Wholesale and Retail Trade clocked in at 12K and 29K respectively. Not bad and consistent with rising consumer expenditures.
• Transportation came in big at 50K on 42K couriers and messengers. I am not sure if that is a strike resolution of something, but keep that in mind.
• Information managed not to fire people, coming in at 6K, call that a win.
• Financial Services likewise clocking in at 2K
• Professional and Business Services was weak at 12K with a particularly disconcerting drop of 8K in Temp workers.
• Ed and Health added 29K, YAWN
• Leisure and Hospitality added 21K with a respectable 24K going towards food service.
• Government shed12K workers with a still amazing 9K local government education workers.

Employment Summary, Part Time Workers, and Unemployed over 26 Weeks - There were 200,000 payroll jobs added in December. This included 212,000 private sector jobs added, and 12,000 government jobs lost. The unemployment rate fell to 8.5% from a revised 8.7% in November (revised from 8.6%). U-6, an alternate measure of labor underutilization that includes part time workers and marginally attached workers, declined to 15.2% - this remains very high. U-6 was in the 8% range in 2007. For the year, the economy added 1.64 million total non-farm jobs or just 137 thousand per month. This is a better pace of payroll job creation than in 2010, but the economy still has 6.0 million fewer payroll jobs than at the beginning of the 2007 recession.  There were 1.92 million private sector jobs added in 2011, or about 160 thousand per month.  Both the participation rate and the employment population ratio were unchanged in December at 64.0% and 58.5% respectively. The average workweek was increased slightly to 34.4 hours, and average hourly earnings increased 0.2%. "The average workweek for all employees on private nonfarm payrolls increased by 0.1 hour to 34.4 hours in December. ... In December, average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents, or 0.2 percent, to $23.24. Over the past 12 months, average hourly earnings have increased by 2.1 percent." From the BLS report:  The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) declined by 371,000 to 8.1 million in December. This is the lowest level since January 2009.This graph shows the number of workers unemployed for 27 weeks or more.  According to the BLS, there are 5.588 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 5.680 million in November.

Interesting Facts from Today's Employment Report - A few interesting items from today's BLS Employment Report for December:

• 1. The unemployment rate for workers with a college degree fell to 4.1% in December, which  is the lowest jobless rate for that group since January 2009, almost three years ago.   The number of employed college graduates is at an all-time high of 45.2 million, and more than 1.6 million above the December 2007 level when the recession started.  In contrast, the jobless rate for workers with less than a high school degree jumped to 13.8% in December from 13.3% in November, and the employment level for those workers remains 1.24 million jobs below the December 2007 level. This contrast suggests that educational level might be an important factor in the labor market improvements and the drop in the jobless rate to 8.5%, with college-educated workers being the group that is gaining jobs during the recovery, while the least educated workers are the group finding it hardest to find jobs. 
• 2. The manufacturing sector added 225,000 jobs in 2011, following an increase of 109,000 factory jobs in 2010, bringing manufacturing employment to 11.79 million at year-end.  That's the first time since 1996-1997 of two consecutive annual increases in employment by U.S. manufacturing companies, and the 225,000 job gain last year was the largest since a 304,000 increase in 1997.  If manufacturing companies continue to add jobs at the current pace, it's likely that manufacturing employment by mid-2012 will exceed the 12 million mark for the first time since early 2009. 

Real Jobless Rate Is 11.4% With Realistic Labor Force Participation Rate - One does not need to be a rocket scientist to grasp the fudging the BLS has been doing every month for years now in order to bring the unemployment rate lower: the BLS constantly lowers the labor force participation rate as more and more people "drop out" of the labor force for one reason or another. While there is some floating speculation that this is due to early retirement, this is completely counterfactual when one also considers the overall rise in the general civilian non institutional population. In order to back out this fudge we are redoing an analysis we did first back in August 2010, which shows what the real unemployment rate would be using a realistic labor force participation rate. To get that we used the average rate since 1980, or ever since the great moderation began. As it happens, this long-term average is 65.8% (chart 1). We then apply this participation rate to the civilian noninstitutional population to get what an "implied" labor force number is, and additionally calculate the implied unemployed using this more realistic labor force. We then show the difference between the reported and implied unemployed (chart 2). Finally, we calculate the jobless rate using this new implied data. It won't surprise anyone that as of December, the real implied unemployment rate was 11.4% (final chart) - basically where it has been ever since 2009 - and at 2.9% delta to reported, represents the widest divergence to reported data since the early 1980s. And because we know this will be the next question, extending this lunacy, America will officially have no unemployed, when the Labor Force Participation rate hits 58.5%, which should be just before the presidential election.

Average Duration Of Unemployment: Second Highest Ever At 40.8 Week -The NFP report confirms the picture we have all known to grow and love - the people "entering" the labor force are temp workers, those with marginal job skills, and making the lowest wages. For everyone else: better luck elsewhere: the number of people not in the labor force has soared by 7.5 million since January 2007, and the average duration of unemployment is 40.8 weeks - essentially in line with last month's record 40.9. Bottom line - if you are out of a job, you are out of a job unless you are willing to trade down to an entry level "temp-like" position with virtually no benefits or job security.

How Long Will It Take the Economics Reporters to Wipe the Egg Off Their Faces? - All the news reports on the December jobs data are very upbeat about the 200,000 jobs reported for December. The phrase for the day is "better than expected." However, as someone who told friends and family it would be 165,000 I see it as slightly worse than expected. Look at the data boys and girls. We created 42,200 courier jobs in December. Was there really a big surge in hiring in the courier industry? Well, the Bureau of Labor Statistics showed a surge of more than 50,000 new courier jobs last December, all of which were gone in January and then some. In other words, pull out our 42,000 courier jobs and we are looking at job growth of 158,000, not much to celebrate. btw, even 200,000 jobs would not be much celebrate. Job growth averaged almost 250,000 a month for the years 1996-2000. Coming out of a steep recession, we should be expected job growth in the 300k-400k monthly range. Unfortunately, there has been a huge effort to lower expectations so that we come to accept dismal economic performance as the best we can do. (The double-dip recession crew deserve a special flogging in this story.)

Under Obama, a Record Decline in Government Jobs - Three years into his presidency, he has exceeded Reagan in one area: reductions in government jobs. Over all — including a decline of 12,000 public sector jobs in the Labor Department report for December — government — government employment is down 2.6 percent over the last three years, compared to a decline of 2.2 percent in the early Reagan years. That is a record. That record, which will seem a dubious distinction to public-sector employees who backed Mr. Obama, is largely a result of shrinking state governments. State employment fell 1.2 percent in 2011 — the largest percentage for any year since counting began in 1955. The number is down 2.2 percent over the last three years. It was up 1.2 percent during Reagan’s first three years, declining in only one of the years. Local government jobs used to be deemed super safe. Since the federal government started tracking the statistic in 1955, there have been only six years when local government employment declined. They have come in threes: 1981, 1982 and 1983, the first three years of the Reagan administration, and 2009, 2010, 2011, the first three years of the Obama administration. The declines were a little larger under Reagan. The local-government job count fell 3.8 percent under him but just 3.5 percent over the last three years. But if teacher employment is the measure, the cuts have been greater under Mr. Obama. Education jobs at the local level are down 3 percent under Mr. Obama, compared to 2.1 percent in the early Reagan years.

Government Still Trimming Jobs, but Cutbacks Slow - State and local governments continue to be a big drag on the job market, though they are cutting jobs at a slower pace than they were over the past two years when the economy was weaker and their budgets tighter. State and local governments cut 14,000 jobs in December and a total of 244,000 over the year. That tally was only slightly less than the 249,000 state and local jobs that were lost in 2010, but the pace slowed considerably over the second half of the year. Some 66,000 teachers, police officers, firefighters and other government workers lost their jobs in the second half of 2011 — about half as many as in the last six months of 2010. The ebb in state and local job losses will likely continue. State spending is expected to increase in the next fiscal year, which starts in July, while various reports show states’ quarterly tax hauls continue to improve. But while states have seen a marked improvement in collections, the local government sector — which has roughly four times as many workers — has been generally worse off. Local governments, unlike most states, get much of their funding from property taxes, which remain weak along with the housing market.

Seasonal Retail Hiring, Duration of Unemployment, Unemployment by Education and Diffusion Indexes - According to the BLS, retailers hired seasonal workers at the pre-recession pace in 2011. Click on graph for larger image. This graph shows the historical net retail jobs added for October, November and December by year. Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. Retailers hired 718.5 thousand workers (NSA) net this year. This is about the same level as in 2006 and 2007. Note: this is NSA (Not Seasonally Adjusted). This suggests a fairly strong holiday season. This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. The the long term unemployed declined to 3.6% of the labor force - this is still very high, but the lowest since September 2009. This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). Unfortunately this data only goes back to 1992 and only includes one previous recession (the stock / tech bust in 2001). Clearly education matters with regards to the unemployment rate - and it appears all four groups are generally trending down. Note: This says nothing about the quality of jobs - as an example, a college graduate working at minimum wage would be considered "employed".  This is a little more technical. The BLS diffusion index for total private employment was at 61.2 in December, up from 50.7 in November. For manufacturing, the diffusion index increased to 56.8, up from 40.7 in November.  Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS. 

Unemployment declines, but don't sound the all clear just yet - The unemployment report released by the Labor Department on Friday shows nonfarm payroll employment increasing by 200,000 in December and unemployment falling to 8.5 percent. There is some question about the seasonal adjustment procedure used to adjust the numbers for holiday hiring, but even so this is a relatively strong report with job gains "in transportation and warehousing, retail trade, manufacturing, health care, and mining." The good news in the latest unemployment report coupled with the decline in new claims for unemployment insurance over the last few weeks are both pointing to recovery. But how strong and robust will that recovery be? We are recovering from a particularly troublesome type of economic problem known as a balance sheet recession.  It takes considerable time to rebuild all that is lost, and so long as this rebuilding is underway -- so long as people are saving rather than consuming -- economic growth will be slow and lost decades are not at all uncommon in this type of a recession.  It doesn't have to be this way. Effective monetary and fiscal policy can shorten the recovery time. However, fiscal policy makers are not going to increase spending on the scale needed. They are much more likely to do something that works against the recovery such as reducing the deficit before the economy is ready for it than to take further action to spur output and employment.

Gallup Provides Best Unemployment Measure - Given the constantly changing -- and sometimes surprising nature of the government's reports -- Gallup's measurement of the U.S. unemployment rate, based on a random sample of more than 15,000 phone interviews monthly, is likely the best way to monitor the real unemployment situation. On Friday, Jan. 6, the government reported the U.S. unemployment rate for December 2011 was 8.5% on a seasonally-adjusted basis and 8.3% unadjusted. The prior day, Gallup reported its unadjusted unemployment rate at 8.5% for December -- the same as in November. On an unadjusted basis, both Gallup and the government show a relatively stable unemployment situation over the last three months of 2011 -- probably the best view of the real situation.However, the government's adjusted data -- as revised -- shows something completely different with the unemployment rate declining steadily from 8.9% in October to 8.5% in December. In 2012, anything may happen, as the government rebases its data in January and then adjusts its results monthly. The current declining trend could continue or reverse -- either way all of these adjustments may create political debates about whether the real job situation is improving or not.

Measuring Long-Term Hardship in the Labor Market - From peak to trough, the United States lost almost nine million jobs in the most recent economic downturn. What was completely unprecedented about the most recent recession, however, was the explosion in long-term unemployment. The depth and length of the recession pushed the long-term unemployment rate – the share of unemployed workers who have been unemployed for 27 weeks or longer – to over 40 percent throughout the entirety of 2010 and 2011. The official concept of “long-term unemployment,” however, is incomplete and, in some cases, even potentially misleading. As tracked by government statistics, the long-term unemployed are only a relatively small part of the population facing extended, sometimes permanent, spells without work. This paper proposes rethinking our understanding of long-term unemployment in two ways. First, we encourage shifting from a narrow focus on long-term unemployment toward a broader concept of “long-term hardship” in the labor market. Second, we suggest complementing the standard measure of long-term unemployment, which reports the share of the unemployed who have been out of work for six months or more, with an alternative measure, which reports the share of the total labor force that has been unemployed for six months or more.

Work-At-Home Scam Victims Receive $9.70 Per Person In Settlement -  With more Americans out-of-work, the economic downturn has given work-at-home scammers a boost. The number of complaints about work-at-home scams filed to the FTC grew to nearly 8,000 in 2009 from slightly more than 4,000 in 2006, according to USA Today. The firms often take advantage of vulnerable Americans by offering them the opportunity to make money by stuffing envelopes, doing online searches or assembly or craft work, according to the FTC.  In addition to the unemployed, financial scammers are also increasingly preying on the elderly, a separate USA Today report found. Since the unemployment rate has seen an unwelcome boost in recent years, the Federal Trade Commission has stepped its enforcement efforts against firms that advertise the opportunity for Americans to get rich quick working from home, only to ask potential customers to pay up front for materials that allegedly don't result in a successful business. But by the time the FTC prosecutes the businesses and the cases run their way through the court system, the firms have often already spent or hidden the money, The Washington Post reports.  The result? In a recent FTC settlement with a Texas-based company, the victims of an alleged scam only received an average payment of $9.70, WaPo reports.

An Appalling Idea, Even by Washington Standards - For legislation to extend the payroll tax cut through the end of 2012, House Republicans are expected to push for a provision on unemployment insurance (UI) that is appalling even by current Washington standards. Neither President Obama nor Congress should accept any payroll-tax legislation that includes it. Here’s why: The provision, part of a full-year payroll-tax bill that the House passed in December, would deny UI benefits to any worker who lacks a high school diploma or GED and is not enrolled in classes to get one or the other — regardless of how long the person worked or whether he or she has access to adult education, which itself has been subject to significant budget cuts in the past few years and is heavily oversubscribed. The proposal would deny UI benefits to hundreds of thousands of workers — many of them middle-aged — who have worked hard, played by the rules, and effectively paid UI taxes for years and who then were laid off due to no fault of their own. Older workers would be hit the hardest. Nearly half (47 percent) of UI recipients with less than a high school education or the equivalent are over age 45. In 2010, half a million workers age 50 or over who received UI lacked a high school diploma.

Unemployed Rely More On Family Than Government : NPR: A Kaiser Family Foundation and NPR survey shows that many people enduring long-term joblessness have been relying more heavily on friends and family than government or other safety net services to get by. Many surveyed also say that, so far, the federal government's efforts to boost the economy and job market have done more harm than good. Now, a recent NPR Kaiser Family Foundation survey of the long-term unemployed and underemployed. It found little trust in the government's ability to both help the economy and help them. And as Kirk Siegler of member station KUNC reports, that means many jobless Americans are turning to friends and to family instead.

With Unemployment Insurance, Is 99 Weeks the Magic Number? - A possible compromise between Democrats who want to leave the unemployment compensation system unchanged and Republicans who want to return to pre-recession benefit formulas might be to adopt a benefit formula from some of the previous recessions. At the end of 2011, Congress allowed unemployment beneficiaries to continue to collect under both the emergency and extended programs, which permit the unemployed to receive benefits for up to 99 weeks of unemployment. Some economists believe that unemployment insurance stimulates spending because unemployed people are thought to spend most, if not all, of the money they have on hand. Some economists also suggest that unemployment insurance prolongs unemployment because an unemployed person has to give up his benefits as soon as he finds and starts a new job or returns to working at his previous job. Either way, some people cannot find work, and unemployment benefits help cushion their blow.

David Ignatius Hides Upward Redistribution Policies as Market Outcomes, by Dean Baker: People are inclined to give much more legitimacy to market outcomes than policy outcomes engineered by governments. That is why there is a whole industry devoted to convincing people that the upward redistribution of income over the last three decades, which has given the bulk of economic gains to the One Percent, is really just the result of the natural workings of the market. David Ignatius is one of the people who works in this industry. His Post column today urges readers to contemplate the awful thought that, quoting Francis Fukuyama: "What if the further development of technology and globalization undermines the middle class and makes it impossible for more than a minority of citizens in an advanced society to achieve middle-class status?” It is very useful to the One Percent to pretend that their wealth and the near stagnation in living standards for everyone else is just the result of "the further development of technology and globalization." However this has nothing to do with reality.

Charting The Extinction Of American Disposable Income - It was the best of times, it was the worst of times. Given today's excitement at a rallying equity market, we are already hearing chatter on raising GDP estimates even though macro data is benefiting from standard seasonal improvements. However, while these good times are rolling for some (who, we are not sure), Sean Corrigan (of Diapason Commodities) points to our real disposable income. The man on the street's spend-ability has seen the worst five years' growth in half a century. For four decades, US real per capita disposable income has risen at ~20% a decade. For the average working man, that is a doubling of disposable income in a typical working life. The last 5 1/2 years, however, have seen no change whatsoever - the worst performance in at least half a century.

Overclass vs. Underclass - The middle class looks nervously up, then down. Which is the greater economic threat, the overclass or the underclass? Perceived answers to this question now shape political allegiances in the United States. Not that the middle class is sure where its boundaries lie. Much depends on what other labels are offered – such as working class or upper middle or lower middle rather than just plain middle. But whatever its exact size, the middle class is usually considered more deserving – and more threatened – than those at the extremes. Those on the left argue that the overclass threatens the country’s well-being, while those on the right point their fingers at the underclass. President Obama wants to raise taxes on millionaires; Republicans want to cut social programs directed at the poor. Occupy Wall Street accuses the top 1 percent of greed; Tea Party conservatives accuse welfare recipients of sloth, another deadly sin. Many people, including me, have decided that the overclass poses the most serious threat today to the middle class in the United States because it markets the assertion that the underclass is the source of all our problems. What the middle class decides will depend on its assessments of the relative threats of increasingly concentrated wealth at the top versus growing economic desperation at the bottom.

No longer the land of opportunity - “Over the past three years, Barack Obama has been replacing our merit-based society with an Entitlement Society,” Mitt Romney wrote in USA Today last month. The coming election, Romney told Wall Street Journal editors last month, will be “a very simple choice” between Obama’s “European social democratic” vision and “a merit-based opportunity society — an American-style society — where people earn their rewards based on their education, their work, their willingness to take risks and their dreams.” The best way to measure a nation’s merit-based status is to look at its intergenerational economic mobility: Do children move up and down the economic ladder based on their own abilities, or does their economic standing simply replicate their parents’? Sadly, as the American middle class has thinned out over recent decades, the idea of America as the land of opportunity has become a farce. As a paper by Julia Isaacs of the Brookings Institution has shown, sons’ earnings approximate those of their fathers about three times more frequently in the United States than they do in Denmark, Norway and Finland, and about 1¹ / ₂ times more frequently than they do in Germany. The European social democracies — where taxes, entitlements and the rate of unionization greatly exceed America’s — are demonstrably more merit-based than the United States.

Unpaid internships hurt mobility - In his excellent piece in today’s New York Times on the declining economic mobility of Americans, Jason DeParle mentions a commentary by Reihan Salam for the National Review Online, “Should we care about relative mobility?”Salam disputes that there’s anything wrong in the natural tendency of economically successful families to give their children special advantages in the competition for jobs, education and other resources. He admits, however, that affluent white families may have social networks that blacks cannot access and that protect whites, but not blacks, from downward mobility. The particular mechanism Salam identifies – internships — is one that EPI has identified as a serious problem for the economic mobility of minorities and for the labor market in general.  Salam recognizes that internships are sometimes reserved for the affluent:  Unpaid internships, in particular, exclude students from poorer families who can’t afford to work for nothing for a summer or a semester, especially after they graduate from college with tens of thousands of dollars of student loan debt. The children of affluent families, on the other hand, can afford to live in the most expensive cities in the U.S., such as New York and Washington, making contacts, building their resumes, and sometimes even learning skills, while their parents pay for their room and board, travel and entertainment.

Another Excellent Inequality Study -The Congressional Research Service (CRS) isn’t as well known in these parts as the CBO, but their reports are widely considered equally reliable and nonpartisan. So I took notice of their newly released study on income inequality.  The CRS study is notable in numerous respects: it uses high quality tax return data;  it provides useful breakdowns of income by source (wages, cap gains, etc.) and their impact on inequality; it provides before- and after-tax analysis.Two drawbacks are the 1) data are for income tax filers only—including, however, low-income families that get tax refunds—and 2) the data years and 1996 and 2006, so the endpoint seems a bit outdated (it’s the last year of publicly available of this sort).  However, as CRS convincingly states, these years are actually well-chosen: …both years were at approximately similar points of the business-cycle with moderate inflation (about 3%), a modest unemployment rate (about 5%), and moderate economic growth (3.7% in 1996 and 2.7% in 2006). Second, 2006 was the year before the August 2007 liquidity crunch and the onset of the severe 2007-2009 recession.  Third, there were major tax policy changes between these two years. Fourth, both 1996 and 2006 were three years after the enactment of tax legislation that affected tax rates and are unlikely to be affected by short-run behavioral responses to these changes. Here are some of the findings that caught my eye:

Harder for Americans to Rise From Lower Rungs —Movin’ on up,” George Jefferson-style, is not only a sitcom song but a civil religion. But many researchers have reached a conclusion that turns conventional wisdom on its head: Americans enjoy less economic mobility than their peers in Canada and much of Western Europe. The mobility gap has been widely discussed in academic circles, but a sour season of mass unemployment and street protests has moved the discussion toward center stage. Former Senator Rick Santorum of Pennsylvania, a Republican candidate for president, warned1 this fall that movement “up into the middle income is actually greater, the mobility in Europe, than it is in America.” National Review, a conservative thought leader, wrote2 that “most Western European and English-speaking nations have higher rates of mobility.” Even Representative Paul D. Ryan, a Wisconsin Republican who argues that overall mobility remains high, recently wrote that “mobility from the very bottom up” is “where the United States lags behind.” Liberal commentators have long emphasized class, but the attention on the right is largely new.

Dividends, Capital Gains, and the Growth of Income Inequality - Yesterday, I posted this analysis of an informative new report from the CRS on the increase in income inequality between 1996 and 2006.  One important finding from the report decomposes the increase in inequality, as measured by the Gini coefficient, into the contributions made by different income types.  Such diagnostics can be very helpful when we’re thinking about prescriptions. I’ve plotted the results below.  The Gini coefficient is a measure of inequality that ranges between 0 and 1, where higher numbers imply a less equal distribution.  Over these 10 years, the Gini of after-tax income increased from 0.503 to 0.560, an increase of 0.057, or 11%.  The figure below assigns that 0.057 point growth to the different sources of income.  Note that some sources led to higher inequality, while other reduced its growth.  On net, however, inequality grew. Source: CRSThe largest single contributor to the growth of inequality, 1996-2006, was dividends and capital gains.  Adding in business income, like profits from a hedge fund, comes to 0.061, more than explaining the 0.057 point increase in the Gini index.

The biggest driver of income inequality —A new report¹ from the Congressional Research Service — the nonpartisan public policy branch of Congress — takes a closer look at the drivers of income inequality between 1996 and 2006, the last period of moderate economic growth before the latest boom-bust cycle. The report explains that the Bush tax cuts contributed significantly to growing inequality but concludes that income from capital gains and dividends — investments in stocks, bonds, real estate and other assets — mattered even more: Changes in income from capital gains and dividends were the single largest contributor to rising income inequality between 1996 and 2006. Changes in tax policy also made a significant contribution to the increase in income inequality, but even in the absence of tax policy changes income inequality would likely have increased. Although earning inequality increased between 1996 and 2006, changes in wages and salaries appear to have had little effect on the increase in overall income inequality.  Democrats like President Obama have proposed raising the capital gains tax — which was lowered under Bush — partly out of interest in bridging this divide. Many conservatives, by contrast, believe that capital gains are taxed too much, arguing that it’s income that can be double-taxed under corporate and individual income taxes. All the major Republican presidential candidates but Romney and Santorum want to eliminate the capital gains tax entirely.

Myth of American Upward Mobility Punctured - We’ve been talking about income inequality lately, and tied into that is the idea of upward mobility. The United States, in the myths of cock-eyed optimists everywhere, remains the land of opportunity, where everyone can get a fair shot at greatness. But that America hasn’t existed for a while. In fact, as Jason DeParle reports, upward mobility doesn’t really exist in this country anymore. At least five large studies in recent years have found the United States to be less mobile than comparable nations. A project led by Markus Jantti, an economist at a Swedish university, found that 42 percent of American men raised in the bottom fifth of incomes stay there as adults. That shows a level of persistent disadvantage much higher than in Denmark (25 percent) and Britain (30 percent) — a country famous for its class constraints. Meanwhile, just 8 percent of American men at the bottom rose to the top fifth. That compares with 12 percent of the British and 14 percent of the Danes. Despite frequent references to the United States as a classless society, about 62 percent of Americans (male and female) raised in the top fifth of incomes stay in the top two-fifths, according to research by the Economic Mobility Project of the Pew Charitable Trusts. Similarly, 65 percent born in the bottom fifth stay in the bottom two-fifths.

More Mobility Pictures and Words - I promised I’d follow up on this and I do try to stay true to my word. [These come from the mobility chapter I contributed to the 2008/09 version of the book State of Working America, an EPI publication.] The first figure reflects some of the points from the NYT article this AM (see link above).  Each bar represents a correlation between the incomes of fathers and sons, once the sons grow up.  So this is a “how-far-does-the-apple-fall-from-the-tree” measure.  And larger correlations mean closer apples.  Basically, the more you can look at someone’s economic situation at birth and accurately predict where they’ll end up, the less mobility there is.  Next, two figures that are particularly important in terms of the factors responsible for tamping down mobility, particularly for lower-income children.  They both show that educational opportunity—a critical component of upward mobility for kids from less advantaged backgrounds—is itself inequitably distributed.  The first picture just compares the family income of kids in the entering classes at top universities versus community colleges.  Only 3% of kids entering the top-tier schools come from the low end of the income scale; almost three-quarters come from the top. But it’s the next chart that’s the real killer.  This one controls for not just income, but cognitive ability as well, based on test scores in eighth grade.  It then follows these kids over time and asks what share completed college.

Median Adjusted Gross Incomes by Tax Filling Status - Sometimes, as we work on our various projects, we stumble across data that's kind of interesting in and of itself.  To that end, today's example of that would appear to provide more evidence that social factors have more to do with the perceived rise in income inequality in the United States over time than do economic factors:  In the chart above, we've presented the median adjusted gross incomes we've estimated for 2009's income tax filers according to their tax filing status. The number in parentheses below each column in the cart indicates the number of tax returns filed in 2009 for each group.  It would seem that just marital status has a lot to do with the observed differences between the various kinds of income tax filers.

Stigmatizing Food Stamps - Five years ago, New York State stopped requiring that all applicants for food stamps be electronically fingerprinted. Recently, California and Texas ended their requirement, leaving New York City and Arizona the only jurisdictions to continue the stigmatizing requirement.   Especially at a time when so many families are struggling, the Bloomberg administration should drop the requirement that leads too many New Yorkers to forgo help. If it does not, Gov. Andrew Cuomo should issue an executive order ending the city’s exemption.  Mayor Michael Bloomberg and his human resources commissioner, Robert Doar, contend that fingerprint matching is essential for detecting and deterring fraud and avoiding costly duplications. But there is no evidence that finger-imaging is either cost-effective or necessary. Collecting fingerprints is useless for uncovering scams like government employees’ making up phony cases or applicants’ lying about their income. Matching applicants’ names with Social Security numbers, as other jurisdictions do, would be cheaper and equally effective.

Does the US Populace Know It's Turning Its Nation's Poor Into Criminals? Or Is It The Ultimate Money-Maker In A Deep Recession? - Suzan - I met Barbara Ehrenreich when she spoke in Key West in the mid-90's about her research for her book, Nickeled and Dimed, for a consortium of women's organizations which had asked me to help with the preparations. I really enjoyed her witty and intelligent presentation and queried Barbara afterwards about the problem I was just beginning to understand concerning the difficulty of so-called "overqualified" professionals in obtaining almost any type of employment after layoffs due either to too much education and/or experience or being older than mid-30's. Her next book, Bait and Switch, was a nice answer for me. Not that I ever got a job again which was more than a short-term contract, but still . . . at least I knew someone else understood what was going on early in the cycle. I thoroughly enjoyed and touted personally (as I really like her and her research skills) at this blog her last book, Bright-Sided, on the dangers of too much positive thinking when reality demands a much more knowledgeable perspective. I also have personal experience with her current subject (unfortunately). It's embarrassing to admit impending poverty, not to mention being poor in this society (and maybe in all societies everywhere today), but it's a crushing phenomenon now experienced by a very large and increasing number in our population and it doesn't seem like it's receding a bit.

3.5 Million Homeless and 18.5 Million Vacant Homes in the US - The National Economic and Social Rights Initiative along with Amnesty International are asking the U.S. to step up its efforts to address the foreclosure crisis, including by giving serious consideration to the growing call for a foreclosure moratorium and other forms of relief for those at risk, and establishing a housing finance system that fulfills human rights obligations.  New government census reports have revealed disturbing information that details the cold, hard numbers of Americans who have been deeply affected by the state of our economy, and bank foreclosure practices: In the last few days, the U.S. government census figures have revealed that 1 in 2 Americans have fallen into poverty or are struggling to live on low incomes. Along with poverty and low incomes, the foreclosure rate has created its own crisis situation as the number of families removed from their homes has skyrocketed. Since 2007, banks have foreclosed around eight million homes. It is estimated that another eight to ten million homes will be foreclosed before the financial crisis is over. This approach to resolving one part of the financial crisis means many, many families are living without adequate and secure housing. In addition, approximately 3.5 million people in the U.S. are homeless, many of them veterans. It is worth noting that, at the same time, there are 18.5 million vacant homes in the country.

Billions needed to upgrade America’s leaky water infrastructure - At first glance, the pizza-size hole that popped open when a heavy truck passed over a freshly paved District street seemed fairly minor. Then city inspectors got on their bellies with a flashlight to peer into it. What they discovered has become far too common. A massive 19th-century brick sewer had silently eroded away, leaving a cavern beneath a street in Adams Morgan that could have swallowed most of a Metro bus. It took three weeks and about a million dollars to repair the sewer, which was built in 1889. Time and wear “had torn off all the bricks and sent them God knows where,” “We have to find them and see if they’re plugging up the system somewhere farther down the line.” If it were not buried underground, the water and sewer system that serves the nation’s capital could be an advertisement for Band-Aids. And it is not much different from any other major system in the country, including those in many suburbs and in cities less than half as old as Washington.

Jobless Rates Drop in Most Cities - Unemployment rates in most cities were below year-earlier levels in November, the Labor Department reported, but 133 of 372 metropolitan areas posted flat or declining employment from a November 2010. Unemployment rates at the city level aren’t seasonally adjusted to take things like higher holiday employment into account, so the best comparisons are to year-earlier levels instead of comparing monthly variations. Without seasonal adjustments the national unemployment rate was 8.2% in November. One hundred thirty seven metropolitan area recorded November unemployment rates above the national average, while 225 were lower. The highest unemployment rates continued to be concentrated in California with seven of the top eight located in the state. El Centro, Calif., and Yuma, Ariz., recorded the highest rates in the country in November at 27.2% and 23.7%, respectively. The lowest rates were recorded in North Dakota with Bismarck at 2.8% and Fargo at 3.1%. Lincoln, Neb. came in third at 3.2%. Among metropolitan areas with over a million people, Las Vegas and California’s Inland Empire topped the list with a 12.5% each. Minneapolis-St. Paul was the lowest among large cities with a rate of 5.1%.

Question #7 for 2012: State and Local Governments - Earlier I postedTen Economic Questions for 2012. I'm trying to add some thoughts, and a few predictions for each question. Many of the questions are interrelated. The question on monetary policy depends on inflation (question #9), the unemployment rate (question #6) and what happens in Europe (question #8). And the unemployment rate is related to GDP growth (question #4), and on and on ... Question #7: State and Local Governments: It is starting to look like there will be less drag in 2012 than in 2011. How much of a drag will state and local budget problems have on economic growth and employment?  How about this headline from Bloomberg this morning: Michigan Fiscal Agency Anticipates $735 Million Budget Surplus for 2011-12? This doesn't mean the cuts are over because the budget assumes further cuts, especially for education. But it suggests progress. There was a similar article about California a couple of weeks ago in the San Francisco Chronicle: California leaders say time for cuts may be ending. Once again there are more cuts coming, but the end may be in sight.

State revenue rises, but not enough to offset cuts - Twenty-nine states are spending less from their general funds today than they did before the recession, according to a recent joint survey from the National Governors Association and the National Association of State Budget Officers. More than 30 states have raised taxes since the recession began, but some of those increases were temporary and are expiring soon, as in Arizona. With the economy slowly reviving and unemployment rates dipping, many governors and lawmakers say they don't want to jeopardize the recovery by raising taxes again. But tax revenue is not expected to grow enough to make up for the impact of four years of dismal economic times. Rainy-day funds, internal transfers and other one-time sources have largely been tapped, so governors and lawmakers must look for new places to cut spending. Changes to public employee retirement benefits and sweeping reforms to health care programs such as Medicaid are among the most likely targets. At least 17 states project budget gaps for the next fiscal year, while a handful need to balance budgets in the remaining six months of the current budget year. The revenue of all 50 states combined remains $21 billion below 2008 levels, according to the National Governors Association-NASBO report.

State- and local level corporate subsidy tracker - A growing number of state governments are disclosing which companies they are giving tax breaks and other subsidies in the name of job creation and economic development. Yet much of that information is being disseminated through hard-to-find reports and web pages. SUBSIDY TRACKER is the first national search engine for state economic development subsidies. It brings together recipient data from a wide range of subsidy programs in states across the country.Each entry identifies the recipient company and, depending on availability, provides data on the dollar value of the subsidy, the program and state agency involved, the location of the subsidized facility, and the employment impact of the subsidy. Each entry also indicates where the data came from, so the user can go to the original source for more details. For more information on the data, see the User Guide. Subsidy Tracker is a work in progress. We are continually adding data from more programs and increasing the years of coverage. Subsidy Tracker currently contains more than 114,000 awards from 264 programs in 42 states. Inventory of data sources (updated November 8, 2011) 

Quinn’s 3-year outlook forecasts gloomy budget - The long-term forecast for the Illinois budget looks gloomy, with less state money available and government services facing cuts, Gov. Pat Quinn’s office said Tuesday. Quinn’s three-year projection shows state revenues climbing for two years and then dropping sharply when the state income tax increase expires. More federal money could make up the difference, but Illinois government would wind up with roughly the same amount to spend in 2015 that it has now: a little over $33 billion. Meanwhile, expenses will keep climbing unless officials take action. The state’s contribution to government pension systems is projected to grow 43 percent, to about $5.9 billion. Quinn’s forecast shows health care costs holding steady, but that assumes something happens in the next few years to control expenses. Without that, Medicaid costs could rise by hundreds of millions of dollars a year. “Our revenue growth is not enough to keep up with pensions and Medicaid. It creates a squeeze for everything else,”

California lawmakers return to face huge budget deficit - Lawmakers returned to Sacramento with a bang Wednesday, kicking off 2012 with a flurry of new bills, a leadership transition and no shortage of drama involving members' personal troubles. While tackling a projected budget deficit of roughly $12 billion over the next 18 months will be a top priority, Senate President Pro Tem Darrell Steinberg, a Democrat, predicted that members would take action on a long list of issues during the second year of the two-year session, including public employee pensions, the state's high-speed rail project and an $11 billion water bond slated for the November ballot. The Sacramento Democrat said he felt the three-month recess, the first full break of its kind in years, had given members the energy and focus to "get off to a fast start this year." For Senate Republicans, the new year means a new leader. The caucus met in the afternoon to elect Republican Bob Huff as GOP leader, the successor to Sen. Bob Dutton, who is termed out and running for the Assembly this year.

California Train Plan Hits Bump Over Funds - California’s ambitious plan for a high-speed rail system hit a big roadblock Tuesday, as an independent panel urged lawmakers to deny authorizing the issuance of $2.7 billion in bonds to kick off the $98.5 billion project. The California High-Speed Rail Peer Review Group—which the state legislature appointed to analyze funding for the rail system—questioned the California High-Speed Rail Authority’s plan to start construction without any assurance of future funding from the federal government, among other factors. Moving ahead “represents an immense financial risk” for California, the group said in its report, echoing concerns from critics who say the project could leave state taxpayers on the hook for billions of dollars in future costs. The panel appeared to leave the door open to supporting state funding in the future, if the rail authority addresses its concerns. While the report isn’t binding, it puts pressure on California lawmakers as they decide whether to release billions of dollars in state bonds for the project.

Urban Growth and Decline: The Role of Population Density at the City Core - Cleveland Fed - In recent decades, some cities have seen their urban centers lose population density, as residents spread farther out to suburbs and exurbs. Others have kept populous downtowns even as their environs have grown. Population density in general has economic advantages, so one might wonder whether a loss of density, which may be a symptom of negative economic shocks, could amplify those shocks. We look at four decades of census data and show that growing cities have maintained dense urban centers, while shrinking cities have not. There are reasons to think that loss of population density at the core of the city could be particularly damaging to productivity. If this is the case, there could be productivity gains from policies aimed at reversing that trend.

Mayor Dave Bing's Detroit rescue plan fails to win over City Council - Mayor Dave Bing delivered to Detroiters a rescue plan Thursday that he says can save the city from insolvency and an emergency manager. But the plan is not new and depends largely on concessions that unions have strongly resisted. Bing unveiled the plan in a rare appearance before the City Council but did little to convince members that it was bold enough to avoid the appointment of an emergency manager, which the state warned could happen anytime during the next two months. "Think bold; think outside the box," Councilwoman Saunteel Jenkins urged the mayor. "There is a sense of urgency. The goal is to figure out if we are going to get out of this financial crisis on our own." Bing's rescue plan calls for $360 million in cuts during the next 18 months, about half of which depends on labor unions accepting major concessions in health care and pension benefits. Among the cuts: $20 million by reducing overtime; $14 million by laying off 1,000 employees in February; $13 million in vendor payment reductions. The Police and Fire departments each also plan to each cut about $12.5 million from their budgets, with a combined 200 layoffs.

Hundreds of Miami-Dade officer layoffs expected -- Miami-Dade commissioners voted against forcing officers in the county to spend more of their hard-earned money, which means that hundreds of officers may soon receive pink slips. Miami-Dade County Mayor Carlos Gimenez has asked for $239 million in concessions from all of the unions, $75 million specifically from the Police Benevolent Association. In November, the Police Benevolent Association and the County reached an agreement to cut $57 million, but the union rejected the portion of the contract that increased healthcare contributions. On Thursday, the commission was forced to choose whether they would require Miami-Dade Police officers to contribute another five percent toward their healthcare benefits, or lay off law enforcement officers. Hundreds of Miami-Dade Police officers packed the commission chambers, wearing T-shirts with the words "Enough is Enough." The officers, who are already giving five percent of their salaries for their benefits, declared they could not afford to give any more of their money.

T Proposing 43 Percent Fare Hikes - Public transit riders would face fare hikes as high as 43 percent, along with service cuts, under proposals made Tuesday by the Massachusetts Bay Transportation Authority as it tries to close a projected $161 million budget gap. State transportation officials unveiled two possible scenarios at a meeting of the MBTA's Board of Directors. The T has not had a fare hike in five years. Under one scenario, a bus ride could jump from $1.25 to $1.75 while a subway ride could jump from $1.70 to $2.40 for passengers holding automated CharlieCards. Under a second scenario, fare increases would rise by a more modest 35 percent - $1.50 for a bus ride and $2.25 for subway - but service cuts would be more extensive.

Fewer Kids in the U.S. - The U.S. under-18 population fell between 2010 and 2011, the first time in at least two decades that the country has seen its minor population decline, according to demographers and new Census data. Getty ImagesThe U.S. under-18 population was 73,934,272 in July 2011, a decline of 247,000 or 0.3% from July of 2010, according to an analysis of Census data by William H. Frey, a demographer at The Brookings Institution. The child population is still up 2.3% from 2000, largely because of gains made in the early-decade boom years. The child population is falling because fewer immigrant children are coming across U.S. borders, and because fewer children are being born. Meantime, the so-called millennial generation is moving into adulthood. With fertility rates down, Mr. Frey says “it doesn’t look like a youth boom will reverberate anytime soon.” The U.S. minor population fell in the 1970s as well, as baby boomers moved into adulthood and women entered the labor force en masse, delaying families in the process. A large drop in fertility was also behind a decline in minors between 1920 and 1930.

Welfare Lines Overflow - Growing numbers of New Yorkers seeking food stamps have created an unwelcome spillover effect at some of New York City's job centers: overcrowding that in some cases has grown so severe, benefits were jeopardized. The crush of people grew so large at one Brooklyn center in November that the Fire Department intervened and prevented anyone from entering the building. That was an extreme example of the problem. But clients at many of the city's 29 job centers—which manage public-assistance benefits, including food stamps—regularly arrive long before the doors open to wait in line. Advocates said people miss mandatory appointments, leading to a bureaucratic battle to reopen their cases, or abandon the process after growing discouraged. "It's like everybody is running around with their head cut off, and no one cares." Officials at the city's Human Resources Administration, which runs the centers, acknowledged that serious overcrowding is a problem at five facilities. Advocates believe the problem is broader, affecting roughly 10 centers.

Circle of Concern Food Pantry Sees 13% Increase in 2011 - Circle of Concern Food Pantry has been serving those in need since 1967, but never has the need been so great. Glenn Koenen tells KMOX in 2011, Circle of Concern fed 13-percent more people then in 2010. The exact number, 25,161 people were served last year. Many families that use to be middle-class, supported Koenen’s food pantry, now they need the help. Koenen says as people’s unemployment and resources run out, they are turning to Circle of Concern. He says many of those people feel as though they have lost their middle-class standing and will never be able to bounce back.Despite more people starting to go back to work, Koenen says “they just can’t earn enough money to escape poverty.” In 2002, Circle of Concern served 75-hundred. The food pantry operates entirely off of donations. Koenen has a request, circle a day in February or March and collect food in your neighborhood and then, donate the items to Circle of Concern or any food pantry of your choice.

Homeless have been sleeping on clinic’s porch for months - The jarring sight we saw in the wee hours of the morning Thursday at Baltimore’s new $15.5 million homeless services clinic – eight people sleeping in barely above freezing temperatures outside the building on its “front porch” – was not unusual, it seems. Kevin Lindamood, president and CEO of Health Care for the Homeless (HCH), said people began sleeping outside their building at 421 Fallsway a year ago – and the “porch population” that has been coming there ever since is “not static.” Caseworkers are assigned to the people who turn up, meet regularly with them and often manage to find them a bed somewhere in town, Lindamood said. But new people keep coming. “We’ve had couples, we recently had two women and, at one point, we had a woman who was eight months pregnant,” he said, adding that the staff of the clinic (it is not a shelter) eventually found her a place to stay that was out of the elements.

Charlotte homeless shelter expecting record numbers (Video) - As the temperature plunges, Charlotte's Men's Shelter will not turn away anyone, no matter how many show up.

Growing Number Of States Contending With Crisis-Level Child Poverty -- Child poverty is getting worse in America. And with more and more states seeing their populations of disadvantaged youth soar beyond pre-recession levels, the crisis is far from limited to a few troubled states. In 2007, before the economy seized up, and before a combination of rising unemployment and plunging home values left millions of Americans scrambling to make ends meet, the child poverty rate in America was 17.8 percent, according to a report released in December from First Focus and the Brookings Institution. Only fourteen states had child poverty rates of 20 percent or more, a percentage that put them in a category the report calls "high child poverty status." Things have devolved considerably in the years since, however. By 2010, the national child poverty rate had risen to 21.6 percent, and the number of high-child-poverty states had nearly doubled, to 25. It's expected to get worse before things get better. While the official statistics aren't in yet for 2011, the Brookings report predicts that nationwide child poverty swelled to 22 percent in the year just ended, and that the number of high child poverty states grew again to 28. One in five Americans has had trouble putting food on the table in the past year, and nearly half of all U.S. households are struggling to cover basic expenses like electricity and medical care.

Philly schools send layoff notices to 1,400 - The Philadelphia School District has sent layoff notices to an additional 1,400 employees as it struggles to contain costs while facing a bleak budget picture. The Philadelphia Inquirer ( http://bit.ly/vmtPYT) reports the district issued the notices last week to blue-collar workers who clean buildings and attend to buses. The layoffs don't take effect until Dec. 31, 2012. The district laid off nearly 850 similar workers in September. More than 1,000 teachers were laid off over the summer. A district spokesman says the layoffs were necessary because the union rejected a contract extension that included $16 million in concessions. Union leaders say the proposal was rejected after the district paid nearly $1 million to buy out the contract of former Superintendent Arlene Ackerman.

Schools will be cut $4.8 billion if taxes don't pass, Gov. Jerry Brown says -- Putting schools and voters squarely in the middle of what could be an explosive battle over taxes, Gov. Jerry Brown on Thursday laid out a fiscal blueprint that heavily relies on cash the state doesn't yet have. Brown called for a budget that assumes $6.9 billion in new revenues from a tax measure he plans to take to voters in November. The governor says passage of the measure would wipe out a $9.2 billion deficit through mid-2013 and give schools $4.9 billion more than this fiscal year. It was the opening act to what will be Brown's main political thrust this year: to persuade voters that without new revenues California's grim times will become even bleaker. If voters reject the taxes, new cuts of $5.4 billion -- including the new funding for schools -- would be triggered, on top of the $4.2 billion in cuts that Brown has proposed for the next budget year, which begins July 1. Those potential cuts could reduce the school year by three weeks.

The private education dilemma - As an Australian parent in 2012, the public versus private school debate is hard to avoid.  In a society where private schooling is becoming the norm, yet literacy and numeracy skills are stagnating, how does one objectively analyse the costs and benefits of school choice? First, let me say that school choice is just one factor determining vocational, personal and emotional skills during adolescence.  Genetics, parenting, the home environment, peer groups, sports and other club activities, amongst many factors, all contribute to shaping young minds. Additionally, the composition of students at the school plays a strong role in determining academic outcomes.  Many private schools for example, offer academic scholarships.  If those students had instead attended the local public school, any difference in average academic results may be greatly reduced. How then does one separate the impact of school choice from these other factors?

Shocker: Empathy Dropped 40% in College Students Since 2000 - College students who hit campus after 2000 have empathy levels that are 40% lower than those who came before them, according to a stunning new study presented at the annual meeting of the Association for Psychological Science by University of Michigan researchers. It includes data from over 14,000 students. Although we argue in Born for Love: Why Empathy Is Essential--and Endangered that modern child-rearing practices are putting empathy at risk, this is the largest study presented so far to quantify the decline. Previous research done by psychologist Jean Twenge had measured what she labeled a "narcissism epidemic," with more students showing selfish qualities and with increases in traits that can lead to a diagnosis of narcissistic personality disorder. That is a condition in which people are so self-involved that other people are no more than objects to reflect their glory.

For Better Grades, Try Bach in the Background - In the journal Learning and Individual Differences, a research team led by Fabrice Dosseville of the Universite de Caen Basse-Normandie describes an experiment featuring 249 university students. All were enrolled in an introductory course in sports psychology. The students were divided into two groups “that were equal on academic performance.” Each group viewed a different version of an hour-long videotaped lecture on “Expertise in Athletics,” in which the talk was accompanied by synchronized slides. For one group, the lecture was accompanied by a series of familiar classical pieces, including excerpts from Mozart’s Eine Kleine Nachtmusik, Tchaikovsky’s Nutcracker and Bach’s Third Brandenburg Concerto. The other group heard the lecture with no background music. Within 15 minutes of hearing the lecture, all the students took a multiple-choice quiz featuring questions based on the lecture material. The results: the students who heard the music-enhanced lecture scored significantly higher on the quiz than those who heard the music-free version.

Princeton Brews Trouble for Us 1 Percenters - To: The Upper Ones, From: The Strategy Committee, Re: The Alarming Behavior of College Students The committee has been reconvened in haste to respond to a disturbing new trend: the uprisings by students on elite college campuses.  Across the Ivy League the young people whom our Wall Street division once subjugated with ease are becoming troublesome. Our good friends at Goldman Sachs, to cite one example, have been forced to cancel their recruiting trips to Harvard and Brown. At Princeton, 30 students masquerading as job applicants entered a pair of Wall Street informational sessions, asked many obnoxious questions (“How do I get a job lobbying the U.S. government to protect Wall Street interests?”), rose and chanted a list of charges at bankers from JPMorgan and Goldman Sachs, and, finally, posted videos of their outrageous behavior on YouTube. The committee views this latter incident as a sure sign of trouble to come. The whole point of going to Princeton for the past several decades has been to get a job at Goldman Sachs or, failing that, JPMorgan. That Princeton students are now identifying their interests with the Lower 99 percenters is, in its way, as ominous as the return of the Jews to Jerusalem.

Want a Job? Go to College, and Don't Major in Architecture - Say it with me, readers: College is worth it. For all the bellyaching about wasted degrees and the many indebted grads stuck on their parents’ couches, recent college graduates are still doing a lot better than their less-educated counterparts. Unemployment for new graduates is around 8.9 percent; the rate for workers with only a high school degree is nearly three times as high, at 22.9 percent. That’s according to a new report [PDF] from Georgetown’s Center on Education and the Workforce. The report also had some fascinating statistics on earnings and jobless rates by college major, something we’ve written about before. The chart below shows unemployment rates sorted by major, based on 2009-10 census data. You can also see jobless rates for graduates of a given undergraduate major who went on to receive further education (not necessarily related to their college major). In the chart, “recent college graduate” refers to workers who are 22 to 26 years old; “experienced college graduate” covers those 30 to 54; and “graduate degree holder” is limited to workers 30 to 54 years old.

M.I.T. Game Changer: Free Online Education For All - For Wall Street Occupiers or other decriers of the “social injustice” of college tuition, here’s a curveball bound to scramble your worldview: a totally free college education regardless of your academic performance or background.  The Massachusetts Institute of Technology (M.I.T.) will announce on Monday that they intend to launch an online learning initiative called M.I.T.x,which will offer the online teaching of M.I.T. courses free of charge to anyone in the world. The program will not allow students to earn an M.I.T. degree. Instead, those who are able to exhibit a mastery of the subjects taught on the platform will receive an official certificate of completion. The certificate will obviously not carry the weight of a traditional M.I.T. diploma, but it will provide an incentive to finish the online material. According to the New York Times, in order to prevent confusion, the certificate will be a credential bearing the distinct name of a new not-for-profit body that will be created within M.I.T. The new online platform will look to build upon the decade-long success of the university’s original free online platform, OpenCourseWare (OCW), which has been used by over 100 million students and contains course material for roughly 2,100 classes. The new M.I.T.x online program will not compete with OCW in the number of courses that it offers. However, the program will offer students a greater interactive experience.

Is college worth the money and debt? - The cost of college has increased by 11x since 1980 while inflation overall has increased by 3x. Diluting education with for-profits. and saddling millions with debt. Is a college degree worth it?  Since the debt bubble burst spectacularly in 2007 many more prospective students are questioning the worth of a college degree.  For so many decades it was simply taken at face value that getting a college degree, any college degree would be worth it.  Slowly this perception has morphed when annual tuition is running at $20,000 or more at for-profit institutions and $50,000 for private institutions.  More to the point, most of the recent educational growth has been financed with large wallet crushing student loans.  This financing of the college dream is turning out story after gut-wrenching story of college education nightmares.  When a college education becomes this expensive it is important that potential students become savvy consumers.  The financial sector certainly isn’t going to offer any advice on navigating the minefield of higher education since they largely have their greedy hands on this sector of the economy as well.

The calm before the student loan bubble bursts -  For-profits make up 9 percent of student enrollment yet produce 27 percent of all private loans. The inevitable pop of the student loan bubble. The worth of a college degree has now come into question because of the massive student loan bubble.  An education is vital yet the monopoly on knowledge has been turned upside down with readily accessible information through technological changes.  What is odd however is during a time of knowledge access ubiquity you have a field sprouting up of institutions that simply target the unknowing with promises of degrees that yield worthless marketable prospects.  Many for-profit colleges fit in perfectly with the financialization of our nation.  The main goal is to draw in a large unsuspecting audience and saddling millions with unsustainable amounts of debt for a piece of paper that has little worth in regards to career aspirations.  Like the subprime mortgages pushed by lower levels of the financial industry only for quick profits, many of the for-profit colleges have done very similar things to the prestige of a college diploma.  When a list of cats and dogs with college degrees is listed on Wikipedia we know there are serious issues in how some for-profits operate.

Funding gap doubles for US corporate pensions - The funding gap for US corporate pension plans almost doubled in 2011 as bond yields dropped and stock market performance failed to keep up with rising liabilities, to leave a far greater hole than at the height of the financial crisis.  From a moderate surplus at the end of 2007, pension plan assets at S&P 500 companies now cover only about 74 per cent of estimated liabilities, calculates Credit Suisse, a deficit of roughly $450bn.  At the start of the year the S&P 500 pension funding gap was estimated at $250bn, according to Credit Suisse.  Falling interest rates, or yields, have also lowered the discount rate used to calculate the value of promises to past and present employees.  Credit Suisse calculates that every 25 basis point fall in the discount rate equals a $45bn increase in liabilities.  The discount rates used by companies has fallen about three times that much this year.  David Zion, head of accounting and research for Credit Suisse said: “You need really good returns to offset that. The typical pension plan has generated slightly positive returns this year, you can’t say that’s good”.

Illinois revenues to drop, pensions increase– Illinois’ projected budget shortfall is expected to increase over the next three years as the income tax increase expires and pension contributions increase. The governor must release three-year projections of revenue and expenses annually under new rules designed to improve the budgeting process. It shows state pension contributions increasing to $5.9 billion annually by Fiscal Year 2015, up from this year’s $4.1 billion. Kelly Kraft, spokeswoman for the governor’s budget office, says small operational cuts have been made, but more serious cuts must happen. “These are real savings that we are talking about here, but then when you take a look at the pension costs, as well as the increasing Medicaid costs, those costs are billions of dollars that we’re talking about,” she says. Kraft says the projection doesn’t include debt restructuring, but does set extra revenue aside to pay old unpaid bills. She says the governor will continue to push a borrowing plan to pay off bills at a lower interest rate.

N.J.'s elderly population to surge - The Garden State population has grown to 8.8 million, and within 20 years is expected by state demographers to approach 9.4 million. Of greater consequence than the raw numbers is how much growth is expected in the elderly population, equal to more than 90 percent of the overall change. Baby boomers, the post-World War II generation born between 1946 and 1964, account for nearly 30 percent of New Jersey’s population. As they age, they’ll push the number of residents 65 years and older from 1.15 million four years ago to more than 1.8 million by 2028, nearly 20 percent of the population.

You Cannot Make This Up: New Criterion Tells Us We Should Ditch Social Security Because All Minimum Wage Earners Can Become Millionaires  - Yves Smith - People who write for right wing outlets live in an alternative reality. The piece that Michael Thomas pointed out to me from the New Criterion, “Future tense, V: Everybody gets rich,” by Kevin D. Williamson, belongs in a special category of its own in terms of the degree of disconnect it exhibits.  As much as I enjoy shredding articles, this piece has so much wrongheadedness in a compressed space so as to make a full bore exercise of unpacking it a a major exercise. Let’s deal with just this part, which is a neat one-two effort to tell us no one need safety nets like Social Security because even people making minimum wage can be rich: The welfare state isn’t a very good buy. The average Social Security benefit runs just over $1,100 a month—peanuts, hardly enough to keep you in cut-rate butter once your median rent of more than $800 has been paid. For that, you’re taxed 12 percent of your take-home pay. Compare that to this: A married couple, each earning the minimum wage, investing only 10 percent of their earnings at a modest 7 percent return, retires with an annual income of more than $100,000 a year—even if they never touch the $1.5 million principle they’ll leave to their children. President George W. Bush was mocked for calling his proposal to cultivate such minimum-wage millionaires the “Ownership Society,” but it was the most important initiative of his presidency. Erm, the worst is I get the strong impression Williamson believes every bloomin’ word he wrote. I gather no one told him the global financial crisis was the culmination of the ownership society, which was purchased with minimal equity and cheap leverage. Let’s start with the most obvious reason why Williamson’s little tale of minimum wage people retiring as millionaires is observed about as often in the real world as unicorns: his fantasy expectation that they save 10% of their incomes. The savings rate for Americans as a whole hasn’t been over 10% since 1984. It is currently 3.5%.

Medicaid clients in Colorado at "all-time historical high" in November - Nearly 615,000 Coloradans were on Medicaid in November, by far a record high, officials said Wednesday, attributing the vast bulk of the growth to economic hard times rather than recent eligibility expansions. "We've had a mushrooming of clients," Sue Birch, director of the state Department of Health Care Policy and Financing, told members of the legislature's Joint Budget Committee. Birch said the 614,146 Coloradans enrolled in Medicaid in November represented a 57.7 percent increase over January 2007. "This is an all-time historical high," she said. Added to the 71,988 children and pregnant women covered under the state's CHP+ program — a 42 percent increase over January 2007 — it means roughly 13 percent of all Coloradans are covered by state health-insurance programs.

Medicaid shortfall grows with no fix in sight - The funding shortfall in North Carolina's Medicaid program has ballooned to $150 million, and the political fight over how to fill the growing budget hole shows no signs of a solution. Health and Human Services Secretary Lanier Cansler says the Medicaid program, which serves more than 1 million people statewide, won't be able to achieve more than $350 million in cuts mandated by the state budget under its current operations. Cansler says the budget offers him only one option to accomplish the required savings: deep cuts to optional services and to the reimbursement rates the state pays Medicaid providers. The federal government has approved fewer than half of the 54 rate cuts DHHS has proposed, he told lawmakers on Tuesday, which cuts into the projected savings they counted on in the budget. "If we don't find a way to solve the problem come May, it's going to be extremely serious because, again, we can't write Medicaid checks if we don't have the money," he said. Increased demand for services and overpayments DHHS made to providers aggravated the shortfall, which officials said could grow to $243 million by the 2012-13 fiscal year, which starts in July.

State pushes prescription painkiller methadone, saving millions but costing lives - For the past eight years Washington has steered people with state-subsidized health care — Medicaid patients, injured workers and state employees — to methadone, a narcotic with two notable characteristics. The drug is cheap. The drug is unpredictable. The state highlights the former and downplays the latter, cutting its costs while refusing to own up to the consequences, according to a Seattle Times investigation that includes computerized analysis of death certificates, hospitalization records and poverty data.

Medicare Debate in 2012 Is All About Baby Boomers - Baby boomers take note: Medicare as your parents have known it is headed for big changes no matter who wins the White House in 2012. You may not like it, but you might have to accept it. Dial down the partisan rhetoric and surprising similarities emerge from competing policy prescriptions by President Barack Obama and leading Republicans such as Wisconsin Rep. Paul Ryan. Limit the overall growth of Medicare spending? It's in both approaches. Squeeze more money from upper-income retirees and some in the middle-class? Ditto. Raise the eligibility age? That too, if the deal is right. With more than 1.5 million baby boomers a year signing up for Medicare, the program's future is one of the most important economic issues for anyone now 50 or older. Health care costs are the most unpredictable part of retirement, and Medicare remains an exceptional deal for retirees, who can reap benefits worth far more than the payroll taxes they paid in during their careers. "People would like to have what they used to have. What they don't seem to understand is that it's already changed,"

Patients rush to use up health benefits - While many people are spending the last week of the year hitting after-Christmas sales, Sue Sners has other ways to save money. A mammogram on Wednesday. Hand surgery on Friday. Across the country, people are squeezing as many healthcare appointments as possible into 2011 — colonoscopies, mammograms, root canals. Some people need to take advantage of their current insurance coverage before their employer switches plans. Others hurry to spend money in a flexible spending account, which might otherwise be lost when the ball drops at Times Square. And those who have met their deductibles, or even their out-of-pocket yearly maximums, can get relative bargains by expediting care that they need anyway. Sners, 55, has met her $1,000 annual healthcare deductible, so her insurance provider will pick up much of her costs. "Everything's so expensive now, and people are trying to save wherever you can," she said. Consumers' knowledge of insurance deductibles and flex accounts has improved, and they are trying to use that knowledge to their advantage.

Uninsured turn to daily deal sites for health care - The last time Mark Stella went to the dentist he didn't need an insurance card. Instead, he pulled out a Groupon. Stella, a small business owner, canceled his health insurance plan more than three years ago when his premium rose to more than $400 a month. He considered himself healthy and decided that he was wasting money on something that he rarely used. Daily deal sites like Groupon and LivingSocial are best known for offering limited-time discounts on a variety of discretionary goods and services including restaurant meals, wine tastings, spa visits and hotel stays.  The sites are increasingly moving beyond little luxuries like facials and vacations and offering deals that are helping some people fill holes in their health insurance coverage. Visitors to these sites are finding a growing number of markdowns on health care services such as teeth cleanings, eye exams, chiropractic care and even medical checkups. They're also offering deals on elective procedures not commonly covered by health insurers, such as wrinkle-reducing Botox injections and vision-correcting Lasik eye surgery. About one out of every 11 deals offered online is for a health care service, according to data compiled by DealRadar.com, a site that gathers and lists 20,000 deals a day from different websites.

For some in need, Facebook is route to new kidney - Here's another reason for holdouts to join the social media site Facebook: It's a great place to find a kidney. Between the children's photos and reminiscences about high school, more and more pleas for help from people with failing kidneys are popping up. Facebook and other social media sites are quickly becoming a go-to place to find a generous person with a kidney to spare, according to the people asking for help and some national organizations that facilitate matches. Damon Brown found a kidney on Facebook after telling his story on a special page the Seattle dad created under the name, "Damon Kidney." His friends and family forwarded the link to everyone they knew and on Jan. 3 a woman his wife has known for years, but not someone they consider a close family friend, will be giving him a kidney.  Brown's story is not unique, said April Paschke, a spokeswoman for the United Network for Organ Sharing, a private nonprofit organization that manages the nation's organ transplant system for the federal government. "We see more and more people matched up by social media," she said. "It's an extension of the way we communicate. Before we found the Internet, people found other ways: through a church bulletin, word of mouth or an advertisement even."

Doctors Support Occupy Wall Street Because Wall Street Is Occupying Health Care - Physicians for a National Health Program We support Occupy Wall Street because the private health insurance industry exemplifies the OWS movement’s central tenet: its unchecked corporate greed tramples human need. We support OWS because economic and social inequalities make our patients sick. Low wages, high unemployment, inadequate education, unhealthy food, unaffordable housing, unsafe jobs, a polluted environment, and a lack of access to affordable health care breed death and disability. We support OWS because health care is a human right. We reject a system that forces us to treat patients differently based on their insurance and the treatments they can “afford.” We support OWS because we believe in evidence, and evidence shows us that profit-driven health care decreases access, raises costs and lowers quality. It’s unhealthy for the 99%; only a few corporate executives, bankers, and lobbyists benefit. We support OWS because our political leaders, held hostage by corporate money, reject evidence-based health policies such as a single-payer reform that would save both lives and money. We support OWS because the health care economy – like the overall economy – has ample resources to take care of 100%, but those resources are siphoned off by profit-driven corporations in the interest of the 1%. We support OWS because we took an oath to do no harm, and our corrupt political and economic systems are harming us all. We support OWS because we are hopeful that we can change our society. Join us!

Prescription drug shortage crisis hits hard - When Jenny Morrill, who has been battling ovarian cancer since 2007, went to the hospital for her scheduled chemotherapy treatment in June, the nurse greeted her with both good news and bad. "She said, 'The good news is that you're doing really well on this drug Doxil. The bad news is that we have no Doxil to give you,' "  Morrill, a mother and a former arts administrator who lives near Kingston, N.Y., is one of thousands of patients with ovarian cancer, multiple myeloma, AIDS-related Kaposi's sarcoma or other cancers who were left in the lurch last summer when supplies of Doxil, a chemotherapy drug less toxic than many comparable agents, ran out because of production problems at the only plant that made it. In recent years, about 7,000 patients in the United States were using the drug at any given time. But by November, the factory had shut down completely. The shortage has disrupted treatment plans and has upset patients. "A lot of things can go wrong when you're in cancer treatment - your white count can go down, you can become too frail to get treatment, the chemo can stop working. One of the things you never consider is that treatment might just not be available,"

Medication Shortages Surge To Record In 2011 — The number of new prescription drug shortages in 2011 shot up to 267, well above the prior record and about four times the number of medication shortages in the middle of the last decade. As the drug shortages worsen, so does their impact on patient care, particularly in hospitals. The inability to get crucial medicines has disrupted chemotherapy, surgery and care for patients with infections and pain. At least 15 deaths since 2010 have been blamed on the shortages, which have set a record high in each of the last five years. "At the beginning of the year, we were on a pace of about a shortage every day,"  She noted the Food and Drug Administration has said it has prevented more than 100 new shortages in 2011. That's partly because of an executive order President Obama issued on Oct. 31 to address the shortages, with provisions requiring more manufacturers to report potential shortages in advance to the FDA. But Fox is still worried because many of the current shortages won't be resolved anytime soon, based on reports from several key manufacturers that have had to shut down production because of contamination or other quality problems. For some medicines, there may be only one other manufacturer, which doesn't have the capacity to fill the gap immediately or completely.

FDA Gives Up on Antibiotic Restrictions in Livestock - The Food and Drug Administration (FDA) pulled a Scrooge move just before Christmas. The agency published an entry in the Federal Register declaring that it will end its attempt at mandatory restrictions on the use of antibiotics in animal agriculture. The agency isn’t advertising the shift, though: This news would have remained a secret if not for Maryn McKenna’s Superbug blog over at Wired. McKenna, who specializes in writing about antibiotics and their link to pathogens, caught the Federal Register notice. McKenna created an excellent timeline that traces the history of the issue back to the 1950s. In 2009, the Obama administration breathed new life into a moribund process because the top two Obama appointees at the FDA, Commissioner Margaret Hamburg and her then-deputy Joshua Sharfstein, strongly supported restricting antibiotic use in agriculture. But despite Hamburg and Sharfstein’s many supportive statements, the FDA has only produced a draft set of “voluntary” guidelines. And, with this latest announcement, it looks like that’s as far as they’re willing to go. Inaction has consequences: According to the vast majority of microbiologists and public health experts, restrictions on agricultural uses are key to preserving the effectiveness of antibiotics as well as to preventing the spread of antibiotic-resistant bacteria like MRSA and salmonella Heidelberg (cause of last summer’s record-breaking ground turkey recall). And it’s no small dosage: Every year 29 million pounds of antibiotics are given to animals — often via their feed. That figure represents 80 percent of all antibiotics used in the U.S.

Eaters, beware: Walmart is taking over our food system | Walmart’s greenwash: Why the retail giant is still unsustainable - Aubretia Edick has worked at a Walmart store in upstate New York for 11 years, but she won't buy fresh food there. Bagged salads, she claims, are often past their sell-by dates and, in the summer, fruit is sometimes kept on shelves until it rots. "They say, 'We'll take care of it,' but they don't. As a cashier, you hear a lot of people complain," she said. Edick blames the problems on the store's chronic understaffing and Walmart's lack of respect for the skilled labor needed to handle the nation's food supply. At her store, a former maintenance person was made produce manager. He's often diverted to other tasks. "If the toilets get backed up, they call him," she said. Tracie McMillan, who did a stint working in the produce section of a Walmart store while researching her forthcoming book, The American Way of Eating, reports much the same. "They put a 20-year-old from electronics in charge of the produce department. He didn't know anything about food," she said. "We had a leak in the cooler that didn't get fixed for a month and all this moldy food was going out on the floor." Walmart doesn't accept the idea that "a supermarket takes any skill to run," she said. "They treated the produce like any other kind of merchandise."

Heat, Humidity and Crop Yields - If you haven't been following, I've written a lot about the strong and robust association between extreme heat and crop yields. This puzzles some crop scientists who focus on soil moisture and precipitation as the key impediments to higher yields.  But in comparison to any precipitation or soil moisture variable we've constructed, extreme heat, measured as degree days above 29C, is a far better predictor of yield.  And the underlying relationship is similar across widely varying climates and whether identified over the cross section (comparing average yields with average climates over locations) or the time series (comparing yields over time in a fixed location with different weather outcomes).  Such a robust and pervasive pattern in observational data is extremely rare. Most of the hard work is in constructing fine-scale measures VPD and degree day measures, including our measure of extreme heat.  Since these measures are nonlinear in temperature, accurate measurement requires daily measures of minimums and maximums on a fine geographic scale that is matched with the locations where crops are grown. This involves tedious cleaning of weather station data and a combination of statistical techniques and a climate model to interpolate weather outcomes between weather stations. Once we estimate VDP, precipitation and temperature measures on a fine scale, we then aggregate, weighting each fine-scale grid by the crop area.  State-level plots over time are shown below (click for a larger view).

Shortage of Seed Could Hamper US Corn Crop - Last year’s volatility in the corn market could repeat itself this year, but for a different reason. Seed corn, which is grown from specialized plants, is in short supply due to dry conditions in the Midwest and West last summer. Seed suppliers like Monsanto Co. (NYSE: MON) and E.I du Pont de Nemours and Co. (NYSE: DD), as well as food processors such as General Mills Inc. (NYSE: GIS), Kellogg Co. (NYSE: K), and Kraft Foods Inc. (NYSE: KFT) could all feel the pinch, if for different reasons. The Wall Street Journal cites a trader who says: Corn prices slumped in the second half as the fall harvest replenished supplies. But in the past three weeks, corn futures prices have been on the rise, jumping 14% in the past three weeks. While much of that has been on the back of fears of lower-than-expected production in South America because of drought, the prospect of falling corn seed could propel prices even further. Corn prices, currently around $6.50/bushel, could rise as high as $10/bushel if the seed is indeed in short supply.

Bugs may be resistant to genetically modified corn - One of the nation's most widely planted crops — a genetically engineered corn plant that makes its own insecticide — may be losing its effectiveness because a major pest appears to be developing resistance more quickly than scientists expected.The U.S. food supply is not in any immediate danger because the problem remains isolated. But scientists fear potentially risky farming practices could be blunting the hybrid's sophisticated weaponry. When it was introduced in 2003, so-called Bt corn seemed like the answer to farmers' dreams: It would allow growers to bring in bountiful harvests using fewer chemicals because the corn naturally produces a toxin that poisons western corn rootworms. The hybrid was such a swift success that it and similar varieties now account for 65 percent of all U.S. corn acres — grain that ends up in thousands of everyday foods such as cereal, sweeteners and cooking oil. But over the last few summers, rootworms have feasted on the roots of Bt corn in parts of four Midwestern states, suggesting that some of the insects are becoming resistant to the crop's pest-fighting powers. Scientists say the problem could be partly the result of farmers who've planted Bt corn year after year in the same fields.

“Zombie” Fly Parasite Killing Honeybees - A heap of dead bees was supposed to become food for a newly captured praying mantis. Instead, the pile ended up revealing a previously unrecognized suspect in colony collapse disorder a mysterious condition that for several years has been causing declines in U.S. honeybee populations, which are needed to pollinate many important crops. This new potential culprit is a bizarre and potentially devastating parasitic fly that has been taking over the bodies of honeybees (Apis mellifera) in Northern California. John Hafernik, a biology professor at San Francisco State University, had collected some belly-up bees from the ground underneath lights around the University’s biology building. “But being an absent-minded professor,” he noted in a prepared statement, “I left them in a vial on my desk and forgot about them.” He soon got a shock. “The next time I looked at the vial, there were all these fly pupae surrounding the bees,” he said. A fly (Apocephalus borealis) had inserted its eggs into the bees, using their bodies as a home for its developing larvae. And the invaders had somehow led the bees from their hives to their deaths. A detailed description of the newly documented relationship was published online Tuesday in PLoS ONE.

The Honeybee Decline Story: Neonicotinoid and Spinosads Insecticides which Harm Honeybee Central Nervous Systems - If Germany, France, Italy, and Slovenia have banned Clothianidin, a pesticide which harms the central nervous system of insects and is known by the EPA to significantly harm the honeybee, why is it not banned here in the United States? One can't help but be confused by the multitude of headlines over these past several years which have claimed to know (or not know) the cause of Colony Collapse Disorder, or CCD. Luckily, I have a friend here in Boulder who raises bees and is connected to other beekeepers and real world experts who are carefully watching the honeybee decline story. They believe that a new Purdue study is very important and significant, which implicates the insecticide class of neonicotinoids: Multiple Routes of Pesticide Exposure for Honey Bees Living Near Agricultural Fields. When you visit Wikipedia's neonicotinoid page, it begins,  "Neonicotinoids are a class of insecticides which act on the central nervous system of insects with lower toxicity to mammals. Neonicotinoids are among the most widely used insecticides worldwide, but recently the uses of some members of this class have been restricted in some countries due to a possible connection to honey-bee colony collapse disorder, though no scientific evidence has been established confirming that connection." Wikipedia needs to update their page, since scientific evidence certainly has been established with this Purdue study and had already been well-established by this 2010 EPA (PDF) leaked document.

Fifteen Years After Their Reintroduction, Wolves are Being Slaughtered Again  - In doing this blog, I've become pretty numb to bad news. But sometimes, I'll read a story that depresses me so badly that I just want to stop the world so I can get off. As reported by the Los Angeles Times, the politically motivated slaughter of wolves has resumed in the very same states where their reintroduction was widely celebrated just a decade-and-a-half ago: Congress removed wolves in Montana and Idaho from the protection of the Endangered Species Act in April. And this fall, the killing began. As of Wednesday, the Idaho Department of Fish and Game reported that 154 of its estimated 750 wolves had been "harvested" this year. Legal hunting and trapping — with both snares to strangle and leg traps to capture — will continue through the spring. And if hunting fails to reduce the wolf population sufficiently — to less than 150 wolves — the state says it will use airborne shooters to eliminate more. In Montana, hunters will be allowed to kill up to 220 wolves this season (or about 40% of the state's roughly 550 wolves). To date, hunters have taken only about 100 wolves, prompting the state to extend the hunting season until the end of January. David Allen, president of the powerful Rocky Mountain Elk Foundation, has said he is urging the state to follow Idaho's lead and "prepare for more aggressive wolf control methods, perhaps as early as summer 2012."

A Punch to the Mouth: Food Price Volatility Hits the World - 2011 was an abysmal year for the global insurance industry, which had to cover yet another enormous increase in damages from natural disasters. Unknown to most casual observers is the fact that during the past few decades the frequency of weather-related disasters (floods, fires, storms) has been growing at a much faster pace than geological disasters (such as earthquakes). This spread between the two types of insurable losses has moved so strongly that it prompted Munich Re to note in a late 2010 letter that weather-related disasters due to wind have doubled and flooding events have tripled in frequency since 1980. The world now has to contend with a much higher degree of risk from weather and climate volatility, and this has broad-reaching implications. And critically, it has a particular impact on food. Many factors seen over the past decade have produced higher food prices: population growth, urbanization, the decline of arable land per person, and the upgrading of diets for example. But more damaging than food inflation has been the pushing of global food prices out of their long, quiet envelope of stability. From the recently released UN Report on the World Food Situation:

East Africa famine: Somali prime minister denies food shortage - The United Nations says that 250,000 Somalis are suffering from famine in three regions including Mogadishu, a fact that Abdiweli Mohammed Ali, who leads Somalia’s officially recognised government, has denied. "I don’t believe there’s a famine in Mogadishu. Absolutely no," he told The Daily Telegraph. "You know the aid agencies became an entrenched interest group and they say all kind of things that they want to say.” Mr Ali leads a government that depends almost completely on outside donations. Our reporter visited a UN feeding centre in the city, where he found hundreds of starving women with their children seeking food.

Buy local or don't buy at all? - Elisabeth Rosenthal at the NYTimes: But even as more Americans buy foods with the organic label, the products are increasingly removed from the traditional organic ideal: produce that is not only free of chemicals and pesticides but also grown locally on small farms in a way that protects the environment. The explosive growth in the commercial cultivation of organic tomatoes here, for example, is putting stress on the water table. In some areas, wells have run dry this year, meaning that small subsistence farmers cannot grow crops. And the organic tomatoes end up in an energy-intensive global distribution chain that takes them as far as New York and Dubai, United Arab Emirates, producing significant emissions that contribute to global warming. From now until spring, farms from Mexico to Chile to Argentina that grow organic food for the United States market are enjoying their busiest season. And here is the follow-up question from at the blog formerly known as Green, Inc: I know that food miles – the carbon dioxide emissions produced by food transport – constitute only a small fraction of the total emissions related to food production. Still, for me, there’s a bit of cognitive dissonance in eating an organic tomato that was grown in a desert and then flown 3,000 miles so I can feel good about eating “natural” foods.

Satellite Studies Reveal Groundwater Depletion - With a world population estimated at just shy of 7 billion and growing, the UN Food and Agriculture Organization says agricultural production will need to increase 70% by 2050. As agriculture takes up most of human water use, that’s going to put vastly greater demands and strains on our water resources at a time when climate change is changing temperature and precipitation levels and patterns in ways that cannot be predicted at local levels but are likely to make this even more difficult to achieve. One thing that has been determined is that groundwater levels have dropped in many places around the world in the past nine years, including across key agricultural areas, such as southern Argentina, western Australia and the western US, according to a pair of studies of satellite gravity monitoring data conducted by researchers at the University of California Center for Hydrologic Modeling in Irvine, Science News reports. Groundwater depletion is especially pronounced beneath parts of California, India, the Middle East and China. Besides showing that water is being pumped out of underground groundwater aquifers faster than it’s being replenished, the results raise concerns that farming in particular is the primary cause, according to the Science News report. The Gravity Recovery and Climate Experiment (GRACE), conducted jointly by NASA and the German Aerospace Center, has been taking monthly snapshots of global groundwater used in the two studies since 2002. GRACE data is especially useful in accumulating data across countries where governments do not maintain extensive networks of groundwater monitoring wells. While the US maintains an extensive nationwide network of such wells, countries, such as China, do not.

Current US Drought Map - To strengthen my (and hopefully your) intuition for the Palmer Drought Severity Index I'm going to try and post the current US map on a monthly basis.  For more background on the Palmer Index see this post.  The map for the week through Dec 31 is shown above.  You can see that most of Texas is still in the grips of an extreme drought and a lot of the southeast is also pretty badly off.  This continues a pattern that lasted through most of last year in which a lot of the southern half of the country was very dry while the northern half was unusually soggy.  However, the southern droughts are not as extensive now as they were at their height in August. You can see a nice animation of the monthly PDSI for the whole of 2011 at NOAA's site. You can also construct longer movies of any portion of the twentieth century you'd like to watch - for example here's one of the dust bowl years.  We still haven't managed to create anything that bad (in general most of the US has been trending wetter not drier under global warming) .

Can the 2012 Farm Bill protect the Ogallala Aquifer? - To look at the pale-green buffalo grass that covered the High Plains, you would never suspect that an aquifer holding as much water as Lake Huron lay beneath. By the time we sold our farm in 2006, Plains farmers were pumping 6 trillion gallons. That's 1.5 trillion more than the Colorado River carries to the Southwestern United States. The Ogallala Aquifer sits below 174,000 square miles of crop and rangeland from South Dakota to Texas.The Ogallala Aquifer is vast. It underlies portions of eight large states -- 174,000 square miles of crop and rangeland all the way from South Dakota to Texas. But it is also invisible. So it's not surprising that until the debate over the Keystone XL pipeline erupted, few people had ever heard of it. Then for several months, its melodious name was broadcast all over the national news. Now that the aquifer is safe from the pipeline (for the time being), there's another risk worth examining: industrial agriculture. Nebraska landowners stepped up to protect the Ogallala from potential pipeline spills. Now they should do their damndest to stop the overpumping and nonpoint-source pollution that have already made parts of it unusable. If it is not protected, then many parts of the aquifer will either run dry or be too polluted to use by the end of this century. This is especially frightening because it would take thousands of years for the Ogallala to replenish itself.

Why are we Depleting and Polluting the Ogallala Aquifer to Manufacture Ethanol? - I would like to point readers to Grist today, where my friend Julene Bair has written another excellent article, "Can the 2012 Farm Bill protect the Ogallala Aquifer?" In it, she goes after one of the subjects which upsets me most, that of Nebraska corn farmers using precious ancient aquifer water to make corn ethanol to burn in our gas guzzling SUV tanks, lawn mowers, 4-wheelers, snowmobiles, F-150s, and H2s.  Aquifer water is next-to-free for farmers wishing to irrigate. Once they pay for thei