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

Saturday, February 25, 2012

week ending Feb 25

U.S. Fed balance sheet shrinks in latest week (Reuters) - The U.S. Federal Reserve's balance sheet contracted slightly in the latest week, Fed data released on Thursday showed. The Fed's balance sheet stood at $2.91 trillion on Feb. 22, down from $2.92 trillion on Feb. 15. The Fed's holdings of Treasuries totaled $1.657 trillion as of Wednesday, Feb. 22, versus $1.667 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $4 million a day during the week versus $7 million a day previously. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) was $853.05 billion versus $847.8 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $100.8 billion, versus $101.5 billion the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances -- February 23, 2012

Will the Central Bank Bailouts Ever End? - Guess which US bank holds assets equal to a fifth of US GDP. Now guess what percent of its assets have extremely long maturities, greater than ten years: a) 10%; b) 20%; c) 30%; d) 40%; e) 50%. Answer: The Fed, and e) 50% of its assets have ten years or more to maturity. Recap. The global financial crisis (GFC) began about four years ago. The Fed pulled out all the stops to save the biggest banks. As I discussed previously the Fed engaged in “deal-making” designed to protect creditors of failing banks, and used Section 13(3) to create Special Purpose Vehicles that engaged in legally questionable lending and asset purchases to save banks and shadow banks. Four years later, the Fed’s balance sheet is still humongous and it is even increasing its interventions in recent weeks through loans to foreign central banks. A recent speech by Herve Hannoun at the Bank for International Settlements, “Monetary policy in the crisis: testing the limits of monetary policy” (link below) shows that ramping up the role for central banks has taken place all over the world. Indeed, in emerging market economies, the central banks have assets equal to 40% of GDP. But the intervention by central banks during this GFC is entirely unprecedented–and is starting to worry most observers, who are asking when, or if, this will ever end.

Where Did All That Printed Money Go? - Normally when we think of printing money, we are talking about the Fed buying Treasuries, or some other securities from the Primary Dealers. The PDs then take the cash and buy Treasuries from the government. The Fed’s asset base is thereby increased, and an offsetting liability, bank reserves on the Fed’s balance sheet, also increases. The Fed’s been getting away with this kind of printing for a long time now, but there’s been some seepage of money into financial assets, driving prices of bonds to the stratosphere and triggering “beneficial” rallies in stocks, and more malevolent rallies in commodities, particularly crude oil, but “core” consumer prices have lain more or less dormant..But there’s another, different, type of “printing”, and this one is literal, honest-to-god printing! Dr. Bernankenstein wasn’t joking when he said the Fed had a printing press in the basement (cue evil laughter). The kind of “printing” I’m talking about is the actual printing of currency–cash, Benjamins et. al. Each week the district Fed banks usually print a total of a billion to several billion in cash, load it in armored trucks, and ship it out to the hinterlands, places like Staten Island, Cleveland, and Afghanistan. The cash shows up as a liability–Federal Reserve Notes–on the Fed’s balance sheet because cash. Also on the Liability side of the Fed’s balance sheet as reported weekly in the Fed’s H.4.1 statement are Treasury deposits, deposits by banks, also known as reserve deposits, reverse repos, Term Deposits of banks when the Fed offers them, and a mysterious category called Other deposits....

FRB: Press Release--Minutes of Board discount rate meeting on January 23, 2012 -- February 21, 2012: The Federal Reserve Board on Tuesday released the minutes of its discount rate meeting on January 23, 2012. The minutes are attached. Attachment (10 KB PDF)

When will the Fed hike rates? - TYLER COWEN points us to the blogger at Sober Look, who thinks markets aren't buying the Fed's low-rate communications:Misconceptions still persist that the Fed is on hold with respect to rates until at least late 2014. The markets would disagree. The Fed Funds futures have the first rate hike (25bp) centered around August of next year and the second hike (to 50bp) on July of 2014.... The market is fully ignoring the FOMC's prolonged zero rate forecast. If Bernanke tried to lower short-term rate expectations by the announcement, he failed miserably, as the rate expectations are now even higher than prior to the announcement. Why is the market pricing in higher short-term rates (an early rate hike)? The answer has to do with relatively strong economic data coming out of the US and rising commodity prices. All of this is driving up inflation expectations. The chart below shows TIPS implied 2-year forward inflation expectation now comfortably above 2%, the Fed's inflation target. This strikes me as mistaken in a few different ways. First, the market's expectations for the timing of rate hikes is almost perfectly consistent with the Fed's own projections. The language of the statement suggests the Federal Open Market Committee:

Dudley Sees Higher U.S. Interest Costs, Making Fiscal Repairs ‘Essential’ -  Federal Reserve Bank of New York President William C. Dudley warned that interest costs on government debt will eventually increase as the central bank raises borrowing costs, and he said it is “essential” for the U.S. to start aiming for fiscal balance.  “We are in an unusual period in which net interest expense is temporarily depressed,” he said. “This will not last and the fiscal authorities need to factor this in when considering what needs to be done to put the federal budget deficit and the nation’s debt burden on a sustainable path.”  Dudley repeated last month’s statement by the Federal Open Market Committee that low rates of resource use and subdued inflation “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” He is a permanent voting member of the panel.  “These unusually low interest rates are the result of monetary policy actions taken by the FOMC,” Dudley said in remarks prepared for the U.S. Monetary Policy Forum hosted by the University of Chicago Booth School of Business. “The sole purpose of these actions has been to promote the dual mandate objectives of maximum employment and price stability in the wake of the financial crisis.”

Why We Can't Believe the Fed - The Federal Reserve's interest rate-setting Open Market Committee recently broke new ground in Chairman Ben Bernanke's transparency campaign by proffering predictions of its own behavior over the next three years. This is a huge innovation for the Fed, which has never predicted economic data it directly controls.  The idea was first to anchor market expectations that short-term rates will stay at historic lows, thereby encouraging investors and companies to move more aggressively into longer-term, riskier assets with higher expected returns—which the Fed hopes will fuel economic growth. But the Fed also set for itself a formal, long-run inflation target of 2%. If the Fed has a good handle on where the economy is heading over the next several years, then its pledges of extended low rates and a 2% inflation target imply little risk of its needing to change course and jar the markets. But how good is the Fed's actual track record on predicting the economy?  The Fed studied its own staff's forecasting performance over the period 1986 to 2006. It found that the average root mean squared error—or the deviation from the actual result—for the staff's next-year gross domestic product (GDP) forecasts was 1.34, compared with 1.29 by what the Fed describes as a "large group" of private forecasters. That is, the Fed's predicting performance was worse than that of market-watchers outside the Fed. For next-year CPI forecasts, the error term was 1.03 for Fed staff, and only 0.93 for private forecasters. The Fed's conclusion? In its own words, its "historical forecast errors are large in economic terms."

Christina Romer: We Need A Regime Change at the Fed - Christina Romer does the Five Books interview and one of her recommended reads is a famous article by Peter Temin and Barry Wigmore titled "The End of One Big Deflation."   Here is Romer discussing the implications of this article for today: What we learned from the Temin and Wigmore paper is that one way out of a recession at the zero lower bound is by changing expectations. To do that, often what is needed is a very strong change in policy – something economists call a “regime shift”. The most effective way to shake an economy out of a terrible downturn when we’re at the zero lower bound is an aggressive change in policy that makes people wake up, say “this is a new day” and change their expectations. What the Fed has done since early 2009 is much more of an incremental change. In other words, the Fed has failed to appropriately manage expectations and so we are stuck in a slump.  So what would in the current environment rise to the level of a "regime shift"?  What would change expectations enough to catalyze a broad-based recovery in aggregate demand?  Here is Romer's answer:  I think that what the Fed needs instead is a regime shift. A number of economists have suggested that the Fed adopt a new framework for monetary policy, like targeting a path for nominal GDP.  Pledging to get back to the pre-crisis path for nominal GDP would commit the Fed to much more aggressive policy. Such a strong change in the policy framework could have a dramatic effect on expectations, and hence on the behavior of consumers and businesses.

Bigger beast, thicker chains - ECONOMISTS take central bank independence very seriously, and generally consider anything that undermines it bad policy. Its importance stems from the trade-off between the long-term and the short-term. The policies that generate temporary stimulus today can lead to uncertainty and reduced growth in the future. Politicians, with frequent election cycles, tend to be short-sided. Monetary policy can only balance the needs of the long- and the short-term when it’s not hostage to the political process. Independence also ensures that the central bank can act swiftly during financial crisis. But as John Cochrane points out, independent power must be limited: The price of independence is limited power. Central banks that only try to control inflation, and only using one tool, such as purchases and sales of Treasury debt, can be walled off from the political process. As a country, we can decide that the price level will not be used for political purposes and assign its maintenance to technocrats. Since the financial crisis the scope of the Fed’s regulatory duties have increased, and Mr Cochrane frets that this will ultimately undermine its independence.The more powerful it becomes, the more accountable it needs to be.

Republican House bill would strip US Fed's jobs mandate (Reuters) - Seeking to make good on past threats in Congress to rein in the Federal Reserve's powers, a prominent Republican lawmaker said on Thursday he will introduce legislation to focus the U.S. central bank on a single mandate to fight inflation and protect the dollar's value. Representative Kevin Brady, vice chairman of the Joint Economic Committee, said in a statement his "Sound Dollar Act" aims to "maintain the purchasing power of the dollar in order to foster long-term economic growth and stability." He plans to formally introduce it in early March. The Fed since the 1970s has had two mandates - to maintain stability and promote maximum employment - but the latter came under fire from some members of Congress after the Fed started buying hundreds of billions of dollars worth of Treasury and mortgage bonds to push down borrowing rates. Many Republicans have derided the so-called quantitative easing program as "printing money" and say it has devalued the dollar, driving up commodity prices and setting the stage for a nasty bout of future inflation.

Why Won’t The Federal Reserve Board Talk To Financial Reform Advocates? - Simon Johnson - The Federal Reserve has great power in modern American society, including the ability to move the economy and, at least indirectly, to create or destroy fortunes. Its powers operate in two ways: through control over monetary policy, meaning interest rates and credit conditions more broadly, and through its influence over how the financial system is regulated generally and how specific large banks are treated. The secrecy of our central bank has long been a source of controversy. In line with changes at central banks in other countries over recent decades, the Fed’s chairman, Ben Bernanke, has pushed for more transparency regarding how individual members of the Federal Open Market Committee view the economy – and thus how they are thinking about the future course of interest rates (and the Fed keeps us posted). This is a commendable change, helping people throughout the economy understand what the Fed is trying to do and why. Under pressure from both left and right – for example, in the unlikely alliance of Senator Bernie Sanders of Vermont and Representative Ron Paul of Texas – the Fed has also, after the fact, disclosed more of its actions during the recent financial crisis. But in terms of its process for determining financial-sector regulation, the Federal Reserve – at least at the level of the Board of Governors in Washington – is moving in the wrong direction.

New York Fed Said to Plan Sale of AIG-Linked Mortgage Bonds‎ - The Federal Reserve Bank of New York is seeking bids for more of the mortgage bonds assumed in the government rescue of American International Group Inc. as prices on the debt rally, two people with knowledge of the plan said. After it was approached by a potential buyer, the New York Fed may sell the remaining assets in its Maiden Lane II LLC vehicle, totaling about $6 billion in face value, said the people, who asked not to be identified because the deal is private. Maiden Lane II was created in 2008 to buy holdings that AIG handed the central bank in exchange for a cash injection.The New York Fed has used two previous sales this year totaling about $13 billion to retire its loan to Maiden Lane II. Those transactions were in response to unsolicited bids, after the New York Fed halted regular and more public auctions last year of about $10 billion that were blamed for damaging prices in credit markets. The latest sales haven’t curbed a rally in home-loan bonds.

More on the Output Gap - As I said, Bullard’s thinking on the output gap mirrors that of a lot folks. Tyler Cowen points to this from Sober Outlook. A key part of the post says This output gap, thought often taken for granted, may in fact be much smaller. Some recent work by Barclays Capital has already shown that the potential GDP (red line) is basically extrapolating the bubble of the pre-crisis era and is therefore unreliable.  The CBO number crunchers wish to believe in their ability to compute the potential GDP of the US economy.  The reality is that nobody knows how much output the US economy is truly capable of. But there are signs that the gap may now be below the CBO’s assertion. In one sense the  paragraph is true. No one knows for sure exactly what you could get out of the US economy, especially if you want to get the highest value added production. This is part because its not completely clear what “highest valued added production” might even mean in thoroughly consistent way. However, it we take a step back and ask more or less how much could you squeeze out the US economy, in terms of easily recognizable production we could probably back of the envelope this without too, too much trouble.

NGDP Targeting News Roundup - Just when you thought interest in nominal GDP (NGDP) might be waning there is more, including some discussions of it from central bank officials.  

  • First, Mark Carney, Governor of the Bank of Canada delivered a speech where he discussed what would be a monetary policy for all seasons. He had some nice things to say about NGDP targeting, but ultimately comes out in favor of flexible inflation targeting as the top choice. 

  • Second, Renee Holtom of the Richmond Fed has a nice article examining the implications of the Fed tolerating higher inflation as a way to kick start a robust recovery.  She discusses all the reasons for doing so, including a NGDP target..

  • Third, in what appears to be the latest convert to Market Monetarism, Jason Rave does a good review of NGDP targeting. 

What is Money? - Nick Rowe says we should not think of money as a store of wealth: Money is what money does. There are two functions of money that define what is and what is not used as money: medium of exchange; and medium of account. That's it... We need to start worrying a lot more about how money works as a medium of exchange. We need to understand a lot better than we do how money works as a coordinating device in a decentralised economy. And we need to understand a lot better than we do how money can sometimes fail as a coordinating device. Because, outside a very simple economy, people can't barter their way back to full employment if the monetary exchange system fails. We need to stop thinking of money as a store of wealth, just like all the others. And let's start by changing the textbook definition of money, by deleting that bit about money being a store of wealth.  I agree, but would add that we also need to start thinking about money at all levels of transactions. Most textbooks and many economists think of money assets at only the retail level (i.e. the M2 money supply).  This crisis has taught us that institutional money assets--those assets like treasuries, commercial paper, and repos that facilitate transactions in the financial system--matter too.  The bank run on the shadow banking system was a bank run using institutional money assets.  If we really want to understand money and its implications for the economy we need to be thinking about these money assets too.

Updated Seasonal Factors Remove Much of the Volatility from 2011 Monthly CPI Data - 2011 was a roller coaster ride for U.S. consumer price inflation—or was it? If you went by the releases from the Bureau of Labor Statistics, monthly CPI inflation, stated as annual rates, bounced from over 6 percent in February, down to under -2 percent by June, and then back up over 6 percent in July. That made life hard for policy makers, forecasters, and anyone trying to use the CPI to index payments. It turns out, though, that inflation was not so volatile after all. As part of yesterday’s CPI report for January, the BLS released revised seasonal adjustment factors. When we apply the new adjustment factors to data for the last two years, as in the following chart, much of the month-to-month variation in inflation disappears. The smoothing of the June-to-July bounce in inflation is especially noticeable.  The revision of seasonal adjustments does not affect year-on-year inflation. Meanwhile, the inflation report for January shows a modest upturn, as we would expect from other signs of a strengthening economy. The uptick of inflation is broadly based. The headline all-items CPI and the core CPI, which omits food and energy prices, both rose to a 2.4 percent annual rate, just above the Fed’s now-official inflation target. The Cleveland Fed’s 16 percent trimmed mean CPI also notched upward to a rate above 2 percent.

Is It Time to Start Worrying About Inflation Again? - People tend to forget about inflation during a recession, because it typically abates until a recovery gets under way. But now inflation appears to be coming back. Ignore the monthly numbers – they’re too volatile to be reliable. But Friday’s inflation report showed that consumer prices have risen 2.9% over the 12 months through the end of January. Moreover, there’s an even more worrying pattern if you look at the same measure at half-year intervals since the start of 2009. The series goes: minus 0.6%, minus 0.1%, 2.1%, 1.2%, 2.8%, 3.5%. With only one interruption, that trend shows inflation on the rise. Some commentators argue that inflation isn’t a problem yet for several reasons: First, the consumer price index typically gives higher inflation readings than some other measures. Second, the economy is still relatively weak and unemployment remains high. That means any short-term price increases are likely to die out rather than fueling a self-sustaining inflation spiral. And third, policymakers have to balance the risks of inflation against the need to keep the economic recovery going and reduce unemployment. As long as unemployment is above 7%, inflation is a lesser risk than slipping back into recession.

Weighing the risks to the inflation outlook: Two views - Atlanta Fed's macroblog - The Federal Reserve Bank of Atlanta's Survey of Business Inflation Expectations released earlier today showed a continuation of rather modest expectations for unit cost pressures over the coming 12 months. In February, our panel of firms reported a 1.9 percent average expected rise in unit costs over the coming year, still within the very narrow 1.8 percent to 2 percent range the group has been reporting over the past five months.  That's the good news. Now for some (potentially) bad news. In a special question this month, we asked the panel to weigh in on their expectations for annual unit cost increases over the longer term—specifically, the next 5 to 10 years. The group's expectation was a percentage point higher, at 2.9 percent.  The reason for the higher expectation for unit costs over the longer term can be seen in the following chart, which compares how the group assigns probabilities to unit cost changes over the next 12 months to how they judge these probabilities over the longer term.  In both instances, the Atlanta Fed's Business Inflation Expectations panel of firms puts the greatest likelihood that unit costs will rise in the 1 percent to 3 percent range—in a range that matches the Federal Open Market Committee's longer-term inflation objective.

Atlanta Fed Survey Finds Long-Term Inflation Worry - Most Federal Reserve officials are fond of observing that even as they pursue a very aggressive and unprecedented monetary-policy path, their actions aren’t stirring up inflation. In doing so, they’re countering critics who worry the central bank has gone too far in efforts to stimulate growth, and that current policies are running a significant risk of generating a future surge in price pressures. Fed officials have countered they have the tools to make sure their actions don’t fuel a break out in prices. They also note the data doesn’t show much worry about future inflation gains. But a new survey of local businesses conducted by the Federal Reserve Bank of Atlanta, released Wednesday, suggests South-Eastern region business leaders may not share the Fed’s confidence about future inflation. The survey of 168 firms found an average expectation inflation would hang close to the Fed’s target at 1.9% over the next 12 months.The short run was not where the potential problem lies. Survey respondents predict inflation over the next five to 10 years to rise by 2.9%, a level that would problematic to the Fed. Of those who answered the question, the bias of regional companies clearly points to expectations that long term inflation risks are rising. Respondents said there was a 38% chance prices will rise between 1.1% to 3%, and a 29% chance of a gain between 3.1% and 5%. Those surveyed put a one in five chance on inflation rising by 5% or higher over the next five to 10 years.

Inflation: Life on the Phillips curve | The Economist - VIA Modeled Behavior, I see that Arnold Kling has written a post which reads: Mainstream macro in the 1970s (which a lot of people seem to have gone back to) held that there was a NAIRU, meaning the non-accelerating inflation rate of unemployment. If unemployment was above that, inflation would fall. If it was below that, inflation would increase. So, policy should shoot for the NAIRU. These days, unemployment is 8.3 percent, and inflation is increasing. Just sayin’. Just sayin'...what, exactly? Don't imply, man, argue! Follow the point through to its conclusion and see if it actually holds together!  Mr Kling says that according to this theory a rate of unemployment below NAIRU will trigger an increase in inflation. He then observes that with 8.3% unemployment, inflation is increasing. And he deploys the just sayin' line to imply that the economy is therefore below NAIRU—that is, at structural full employment, suggesting that further demand stimulus is undesirable. He is wrong on multiple levels.

Restraining unit labour costs is a right-wing conspiracy - In an otherwise excellent post, Matt Yglesias commits one of the deadly sins of monetary policy: [M]y favorite indicator of inflation is “unit labor costs”… Unit labor costs are basically wages divided [by] productivity. It’s not the price of labor, in other words, but the price of labor output. If productivity is rising faster than wages, then even if wages themselves are rising unit labor costs are falling. Conversely, if wages rise faster than prodictivity than unit labor costs are going up. Clearly there’s nothing wrong with a little increase in unit labor costs here or there. But over the long term, growth in unit labor costs needs to be constrained or else it becomes impossible to employ anyone. And you can see that in the seventies it’s not just that gasoline got more expensive, we had an anomalous spate of high unit labor cost growth. That was inflation and it’s what led to the regime change that’s governed for the past thirty years. That all sounds reasonable. But Yglesias has fallen into a trap. Unit labor costs are not “basically wages divided [by] productivity”. That’s not the right definition at all. Unit labor costs are nominal wages per unit of output.  An increase in unit labor costs can mean one of two things. It can reflect an increase in the price level — inflation — or it can reflect an increase in labor’s share of output. The Federal Reserve is properly in the business of restraining the price level. It has no business whatsoever tilting the scales in the division of income between labor and capital.

Debt and Regret: Inflation Edition - Mike Konczal posts a summary of a working paper by Mason and Jayadev. The leader: Changes in debt-income ratios can be attributed to primary borrowing, interest rates, growth, and inflation. In a new working paper, we apply such a decomposition to the evolution of U.S. household debt.  This shows that changes in borrowing behavior has played a smaller role in the growth of household leverage than is widely believed. I think the authors are essentially correct – declines in inflation are the key driver behind high household indeptedness. What they are not as explicit about is that indeptedness is fundamentally a nominal phenomenon. Its always difficult for me to lucidly explain this even to myself but these two graphs should help. First, look at how household debt has grown. An almost inexorable rise since the early 1980s. Even now we are barely back to 2005 levels. Now compare that to debt service payments. Though by 1995 the level of debt-to-income had gone up by about 50%, debt service payments were almost as low as the through in the 1980s. And, today while debt-to-income is just shy of 200% of early 1980s levels, debt service payment are not that far off the bottom. This is because inflation causes your debt-to-income ratio to fall faster, but it does this by requiring a higher payment at even given level of debt. So even though debt-to-income was much lower in 1985, for example, debt payments were higher. One of the things I think these means – but I haven’t worked it out – is that low inflation creates a fundamentally more precarious economy, even without thinking about the zero lower bound.

Is the Fed Responsible for High Oil Prices? - Finding novel ways to blame the Federal Reserve for America's economic woes has become a favorite parlor game on both the political left and right. And now that the rising price of oil is threatening to slow down or possibly derail the recovery, it was probably only a matter of time before someone tried to blame Ben Bernake & Co. for the cost of crude. Today, The Wall Street Journal's editorial board took a brief stab at it while they were busy lambasting President Obama's energy policies. To its (limited) credit, the Journal does acknowledge that there might be a few other factors pushing up global crude prices, such as instability in the Middle East and rising demand in China and Brazil. But for various reasons, those can't possibly be the root of the problem, it argues. The more likely culprit, the paper says? U.S. monetary policy.  Oil is traded in dollars, and its price therefore rises when the value of the dollar falls, all else being equal. The Federal Reserve throughout Mr. Obama's term has pursued the easiest monetary policy in modern times, expressly to revive the housing market. It has done so with the private support and urging of the White House and through Mr. Obama's appointees who are now a majority on the Fed's Board of Governors.

The Fed Can’t Print Oil But It Can Print Money - Rising oil price remain my principle concern regarding the recovery. My thesis is that rising oil prices are a monetary contraction because the funds are just parked in T-Bills. Imagine for example if rising oil prices caused Oil Producing countries to buy more Boeings or Catepalliar Equipment. Would we expect oil prices to be contractionary? Or would they simply shift production away from consumption and towards exports? Economists naturally think of international trade as pure exchange but of course its not. Dollar denominated assets are accumulated. This means it has monetary effects particularly at the zero lower bound. If we were in a normal world the appropriate response to higher oil prices would be to cut interest rates as T-Bills are seeing higher demand. Otherwise, the Fed will have to slow the growth of the money supply in order to maintain the Funds rate – which must wash with the T-Bill rate – and would otherwise fall. My advice would be to go with something like this: Higher oil prices represent headwinds for the US economy and may justify more accommodative action to prevent job growth from slowing.

Chicago Fed Nat'l Activity Index Is Positive For 2nd Straight Month - For the first time in a year, the Chicago Fed National Activity Index (CFNAI)—a broad measure of the U.S. economy—posted a positive reading for the second month in a row. Nonetheless, the pace slowed, with CFNAI slipping to +0.22 for January from December’s +0.54. Meanwhile, the three-month moving average (CFNAI-MA3) rose slightly to +0.14 last month, up from +0.06 in December, which the Chicago Fed advises is a sign "that growth in national economic activity was slightly above its historical trend." CFNAI is a weighted average of 85 indicators of U.S. economic activity. The Chicago Fed recommends reading its 3-month moving average (CFNAI-MA3) as follows: a value below -0.70 after a period of economic expansion "indicates an increasing likelihood that a recession has begun." By that rule, the January CFNAI-MA3 reading of +0.14 suggests that the economy will continue growing for the foreseeable future.

Chicago Fed: Economic Growth in January above Average -The Chicago Fed released the national activity index (a composite index of other indicators): Index shows economic growth in January again above average:The Chicago Fed National Activity Index decreased to +0.22 in January from +0.54 in December, but remained positive for the second straight month for the first time in a year. ...  This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.  This suggests growth slightly above trend in January - but still not strong growth. According to the Chicago Fed: A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

Fed’s Bullard Optimistic On Economy, Labor Market Gains - St. Louis Federal Reserve Bank President James Bullard expressed optimism over the economic recovery on Friday, saying he saw a “real gain” in the recent decline in the unemployment rate. The Fed official also distanced himself from the specific language in the central bank’s latest policy statement. Last month the Fed said it expected to keep interest rates at exceptionally low levels until late 2014. Bullard said that he would have preferred not to include a “calendar date” in the statement. “Way out at the end of 2014, we don’t know what the economy’s going to look like and it over-emphasizes our forecasting ability, which isn’t that good,” Bullard told reporters at a conference on Friday held by the University of Chicago Booth School of Business. Bullard was largely hopeful about the economy’s prospects in 2012. “It’s reasonable to be optimistic,” he said. “Just because you had some bad shocks and things went badly in 2011 doesn’t mean that’s what’s going to happen in 2012,” he said. The probability of a severe meltdown in Europe is now lower, compared to last fall, he said.

Threats to the Current Recovery - Let’s take a well-deserved break from manufacturing and tax policy and cheer things up with a post on threats to the current recovery. As I’ve stressed, IMHO we’re not yet into the virtuous cycle where we can count on above-trend growth to generate jobs, which boosts paychecks, which supports consumption, which signals investors to get into the game, which leads to more growth, etc. But we’re headed there.  The best evidence for that is the improving job market—that’s been the missing link in the above cycle.  Outside of public sector job losses—there’s your first ongoing threat—net payroll gains have accelerated in recent months and that’s helped to nudge down the unemployment rate which has ticked down by one or two tenths every month since last September. In that spirit, the first two figures show steady, favorable trends in the four-week average of unemployment insurance claims, closing in on pre-recession levels, and the number of job-seekers per job opening, which has recovered about half of its losses since the downturn.

Why The U.S. Economy Could Go Haywire - Americans participating in a recent Gallup poll showed the highest level of confidence in an economic recovery in a year.  Sounds great, but you can’t ignore the nearly 13 million unemployed, the 46 million people on food stamps and the roughly 29% of the country’s homeowners whose mortgages are under water. They would find it hard to subscribe to the poll’s sunny conclusion. On the other hand, there’s no getting away from a bevy of seemingly increasingly favorable economic data, which, more recently, includes falling weekly jobless claims, four consecutive monthly gains in the leading economic indicators, somewhat perkier retail sales and a pickup in housing starts and business permits. Pounding home this cheerful view is the media’s growing drumbeat of increased economic vigor. Confused? How can you not be? But President Obama has to be elated at this widely perceived peppier economy. During much of his presidency, he’s been roasted by some critics as an economic illiterate, with one Internet poster recently reading: “Obama had a dream and we got a nightmare.” Now, though, thanks to the public’s growing acceptance of the idea that things are getting better, Obama’s approval ratings are on the rise. Even a number of his Wall Street critics are starting to acknowledge his chances of winning a second term have greatly improved and some believe he’s almost a shoo-in should the current economy continue to pick up steam.

False Recovery 2.0: It's Beginning to Look a Lot Like 2011 - Let's play "Name That Year of the Recovery." In the first quarter of this Mystery Year, the economy adds more than 200,000 jobs in consecutive months. Manufacturing is roaring. Investors are giddy and stocks improve for the third month in a row. The Dow breaks 12,000 for the first time since 2008. Economists are screaming, "Recovery Winter!" Surprise! It's 2011. The economy accelerated around the '10-'11 bend with practically every conceivable tailwind: accelerating employment, strong industrial production, and a decent, if spotty, normalization in housing. But you all remember what came after. Unrest in the Middle East sent oil over $100 a barrel. Europe's crisis weighed on banks, confidence, and exports. A showdown over the debt ceiling made a mockery of Washington. By the summer, the boomlet has wilted, job creation has slowed to a pathetic trickle, and economists were talking seriously about a double-dip recession. Fast-forward to 2012. The economy has added more than 200,000 jobs in consecutive months. Manufacturing is roaring. Investors are giddy. Stocks have hit 2008 highs. Economists are screaming, "Recovery Winter!"

Austerity. China. The Housing Market. The Middle East. Four reasons to stay gloomy about the global economy. -  Since late last year, a series of positive developments has boosted investor confidence and led to a sharp rally in risky assets, starting with global equities and commodities. Macroeconomic data from the United States improved; blue-chip companies in advanced economies remained highly profitable; China and emerging markets slowed only moderately; and the risk of a disorderly default and/or exit by some members of the eurozone declined. Moreover, the European Central Bank, under its new president, Mario Draghi, appears willing to do anything necessary to reduce stress on the eurozone’s banking system and governments, as well as to lower interest rates. Central banks in both advanced and emerging economies have provided massive injections of liquidity. Volatility is down, confidence is up, and risk aversion is much lower—for now.But at least four downside risks are likely to materialize this year, undermining global growth and eventually negatively affecting investor confidence and market valuations of risky assets.

Measuring Housing's Drag on the Economy - Here’s a reminder about a problem that still doesn’t get the attention that it deserves: Housing has blown a giant smoking hole in the middle of our economy, and the consequences continue to impede the pace of recovery.A new paper presented Friday at a monetary policy conference in New York puts some interesting new numbers on the scope of the problem. The pace of recovery since the financial crisis has been less than half as fast as after the last two major recessions, which ended in 1975 and 1982. In first 10 quarters after those recessions, the economy grew by 13.4 percent; in the wake of this recession, the economy grew by only 6.2 percent. And, the paper says, “more than half the underperformance in this recovery is associated with housing-related sectors.” Yes, that’s right. Housing is more than half of our problem.

Modern Monetary Theory, an unconventional take on economic strategy - About 11 years ago, James K. “Jamie” Galbraith recalls, hundreds of his fellow economists laughed at him. To his face. In the White House. It was April 2000, and Galbraith had been invited by President Bill Clinton to speak on a panel about the budget surplus.  But if Galbraith stood out on the panel, it was because of his offbeat message. Most viewed the budget surplus as opportune: a chance to pay down the national debt, cut taxes, shore up entitlements or pursue new spending programs. He viewed it as a danger: If the government is running a surplus, money is accruing in government coffers rather than in the hands of ordinary people and companies, where it might be spent and help the economy. “I said economists used to understand that the running of a surplus was fiscal (economic) drag,” he said, “and with 250 economists, they giggled.” Galbraith says the 2001 recession — which followed a few years of surpluses — proves he was right. A decade later, as the soaring federal budget deficit has sharpened political and economic differences in Washington, Galbraith is mostly concerned about the dangers of keeping it too small. He’s a key figure in a core debate among economists about whether deficits are important and in what way. The issue has divided the nation’s best-known economists and inspired pockets of passion in academic circles. Any embrace by policymakers of one view or the other could affect everything from employment to the price of goods to the tax code.

The Washington Post Goes “Unconventional” - Dylan Matthews had a piece on Modern Monetary Theory in the Washington Post yesterday that featured Levy Institute scholars James Galbraith and Randall WrayWaPo also put together a “family tree” that displays some Post Keynesian and New Keynesian lineages. The piece has been bouncing around the internet, first with some supportive comments by Jared Bernstein.  Both Dean Baker and Kevin Drum ask what’s so special about MMT, with Drum suggesting a focus on views about inflation.  According to Drum, this is the central question: So should we focus instead on a genuine target of 4% unemployment, reining in budget deficits only when we fall well below that? That depends a lot on what you think the productive capacity of the country really is, and the mainstream estimate of NAIRU, the highest unemployment rate consistent with stable inflation, is around 5.5% right now. Of course, you might also want to consider MPT, or Modern Petro-Monetary Theory. Rather than asking what level of economic growth kicks off unacceptable inflation, it asks what level of economic growth kicks off an oil price spike that produces a recession and higher unemployment. In comments at Mother Jones, Galbraith engages with Drum’s “MPT” point: Kevin – your instinct on the oil price is on target, in my view.  The inflation threat that we face doesn’t come from deficits or high employment — it comes from the cost and price of energy.  But managing this is not within the competence of the Federal Reserve.

Otherwise Good WaPo Article on Modern Monetary Theory Marred by Undeserved Praise of Roosevelt Institute - Yves Smith  - In the “wonders never cease” category, the Washington Post, which is normally firmly in the camp of orthodox economic thinking and budget hawkery, ran a very well researched and complementary article by Dylan Matthews on Modern Monetary Theory. This may be a sign of MMT moving out of being regarded in policy circles as fringe (some might say lunatic fringe) to a useful part of an economist’s toolkit.  Given that the piece did a good job of naming most of the major thinkers and writers on MMT (Marshall Auerback, and Rob Parenteau, creator of the term, “austerian,” were not mentioned, sadly), and also gave a nice shout out to Naked Capitalism as one of the blogs showcasing MMT writers, I feel a bit churlish criticizing the article. But one misconstruction stands out. It mentions the Roosevelt Institute’s New Deal 2.0 blog as another MMT friendly venue, when that is not longer the case, and for reasons that do not reflect well on the Roosevelt Institute.

Izabella Kaminska: Why MMT is Like an Autostereogram - We’ve discussed MMT’s recent foray into the mainstream, and the confusion it has consequently courted. But that’s the funny thing about the theory. It is naturally divisive because most of the time it fails to communicate its message succinctly. Which is weird, since the premise is actually fairly simple to understand. We’d say it’s akin to looking at an autostereogram. Once you get it, you never see things quite the same way again. But at the same time, try as they might, some people will never be able to see the image. Ever. And it all rests on one key fact (at least as far as we can tell!) . Rather than treating money as an object of wealth or somebody else’s debt, a means to trade … MMT treats money as a claim on wealth, a product of trade. This one view makes all the difference. Unlike the first viewpoint, which assumes that debt and money came out of trade, MMT believes debt, or more specifically monetary credit, pre-dates trade. Coinage and all forms of monetary token are thus just a physical representation of what is actually an innate credit system. In and of itself, money — the token — has no value. And this is largely why a fiat monetary system can work. The monetary unit doesn’t need to be a ‘valuable’ piece of metal. It’s who guarantees the token that matters. In modern times, that means the state. What’s more, suppress the credit system (which in the case of the United States is represented by the government’s debt) and inevitably you suppress an economy’s ability to trade. And this, by the way, is why MMTers believe government debt can never really constrain an economy whose government controls the official currency. Furthermore, this is also why in a time of crisis they believe you need more government guarantees, not less — hence their support of higher debt limits. If one chart sums up the theory best we think it’s this one from Stephanie Kelton:

In Which I Disagree With Izabella Kaminska - Well sort of, She writes This was exciting news for fans of the alternative economic school, more popularly known as MMT, which asks people to think of money, credit and tax in a completely different way to what is usually considered conventional in economics. All in all, we have to say, the article did a good job, at least when it comes to explaining the origins and basics of the theory. As a primer it worked well. . . .The reaction, of course, is interesting because it shows to what degree MMT really does represent a paradigm shift in economics. If you can’t flip your brain into MMT mode, try as you might, you’ll never really understand what they’re going on about. So earlier I made some disparaging comments about folks who don’t get the basic ideas that either the MMTers or the MMers are pushing. That was at minimum inappropriate. Still, I think it’s a mistake to talk about MMT as if it is some grand new way of looking at the world. Its basically just understanding how Central Banks with a little bit of progressive liberalism sprinkled on top for extra fun.

Krugman Embraces Keynesian Label to Defend Government Spending -- Nobel-prize winning economist Paul Krugman maintained his calls for government spending to create jobs after being labeled a “crude Keynesian” by fellow academic Jeffrey Sachs. “The job of the government” is “to step in,” Krugman, a professor at Princeton University, said at a panel discussion at New York’s Metropolitan Museum of Art yesterday. Sachs, an economics professor at Columbia University who also spoke on the panel, criticized Krugman earlier this month for not paying enough attention to the growing federal debt. Sachs said the government should focus more on investing in long-term programs like education instead of short-term stimulus measures. “We need plans, we need decade-long investments,” said Sachs, whose books include “The Price of Civilization” and “The End of Poverty.” Instead, he said, “We get year-to-year improvisation that passes for some kind of stimulus.” Krugman, 58, said more spending is needed to battle unemployment, which has held above 8 percent since February 2009, the longest such run since the monthly record-keeping began in 1948. Nonetheless, the rate is starting to drop, reaching a three-year low of 8.3 percent in January.

The Memo that Larry Summers Didn’t Want Obama to See - For the past three years, Washington journalists and politicos have obsessed over a 57-page memo that Barack Obama’s incoming economic team prepared for him in late 2008. The document has achieved such totemic status for good reason: It decisively shaped the Obama administration’s initial response to the economic crisis. The memo outlined the president-elect’s options for dealing with the teetering banks, the cash-strapped automakers, and the country’s tidal wave of foreclosures. Above all, the memo laid out options for a massive stimulus package—the mix of tax cuts and government spending designed to end the recession and boost employment. The economic team presented the contents of the memo to Obama at his transition headquarters on December 16, 2008, at which point they collectively settled on a proposed stimulus of nearly $800 billion. Last month, my friend and former colleague, Ryan Lizza, wrote a much-discussed piece in The New Yorker based on a copy of this and several other previously-unpublished memos. The piece and the corresponding memo described the stimulus options that Obama’s team—including Larry Summers, his top economic adviser, and Christy Romer, soon to be his chief White House economist—ultimately sent him. The options ranged from about $550 billion to just under $900 billion. Intriguingly, Lizza also noted that Romer “was frustrated that she wasn’t allowed to present an even larger option,” suggesting that while the memo he obtained may have been the end of the story, it was far from the whole story.

Shifting the Center of the Political Debate - I want to follow up on Paul Krugman's post about the shifting Overton window in the UK toward the political right (think of the Overton window as a view into the center of a debate). As Krugman would be the first to tell you, it's not just in the UK. For example, consider the current discussion over the president's proposed budget, a budget that is touted as "broadly consistent with the bipartisan deficit reduction proposals put forward by the Bowles-Simpson Commission." I thought the recommendations for balancing the budget that came out of the Bowles-Simpson committee gave far too much to the GOP - the solutions that were proposed were much further to the right of the political spectrum than I would have preferred. My recollection is that people such as Paul Krugman and Dean Baker were critical as well (and recall that there was no official report because four Democrats and three Republicans on the seventeen member committee could not agree to the recommendations on the table -- instead we got an unofficial report from the committee chairs, Bowles and Simpson). However, Republicans have shifted the debate so far to the right that Bowles-Simpson is now being portrayed by the administration and others as a model of balance, reason, and compromise that both sides ought to embrace.

The Moving of the Overton Window on Fiscal Policy - I liked this Mark Thoma piece about the shifting of the Overton Window. I think I alluded to this with my story on a new round of tax cuts being humped by the GOP, and the new bipartisan consensus on the virtue of tax cuts as a stimulus measure. I know exactly what the Administration would say, they’re trying to get things done, and a payroll tax cut mimics a wage increase. And on the merits, that’s fine. But the point I made earlier is that it’s the ideological drift that you get when you fight on the other side’s turf that becomes the problem. This is what Thoma gets at in his piece: I thought the recommendations for balancing the budget that came out of the Bowles-Simpson committee gave far too much to the GOP – the solutions that were proposed were much further to the right of the political spectrum than I would have preferred.   Republicans have shifted the debate so far to the right that Bowles-Simpson is now being portrayed by the administration and others as a model of balance, reason, and compromise that both sides ought to embrace. Thoma adds that Tim Geithner actually backed off of one aspect of Bowles-Simpson, the Social Security changes, because they were, in Geithner’s words, too tilted on the side of benefit cuts. But the problem lies in making Bowles-Simpson as the wise middle ground in the debate. When the President reached out to John Boehner with a deficit plan that was actually to the right of Bowles-Simpson, again playing on the opposing turf, then it was foreordained that Bowles-Simpson would become the moderate compromise, even though it couldn’t even get a vote on its own committee.

Give People Shares of GDP - We can solve the debt crisis by replacing T-bills with “Trills.” -  Robert Shiller - Corporations use a combination of debt and equity to finance their investments and operations. Nations, in contrast, rely exclusively on debt. When a nation’s economy stalls and its debt continues to grow—you may have noticed this happening a lot recently—disaster looms for the country’s taxpayers. This is why Europe is in turmoil right now. But things don’t have to work this way. Here’s an audacious alternative: Countries should replace much of their existing national debt with shares of the “earnings” of their economies. This would allow them to better manage their financial obligations and could help prevent future financial crises. It might even lower countries’ borrowing costs in the long run. National shares would function much like corporate shares traded on stock exchanges. They would pay dividends regularly. Ideally, they’d be perpetual, although a country could always buy its shares back on the open market. The price of a share would fluctuate from day to day as new information about a country’s economy came out. The opportunity to participate in the uncertain economic growth of the issuer might well excite, rather than scare off, investors—just as it does in the stock market.

Difference on Deficit Reduction is not about “How Much?” but “Who Pays?” – Treasury blog - The Budget released by the President this week uses a balanced approach to achieve more than $4 trillion in deficit reduction over the next 10 years. This level of savings and the manner in which they are accomplished are broadly consistent with the bipartisan deficit reduction proposals put forward by the Bowles-Simpson Commission and the Senate’s bipartisan “Gang of Six.” Using this balanced approach, the President’s Budget reduces deficits from about 9 percent of GDP in 2011 to below 3 percent by 2018, and stabilizes the debt as a share of the economy by the middle of the decade.In general, there is little disagreement on the magnitude of savings that are needed over the next decade to put us on a sustainable fiscal course. Rather, the main difference between the President and Republicans is related to the composition of these savings .As Secretary Geithner made clear in testimony on the Budget this week, the greatest impediment to bipartisan progress on reducing deficits is the unwillingness by Republicans in Congress to take a balanced approach. Instead, they have sought to achieve budget savings solely through cuts to critical programs like Medicare and Medicaid, without asking the most fortunate citizens to contribute anything more than they do today.

Is the Administration Joining Team Balance-Sheet Recession? - There’s a mini-debate going on over the relationship between the housing crash and weak demand. As Cardiff Garcia of FT Alphaville recently summarized it: “This reminded us of the debate last year about whether the sluggishness in consumer spending was the result of households wanting to deleverage or was caused by the big negative wealth effect caused by the huge crash in home prices.” See this from James Surowiecki on the wealth effect and the Q&A I did with Amir Sufi on deleveraging. Which is the main driver, deleveraging balance sheets or a wealth effect? I’m more on team balance sheet. It must seem like an esoteric debate, but it has some consequences. If it’s about deleveraging balance sheets, the problem is an income/debt issue. It can be solved by reducing debt through forgiveness, lower interest rates and refinancing, equity swaps, a jubilee, and many other options. The models used in these stories indicate that any kind of transfer from creditors to debtors will make the economy better off. If it’s a wealth effect, forgiving debt is likely to be less important — it’s not the root of the problem. Redistribution between creditors and debtors is unlikely to have a major impact outside of marginal propensities to consume. You’d need to get housing prices back up for there to be a significant adjustment.

It's February 21: Do You Know Where The Obama 2013 Budget Is? - I've been in the budget business for a long time, and I have to admit that few presidential budget have disappeared from view as fast as the one the Obama administration submitted to Congress last Monday. By last Tuesday — that is, by the day after it was released — you had trouble finding the Obama administration’s fiscal 2013 budget. I don’t mean that hackers made it impossible to download the budget from the Office of Management and Budget’s website or that the Government Printing Office bookstore near you was sold out of the four volumes. But even in a city like Washington, D.C. — where “long term” generally means after lunch tomorrow — the speed with which the Obama budget went from lead story to old news was impressive. It was also a great indication of what this year’s budget debate will be like. No doubt part of the disappearing act was planned. Although the word from deep within the administration was that the release of the budget was delayed a week from the Feb. 6 Congressional Budget Act deadline because of a last-minute change affecting military spending, it now seems possible that the White House was also looking at the calendar when it decided to wait until Feb. 13.

Obama’s Plan to Save the Military From Cuts—at the Expense of Domestic Programs - As budget wonks comb over President Obama’s outline for fiscal year 2013, a startling White House plan has become clear: the administration is seeking to undo some mandatory cuts to the Pentagon at the expense of critical domestic programs. This wasn’t a featured part of the White House budget rollout, and for good reason—it undercuts the administration’s carefully crafted message of benevolent government action and economic fairness. The process for this shift is complicated, and has been flagged by the Center on Budget and Policy Priorities. Essentially, Obama wants to eliminate individual spending caps for both military and non-military spending, and institute one single discretionary spending cap instead.  To understand how deep the retreat really is, one first needs to understand the difference between security spending and defense spending. Spending on defense applies to the “National Defense Function”—that is, the entire Pentagon budget, plus $24 billion for nuclear weaponry and environmental cleanup programs at the Department of Energy, the defense activities of the FBI, and a small handful of other defense programs. Security spending, on the other hand, excludes some of the Department of Energy money, along with some of the other FBI and small program funding—but includes the Department of Veterans Affairs, the Department of Homeland Security and the “International Affairs” part of the budget, which is mainly State Department funding and foreign aid.

Competitiveness, and the Bush Tax Cuts and Deficits, by Menzie Chinn: The Administration released the annual Economic Report of the President on Friday. Many topics were covered, but here I’ll remark upon a few issues, motivated by several graphs. First is price markup over unit labor cost. The interesting trend since 2001 has been the rise in this variable. From this graph, one would be hard pressed to find American business in terrible shape. Productivity has increased, labor compensation growth has been modest, so that it’s obvious where profits have come from. This also means (to me) that there is substantial space for rising wages to be absorbed without a commensurate wage-price spiral. As I noted in this recent post, rapid productivity growth combined with slow compensation growth has improved American competitiveness. Nominal dollar depreciation over that period emphasized that improvement. The next graph decomposes the budget deficit into its constituent components, going forward. The graph highlights the impact of the 2001 and 2003 tax cuts on the Nation’s fiscal prospects. In a word, disastrous.

America needs its own infrastructure bank - America needs to invest in infrastructure. Despite signs of improvement, our economy is still in crisis. We could create millions of jobs by rebuilding our transport and water systems – ending the congestion that stifles our ports, airports, railroads and highways; increasing productivity; and empowering the US to compete with countries that are investing in infrastructure on a massive scale. Infrastructure financing tools are available, providing Washington wants to use them. They could bolster investment by leveraging hundreds of billions of dollars in private and international capital. The potential tools include a national infrastructure bank and other relatively minor legislative changes to encourage private investors off the sidelines. American mutual funds, pension funds and retail investors allocate relatively small portions of their $37,000bn in capital to new infrastructure initiatives.  Congresswoman Rosa DeLauro has introduced a House bill to create one, and Senators Kay Bailey Hutchison and John Kerry co-sponsored similar legislation in the Senate. President Obama also supports a such a project. So do the AFL-CIO labour group and the US Chamber of Commerce, organisations that differ sharply on many issues but unite in calling for the US to rebuild. A national infrastructure bank could be independent and transparent. Government-owned but not government-run, it would have a bipartisan board and a staff of experts and engineers to plan projects based on quality and public need, not on politics. The infrastructure bank also should have authority to finance projects by issuing bonds with maturities of up to 50 years. These long-duration bonds would align the financing of infrastructure investments with the benefits they create, and their repayment would allow the bank to be self-financing.

By Request: More On Budget Process Changes - Last Wednesday I got an email challenging my comments about House Budget Committee Chairman Paul Ryan's (R-WI) poor decision to move ahead with changes in the congressional budget process. For those who don't remember, I posted that there's no doubt that the current system isn't working and that changes are needed, but that the way Ryan was trying to do it wouldn't work because he was putting the federal budget cart before the fiscal policy horse. The person who emailed me thought that the Ryan changes were good, that I was wrong (He used a very different word), and that my heritage needed to be questioned. As I've said many times before, including in testimony before the House Rules Committee a number of years ago, you shouldn't change the budget process until you know what you're trying to accomplish. Once you get an agreement on that -- reduce spending, lower the deficit, lower the debt, set revenues-to-GDP at a certain level, etc.) -- it's relatively easy to come up with a process that will get you there from here. Doing it the other way -- process changes before there's an agreement on the goal -- is a sure way to get the process ignored, waived, or simply defied.

Budget Gimmicks Are Alive and Well in the Payroll Tax Cut - The other day, I criticized the unwillingness of Congress to finance the latest extension of the payroll tax cut. Since that blog, the Congressional Budget Office released its estimates of the cost of the entire mini-stimulus, including the so-called “doc fix” and changes in unemployment compensation. And the games were even worse than I feared. Congress made no pretense of paying for the payroll tax cut itself. But it did claim it would pay for the rest of the package. Hint: It didn’t. There are two bits of legerdemain happening here. Both are functions of the 10-year budget window the Congressional Budget Office and the Joint Committee on Taxation use to score legislation. The first gimmick allows Congress to pretend tax cuts or new spending are temporary, when it is obvious to all they are not.  The second is a sort of congressional lay-away plan. Lawmakers get to buy politically popular policies today but avoid paying for them until years from now. There is nothing new in all this. Congress has been playing games with the 10-year budget window (or its cousin the 5-year window) for decades. But the mini-stimulus showed business as usual is alive and well on Capitol Hill, despite the best efforts of the tea party caucus.

Payroll tax cut undermines Social Security's security - The accepted response to the economic deal reached in Congress last week, extending the Social Security payroll tax holiday and unemployment insurance and maintaining reimbursement levels for Medicare doctors, is huzzah! So why should we consider this action cause for despair? It's because with every extension of the payroll tax holiday, which was first enacted in 2010, the prospect that Congress will ever restore the tax to its statutory 6.2% of covered income recedes a little bit further over the horizon. And that's bad medicine for Social Security. To be fair, thus far the payroll tax holiday hasn't impaired Social Security's fiscal resources one bit. By law, 100% of the cut must be compensated for by transfers from the general fund; those transfers have come to about $130 billion since 2010, covering the original "temporary" one-year holiday and a two-month extension passed late last year. The new extension will require a further transfer of about $94 billion, according to the Congressional Budget Office. Yet because of the unique features of the program's financing, tampering with its revenue stream is playing with fire. The payroll tax is currently set at 12.4% of wages, split equally between employer and employee, up to a maximum of $110,100. The tax holiday cuts the employee's 6.2% share to 4.2%.

Just How Big is the Payroll Tax Cut? - The 2-percentage-point payroll tax cut extended by Congress in December and again last week will save workers a total of $114 billion this year, according to the Joint Committee on Taxation. Spread over nearly 160 million workers, that’s an average tax cut of $714. Yet the typical news report says “the average worker earning $50,000 [will] take home an extra $1,000.” That’s a big difference. What’s going on? The calculation implicit in the news report is simple arithmetic—2 percent of $50,000 is $1,000. But the average worker earns much less—just under $40,000 in 2010, according to the Social Security Administration. That suggests that the average tax saving would be about $800, still more than $714. The remaining difference results from the Social Security tax cap–$110,100 this year. Since incomes over the cap go into the overall wage average, the average wage subject to the Social Security tax is less than the average for all pay, roughly 10 percent less.

Tax-Cut Bill Includes Changes to Jobless Benefits - Tucked into a $140 billion bill extending emergency jobless benefits and a temporary cut to payroll taxes are several provisions intended to modernize the country’s outdated unemployment insurance system. Experts described the little-noticed changes as marginal improvements, but important ones, and said they promised to aid the long-term jobless and help hold down the unemployment rate in future recessions.  “We’ve had the same unemployment insurance system since the 1930s, and it really was designed for a different time,” Alan B. Krueger, the chairman of the White House Council of Economic Advisers, said in an interview. “Most people on unemployment insurance back then had been temporarily laid off from manufacturing jobs. Obviously, that’s not true now — these are people who are often moving into a whole new industry.”  The bill, which passed Congress on Friday and President Obama has said he will sign, allows states to use unemployment insurance money for programs that help move the jobless back into the work force. Such programs, like Georgia Works, often offer employers wage subsidies for taking on and retraining jobless workers.  The bill also requires states to reassess the eligibility of workers for their unemployment insurance — confirming, for instance, that a person receiving long-term benefits is actively searching for a job.

Intergenerational Accounting at the Public Mutual Fund and Insurance Company - The government is not literally a mutual fund and insurance company. But in many ways, it operates like one, and greater awareness of the parallels would improve the quality of public debate over public spending. Most discussions of taxes and benefits treat either one or the other in isolation. This is not helpful. Imagine telling investors what they pay for shares of a company without explaining what they get in dividends or capital gains, or explaining the costs of insurance without specifying the benefits. What both investors and taxpayers should focus on is the difference between costs and benefits, appropriately discounted to reflect differences in their timing. But most discussions of taxes focus only on what is paid rather than net taxes (the difference between taxes paid and benefits received). Many focus even more narrowly on federal income taxes, ignoring state and local taxes and Social Security contributions. Likewise, many discussions of the social safety net describe the benefits that individuals receive without asking what taxes they have paid or will pay in the future. When comparisons are made, as in a fascinating report last week in The New York Times, they are often limited to federal taxes and benefits within programs such as Social Security and Medicare.

Who Actually Benefits From Federal Benefits? - Republican candidates have lately been parroting Charles Murray's argument that our "entitlement society" has created a nation of deadbeats who would rather live off government benefits than find a job. In response, the Center on Budget and Policy Priorities (CBPP) released a study earlier this week showing the fraction of government benefits that go to able-bodied workers. Their estimate is about 9 percent. I linked to the CBPP study on Monday, and since their methodology was fairly complex, I added a back-of-the-envelope version that simply added up the benefits of programs that don't serve the elderly, disabled, or working poor.  The next day I got an email from Arloc Sherman, one of the authors of the study. You can't just add up these programs, he told me, because even a lot of programs that people think of as "welfare" actually serve the elderly, disabled, and working poor too. Medicaid is the biggest example: Most of us think of Medicaid as a program for the poor, but more than half of all Medicaid spending actually goes to the elderly and the disabled. So what percent of each program goes to the elderly, disabled, or working poor? The bulk of both Medicare and Social Security goes to the elderly and most of the balance goes to the disabled.  But what about the others? I was surprised when I saw the complete breakdown, and you might be too. Here it is:

Tax Code Not Aligned With Basic Principles -  As I pointed out last week, tax burdens depend a lot on how one defines “income.” In particular, the tax law makes a sharp distinction between income earned through wages and salaries, sometimes called “earned” income, on the one hand, and income from capital, or “unearned” income. Wage income is very heavily taxed because both the income tax and payroll tax apply to it. The lower one’s income is, the more likely that it consists solely of wages. Therefore, the heavy taxation of labor necessarily hits hard those with low and middle incomes. By contrast, income from capital is lightly taxed. Unrealized capital gains are untaxed, realized gains are taxed at a maximum rate of just 15 percent, and gains held until death are never taxed. Moreover, wealthy hedge fund managers are permitted to treat their managerial fees as if they are capital gains, something that is called “carried interest.” Dividends on corporate stock are also taxed at a maximum rate of 15 percent. The wealthier one is, the less his or her income is derived from labor. According to the Tax Policy Center, households in the middle three quintiles get about 70 percent of their total income from wages and salaries. For those in the top 1 percent of the income distribution, only about 30 percent of their income comes from labor and for those in the top tenth of 1 percent, just 20 percent of their income comes from labor.

Obama to propose lowering corporate tax rate to 28 percent - President Obama on Wednesday plans to propose a major overhaul of the nation’s corporate tax code, an election-year gambit that is likely to draw a contrast over a key policy issue with the Republicans vying to replace him. Obama will propose lowering the nation’s tax rate to 28 percent. At the same time, however, he will seek to increase the amount of revenues raised overall through corporate taxation by eliminating numerous deductions and loopholes that save companies tens of billions of dollars a year on their tax bills, according to a senior administration official.  Today, the U.S. corporate tax rate of 35 percent is one of the highest in the world, but an abundance of loopholes and deductions means that many companies pay far less than that — or nothing at all. Companies in the United States pay almost half the taxes than companies do in other rich countries, compared to the size of the economy, according to the Organization for Economic Cooperation and Development.

Obama Offers to Cut Corporate Tax Rate to 28%— President Obama will ask Congress to scrub the corporate tax code of dozens of loopholes and subsidies to reduce the top rate to 28 percent, down from 35 percent, while giving preferences to manufacturers that would set their maximum effective rate at 25 percent, a senior administration official said on Tuesday.  Mr. Obama also would establish a minimum tax on multinational corporations’ foreign earnings, the official said, to discourage “accounting games to shift profits abroad” or actual relocation of production overseas.  With the framework for changes that the Treasury secretary, Timothy F. Geithner, will outline on Wednesday, Mr. Obama will enter an election-year debate with Republicans in Congress and in the presidential race who seek even lower taxes for businesses. But an overhaul of the corporate code is unlikely this year, given that political backdrop and the complexity of an undertaking that would generate a lobbying frenzy as businesses vie to defend old tax breaks or win new ones.

Corporate tax cut: Good idea, but won't stimulate economy… The White House is proposing to cut corporate income taxes from 35 percent to 28 percent. President Obama also recommends that manufacturers get a further cut, to 25 percent, and he wants to impose a minimum rate on foreign earnings to discourage the use of tax shelters. There would other less substantive changes as well under his plan. The cut in the statutory tax rate, however, may not have as large an effect on the corporate sector as many anticipate. The reason is that this is intended as a revenue neutral change in taxes. To accomplish revenue neutrality, the cut in the tax rate will be accompanied be closing loopholes, i.e. a broadening of the base. Thus, every company receiving a tax break will be matched somewhere else by companies experiencing a tax increase. Thus, while some firms will benefit, others will get hit harder by these taxes and the net effect overall should be roughly a wash.

Tax Breaks: A Primer - On Wednesday the Obama administration released its proposal to revamp corporate taxes, partly by cutting “loopholes and subsidies” that enable so many savvy companies to pay so little. The proposal also happens to add its own new loopholes and subsidies, most prominently for manufacturing companies. Such “loopholes and subsidies” are formally called tax expenditures. The name comes from the fact that they are arithmetically equivalent to spending government money. Here’s how: Charging a company one dollar less in taxes is effectively the same as giving a company one dollar; both leave the government with one dollar less, and the company with one dollar more. But politically, calling the subsidy a “tax break” sounds a lot better than calling it a “spending” gift. Economists generally discourage the use of tax expenditures, for three basic reasons. First, tax expenditures distort market behavior — which they’re sometimes designed to do, and sometimes not. Second, they junk up the tax code, causing taxpayers to spend more time and money just to comply with tax law, and to a large extent help people rich enough to hire sophisticated accounting firms. Third, tax expenditures add up to a ton of money.

Inside Obama’s Framework for Business Tax Reform - Here’s what I love about President Obama’s Framework for Business Tax Reform: His diagnosis of the problem is spot on. In just a few pages, the Treasury Department does a marvelous job describing what’s wrong with the way the U.S. taxes business. Anybody interested in understanding why the tax code is such a mess should read this. Here’s what I don’t like: After doing a great job explaining the problem, Obama often flops when it comes to a cure. Sure, he proposes cutting the corporate rate. These days, who doesn’t?  But when it comes to which tax preferences he’d dump, Obama often ducks the tough choices. More troubling, some of his proposed cures may make the disease worse. Here are a couple of examples. The joint White House and Treasury Department paper explains what’s wrong with business subsidies and high tax rates. One big flaw: this toxic brew distorts business decisions. It encourages firms to finance with debt instead of equity, it drives firms to organize as pass-throughs such as partnerships to avoid paying taxes twice on corporate profits, and it drives investment to low-tax industries and away from high-tax industries. Obama’s cure: He proposes to cut rates for all non-manufacturing corporations from today’s top rate of 35 percent to a flat 28 percent. Manufacturers would enjoy a more generous 25 percent rate, and “advanced manufacturing”, whatever that is, would receive an even lower rate. But wait a minute, didn’t the president just tell us that it is bad thing to use the tax code to distort investment decisions?

The devil's in the details (and the politics) Since the late 1980s, top corporate tax rates around the world have dropped to a point that America’s, once below the international average, is now well above. As this has happened, American-based multinational companies have shifted more activity offshore; their foreign employment steadily rose over the last decade as domestic employment fell. This is mostly because of the appeal of cheap labour and growing markets in the emerging world, but business groups and many economists think America’s tax rate is also to blame. Liberal analysts blame the tax code for a different reason: it allows multinationals to stash income in foreign havens and indefinitely defer taxes on it, encouraging the outsourcing of jobs. Barack Obama claims to be ready to do something about it. Calling the present tax code “outdated, unfair, and inefficient”, he proposed on February 22nd a reduction of the top corporate rate to 28% from 35% (39% including state and local taxes). Previous analysis suggests such a cut would cost more than $700 billion (or 0.4% of GDP) over the next decade. Mr Obama would add to the price tag by making permanent a variety of tax provisions, such as the credit for research and development, that are on course to cost $250 billion over the next decade.

The President’s Corporate Tax Reform Plan: Rhetoric and Reality -  The administration released today its corporate tax reform "framework", which is largely a rehash of previous proposals, but with a lowering of the corporate rate from 35 percent to 28 percent.  As with previous proposals, there is a complete disconnect between the rhetoric and reality, particularly in regards to simplification of the tax code and elimination of special interest loopholes, aka tax expenditures.  First, the rhetoric (which is quite agreeable): The United States now essentially trades off greater tax expenditures, loopholes, and tax planning for a higher statutory corporate tax rate relative to other countries. This is a poor trade that produces a tax system that is uncompetitive relative to other countries, distorts business decision making, and slows economic growth. Now the reality, which goes in the opposite direction.  The following table lists all the tax provisions that are sufficiently specified in this proposal.  The administration proposes to close a mere 6 loopholes, out of about 250 (according to the Joint Committee on Taxation).  Worse, the administration proposes to add 11, for a net gain of 5 loopholes. Mind you, this is all in the same document, presumably written or edited by the same person or group of people.  This is a framework for cognitive dissonance, not tax reform.

Winners and Losers From a Tax Proposal —The Obama administration, seeking to promote domestic manufacturing without increasing the federal deficit, proposed Wednesday to offset new tax breaks for manufacturers by raising taxes on a wide range of other companies.  Some of the prospective losers are familiar targets, including oil and gas companies, private equity1 firms and companies that move jobs overseas.  The proposal would also roll back provisions that benefit a range of other companies, including Menards, the Midwestern home improvement chain; Brown-Forman, which distills Jack Daniel’s; and Duke Energy, of North Carolina.  Some manufacturing firms could face higher taxes, too, because they are major beneficiaries of those same provisions. Over all, the plan seeks to reduce the share of profits manufacturers pay in federal taxes from an average of 26 percent in 2007 and 2008 to a maximum of 25 percent.

Playing Favorites in the Corporate Tax Code - The President’s new Framework for Business Tax Reform is two documents in one. The first diagnoses the many flaws in America’s business tax system, and the second offers a framework for fixing them. Much of the resulting commentary has focused on the policy recommendations. But I’d like to give a shout out to the diagnosis. The White House and Treasury have done an outstanding job of documenting the problems in our business tax system. As the Framework notes, our corporate tax system pairs a high statutory tax rate with numerous tax subsidies, loopholes, and tax planning opportunities. Our 39.2 percent corporate tax rate (including state and local taxes) is the second-highest in the developed world, and will take over the lead in April when Japan cuts its rate. But our tax breaks are more generous than the norm. That leaves us with the worst possible system – one that maximizes the degree to which corporate managers have to worry about taxes when making business decisions but limits the revenue that the government actually collects. It’s a great system for tax lawyers, accountants, and creative financial engineers, and a lousy system for business leaders and ordinary Americans.

More Thoughts on Obama’s Corporate Tax Plan - As we wrote yesterday, the Obama administration should be given credit for recognizing that the U.S. corporate tax system is out of step with the rest of the world and their plan to cut the rate from 35 percent to 28 percent would represent a good first step toward making the U.S. more competitive. That said, the rest of their plan uses the tax code to promote a mercantilist and isolationist view of the U.S.'s place in the global economy. The administration is clearly distrustful of companies that do business abroad and has the mistaken notion that America can compete for the 85 percent of global business that is outside of the U.S. from the safety of our shores. Thus the plan would increase taxes on U.S. multinational companies as a means of paying for the lower corporate tax rate which will largely benefit domestic companies. On that note, it seems very unfair that foreign companies doing business in this country would get a 20 percent tax cut but U.S. companies doing business abroad would get a tax increase. How does that help U.S. competitiveness?

When Reforming Corporate Taxes, Don’t Forget the Deficit - We released a brief analysis of the President’s corporate tax reform framework this morning.  Here’s the opening:The Administration has advanced a coherent framework for corporate tax reform that could lead to a more efficient corporate tax regime.  The framework’s main weakness is that it seeks no deficit-reduction contribution from corporate tax reform, aiming only for revenue neutrality. Given the nation’s serious long-term budget problems and the painful sacrifices that policymakers will have to impose to put the budget on a sustainable path, it is imperative that all parts of the budget be on the table.  A key test of well-designed corporate tax reform, therefore, is that it contributes to long-term deficit reduction; the Administration’s framework falls short in this critical area.  The framework also lacks detail on how to achieve its revenue-neutrality goal.

Obama’s Job Creation Tax Credit: Cool Idea, Bad Policy - A tax credit? For small businesses? To create jobs? And raise wages? Wow! What a great idea! What’s not to like? Quite a bit, in fact. In his fiscal 2013 budget proposal, President Obama has suggested a temporary 10% tax credit designed to spur job creation and wage growth among small businesses. It’s a fine idea with a long pedigree — just the ticket if you’re in the market for small-bore economic policies that sound cool but don’t do much. This sort of legislation is obviously well intentioned. High and persistent unemployment is a blight on the economy. Left unchecked, it can even be a threat to democracy — research suggests that long-term joblessness is associated with support for authoritarian government. But here’s the problem: Job creation tax incentives don’t work. At least not well. And to the extent they provide the appearance of efficacy without the substance, they hinder the kind of economic policy that actually might put people back to work.

Bruce Bartlett and Jon Stewart Talk Tax Reform - From last night’s Daily Show; a great promo for Bruce’s great new book–but also a great promo for tax economists.  Kind of makes us look appealingly dweeby, doesn’t it?!

How to Get the Rich to Share the Marbles - Suppose scientists discovered a clump of neurons in the brain that, when stimulated, turned people into egalitarians. This would be good news for Democratic strategists and speechwriters, who could now get to work framing arguments about wealth and taxation in ways that might activate the relevant section of cerebral cortex. This “share-the-spoils” button has been discovered, in a sense, but it may turn out to be harder to press than Democrats might think. Pretend you’re a three-year-old, exploring an exciting new room full of toys. You and another child come up to a large machine that has some marbles inside, which you can see.  There’s a rope running through the machine and the two ends of the rope hang out of the front, five feet apart. If you or your partner pulls on the rope alone, you just get more rope. But if you both pull at the same time, the rope dislodges some marbles, which you each get to keep. This is the scenario created by developmental psychologists Michael Tomasello and Katharina Hamann at the Max Planck Institute in Leipzig, Germany. In this situation, where both kids have to pull for anyone to get marbles, the children equalize the wealth about 75% of the time, with hardly any conflict. Either the “rich” kid hands over one marble spontaneously or else the “poor” kid asks for one and his request is immediately granted.

A “Homes for Heroes” Tax Credit - NY Fed - Over the next few years, large volumes of homes are likely to flow from foreclosure onto lenders’ balance sheets as “real estate owned,” or REO. Without a significant boost to demand, this large volume of “distressed” real estate could potentially put substantial downward pressure on home prices. Accordingly, new policy initiatives are needed to increase the rate at which properties that flow into REO get reabsorbed back into use as renter- or owner-occupied units. In this post, I make the case for a “Homes for Heroes” tax credit.

Opinion: The enduring fallacy of the CEO president - Is it safe to assume that a successful CEO is uniquely prepared to be president? No more than it is safe to assume a successful president is uniquely prepared to be CEO. This, at least, is what I tell students in my leadership class. The response aims to make them think hard about the common traits successful leaders across professions share — and to think harder about the very different challenges they face. For his part, Mitt Romney has staked his presidential ambitions on the answer to the first question being yes — an unequivocal, resounding yes. He is not alone in his opinion. For many people, success in business suggests a special fitness for presidential leadership. They have a point, insofar as accomplished CEOs typically possess an aptitude for rigorous analysis, strategic thinking, and organizational efficiency. These are indispensable skills for any chief executive, but they are also more relevant to solving problems than defining them.

‘A narrative of ... life under a Romney presidency’ - On a call with reporters, Glenn Hubbard, the Columbia economist who is one of Mitt Romney’s top economic advisers, described the Romney campaign’s latest tax proposal in unusually evocative terms. “If you take the spending and tax pieces together, it’s a narrative of the policy agenda and life under a Romney presidency,” Hubbard said. And so it is. But if you really follow the numbers, and the policies they imply, it may not be the narrative the Romney campaign wants. The proposal’s basic features are a 20 percent cut in marginal tax rates (so the top rate would fall from 35 percent to 28 percent, the second-highest rate would fall from 33 percent to 26.4 percent, and so on), a 30 percent cut in corporate taxes, and a cap on federal spending. But that’s just a string of numbers.  What’s important, as Hubbard correctly says, is the story they tell about a Romney administration. And that goes something like this: Under a Romney presidency, there will be a massive redistribution — or perhaps it should be called a re-redistribution — from low-income people who depend on government programs such as Medicaid to higher-income folks who pay taxes.

The failure of austerity politics - “We are headed to a Greece-type collapse,” GOP presidential candidate Mitt Romney has warned repeatedly, while indicting President Obama’s stimulus plan. Romney promises to slash spending and balance the budget to unleash growth. Only now his warning provides a starkly different caution. Portugal, Ireland, Spain, Italy, Britain — the countries that have responded to the economic crisis by focusing on slashing their deficits — are sinking. And the ruin inflicted on Greece threatens its democracy, as riots and resistance spread.  The advocates of austerity — here and in Europe — have argued that cutting spending and reducing deficits, even with interest rates already near zero, would revive the economy. The irresponsible — other than the banks — would be disciplined. This would reassure investors and “job creators,” and they would invest and start to hire again. With an added refrain about deregulation, this remains the mantra chanted ceaselessly by Republicans.  In the United States, President Obama resisted, but in Europe, austerians — led by Angela Merkel in Germany and the new Tory government of David Cameron in Britain — won the day. But what New York Times columnist Paul Krugman justly derided as the “confidence fairy” didn’t show up. Turns out businesses lacked customers, not confidence. And the countries that followed that advice have been sinking into recession or worse ever since.

Romney’s Economic Closet, by Paul Krugman - Taking in Michigan, Mr. Romney was asked about deficit reduction, and he absent-mindedly said something completely reasonable: “If you just cut, if all you’re thinking about doing is cutting spending, as you cut spending you’ll slow down the economy.” A-ha. So he believes that cutting government spending hurts growth, other things equal.  The right’s ideology police were, predictably, aghast; the Club for Growth quickly denounced the statement as showing that Mr. Romney is “not a limited-government conservative.” On the contrary, insisted the club, “If we balanced the budget tomorrow on spending cuts alone, it would be fantastic for the economy.” And a Romney spokesman tried to walk back the remark, claiming, “The governor’s point was that simply slashing the budget, with no affirmative pro-growth policies, is insufficient to get the economy turned around.” But that’s not what the candidate said, and it’s very unlikely that it’s what he meant. Almost surely, he is, in fact, a closet Keynesian.  How do we know this? Well, for one thing, Mr. Romney is not a stupid man.  Beyond that, we know who he turns to for economic advice; heading the list are Glenn Hubbard of Columbia University and N. Gregory Mankiw of Harvard— both also have long track records as professional economists. And what these track records suggest is that neither of them believes any of the propositions that have become litmus tests for would-be G.O.P. presidential candidates.

Most GOP Presidential Candidates Would Increase the Deficit - Republican Presidential candidates say–all the time–that they hate budget deficits. A linchpin of each of their campaigns is a promise to slash government and eliminate the deficit and the national debt. So which one of them would accomplish this ambitious goal? According to a new analysis from the non-partisan Committee for a Responsible Federal Budget, none of them would. At least not through the next decade. In fact, compared to what the fiscal watchdog calls a realistic budget baseline (that is, if the government continues on the track it’s on today) all of the GOP candidates, save for Ron Paul, would make matters worse. Rick Santorum and Newt Gingrich would make things far, far worse. Mitt Romney’s tax and spending plan wouldn’t bend the debt curve very much one way or the other. But, according to CRFB, if he doesn’t find a way to pay for his latest plan to cut tax rates by 20 percent Romney would significantly increase deficits and the debt as well.     Except for Paul, each of the candidates has the same problem. They have enthusiastically promised to cut taxes in very specific ways—sometimes by vast amounts. But when it comes to offsetting spending reductions or cuts in tax breaks, they mostly offer little more than platitudes.

Fatally Flawed Approaches to the Budget Deficit and Taxes; Debt Will Swell Under 3 of 4 Republican Hopefuls' Tax Plans - A number of proposals on taxes and the budget have come out recently, one by President Obama, one by Mitt Romney, and one by a friend, John Mauldin. Every one of the proposals are fatally flawed, most of the for multiple reasons. Before one can fix a problem one must understand it. In general, Democrats want to raise taxes and spend money. Republicans on the other hand generally want to cut taxes and spend money. Military spending and Medicare spending both soared under Republican. Bush signed a disastrous Medicare bill. Both parties claim to be against deficit spending. However, if neither party wants deficit spending then why are their deficits? Before we get to what's wrong let's take a short look at some recent proposals.

D’oh! Debt Hawks Fear Most GOP Tax Plans Will Increase Deficit - A key test for the political establishment and the media this campaign cycle will be whether they accurately explain the Presidential candidates’ budget plans to voters, or whether they allow the candidates to spin their way out of the severe implications of their own proposals. An event hosted Thursday morning by the fiscal discipline hawks at the Center for a Responsible Federal Budget offered this corner of the establishment an early critique of the GOP candidates’ tax and spending plans — all of which drew mixed reviews or worse. “We have a historically low rate of taxation per GDP. I think we’re in the 15 to 16 percent range, spending in the 23 to 24 percent range,” said Vic Fazio, a former Democratic Congressman. “That gap has to close. Most if not all of these tax proposals would widen it.” The GOP plans are all marked by large, swift cuts to federal revenue, achieved largely by lowering taxes on the wealthy, matched with vague cuts to support programs like Medicare, Medicaid and Social Security, and the dubious assertion that the tax cuts will largely pay for themselves — a claim former Republican congressman Bill Frenzel called “wishful thinking translated into public policy.” The result, according to CRFB figures, isn’t fiscal discipline, but a smaller federal government.

Party of Higher Debts - The Committee for a Responsible Budget recently released an analysis of the budgetary proposals of the four remaining Republican presidential candidates (hat tip Ezra Klein, who shows the key graph). In short, all of the candidates propose to increase the national debt by massive amounts relative to current law, which includes the expiration of the Bush tax cuts at the end of this year. CFRB compares the candidates’ plans to a “realistic” baseline that assumes the Bush tax cuts are made permanent and the automatic sequesters required by the Budget Control Act of 2011 are waived, among other things. Relative to that extremely pessimistic baseline, Santorum and Gingrich still want huge increases to the national debt; only Paul’s proposals would reduce it. Romney’s proposals would have little impact, but that was before his latest attempt to pander to the base: an across-the-board, 20 percent reduction in income tax rates. How is this possible, since all of them have promised to cut spending? Huge tax cuts, on top of the Bush tax cuts. Romney, as mentioned above, would reduce all rates by 20 percent, repeal the AMT, and repeal the estate tax. Santorum would cut taxes by $6 trillion over the next decade. Gingrich would cut taxes by $7 trillion. Paul, the responsible one, would only cut taxes by $5 trillion.

One Day After Obama’s SuperPAC Reversal, His Campaign Manager Privately Reassured Wall St Obama Won’t Be Populist - Bloomberg’s Hans Nichols reports that on February 7, one day after Obama’s promise-breaking announcement to embrace unlimited corporate donations for his campaign, Obama campaign manager Jim Messina held a private meeting with top executives from Wall Street. According to Nichols’ sources, Messina told the donors that Obama would not demonize Wall Street during the campaign: Jim Messina, President Barack Obama’s campaign manager, assured a group of Democratic donors from the financial services industry that Obama won’t demonize Wall Street as he stresses populist appeals in his re-election campaign, according to two people at the meeting.Many have argued that Obama’s decision to embrace super PAC fundraising is a shrewd political move. But as Republic Report has pointed out, corporate CEOs donate to campaigns often with the expectation that they will get something back in return. Obama may be arming himself for the ad campaign against the Republican nominee, but he’s doing so by selling away his principles and perhaps the public interest.

Obama Campaign Lists 35 National Co-Chairmen Wall Street Journal. Notice who is on the list: attorneys general Kamala Harris (California) and Tom Miller (Iowa, and leader of the AG effort)

25% of super PAC money coming from just 5 rich donors - Five wealthy people, led by Dallas industrialist Harold Simmons and Las Vegas casino mogul Sheldon Adelson, have donated nearly $1 of every $4 flowing to the super PACs raising unlimited money in this year's presidential race, a USA TODAY analysis shows.

The GOP's Big Investors - Robert Reich  - Have you heard of William Dore, Foster Friess, Sheldon Adelson, Harold Simmons, Peter Thiel, or Bruce Kovner? If not, let me introduce them to you. They’re running for the Republican nomination for president. I know, I know. You think Rick Santorum, Newt Gingrich, Ron Paul, and Mitt Romney are running. They are – but only because the people listed in the first paragraph have given them huge sums of money to do so. In a sense, Santorum, Gingrich, Paul, and Romney are the fronts. Dore et al. are the real investors.

The Buying of the President 2012 - The more we learn about Super PACs, the uglier the picture gets. A new analysis by USA Today found that just five super-wealthy individuals have contributed 25 percent of the money raised by Super PACs since the beginning of 2011. The New York Times added that “two dozen individuals, couples or corporations have given $1 million or more to Republican super PACs this year…. Collectively, their contributions have totaled more than $50 million this cycle, making them easily the most influential and powerful political donors in politics today.” The hierarchy is topped by Texas businessman Harold Simmons, a major funder of the Swift Boat Veterans for Truth in 2004, who has donated nearly $15 million to three different GOP candidates (Perry, Gingrich and Romney) and the Karl Rove–founded American Crossroads. He’s followed by Las Vegas casino magnate Sheldon Adelson, who’s given $10 million to Gingrich’s Super PAC and says he may give an additional "$10 or $100 million to Gingrich” before the primary season is over.

GOP squirms in Michigan over auto bailout success - Michigan has become squirm central for Republican presidential candidates who are trying to explain their opposition to the auto bailout before the big primary in the home of automakers. Their tale is terribly tangled, and President Barack Obama isn't telling it straight either. Obama, in taking credit, and Republicans, in assigning blame, have ignored one driving force behind the love-it-or-hate-it bailout: George W. Bush in the waning days of his presidency. Moreover, GOP rivals Mitt Romney and Rick Santorum would have people believe the United Auto Workers union runs General Motors and the government ''gave'' it away, neither true. The issue is a particularly nettlesome one for Romney, Detroit-born son of a Michigan governor and auto company chief executive. His provocatively headlined 2008 article, ''Let Detroit Go Bankrupt,'' has made for tortured explanations in the campaign for the Feb. 28 primary -- though the prescription he preached back then is not wholly at odds with what the government finally did.

The New York Times confirms that Bain Capital really, really REALLY did not want to lend GM and Chrysler money for their managed bankruptcies. Really. - According to an article in today’s New York Times, Bain Capital was asked to do so, but declined.  Well, actually it was asked to help GM out, and declined. The article recounts much of the controversy concerning Romney’s actual position on a government bailout for the companies back in 2008-09 and his current statements about it, and how these are playing out now politically here in Michigan and possibly in other states in which there is a heavy auto-industry presence.  This is an especially serious matter because the very foundation of Romney’s candidacy is his vaunted business acumen.  If he really believed that private funding existed for managed bankruptcies of these two companies, then he based that belief on something other than fact, something other than evidence.  And if, as is likely, he well knew that no private funding would be available, and that without government funding these companies’ bankruptcies would be liquidations, then why was he claiming otherwise?

Implementing the Dodd-Frank Act: The Federal Reserve Board's Role - Milestones - The Federal Reserve Board is responsible for implementing numerous provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act" or "DFA"), sometimes in conjunction with other government agencies. Listed below are the implementation initiatives recently completed by the Board, as well as several of the most significant initiatives that the Board expects to address over the next few months. Timeframes for upcoming initiatives are estimates and may be adjusted.  Initiatives Completed Initiatives Planned: January to March 2012 Dodd-Frank Act: Statutory Dates For Actions

Letter to the Editor: Assistant Secretary Eberly Responds to the Economist -  Your editorial of February 18 on regulation in America contained many of the entertaining anecdotes for which the Economist is well-known and –appreciated. But anecdotes don’t constitute systematic evidence, and the article notably lacks credible facts on the overall costs and benefits of regulation. There is a serious discussion to be had on this topic, but not based on the articles in last week’s issue. There is no attempt to consider the motivating benefits of regulation (-- like safety, transparency, environmental protections) and the only quantitative study of the costs that you cite has been widely questioned. Despite later acknowledging (page 28) that “the overall cost of regulation is unknown,” the cover and editorial state that regulation is too costly and growing more so. The only quantitative evidence cited for this claim is a study that, first of all, concludes with data from 2008. It has nothing to say about regulation during the Obama Administration, though new regulations are one of the editors’ complaints. However, in defense of earlier Administrations and careful measurement, a closer look at the study shows that it confuses low regulatory quality (as measured by the World Bank) with regulatory stringency. By this twist of definition, the study implies that Somalia, being virtually lawless, has the most stringent regulations in the world, explaining its poor economic performance, while those with the highest quality regulation, like the Netherlands and Canada, are interpreted to have the loosest regulation. Moreover, the same study implies that primary education is an even worse burden on the U.S. economy than regulation, reducing GDP by more than $3 trillion annually.

Grit is Good - Howard Davies - The United States is widely recognized as possessing the deepest, most liquid, and most efficient capital markets in the world. But there are signs that these assumptions are now being challenged. Prior to the crisis, regulatory authorities focused mainly on removing barriers to trading, and generally favored measures that made markets more complete by fostering faster, cheaper trading of a wider variety of financial claims. That is no longer the case. On the contrary, nowadays many are questioning the assumption that greater market efficiency is always and everywhere a public good. Phrases like “sand in the machine” and “grit in the oyster,” which were pejorative in the prelapsarian days of 2006, are now used to support regulatory or fiscal changes that may slow down trading and reduce its volume. For example, the proposed Financial Transactions Tax in the European Union implies a wide-ranging impost generating more than €50 billion a year to shore up the EU’s own finances and save the euro. The Volcker rule (named for former Federal Reserve Chairman Paul Volcker) provoked similar arguments. Critics have complained that it would reduce liquidity in important markets, such as those for non-US sovereign debt. Defending his creation, Volcker harks back to a simpler time for the financial system, and refers to “overly liquid, speculation-prone securities markets.”

Under Volcker, Old Dividing Line in Banks May Return - The Volcker Rule, and its limitations on bank trading, may have the unintended effect of dividing the world back into investment banks and commercial banks. The unusual twist here is that Goldman Sachs and Morgan Stanley may end up stuck on the wrong side of the fence, treated under the law as commercial banks instead of the investment banks they once were. The backdrop to this issue is that it is increasingly clear that banks are simply unable to make as much money from proprietary and other trading businesses as they did before the financial crisis. Take Goldman Sachs. In 2007, Goldman had revenue of $7.6 billion from traditional investment banking, but $31.2 billion in revenue from trading-related operations. Last year, Goldman had just $17.3 billion in revenue related to trading operations. This is a trend likely to accelerate. Under the Dodd-Frank regulatory overhaul, derivatives are to be traded on central clearing agencies rather than between investment banks as before the financial crisis. Heightened bank capital requirements prevent warehousing large amounts of securities and increase the cost of financing. Then there is the Volcker Rule, which is likely to substantially reduce much of the banks’ profits from their trading businesses.

Why the Volcker Rule is crucial to the 99% - Occupy the SEC  - The United States aspires to democracy, but no true democracy is attainable when the process is determined by economic power. Accordingly, Occupy the SEC is delighted to participate in the public comment process for the implementation of Section 619 of the Dodd-Frank Act by the SEC, Federal Reserve, OCC and FDIC ("the Agencies"). This country's governing principles of transparency and due process mandate that any rules implemented by our regulators comport with the democratically-elected legislature's intention to protect the people from the widespread banking abuses and excesses of the recent past. We believe the Volcker Rule is important to the future of the banking industry and, if strongly enforced, will help move our financial system in a more fair, transparent, and sustainable direction. Prohibiting banking entities from engaging in proprietary trading and banning their sponsorship of covered funds are key elements to regulating the financial system and giving force to the Dodd-Frank Act. At its core, the Volcker Rule seeks to make sure that if a banking entity fails, it does not bring down the whole system with it. We appreciate the momentous challenges that the agencies continue to face in effectively implementing the rule, and we present these comments to assist them in their task. […]

Occupy the SEC: Moving From the Campsite to the Weeds of Regulatory Reform - The surest way to rankle a supporter of the Occupy Wall Street movement is to repeat the common claim that the movement has no defined goals, a criticism that has dogged the group since it’s inception. But last week an offshoot of the movement, called “Occupy the SEC,” undermined that characterization when it submitted a 325-page letter to federal regulators filled with concrete criticisms and proposals for the final implementation of the so-called ‘Volcker Rule.’ The letter offered detailed responses to the hundreds of queries that regulators posed to the public on the possible effects of the rule, which bars federally-supported banks from making speculative trades or owning private equity or hedge funds. It was also an example of the Occupy movement participating in the regulatory process alongside the lobbyists for big banks whom they supposedly despise. In fact, the letter shows that it’s members not only have a high level of financial sophistication, but also a respect for what a modern capitalist financial system can bestow upon society.

Occupy the SEC Discusses Volcker Rule on RT - via Yves Smith - It’s always a pleasant surprise to see a TV program have a long form discussion on a fairly technical topic. Readers should enjoy the RT interview of Caitlin Kline and Alexis Goldstein of Occupy the SEC on its Volcker Rule comments. They discussed the major areas they were concerned with and some loopholes in the draft regulations.

Bank Lobby Widened Volcker Rule Before Inciting Foreign Outrage -- U.S. banks pushed regulators to widen proposed restrictions on trading and hedge-fund ownership by foreign firms, then encouraged governments around the world to complain about the rule's reach. The two-pronged lobbying strategy resulted in foreign officials joining U.S. lenders to push back against the Volcker rule, named after former Federal Reserve Chairman Paul A. Volcker and incorporated in the 2010 Dodd-Frank Act. “The criticism of foreign governments on behalf of their banks is helping U.S. banks fight the rule,” said Anat Admati, a professor of finance at Stanford University. “It also muddies the water, shifting the debate away from the main issue, which is reducing the risks banks impose on the economy.” The Volcker rule seeks to prevent deposit-taking firms from making bets with their own capital or owning hedge funds. Last year, U.S. banks including JPMorgan Chase & Co. and Morgan Stanley lobbied the Fed and other regulators to apply the regulation more broadly to companies based outside the U.S., according to four people with knowledge of the discussions who asked not to be identified because the talks were private.

The Volcker Rule, Made Bloated and Weak - Last week, it finally became clear that the Volcker Rule was as good as dead. The Volcker Rule, named after Paul A. Volcker, former chairman of the Federal Reserve, is meant to bar financial institutions that are protected and subsidized by the federal government from trading for their own accounts. That is, it’s pretty simple: Traders shouldn’t speculate for their own personal gain using the money you and I pay in taxes. Yet bank lobbyists with complicit regulators and legislators took a simple concept and bloated it into a 530-page monstrosity of hopeless complexity and vagueness. They couldn’t kill the rule. Instead, they are getting Congress and regulators to render it morbidly obese and bedridden. Of course, that is no accident. The biggest banks, which are in business today only because taxpayers bailed them out, want to protect their valuable franchises. “Most of the length, complexity and questions are in there because of industry lobbying,” The rule is “the bastard child of the lobbying industry,” he said. “You can’t demand and insist and lobby for all these rules and exemptions and then complain that it’s too long and complex.”

Consumer Inquiry Focuses on Bank Overdraft Fees — — The Consumer Financial Protection Bureau is beginning an inquiry into how banks levy overdraft fees they charge customers who bounce checks or withdraw more than they have in their accounts using debit cards or automated teller machines, the head of the agency said Tuesday.  Richard Cordray, the director of the bureau, said the inquiry would focus on whether some banks misled consumers in 2010 when they put in place new Federal Reserve regulations for overdraft protection. The agency will try to determine whether banks routinely reorder customer transactions to maximize potential overdrafts, and will seek data on the effect of overdraft fees on young and low-income bank customers.  Coming a little more than a year and a half after the Federal Reserve issued a new set of regulations governing overdraft rules for banks that issue A.T.M. and debit cards, the renewed scrutiny is unlikely to please bankers, many of whom are already wary of the regulatory burden they say the consumer bureau is likely to impose on banks.

Why Big Banks Deserve to Get Slammed - The latest affront to the nation's big banks comes from Richard Cordray, head of the new Consumer Financial Protection Bureau, who said recently that he plans to investigate bank overdraft fees and perhaps issue new rules to rein in bank practices that could be misleading or even abusive. Banks have increasingly turned to such fees to help offset losses they've suffered through bad loans, poor investments, and new restrictions meant to limit risk-taking. To the banks, the latest news from Washington represents a continued assault on the livelihood of fine working Americans, and on free enterprise itself. Since the 2008 financial crisis, banks have had to endure all manner of indignity, including limits on bonuses paid to executives, congressional hearings meant merely to embarrass them, strict new rules that limit profitability, and a grandiose 49-state investigation into foreclosure practices that served largely as a grandstanding opportunity for politicians. That's in addition to finicky shareholders who sell their holdings and push bank stocks down every time there's a wobble in the financial markets. The banks, however, seem not to have learned a vital and simple lesson: They have become their own worst enemy. Big banks have become so corporatized and inhumane that taking potshots at them is like criticizing Iran or swatting flies: Practically nobody in America objects.

How Greece Could Take Down Wall Street - Ellen Brown -There is one bit of bad behavior that Uncle Sam himself does not have the funds to underwrite: the $32 trillion market in credit default swaps (CDS). Thirty-two trillion dollars is more than twice the U.S. GDP and more than twice the national debt. CDS are a form of derivative taken out by investors as insurance against default. According to the Comptroller of the Currency, nearly 95% of the banking industry’s total exposure to derivatives contracts is held by the nation’s five largest banks: JPMorgan Chase, Citigroup, Bank of America, HSBC, and Goldman Sachs. The CDS market is unregulated, and there is no requirement that the “insurer” actually have the funds to pay up. CDS are more like bets, and a massive loss at the casino could bring the house down. It could, at least, unless the casino is rigged. Whether a “credit event” is a “default” triggering a payout is determined by the International Swaps and Derivatives Association (ISDA), and it seems that the ISDA is owned by the world’s largest banks and hedge funds. That means the house determines whether the house has to pay. The Houses of Morgan, Goldman and the other Big Five are justifiably worried right now, because an “event of default” declared on European sovereign debt could jeopardize their $32 trillion derivatives scheme. According to Rudy Avizius in an article on The Market Oracle (UK) on February 15, that explains what happened at MF Global, and why the 50% Greek bond write-down was not declared an event of default.

Responding to Critics, S.E.C. Defends ‘No Wrongdoing’ Settlements - The chairwoman of the Securities and Exchange Commission defended the agency’s record of settling fraud cases with Wall Street companies, saying on Wednesday that she believed the agency’s practices “clearly have deterrent value,” even though firms were often charged repeatedly for violating the same securities laws. Mary L. Schapiro, the S.E.C. chairwoman, added that repeat offenders remained a problem because “people have short memories” on Wall Street. That forces the commission to bring many of the same types of cases “so that people don’t forget that they have these obligations and that somebody is watching and somebody is willing to hold them accountable.” The remarks, at a news media breakfast, were the first by Ms. Schapiro to address the issue since a federal district judge refused last year to approve a commission settlement of fraud charges involving Citigroup.

Make losses and prosper, AIG edition - Dear American International Group, can’t you do anything in a small way? The gigantic numbers make our heads bleed and ruin any sense of scale we once had. A $182bn bailout, $467bn net notional of super senior credit default swaps written, and now, in AIG’s fourth quarter results, $17.7bn of $19.8bn of fourth quarter net income is down to… a “release of valuation reserves”? It’s a huge one-time accounting gain. AIG’s announcement of a 82 per cents per share operating profit beat the consensus of 63 cents. Uncle Sam, a 77 per cent owner of the insurer, should be well pleased. Or should he? To understand what this valuation reserve is, think first about the massive losses AIG made over the crisis. When a company is loss-making, it can’t pay tax. Obvious enough. But it also gets to store up the losses to lower its tax bill in the future. The fact that the company will pay less tax in the future is placed on the company’s balance sheet as a “deferred tax asset” (DTA).

Investigators Probe a Rush at MF Global to Move Cash - Investigators probing the collapse of MF Global Holdings Ltd. are scrutinizing two money transfers made during the securities firm's final days in an effort to uncover what happened to $1.6 billion in missing customer funds. Federal regulators at the Commodity Futures Trading Commission and the U.S. bankruptcy trustee for MF Global's brokerage unit are examining two separate transfers from customer accounts, including a previously undisclosed $165 million transaction, said people familiar with the matter. They said some of the investigators are poring over emails and records related to these and other money transfers.

Ann Barnhardt & Warren Pollock Have an Open Conversation - Ann Barnhardt and I (Warren Pollock) have an open conversation organized to provide background to this crisis, the setting of legal precedent, netting, settlement, and future trends including a potential bank holiday. We talk about MF Global as it applies to savings and commercial banking, brokerage, insurance, and commodities. We talk about numeric impossibility of solving the problem, incest between government and finance, having the victim of the crisis pay rather than the fraudster. We explain how the MF Global bankruptcy process will define how customer funds will be treated in a bank holiday. We talk about the idea of having an honest bank holiday to root out fraud vs an economic crisis which plays to looting and criminal activity of vested interest.

Janet Tavakoli: Financial Sector Executives Commit Fraud, Avoid Prosecution, and Make Certain Future Crises - Janet Tavakoli discusses her new book, The New Robber Barons:
On how money is used to prevent enforcement of criminal law: When trillions of dollars are at stake, no one tells the truth and everyone plays for keeps. We have had sufficient legislation and regulation on the books, but our laws have not been enforced. Instead, bankers use their massive wealth to lobby Congress and to get off with a slap on the wrist. They have successfully prevented prosecution for widespread, massive fraud.
On the fraud committed in the C-Suites: At the top of these institutions, we had CEO's and CFO's who signed off on accounting statements that were false. In 2007, HSBC wrote down massive losses. Our banks did not. Under Sarbanes Oxley, they signed off on statements that they knew, or should have known, to be false.
On how CFO's and CEO's have used campaign contributions to place themselves above the law: They have bought off Congress through campaign contributions - in order to prevent investigations and prosecutions. We should be seeing multiple thousands of indictments - and not just people at the bottom, but also the people at the top who were in charge of our largest banks during the financial crisis.
On whether we have taken steps to prevent another financial crisis: We are vulnerable for a repeat. When fraud goes unpunished, the stage is set for ever greater financial failure. This is exacerbated by having printed money indiscriminately to try to bail people out of the previous failure.

“Crooks on the Loose? Did Felons Get a Free Pass in the Financial Crisis? “ -  Yves Smith - This is a video of a panel discussion at NYU Law School earlier this month at which former prosecutors Neil Barofsky and Eliot Spitzer took on party-line-defending Lanny Breuer of the Department of Justice, and to a lesser degree, Mary Jo White, former US attorney who now works on the defense side. Various reports on the discussion indicate that sparks flew at several junctures, so I am confident the NC audience will find it engaging as well as informative.

Holder Defends Efforts to Fight Financial Fraud - Attorney General Eric H. Holder Jr. defended the Justice Department’s record on financial fraud Thursday evening, asserting that the administration’s “record of success has been nothing less than historic.” In a speech at Columbia University, Mr. Holder said, “From securities, bank and investment fraud to mortgage, consumer and health care fraud — we’ve found that these schemes are as diverse as the imaginations of those who perpetrate them, and as sophisticated as modern technology will permit.” Mr. Holder’s remarks were among his first public comments since President Obama, during last month’s State of the Union address, announced the administration’s redoubled commitment to combat financial fraud. Critics have faulted the Justice Department for not pursuing criminal cases against the banking executives whose conduct helped bring about the 2008 global financial crisis and subsequent deep recession.

Is Obama Getting Serious About Bank Fraud? - Real News Network video (Bill Black: Are Pres. Obama's new measures effective or window dressing?)

FDIC Lawsuits Yielded Big Penalties, But Bankers Haven't Paid Up - Like many banks engulfed by the mortgage crisis, First National Bank of Nevada specialized in risky home loans that didn't require borrowers to prove their incomes. When the housing bubble burst, First National got crushed in 2008 under the weight of bad loans that it could no longer resell to investors. Last year, the Federal Deposit Insurance Corporation sued two former senior executives of the defunct bank for alleged negligence and breach of fiduciary duty, hoping to recover nearly $200 million in losses that it tied directly to those executives' decisions. The two men denied wrongdoing and settled for $40 million. But they didn't pay a dime. Instead, the federal agency - which is better known as a regulator that seizes control of failing banks and provides deposit insurance for consumers than for its prosecutorial endeavors - is still fighting in court to collect that money from Catlin Group Ltd., a Lloyd's insurance syndicate. Catlin provided an equivalent of malpractice insurance to First National's executives, but the insurer denied liability for the executives' alleged mistakes.

JPMorgan, Citi, BofA sued for $949 million by Sealink (Reuters) - JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and more than a half dozen other major banks are being hit with a new lawsuit over $949 million in residential mortgage-backed securities. A summons was filed Tuesday by Sealink Funding Ltd, an Irish entity that oversees risky RMBS, in New York state Supreme Court. Sealink has filed numerous other lawsuits against major banks over billions in residential mortgage-backed securities it bought. New York attorney Joel H. Bernstein, who represents Sealink, said the new case is over "securities they have not sued for in the past." Sealink claims the purchases were based on faulty offering materials, including misrepresentations of underwriting standards. It seeks damages or to have the purchases rescinded.

Tom Deutsch of American Securitization Forum Finally Gets His Comeuppance: Pimco and Likely Other Investors Quit - Yves Smith - Bloomberg reported a few weeks ago of a rift in the group that supposedly represents the mortgage securitization industry, the American Securitization Forum. We say “supposedly” because the interests of its two main types of members, the sell side, meaning the parties that put together deals, and the buy side, meaning investors, are now directly opposed. That rift has now escalated to what looks like a fatal schism, as bond king Pimco has quit the ASF over the refusal of the ASF to send a letter voicing investors’ objection to concerns about the pending mortgage settlement. We are told by other investors that Pimco’s departure is likely to herald a wholesale exodus by investors who have long felt their views are not taken seriously by the ASF. Although most readers probably have had no reason to take notice of the ASF, it is important to recognize its role in defending the worst practices of the mortgage originators and servicers. After the robosigning scandal broke in fall 2010, there was a series of Congressional hearing on the topic (my recollection is five, but it might have been six). Tom Deutsch appeared at several of them and is likely to have made more appearances over these hearings than any other individual.

Freddie Mac pitches REO plan to mortgage-bond investors - Freddie Mac has begun talks with institutional mortgage-bond investors interested in buying hundreds of distressed single-family residential properties across the US in order to convert them to rental units, according to people with knowledge of the discussions. Freddie Mac is making efforts to fast-track its own version of a proposed US foreclosure-rental program, even though the Obama administration and the US Federal Housing Finance Agency have so far only officially sanctioned a Fannie Mae "real-estate owned to rental" pilot program, announced on February 1. The FHFA, which regulates both Fannie Mae and Freddie Mac, did say at the time that similar foreclosed-home sales from Freddie Mac and the US Federal Housing Administration "may be considered" at a later date. However, Freddie Mac's own plan has apparently gained traction over the past two weeks, and its proposed strategy of disposing of its enormous overhang of REO properties is likely to differ from Fannie's in important ways, particularly in how qualified investors may be able to procure financing to buy the pools of foreclosed single-family homes.

Bank of America stops selling mortgages to Fannie Mae - Bank of America is faced with numerous reps and warrants challenges on the mortgage front, and as a result of growing uncertainty, it will no longer sell certain mortgage refinances into Fannie Mae mortgage-backed securities. "The issue is tied to ongoing disagreements between Bank of America and Fannie Mae in regards to repurchases," said Dan Frahm, spokesman for BofA. Specifically, Bank of America will no longer place non-Making Home Affordable Program (MHA) refinance first-lien residential mortgage products into Fannie mortgage-backed securities...."We continue to deliver MHA programs, including loan modifications and refinancing[sp] through HARP to our customers whose loans are owned by Fannie Mae," Frahm said, adding mortgage origination levels will not drop at the bank. "We're adequately prepared for this, there will be no impact to our customers." BofA will likely do more business with Freddie Mac and Ginnie Mae as a result of this decision.

Fannie Putting More Dubious New Loans Back to BofA, So BofA Will Stick Them to Freddie Instead -  Yves Smith - Bloomberg has an article up “BofA Halts Routing New Mortgages to Fannie Mae,” doesn’t put the key issue, which is Bank of America’s continuing shoddy mortgage origination practices, in a sufficiently sharp spotlight.  The piece starts out in a direct-seeming manner: Bank of America Corp., the second- biggest U.S. lender by assets, is stopping the sale of new home loans to government-owned Fannie Mae as a dispute over who should bear the costs for defective mortgages escalates. The bank is cutting off Fannie Mae from loans starting this month, except for modifications and some refinancings, because of the U.S.-controlled company’s stance on repurchases, There is some revealing wording in the next paragraph: that the Charlotte bank is taking its marbles, um, mortgages away, refusing “to cooperate with what it deemed to a new Fannie Mae policy that required loan repurchases if an insurer drops coverage.”  That turn of phrase suggests that Fannie had an existing policy it didn’t enforce much or at all, and now that it is in conservatorship, it is getting more tough minded in order to produce more income for taxpayers. But let’s skip down to the section that describes the bone of contention: Bank of America told investors in August that Fannie Mae’s policy on insurance rejections may result in higher repurchase costs. Fannie Mae typically requires a borrower to buy mortgage insurance if the loan exceeds 80 percent of the home’s value. The coverage guards against losses when borrowers default and foreclosure fails to recoup costs. Are these putbacks really about insurance? It looks to me that BofA is misrepresenting the actual bone of contention more than a little. It looks like someone at Fannie woke up and realized that any case of a guarantor voiding a policy was prima facie evidence that BofA had breached a rep and warranty about loan quality.

Legal Fees Mount at Fannie and Freddie - Taxpayers have advanced almost $50 million in legal payments to defend former executives of Fannie Mae and Freddie Mac in the three years since the government rescued the giant mortgage companies, a regulatory analysis has found. In that time, $37 million has gone to three former Fannie Mae executives accused of securities fraud, according to the analysis by the inspector general of the Federal Housing Finance Agency, which oversees both companies. Acting as their conservator, the agency is charged with protecting taxpayers from further losses at Fannie Mae and Freddie Mac. Those losses now stand at $183 billion. Although the legal costs for the former executives are a small fraction of the companies’ mortgage losses, it is imperative that the housing agency move to limit these fees, said Steve A. Linick, inspector general of the agency.

FHFA releases plan for Freddie, Fannie exit - A federal housing regulator on Tuesday released a plan for beginning to scale back mortgage giants Fannie Mae and Freddie Mac — just as the Obama administration is pressing the taxpayer-backed companies to do more to help homeowners.The Federal Housing Finance Agency, which oversees Fannie and Freddie, laid out steps to wind down the companies, largely by increasing fees charged to borrowers who take out mortgages. The FHFA’s hope is that as the cost of receiving a taxpayer-backed mortgage goes up, more borrowers will turn to private lenders, whose loans do not carry government backing. But the effort could conflict with measures being pursued by Fannie and Freddie — and the Obama administration — to increase the government’s role in housing.  A year ago, the administration released a white paper calling for a gradual wind-down of Fannie and Freddie, whose bad bets on risky home loans before the financial crisis have cost taxpayers more than $130 billion. But for much of the past year, the White House has been going in the opposite direction. Administration officials have been urging Fannie and Freddie to take steps to help homeowners in an effort to lift home values, free up cash in the economy and help borrowers avoid foreclosure.

Mortgage Foreclosure Settlement: Who Pays? - Just who is paying for the big mortgage settlement, anyway? The Obama administration says it's the banks. Mortgage investors worry it will be them. Taxpayers fear they'll have to pony up. Unfortunately, until we actually see the settlement terms and watch the process in action, we won't know for sure. Based on currently available information about the settlement, there's no way to refute the government's claim that banks will bear the brunt of the settlement's costs. But the waters have been muddied by past government statements, and by the government's failure to make the terms of the settlement public even as it rushed to announce that a deal was done. And there is still plenty of room to argue that banks, which are settling charges that they mishandled thousands of troubled mortgages, are getting off fairly easily in what is supposed to be a deal that punishes them and deters future misdeeds. The latest controversy involves the charge that banks are getting a taxpayer incentive, through the government's existing Home Affordable Modification Program, or HAMP, to live up to their obligations under the mortgage settlement.

Some Doubt a Settlement Will End Mortgage Ills - Even as government officials prepare to unveil new standards this week for how banks treat millions of Americans facing foreclosure, housing advocates and homeowners are skeptical the rules will be able to do something past efforts have not: provide a beleaguered borrower with one individual to help them navigate the mortgage maze.  While the entire process of seeking a mortgage modification is complicated and time-consuming, few elements are as maddening as the inability to get through to a representative at the bank, or being asked for the same documents again and again.  So the promise of a single point of contact has emerged as a crucial element in the much-ballyhooed $26 billion settlement reached earlier this month involving state attorneys general, the federal government and the five biggest mortgage servicers. These rules will apply nationwide and come with commitments of strong enforcement by federal and state authorities, but they carry a familiar ring for those experienced in the foreclosure process.  Last April, the industry made many of the same pledges under a consent order with the Office of the Comptroller of the Currency and since then, consumer representatives say, there has been barely any improvement, adding that loan files continue to be handed off from one agent to another, sometimes weekly, and that even when a single person is assigned to their cases, one phone call after another goes unreturned.

National Mortgage…Fiasco? - On February 9, to much fanfare, President Obama announced an approximately $25 billion National Mortgage Settlement with five of the country's largest banks, JP Morgan Chase, Bank of America, Ally/GMAC, Wells Fargo, and Citi. It is the largest multi-state settlement regarding the mortgage meltdown since the $8.68 billion Countrywide Settlement in 2008. But the excitement is misplaced — it is not clear yet whether the deal has been finalized, and the actual settlement that the federal government and 49 attorneys general have apparently reached with the banks has not been released. The ostensible purpose of the settlement is to resolve violations of federal and state law and to help a percentage of the 11 million borrowers who are in debt to the tune of more than $700 billion. In addition, the settlement is to provide aid to those who have lost their houses because mortgage servicers working for the banks filed incomplete, and potentially fraudulent, foreclosure documents. However, according to Prentiss Cox, a professor at the University of Minnesota Law School, the $25 billion national mortgage settlement may end up functioning more as loss mitigation for the five banks than as relief for underwater borrowers.

The “Robo-Signed” Foreclosure Fraud Settlement - The New York Post correctly calls the foreclosure fraud settlement something analagous to the robo-signing scandal the settlement releases from liability: More than a year after the scandal broke over the rapid signing of thousands of foreclosure documents without reviewing their accuracy, New York Attorney General Eric Schneiderman and his cohorts, along with the Justice Department and the Department of Housing and Urban Development, are crowing. They claim they’ve clinched a $25 billion deal to punish five big banks for robo-signing and other wrongdoing in the foreclosure mess. Trouble is, the regulators don’t have a final deal, just a provisional one. Important elements could change — likely for the worse for homeowners and investors — before the army of bank and government lawyers involved signs off. This means the regulators essentially rushed to push through an incomplete and flawed document, just like robo-signers did, without all the critical facts at hand. Instead of a detailed term sheet, there’s only a “coming soon” tag on the National Mortgage Settlement Web site. The state and federal regulators may complain that this is just a distortion, and that they have a very difficult job to figure out the term for 49 states and multiple federal agencies, and they’re just working out the complexities. Well, they should have thought of that when they announced a settlement to great fanfare. Terms matter, and without them, the settlement is no more than a theory.

Foreclosure Fraud Settlement: Will There Be Terms, Or Just Suggestions? - Before the foreclosure fraud settlement was inked, at least half a dozen Republican Attorneys General said publicly that they were philosophically opposed to principal reductions of any kind. Then, in December of last year, the committee that helps elect Republican AGs received hundreds of thousands of dollars from Citi, Wells Fargo and JPMorgan Chase. All of a sudden, every Republican AG but Oklahoma signed on to the deal. This tells you how “philosophical opposition” can be overcome, and also how scared the banks are of the settlement. And it may tell you how everyone expects the settlement to be implemented, i.e. just like every other settlement with the banks – poorly. The New York Times today looks at single point of contact, a standard for servicing which has been mandated on at least a couple of occasions, without success. While the entire process of seeking a mortgage modification is complicated and time-consuming, few elements are as maddening as the inability to get through to a representative at the bank, or being asked for the same documents again and again. So the promise of a single point of contact has emerged as a crucial element in the much-ballyhooed $26 billion settlement reached earlier this month involving state attorneys general, the federal government and the five biggest mortgage servicers. These rules will apply nationwide and come with commitments of strong enforcement by federal and state authorities, but they carry a familiar ring for those experienced in the foreclosure process. I agree with Yves Smith that single point of contact is not really the issue. If you had accurate record-keeping at the servicers, than any call center employee could access the proper data and help customers.

Will Expiration of Tax Break Render Much of Mortgage Settlement Moot? - - Yves Smith  - Even though the mortgage settlement deal was without a doubt massively lawyered from the bank end, and should have received similar levels of scrutiny from the Federal and state officials, a major fly in the ointment may have been overlooked. The tax rule allowing a reduction in mortgage debt not to be counted as income expires at the end of this year. As the Seattle Times explains: Before 2007, all cancellations of debt by creditors — whether on auto loans, personal loans or mortgages — were treated as taxable events under the federal tax code. If you owed $200,000, but paid off only $150,000 through an agreement with the lender, the $50,000 difference would be ordinary income, taxable at regular rates. Under the debt-relief law for qualified homeowners, you can avoid taxation on forgiven mortgage amounts up to $2 million if married filing jointly, or $1 million for single filers. To be eligible, the debt must be canceled by a lender in connection with a mortgage restructuring, short sale, deed-in-lieu of foreclosure or foreclosure. The transaction must be completed no later than Dec. 31… Picture this scenario: You negotiate for months with your lender, realty agents and potential buyers. Finally you pull together a short-sale package calling for the bank to forgive $100,000. But the deal runs into hitches and doesn’t go to closing until after the Dec. 31 expiration date. Now your house is gone, your credit is shot, you’re looking for a place to rent, and the IRS demands taxes on your phantom “gain” of $100,000 on the sale.

Mortgage Settlement Fails to Address Banking Criminal Enterprise -- Yves Smith  - Yves here. The release by San Francisco county assessor-recorder Phil Ting of a study of document irregularities in foreclosures has put a spotlight on the failure of Federal banking regulators and state officials to do anything beyond cursory examinations of servicers’ bad practices. If a country official with limited resources can show that there are widespread abuses, what is the excuse of state and Federal officials for their failure to understand the depth and severity of these problems? As Dave Dayen has pointed out, it was two county registers of deeds, Jeff Thigpen in Guiford County, North Carolina, and John O’Brien of South Essex County, Massachusettes, who were the first to look at their own records to see how extensive the frauds were. O’Brien has called his office a “crime scene” and refused to register any more fraudulent deeds. He also performed a study of his own, and the results were released in June 2011. As Dayen reported, the study found widespread failures and apparent fraud, just like the later San Francisco exam: Register John O’Brien revealed the results of an independent audit of his registry. The audit, which is released as a legal affidavit was performed by McDonnell Property Analytics, examined assignments of mortgage recorded in the Essex Southern District Registry of Deeds issued to and from JPMorgan Chase Bank, Wells Fargo Bank, and Bank of America during 2010. In total, 565 assignments related to 473 unique mortgages were analyzed. McDonnell’s Report includes the following key findings:
• Only 16% of assignments of mortgage are valid
• 75% of assignments of mortgage are invalid.
• 9% of assignments of mortgage are questionable
• 27% of the invalid assignments are fraudulent, 35% are “robo-signed” and 10% violate the Massachusetts Mortgage Fraud Statute.
• The identity of financial institutions that are current owners of the mortgages could only be determined for 287 out of 473 (60%)
• There are 683 missing assignments for the 287 traced mortgages, representing approximately $180,000 in lost recording fees per 1,000 mortgages whose current ownership can be traced.

Politico: Schneiderman Caved to Administration Pressure on Mortgage Settlement, Did Not Get Tighter Release for Abandoning Opposition -  Yves Smith - If you were following the mortgage settlement negotiations, it was very clear than the decision of New York state attorney general Eric Schneiderman to abandon his role as the de facto leader of the opponents of the agreement, join a Federal task force to investigate mortgage abuses, and go silent on where he stood on the negotiations put the dissenters in disarray and enabled the Administration to push the deal over the line. While this blog has repeatedly pointed out that Tom Miller, the Iowa attorney general and leader of attorneys general in the settlement negotiations, is not the most credible source, the flip side is that the description of the release in the Administration’s own propaganda website strongly suggests that the release of bank liability is broad, rather than narrow, as deal cheerleaders claimed. If you take this section of an article at Politico, “HUD boss jumps into mortgage melee,” (hat tip reader Deontos) at face value, you can only draw damning conclusions about New York attorney general Eric Schneiderman’s role:

Neil Barofsky on Taxpayer Subsidies to the Mortgage Settlement - (video) Neil Barofsky, former Special Inspector General of the TARP, weighs in on the mortgage settlement at Bloomberg. One intriguing little aspect of this deal is the degree to which the Administration, particularly HUD, is frustrated that its PR efforts are landing with a thud. I’ve been told of HUD efforts to push back against my post, “The Top Twelve Reasons Why You Should Hate the Mortgage Settlement,” as well as an important article by Shahien Nasiripour at the Financial Times on how the administration’s mortgage modification program HAMP would wind up providing taxpayer subsidies to the settlement.  The Bloomberg reporter Erik Schatzker mentions how HUD has disputed the Financial Times reporting and Barofsky explains why the FT got it right.

HAMP’s Role in the Settlement - Treasury - An article in last Friday’s Financial Times raises questions about the historic mortgage settlement between the five largest mortgage servicers in the United States, 49 state attorneys general, and the federal government. The article, entitled “US taxpayers to subsidise $40 bn housing settlement,” argues that there is a taxpayer subsidy because modifications performed under the Treasury’s Home Affordable Modification Program (HAMP) are eligible for credit under the settlement.In reality there is no such subsidy.  Servicers cannot use HAMP incentives to meet their obligations under the settlement, plain and simple.  Here are the facts. HAMP pays incentives to encourage mortgage modifications.  While those incentives occasionally include payments for reducing principal, most HAMP modifications do not include principal reduction. The settlement does not give any credit for these HAMP modifications—those that involve payment reduction through a decrease in interest rate or an extension of the term, but no principal reduction.  Of the almost 1 million permanent HAMP modifications done to date, the vast majority—more than 95 percent—fall into this category.  Again, servicers do not receive any credit under the settlement for these modifications.

HUD Continues Defense of Allowing HAMP Modifications as Part of the Foreclosure Fraud Settlement - The pushback from the Administration on one particular story arising from the foreclosure fraud settlement has been pretty intense. You cannot say that Shahien Nasiripour doesn’t have the attention of HUD. Today, they devoted an entire blog post (unsigned, from “HUD Public Affairs”) to refuting Nasiripour’s story in the Financial Times (which they don’t link, so I will) about how bank servicers can count HAMP modifications toward the “credits” in the foreclosure fraud settlement. But really they only refute the title of Nasiripour’s story: The article, entitled “US taxpayers to subsidise $40 bn housing settlement,” argues that there is a taxpayer subsidy because modifications performed under the Treasury’s Home Affordable Modification Program (HAMP) are eligible for credit under the settlement. In reality there is no such subsidy. Servicers cannot use HAMP incentives to meet their obligations under the settlement, plain and simple. This does not refute Nasiripour’s story, which includes this very point from Administration officials: Federal officials involved in negotiating the settlement defended the arrangement, pointing out that the amount reimbursed to the banks could not be directly used towards fulfilling settlement obligations

Tom Miller, HUD Officials Laugh at Schneiderman Publicly - Whether you believe in Eric Schneiderman’s ability to deliver a legitimate investigation on mortgage securitization fraud or not, you have to admit that the united front on opposition to a settlement on foreclosure fraud collapsed the moment that he agreed to helm that federal investigatory task force. He immediately separated “pre-bubble” and “post-bubble” conduct, allowing for a settlement on the latter while he joined the investigation on the former. And eventually, every other AG on the Democratic side fell in line, as they didn’t have New York as an anchor to stay out of a settlement. That’s just what happened. And now we have HUD Secretary Shaun Donovan and Iowa AG Tom Miller, head of the executive committee that settled on foreclosure fraud, clowning Schneiderman on the record, saying that he got next to nothing in exchange for his holdout. The story by Glenn Thrush frames a battle between Donovan and Treasury Secretary Timothy Geithner on whether to force banks to reduce principal on loans as part of the settlement: In fact, Donovan’s preferred approach to solving the worst housing meltdown in U.S. history — forcing banks to write down a relatively modest amount in mortgage principal to help out homeowners — won out over initial objections of Treasury Secretary Timothy Geithner, a boogeyman to many liberals who think he’s been too soft to punish the One Percent. “Something really changed [in the White House] after ‘Occupy.’… Shaun was a lot more empowered to make a deal,” said New York Attorney General Eric Schneiderman, who wrangled with Donovan during months of negotiations between 50 state law enforcement agencies, HUD, the Justice Department and five of the nation’s largest banks.

Firedog bitten -, the progressive website that has closely followed the settlement between the feds, states and mortgage lenders, somehow interpreted my story on HUD chief Shaun Donovan as a riff on how HUD and its allies gamed NYAG Eric Schneiderman into accepting a weak deal. "That’s just what happened. And now we have HUD Secretary Shaun Donovan and Iowa AG Tom Miller, head of the executive committee that settled on foreclosure fraud, clowning Schneiderman on the record, saying that he got next to nothing in exchange for his holdout," writes David Dayen on the site. Huh? Miller, who has clashed with Schneiderman over the terms of the releases with banks, did take a shot at Schneiderman, and I make it clear the two have a contentious history. But Donovan? No way. I make the opposite point throughout the story, including an early assertion of how Schneiderman pressed HUD to get tougher on banks: Donovan, sources told me, felt like he developed a good working relationship with the AG after a very rocky start.

Quelle Surprise! Servicers Rip Off Investors as Well as Homeowners -- Yves Smith - We’ve been giving examples off and on about how servicers scam borrowers. Examples include impermissibly deducting fees before applying payments to interest and principal; force placed insurance, inflated prices on and excessive frequency of broker price opinions, and in altogether too many cases, treating payments that are on time as late. What many observers fail to appreciate is that these are tantamount to scamming investors. If a borrower goes into default, any bogus charges will be deducted from the sale of the house, and hence come out of investors’ hides. Lisa Epstein of Foreclosure Hamlet is a mortgage document maven and has been looking extensively at investor reports and compared them to court documents and has found serious discrepancies. Her research shows that servicers are not only taking advantage of borrowers but are also scamming investors.  Lisa looked into a Countrywide trust (CWALT 2008-oc8) with Bank of America as the servicer, in part because it is the focus of an important case in Florida, Pino versus Bank of New York. She determined that despite the fact that the case had been satisfied in July 2011, it was still being included as of January 2012 in the monthly investor report. That means Bank of America is still charging servicing fees on it, and likely other fees (late fees, periodic broker price opinions, etc). And she found that the Pino loan is not alone in having court records show that the property has been sold (ie, the trust is clearly no longer holding the mortgage), yet is still reported as an asset of the trust. From 4closureFraud

Cochrane Sees Moral Hazard Only in One Direction. - Several people have been writing about John Cochrane’s post on Federal Reserve independence, but few have mentioned what is actually making Cochrane mad.  Why does Cochrane feel something has gone terribly wrong?  Here’s a quick scan:Led by the White House, the state Attorneys General announced their “settlement” with banks….There are also costs.  This money comes from somewhere…To say nothing of the blatant unfairness, and moral hazard…or the larger moral hazard of using the threat of prosecution for procedural errors to force anyone to cough up money towards unrelated policy goals… Heavens, what a scandal…Documents not properly notarized! Notice it does not even “allege” that anyone was actually kicked out of a house who was paying their mortgage. Look at Cochrane’s post – the robosigning and subsequent scandals are viewed as nothing of significance.  Not only are these acts against the law, but not breaking these laws are essential to the whole securitization chain.  Following the proper legal steps in creating and executing these financial instruments is necessary for the whole thing to work.  From REMIC to trust to property law to bankruptcy remoteness to everything else, unless you are actually following these steps you are causing huge problems for the securitization later on.  The same goes for foreclosures.  Like all property, they are legal creations.  And for a particularly complex piece of property like a security composed of many home mortgages, following the law is essential.

Donovan: The Foreclosure Fraud Settlement Is Strong Because of the OCC Settlement - I’ve been amused by the consistent pushback from HUD’s Shaun Donovan, who has made himself into a leading figure just by his ubiquitousness, as it relates to the foreclosure fraud settlement. Donovan has been the point person to rebut criticism of the settlement, and he is back again today in CNN. The settlement, which hasn’t been released or even decided as far as we know, raised so many questions that Donovan has had to divvy up his rebuttal in parts. His subject today is the $2,000 for foreclosure victims, which is pretty indefensible. In fact, Donovan doesn’t really try to defend it. “Some have questioned whether $2,000 is enough redress for families who lost their homes improperly. The answer is obviously no.” Moving away from that inadequate $2,000, Donovan says that there are other ways for individuals to get the restitution they deserve: First, it recognizes that the federal banking regulators have established a process through which these families can receive help by requesting a review of their file. If a borrower can document that they were improperly foreclosed on, they can receive every cent of the compensation they are entitled to through that process. Second, the agreement preserves the right of homeowners to take their servicer to court. Indeed, if banks or other financial institutions broke the law or treated the families they served unfairly, they should pay the price — and with this settlement they will. OK, so in the first place, Donovan is talking about the OCC (Office of the Comptroller of the Currency) consent orders. He doesn’t mention that they are a sham. The foreclosure reviews will be overseen by “independent” consultants chosen by and paid by the banks. What I wrote in November still holds:

More Foreclosure Mischief: Bankruptcy Hijackings - Yves Smith  - One of the common complaints from banks that the concerns raised by borrowers over robosigning are mere “paperwork” problems, that everyone who is foreclosed on deserved it, and no one was really hurt. That is patently false, as there have been an embarrassing number of instances where someone with no mortgage was foreclosed on, as well all too many cases of servicer-driven foreclosures. And that’s before we get to damage to property records.Attorney Timothy Fong called our attention to a below the radar form of chicanery that is predictable when you have nonjudicial foreclosure with no significant oversight and agents who lack incentives to do a good job. To some translate of the account below, MFRS = Motion for Relief of Stay. Even though a bankruptcy is supposed to hold all creditors at bay until the court sorts out what to do (which in a Chapter 13 is to develop a payment plan), servicers typically harass the borrower by filing Motions for Relief of Stay, which is a fancy of saying, “I want the house now.” If the borrower has hired a competent BK attorney, he can beat it back (although this still wastes the borrower’s by definition scarce funds). But a lot of people hire friends or family that are not BK savvy, and the banks hope to trip them up (either by not responding to the filing, or by signing a document in which the servicer agrees not to file future Motions for Relief of Stay, but which includes some innocuous looking but hugely detrimental provisions). You need to read the part I boldfaced to see how widespread this sort of bankruptcy hijacking has become. And notice further how this works: the fraudsters pretend a person in bankruptcy owns a property that isn’t his. Not only does the financially stressed borrower have to incur costs to clear this up, but he also is at risk of being construed to be a participant in the scheme. From a recent post in Los Angeles Bankruptcy Law Monitor.

Schneiderman Sues Again - New York Attorney General Eric Schneiderman seems to think his job is to sift through the wreckage of the housing market and shoot the wounded. His latest target is electronic mortgage record-keeping, which he calls a scandal, perhaps because he doesn't understand it. Mr. Schneiderman is following Delaware's Beau Biden, who sued the Mortgage Electronic Registration Systems in October, and Massachusetts's Martha Coakley, who added banks to her suit in December. The New York complaint names many of the same institutions and alleges that MERS, as the database is known, has harmed homeowners by undermining judicial foreclosure and creating "confusion and uncertainty" about property ownership interests. MERS is used by 3,000 lenders, servicers and government agencies, operates in all 50 states, and has roughly 30 million active mortgage loans in its system. The housing market can't recover until the nation's courts work through foreclosure backlogs, an area in which MERS plays a vital role. So it's not clear what the AG wants to accomplish, other than to hit another private housing institution for cash and slow down foreclosures.  Mr. Schneiderman implies that MERS itself is a scam, created in 1995 by the mortgage industry and Fannie Mae and Freddie Mac to "allow financial institutions to evade county recording fees, avoid the need to publicly record mortgage transfers, and facilitate the rapid sale and securitization of mortgages en masse." This "bizarre and complex end-around" has saved more than $2 billion, he complains.

Foreclosure process is ‘utterly broken’-A recent study of San Francisco home foreclosures found widespread irregularities in almost all the home seizures scrutinized. The report, commissioned by San Francisco Assessor-Recorder Phil Ting, was prepared by Aequitas Compliance Solutions Inc. of Newport Beach.  Company partner Lou Pizante conducted the study. He explained its findings …

  • Us: What did your report show?  Lou: We reviewed about 16% of all foreclosure sales that occurred in San Francisco from 2009 through 2011. The audit shows that 99% of the sampled foreclosures contain at least one irregularity and 84% appear to contain one or more clear violations of law.
  • Us: What were the key problems identified in your report? Lou: We looked at six general subject areas, including assignments (which relate to chain of title), notices of default and trustee sale and suspicious activity (like robo-signing). The report, which you can download from the Aequitas website, explains these things in laymen terms. Within each subject area, we looked at a variety of issues.

Assessor-Recorder Phil Ting Uncovers Widespread Mortgage Industry Irregularities - YouTube

84 Percent of San Francisco Foreclosures Fraudulent--Why are Bankers Still Getting Away with Crimes? - Last week, five of the nation’s largest banks and 49 of its attorneys general announced a $26 billion settlement that essentially let the banks off the hook for the widespread use of fraudulent documents in the foreclosure process. Thursday, the San Francisco County assessor released an audit suggesting that many, many more demonstrable crimes were committed during the foreclosure bust of the past few years. My use of passive tense is not accidental; the audit doesn’t name names, though it’s long past time we start doing so. “It is very apparent that the system is broken from many different vantage points,” Phil Ting, the county assessor, told the New York Times’ Gretchen Morgenson. Actually, someone broke the system, and evidence that the break was willful is now piled as high as banking execs’ bonuses. Morgenson describes the audit as such: “About 84 percent of the files contained what appear to be clear violations of law, it said, and fully two-thirds had at least four violations or irregularities.” That’s not a quirk. That’s not a system that needs tweaking. That’s not even incompetence. It’s rampant lawlessness. And it’s by design.

Pushback on the San Francisco City Assessor-Recorder Foreclosure Audit - Not surprisingly, there's been some attempts to downplay the significance of the SF City Assessor-Recorder foreclosure audit. The attacks have come in three flavors:  questions about the auditors' own background; questions about the accuracy of the report; and the "who cares, as these are just lousy deadbeats" argument. Even if we acknowledge that there is something to each of these attacks, they don't take away from the core finding of the report, which is that things are FUBAR in mortgage documentation, and that is going to inevitably result in some honest, but unfortunate homeowners being harmed. The first attack is on the credentials and former activities of the auditors. Given the deeply compromised background of the OCC foreclosure review auditors, this is a chutzpadik attack. The sad truth is that there isn't a huge pool of people who can do this sort of audit.  The second attack on the audit is to point out that it doesn't get everything right. I address specific criticisms below, but it's kind of irrelevant.  The issue isn't whether the audit gets things 100% correct.  Instead, it's a gestalt point, namely that things are FUBAR in mortgage documentation, both on the front end (securitization) and the back end (foreclosure).  Whatever quibbles one might have with the audit's methodology, it's pretty hard to deny that there aren't serious paper work problems. 

San Francisco Foreclosure Audit Elicits Predictable Responses from Securitization Mess Deniers -  Yves Smith - Given the existence of a large and still for the most part very well remunerated mortgage industrial complex, it is not surprising that a investigation done by a mere county that found errors in virtually all the loans in a small sample of foreclosures created a hue and cry.  While state attorney general Kamala Harris remarked that, “The allegations are deeply troubling and, sadly, no surprise to homeowners and law enforcement officials in California,” and Nancy Pelosi wrote to ask Eric Holder to take a look, the securitization problem deniers went to assault mode. Paul Jackson came close to having a heart attack on Twitter, apparently hoping that rapid burst ad hominem attacks would mask his lack of a substantive argument, and also distract from the fact that he had yanked a straight up the center account on the audit by one of his best reporters, Jon Prior. Since Jackson is particularly aggressive in defending the interest of his backers and advertisers, it is not surprising that he has gotten around to penning an article on the SF audit. The reason I dwell on Jackson’s stance is that he gets sanctimonious about his action:  I made the decision to pull our story covering the audit off the HW website in the interest of ensuring that our reporting wasn’t echoing false information. Jackson is in no position to throw stones. We’ve debunked quite a few of past articles on securitization in which he has misrepresented the significance of court decisions and gone to some lengths to try to smear individuals who are on the front lines of exposing the chain of title and foreclosure fraud carnage.

The Foreclosure Fraud Iceberg - Secretary Donovan is trying convince the American public that the what the Obama administration is doing is all that can be done to address our housing and foreclosure crisis. That’s farcically false. Other people are pushing the related message that fraud and forgery by foreclosing bankers isn’t important; the only thing that matters is whether homeowners are in default. Both groups want you to believe that the foreclosure fraud “settlement” is a good and just. Except the “settlement” isn’t. The “settlement” is just the latest in a long line of decisions not to enforce the law and further reinforces the idea that gold-collar criminals are above the law. (I put “settlement” in quotes because we’re now double digit days past the February 9 announcement, and still, there’s no deal submitted to a court for approval. And that means there’s no deal.) So let’s take a good look at the foreclosure fraud iceberg.

New Study From Consumer Advocates Shows Mass Servicer Abuse - Well, here’s an interesting report that might have been good to have in hand a few weeks ago. The National Association of Consumer Advocates, the National Association of Consumer Bankruptcy Attorneys and the National Consumer Law Center have released the results of a survey showing that “mortgage servicers continue to initiate foreclosure proceedings improperly, either while a homeowner is awaiting a loan modification or due to improper fees or payment processing.” This is a key element of the servicing standards in the (as-yet unseen) foreclosure fraud settlement, but it was also part of the consent order last year from the Office of the Comptroller of the Currency. In other words, the banks are under an order to stop doing these types of things, and they have simply not complied. That’s the state of things heading into the settlement, when the banks will be asked to comply again. The study from NACA, NACBA and NCLC surveyed attorneys representing homeowners in foreclosure cases in 45 states and the District of Columbia. The results are really staggering. Here’s a sample: Over 90% of the respondents report representing a homeowner placed in foreclosure while awaiting a loan modification in the last year.  Homeowners were improperly foreclosed on while awaiting both HAMP and GSE loan modifications: of the survey respondents that represent homeowners placed in foreclosure while awaiting a loan modification in the last year, 85% represent homeowners awaiting a HAMP loan modification; 66% represent homeowners with a loan owned by Fannie Mae or Freddie Mac. Over 80% of the respondents represent homeowners where the actual foreclosure sale was attempted while awaiting a loan modification in the last year.

Servicers Continue to Wrongfully Initiate Foreclosures: All Types of Loans Affected - pdf - A February 2012 survey by the National Association of Consumer Advocates (NACA),i the National Consumer Law Center (NCLC)ii and the National Association of Consumer Bankruptcy Attorneys (NACBA)iii demonstrates that mortgage servicers continue to initiate foreclosure proceedings improperly, either while a homeowner is awaiting a loan modification or due to improper fees or payment processing. Consumer attorneys from 45 states reported representing thousands of homeowners improperly foreclosed on within the last year.iv This survey follows a December 2010 survey by NACA and NCLC that found that servicers often wrongfully initiate foreclosure. A copy of the December 2010 survey results is available at

America is Being Stolen, One Piece of Land At A Time...Who Is The Wizard Behind The Curtain? - A sane person would think that if parties were going to be throwing millions of people out of their homes and into the streets, collecting hundreds of millions of dollars in the process and performing the single largest transfer of real property in the United States of America since the Louisiana Purchase we would all know who was behind all of this….wouldn’t you? But ignore the big picture, national security/public policy stuff loaded into that big question for a moment. Even if the answer to that first question was no, you would think that at the very least, if you were being thrown into the street you would have the right to know who owned the note and who was directing the foreclosure against you and your family right? Well, this is Amerika folks, and those quaint notions of transparency, open government and justice don’t apply anymore. The banks and servicers that are taking apart this country one foreclosure at a time, taking your home and throwing your family into the street can do as they please and you have no right to know who they are actually working for. But it’s not just you that is being kept in the dark. You see, courts all across this country are transferring not just hundreds of millions of dollars, but the actual physical dirt and land and the true foundation of this entire nation, one home at a time, one foreclosure case at a time…..AND THEY HAVE NO IDEA WHO THEY ARE TRANSFERRING THE PROPERTY TO!

Homeowners Who Negotiate Debt Relief Could Soon Face Massive Tax Bill - This week, real estate columnist Kenneth R. Harney [1] pointed out that this important tax break will expire [2] at the end of 2012 -- and, because of opposition from conservative members of Congress, might not be renewed.  The Mortgage Forgiveness Debt Relief Act of 2007 [3] ensures that homeowners who restructure their mortgages or short-sell their homes don't have to pay taxes for reducing part of their debt.  Without the law, any cancelled debt typically counts as income. So an underwater homeowner who negotiated a principal reduction on her mortgage would have to pay taxes on that amount of "income."  The law creates an exemption for up to $2 million of forgiven debt [3] on a taxpayer's primary residence.  Harney pointed out that the debt relief act provides a crucial underpinning [2] to last month's $25 billion mortgage settlement [4], which requires five of the country's largest private loan servicers to provide $17 billion in principal reduction and other forms of foreclosure avoidance.  And given the importance of mortgage modifications [5] and principal reductions [6] to the Obama administration, you might think that the law would be on the fast-track towards further extension. (It was extended once before in 2008 [7].)  But Harney reported that some conservative members of Congress may not approve of the program's $2.7 billion price tag [2], or of provisions they might perceive as a federal "bailout" of underwater homeowners.

Massachusetts Home Seizures Threatened in Loan Case: Mortgages -- The highest court in Massachusetts is poised to rule as soon as this month on a foreclosure case that could lead to a surge in claims from home owners seeking to overturn seizures. The justices are deciding whether to uphold a lower court ruling that gave a Boston home back to Henrietta Eaton after Sam Levine, a 25-year-old Harvard Law School student, argued in front of the nation's oldest appellate court that the loan servicer made mistakes when it foreclosed because it didn't hold the note proving she was obliged to pay the mortgage. “If the Massachusetts court says this defense works, that would have a huge ripple effect across the country,” said Kurt Eggert, a professor at Chapman University School of Law in Orange, California. A ruling in favor of Eaton would show how a $25 billion settlement reached this month with state and federal officials still leaves banks exposed to liabilities tied to home repossessions.  At issue in Eaton v. Federal National Mortgage Association, also known as Fannie Mae, are two documents borrowers sign to get a home loan. The first is the mortgage establishing the right to seize a property. The second is the promissory note that creates an obligation to pay the debt. While the servicer had the mortgage when it foreclosed, it didn't have the note. One without the other is known as a naked mortgage.

SB 1890 Would Legalize Mortgage Fraud - Senators in the legislature on Monday, Feb. 20, will vote on SB 1890, a bill designed to fast track foreclosures. Ignoring recent lawsuits and investigations into the fraud committed by the banks, Senator Jack Latvala, R-District 16, has introduced a bill that prevents homeowners from challenging the loss of their home, even if the foreclosure was fraudulent. This would mean that someone can buy a foreclosed property with clear title, even if the foreclosing party didn’t own the home. The bill also requires the Supreme Court to unnecessarily amend existing statutes and rules of civil procedures. Opponents to this bill feel this further demonstrates that fraud was involved in most of the foreclosure lawsuits, and that this simply attempts to “sweep it under the rug.” The companion bill, HB 213, sponsored by Kathleen Passidomo, was scheduled to be heard in the House Judiciary Committee on Feb.16. Upon learning that busloads of Floridians were organizing to present their objections at the hearing, the bill was removed from the schedule. Instead of hearing HB 213 on Feb. 16, the Judiciary Committee debated for two hours on a bill that would give legislators and their staff full immunity in perpetuity from being called as witnesses, or deposed on their intent, when creating new legislation. This protects them from providing the public with full disclosure required under the Sunshine Laws. The bill passed the house and will soon go to the senate.

Shocking Economic Insight – Mass Foreclosures Will Drive Down Home Prices - Honest economists explain their reasoning, which is that there is a need to find a market bottom. They argue that in a healthy market sellers should not compete with REO properties and buyers need not worry an oncoming glut of foreclosures will drive down the value of their house. These economists, who remain in the minority, usually preface this is a lousy solution albeit the only one they can think of. More common are bankers and economists who paint a rosy picture at the notion of throwing millions of families to the street, and millions of homes to the market. “Once distressed inventory comes down and all of a sudden there’s not enough homes, you’re going to have a real bounce,” said JP Morgan Chase CEO Jamie Dimon in a recent interview. Dimon surely knows the 2010 Census reports 131.8 million residential housing units for 312.9 million people, including about 17 million empties, so I’m not sure where his housing shortage comes from. Dimon’s bank is sitting on a powder-keg of $87.6 billion of mostly worthless second mortgages at the end of Q3, 2011, according to the FDIC, so I can see why he’s playing cheerleader for a housing renaissance. But treating people like chumps, by encouraging them to buy in this broken market, crosses the line from puerile to patronizing. If Dimon’s bank is genuinely bullish on housing then let them show it by dramatically ratcheting up their non-GSE lending. It will be interesting to see how JPM investors react to what I’m sure will be Dimon’s forthcoming announcement that JP Morgan Chase plans to lower credit-standards, increase private mortgage lending, and retain the loans on their own balance sheet. Every argument housing cheerleaders advance is easily debunked.

FORECLOSURES: Here They Come - After a reprieve in 2011, and a key reason why prognostications of a US housing market bottom is misguided, RealtyTrac reported that foreclosure filings were up 3% in January, month-over-month. Notice of defaults, however, are still depressed, down 22% from a year ago and unchanged from the prior month. The 3% is statistically insignificant and I am not being an alarmist, but it represents the beginning of the distressed sale ramp-up now that the mortgage servicing settlement has finally been hammered out (actually the increase occurred before the agreement was final). Daren Blomquist with RealtyTrac said increased foreclosure activity in key judicial foreclosure states is the likely result of lenders gaining some certainty over foreclosure processing issues, court decisions and regulations impacting the default process. He also points to the $25 billion mortgage servicing settlement that financial firms reached with state attorneys general over robo-signing and foreclosure issues. On the surface, filings are still 19% below year ago levels, but the year ago level was artificially low just after the “robo-signing” scandal at the end of 2010. “It’s a bit surprising that we are seeing this increase in January before the settlement was even announced,” Blomquist said. “It may be that lenders were ramping up (foreclosure activity) with the expectation of the settlement happening.”

Million-dollar foreclosures rise as rich walk away - Five years after the housing bubble burst, America's wealthiest families are now losing their homes to foreclosure at a faster rate than the rest of the country -- and many of them are doing so voluntarily. Over 36,000 homes valued at $1 million or more were foreclosed on -- or at least served with a notice of default -- in 2011, according to data compiled by RealtyTrac, which tracks foreclosures. While that's less than 2% of all foreclosures nationwide, it represents a much bigger share of foreclosure activity than in previous years. "These properties are accounting for a bigger piece of the foreclosure pie," said Daren Blomquist, vice president of RealtyTrac. Out of all foreclosure activity, the share of foreclosures on properties valued at $1 million or more has risen by 115% since 2007 while the share of multi-million dollar foreclosures -- or homes valued at more than $2 million -- jumped by 273%. Meanwhile, the share of foreclosures on mid-range properties valued between $500,000 and $1 million fell by 21%.

Tinseltown, Ghost Town - Of the 11 million Americans under water on their homes and facing foreclosure, more than two million reside in California. None of the Hollywood guilds keep records of how many of their members are among them, but several unions and charitable performing arts foundations report an increase in members applying for emergency housing assistance. When two of my three immediate neighbors have been foreclosed on, there are undoubtedly untold screenwriters, actors, directors and others quietly, invisibly struggling to keep their homes.

LPS: Number of delinquent mortgage loans declined in January, In foreclosure increases slightly - LPS released their First Look report for January today. LPS reported that the percent (and number) of loans delinquent declined in January from December, but that the percent (and number) of loans in the foreclosure process increased slightly. The following table shows the LPS numbers for January 2012, and also for last month (Dec 2011) and one year ago (Jan 2011). At the current rate of decline, the number of delinquent lonas will be back to "normal" in about three years (around 4.5% to 5% of loans are delinquent even in good times). However the number of loans in the foreclosure process hasn't change year-over-year - although that will probably change soon with the mortgage servicer settlement (around 0.5% of loans in foreclosure is "normal").

Overdue Mortgages Number 6,082,000 - New data from Lender Processing Services (LPS) shows that as of the end of January, there were 6,082,000 mortgages in the U.S. going unpaid. That tally includes loans that are 30 or more days delinquent and loans in foreclosure. LPS’ mortgage performance statistics are derived from its loan-level database of nearly 40 million mortgage loans. The national mortgage delinquency rate as of January month-end was 7.97 percent. LPS determines the delinquency rate as a measurement of all loans behind by at least one payment, excluding those already in the process of foreclosure. The delinquency rate registered a decline, both for the month and the year, with January’s rate down 2.2 percent from December 2011 and down 10.5 percent from January 2011. The total foreclosure inventory rate hit 4.15 percent last month – up 1.1 percent compared to December 2011, but down a slight 0.1 percent when comparing year-over-year numbers. According to LPS’ report, there were 2,084,000 properties that were counted as part of the foreclosure inventory last month. The number of properties with mortgages 30 or more days past due but not yet referred to a foreclosure attorney tallied 3,998,000. Of these, 1,772,000 had been delinquent for 90 days or longer.

Lawler: Number of Seriously-Delinquent FHA-Insured SF Loans Jumped Again in January - From economist Tom Lawler: Number of Seriously-Delinquent FHA-Insured SF Loans Jumped Again in January; HUD Secretary “Fiddles” as FHA Burns Data from the FHA’s Neighborhood Watch Early Warning System indicate that the number of FHA-insured loans that were seriously delinquent jumped again in January. According to report on the EWS for servicers who combined have an “active” FHA servicing portfolio of over 7.33 million loans, 732,775 of these loans were seriously delinquent at the end of January. While this report does not exactly match the SDQ numbers reported in various monthly FHA reports (which have not yet been released in January, it tracks the “official” numbers pretty closely. These data, combined with other data from the EWS (not shown here), suggest that the performance of the FHA’s pre-2010 book has continued to deteriorate significantly. Based on this report, I estimate that the serious delinquency rate on FHA’s SF book in January (as measured by the FHA Monthly Outlook and/or FHA Monthly Report to the FHA commissioner) jumped to around 9.9% last month, up from 9.59% in December, 8.18% last June, and 8.89% last January.

Mortgage Delinquencies by Loan Type - By request, the following graphs show the percent of loans delinquent by loan type: Prime, Subprime, FHA and VA. First a table comparing the number of loans in 2007 and Q4 2011 so readers can understand the shift in loan types. Both the number of prime and subprime loans have declined over the last four years; the number of subprime loans is down by about one-third. Meanwhile the number of FHA loans has increased sharply. This graph shows the percent of loans delinquent by days past due. Loans 30 days delinquent increased to 3.22% from 3.19% in Q3.  Delinquent loans in the 60 day bucket decreased to 1.25% from 1.30% in Q4.  There was a decrease in the 90+ day delinquent bucket too. This decreased to 3.11% from 3.50% in Q3 2011. This is the lowest level since 2008, but still way above normal (probably around 1% would be normal). The percent of loans in the foreclosure process declined slightly to 4.38% from 4.43%. The second graph is for all prime loans. Since there are far more prime loans than any other category (see table above), about half the loans seriously delinquent now are prime loans - even though the overall delinquency rate is lower than other loan types. This graph is for subprime. Not all PLS was subprime, but the worst of the worst loans were packaged in PLS. Although the delinquency rate is still very high, the number of subprime loans has declined sharply. This graph is for FHA loans. The delinquency rate increased in Q4. The last graph is for VA loans. This is a fairly small category (see table above). There are still quite a few subprime loans that are in distress, but the real keys are prime loans and FHA loans.

Home Depot on Housing - There were some interesting comments from the Home Depot CEO today (transcript with via Seeking Alpha). Home Dept CEO Francis Blake talked about the favorable weather, but he thought there was more: There are some interesting challenges in setting expectations for 2012. First, the macro data on housing suggest uncertainty. ... The Fed has noted that housing remains a drag on economic recovery with factors such as delayed household formation and credit supply, contributing to a continued imbalance between housing supply and demand. The Fed has suggested the policy actions will be needed to fix this, but it wouldn't appear that any major policy changes are likely in the near-term. Second, despite this, the performance of our business particularly in the back half of 2011, would suggest the strengthening market. This quarter's comps were achieved against a very strong fourth quarter comp in 2010 and exceeded our internal forecast. But we're mindful that this past December and January were the fourth warmest on record, with much of the nice weather occurring across the heavily populated eastern U.S. Better weather translates into improved sales for exterior categories like building materials and also translates into increased customer transactions, which lift the entire business.

Home resales at 1-1/2 year-high, supply falls - (Reuters) - Home resales rose to a 1-1/2-year high in January, pushing the supply of properties on the market to the lowest level in almost seven years in a hopeful sign for the housing sector. The National Association of Realtors said on Wednesday existing home sales increased 4.3 percent to an annual rate of 4.57 million units last month, the fastest pace since May 2010. It was the latest indication the housing market may be coming off the floor. While economists attributed some of the rise to unseasonably warm winter weather, they also said it signaled genuine improvement. Sales were up across all four regions of the country, with the West recording the biggest gain -- an 8.8 percent increase. "At least some of the improvement in the last few months could have reflected milder winter weather, but for the most part, it seems that the housing sector may have turned the corner,"The tenor of the report was weakened somewhat by a sharp downward revision to December's sales data to show only a 4.38 million unit sales rate rather than the previously reported 4.61 million unit pace.

Housing Takes Another Step Out of The Cellar - Wednesday brought further evidence that housing has climbed out of the sub-basement. But it’s a long way from heading up the stairs to expansion. Existing home sales increased 4.3% to an annual rate of 4.57 million in January. But the gain came only because the National Association of Realtors sharply lowered December sales to 4.38 million. If December sales had stayed at their original 4.61 million, January sales would have been down slightly. Even so, the home sales report joins other data that point to a stabilization in housing. The most positive sign was the reduction in excess supply of homes for sale. According to the Realtors, 2.31 million homes were on the market at the end of January, the lowest number since March 2005. At the current sales pace, that represents a 6.1 months’ supply of inventory, a healthy rate and half the months’ supply seen during housing’s worst days. It is too soon to declare victory over the excesses in the real estate market, however. That’s because millions of homes–owned by distressed owners or by banks–are just waiting to be put on sale.

Existing Home Sales in January: 4.57 million SAAR, 6.1 months of supply - The NAR reports: Existing-Home Sales Rise Again in January, Inventory Down Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 4.3 percent to a seasonally adjusted annual rate of 4.57 million in January from a downwardly revised 4.38 million-unit pace in December and are 0.7 percent above a spike to 4.54 million in January 2011. ...Total housing inventory at the end of January fell 0.4 percent to 2.31 million existing homes available for sale, which represents a 6.1-month supply at the current sales pace, down from a 6.4-month supply in December. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in January 2012 (4.57 million SAAR) were 4.3% higher than last month, and were 0.7% above the January 2011 rate. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 2.31 million in January from 2.32 million in December. This is the lowest level of inventory since March 2005. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Existing Home Sales: Inventory and NSA Sales Graph - First a comment from Merrill Lynch:  One of the most encouraging aspects of the report was the continued drop in inventory. The number of homes on the market for sale fell further in January after plunging 11.5% in December.  However, we expect this to be a temporary cyclical low. Part of the drop in inventory reflects delays in the foreclosure process which has slowed the flow of distressed properties into the market. We expect supply to edge back to 8 months this year. The NAR reported inventory fell to 2.31 million in January. This is down 20.6% from January 2011, and this is about 8% above the inventory level in January 2005 (mid-2005 was when inventory started increasing sharply). This decline in inventory was a significant story in 2011. The following graph shows inventory by month since 2004. In 2005 (dark blue columns), inventory kept rising all year - and that was a clear sign that the housing bubble was ending. This year (dark red for January) inventory is at the lowest level for a January since 2005. The following graph shows existing home sales Not Seasonally Adjusted (NSA). Sales NSA (red column) are slightly above the sales for the last four years (2008 through 2011), but well below the bubble years of 2005 and 2006. The level of sales is still elevated due to investor buying. The NAR noted:  All-cash sales were unchanged at 31 percent in January; they were 32 percent in January 2011. Investors account for the bulk of cash transactions.

Comments on Existing Home Inventory - Analysts are trying to explain the recent sharp decline in existing home inventory and trying to estimate the impact of less inventory on house prices. As an example, Goldman Sachs economist Zach Pandl wrote yesterday:  Inventory of existing homes on the market declined by 21% in the year to January, or by 600,000 units. The “months supply” of existing homes—homes for sale divided by the current sales pace—fell to 6.1 in January, the lowest level since April 2006. Although we consider these declines a modest positive for the housing market outlook, we also think they exaggerate the improvement in excess supply. ...Active listings—which are what the existing home sales report measures—decline if a house is sold, but also if a current homeowner pulls their home off the market. They can also be held down by prospective home sellers who decide not to sell due to weak demand conditions. Here is a graph showing the months-of-supply and the year-over-year decline in inventory. The two factors that Pandl identifies - homeowners pulling their homes off the market and prospective sellers not listing - can be grouped as 1) sellers waiting for a better market.  2) There is a seasonal pattern for inventory, and usually December and January have the lowest inventory levels for the year. 3) The NAR reports active listing, and there a large number of "contingent short sales". This is another key point. The NAR reports active listings, although there is some variability across the country in what is considered active, most "contingent short sales" are not included.

Home prices fall, but inventory levels improve - The national inventory of single-family homes, condos and townhomes declined 23.2% in January from a year earlier, as more markets benefited from an influx of investors and buyers looking for deals, said. Of the 146 markets tracked by the website of the National Association of Realtors, 145 saw declining inventory levels. Still, the nation is in a stall when it comes to a recovery in home prices. said the national median list price in n January fell to $185,500 from $188,000 in December and $189,248 last year. believes January statistics show the housing market in a period of stabilization. States like Florida, which was battered by the housing bust and foreclosure crisis, noted significant drops in for-sale inventory levels. Three Florida metropolitan areas — Fort Lauderdale, Orlando and Tampa-St. Petersburg-Clearwater — saw for-sale inventory levels drop more than 42% in January. Springfield, Il., was the only market to see a year-over-year increase in for-sale inventory. However, New York, Philadelphia, Hartford, Conn., Syracuse, N.Y., and El Paso, Texas, only saw minor drops in inventory levels, suggesting the markets are still dealing with inventory overhang.

Lawler: Declining Inventory of Existing Homes for Sale: Don’t Forget Conversion to Rentals - Yesterday I posted some thoughts on the sharp decline in listed inventory. Here are some additional comments from housing economist Tom Lawler: While there has been a lot of discussion among analysts on the reasons behind the “stunning” plunge in existing SF homes listed for sale over the past several years, few have mentioned what appears to have been a substantial increase in the number of SF homes purchased by investors with the explicit intention to rent the homes out for several years. One reason, of course, is that there are not good, reliable, and timely statistics on the number of SF homes rented out, much less any data at all on the intended holding-period of folks renting out SF homes. There are, of course, lots of anecdotal stories about a surge in the number of investors (including LLCs, hedge funds, etc.) buying SF properties, especially REO properties, because of attractive rental yields; there are some data from local MLS on leasing activity showing a surge in the past several years; and there are certainly surveys pointing not just to an increase in investor buying of homes, but a rise in the cash share of investors purchases over the past several years. But there is a dearth of actual data. Data from the ACS does suggest that the share of occupied SF detached homes that were occupied by renters increased rather dramatically in the latter part of last decade, The below table is based on decennial Census data for 2000, and the 5-year, 3-year, and 1-year estimates from the ACS for 2006-10, 2008-10, and 2010.

U.S. House Prices Fell 0.1 Percent in Fourth Quarter 2011 - U.S. house prices fell modestly in the fourth quarter of 2011 according to the Federal Housing Finance Agency’s (FHFA) seasonally adjusted purchase-only house price index (HPI). The HPI, calculated using home sales price information from Fannie Mae and Freddie Mac-acquired mortgages, was 0.1 percent lower on a seasonally adjusted basis in the fourth quarter than in the third quarter. ... Over the past year, seasonally adjusted prices fell 2.4 percent from the fourth quarter of 2010 to the fourth quarter of 2011. ...FHFA’s expanded-data house price index, a metric introduced in August that adds transactions information from county recorder offices and the Federal Housing Administration to the HPI data sample, fell 0.8 percent over the latest quarter. ...While the national, purchase-only house price index fell 2.4 percent from the fourth quarter of 2010 to the fourth quarter of 2011, prices of other goods and services rose 4.0 percent over the same period. Accordingly, the inflation-adjusted price of homes fell approximately 6.2 percent over the latest year.

FNC House Prices, Zillow's forecast for Case-Shiller - Note: The Case-Shiller House Price index for December will be released Tuesday, Feb 28th. CoreLogic has already reported that prices declined 1.4% in December (NSA, including foreclosures). It appears that the Case-Shiller indexes (both SA and NSA) were at new post-bubble lows in December.  Today from FNC: December Residential Property Values Decline 0.7%  Based on the latest data on non-distressed home sales (existing and new homes) through December, FNC’s national RPI shows that single-family home prices fell in December to a seasonally unadjusted rate of 0.7%. ... As a gauge of underlying home value, the RPI excludes sales of foreclosed homes, which are frequently sold with large price discounts reflecting poor property conditions. All three RPI composites (the National, 30-MSA, and 10-MSA indices) show month-to-month declines in December, ranging from -0.7% at the national level to -1.1% in the nation’s top 10 housing markets. The FNC index tables for four composite indexes and 30 cities are here. Zillow Forecast: Zillow Forecast: December Case-Shiller Composite-20 Expected to Show 4.0% Decline from One Year Ago Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) will decline by 4.0 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will decline by 3.9 percent.

The current housing bust is much worse than the Great Depression  - Great chart from the recently released Economic Report of the President. We suspect the Great Depression housing bust didn’t have the government props to soften the blow as we do today, which, therefore, on a relative basis, makes the current bust much worse. The prior conditions to the current bust must have been much worse than those before the Great Depression. If not for the decisive action of Paulson, Bernanke, Geithner and Co. we all may have become farmers living under the freeway. Can’t prove counterfactuals, but that is what we believe. So give them an A+ for stabilization. Structural adjustment and long-term reform is an entirely different story, however. We heard Meredith Whitney say this morning that 95 percent of current mortgages are backed, effectively, by the taxpayer, …95-plus percent of mortgages today are being backed by Fannie and Freddie. Fannie and Freddie are effectively subsidizing unprofitable mortgages that the banks wouldn’t put on their balance sheet. That’s not sustainable and ultimately the taxpayer is paying the bill for it. The banks used to price profitable loans and you know, they’re a myriad of loan products that they’re still not pricing for profits. Basic microeconomics tells us that government repression of prices creates supply shortages. Think back to the rent control supply and demand graphs in Econ 101, which we have modified in the chart below.

New Home Sales in January at 321,000 Annual Rate - The Census Bureau reports New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 321 thousand. This was down from a revised 324 thousand in December (revised up from 307 thousand). The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Sales of new single-family houses in January 2011 were at a seasonally adjusted annual rate of 321,000. This is below the revised December rate of 324,000 and is 3.5 percent above the January 2011 estimate of 310,000. The second graph shows New Home Months of Supply. Months of supply decreased to 5.6 in January. This is the lowest level since January 2006. The seasonally adjusted estimate of new houses for sale at the end of January was 151,000. This represents a supply of 5.6 months at the current sales rate. Starting in 1973 the Census Bureau broke inventory down into three categories: Not Started, Under Construction, and Completed. This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale was at 57,000 units in January. The combined total of completed and under construction is at the lowest level since this series started. The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In January 2012 (red column), 22 thousand new homes were sold (NSA). This was the second weakest January since this data has been tracked. The record low for January was 21 thousand set in 2011. The high for January was 92 thousand in 2005.

New Home Sales: 2011 Still the Worst Year, "Distressing Gap" remains very wide - Even with the upward revisions to new home sales in October, November and December, 2011 was the worst year for new home sales since the Census Bureau started tracking sales in 1963. The three worst years were 2011, 2010, and 2009 with sales of 304, 323 and 375 thousand respectively.  Sales will probably increase in 2012, and sales will also probably be higher than the 323 thousand in 2010. But I expect this year will still be the third worst on record.  The following graph shows the recent minor increase off the bottom for new home sales:Not much of an increase. Last month I posted a few housing forecasts for 2012. The forecasts for new home sales ranged from 330 thousand to 365 thousand (excluding Moody's) - and that wouldn't be much of an increase from the current level. The second graph shows existing home sales (left axis) and new home sales (right axis) through January. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders can't compete with the low prices of all the foreclosed properties.

Why Renters Rule U.S. Housing Market (Part 1): The collapse in housing and the 33 percent plunge in house prices since 2006 are favoring renting over homeownership. This trend will dominate the housing market for the next four or five years, and put additional pressure on a weak economy. Policy makers in Washington continue to have a soft spot for homeownership. Many recent government actions can be viewed as attempts to keep people in their homes, even owners who clearly can’t afford them. In addition to specific plans such as the Home Affordable Modification Program, or HAMP, and the Home Affordable Refinance Program, or HARP, the Obama administration is trying to revive the moribund housing sector by encouraging mortgage lenders and servicers to refinance loans at lower rates. This reduces interest income for banks, which are now compelled by the Dodd-Frank law to retain 5 percent of the credit risk on lower-quality residential mortgages that are securitized and sold to others. Furthermore, banks are reluctant to refinance loans that Fannie Mae and Freddie Mac then guarantee and put back to the lenders if they find any defects. Four banks now control more than 60 percent of the mortgage market, and many mortgage servicers have reduced staff or been slow to gear up to handle delinquent mortgages and refinancings. Except for those who qualify for HARP, refinancing is highly unlikely for 8 million owners who are underwater -- owing more than the value of their homes -- because new terms are treated as new loans.

America’s Poorest People Running Out Of Places To Live: Study - In every state in the country, there are people looking for cheap rental housing -- and in every state, there aren't enough units available, according to a report released Wednesday by the National Low Income Housing Coalition, a nonprofit organization. "The existence of the gap is not a matter of debate," the report notes. The findings highlight the increasingly desperate situation of people who work but don't earn much, and who are finding themselves priced out of the rental market as more and more Americans look for alternatives to traditional homeownership.  For every 100 households that earn less than one-third of the median income for their region, according to the report, there are only 30 affordable and available rental units -- meaning, places to live that aren't dilapidated, prohibitively expensive, too far from public transportation, or already occupied by someone earning a higher salary.

Economists Argue Government Should Boost House Rental Stock - Government officials should help boost the nation’s stock of rental housing to heal the housing market and mend the economy, and to prevent the Federal Reserve from facing a persistent and unwanted source of inflation pressure. The best way to accomplish that would be to help investors buy properties to convert them into rental stock, a group of top economists argue in a paper presented Friday at a conference held by the University of Chicago Booth School of Business. The paper was written by J.P. Morgan Chase‘s Michael Feroli, Bank of America Merrill‘s Ethan Harris, Amir Sufi of the University of Chicago and Kenneth West of the University of Wisconsin. “A successful own-to-rent policy,” the paper said, could “speed the efficient reallocation of resources, ease pressure on home prices and speed the turn in the housing market,” the economists wrote. “An added benefit” for the Fed is that by taking the pressure off housing related components in consumer level price data, “it would help contain inflation.” As they see it, assisting investors to buy the unoccupied and distressed supply of housing is a win for all concerned. They recommend the government offer “bulk” financing to investors, and support a relaxation of lending restrictions currently put in place by Fannie Mae and Freddie Mac.

Middle Class Getting Pushed Out of Banking - Excessive regulation of financial institutions is squeezing out middle-class consumers who soon will find themselves locked out of the banking system, analyst Meredith Whitney said Wednesday. That trend already is beginning to manifest itself in terms of who is driving most consumer spending, Whitney, the president and founder of Meredith Whitney Advisory Group, said in a CNBC interview. “It’s somewhat of a false indicator looking at consumer spending and saying all consumers are doing so much better,” she said. “You haven’t had substantive wage growth and you see the contraction in available credit for mainstream America take a toll.”Whitney said such figures can be misleading in that the spending is being driven mostly by shoppers at opposite ends of the spectrum. The ones in the middle, she said, are finding it harder to be active consumers.

One in four Americans have more debt than savings -Many U.S. consumers are so deep in a financial hole that even as the economy begins to turn around they can’t quite dig themselves out. A survey by released Tuesday found that 25 percent of Americans have more credit card debt than they have in emergency savings, and that spells trouble if an emergency situation actually hits. Consumers are doing better when it comes to living within their means, said Greg McBride,’s senior financial analyst. But, he added, years of stagnant wage growth, high unemployment, declining home values and escalating household expenses have strained wallets. “Even though there’s been progress things are still out of whack,” he said. And the economic pictures may get even gloomier for consumers if gas prices continue to escalate, he pointed out. Last year, he said, “60 percent of Americans said they cut back on discretionary spending because of gasoline prices.”

Gasoline Prices: $4.50 per gallon by Memorial Day? - From the Mercury News: Gas prices surging beyond $4 a gallon -- and they will go higher The statewide average of $3.96 on Friday is 25 cents higher than just a month ago and 46 cents more than this time last year. ... Some oil analysts predict $4.50 a gallon or more by Memorial Day on the West Coast and major cities across the United States such as Chicago, New York and Atlanta. High gasoline prices is one reason American are driving less. Brad Plumer at the WaPo discusses a few other reasons: Driving, gas prices and the end of retail Americans have cut way back on driving in recent years. Total vehicle-miles traveled has stagnated since 2007. One big question is whether this is a temporary blip due to the downturn — unemployed people, after all, don’t commute — or evidence of a long-term structural shift. Theories for a structural shift generally involve demographics: America’s swelling ranks of retirees don’t drive as much, while kids these days prefer Facebook to motoring around with friends. But there’s another possible factor: the torrid growth of online shopping. Phil Izzo has the numbers, which are striking. And below is a graph of gasoline prices. Gasoline prices bottomed in December and have been moving up again. Note: The graph below shows oil prices for WTI; gasoline prices in most of the U.S. are impacted more by Brent prices.

Weekly Gasoline Update: Up 36 Cents in Nine Weeks - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump, both regular and premium, increased 7 cents over the past week, continuing their steady increase since mid-December. Both are up 36 cents from the interim low in the December 19th EIA report. WTIC closed today at 106.25. It is 6.7% off its 2011 interim high, which dates from early May 2011. As I write this, shows three states, Hawaii, Alaska and California, with the average price of gasoline above $4.  The next chart is an overlay of WTIC, Brent Crude and unleaded gasoline (GASO). During much of last year there was a disconnect between WTIC and Brent Crude, but over the last quarter that spread has shrunk considerably. The price volatility in crude oil and gasoline have been clearly reflected in recent years in both the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE). For additional perspective on how energy prices are factored into the CPI, see What Inflation Means to You: Inside the Consumer Price Index.

Market Deja Vu? The Price of Gasoline Begins To Surge Out Of Control Again - Does it cost you hundreds of dollars just to get to work each month? If it does, you are certainly not alone. There are millions of other Americans in the exact same boat. In recent years, the price of gas in the United States has gotten so outrageous that it has played a major factor in where millions of American families have decided to live and in what kind of vehicles they have decided to purchase. Many Americans that have very long commutes to work end up spending thousands of dollars on gas a year. So when the price of gas starts going up to record levels, people like that really start to feel it. But the price of gas doesn’t just affect those that drive a lot. The truth is that the price of gas impacts each and every one of us. Almost everything that we buy has to be transported, and when the price of gasoline goes up the cost of shipping goods also rises. The U.S. economy has been structured around cheap oil. It was assumed that we would always be able to transport massive quantities of goods over vast distances very inexpensively. Once that paradigm totally breaks down, we are going to be in a huge amount of trouble. For the moment, the big concern is the stress that higher gas prices are going to put on the budgets of ordinary American families. Unfortunately, almost everyone agrees that in the short-term the price of gas is going to go even higher.

Once again, speculators behind sharply rising oil and gasoline prices - U.S. demand for oil and refined products — including gasoline — is down sharply from last year, so much that United States has actually become a net exporter of gasoline, unable to consume all that it makes. Yet oil and gasoline prices are surging. On Tuesday, oil rose past $106 a barrel and gasoline averaged $3.57 a gallon — thanks again in no small part to rampant financial speculation on top of fears of supply disruptions. The ostensible reason for the climb of crude prices on the New York Mercantile Exchange, where contracts for future delivery of oil are traded, is growing fear of a military confrontation with Iran in the Persian Gulf's Strait of Hormuz, through which 20 percent of the world's oil passes. Other factors driving up prices include last month's bankruptcy of Petroplus, a big European refiner, and a recent BP refinery fire in Washington state that's temporarily crimped gasoline supply along the West Coast; gas now costs an average of $4.04 a gallon in California.

Will Rising Gasoline Prices Derail The Economic Recovery? - Gasoline prices are on the march once again, reaching an average price of $3.52 a gallon in the U.S. for the week of February 13, according to the Energy Information Administration. Prices have been advancing steadily since mid-December and are now at the highest level since last September. Some analysts predict that we'll see $4-a-gallon soon as a national average. If so, will the rally in fuel costs threaten the economic recovery?  “We’re always over-sensitive to the price of gasoline,” economist Chris Kuehl tells the Kansas City Star. “It just provokes consumers into total depression if the price goes up. … It’s just psychological.” The last time gasoline prices approached the $4-a-gallon range—last April and May— the economy's momentum slowed and recession risk started climbing. Are we headed for a repeat scenario? In search of clues, let's consider how consumer spending stacks up after subtracting purchases of gasoline. The bulk of U.S. GDP is based on consumption and so there may be warning signs for the macro outlook in the trend for retail sales ex-gasoline purchases.

‘Why This Time Could Be Different’ With High Gasoline Prices - Soaring oil prices in the spring of 2008 sent gasoline prices surging and accelerated the recession. Now, rising gas prices are threatening the recovery. But lower natural gas and utility costs this time around might limit some of the damage, says Deutsche Bank chief U.S. economist Joseph LaVorgna. In a note to clients Tuesday, titled “Why this time could be different,” LaVorgna reminds us of his rule of thumb (which he shared with us before and during the 2008 crisis) for measuring the effect of run-ups at the pump: a one-cent increase in gasoline prices increases household energy consumption by about $1.4 billion. With the 29-cent jump in gas prices over the past two months, that would translate into about $40.6 billion in higher household energy costs. Today, he says the economy can handle the higher oil prices “provided that they do not increase substantially further and remain at elevated levels on a longer-term basis.” One key reason: Lower natural gas prices, and lower utility consumption (including electricity) due to a warm winter, are offsetting much of the higher oil costs. LaVorgna puts the benefit from both at about $16 billion, or almost half of the recent run-up in gasoline prices (assuming gasoline prices hold near their current levels). He still puts the gasoline “breaking point” at $4 per gallon.

THIS Is The Reason You Shouldn't Worry About Higher Gas Prices: Great point here from Barclays' Peter Newland on the topic du jour: What matters is not rising gas prices; what matters is the speed at which gas prices are rising. As we showed in a simulation study last year, the effect on growth of a rise in energy prices depends importantly on the abruptness of the increase. We found that, given a gradual and temporary rise, consumers are able to adjust saving patterns to smooth consumption, minimising the impact. However, a sharp and sustained spike has a more significant effect on consumer behaviour. The surge in early 2011 came against the backdrop of the onset of troubles in Tunisia, Egypt and Libya. As yet, no comparable trigger has emerged in 2012, although geopolitical risk is ever present. Based on current futures pricing, the retail gasoline price looks set to rise to a similar high point just below $4 per gallon this year, most likely in Q2. However, the rate of energy price inflation that this implies is significantly less than in the same period last year, given the higher starting point and less rapid ascent. Indeed, current futures pricing would be consistent with around a 10% q/q (saar) increase in the gasoline component of the CPI in Q1, and a broadly sideways move in Q2. By comparison, gasoline inflation was close to 50% in Q1 2011 and prices rose a further 31% in Q2.

Rising Gas Prices Give G.O.P. Issue to Attack Obama - Rising gasoline prices, trumpeted in foot-tall numbers on street corners across the country, are causing concern among advisers to President Obama that a budding sense of economic optimism could be undermined just as he heads into the general election. White House officials are preparing for Republicans to use consumer angst about the cost of oil and gas to condemn his energy programs and buttress their argument that his economic policies are not working.  In a closed-door meeting last week, Speaker John A. Boehner instructed fellow Republicans to embrace the gas-pump anger they find among their constituents when they return to their districts for the Presidents’ Day recess. “This debate is a debate we want to have,” Mr. Boehner told his conference on Wednesday, according to a Republican aide who was present. “It was reported this week that we’ll soon see $4-a-gallon gas prices. Maybe higher. Certainly, this summer will see the highest gas prices in years. Your constituents saw those reports, and they’ll be talking about it.”

The GOP’s disconnect on gas prices - While Ed deserves credit for flagging rising gas prices as an emerging Republican advantage, the GOP’s prosecution of it has a depressing familiarity: Drill, baby drill. Those who don’t remember history are doomed to repeat it, I guess. Gas prices are driven by: 1.) geo-political forces, exaggerated by an active futures market. Day-to-day supply and demand are secondary to speculation about what might happen to supply given the latest in Iran, Venezuela or Mexico; 2.) a falling U.S. dollar; and 3.) the market’s conclusion that “peak oil” has arrived with the coming on line of India’s and China’s automobile ownership.  To further demonstrate the disconnect between traditional laws of supply and demand when it comes to gas prices, consumption in the United States is down and production is at a six-year high.  As in many areas of the world’s economy, the United States can no longer impose its will on energy prices. Indeed, in this area, one would have thought we would have learned a lesson more than a generation ago when OPEC brought us to our knees. But it seems not.

Gasbag: Why No President Can Bring Us $2 Gasoline - Good news or bad news, foreign or domestic, the President gets the credit — and he gets the blame, whether he actually deserves either. That goes for one of the most importantly economic indicators — psychologically at least — that’s out there: gas prices. A gallon of gas now costs an average of $3.53, already up 25¢ from the beginning of the year, and the highest price it’s even been at this time of the year. (Gas prices are usually lower in the winter, when the cold weather and lack of holidays curtails some driving.) With the U.S. economy strengthening — driving up demand for gasoline, and price as well — and the situation in Iran and the rest of the oil-producing Middle East looking uncertain, analysts believes gas could be well over $4 a gallon by the prime driving months of the summer.  But does a President really have that much control over how much it costs for you to fill your car? The short answer is: not really. One way to understand that is to look at how gas prices have fared under President Obama. When he entered office in January 2009, gas cost $1.81 a gallon. Now it’s nearly $2 a gallon higher, an increase of 95%. That sounds bad, but the main reason gas had become so cheap at the start of the Obama Administration was that he was took office during the heart of the worst global recession since the Great Depression.

Dem leader Pelosi blames Wall Street for spike in gas prices - Oil speculators, not a lack of domestic drilling, are to blame for the nation's rising gas prices, the top House Democrat argued Wednesday. House Minority Leader Nancy Pelosi said unscrupulous Wall Street investors have artificially inflated prices at the pump, which are climbing toward $4 per gallon. The California Democrat called on Congress to take "strong action" to rein in the allegedly excessive speculation, and accused Republicans of protecting Wall Street profits at the expense of consumers. "Wall Street profiteering, not oil shortages, is the cause of the price spike," Pelosi said in a statement. "Unfortunately, Republicans have chosen to protect the interests of Wall Street speculators and oil companies instead of the interests of working Americans by obstructing the agencies with the responsibility of enforcing consumer protection laws."

Obama to Talk About Gasoline Prices on Thursday - During an event at the University of Miami, Mr. Obama will discuss the steps the country can take to tackle what the White House sees as an annual cycle of spikes in gas prices, the officials said. At the same time, these officials, who briefed reporters Tuesday on the president’s plans, acknowledged that there is almost nothing the president can do in the near term to lower gas prices.But rising gas prices are a threat to the president as he runs for re-election this year. It’s one of the issues of chief concern to Mr. Obama’s political advisers and has become the subject of criticism of Mr. Obama on the campaign trail. Mr. Obama’s speech Thursday will call for a diverse energy plan and lay out his efforts to boost domestic production of oil and gas. His defense comes as Republican presidential candidates blame him for the rise in gasoline prices and cast him as unfriendly to domestic oil production, particularly his administration’s decision to postpone the construction of the Keystone pipeline. The administration officials pushed back against the GOP criticism, arguing that Americans don’t trust Republicans on energy issues because their plans focus narrowly on production, which has been rising.

THE TRUTH ABOUT GAS: Here's How Much Of Your Life Every Year Just Goes To Filling Your Tank: As long as everyone is talking about gasoline prices, here's another way to think about it: How long does the average American worker have to work in order to buy one gallon of regular gas? We'll answer that in two steps. First, here's a chart of average hourly earnings divided by the price of an average gallon of gasoline. The number of gallons of gas you can get from an hour of work. So right off the bat you see how workers have fallen behind on this measure since the late 90s. In the late 90s, an hour of work bought you 14 gallons of gas. Today, an hour of work gets you 6 gallons of gas. Now to take it another step further, and see how long it takes to buy one gallon of gas, you just have to divide this number into 60. So in the late 90s, you could earn one gallon of gas in just over 4 minutes. Today you have to work for 10 minutes to buy a gallon of gas. Now we'll just take it another step further. Assuming a gas tank requires 20 gallons to be full, we can just multiply by this by 20, and see that it will take the average worker over 3 hours now to fill up a tank of gas. Back in the day, it took just 80 minutes. And here's one last chart. Assuming you have to fill up your car 50 times per year, then it means you spend about 170 hours every year just to fill up your car.

Gasoline prices and taxes by state - (interactive) Gas prices keep rising nationwide. But how much you actually pay is affected by your income and local economy. Mississippi residents spend a whopping 11.8% of their income on gas. Gas prices reflect the average price in each state and are updated daily from data gathered by the AAA Fuel Gauge Report.

In Nod to Rising Gas Prices, Obama Discusses Energy Policy… President Obama, confronted by the political perils of surging gas prices in an election year, on Thursday defended his efforts to wean the United States off imported oil, even as he conceded there was little he could do in the short run to ease the pain at the pump. The president offered what he called an “all-of-the-above” response, based on more domestic oil production, development of alternative energy sources and stricter fuel-efficiency standards. Drawing a sharp contrast with Republicans and anticipating potential attacks on the campaign trail, Mr. Obama ridiculed his opponents for recycling a “three-point plan for $2 gas.” “Step one is to drill, and step two is to drill, and then step three is to keep drilling,” he said. The president said that the United States is producing more oil now than at any time during the last eight years, with a record number of rigs pumping. The White House, he said, was prepared to open new areas in the Arctic Ocean and the Gulf of Mexico to exploration. But Mr. Obama warned that no amount of domestic production could offset the broader forces driving up gas prices, chief among them Middle East instability and the ravenous energy appetite of China, which he said added 10 million cars in 2010.

Obama: Opponents are ‘Rooting for Bad News’ on Gas Prices - President Obama said Thursday that there are no “quick fixes” for rising gasoline prices that are threatening the economic recovery and providing fodder for attacks from his political rivals. Gas prices have risen 29 cents per gallon since December, with regular-grade gas now averaging $3.64 a gallon in the Washington region at a time of year when consumers usually enjoy a respite from price hikes. The high cost at the pump could turn into an election-year mess for the president, whose approval ratings have surged recently as the economy improved. Republicans, sensing an opportunity, have blamed Obama for not giving oil companies greater freedom to drill for new U.S. supplies that might ease prices.

Improving US Oil Efficiency not due to Financialization - Yesterday I posted a graph of US oil efficiency over time, and suggested the results were mildly encouraging: Americans do seem to be slowly getting the message. With sustained high prices, when there is at least modest economic growth, people focus on making their operations use oil more efficiently, and the results are showing up in the national statistics. However, several commenters argued that the results were an artifact of increasing "financialization" of the US economy.  Presumably the idea is that financial services involves a lot of creation of measured value but little oil consumption.  This idea is not well supported by the data.  The graph above shows yesterday's data for oil efficiency on the right axis along with the fraction of GDP due to financial services and insurance (right axis - data from BEA).  While it is true that financial servies has grown from a little under 3% of the economy to 6% by the year 2000, this is nowhere near enough to account for the more than doubling of the oil efficiency of the entire economy over the same period - clearly the other 95% or so of the economy must have got a lot more oil efficient also.

Time to Tap the Strategic Oil Reserves? - Americans are rightly concerned about rising oil and gasoline prices. On February 21 oil closed at $106 per barrel, while the average gallon of gas in the United States cost $3.59. Bloomberg reports that prices could continue to rise:While gas prices tend to rise through the first half of the year, this is the earliest the average price per gallon has breached the $3.50 mark. If this pace continues, the national average should hit $4 a gallon by May, if not sooner. This is not good news for consumers or for the economy. High oil and gasoline prices slow economic growth and take a real toll on families’ already-strained budgets. They are difficult to lower in the short run because it is very hard to promptly increase oil supplies. Meanwhile, demand for gasoline does not decrease even as prices increase because most people cannot quickly and significantly reduce the amount they drive. There is one proven tool for temporary reductions in oil and gasoline prices that can forestall reduced economic growth and help middle-class families: selling oil reserves from the Strategic Petroleum Reserve.

Oil Prices and the Economy - Once again we have to consider the impact of high oil prices on the US economy. Bloomberg reports brent crude futures are up to $125.47 per barrel, and WTI is up to $109.77.   In earlier research, Dr. Hamilton showed that prices had to rise above previous prices to be a significant drag on the economy. Last August he wrote: Economic consequences of recent oil price changes In my 2003 study, I found the evidence favored a specification with a longer memory, looking at where oil prices had been not just over the last year but instead over the last 3 years. My reading of developments during 2011 has been that, because of the very high gasoline prices we saw in 2008, U.S. car-buying habits never went back to the earlier patterns, and we did not see the same shock to U.S. automakers as accompanied some of the other, more disruptive oil shocks. My view has been that, in the absence of those early manifestations, we might not expect to see the later multiplier effects that account for the average historical response summarized in the figure above. So far gasoline prices aren't above the 2011 peak levels, although they are getting close. Another post from Hamilton two days ago: Crude oil and gasoline prices. Just something to think about ... The graph below shows oil prices for WTI; gasoline prices in most of the U.S. are impacted more by Brent prices.

Gas Prices Annoy Consumers but Don't Dim Outlook Yet -  Rising gas prices are fueling consumer anger and election-year politics, but so far they have done little to damp optimism about the U.S. economic outlook.  Prices at the pump have risen in recent weeks as tensions with Iran have sparked fears of a supply disruption, driving up the cost of crude oil. Prices of crude hit a nearly 10-month high on Friday, rising $1.94 a barrel to close at $109.77 on the New York Mercantile Exchange, their highest level since early May. Nationally, the average price of a gallon of regular gasoline hit $3.647 on Friday, according to the auto club AAA, up nearly 27 cents from a month earlier and up 11.8 cents in the past week. "Consumers are not as concerned with the current level of gas prices as they were in past episodes,"

Crude oil and gasoline prices - Crude oil prices this week reached their highest level since last April. What will that mean for U.S. consumers at the gas pump? The first question to be clear on is which crude oil price we're talking about. Two of the popular benchmarks are West Texas Intermediate, traded in Oklahoma, and North Sea Brent. Historically these two prices were quite close, and it didn't matter which one you referenced. But due to a lack of adequate transportation infrastructure in the United States, the two prices have diverged significantly over the last year.  My rule of thumb has been that for every $1 increase in the price of a barrel of crude oil, U.S. consumers are likely to pay 2-1/2 more cents for a gallon of gasoline. The yellow line in the graph below plots the average U.S. retail price of regular gasoline in the U.S. over the last 4 years. The blue line is the gasoline price you'd predict if you applied my rule of thumb to the WTI price (assuming 80 cents/gallon for average tax and mark-up), while the fucshia line gives the prediction if you assume that the U.S. retail price is based on Brent. The three lines were quite close until Brent began to diverge from WTI at the beginning of last year. Since then, the U.S. retail price has tracked the world Brent price much more closely than it has WTI.

Recent Acceleration of US Oil Efficiency - The above picture shows the amount of gross domestic product produced by the US economy per barrel of oil consumed on a quarterly basis from 1965 through the end of 2011.  The data are from the BEA and the EIA and are expressed in $2005. The graph tells an interesting story.  Prior to the late 1970s, the US economy used oil very inefficiently (because it had been very cheap for a long time).  After the oil shocks of 1973 and particularly 1979, oil efficiency began to rise rapidly in the early 1980s.  Then it slowed down after the price pressure was off, but continued to rise at a steady moderate pace from the late 1980s through the mid 2000s.  In the later stages of the 2005-2008 oil shock, it rose sharply, but then appeared to be set back by the great recession.  Then in 2010-2011 it has again been rising very sharply, presumably under the influence of fairly high prices. Overall, there has been a 150% improvement in this ratio since the lows of the mid 1970s. There has been almost a 25% improvement just since the beginning of 2005.

Has America Lost its Drive? Part 2 - I made a mistake in my original post.   Graph 4 in that post was based on the wrong data set.  As Roger Chittum pointed out in comments, that graph only covers a subset of total gasoline deliveries. This is the correct graph.  (Source.) The fall off in gasoline delivery is not as extreme as I indicated, but it is still real.  Here is a close-up view of data for the current century, from the same source. Seasonal changes are dramatic.  Peaks occur in July or August, valleys in January or February of most years.  May values, highlighted with blue dots, and September values, highlighted with yellow dots, are recurring secondary peaks and valleys, respectively.  July values are highlighted with red dots.  The years 2008 and 2010 are accented with contrasting blue line segments.Some of the standard explanations are changing demographics and retail habits. An aging population with more retirees might tend to drive less - though this is not my personal experience. Kids these days cruise on social media rather than pleasure drive through the streets of town as we did in my day. On-line shopping, though only about 5% of total retail, is growing rapidly. You can't gainsay any of these trends.  They are probably affecting the big picture.  But it would a stretch to say that they can account for less gasoline use in 2011, but not 2010 or 2009.  But it looks like something is happening, economically or culturally, to cause another downturn in travel - though not as dramatically as I suggested in the original post.

Is America Losing Its Drive? - Pt. 3 Vehicles per 1000 Persons - Roger Chittum got me thinking about the vehicle component of gasoline consumption. I'm going focus on the gross vehicle numbers, and not get too deeply into the car/truck/SUV product mix detail.   Data is from the Department of Energy TRANSPORTATION ENERGY DATA BOOK: EDITION 30—2011.   (Warning:  414 page pdf.) According to Table 3-5 on page 3-9, vehicle ownership, measured as vehicles (both cars and trucks) per 1000 population, peaked in 2007 at 843.57, and dropped by 1.88% to 828.04 in 2009, two years later.  Data presented in the source is from 1900 to 2009.  This graph shows the data from 1950 to 2009.  Recessions are highlighted in red. During the post WW II era up to 1982, recessions might have slowed the growth of vehicle ownership, but they did not cause a decline.  Even the severe recession of 1958 only caused a flat spot on the curve.This changed with the double dip recessions of 1980 to 1982. The reduction from 1981 to '82 is miniscule.  But since then, every recession has led to a significant reduction from the previous year.  As an aside, this is one more time series that shows a change in character right around 1980. This source indicates the most recent value for the U.S. is 765, though it's not clear what "most recent" means.  If this is accurate, then ownership has back-tracked to the 1994 level.   This would correspond to a 7.6% drop from 2009, and an astounding 9.3% drop from the 2007 peak.  I don't believe it; but that value is indicated with a red dot on the next graph, as a point of reference.

Driving, gas prices and the end of retail - Americans have cut way back on driving in recent years. Total vehicle-miles traveled has stagnated since 2007. One big question is whether this is a temporary blip due to the downturn — unemployed people, after all, don’t commute — or evidence of a long-term structural shift. Theories for a structural shift generally involve demographics: America’s swelling ranks of retirees don’t drive as much, while kids these days prefer Facebook to motoring around with friends. But there’s another possible factor: the torrid growth of online shopping. Phil Izzo has the numbers, which are striking. In the fourth quarter of 2011, e-commerce surged to 5.5 percent of all retail sales — and, if anything, that understates the trend, since brick-and-mortar stores include online sales in their own figures. When people order from their computers, of course, they save themselves a trip to the store. Analysts attribute the sharp rise in online shopping to the fact that more Americans are comfortable buying online, while smart phones and tablets have made it increasingly simple to shop. That seems plausible. But it’s also worth pondering whether high gas prices have played a supporting role here. It’s striking that, according to this graph, U.S. brick-and-mortar stores first began their steady decline in retail share right around the time that $3.50-per-gallon gasoline became the norm.

DOT: Vehicle Miles Driven increased 1.3% in December - Note: Vehicle miles have moved sideways for over four years. And gasoline consumption has declined slightly over the same period. For a discussion of the causes, see NDD's post at the Bonddad blog this morning: Why the decline in gasoline demand doesn't mean a recession -- yet. Among other points, NDD writes: "It appears that gasoline conservation is a top priority of consumers." and he provides a list (with data): Ridership of mass transit is up, online retail purchases have increased, automakers are selling more fuel efficient cars, teen driving is down, and more. The Department of Transportation (DOT) reported:

• Travel on all roads and streets changed by +1.3% (3.2 billion vehicle miles) for December 2011 as compared with December 2010.
• Cumulative Travel for 2011 changed by -1.2% (-35.7 billion vehicle miles).
The following graph shows the rolling 12 month total vehicle miles driven.  Even with a small year-over-year increase in December, the rolling 12 month total is mostly moving sideways. In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.  Currently miles driven has been below the previous peak for 49 months - and still counting!  The second graph shows the year-over-year change from the same month in the previous year.

Vehicle Miles Driven And the Ongoing Economic Contraction - The Depart of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through December. Travel on all roads and streets changed by 1.3% (3.2 billion vehicle miles) for December 2011 as compared with December 2010. However, the 12-month moving average shrank by 1.2%, the sixth consecutive month of moving-average decline (PDF report). Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1986.  The rolling 12-month miles driven contracted from its all-time high for 39 months during the stagflation of the late 1970s to early 1980s, a double-dip recession era. The current dip has lasted for 48 months and counting — a new record. Total Miles Driven, however, is one of those metrics that must be adjusted for population growth to provide the most revealing analysis, especially if we're trying to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. I use the Bureau of Labor Statistics' Civilian Noninstitutional Population Age 16 and Over (FRED series CNP16OV). The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971.

Study: Americans driving old cars longer than ever - Americans are keeping new and used vehicles longer because of better quality, concern about debt and economic uncertainty, according to a report released today by research firm R.L. Polk. Based on data collected in the third quarter of 2011, new vehicle owners kept them an average of 71.4 months, or nearly six years, the longest in the eight years Polk has done the survey, and nearly two years longer than the average life of ownership in 2003. The trend was similar for used cars and trucks, which consumers kept an average of 49.9 months, also a record, and up from 32.2 months in early 2003. Consumer spending remains conservative in a still-weak job market with relatively high unemployment rates. Many buyers have longer-term financing options to secure more affordable payments. In addition, vehicles produced in recent years have been more durable and reliable than their predecessors.

Steven Rattner Cross-Examines Romney - Steven Rattner, the lead adviser on the Obama administration’s auto task force in 2009, has an op-ed titled “Delusions About the Detroit Bailout” in today’s New York Times.   Some highlights: Mr. Romney evidently hasn’t felt a need to be consistent or specific as to what should have been done to address the collapse of the auto industry starting in late 2008. But the gist is that the government should have stayed on the sidelines and allowed the companies to go through what he calls “managed bankruptcies,” financed by private capital. That sounds like a wonderfully sensible approach — except that it’s utter fantasy. In late 2008 and early 2009, when G.M. and Chrysler had exhausted their liquidity, every scrap of private capital had fled to the sidelines. I know this because the administration’s auto task force, for which I was the lead adviser, spoke diligently to all conceivable providers of funds, and not one had the slightest interest in financing those companies on any terms. If Mr. Romney disagrees, he should come forward with specific names of willing investors in place of empty rhetoric. Rattner then addresses the claim that Obama improperly rigged the reorganization to favor the UAW: What he conveniently ignores is that the president’s plan was litigated throughout the federal court system — all the way to the Supreme Court, in the case of Chrysler — without so much as a nod to the opponents from a single judge.

Hillary Clinton is Now Secretary of Job Creation -  The State Department may become the nation's human resources department by adding job creation to its already bulging portfolio.  Secretary of State Hillary Clinton invited U.S. companies to call on Foggy Bottom experts for guidance on increasing their exports, safeguarding intellectual property abroad, and increasing foreign direct investment in the U.S. as part of a new administration effort to promote domestic jobs.  Speaking on Tuesday before more than 200 major U.S. executives operating in more than 120 countries, Clinton laid out the State Department’s plans through a concept Clinton coined “Jobs Diplomacy.” Under this approach, U.S. diplomats will take a more active role in looking out for U.S. business interests abroad, making a stronger effort to share their knowledge of foreign markets with U.S. multinationals. Although it’s unclear what the exact structure of the State Department-private sector relationship will be, the concept could potentially be a boon to the U.S. economy, said Ted Alden, a senior fellow at the Council on Foreign Relations.  “You’ve got in the embassies abroad what really amounts to market intelligence—people on the ground who are familiar with the business environments in the countries in which they are working and companies are looking to break into,” he said.

Tenth District Manufacturing Activity Increased Further in February - Kansas City Fed - The month-over-month composite index was 13 in February, up from 7 in January and -2 in December, and the highest since last June. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. Manufacturing activity increased in both durable and nondurable goods-producing plants, with notable strength in machinery, fabricated metals, and aircraft production. Other month-over-month indexes were mixed in February but remained solid. The production and order backlog indexes moved higher, and the employment index edged up from 9 to 11. In contrast, the shipments and new order indexes fell slightly, and the new orders for exports index dropped from 10 to -7. Both inventory indexes increased. ...Most indexes for future factory activity strengthened from the previous month. The future composite index climbed from 12 to 20, and the future production, shipments, and new orders indexes also rose. The future order backlog index jumped from 9 to 24, and the future employment index posted its highest level in a year.

Review & Outlook: Manufacturing Decline - Manufacturing is not the basket case of political lore, and America really is still "making things." There's another, subtler myth too—that this industrial decline is inevitable, by economic determinism or business mistakes. That's some of it, but the truth is that America would probably be making many more things if not for bad but deliberate political choices.  Industry employed one of three workers after the war. Today, it's one of eight. Yet this, too, is largely a measure of economic progress—because it is the result of productivity gains. Productivity is the basic measure of how much we can do with our resources, human and monetary, and increasing it is what drives wage gains and higher standards of living. Real manufacturing output stood at about $35,000 per worker in 1947, in constant dollars. It doubled by 1980 as companies became more efficient. Today this measure is an astonishing $150,000, Manufacturing productivity has increased by 103% since the late 1980s, outpacing every other industry and double the 53% in the larger business economy. This translates to gains for consumers: Prices for manufactured goods have declined 3% since the 1990s, even as overall prices rose 33%. One reason manufacturing is shrinking as a share of GDP is that its costs are falling—unlike, say, in health care, with its negative productivity rate in the official statistics.

Are Manufacturers Really Special? - The Obama administration is undertaking an athletic push to promote manufacturing employment in the United States: proposing giving manufacturers new tax breaks, closing loopholes that benefit companies that send manufacturing jobs offshore, expanding worker training programs and increasing trade enforcement, for instance. The administration underscored manufacturing’s first-among-equals status when announcing its proposed overhaul of the corporate tax code on Wednesday. “It’s a framework that lowers the corporate tax rate and broadens the tax base in order to increase competitiveness for companies across the nation,” President Obama said in a statement. “It cuts tax rates even further for manufacturers that are creating new products and manufacturing goods here in America.” But what’s so special about manufacturing? Is there really a reason for the White House to champion that certain set of businesses? Why not services? Or another growing sector of the economy, like agriculture? Policy experts have long been divided on these questions. Many economists argue that there’s nothing special about manufacturing, and that Mr. Obama’s proposals are simply an election-year sop. But others say the United States can create, retain and regain higher-end manufacturing jobs. They also argue that manufacturing has potent spillover effects that make it worthwhile for the government to promote. A new paper by the Brookings Institution’s Metropolitan Policy Program lays out the case for manufacturing exceptionalism in detail.

Why Does Manufacturing Matter? Which Manufacturing Matters? - Brookings Institution: Manufacturing matters to the United States because it provides high-wage jobs, commercial innovation (the nation’s largest source), a key to trade deficit reduction, and a disproportionately large contribution to environmental sustainability. The manufacturing industries and firms that make the greatest contribution to these four objectives are also those that have the greatest potential to maintain or expand employment in the United States. Computers and electronics, chemicals (including pharmaceuticals), transportation equipment (including aerospace and motor vehicles and parts), and machinery are especially important.  American manufacturing will not realize its potential automatically. While U.S. manufacturing performs well compared to the rest of the U.S. economy, it performs poorly compared to manufacturing in other high-wage countries. American manufacturing needs strengthening in four key areas:

  • Research and development
  • Lifelong training of workers at all levels
  • Improved access to finance
  • An increased role for workers and communities in creating and sharing in the gains from innovative manufacturing

Manufacturing Job Loss Is Not Inevitable – Brookings - Despite small gains during the last two years, the trend in U.S. manufacturing jobs for the last 30 years has been downward, leading some to argue that long-term manufacturing job loss is inevitable. But our research shows otherwise. There are two common versions of the “inevitability” argument. One holds that U.S. manufacturing wages are too high to be internationally competitive. The other maintains that manufacturing job losses are the result of productivity growth. Both arguments are false. The United States did not have to lose all of the 6 million manufacturing jobs that disappeared between the beginning of 2001 and the end of 2009. Nor does it have to continue to bleed manufacturing jobs. High wages cannot be the culprit; because wages in U.S. manufacturing are not especially high by international standards. As of 2009, 12 European countries plus Australia had higher average manufacturing wages than the United States. Norway topped the list with an average manufacturing wage of $53.89 per hour, 60 percent above the U.S. average of $33.53. Moreover, the United States lost manufacturing jobs at a faster rate since 2000 than several countries that paid manufacturing workers more. Among the 10 countries for which the Bureau of Labor Statistics tracks manufacturing employment, Australia, France, Germany, Italy, the Netherlands, and Sweden both had higher manufacturing wages and lost smaller shares of their manufacturing employment than the United States between 2000 and 2010.

How to save U.S. manufacturing jobs - The United States lost 6 million manufacturing jobs between early 2001 and late 2009. And despite small gains during the last two years, the trend in manufacturing employment for the last 30 years has been downward. That has led some to argue that long-term job loss in the industry is inevitable. But our research shows otherwise. There are two common versions of the "inevitability" argument. One holds that U.S. manufacturing wages are too high to be internationally competitive. The other maintains that manufacturing job losses are the result of productivity growth. Both arguments are wrong. High wages can't be the culprit, because wages in U.S. manufacturing are not especially high by international standards. As of 2009, 12 European countries plus Australia had higher average manufacturing wages than the United States. Norway topped the list with an average manufacturing wage of $53.89 per hour, 60 percent above the U.S. average of $33.53.

Manufacturing: Not a Magic Pill for the Economy - Brookings - In his State of the Union speech, President Obama said that the blueprint for economic recovery "begins with American manufacturing." There are, of course, welcome developments. But anecdotes about some firms' successes are not representative of the performance of an entire industry. It is magical thinking to believe that manufacturing can reclaim the role it had in the mid-20th century, and be the main driver behind the resurgence of today's economy. Let's start with some perspective: the 300,000 new manufacturing jobs created since the depths of the Great Recession represent only 8% of total job growth. This is less than proportionate to the relative size of manufacturing. Its current share of employment is only about 9% of the nation's overall total. In the 1980s, manufacturing employment commanded a 21% share of the overall total. Over the past three decades, employment in manufacturing has decreased about 40%. So while manufacturing has been a bright spot lately, this is a story of productivity gains, not of employment growth. Thanks to productivity gains, the employment drop occurred while the value added by manufacturing increased by 40%. Hourly compensation to workers has remained stagnant. So the question arises: who benefits from policies to support manufacturing, workers or owners?

Understanding manufacturing labor and wage trends - Chicago Fed - The number of net jobs held by workers in the manufacturing sector have declined markedly in recent decades—and especially so during the recent recession. Yet, manufacturers bemoan shortages of skilled workers, even while they tout emerging employment opportunities. What is the possible disconnect that is at play in the manufacturing sector? For one, worker shortages may not apply to all categories of workers, but rather to those with high or specialized skills. Across the entire U.S. economy, employers have had sharper needs for workers with greater levels of skills and educational attainment in recent years. And so, manufacturers may find it difficult to meet their own needs in this regard. If this is the case, one place to look for evidence would be in the wages of workers who are now in manufacturing. How have wages and compensation in the manufacturing sector changed over the years? One of the longest-running data series on manufacturing wages is available from the U.S. Bureau of Labor Statistics (BLS). The BLS provides data on the hourly wage of nonsupervisory and production workers in manufacturing. In the chart below, we show these data with some modification. In particular, we convert the data into dollars of constant spending power using the personal consumption expenditure deflator. The average wage below is expressed in today’s dollars, running from the end of 2011 back through 1947.

U.S. manufacturing sees shortage of skilled factory workers - Unemployment hovers above 9 percent. Foreign competition has thrown many out of work. It is a platitude that this industrial hub, like the country itself, needs more manufacturing work. But as the 2012 presidential candidates roam the state offering ways to “bring the jobs back,” many manufacturers say that, in fact, the jobs are already here. What’s missing are the skilled workers needed to fill them. A metal-parts factory here has been searching since the fall for a machinist, an assembly team leader and a die-setter. Another plant is offering referral bonuses for a welder. And a company that makes molds for automakers has been trying for seven months to fill four spots on the second shift. Through a combination of overseas competition and productivity gains, the United States has lost nearly 4 million manufacturing jobs in the past 10 years. But many manufacturers say the losses have not yielded a surplus of skilled factory workers. Instead, as automation has transformed factories and altered the skills needed to operate and maintain factory equipment, the laid-off workers, who may be familiar with the old-fashioned presses and lathes, are often unqualified to run the new.

The “Can’t Find Workers” Meme - In a time when millions of American workers can’t find work, it’s only natural to be intrigued by counterintuitive stories that claim American companies can’t find workers. Today, it’s the Washington Post’s turn to jump on this meme. It reports that manufacturers are having a hard time finding workers to work. Here’s the classically counterintuitive lede: Unemployment hovers above 9 percent. Foreign competition has thrown many out of work. It is a platitude that this industrial hub, like the country itself, needs more manufacturing work. But as the 2012 presidential candidates roam the state offering ways to “bring the jobs back,” many manufacturers say that, in fact, the jobs are already here. What’s missing are the skilled workers needed to fill them. The Post writes that the laid-off workers don’t know how to operate newfangled machinery and that Baby Boomers are retiring but younger generations “have avoided the manufacturing sector because of the volatility and stigma of factory work, as well as perceptions that U.S. manufacturing is a ‘dying industry.’” I have another way to put that: These young folks don’t want to spend a lot of money and time training to do a specific job they might not get only to get laid off when some private-equity slicks (where the real money’s at) buy out the company and ship the jobs to China. That’s what happens when owners and management have shredded the social contract.

When (and where) work disappears - A new study co-authored by MIT economist David Autor shows that the rapid rise in low-wage manufacturing industries overseas has had a significant impact on the United States. The disappearance of U.S. manufacturing jobs frequently leaves former manufacturing workers unemployed for years, if not permanently, while creating a drag on local economies and raising the amount of taxpayer-borne social insurance necessary to keep workers and their families afloat. Geographically, the research shows, foreign competition has hurt many U.S. metropolitan areas — not necessarily the ones built around heavy manufacturing in the industrial Midwest, but many areas in the South, the West and the Northeast, which once had abundant manual-labor manufacturing jobs, often involving the production of clothing, footwear, luggage, furniture and other household consumer items. Many of these jobs were held by workers without college degrees, who have since found it hard to gain new employment. “The effects are very concentrated and very visible locally,” “People drop out of the labor force, and the data strongly suggest that it takes some people a long time to get back on their feet, if they do at all.”  Moreover, Autor notes, when a large manufacturer closes its doors, “it does not simply affect an industry, but affects a whole locality.”

Unemployment Aid Applications Stay at Four-Year Low — The number of people seeking unemployment aid was unchanged last week and the four-week average of applications fell to its lowest point in four years. The figures add to evidence that show the job market is improving. Applications stayed last week at a seasonally adjusted 351,000, the Labor Department said Thursday. That’s the fewest since March 2008, when the country was just a few months into the recession. The four-week average, which smooths week-to-week fluctuations, dropped for the sixth straight week to 359,000. That’s also the lowest since March 2008. Applications have fallen steadily since last October. The average has declined 13.5 percent since then. When applications drop consistently below 375,000, it usually signals that hiring is strong enough to lower the unemployment rate.

Jobless Claims Flat Last Week At 4-Year Low - Today’s initial jobless claims report is a yawn with last week’s new filings for unemployment benefits showing no change from the previous week’s total, which was revised upward slightly. But the latest numbers don’t provide any reason to question the persistence in the recent decline for this series. The unchanged 351,000 seasonally adjusted total for new claims last week is still the lowest since early 2008.As recently as last month, claims were over the 400,000 mark. The fact that the latest update remains lower by 50,000 implies that the labor market will continue growing. In turn, that suggests that growth still has an edge for the broader economy.

Suddenly, a Sharp Deterioration in the Job Market - A hullabaloo broke out on February 3 after the BLS released its jobs report that indicated that a surprisingly robust 243,000 jobs were created in January, and that the unemployment rate had dropped to an even more surprising 8.3%.  Rarely, if ever, had BLS numbers caused so much public disagreement—and scorn. But that’s history. On Friday, Gallup’s mid-month unemployment reading, which covers the preceding 30 days, jumped from 8.3% in mid-January, the low point since the financial crisis, to 9.0%. An astounding increase. And its Job Creation Index confirmed that trend, dropping from +16 in January to +13 in February. Worse, 10% of the employees in mid-February were part timers in search of full-time jobs, though down a tad from January's of 10.1%, the all-time worst level in Gallup's history! Underemployment—a combination of the unemployed and part-timers who are looking for a full-time job—jumped to 19% from the mid-January reading of 18.1%. While Gallup’s unemployment reading has improved steadily over the course of 2011, the underemployment reading has simply gotten worse.

USPS Plans 35,000 Cuts as Plants Shut - The U.S. Postal Service, which predicts an annual loss of $18.2 billion by 2015, plans to eliminate 5.4 percent of its workforce by closing almost half of its mail-processing facilities to cut costs. The service plans to shut 223 of its 461 mail-processing plants by February 2013, Postmaster General Patrick Donahoe said in a telephone interview today. The closings will cut about 35,000 jobs, said David Partenheimer, a Postal Service spokesman. The closings will save the Washington-based service about $2.5 billion a year, Donahoe said. In September, the agency said it was seeking to save $3 billion a year by closing 252 plants and cutting 35,000 jobs. Shutting mail-processing facilities is part of a plan to consolidate work and slow mail delivery to save money. The service, which is seeking to end Saturday mail delivery, posted a loss of $3.3 billion for the quarter ended Dec. 31.

Sears to 'Unload' 1200 Stores? - Sears might “unload” 1,200 stores in an effort to raise money, the Wall Street Journal reported Thursday. A majority stakeholder in Sears Holdings Corp., which operates Sears and Kmart, is hoping to receive $770 million in cash related to the stores. Sears Holdings Corp., based in Hoffman Estates, Ill., Thursday reported a significant loss for the fourth quarter after a difficult holiday shopping season. The company had a net loss of $2.4 billion for the quarter that ended Jan. 28, including several one-time charges, compared to a profit of $374 million for the same period last year. Sales dropped $518 million to $12.5 billion last quarter. Officials have tried to turnaround the company as same-store sales have fallen for six straight years. Sears describes itself as the country’s “fourth largest broadline retailer with over 4,000 full-line and specialty retail stores in the United States and Canada,”

Pensions Find Private Equity Bites as Blackstone Cuts Jobs - Shirley Kimber walked off the production line from her $17.56-an-hour job at a Birds Eye Foods plant in Fulton, New York, for the last time in November.  The new owners, Pinnacle Foods, a company held by the private equity firm Blackstone Group, closed the factory and fired 270 workers. Kimber, 64, got eight weeks severance for her 12 years on the job and lives with her 37-year-old unemployed daughter in the rust-belt town of about 12,000, northwest of Syracuse. “They just used us. That’s exactly what they did,” Kimber said. “And then they kicked us to the curb.”  While the closing killed union jobs, it may also help protect the retirement benefits that organized labor bargained for on behalf of public employees.  In addition to Blackstone, the world’s largest buyout firm, New York State’s two public employee pensions and four New York City pensions stand to gain from the drive for higher profits at Pinnacle foods. The retirement funds poured $920 million into the $20 billion Blackstone fund that owns Pinnacle, which took over Birds Eye in 2009.

Surge in temp jobs reflects change in workplace - The nation’s unemployment rate is falling faster than expected, but what counts as a job has become increasingly murky. More than a quarter of people who have found jobs since the recession ended have landed in temporary positions, according to government data, though private estimates range far higher. The numbers reflect a fundamental change in the way Americans work, with neither businesses nor their employees expecting to stay together for life.  That is raising new questions about the sustainability of the drop in the unemployment rate as workers cycle through jobs more quickly. It also leaves them more vulnerable to cycles of boom and bust — temporary workers are usually the first hired and first fired — and forces them to shoulder the responsibility of paying for health care and retirement. “By definition, a good job was with a big company with big benefits where you could expect to work for your whole life,” “The social benefits system relies on almost everybody working in a quote-unquote job. That’s not the case now.”

Length of Unemployment is Worst Since World War II - The key graph: Assuming the economy is “trying” to reach equilibrium, this suggests that it “wants” less workers. If that is a secular trend, as suggested by the steadily lengthening jobless recessions since the 80s, …we’re faced with the need for a new structure wherein people’s claims to a decent share of the pie are not linked to their ability (luck) in finding well-compensated employment. Alternative means are necessary to provide widespread prosperity and the widespread demand that gives producers the incentive to expand and innovate. Have I mentioned expanding the EITC lately, and indexing it to unemployment?

The Awful Long-Term Unemployment Crisis - The vast majority of the 5.5 million long-term unemployed have been out of work for more than a year. For this installment of "Working it Out," we asked you if the government should enact special programs to help the long-term unemployed. We've received more than 100 responses. Here are some of the smartest, most heartfelt, and most provocative.

Employers discriminate against long-term unemployed: reports - A number of long-term, unemployed people in Stamford, Connecticut revealed to CBS’ 60 Minutes how they have been discriminated by the job market for being out of work, resulting in questions as to whether they would be employed ever again.  "There’s no doubt,” worker Frank O’Neil told reporter Scott Pelley. “I mean, I’ve seen it in print, whether it’s some newspaper ads or online during those types of advertisements, I’ve actually seen, ‘If you are unemployed, you need not apply.’” O’Neil added: “Just look at the web. You see the phrase everywhere: ‘Must be currently employed.’ Businesses can’t legally discriminate by age, race or sex, but there’s a new minority group now, the long term unemployed.”

Jobs scarce, but the stigma stays - Experts say being unemployed remains a disadvantage and a stigma even though mass layoffs indiscriminately swept through corporate divisions, entire companies and vulnerable industries. An advocacy group for workers surveyed online job postings last year and found more than 100 companies that want only applicants who are currently employed. And it's worse for those who have been without a full-time job for longer than a few months - a Catch-22 that has not been rendered obsolete by the sheer numbers of the long-term unemployed. For the past two years, more than 40 percent of the nation's unemployed have been out of a job for 27 weeks or more, according to data from the U.S. Bureau of Labor Statistics. "It's something no one talks about, but it's out there," said Cindy Waite, president and CEO of Accentuate Staffing in Raleigh. "It's the perception their skills are lacking, they're not trying hard enough to get a job, and that A-players would be getting jobs."

American incomes and low wage America - top 1 percent earn above $343,927, top 5 percent above $154,643, top 10 percent above $112,124, top 25 percent above $66,193, top 50 percent above $32,396 – Over 68,500,000 tax filers, 50 percent of the country, make $32,000 a year or less. Food stamp usage peaks at over 46 million. A recent report regarding income has thrown a few people off.  I think many Americans fail to realize how many people are barely making it day to day financially.  Do people realize that we still have 46,000,000+ Americans on food stamps and this coincides perfectly with the booming market in dollar stores?  These are not glamorous economic metrics for the global economic super power.  Hard to believe but the truth is the working and middle class has been squeezed over the last few decades.  This goes beyond politics and is completely driven by the aggregation of financial power.  The grim reality is that even after the grandest collapse since the Great Depression not one strong piece of legislation has been passed to curb the investment banking casino.  More to the recent report, the latest tax data on incomes shows how many Americans are simply getting by.

The compression of generations – 25 million adults live at home with parents because they’re unemployed or underemployed. The crushing cost of a college education today - The thought of moving out on your own and making your individual way in the world is very much an American trait.  Certainly movies and television shows almost always assume every American has moved out on their own once adulthood is reached.  What this recession has taught us is never take anything for what is shown on the surface.  Many young adults, many times to the chagrin of baby boomer parents, have moved back home because of the employment market conditions brought on by the recession.  Roughly 25 million adults live at home with their parents for a variety of reasons but mostly economic.  For many the debilitating cost of student debt is hindering their progression into the independent marketplace.  For others it is the lack of solid wages that actually provide enough to support a person living on their own.  And for many others the inability to find a job is still a very common experience.

Cognitive inequality - LAST week, I participated in a panel discussion on open questions in economics with professor and economics blogger extraordinaire Karl Smith. We got to talking about inequality, and I ran through a few of the bog standard interpretations of rising income gaps: mismatches between the supply of and demand for skills, superstar effects at the very top, and improved rent-seeking in the financial sector. Mr Smith offered something dramatically different, some of which he gets at in this post: I want to make the point that this consistent with my long thesis that we are returning to an environment where productivity gains do not accrue to unskilled labor because they are imbedded in the brains of the innovators. A factory is really big and hard to keep secret. Computer code less so. When you simply write down the process you want or draw the object you want and the computer translates it for you the seep down will grind to complete halt. He takes this in some interesting directions, but I want to stop there and use this thought to begin to tie a few threads together. Politicians, and many economists, are increasingly focused on the importance of global supply chains—where production is done and what benefits are conferred on those controlling which parts of the production line. What most people seem to gloss over is the fact that the most important parts of modern supply chains are embedded in the heads of innovators and (I would add and Mr Smith probably would not) in the space between groups innovators in which discussions about innovation take place.

Why Inequality Matters: The Housing Crisis, The Justice System & Capitalism - Extreme economic inequality is among the most destructive forces in a society. As inequality grows, it undermines the effective functioning of the economy, the basic tenets of capitalism, and the foundations of democracy. Unfortunately, the housing crisis and now the housing settlement increasingly look like an example of how this mechanism works. One of the central characteristics of highly unequal societies is that two sets of laws develop: One set for the rich and powerful and one set for everyone else. The more unequal societies become, the more easily they accept the unacceptable, and with each unrebuked violation, the powerful actors at the top of the society gain an ever greater sense of entitlement and an ever greater sense that the laws that govern everyone else don’t apply to them. As a result, their behavior becomes increasingly egregious. In contrast, sustainable capitalism requires that all participants in a contract or bargain believe their interests will be enforced equally by the courts:  When powerful players are permitted to alter established rules at will, capitalism ultimately collapses.

Is This the End of Market Democracy? - The 2012 election will offer voters a stark choice between right and left alternatives.  While Americans are going to be able to choose between two contrasting ideologies, what if both choices are off the mark? What if the legitimacy of free market capitalism in America is facing fundamental challenges that the candidates and their parties are not addressing? Here are some of the issues that are making some politicians and political thinkers uneasy: Are large segments of the American workforce — millions of people — at a structural disadvantage in the face of global competition, technological advance and ever more sophisticated forms of automation? Is this situation permanent? Will the share of profits from improving corporate productivity flowing to capital and to high-earning C.E.O.s continue to grow, while the income of wage earners stagnates and their share of profits declines? Has the surging wealth and income of the top one percent and of the top 0.1 percent reached a tipping point at which the political leverage of the very affluent decisively outweighs the influence of the electorate at large? Is it possible that in the United States and Europe, democratic free market capitalism is no longer capable of providing broadly shared benefits to a solid majority of workers?

Instead of being disgusted by poverty, we are disgusted by poor people themselves - Empathy has crashed. No more cruel to be kind. We must simply be cruel. An addict is the author of their own misfortune. Her poverty is self-inflicted. All these hopeless people: where do they all come from? It is, of course, possible never to really see them, as their distress is so distressing. Who needs it? Poverty, we are often told, is not "actual", because people have TVs. This gradual erosion of empathy is the triumph of an economic climate in which everyone, addicted or not, is personally responsible for their own lack of achievement. Poor people are not simply people like us, but with less money: they are an entirely different species. Their poverty is a personal failing. They have let themselves go. This now applies not just to individuals but to entire countries. Look at the Greeks! What were they thinking with their pensions and minimum wage? That they were like us? Out of the flames, they are now told to rise, phoenix–like, by a rich political elite. Perhaps they can grow money on trees? Meanwhile, in the US, as this week's shocking Panorama showed, people are living in tents or underground in drains. These ugly people, with ulcers, hernias and bad teeth, are the flipside of the American dream. Trees twist through abandoned civic buildings and factories, while the Republican candidates, an ID parade of Grecian 2000 suspects, bang on about tax cuts for the 1% who own a fifth of America's wealth. To see the Grapes of Wrath recast among post-apocalyptic cityscapes is scary. Huge cognitive dissonance is required to cheerlead for the rich while 47 million citizens live in conditions close to those in the developing world.

Recycling the cycle of poverty - In the winter of 1963, the sociologist Charles Lebeaux argued that poverty, rather than merely a lack of money, was in fact the result of several complex, interrelated causes. “ “It involves a reinforcing pattern of restricted opportunities, deficient community services, abnormal social pressures and predators, and defensive adaptations. Increased income alone is not sufficient to overcome brutalization, social isolation and narrow aspiration.”1In the midst of Johnson’s War on Poverty, the argument that poverty was about more than money – or, as was sometimes argued, wasn’t even primarily about money – was common currency in both liberal and left-leaning circles. Two weeks ago, New York Times columnist Nicholas D. Kristof continued this tradition when he expressed his concern that contemporary liberals tend to chalk poverty up to merely a matter of dollars and cents. “I fear that liberals are too quick to think of inequality as basically about taxes,” wrote Kristof. “Yes, our tax system is a disgrace, but poverty is so much deeper and more complex than that.” Kristof’s column, “The White Underclass,” was just one of a flurry of responses to the release of Charles Murray’s new book, Coming Apart. Murray’s book continues the legacy of his seminal 1984 work, Losing Ground, in which Murray argued that liberal welfare social policies destroyed the moral values and work ethic of the black community, resulting in the rise of single mother households and welfare dependency.

What's To Be Done About The Lower Classes -  I was thinking about BoBo's latest Charles Murray inspired claim that that what the lesser humans among us need is some "bourgeois paternalism." Apparently they're behaving badly, in ways which hurt BoBo's aesthetic sensibilities, and Upper Class Daddy is going to have to bring out the rod. Because what poor people - and their kids - need is leadership and discipline from the proper sort of people. Like BoBo. Mostly these people need decent schools, affordable simple health care, and, yes, a bit more money without working 3 jobs. A stern lecture from Daddy BoBo probably won't do much for them.

If Liberals Want to Help the Poor, They Should Focus on the Middle Class - What’s the surest sign that the economic crisis is finally lifting and normalcy is in sight? We’re back to arguing about how the middle class is doing over the long sweep of history since the 1980s: Have they been dragged down by stagnating wages, high-end inequality, economic insecurity, and a greater chance that economic mobility will take them downward than up? Or is the middle class doing OK? This debate had been in hibernation for the last three years, while everyone except the top 1 percent took a beating. But it was reawakened recently, particularly by a series of papers and articles—including one in this magazine—by Scott Winship, a fellow at the Brookings Institution. Winship, joined by economist Tyler Cowen and others, throws cold water on an emerging consensus among economists and political scientists: that economic insecurity has increased for most families, that mobility has declined, and that rising economic inequality is related to slower (or more volatile) economic growth or to declining mobility.The middle class, he argues, “is doing just fine.”  What is really at stake in this debate? What makes technical disputes about inequality and mobility such a flashpoint? There must be some significant political or policy implications that follow from this argument, or it would be playing out in the American Economic Review rather than in this magazine and National Review.

Elitist Hokum from Krugman - It has become a standard left-liberal jibe that those complaining of government largesse receive a piece thereof themselves. Such beneficiaries go against their own interest if they favor smaller government—so it is alleged. Thus Paul Krugman in the NYT largely agrees with Thomas Frank, who attributed apparent red state ingratitude to the exploitation of social issues by Republicans in his book What’s the Matter with Kansas?   In addition Mr. Krugman cites evidence suggesting large percentages of Social Security and Medicare beneficiaries  are confused about their use of these government programs.  They don’t seem to think they’re getting handouts. Maybe that’s because they’re in fact not getting handouts.  As they were reminded every time they looked at their paycheck stub and saw the Social Security and Medicare tax deductions, they were forced to sacrifice part of their income for these programs through their working lives. The programs are compulsory; there is no opting out of them; the taxes come out of your paycheck whether you like it or not. Therefore the notion that people who don’t like big government should not get Social Security and Medicare is utter nonsense. What are they supposed to do? Refuse the benefits that they already paid for?

Spinning Necessity as a Virtue: Families to Stand in for Fragmenting Social Safety Nets - Yves Smith - An anodyne seeming article at VoxEU, which I reproduce in full below, makes a straightforward seeming case for policies that bolster family ties in the face of a nasty combination of aging populations and high unemployment among the young.  It isn’t hard to see that this line of thinking is the policy equivalent of getting in front of a mob and trying to call it a parade. We can already see that in bad economic times, many people turn to relatives for help. Kids leave home later, and my impression is having parents help with buying a home is far more common than when I was young. It was unheard of for someone middle aged to move in with his parents; now that sort of story is a human interest staple. I suspect that we will see a partial reversion to the living arrangements of 50 to 100 years ago, when it was more common for multiple generations to live together (which will increase average household sizes and might make better use of McMansions at the expense of new home construction).  And even the wealthy worry about their ability to take care of their kids. I saw someone today whose joked that his wife’s car was in a list published last weekend of the 100 most expensive cars in Connecticut. He said that even though his kids were smart and would probably go to good schools, he was not sure they’d be able to get jobs. Normally, if push came to shove, he’d be able to get them quietly hired by a friend if the employment market was terrible when they got out of college or grad school, but many of his colleagues were retiring or downsizing their businesses. And even though they’d never starve, he thought it was very important that they work so as not to become trust fund wastrels, or worse, druggies.

Millennials Are Up The Creek Without A Paddle - On Time's Moneyland blog, Josh Sanburn took note of that fact that the Fewest Young Adults in 60 Years Have Jobs. The grim unemployment picture for young adults is clearly seen in Pew’s new report, which shows that slightly more than half (54.3%) of all 18- to 24-year-olds were employed at the end of 2011. That rate is only slightly higher than in 2010 (54%), but dramatically lower than the 62.4% rate of just four years earlier. It’s the lowest rate since the government started keeping records in 1948... When we look at the details, the picture is grimmer still. One of the reasons that rate is so low today is that many, faced with the prospects of unemployment, went back to school. Last year, 45.2% of young adults were enrolled in high school or college compared to 1990, when 31.3% were enrolled. Higher enrollment is probably a good thing for the economy long term, but it’s also a sign that many students felt they had no real hope in the current job market without more education. But it’s also likely that many of those same students would like to be earning some money in between classes and can’t: Only 40.7% of college students have a job, down from 47.6% in 2007. (The employment rate for 18- to 24-year-olds not in school also fell, from 73.2% four years ago to 65%.) Unfortunately, fewer working students may mean they’re relying more on student loans to finance their educations.

America’s last hope: A strong labor movement - The fate of the labor movement is the fate of American democracy. Without a strong countervailing force like organized labor, corporations and wealthy elites advancing their own interests are able to exert undue influence over the political system, as we’ve seen in every major policy debate of recent years.Yet the American labor movement is in crisis and is the weakest it’s been in 100 years. That truism has been a progressive mantra since the Clinton administration. However, union density has continued to decline from roughly 16 percent in 1995 to 11.8 percent of all workers and just 6.9 percent of workers in the private sector. Unionized workers in the public sector now make up the majority of the labor movement for the first time in history, which is precisely why — a la Wisconsin and 14 other states — they have been targeted by the right for all out destruction. The urgency is striking. Instead of being fundamentally discredited, the oligarchs and plutocrats who crashed our economy are raking in record profits and acting even more aggressively to bury the American labor movement once and for all. Over the last year, several labor leaders have told me that they believe unions have only about five more years left if they don’t figure out some kind of breakthrough strategy.

Georgia's Reaction to Occupy Striking With AT&T Workers -  ALERT:: here comes the full on assault on BOTH the labor movement, Occupy, and all social justice organizations in Georgia. : Georgia Senate Bill 469 (SB469), introduced today, attempts to effectively bankrupt labor organizations in our state and prevent our movements from 'mass picketing' outside of a business or private residence we 'target' with penalties up to $10,000 per day of violation. But there's more....perhaps the most blatant and outrageous assault on our movements, coming right on the heels of our historic direct action at Occupy AT&T is Section 5- which will make it a FELONY to 'conspire' to commit criminal trespass while engaged in a political direct action- the act that 12 of us led last Monday at AT&T. There is no coincidence that the anti-worker, corporate funded, sponsors of SB 469 have set their targets on ALL progressive social forces in Georgia and thus require our immediate and unified response. This bill poses an absolute attack on basic worker rights and on all of our movements- but should also be viewed as a historic opportunity for us to mobilize a response in kind with even more united, bold series of actions to defeat it. Read the bill in its entirety here:

Tough times keep older workers from retiring - Don't plan on attending many retirement parties this year: More Americans are working into their so-called golden years, and experts say a combination of economic factors will sustain this trend in the near future. "People have basically gotten scared," . According to the Employee Benefit Research Institute, just over 40 percent of Americans 55 and older are still in the workforce, a figure that has been climbing steadily since hitting a trough of just under 30 percent in the early '90s. "Certainly there are some who want to work," More older workers have this opportunity because there are more jobs today that are physically undemanding, as compared to decades earlier. Advertise | AdChoicesBut experts say the main reason older employees are staying on the job is because they have no choice. "People have been telling us in our surveys that they've reevaluated the age they were going to leave the labor force in a large part due to the economic downturn,". Workers who were lucky enough retain jobs during the recession are hanging onto them for several reasons. More employers are shifting from traditional, defined-benefit pensions to defined-contribution plans. Rather than a monthly stipend for life, today's employees have a fixed dollar amount on which they have to live in retirement. "A lot of people are going to be leery of tapping into that because it is a finite amount," 

For boomers, it's a new era of 'work til you drop' - Forty years into that run, the 60-year-old communications specialist for a Wisconsin-based insurance company has worked more than a half-dozen jobs. She's been laid off, downsized and seen the pension disappear with only a few thousand dollars accrued when it was frozen. So, five years from the age when people once retired, she laughs when she describes her future plans. "I'll probably just work until I drop," she says, a sentiment expressed, with varying degrees of humor, by numerous members of her age group. Like 78 million other U.S. Baby Boomers, Symons and her husband had the misfortune of approaching retirement age at a time when stock market crashes diminished their 401(k) nest eggs, companies began eliminating defined benefit pensions in record numbers and previously unimagined technical advances all but eliminated entire job descriptions from travel agent to telephone operator. At the same time, companies began moving other jobs overseas, to be filled by people willing to work for far less and still able to connect to the U.S. market in real time.

Corrections Corporation of America Wants to Buy State Owned Prisons and Then Get States to Commit to Keeping Them Full of Prisoners - Via: ACLU: Recently we learned that the Corrections Corporation of America (CCA), the largest private prison company in the country, sent a letter to 48 state governors offering to buy up their state-owned and operated prisons and put them under CCA control. If offering cash-strapped states a quick infusion of money by taking control of prisons off their hands sounds too good to be true, that’s because it probably is. See, to take CCA up on its offer to buy a prison, a state would have to sign a 20-year contract and promise a 90 percent occupancy rate over that period. In other words, CCA is asking states to commit to maintaining prisons filled to capacity. This makes sense, since CCA is a for-profit business whose success depends on keeping prisons full, something CCA freely admits. In fact, in a 2010 Annual Report filed with the Securities and Exchange Commission, CCA stated: “The demand for our facilities and services could be adversely affected by…leniency in conviction or parole standards and sentencing practices.” In other words, CCA has much to gain from policies that lock up more people for more time.

U.S. Prisons Are Becoming Old Age Homes - For what exactly do you do with an aging prisoner who has been behind bars for half a century, whose health is failing and who is no longer a threat to anyone. Do you let them back out on the street where they likely have no remaining living relatives or friends, let alone any ability to care for themselves? It's a very tricky issue that is about to get trickier, as reported last week by Digital Journal: A dramatic increase of aging prisoners in the United States is leaving prison officials stretched in providing proper housing and medical care, and now find themselves operating “old age homes behind bars,” a new report reveals. Old Behind Bars: The Aging Prison Population in the United States, (pdf), a 104-page report by Human Rights Watch, reveals that in just three years, between 2007 and 2010, federal and state prisoners age 65 or older grew 94 times the rate of the total U.S. prison population. The number of prisoners age 65 or older is now 26,200, an increase of 63 percent. "Prisons were never designed to be geriatric facilities, . “Yet US corrections officials now operate old age homes behind bars.” In U.S. state and federal prisons, the number of those incarcerated age 55 or older has nearly quadrupled between 1995 and 2010, a 282 percent spike, even as the total number of prisoners grew by 42 percent. There are now 124,400 prisoners age 55 or older.

Florida bill would slash minimum wage for tipped workers - A Florida Senate committee has followed the advice of a restaurant association and passed a bill that would cut the minimum wage for tipped workers by more than half. The bill, SB 2106, would slash the current Florida tipped minimum wage of of $4.65 an hour to the federal standard of of $2.13 an hour, according to the Orlando Sentinel. Restaurants would have to promise that employees would make at least $9.98 an hour with tips to qualify for the new wage.“We are being brave and bold and being statesmen and not politicians,” Republican state Sen. Nancy Detert, the committee’s chair, asserted, adding that the bill had been requested by the Florida Restaurant and Lodging Association.

Unemployment payouts drop $40 million a day - California paid out $1.3 billion in unemployment benefits in December or about $60 million a day, the state Employment Development Department reports. That's a $40 million-a-day drop from December two years ago when California's unemployment rate was 10 percent compared with 8.5 percent last December. In 2009, the state wrote $2.2 billion in benefits checks – about $100 million a day.  Total payouts declined in December, in part because Congress ended an extra $25 a week in benefits in December 2010. The extra benefits were part of the economic stimulus package approved during the height of the recession. California unemployment benefits now range from $40 to $450 a week with the average weekly payment $292. Fewer laid-off workers are filing for benefits – 569,066 last December compared with 767,618 in December 2009.  And thousands of other long-term unemployed – 638,000 at last count – have exhausted the maximum 99 weeks of benefits and are no longer on California's unemployment rolls. State unemployment payments are expected to drop even more in March when a new law extending unemployment insurance benefits takes effect. Under the law, approved last week by Congress, the unemployed will be eligible for only 73 weeks of benefits instead of the current 99. The EDD estimates at least 90,000 people will be dropped from the unemployment rolls because of the cut in benefits.

Quinn's bad news budget: 'Our rendezvous with reality has arrived'  - Democratic Gov. Pat Quinn today delivered a bad news budget speech, calling for prison closures, layoffs and cutbacks to health care for the poor. "This budget contains truths you may not want to hear," Quinn said. "But these are truths that you do need to know. And I believe you can handle the truth." Quinn said too many governors and lawmakers have spent too much over the past 35 years. "Today, our rendezvous with reality has arrived," Quinn said. The governor focused the early portion of his speech on the need to reform state worker pension systems. Quinn blamed previous governors and General Assemblies for not funding the pension system over decades, pointing out that pension payments now take up 15 percent of the state's main checking account as a result. A panel of lawmakers has an April 17 deadline to submit recommendations on reforms to reduce costs. "I want to repeat: everything is on the table for our pension working group," Quinn said.

Texas remains $4.1 billion short on its budget - The Texas economy is coming back, but the state budget is still in trouble. The chairman of the Legislative Budget Board John O'Brien told lawmakers Tuesday that they did not appropriate enough to cover state expenses for Medicaid and other programs. The state is short more than $4.1 billion in the current budget. The chief revenue estimator for the Texas comptroller, John Heleman, said the Texas economy had rebounded faster than the rest of the nation. He also said that the state had recovered more than 440,000 jobs, but that many people had moved to Texas since 2008 and have not found jobs. Heleman also said that the state's Rainy Day Fund has $6.1 billion and will have $7.3 billion by the end of the fiscal year.

City Manager Takes Steps Toward Bankruptcy - Stockton, California, may take the first steps toward becoming the most populous U.S. city to file for bankruptcy next week because of burdensome employee costs, excessive debt and bookkeeping errors that misrepresented accounts, city officials said today. The Stockton City Council will meet Feb. 28 to consider a type of mediation that allows creditors to participate, the first move toward a Chapter 9 bankruptcy filing under a new state law. The council will also weigh suspending some payments on long-term debt of about $702 million, according to a 2010 financial statement. “Somebody has to suffer and in this case the city manager has decided it should be the bondholders who suffer,” Marc Levinson of the Sacramento-based law firm Orrick, Herrington & Sutcliffe LLP, which represents the city, said at a news briefing at Stockton’s City Hall today.  Stockton, a farming center about 80 miles (130 kilometers) east of San Francisco, has fought to avert bankruptcy by shrinking its payroll, including a quarter of the roughly 425- member police force. At 292,000, the city has more than twice as many residents as Vallejo, California, which became a national symbol for distressed municipal finance in 2008 when it sought protection from creditors.

When a County Runs Off the Cliff -- ONE county jail here is so crowded that some inmates sleep on the floor, while the other county jail, a few miles down the road, sits empty. There is no money for the second one anymore. The county roads here need paving, and the tax collector needs help. There is no money for them, either. There is no money for a lot of things around here, not since Jefferson County, population 658,000, went bankrupt last fall. There is no money for holiday D.U.I. checkpoints, litter patrols or overtime pay at the courthouse. None for crews to pull weeds or pick up road kill — not even when, as happened recently, an unlucky cow was hit near the town of Wylam. This is life today in Jefferson County — Bankrupt, U.S.A. For all the talk in Washington about taxes and deficits, here is a place where government finances, and government itself, have simply broken down. The county, which includes the city of Birmingham, is drowning under $4 billion in debt, the legacy of a big sewer project and corrupt financial dealings that sent 17 people to prison.

Big Banks Squeeze Billions in Profits from Public Budgets - SEIU (pdf) An estimated $28 billion already taken out of public budgets to pay banks on swap deals, big banks seek to collect billions more. Big banks are profiting at state and local governments’ expense using the same toxic financial instruments that helped crash the economy. These derivatives known as interest rate swaps, were sold to governments with a promise that they would lower their borrowing costs but have now become a huge liability. The banks have already taken as much as $28 billion from state and local governments. Now, during the worst public budget crisis in memory, the big banks seek to collect billions more from toxic deals that local and state governments are trapped into and are forcing layoffs and cuts to services to cover payments to banks. Big banks must renegotiate or cancel the derivatives, which could prevent the transfer of billions of dollars from public budgets to big banks.

Alternative financing for state and local governments: Do ‘managed competition’ and asset sales or leases make sense? - Chicago Fed - State and local governments are finding themselves in a fiscal bind. According to the National League of Cities’ annual fiscal survey, city governments report that their general revenues will decrease by 2.3% in 2011 and they anticipate a further decline in 2012. State governments don’t seem a whole lot better off. The Center on Budget and Policy Priorities estimated that 29 states face budget gaps for fiscal year (FY) 2012, totaling $44 billion; and it expected this total budget gap to grow throughout the spring as revenue growth slows.  Given this stress on core revenues, it isn’t surprising that state and local governments may be looking to unconventional financing measures to shore up budgets. Two ideas that are frequently mentioned are “managed competition” (the idea of allowing existing government services to be competitively bid out) and asset sales or long-term leases. In the case of managed competition, discrete government services are put up for bid and often existing government units are allowed to bid against outside providers for providing a service such as collecting trash or processing permits or licenses. In the case of asset sales or leases, the idea is to immediately monetize the value of a particular asset that in many cases is not directly related to the core function of local government. In both cases, a clear objective is to improve the efficiency with which either a program or an asset is managed and to free up resources for government to focus on central operations.

Gay Marriage Debate Is About Money, Too - Early this month, a federal appeals court panel declared unconstitutional a California ballot measure making same-sex marriage illegal. Although the decision produced headlines and strong emotional reactions on both sides, the case boiled down to a single question: Are same-sex couples entitled to call themselves “married”?  Nothing else was at stake, because same-sex couples in California are eligible to form domestic partnerships that grant, in the court’s words, “virtually all the benefits and responsibilities afforded by California law to married opposite-sex couples.” Same-sex couples already had the right to live together, have sex, adopt children and so forth. They just could not call themselves married. Clearly that word is important to people on both sides of this issue.  At the federal level, however, the fight is not just about words; it is also about money. Federal law bestows a long list of rights — more than 1,000 — on legally married couples. Spouses may give each other unlimited bequests tax free, and they are permitted to file joint tax returns. If one spouse is a citizen, the other can become a citizen, too, and spouses get special treatment from Social Security. For some couples, a lot of money is on the line. That’s why you are reading this column in the business section.

Psychiatric Patients With No Place to Go but Jail - The sounds of chaos bounce off the dim yellow walls. Everywhere there are prisoners wearing orange, red and khaki jumpsuits. An officer barks out orders as a thin woman tries to sleep on a hard bench in a holding cell. This is a harsh scene of daily life inside what has become the state’s largest de facto mental institution: the Cook County Jail.  About 11,000 prisoners, a mix of suspects awaiting trial and those convicted of minor crimes, are housed at the jail at any one time, which is like stuffing the population of Palos Heights into an eight-block area on Chicago’s South Side. The Cook County sheriff, Tom Dart, estimated that about 2,000 of them suffer from some form of serious mental illness, far more than at the big state-owned Elgin Mental Health Center, which has 582 beds.  Mr. Dart said the system “is so screwed up that I’ve become the largest mental health provider in the state of Illinois.” The situation is about to get worse, according to Mr. Dart and other criminal justice experts. The city plans to shut down 6 of its 12 mental health centers by the end of April, to save an estimated $2 million, potentially leaving many patients without adequate treatment — some of them likely to engage in conduct that will lead to arrests.

Jobless disability claims soar to record $200B as of January - Standing too many months on the unemployment line is driving Americans crazy — literally — and it’s costing taxpayers hundreds of billions of dollars. With their unemployment-insurance checks running out, some of the country’s long-term jobless are scrambling to fill the gap by filing claims for mental illness and other disabilities with Social Security — a surge that hobbles taxpayers and making the employment rate look healthier than it should as these people drop out of the job statistics. As of January, the federal government was mailing out disability checks to more than 10.5 million individuals, including 2 million to spouses and children of disabled workers, at a cost of record $200 billion a year, recent research from JPMorgan Chase shows. The sputtering economy has fueled those ranks. Around 5.3 percent of the population between the ages of 25 and 64 is currently collecting federal disability payments, a jump from 4.5 percent since the economy slid into a recession. Mental-illness claims, in particular, are surging. During the recent economic boom, only 33 percent of applicants were claiming mental illness, but that figure has jumped to 43 percent.

More than 1.4 million families live on $2 a day per person – The number of families living on $2 or less per person per day for at least a month in the USA has more than doubled in 15 years to 1.46 million. That's up from 636,000 households in 1996, says a new study released by researchers at the University of Michigan and Harvard University. Government benefits blunt the impact of such extreme poverty, but not completely, says one of the researchers, Luke Shaefer, a professor of social work at Michigan. When food stamps are included as income, the number of households in extreme poverty, defined as living on $2 a day, drops to 800,000, Shaefer says. That's up from 475,000 in 1996. "This seems to be a group that has fallen through the cracks," says Kathryn Edin, a Harvard researcher and professor of public policy. The study found that among households in extreme poverty, one in five received rent vouchers or lived in public housing. Sixty-six percent had at least one child with public health insurance. The study did not factor in how those benefits affect household income.

Food pantry demand doubles -"We were feeding 2,500 people a month last year, and now we are feeding over 5,000 people per month," said Fred Steinbach, board chairman of the Jewish Family and Children's Service, which runs the food pantry. "We didn't have room to run the facility efficiently." The pantry serves the St. Louis region, but in recent years more clients are coming in from areas such as Ladue, Chesterfield and Creve Coeur. Other food pantries in the region have also seen spikes in demand from people in affluent suburbs. "We have people picking up food at the pantry this year who donated last year," Steinbach said. "What we are hearing is people have mortgages that they can't unload and a house that they can't sell, and their families still need to eat."

Huge increase in U.S. kids living in poverty: study - Years of economic setbacks have taken their toll on the nation’s youngest residents, with another 1.6 million children living in high-poverty neighborhoods, according to one study that shows nearly 8 million children residing in poor areas in 2010. In 2000, 6.3 million children lived in high poverty in the United States, a report by the Annie E. Casey Foundation found. The growth – a 25 percent increase – reverses the trend just a decade ago that saw fewer children living in communities with high poverty rates, according to the nonprofit group. And three-quarters of those children live in such areas despite having at least one parent working, the study showed. The findings reflect the hit the U.S. economy took during and after the 2007-2009 recession even as signs now point to steady recovery.

Special Report: Homeless Students (Video) Until recently, Strachan was homeless. Her only escape from the streets was the City Rescue Mission women's shelter. She's also a student at the Lansing Community College working toward a bachelor's degree in psychology. "I'm telling myself, school is the way to go, you'll get a good degree, better job, better money. I'm trying to get myself the good stuff," Strachan said. Strachan's situation is not unique. According to Dotty Wilinksi, case manager at the City Rescue Mission women's shelter, almost 30% of their residents are students. She says that number is on the rise because many who are unable to find employment are choosing to go back to school to improve their chances of getting a job. However, without current employment, many who are trying to get a degree face another problem. As the cost of education continues to rise, paying for school can be a challenge.

Would We Have Drugged Up Einstein? How Anti-Authoritarianism Is Deemed a Mental Health Problem -  In my career as a psychologist, I have talked with hundreds of people previously diagnosed by other professionals with oppositional defiant disorder, attention deficit hyperactive disorder, anxiety disorder and other psychiatric illnesses, and I am struck by 1) how many of those diagnosed are essentially anti-authoritarians; and 2) how those professionals who have diagnosed them are not.   Anti-authoritarians question whether an authority is a legitimate one before taking that authority seriously. Evaluating the legitimacy of authorities includes assessing whether or not authorities actually know what they are talking about, are honest, and care about those people who are respecting their authority. And when anti-authoritarians assess an authority to be illegitimate, they challenge and resist that authority—sometimes aggressively and sometimes passive-aggressively, sometimes wisely and sometimes not.  Some activists lament how few anti-authoritarians there appear to be in the United States. One reason could be that many natural anti-authoritarians are now psychopathologized and medicated before they achieve political consciousness of society’s most oppressive authorities. 

Creepy model watch -  I really feel like I can’t keep up with all of the creepy models coming out and the news articles about them, so I think I’ll just start making a list. I would appreciate readers adding to my list in the comment section. I think I’ll move this to a separate page on my blog if it comes out nice.

  1. I recently blogged about a model that predicts student success in for-profit institutions, which I claim is really mostly about student debt and default,
  2. but here’s a model which actually goes ahead and predicts default directly, it’s a new payday-like loan model. Oh good, because the old payday models didn’t make enough money or something.
  3. Of course there’s the teacher value-added model which I’ve blogged about multiple times, most recently here. The abstract is stunning: Recently, educational researchers and practitioners have turned to value-added models to evaluate teacher performance. Although value-added estimates depend on the assessment used to measure student achievement, the importance of outcome selection has received scant attention in the literature. Using data from a large, urban school district, I examine whether value-added estimates from three separate reading achievement tests provide similar answers about teacher performance.

Calif. community colleges feel pinch of cuts- California community colleges are struggling to deal with recent budget cuts totaling more than $500 million. To make matters worse, more cuts are looming. The latest budget axe was felt throughout the entire community college system, which has more than 100 schools. Pasadena City College officials say that after sustaining numerous cuts during the financial crisis, they got hit this month with this latest budget blow. Officials said it has forced them to scrap 45 classes and send 50 faculty members into early retirement.

Pennsylvania university heads paint bleak tuition outlook (Reuters) - The heads of Pennsylvania's four largest universities pleaded with lawmakers on Wednesday to ignore Governor Tom Corbett's proposal to cut state subsidies on higher education by 30 percent. During budget hearings early on Wednesday, University of Pittsburgh Chancellor Mark Nordenberg called Corbett's proposal "deep, dramatic and disproportionate," adding that if enacted, Pitt would have to raise tuition by $3,000 annually. Corbett unveiled the cuts in a $27.1 billion budget proposed earlier this month. He also said he wanted to withhold 20 percent of funding from 14 other state-related universities. The $230 million saved from higher education costs would help plug a projected $719 million deficit, he said. Such a cut would follow a 24-percent decrease in state aid this year. Pennsylvania has until June 30 to adopt its 2012-13 budget and it is constitutionally prohibited from carrying a deficit.

The Hidden Majority of For-Profit Colleges - Whether you support or oppose the growing role of the for-profit sector in postsecondary education, you probably don’t know the half of it. Literally. A new study by the economists Stephanie Riegg Cellini of George Washington University and Claudia Goldin of Harvard concludes that the estimated number of for-profit institutions in the United States would more than double – to more than 7,500 from 2,944 – if official statistics included institutions that do not receive federal student aid. Most statistics on for-profit institutions – what they are, whom they enroll, what programs they offer and what they charge – are derived from annual reports required from all colleges taking part in the federal student aid programs, which include Pell Grants and Stafford Loans and are known collectively as Title IV aid. Non-participating institutions are not required to report. Given that many for-profit colleges rely on Title IV aid for 80 percent or more of their revenue, as the following table illustrates, it previously seemed implausible that so many other institutions could survive without it.

Pension gap spells trouble for muni bonds - In recent months, America’s mighty Securities and Exchange Commission has been making US local government officials nervous. The reason? In 2010, New Jersey settled civil fraud charges brought by the SEC for allegedly misleading bondholders about the funding of its pension. Since then, the SEC has been scouring other offerings in America’s $3tn plus “muni” market. For as fiscal pressures rise across America – and investment returns tumble – the level of pension underfunding is rising.  It is a trend that investors should watch closely; not to mention anybody dreaming of getting a US state pension in the coming years. For with interest rates at rock bottom levels, a striking dichotomy has opened up over the American economy. In recent weeks, a clutch of private sector American entities have been forced to announce that they are making hefty additional contributions to their pension funds, to offset declining returns. Indeed, these contributions have been so large, they have pushed groups such as Verizon and US Steel into losses in the fourth quarter of last year. But while American companies are facing investor scrutiny over their pension shortfalls, state pension liabilities remain shrouded in fog.

Study finds $135.7B in local pension liabilities - Two dozen city and county governments in California face a combined $135.7 billion in unfunded pension liabilities, according to a study released Tuesday that also found the problem is growing. The Stanford Institute for Economic Policy Research and a nonprofit group, California Common Sense, evaluated 24 local government pension systems that are not part of the California Public Employees' Retirement System, the state's main pension fund. The funds ranged from those for smaller entities, such as Santa Barbara and Stanislaus County, to the largest local governments in California, including Los Angeles, San Diego and San Francisco. The report found that none of the systems is at least 80 percent funded, which often is used as a benchmark for the minimum funding level of pension funds. The study assumed a 5 percent annual rate of return for the funds' investments, much more conservative than the 7.75 percent or greater annual return rate assumed by many of the funds. The two retirement systems operated by the city of Fresno came close, with a funded ratio of 78.5 percent, while the pension system in neighboring Kern County was only 41.5 percent funded.

Social Security and the Economy - Dean Baker - The focus Allan Sloan's Fortune column this week is the deterioration in the near term projections for Social Security. Sloan compares the 2011 Social Security Trustees report with the 2012 projections from the Congressional Budget Office (CBO) and finds a worsening of $300 billion in the projected cash flow of the trust fund over the next five year. He argues that this strengthens the case for measures to shore up the program's finances. There are three slightly technical points on Sloan's analysis that are worth making and then one substantive point.First, Sloan compares sources that use somewhat different assumptions where comparing the Trustees numbers with the CBO numbers. The 2011 CBO numbers would have shown a somewhat worse picture than the 2011 Trustees numbers. If we compare the 2012 CBO numbers with the 2011 CBO numbers we can see the extent to which the situation has deteriorated due to a worsening economic outlook. A second item worth noting is that the deterioration is mostly on the revenue side. Sloan attributes the problem to a higher than projected cost of living adjustments that resulted from the jump in oil prices. While this is a factor, most of the story is on the revenue side. The third point worth noting in this story is the extent to which the deterioration in the projections from 2011 to 2012 is due to the disability portion of the program.

Social Security as you know it, it's over, forget about it. - I caught a bit of Jennifer Granholm's The War Room for 2/23/12.  She was talking gasoline prices and had Ron Klain on for his ideas. He is a past chief of staff for Gore and Biden as VP's. Mr. Klain also published his thought at Bloomberg2/20/12. This post is not about solving the rising gasoline costs. This post is about the further screwing of the 99% by further reducing their security from the risk of life and living.  Let's cut to the chase:  One idea might be a “pocketbook protection” plan, which would work as follows: If the average price of gas exceeds $4 a gallon, an additional, automatic payroll tax cut of 1 percent would kick in, as much as $50 per month, per person. The cut would stay in place for at least 90 days; it would disappear when the price fell below $4.00 per gallon.  There are three advantages to this approach. First, because the plan is of limited duration and is capped at $50 a month, its cost is relatively modest -- about $5 billion a month, or $20 billion total, assuming the usual four-month gas-price surge. Second, because it isn’t a reduction in gas taxes, it doesn’t weaken any incentives for fuel conservation or efficiency: All workers get $50 to soften the blow of higher gas prices, but the less fuel they use, the more money they save. And third, the relief provides the greatest relative help to lower-income workers who need gas to commute and feel the price pinch the hardest.

The plight of minority elderly Americans - It’s something many people know intuitively but that makes the reality no less harsh when it is framed by concrete figures: the sluggish U.S. economy is squeezing black and Latino seniors even harder than their white counterparts. A new study from the University of California, Berkeley’s Labor Center shows the extent of the difficulties facing elderly minorities. Here are some of the low-lights: Elder poverty rates are twice as high among Blacks and Latinos compared to the U.S. population as a whole: 19.4 percent of Black seniors and 19.0 percent of Latino seniors have incomes below the federal poverty line, compared to 9.4 percent for the senior population overall. Less than a third of employed Latinos and less than half of Black workers are covered by an employer sponsored retirement plan, a critical resource in ensuring adequate retirement income.  As a result, they are disproportionately reliant on the limited income provided by Social Security. Among retirees age 60 and older, people of color are disproportionately likely to be low income: for 2007-2009, 31.6 percent of Blacks and 46.5 percent of Latinos were in the bottom 25 percent income group. The “other” race group, which includes Asian/Pacific Islander and Native American populations, is also more likely to be low-income (38 percent).

Medicaid use skyrockets in the suburbs as potential cutbacks loom — The number of suburban residents enrolled in Medicaid has skyrocketed in recent years, even as Gov. Pat Quinn takes aim at funding for the health care program for the poor. Suburban enrollment in the Medicaid program has risen drastically since the state's 2006 fiscal year: 89 percent in DuPage County, 76 percent in Kane, 103 percent in McHenry, 73 percent in Lake, 84 percent in Will, and 19 percent in Cook County, including Chicago, according to data from the Illinois Department of Healthcare and Family Services. That's far higher growth than in the state as a whole, where the number of people enrolled in Medicaid has risen 30 percent in the same period — forcing the state to pay more and sacrifice funding for schools and other programs. In his budget address on Wednesday, Quinn is expected to call for large cuts to Medicaid spending to help deal with the state's dismal finances. Medicaid, which costs the state $15 billion, is one of Illinois' largest expenses.

Illinois’s ‘Toughest’ Budget May Cut $2.7 Billion From Medicaid -- Illinois Governor Pat Quinn will propose a $33.8 billion spending plan that would cut $2.7 billion from the Medicaid program, which provides health care for the poor. It’s the “toughest budget,” Jack Lavin, Quinn’s chief of staff, told reporters in Springfield, capital of the fifth-most- populous U.S. state. The plan, an increase from the current $33 billion, would close two prisons and four mental-health facilities, he said. The state faces a backlog of $9 billion in unpaid bills. The proposal, which Quinn is to present to the Legislature today, would reduce spending in most departments by an average 9 percent. Funding for elementary and secondary education would see a 1 percent increase. The federal Census Bureau reported in December that U.S. state and local-government tax revenue rose 4.1 percent in the third quarter, the eighth consecutive gain. Yet even after record corporate and income-tax increases last year, Illinois faces fiscal 2013 with pension and health care costs that are ravaging its budget.

The Case of the Missing Premium - The Department of Health and Human Services recently announced that health insurers and employers must provide more information to consumers shopping for health insurance. The ensuing coverage, shall we say, was a classic case of journalistic bungling. Reporters took what HHS officials fed them and crafted their pieces for public consumption. But the stories were confusing—in some cases flat-out wrong—and did not exactly offer the clearest of explanations about what’s supposed to be a clearer process for buying health coverage. I’d wager the public didn’t understand much of what the media dished out, and probably won’t until they actually start shopping for coverage again in the fall and find the government hasn’t made it easier after all. Most media stories, like this AP dispatch, got the main point: Private health plans will have to provide consumers with a user-friendly summary of what’s covered along with key cost details such as copays and deductibles. And because the summaries will use a single standard format, it will allow “apples-to-apples” comparisons among health plans that are not possible now.  But insurers and employers do not have to tell consumers how much a policy costs—in other words, no premium information has to be given. Yep, that’s right—the key piece of information needed to make a good decision is missing.

The Safety Net Isn't Free - Benefit payments by government safety net programs, like unemployment insurance, help the people who receive those payments. But government officials, politicians and journalists sometimes go another step and assert that everyone benefits when the poor and unemployed receive payments from the government, because that “puts money in the hands of consumers,” and consumer spending is said to stimulate employers to hire. I explained last week that the “hands of the consumer” theory ignores the hands of the people who pay for safety net benefits. For example, because of the extra taxes needed to help pay for the unemployment insurance program, a taxpayer may no longer be able to afford to make an addition to his house. Thus, while jobs will be needed to serve the unemployed people as they spend their benefit payment, there will be no need for the construction workers and others who would have helped with the taxpayer’s home project. Dean Baker of the Center for Economic Policy and Research disagreed, in a post on the center’s Beat the Press blog, saying that, for now, unemployment insurance benefits do not cost us anything because they are not financed with current taxes:

One reason American health care costs more: We’re fat and getting fatter -  The OECD is out this morning with new projections on international obesity rates and, for the United States, it’s not pretty: We nabbed the dubious honor of the most overweight country. By 2020, the OECD predicts approximately 75 percent of Americans will be overweight or obese.Many comparisons of international health care spending focus on the structure of the health care delivery system: How the United States tends to provides incentives for doctors providing more costly care. But one other reason that American health care is expensive likely has to do with the country’s health care status. Health policy research has borne this idea out: One recent study that compared health care costs for autoworkers across the country found 37 percent of spending variance was due to how sick or healthy workers were in each area. In Medicare, costs of caring for overweight and obese seniors is rising faster than for the general population. Incentives certainly matter in medicine, but so does the health care status of the population each system is treating.

5% of Americans Made Up 50% of U.S. Health Care Spending - When it comes to America's spiraling health care costs, the country's problems begin with the 5%. In 2008 and 2009, 5% of Americans were responsible for nearly half of the country's medical spending. Of course, health care has its own 1% crisis. In 2009, the top 1% of patients accounted for 21.8% of expenditures.  The figures are from a new study by the Department of Health and Human Services, which examined how different U.S. demographics contributed to medical costs. The top 5% of spenders paid an annual average of $35,829 in doctors' bills. By comparison, the bottom half paid an average $232 and made up about 3% of total costs.  Aside from the fact that such a tiny fraction of the country was responsible for so much of our expenses, it also found that high spenders often repeated from year to year. Those chronically ill patients skewed white and old and were twice as likely to be on public health care as the general population.  The graph below looks at how many people remained in each tranche of health care spending in both 2008 and 2009. One fifth of the top 1% of health care spenders in 2008 also were in the top 1% a year later. More than a third of those in the top 5% stayed there both years.

Government issues Medicare Advantage guidelines (Reuters) - The Obama administration on Friday issued 2013 payment and policy guidelines for U.S. health insurers that participate in the Medicare Advantage program, saying the proposed changes would bring lower premiums and stable or improved benefits. But the documents did not include an official preliminary estimate for the net average percentage change in reimbursements, leaving insurers and financial markets in the dark about the guidelines' potential impact on the industry. Analysts said unofficial estimates suggested a possible all-in gain of 2.3 percent, far better than market expectations that had ranged from no change to a decline of 5 percent. A year ago, the Centers for Medicare and Medicaid Services estimated a 1.6 percent net all-in rise for 2012 but later reduced that to 0.4 percent.

Health Care Thoughts: Recommending Brad Delong - When he is not snarking up a storm on his blog or educating Berkeley's young skulls full of mush Brad does some solid academic work.  In concert with Prof. Ann Marciarille (Mrs. Delong if I remember correctly) Delong has posted an interesting piece to SSRN, entitled Bending the Health Cost Curve: The Promise and the Peril of the IPAB.  the article explores the promise and perils of the Independent Payment Advisory Board (IPAB), a major feature of PPACA.  This is a balanced piece with a lot of good background information.  Having been involved in the policy and details of Medicare and Medicaid reimbursement since the late 70s I am more skeptical of technocrats and bureaucrats, but I do see potential, and do see the need. (I also intend to write something about the technical aspects of Medicare reimbursement, but several editors are whipping me now so pleasure work will have to wait). If you have any interest in health care policy and operations, read the Delong piece, well worth the time.

Affordable Care Act’s Popularity Continues to Decline - The Affordable Care Act, President Obama signature health care reform law, continues to slowly but steadily become less popular as time goes on. A new Quinnipiac University poll found that 52 percent of voters think Congress should repeal the law, while just 39 percent think Congress should let it stand as is. This is the highest support for repeal and lowest support for keeping the law in their polling of this question. From Quinnipiac:The drop in support is modest but looking at the numbers there is a clear trend of the law losing support. This poll match what we’ve seen in the Kaiser Family Foundation polling about the ACA. The KFF also found a slow but steady erosion in the law’s favorable numbers since President Obama signed it into law. Since the law wasn’t designed to start really expanding coverage until well after the next election, there is no obvious reason for a large number of people to all of a sudden start supporting the law before November. Most likely the law will continue to grow slowly less popular and will be something of a political liability for Obama in the election.

A Frightening Shortage of Vital Drugs - A severe shortage of a drug used to treat childhood leukemia appears to be easing, lessening the risk that hundreds if not thousands of children might die from a curable disease. This close call and continuing shortages of other vital drugs again highlight why Congress must pass legislation giving the Food and Drug Administration more power to head off such crises.  Some 180 medically important drugs — most of which are injected in hospital, clinics and doctors’ offices — have been in short supply over the past year. This latest shortage involved a drug known as preservative-free methotrexate, which is injected into the spinal fluid to treat acute lymphoblastic leukemia in young children. The preservative can cause paralysis and thus cannot safely be used.  Like many other such shortages, this one was caused by manufacturing problems at one of the few plants still making the drug.   Supplies of the drug subsequently dwindled to the point that major hospitals were close to running out.  Under an executive order issued by President Obama in November, the F.D.A. has been trying to head off shortages by asking manufacturers to report well in advance about any problems that might disrupt their production so that steps can be taken to find alternatives. That is a start but not enough.

Finally, a smoking gun connecting livestock antibiotics and superbugs - How does the livestock industry talk about antibiotics? Well, it depends on who’s doing the talking, but they all say some version of the same thing. Take the National Cattlemen’s Beef Association; they say there is “no conclusive scientific evidence indicating the judicious use of antibiotics in cattle herds leads to antimicrobial resistance in humans [MRSA].” The message is clear. Until scientists trace a particular bug from animals to humans and show precisely how it achieved resistance and moved from farm to consumer, there’s no smoking gun. Thus industry leaders’ heads can remain firmly buried in the sand. Ladies and gentlemen, we now have a smoking gun! NPR reported on it first; here’s their take: A study in the journal mBio, published by the American Society for Microbiology, shows how an antibiotic-susceptible staph germ passed from humans into pigs, where it became resistant to the antibiotics tetracycline and methicillin. And then the antibiotic-resistant staph learned to jump back into humans. The superbug at issue is a strain known as “pig MRSA,” or ST398. It’s the bug I discussed with WIRED writer and Scientific American editor Maryn McKenna recently, and the same one scientists found on retail meat in another study.

White House Refuses to Release Email From Monsanto-Linked Lobbyist - The White House is withholding documents requested under the Freedom of Information Act (FOIA) by an environmental group that suspects the Obama administration of working with Monsanto-linked lobbyists to defend the planting of genetically engineered (GE) crops in wildlife refuges across the country. The information currently being withheld includes a portion of a January 2011 email that a top White House policy analyst received from a lobbyist with the Biotechnology Industry Organization (BIO), which represents GE seed companies such as Monsanto and Syngenta. According to legal filings, the White House withheld the portion of the email because it accidentally contained information on BIO's lobbying strategy that, if released, would cause competitive harm to the group and the companies it represents. "We suspect the reason an industry lobbyist so cavalierly shared strategy is that the White House is part of that strategy," stated Public Employees for Environmental Responsibility (PEER) staff counsel Kathryn Douglass, who is arguing the email should be a public record.

Texas agency likely to cut water to rice farms - For the first time since Gertson's great-grandfather made his way from Denmark through Kansas to the flat, coastal area south of Houston, his family faces the likelihood officials won't release water from two Austin-area lakes into the rivers and canals they use for irrigation. Thousands of farmers in Texas' rice-producing region are likely to be affected by action taken in response to one of the most severe droughts in state history. With water management agencies implementing emergency plans never used before, the Lower Colorado River Authority is widely expected to announce March 1 that it will not release water to rice farmers in three counties. "This is the very first time this has happened," Gertson said. "Rice irrigation was here before LCRA ever existed." Texas usually produces about 5 percent of the nation's rice. Production also is dropping this year in the other five major rice-growing states, including No. 1 Arkansas, as farmers are pressed by rising production costs and dropping prices.

Farmers still Doing Great on Oil Plateau - Kay McDonald points us to newsletters from the Kansas City and Chicago Federal reserves which have very interesting data on farm prices and farm incomes.  The graph above shows the year-over-year changes in farmland prices in the tenth district (Colorado, Kansas, Nebraska, Oklahoma, Wyoming, and portions of western Missouri and northern New Mexico). The shape may remind regular readers of this: Perhaps no surprise that when food prices go up, farms make more money and farmland becomes more valuable.  A good time to be a farmer.  Of course this is coming after a very long interval of misery for farmers.  This picture from the Chicago fed shows longer term farmland prices for the seventh district (Illinois, Indiana, Iowa,  Michigan, and Wisconsin): Ignore the black (nominal) line and focus on the green inflation-adjusted one.  Farmers were on average losing money for decades following the peak of the 1970s, and so farms lost most of their value in the eighties and only reached the 1979 value again in the late aughties.  After a 22% increase in 2011, they are now well above it.

Climate Forecast: 70% of U.S. Counties Could Face Some Risk of Water Shortages by 2050 - According to a new study, more than a third of U.S. counties may be at “extreme” or “high” risk of water shortages by 2050. This won’t be due to a dearth in bartenders, of course, but the result of a swelling population, along with the potential temperature increases and precipitation changes associated with climate change. The research, funded by the Natural Resources Defense Council (which publishes OnEarth), appeared last week in the journal Environmental Science and Technology. The first strike against water supplies comes from increases in population. Projections suggest fairly linear growth between now and mid-century, meaning the U.S. will have about 419.9 million people in 2050 (up from its current population of 313,000,000). All of those additional Americana will have to drink, and eat food grown with water, and turn on lights powered by water-guzzling power plants. Then there’s climate change. Temperature is expected to increase somewhere between 1.5 and 3° Celsius, and the warming air will be able to hold more water. The resulting changes in precipitation aren’t uniform by any means. Models suggest that Texas and the Gulf states will lose more than one inch per year, while the northeastern U.S. could get between two and four extra inches per year.

Graph of the Day: Cumulative Rainfall Anomalies for Southeastern Australia, January 1997 - December 2011 - Cumulative rainfall anomalies for southeastern Australia starting from January 1997 to December 2011 in mm. Individual monthly anomalies are shown in the columns.An alternative way to consider the impact of the rainfall declines and recent rainfall is to look at the cumulative rainfall anomalies for southeastern Australia. The cumulative rainfall anomalies provide a measure of just how much rainfall the region has ‘missed out on’ in the past 15 years. While the systematic accumulation of rainfall deficits was reversed with the heavy spring and summer rainfall of 2010, the total two-year record rainfall makes up for about one third of the total rainfall ‘missed out on’ since 1996. Additionally, the recovery peaked in autumn 2011, with a return to deficits from that time on. In other words, the accumulated below-normal rainfall during the ‘Big Dry’ remains substantially greater than the extra spring and summer rainfall that has fallen during the past two years.

Climate change increased likelihood of Russian 2010 heatwave – study  - The extreme Russian heatwave of 2010 was made three times more likely because of man-made climate change, according to a study led by climate scientists and number-crunched by home PC users. But the size of the event was mostly within natural limits, said the scientists, laying to rest a controversy last year over whether the extreme weather was natural or human-induced. The 2010 heatwave broke all records for Russia – temperatures in the central region of the country, including Moscow, were around 10C above what they should have been for the time of year. More than 50,000 people died from respiratory illnesses and heat stress during that time. The temperatures also had a substantial impact on that year’s Russian wheat harvest, leading to economic losses of more than $15bn. Two studies published in 2011 looked at the causes of the extreme weather, but they disagreed on whether it was a natural event or whether it was a result of anthropogenic climate change.

Warmer Planet Could Be Dominated by Mosquitoes, Tics, Rodents and Jellyfish -  Imagine a planet where jellyfish rule the seas, giant rodents roam the mountains and swarms of insects blur everything in sight. It may sound far-fetched, but enough global warming is likely to change the distribution of wildlife on Earth. While species that are under threat, such as the polar bear, seem to get all the attention, others are beginning to thrive like never before. In the past three months, new studies have been published about killer whales, wandering albatross and trumpeter swans—all of which appear to be benefiting from climate change.

NASA: Earth Is Losing Half A Trillion Tons Of Ice A Year - In the first comprehensive satellite study of its kind, a University of Colorado at Boulder-led team used NASA data to calculate how much Earth’s melting land ice is adding to global sea level rise. Using satellite measurements from the NASA/German Aerospace Center Gravity Recovery and Climate Experiment (GRACE), the researchers measured ice loss in all of Earth’s land ice between 2003 and 2010, with particular emphasis on glaciers and ice caps outside of Greenland and Antarctica. The total global ice mass lost from Greenland, Antarctica and Earth’s glaciers and ice caps during the study period was about 4.3 trillion tons (1,000 cubic miles), adding about 0.5 inches (12 millimeters) to global sea level. That’s enough ice to cover the United States 1.5 feet (0.5 meters) deep. “Earth is losing a huge amount of ice to the ocean annually, and these new results will help us answer important questions in terms of both sea rise and how the planet’s cold regions are responding to global change,”   “The strength of GRACE is it sees all the mass in the system, even though its resolution is not high enough to allow us to determine separate contributions from each individual glacier.”

Moral Hazard and FEMA and Adapting to Sea Level Rise - This piece by Tom Horton makes  a lot of sense.  He argues that sea level rise along the Virginia coastline should nudge an organized retreat and the growth of wetlands.  But, he notes that government disaster relief efforts offer insurance and will have perverse effects as we adapt to climate change. Here is a quote from the end of his piece. "The only way many wetlands could adapt would be if adjacent uplands are left undeveloped to give the marshes a chance to migrate inland as the Bay rises, Stiles says. That’s a good reason to leave places like Bluff Point in conservation zones. Ultimately the taxpayers will pick up the bills, bailing out places like Bluff Point as flooding escalates. Taxpayer-supported federal flood insurance programs, beach replenishment programs, and the Federal Emergency Management Agency are all seeing costs soar as coastal flooding escalates. Private insurers have already pulled back from many coastal areas."

Acidifying The World's Oceans - Every once in awhile I like to catch up on how our continuing destruction of life in the oceans is progressing. If some recent results are anything to go by, things are humming right along. I haven't looked at acidification of the oceans since August, 2010, when I posted The "Other" Carbon Problem — Ocean Acidification, so it's time to take up this happy subject again. The news comes out of the University of Hawaii, where researchers have found unprecedented, man-made trends in oceans acidity. Nearly one-third of CO2 emissions due to human activities enters the world’s oceans. By reacting with seawater, CO2 increases the water’s acidity, which may significantly reduce the calcification rate of such marine organisms as corals and mollusks, resulting in the potential loss of ecosystems. As acidity of seawater rises, the saturation level of aragonite drops. Their models captured the current observed seasonal and annual variations in this quantity in several key coral reef regions. Today’s levels of aragonite saturation in these locations have already dropped five times below the pre-industrial range of natural variability.

Global Extinction: Gradual Doom as Bad as Abrupt - About 252 million years ago, at the end of the Permian period, Earth almost became a lifeless planet. Around 90 percent of all living species disappeared then, in what scientists have called "The Great Dying." Algeo and colleagues have spent much of the past decade investigating the chemical evidence buried in rocks formed during this major extinction. The world revealed by their research is a devastated landscape, barren of vegetation and scarred by erosion from showers of acid rain, huge "dead zones" in the oceans, and runaway greenhouse warming leading to sizzling temperatures. The evidence that Algeo and his colleagues are looking at points to massive volcanism in Siberia as a factor. A large portion of western Siberia reveals volcanic deposits up to five kilometers (three miles) thick, covering an area equivalent to the continental United States. The lava flowed where life was most endangered, through a large coal deposit. "The eruption released lots of methane when it burned through the coal," Algeo said. "Methane is 30 times more effective as a greenhouse gas than carbon dioxide.

Canadian government is ‘muzzling its scientists’ - The Canadian government has been accused of "muzzling" its scientists. Speakers at a major science meeting being held in Canada said communication of vital research on health and environment issues is being suppressed. Prof Thomas Pedersen, a senior scientist at the University of Victoria, said he believed there was a political motive in some cases. "The Prime Minister (Stephen Harper) is keen to keep control of the message, I think to ensure that the government won't be embarrassed by scientific findings of its scientists that run counter to sound environmental stewardship," he said. "I suspect the federal government would prefer that its scientists don't discuss research that points out just how serious the climate change challenge is." The Canadian government recently withdrew from the Kyoto protocol to reduce carbon dioxide emissions. The allegation of "muzzling" came up at a session of the AAAS meeting to discuss the impact of a media protocol introduced by the Conservative government shortly after it was elected in 2008. The protocol requires that all interview requests for scientists employed by the government must first be cleared by officials. A decision as to whether to allow the interview can take several days, which can prevent government scientists commenting on breaking news stories.

Attacks paid for by big business are ‘driving science into a dark era’ - Most scientists, on achieving high office, keep their public remarks to the bland and reassuring. Last week Nina Fedoroff, the president of the American Association for the Advancement of Science (AAAS), broke ranks in a spectacular manner. She confessed that she was now "scared to death" by the anti-science movement that was spreading, uncontrolled, across the US and the rest of the western world. "We are sliding back into a dark era," she said. "And there seems little we can do about it. I am profoundly depressed at just how difficult it has become merely to get a realistic conversation started on issues such as climate change or genetically modified organisms." The remarks of Fedoroff, one of the world's most distinguished agricultural scientists, are all the more remarkable given their setting. She made them at the AAAS annual meeting, an event at which scientists normally revel in their latest accomplishments.

Hans-Werner Sinn on the “green paradox” - The period of real [energy] price declines coincided with the emergence of the “green” movement and the re-orientation of the world energy policies by way of inducing direct demand restraints and introducing incentive systems to foster the development of “green” replacement technologies.  Thus, the threat of market destruction may indeed have increased the supply of fossil fuels enough to more than offset the growing world demand, thereby inducing real energy prices to fall, contrary to what a forward-looking explanation along the lines of Hotelling’s theory would have suggested prima facie. That is from Sinn’s new book The Green Paradox: A Supply-Side Approach to Global Warming.

When Does ‘It Will Hurt the Poor’ Outweigh ‘It’s Good for the Environment?’ - “Nearly every environmental policy hurts the poor the most,” say Iain Murray and David Bier of the Competitive Enterprise Institute. Writing recently in the Washington Examiner, they have it in for any environmental policy that would raise the price of anything—cap-and-trade programs for carbon emissions, clean energy mandates, light bulb regulations, the works. To be sure, some of the policies they list have their flaws, as I would be the first to concede. What I would like to focus on here, though, is when “it will hurt the poor the most” is an independently valid objection to otherwise sound, market-based environmental policies. I am inclined to say that it never is. Here is why: “It will hurt the poor” is usually a smokescreen for some other interest. The first problem with “it will hurt the poor” is that we rarely hear it from the poor themselves or their sincere advocates. Instead, objections to raising prices as a tool of environmental policy come mainly from others. On the right, the argument is a favorite of the affordable energy lobby. It was recently on display, for example, in a post by the American Coalition for Clean Coal Energy (ACCCE) on the blog Behind the Plug. The post laments that rising energy costs, caused in part by environmental regulations, are disproportionately hurting low-income families. The ACCCE’s real worry, of course, is the profitability of the carbon-intensive coal industry. Another ACCCE post is blunt about it : “Any legislation or regulation at the federal or state level must, first, do no harm to one of our most abundant and affordable sources of energy.” That’s “first” as in “looking out for number one.” Other purported objectives—jobs, energy security, helping the poor—are mere supporting actors in the old play “King Coal.”

Feds identify 237,100 acres in Arizona for renewable energy projects - The Bureau of Land Management has recommended 237,100 acres of public land in Arizona are suitable for renewable energy development, part of an effort to speed up the process for clean-energy companies looking to set up shop in the state. The agency Friday released a draft environmental impact statement for its Restoration Design Energy Project, recommending a middle course among six alternatives that ranged in size from 43,700 acres to 321,500 acres.“Arizona has great potential to build a strong renewable energy economy,” Interior Secretary Ken Salazar said in a prepared statement. The BLM project is unique to Arizona, but supporters said it is being looked at for other parts of the country. A similar effort has been launched across the West by the bureau.

Drawing the Line at Power Lines - AS plans for the Keystone XL pipeline faltered over the last six months, its route through a pristine aquifer in Nebraska proved to be its fatal political flaw. Environmental groups had raised numerous other serious objections: Building the pipeline would lead to a rise in climate changing gases; its environmental review was tainted by conflicts of interest; extracting oil from Canadian oil sands was destroying precious ecosystems and boreal forest.  There are pipelines, trains, trucks and high-voltage transmission lines. None of them are pretty, and all have environmental drawbacks. But if you want to drive your cars, heat your homes and watch TV, you will have to choose among these unpalatable options. Practically speaking, there is no energy equivalent of wireless.  Indeed, some of the most pitched energy battles being fought today involve not oil pipelines but “next generation” energy transport: the expansion of pipe networks for natural gas and the high-voltage transmission lines that connect large-scale wind and solar farms to population centers. And these systems are expanding rapidly as the United States shifts away from traditional fossil fuels.

Hydrogen Fuel Cells: Not Long to Wait Now - Fuel cells are one of those technologies we have covered before, usually citing some manufacturer who is fan-faring a new technology purported to be game-changing for the cost structure of the hydrogen fuel cell market. So far, fuel cells are used predominantly in specialist applications such as submarines and space vehicles, or in remote areas where power requirements are low yet refuelling is expensive or difficult — or both. The breakthrough application would be an economically viable application in automobiles, but according to the FT, carmakers have sunk large amounts of money into hydrogen research programs with little to show for it so far, in terms of cars on the road. General Motors says it has invested $2 billion in the technology to date. But although it says it has a test fleet of 100 fuel-cell vehicles on the road in Europe and the US, which will be ready for market introduction by 2016, there is not a viable business model for providing a refuelling infrastructure or firm details of what models will be powered by fuel cells.

The Peak Oil Crisis: Technology Update - Gasoline prices in the U.S. are off on another tear.  In case you missed it, they are already getting $5 for regular down by the Kennedy Center. Somebody in Congress is sure to notice this soon. While waiting to see how the latest settlement of the EU's debt crisis or any of the ongoing Middle East confrontations turn out, it seems like a good time to review a few of the hundreds of announcements of new energy technology that have made in the last few months. The 800 lb. gorilla of course remains cold fusion. While little new has happened in the cold fusion story recently, scientists from around the world continue to report that Low Energy Nuclear Reactions (LENR) really do take place and can make heat. So far two companies say they have developed the technology to the point where they can safely make useful amounts of heat and are preparing to bring heat-making devices to market. Unfortunately, both of these companies, for what they say are proprietary reasons, have refused to let outside scientists examine their technology to verify that it can perform as claimed. This situation may be changing, however, for one of these two companies, a Greece-based organization called Defkalion, say they have arranged for teams of outside investigators to come in later this week and test their device. If this series of tests by outside scientists do take place, we should at least have some sort of independent verification that these "cold fusion" devices are for real, and not a scam as many believe.

Japan Starts to Invest in Tsunami-Proof, Floating Wind Farms - Following the earthquake and tsunami that hit Japan in 2011 causing one of the world’s worst nuclear disasters since Chernobyl at the Fukushima nuclear power plant, the Ministry of Trade and Industry (MITI) announced its plans to develop more floating offshore wind farms.The floating Kamisu wind farm just off the coast of the Ibaraki prefecture comprises of just seven 2 megawatt wind turbines, but was able to withstand the tsunami and provided vital electricity in the wake of the disaster.Using as much as ¥20 billion ($260 million) from the reconstruction budget, created to help redevelop the damaged areas after the devastating tsunami, MITI will work with some of Japan’s largest construction companies such as, Mitsubishi Heavy Industries, Nippon Steel Corp, IHI Corp, and Mitsui Engineering & Shipbuilding, to develop a pilot floating wind farm off the coast of Fukushima. The project will commence in March with just six 2 megawatt turbines, but with plans to run a continuous study of evaluation through to 2016 and the option to further expand the capacity of the farm to as many as 80 turbines (1 gigawatt of power) by 2020.

Fukushima manager dismisses fears that reactors are overheating again --Asked repeatedly to explain the dramatic rise in temperature, Takahashi said the cause had been traced to a faulty thermometer. The manager of the Fukushima Daiichi power plant in Japan has conceded that it will be very difficult to remove the facility's melted nuclear fuel, but dismissed fears that one of the damaged reactors had started overheating again. "Our main challenge is to now remove the nuclear fuel from the reactors," Takeshi Takahashi told visiting journalists on Monday. Fears rose this month that fuel in the No 2 reactor was heating up again, prompting the plant's operator, Tokyo Electric Power (Tepco) to inject more cooling water along with boric acid, which is used to prevent a nuclear chain reaction.

Tokyo is as contaminated as the worst place in Chernobyl - Following up this article..23,300 Bq/Kg of cesium from 4km of filter plant The contamination level of Mizumoto Park turned out to be the same level of “off-limits zone” in Chernobyl. The contamination level of the park was 23,300 Bq/Kg. According to Nuclear Safety Commission, it is converted to be 1.4 ~1.5 million Bq/m2. In Chernobyl, if the area is more contaminated than 1.48 million Bq/m2, it was labelled as off-limits zone, which was the worst level of the pollution. Because cesium doesn’t choose Mizumoto park intentionally, at least some parts are contaminated as the worst area of Chernobyl. Source

Post-Fukushima, Obama gives Nuclear Industry an $8.3b loan guarantee bailout, as residents die of cancer - In a little noticed story from a few weeks, Obama’s NRC just approved two brand spanking new plants near two other nuclear plants owned by Southern Company, outside Augusta, Georgia. First, background from CNN: Loan guarantees pave way for first new U.S. nuclear reactors in yearsPresident Obama announced $8.3 billion in loan guarantees Tuesday for two nuclear reactors to be built in Burke County, Georgia. I’m sorry Mr. Obama, but when has nuclear power ever been considered clean energy? New Plant Vogtle reactors praised despite unresolved nuclear waste plan Questions persist regarding waste storage: The waste, part of 2,490 metric tons of the material statewide, has been accumulating in concrete-lined pools since Vogtle’s first two reactors went online in 1987 and 1989. Those pools will be full in 2014, and the cancellation of the government’s Yucca Mountain waste repository in Nevada has left the fate of spent fuel from all 104 U.S. reactors in limbo. But it gets better: theGrio: Environmental racism: Is nuclear plant causing cancer for poor black residents of Shell Bluff, Ga.?  if nuclear reactors are really economic shots in the arm, why is Burke County still one of the poorest corners of the state a quarter century after Southern Company brought its first pair of local reactors online in 1987?

Coal Consumption in China Rises at Fastest Rate Since 2005 - Energy consumption figures just released by the Chinese government underscore how quickly coal use is booming in China, a country that is already the world’s largest emitter of greenhouse gases. In 2011, China’s coal consumption increased by 9.7%, the most year-over-year growth seen since 2005. The country also saw a substantial increase in natural gas consumption, which climbed by 12% in 2011. The figures, released this week by the National Bureau of Statistics, show just how much work needs to be done in order to de-carbonize China’s rapidly growing energy system. Non-fossil fuels — solar PV, solar thermal, wind, and hydro — now account for 9.4% of China’s primary energy consumption. Officials expect renewables to make up roughly 11.4% of consumption by 2015 and energy intensity to decrease another 16% by 2015. China is also in the process of rolling out provincial greenhouse gas trading programs in an attempt to decrease emissions 45% by 2020 compared to 2005 levels.

New York Judge Rules Town Can Ban Gas Hydrofracking - In a victory for opponents of the drilling process known as hydrofracking, a New York State judge ruled on Tuesday that the upstate town of Dryden in Tompkins County can ban natural gas1 drilling within its boundaries.  In August, Dryden’s Town Board used its zoning laws to pass a drilling ban, one salvo in a battle that is playing out nationwide as energy companies move to drill in densely populated areas. A month after the ban’s passage, Anschutz Exploration Corporation, a Colorado driller with 22,200 acres under lease in the town, filed a lawsuit arguing that the town’s authority did not extend to regulating or prohibiting gas drilling.  In a decision issued on Tuesday, Justice Phillip R. Rumsey of State Supreme Court said that state law does not preclude a municipality from using its power to regulate land use to ban oil3 and natural gas production. The ruling is the first in New York to affirm local powers in the controversy over drilling in the Marcellus Shale, a gas deposit under a large area of New York, Pennsylvania and Ohio.

Is there really so much shale gas in the ground? - Shale gas fever has overtaken America, but we have seen this sort of mania before.  In 2003 and 2004, a "hydrogen economy" was touted as the Next Big Thing. The United States was poised to run its 240 million cars and trucks on it some day, and wean itself off of oil. California would lead the way, putting half a million hydrogen vehicles on the road and building 200 fueling stations by 2010. Today, after the expenditure of around $2 billion of public funds, the U.S. has just two-dozen fueling stations and 500 hydrogen vehicles, plus only modest progress in fuels cells.  Then Americans became drunk on ethanol. More than $20 billion in subsidies was spent over a three-decade period ending Dec. 31 that ultimately turned nearly 40 percent of the U.S. corn crop into less than 10 percent of the country's fuel needs by volume, and less than 7 percent by energy content.   Now the U.S. has gone batty for natural gas. President Barack Obama and key members of Congress have cited a humongous estimate for the natural gas supply supposedly possessed by the United States -- nearly 2,200 trillion cubic feet of the fuel, the equivalent of 379 billion barrels of oil, which if accurate would exceed the crude oil reserves of Saudi Arabia, Only, that widely published figure represents what are called "possible" reserves, not the more certain categories known as "proved" and "probable" -- gas that is more likely to be producible under current technological and market conditions.

Senators Take Emergency Oil Reserve Hostage to Force Keystone Approval - Republican Congressional leaders have failed to force President Obama to approve the Keystone XL pipeline. But that’s not stopping them from trying over and over again, taking hostages in the process. First they used the payroll tax cut extension as a vehicle to force a decision on the pipeline in sixty days, even before the final route was identified. President Obama was forced to disapprove the permit because there was no time to assess its potential pollution. This week, several senators took a different hostage: our emergency oil supply.  On February 13, Senators David Vitter (R-LA), John Hoevan (R-ND), and Richard Lugar (R-IN) introduced the Strategic Petroleum Supplies Act, S. 2100 that would prevent President Obama from selling oil from the Strategic Petroleum Reserve unless Keystone is approved: “the Administration shall not authorize a sale of petroleum products from the Strategic Petroleum Reserve… until the date on which all permits necessary … for the Keystone XL pipeline project application filed on September 19, 2008 (including amendments) have been issued.”

Work-arounds for the politics of Keystone - The Keystone Gulf Coast Expansion Project is now entering its fourth year of regulatory review, and is currently on indefinite political hold. In the mean time, the market is figuring out other alternatives. A key demonstration of the need for better oil transportation infrastructure in the United States is the price gap between West Texas Intermediate, a light, sweet crude traded in Cushing, Oklahoma, and Brent, a similar crude from the North Sea.  Enbridge, another Canadian company, has purchased half-interest in the Seaway Pipeline, which historically had been used to carry oil from the Gulf of Mexico to refiners in Oklahoma. Enbridge's plan is to invest in the infrastructure necessary to allow oil to move in the opposite direction through that pipe in order now to bring crude oil from Cushing down to refiners on the Gulf. Enbridge announced on Friday that this process is well under way. A separate plan is Enbridge's Flanagan South Pipeline Project, which would lay a second set of pipes twinning its existing system to carry oil from Illinois to Cushing. It would serve a similar function as part of Keystone, adding capacity to get more oil from the north down to Cushing, albeit at greater cost and less efficiently than Keystone. In yet a third development, TransCanada is recognizing that even if it can't get the full Keystone Gulf Coast Expansion approved, a great deal could still be accomplished with just the segment from Cushing down to the Gulf.

‘It’s Going to Be War’: First Nations Battle Canadian Tar Sands - The indigenous First Nations of Canada, along with environmentalists and civil society groups, are gearing up for an epic battle as the oil giant Enbridge continues to press for its 'Northern Gateway' pipeline that would transport tar sands oil from Alberta to the coast of British Columbia.  The fight against the Keystone XL has won at least a temporary victory in the United States, but its Canadian counterpart, despite vocal opposition by environmentalists and community members along its westward route, has been largely championed by the ruling conservative government in Ottawa. The Los Angeles Times reports: The $5.5-billion Northern Gateway project, which would carry 525,000 barrels a day of crude 731 miles from a town near Edmonton through the Rocky Mountains to a new port on the British Columbia coast, has long been in the works as a companion to Keystone XL. But with Keystone's recent turmoil in the U.S., Northern Gateway has risen to new prominence as a defiant Plan B for a nation increasingly aggressive in combating international hurdles, whether it's greenhouse gas treaties, low-carbon fuel standards or U.S. presidential politics. "There has always been very strong support by the Harper government, by the province of Alberta and by the oil industry for the Northern Gateway pipeline. But there's no question that for all three of those entities, that urgency increased dramatically with the apparent defeat of Keystone XL,"

Canadian oil’s quiet pipeline to the West - Commentary  A pipeline from Alberta’s oil sands to the British Columbia coast already exists. It’s been “flying under the radar” until now, so to speak. But that’s about to change.  All the media attention had been currently focused much further north, on Enbridge’s proposed $5.5 billion Northern Gateway pipeline from Alberta to isolated Kitimat, B.C., where a shipping terminal is to be built. It’s distracted the media and environmentalists until now: Public hearings on Northern Gateway are underway and expected to last for months.   Houston-based Kinder Morgan has been operating its 600-mile Trans Mountain pipeline from Edmonton to Vancouver’s Burnaby Port for years. Trans Mountain carries only 300,000 barrels per day, a tiny percentage of Alberta crude. Now Kinder Morgan has announced it’s lined up enough shippers to double the pipeline’s capacity. It’ll decide by the end of March whether to go ahead with the $3.8 billion expansion — and face a new set of regulatory and public hurdles.  The Kinder pipeline, which recently allowed the first tanker of bitumen crude to be shipped to China, has gone largely unnoticed during the Northern Gateway media furor. But that will change, no doubt. The prospect of it doubling its capacity to 600,000 barrels a day has already caught the attention of the usual suspects.

Canadian oil: Could some of it be headed for California? - Much of the focus behind Canada’s push to build a new oil pipeline to the West Coast has been to diversify its markets, to reduce its reliance on the U.S. as a customer. The Canadian government says it wants to start selling oil to China and South Korea. But there are strong indications that California could be the ultimate destination for much of the oil shipped on the proposed Northern Gateway pipeline. Analysts say California could see as much as half of the oil transported out of the tar sands of northern Alberta to a port on the coast of British Columbia, where it would be loaded onto tankers for destinations as yet unknown. After the release in December of a University of Calgary study on the economics of transporting Canadian oil, energy economist Michal C. Moore, senior fellow at the university and a former California energy commissioner, predicted that half of Northern Gateway’s oil would go to “under-utilized California refineries,” the Calgary Herald reported, with the other half going to northern Asia.

US, Mexico agree to cooperate on energy -  The United States and Mexico agreed Monday to work together when drilling for oil and gas below their maritime border in the Gulf of Mexico. Secretary of State Hillary Rodham Clinton and Mexico's foreign minister signed the deal at a ceremony in the Mexican resort of Los Cabos as Mexican President Felipe Calderon and U.S. Interior Secretary Ken Salazar looked on. The cooperation stems from an understanding that President Barack Obama and Calderon reached in 2010 to share in the profits and work together to avoid spills. Clinton said the deal would "ensure safe, efficient, responsible exploration of the oil and gas reservoirs in the Gulf of Mexico." "These reservoirs could hold considerable reserves that would benefit the United States and Mexico alike," she said.

US House OKs Opening Arctic National Wildlife Refuge to Oil Drilling - The U.S. House once again passed a bill to open the Arctic National Wildlife Refuge to oil drilling, voting 237-187 Thursday on a measure expected to die in the Senate. "This is my 12th time passing ANWR out of the House and although this is a momentous day, there is still work to be done," said U.S. Rep. Don Young, R-Alaska. He said the Senate should get moving. The legislation, which contains other controversial drilling and pipeline provisions, faces much bigger obstacles in the Senate and with President Obama, said Alaska's senators, Republican Lisa Murkowski and Democrat Mark Begich. Still, the senators take solace in the House vote and say it gives them a new opportunity to open ANWR's coastal plain to drilling with twists designed to make the idea palatable to reluctant Democrats. "I think I've got the votes in the Energy Committee on ANWR," said Murkowski, the ranking Republican on the Senate Committee on Energy and Natural Resources.

Oil And Gas: Roll On The Barrels - When the country’s first oil pipeline from the Forties field opened in 1975, it was the queen who pushed the gold-plated button in BP’s Aberdeen headquarters; Harold Wilson, the prime minister, was there too. This newspaper hailed “the coming glut of energy”.  Back then, the industry thought it would be winding down by the 2010s—the giant Forties field was due to be decommissioned this year. But, as in other oilfields, improved technology, new owners and high commodity prices have made continued development possible. Forties is now producing 16,000 barrels a day more than it was when BP sold it to Apache, a Texas-based firm, in 2003. It should still be pumping oil in 2027. Production is certainly past its peak, however. Since 1999, when Britain was the world’s sixth-largest oil and gas producer, yields have fallen by an average of 6.2% a year, reckons Oil & Gas UK, a trade body (see chart); the country now ranks 18th. But the Department of Energy and Climate Change (DECC) forecasts that over the next 30 years another 14 billion-24 billion barrels of the black stuff will be recovered. There may yet be new finds: Statoil, Norway’s national oil firm, has made two big discoveries in its part of the North Sea in the past year. But much of the remaining British oil is hard and expensive to extract.

EnergyBulletin: Energy Security For Whom? For What? (report)  - Energy Security For Whom? (pdf 100 pages) How can fossil fuels and uranium be kept in the ground and agrofuels off the land in ways that do not inflict suffering upon millions? Mainstream policy responses to these issues are largely framed in terms of "energy security". Yet far from making energy supplies more secure, such policies are triggering a cascade of new insecurities for millions of people. This report considers the pitfalls of "energy security", both as policy and as rhetoric. Its four sections:

  • explore the abstract and historical energy concept reflected in physics, which ignores the different types of political struggle connected with each energy source;
  • describe the wave of new energy enclosures justified by “energy security” that are creating new scarcities and insecurities as people are dispossessed of energy, food, water, land and other necessities of life;
  • outline how the neoliberal market-driven approach to energy and climate policy strengthens energy exclusions, while the financialisation of energy and climate creates energy shortages and delays effective climate action; and
  • summarise the violence that accompanies the everyday “normal” operation of fossil-fuelled industrialism that is entrenched within the “securitisation of everything”.

Has the United States beaten peak oil? - In the past five years, warnings about peak oil have gained a lot of traction. U.S. oil production, after all, has fallen sharply since 1970. Global oil output has plateaued of late, even as China and India are demanding ever more crude. And that’s all caused prices to soar.Yet the recent shale-oil boom in North Dakota has some analysts brushing off this gloomy perspective. A new research note (pdf) from Citigroup argues that the recent surge in North American production has “buried” the peak-oil hypothesis. New drilling technology has allowed companies to extract oil from once-inaccessible shale rock, which has, in turn, allowed the U.S. to slash its oil imports dramatically. What’s more, there are tantalizing shale deposits all around the world — in Argentina, Australia, and even France. So does that mean that, as the Citigroup analysts say, the peak-oil hypothesis is “dead”? Well, not so fast.For one, the recent discoveries in North Dakota, while promising, need to be put in context. As a less-buoyant research note from Barclays Capital emphasizes, North Dakota’s shale plays still only produce 0.5 million barrels of oil per day. In an average year, tiny swings in China’s appetite for crude can easily gobble all of that up. What’s more, the United States still remains the largest importer of crude oil and other refined products in the world, at about 9 million barrels of oil per day. We’re still very far from erasing that dependency.

Oil Prices Are Rising Despite Lowest Demand Since 1997 - Oil is once again trading above $100 per barrel, bringing with it estimates that U.S. gas will cost more than $4 per gallon by May, if not sooner. The Obama administration is already bracing for higher gas prices and the political cost that they could exact. But it isn’t increasing demand for oil that is driving the recent price increase. In fact, demand is the lowest it’s been since April, 1997, according to the Oil Price Information Service (OPIS). Instead, OPIS points to speculators as the party responsible for driving up prices:Strangely, the current run-up in prices comes despite sinking demand in the U.S. “Petrol demand is as low as it’s been since April 1997,” says Tom Kloza, chief oil analyst for the Oil Price Information Service. “People are properly puzzled by the fact that we’re using less gas than we have in years, yet we’re paying more.” Kloza believes much of the increase is due to speculative money that’s flowed into gasoline futures contracts since the beginning of the year, mostly from hedge funds and large money managers. “We’ve seen about $11 billion of speculative money come in on the long side of gas futures,” he says. “Each of the last three weeks we’ve seen a record net long position being taken.”

Congress Pushes Iran Regime Change Over Diplomacy - This is a sobering interview on Real News Network with Lawrence Wilkerson, who was Colin Powell’s chief of staff, on how Congress and Obama are painting themselves in a corner over Iran.

Uncle Sam, Global Gangster -- With the United States now well into the second decade of what the Pentagon has styled an “era of persistent conflict,” the war formerly known as the global war on terrorism (unofficial acronym WFKATGWOT) appears increasingly fragmented and diffuse.  Without achieving victory, yet unwilling to acknowledge failure, the United States military has withdrawn from Iraq.  It is trying to leave Afghanistan, where events seem equally unlikely to yield a happy outcome.  Elsewhere -- in Pakistan, Libya, Yemen, and Somalia, for example -- U.S. forces are busily opening up new fronts.  Published reports that the United States is establishing “a constellation of secret drone bases” in or near the Horn of Africa and the Arabian Peninsula suggest that the scope of operations will only widen further.  In a front-page story, the New York Times described plans for “thickening” the global presence of U.S. special operations forces.  Rushed Navy plans to convert an aging amphibious landing ship into an “afloat forward staging base” -- a mobile launch platform for either commando raids or minesweeping operations in the Persian Gulf -- only reinforces the point. Yet as some fronts close down and others open up, the war’s narrative has become increasingly difficult to discern.  How much farther until we reach the WFKATGWOT’s equivalent of Berlin?  What exactly is the WFKATGWOT’s equivalent of Berlin?  In fact, is there a storyline here at all?

JPM Hikes Crude Price Forecast, Sees $120 WTI By Election…JPM brings some less than good news for the administration, which unless planning to propose another $500 billion or so gas price offsetting fiscal stimulus (which would bring total US debt to $17 trillion by the end of 2012) may find itself with the bulk of its electorate unable to drive to the voting booths come November. In a just revised crude forecast, JPM commodity analyst Larry Eagles, has hiked both his Crude and Brent expectations across the board, and now sees WTI going from $105 currently to a $120 by the end of the year, $4 higher than his prior forecast. Alas, since in another report from this morning titled "Return of Asset Reflation" JPM finally figures out what we have been saying for months, namely that the stealthy global central bank liquidity tsunami is finally spilling out of equity markets and into everything else, inflation is about to become a substantially topic in pre-election propaganda.

Saudi Arabia Cuts Oil Output, Export: Industry Report - The world’s top oil exporter, Saudi Arabia, appears to have cut both its oil production and export in December, according to the latest update by the Joint Organizations Data Initiative (JODI), an official source of oil production, consumption and export data. The OPEC heavyweight saw production decline by 237,000 barrels per day (bpd) from three-decade highs of 10.047 million bpd in November, the JODI data showed on Sunday. The draw-down was sharper for the actual amount exported, declining by 440,000 bpd, or 5.6 percent, to come in at 7.364 million bpd, the data also showed. The level would still be similar to exports after a steep ramp-up last June. In its monthly report on February 10, the IEA put Saudi Arabia’s production number for December slightly lower at 9.55 million bpd, a disparity of 260,000 bpd versus the JODI data. Iran appeared not to have filed data in time for the latest release, providing no additional clues about how many export barrels were already lost in December, as some reports have suggested.

Baghdad seeks to involve BP at Kirkuk oilfield - Baghdad is seeking to involve BP in a major project to revive Iraq's giant northern Kirkuk oilfield, which is suffering from massive declines in production, industry sources said on Friday.  'We envisage BP doing something similar to Rumaila at Kirkuk,' said an Iraqi oil executive. He was referring to a $30 billion BP-operated project to develop Iraq's biggest oilfield, located in southern Iraq.  BP executives met Iraq's Oil Minister Abdul-Kareem Luaibi this week in London.  Production at Kirkuk has slumped to 280,000 barrels per day from 900,000 bpd in 2001 after years of injecting water and dumping unwanted crude and products into the field.  Iraqi officials would like to see BP work to stem declines at this 77-year old workhorse and then raise capacity to around 600,000 barrels per day in five years, the sources said.

As WTI Passes $105, Guardian Says Iran "Military Action Likely", Would Send Crude Soaring - Between the Chinese 'surprise' RRR and the Iran export halt to UK and France (and escalating tensions), Oil prices are off to the races this evening. WTI front-month futures have just broken $105 (now up more than 10% in the last two weeks), the highest levels in over nine months and just 8% shy of the 5/2/11 post-recession peak just under $115. Brent (priced in EUR) remains off last week's intraday highs (as EUR strengthens) but still above the pre-recession peak but in USD it traded just shy of $121 - well above last week's peak. Of course, this will be heralded as a sign of demand pressure from a 'growing' global economy rather than the margin-compressing, implicit-taxation, consumer-spending-crushing supply constraint for Europe and the US that it will become in the not too distant future. As we post, The Guardian is noting that US officials are commenting that "Sanctions are all we've got to throw at the problem. If they fail then it's hard to see how we don't move to the 'in extremis' option." The impact of any escalation from here is gravely concerning with PIMCO's $140 minimum and SocGen's $150-and-beyond Brent prices rapidly coming into focus - and for those pinning their hopes on the Saudis coming to the rescue (and fill the Iranian output gap), perhaps the news that our Middle-East 'allies' cut both production and exports in December will stymie any euphoria.

Crude Could Hit $125 in Weeks - Crude oil prices rose $1.55 a barrel to close at $107.18, Thursday, a 1.8 percent gain and a high for the year, buttressed in part by a weak dollar -- the currency used in energy trading -- but muted somewhat by higher than expected crude inventories. According to the Energy Information Administration, U.S. oil stockpiles rose by 1.6 million barrels last week, topping analyst expectations calling for a 500,000 barrel increase. However, some experts believe that oil could skyrocket even more, to $125 in the next few weeks, as global tensions, demand and cyclical market factors combine to drive the price even higher. Crude prices in recent weeks have trended upward due to uncertainty in the Middle East prompted by tension bedtween Iran and Israel and concerns that the euro zone debt crisis might still unravel. "We have to be prepared for increased crude prices and increased inflation," Hewison said. He added that it is very likely that U.S, crude will increase by an additional $13 to $15 over the next 14 to 21 days.

WTI Crude Oil May Reach $130 a Barrel, Hofmeister Says -- West Texas Intermediate oil may reach $130 a barrel within the next six months, said John Hofmeister, founder and chief executive officer of the advocacy group Citizens for Affordable Energy. “Demand continues to rise in Asia and whether we use less or not doesn’t matter,” Hofmeister, a former executive at Royal Dutch Shell Plc, said in an interview on CNBC. “Price is going up because supply can’t keep up with demand.” U.S. oil and natural gas production has increased slightly because of shale output, he said. “It’s a trickle when we need a river of new supply,” Hofmeister said. Oil futures for March delivery on the New York Mercantile Exchange touched $105.44 today, up $2.20 from the Feb. 17 close and the highest price since May 5. Hofmeister, former president of Shell Oil Co., the U.S. unit of Royal Dutch Shell, questioned the availability of spare production capacity maintained by the Organization of Petroleum Exporting Countries. “I think OPEC is about maxed out,” he said during the interview. “When people talk about spare capacity at OPEC, I just don’t see it. I don’t see it coming through and I’m not sure it’s there,”.

Iran Stops Oil Exports to U.K. Companies - Iran stopped exporting crude oil to French and British companies, the oil ministry’s news website Shana reported, citing Alireza Nikzad Rahbar, a ministry spokesman. Iran “will give its crude oil to new customers instead of French and U.K. companies,” Rahbar said. The halt in shipments followed a warning by the oil minister that the Persian Gulf country might act preemptively ahead of a European Union ban on purchases of Iranian crude planned to start in July, he said, according to the report today. Rahbar gave no further details. The suspension of Iranian exports comes amid rising tension in the Gulf over Iran’s nuclear program, which has prompted the EU and the U.S. to impose additional sanctions against Iran, restricting trade and financial transactions. Iran, the second- largest producer in the Organization of Petroleum Exporting Countries, after Saudi Arabia, is already under four rounds of United Nations sanctions. Iran threatened to halt oil shipments to Italy, Spain, Portugal, Greece, France and the Netherlands when it summoned their ambassadors to the Foreign Ministry on Feb. 15 to protest against the EU’s punitive measures, state media reported. Iran would end sales of crude to the six countries unless they agreed to long-term contracts and payment guarantees, state-run Press TV reported that day, without citing anyone.

Iran announces it has stopped selling crude oil to UK and France -  Tehran takes step four months ahead of EU import ban amid heightening political tensions over country's enriching of uranium - Iran announced on Sunday that it had stopped selling crude oil to British and French companies, in a move that may put further pressure on the price of oil amid heightening political tensions. The price of Brent crude – the benchmark for oil – had been rising last week because of tensions with Tehran, which had warned it might cut oil supplies to the Netherlands, Greece, France, Portugal, Spain and Italy in retaliation for Europe's latest sanctions. On Sunday, a spokesman was quoted on the Iranian oil ministry's website as saying: "Exporting crude to British and French companies has been stopped … we will sell our oil to new customers. We have our own customers … The replacements for these companies have been considered by Iran." The EU has already agreed to stop importing Iranian crude oil from 1 July in an effort to stop Iran enriching uranium.

Iran stops oil sales to British and French firms -(Reuters) - Iran has stopped selling crude to British and French companies, the oil ministry said on Sunday, in a retaliatory measure against fresh EU sanctions on the Islamic state's lifeblood, oil. "Exporting crude to British and French companies has been stopped ... we will sell our oil to new customers," spokesman Alireza Nikzad was quoted as saying by the Ministry of Petroleum website. The European Union in January decided to stop importing crude from Iran from July 1 over its disputed nuclear program, which the West says is aimed at building bombs. Iran denies this. Iran's oil minister said on February 4 that the Islamic state would cut its oil exports to "some" European countries. The European Commission said last week that the bloc would not be short of oil if Iran stopped crude exports, as they have enough in stock to meet their needs for around 120 days.

A Very Different Take On The "Iran Barters Gold For Food" Story - Much has been made of today's Reuters story how "Iran turns to barter for food as sanctions cripple imports" in which we learn that "Iran is turning to barter - offering gold bullion in overseas vaults or tankerloads of oil - in return for food", and whose purpose no doubt is to demonstrate just how crippled the Iranian economy is as a result of the ongoing US embargo. Incidentally this story is 100% the opposite of the Debka-spun groundless disinformation from a few weeks ago that India was preparing to pay for Iran's oil in gold (they got the asset right, but the flow of funds direction hopelessly wrong). While there is certainly truth to the fact that the US is actively seeking to destabilize the local government, we wonder why? After all as the opportunity cost for the existing regime to do something drastic gets ever lower as the popular resentment rises, leaving the local administration with few options but to engage either the US or Israel. Unless of course, this is the ultimate goal. Yet going back to the Reuters story, it would be quite dramatic, if only it was not the case that Iran has been laying the groundwork for a barter economy for many months now, something which various other analysts perceive as the basis for the destruction of the petrodollar system.

How Sanctions on Iran Might Affect World Oil Prices - To find out, we'll adapt a tool we originally developed in November 2011 to estimate what the impact would be upon world oil prices if the United States increased its production of oil by 25%.  Here though, we'll use the CIA's current estimate for world oil production in 2010 of 89,346,535 barrels per day, the most recent year for which the data is available (even going by the Energy Information Administration's world data, which as of 12 January 2012, only covers 10 months of 2010.) The CIA's data indicate that Iran, the fourth largest producer of oil in 2010, produced 4,252,000 barrels per day that year. If sanctions imposed by Western nations only affect 25% of Iran's production, then the effect would be to reduce the daily supply of oil to the world by 1,063,000 barrels per day.  Because most of the oil that would be affected by sanctions upon Iran would be shipped to Europe, we'll use the average January 2012 spot price of $110.69 per barrel for Brent crude oil in Europe as our price reference.  The results may be found by clicking the "Calculate" button below!

Dangerous Ideas - c.martenson - Two very obvious efforts at shaping beliefs are currently being run in the US by various parties wishing to shape our collective beliefs to their liking. One is around the ‘necessity’ and desirability of going to war with Iran. The second, which we will examine closely in this report, concerns Peak Oil. Whether or not Peak Oil is true cannot possibly be in doubt. Within anything other than a geological frame of time, oil is a finite substance. When it is burned, it is gone. Without stretching our brains very far, it is easy to conclude that anything that is finite and consumed will someday be gone.  Peak Oil, then, is really an observation, not a theory. It draws upon and has at its disposal decades of experience with individual oil fields, producing basins, and entire countries all repetitively experiencing the exact same behavior: Oil production increases up to a point, and then it decreases afterwards. This is not theory; it is a related set of facts and careful observations.

Top Ten Ways Iran is Defying US, EU Oil Sanctions and How You are Paying for It All - It wasn’t supposed to be like this, the Neocons assured us. Iran would soon be on its knees because of ever more stringent US sanctions on Iran. But Iran just cheekily sent two warships through the Suez Canal to dock at the Syrian port of Tartous. The old Mubarak government in Egypt might not have allowed such a thing, but the Arab Spring has brought to power an Egyptian government eager to demonstrate its independence from Washington. Brent crude just hit $121 dollars a barrel, the highest in 8 months and a remarkable figure in the absence of a crisis like the Libyan War (responsible for the last big spike). In part, the markets are jittery at the news that Iran is cutting off oil deliveries to the UK and France (Iranian petroleum accounts for only 1 percent of UK imports, and 4 percent of French ones). The Europeans will just find other suppliers or will end up buying Iranian oil through third parties, so the announcement isn’t that significant, but oil traders are a jittery lot. The oil sanctions plan foisted on the United States by Israel and the US Israel lobby pledged that the sanctions would not put the price of oil way up.  I hate to say it but I told you so.So what has allowed Iran to fight back against the draconian US-Israeli-European sanctions regime?

IEA says EU could live with abrupt Iran oil halt (Reuters) - The European Union could cope with an abrupt halt by Iran of its oil exports to the region as buyers of Iranian oil are already adjusting to the EU's forthcoming ban on Iranian shipments, an International Energy Agency official said on Monday. Iran said over the weekend it was cutting supplies to the UK and France. "We don't think this announcement will have a real impact on the market because France and the UK have already stopped buying crude from Iran," Didier Houssin, director of energy markets and security of the International Energy Agency, told Reuters. "If such a move were taken by Iran to immediately stop exports, we don't think it would have a very significant impact on the market. Because again the customers are already adjusting to the new environment...Seoond, we are getting close to the end of the winter period and the second quarter is typically when European refiners go for maintenance." The IEA is ready if needed to use its strategic oil reserves, he said. "We are monitoring the situation carefully as we usually do... We stand ready to react if needed," he said.

Oil Shocks Around the World: Are They Really That Bad? - Recent developments in oil markets and the global economy have, once again, triggered concerns about the impact of oil price shocks around the world. This column wonders whether the fuss is really necessary. It presents evidence of relatively small negative effects of oil price increases. Increases in international oil prices over the past couple years, explained partly by strong growth in large emerging and developing economies, have raised concerns that high oil prices could endanger the shaky recovery in advanced economies and small oil-importing countries. The notion that oil prices can have a macroeconomic impact is well accepted; the debate has centred mainly on magnitude and transmission channels. Most studies have focused on the US and other OECD economies. And much of the discussion has related to the role of monetary policy, labour markets, and the intensity of oil in production

Playing With Fire With Oil And Iran - Juan Cole is listing 10 reasons why the US sanctions against Iran making money from exporting oil are not working. While indeed Iranian oil sales have fallen, the impact of this has been at least partly offset by the rising price of oil due to all the war talk associated with the sanctions, along with the failure of Saudi oil production to increase to fill the cutbacks, along with declines in oil production in Nigeria, Syria, and Sudan for various reasons, as well as the decisions by India, China, Japan, South Korea, and others to repudiate the US policy. All of this threatens Obama's reelection as gas prices are heading up and Republicans are claiming it is due to Obama blocking the Keystone pipeline project, even as they call for an even more hawkish policy against Iran (see Jim Hamilton for the latest analysis of the Keystone project). I largely agree with Cole on most of his points, with some minor variations. He argues that it is the "Israeli lobby," particularly AIPAC, that is responsible for the sanctions policy, although I would think that the lobby is responding to the Israeli government rather than being an independent source for this policy push. Israeli political leaders are fearful of a possible Iranian nuclear bomb, and according to the NY Times today, are probably not able to actually bomb out fully the four sites involved in the Iranian nuclear program, which may be why they are pushing even harder on the US, despite Israeli military intel reportedly agreeing with US intel and DOD that Iran does not have an active nuclear weapons program.

Record sterling oil price sparks fears - Oil prices have soared to a record high in sterling terms and are approaching euro highs, raising fears that European countries struggling with heavy debts will face further barriers to economic recovery. “This is a regional oil shock,” . The rally in the price of crude denominated in the two major European currencies is likely to push up the imported cost of oil. It may undermine growth as well as demand for refined oil products, analysts said.  Alan Clarke, economist at Scotia Bank in London, said the price jump, on the back of tension with Iran, was “not welcome”, adding: “It may well dampen the [UK] recovery that we were hoping for this year.” Brent rallied to £78.48 a barrel, passing the previous all-time high of £77.71 a barrel set in April last year at the peak of the Libyan civil war supply disruption. In euro terms, the oil benchmark reached a three-year high of €92.70 a barrel, a fraction below the peak of €93.50 a barrel set in July 2008. The price of the commodity remains well below its record in US dollars. ICE April Brent is at a nine-month high of $122.72 a barrel, far from the peak of almost $150 that was set in July 2008.

Euro denominated oil hits record - Oil prices soared to a record high in euro terms, surpassing the peak touched in the 2008 price spike and posing a fresh problem for eurozone economies already struggling under the weight of the region’s debt crisis. The euro-denominated price of Brent crude, the global benchmark North Sea crude, rose to a peak of €93.63 a barrel on Thursday, surpassing the previous high hit on July 3, 2008. The new euro record comes just a day after Brent hit a record in sterling terms. The rise in the oil price for Europe and the UK comes on the back of rising tensions between the west and Iran, the world’s third-largest oil exporter. Under the burden of sanctions by Europe and the US, the country is facing growing difficulty selling its oil internationally, forcing other producers such as Saudi Arabia to step in and squeezing spare capacity – the global oil industry’s ability to respond to shocks. “Increasing production in Saudi Arabia means that the spare capacity will decline, making the market more vulnerable to unplanned outages,”

Why $200 oil is the subprime mortgage of energy -  So what do you think might happen when a different reality — in the form of wildly undervalued eco-services and energy-related externalities — comes crashing down on the illusion that there’s no need to steer away from business as usual in an increasingly resource-strained world? The fallout could be severe, considering there are a lot of wildly undervalued eco-services and energy-related externalities that many businesses today aren’t considering, according to Generation Investment Management, the sustainable investment partnership founded in 2004 by former Vice President Al Gore and David Blood. In a new report titled “Sustainable Capitalism,” the Blood-and-Gore-led research team warns that such businesses, and even entire business sectors, could quickly find themselves unprofitable if it suddenly became clear just how valuable those undervalued services and externalities are. The risk, the paper states, lies in “stranded assets” … business assets that could dramatically lose value if, say, the true price of carbon dioxide emissions were taken into account on a company’s bottom line.

The Time of Big Government is Coming to an End - As the world economy crashes against debt and resource limits, more and more countries are responding by attempting to salvage what are actually their most expendable features—corrupt, insolvent banks and bloated militaries—while leaving the majority of their people to languish in “austerity.” The result, predictably, is a global uprising. This current set of conditions and responses will lead, sooner or later, to social as well as economic upheaval—and a collapse of the support infrastructure on which billions depend for their very survival. Nations could, in principle, forestall social collapse by providing the basics of existence (food, water, housing, medical care, family planning, education, employment for those able to work, and public safety) universally and in a way that could be sustained for some time, while paying for this by deliberately shrinking other features of society—starting with military and financial sectors—and by taxing the wealthy. The cost of covering the basics for everyone is within the means of most nations. Providing human necessities would not remove all fundamental problems now converging (climate change, resource depletion, and the need for fundamental economic reforms), but it would provide a platform of social stability and equity to give the world time to grapple with deeper, existential challenges.

China realty weakens - By now, it is very clear that the Chinese real estate market is slowing down.  The latest figures from the National Bureau of Statistics show that prices were down or flat for January compared to December 2011. For a visual representation of what’s happening over the past year or so, the following chart from Bloomberg Brief’sMichael McDonough shows how an increasing number of cities are reporting falling prices over the past 12 months, especially since the last quarter of 2011 where the downturn is accelerating on ever slower transaction volumes across the board:

Chinese Banks’ Bad Loans Rise in Fourth Quarter - Chinese commercial banks’ bad loans increased in the fourth quarter of last year, highlighting pressures the lenders face in maintaining asset quality as the economy slows. Non-performing loans rose 20.1 billion yuan ($3.2 billion) to 427.9 billion yuan as of Dec. 31, the China Banking Regulatory Commission said in a report on its website today. Bad loans accounted for 0.96 percent of total lending, up from 0.95 percent in September and 0.17 percentage point lower than a year earlier. Chinese banks are struggling to keep bad loans in check as the country’s economic expansion slows and the housing market cools under government curbs. Lenders’ non-performing loan ratio had not increased quarter-on-quarter since the end of 2005, according to data compiled by Bloomberg.

China Cuts Bank Reserve Ratios - China is seen making more cuts to banks’ reserve requirements to fuel lending and sustain economic growth as the housing market cools and Europe’s sovereign-debt crisis weighs on exports. The proportion of cash that lenders must set aside will fall half a percentage point from Feb. 24, the central bank said Feb. 18 on its website. Standard Chartered Plc forecasts at least three more reductions this year, while HSBC Holdings Plc (HSBA) sees a minimum of two. The ruling Communist Party aims to sustain the nation’s expansion without undermining a campaign to tame inflation that saw home prices drop in 47 of the 70 biggest cities in January. Policy makers may refrain from interest-rate cuts until nearer mid-year when consumer-price gains have slowed to below 3 percent from 4.5 percent last month,

China Cuts Bank Reserve Requirements - China cut the amount of cash that banks must set aside as reserves for the second time in three months to spur lending as Europe’s debt crisis and a cooling property market threaten economic growth. Reserve requirements will fall by 50 basis points effective Feb. 24 the People’s Bank of China said on its website this evening. Before today’s move, the ratio for the nation’s largest lenders stood at 21 percent.  Premier Wen Jiabao aims to steer the world’s second-biggest economy through a property market slowdown and the weakest export growth since 2009, with the commerce ministry last week calling the trade outlook “grim.” The International Monetary Fund said this month that China’s expansion may be cut almost in half if Europe’s debt crisis worsens.

China Takes New Step to Prime Its Slowing Economy - Determined to keep the domestic economy chugging along, China’s central bank said on Saturday that it would reduce the amount of cash reserves that banks need to hold, a move widely seen as encouraging stronger growth. The decision to cut the reserve ratio requirement for the nation’s biggest banks by half a percentage point, to 20.5 percent from 21 percent, effective next Friday, should make more money available for lending, adding a little extra juice to an economy that has begun to show signs of slowing.  The cut is not a huge move. But with Europe struggling with a debt crisis and growth in the United States still relatively anemic, Chinese officials are worried that exports to its two biggest trading partners could collapse, and investment could slow here.  The decision to reduce the reserve ratio comes after a similar cut in December, which followed more than a year of tightening measures aimed at taming inflation and a soaring property market. The country’s economic leaders have repeatedly moved to tighten bank lending.

China acts to crank up credit as lending, economy slow - China's central bank cut the amount of cash banks must hold in reserves on Saturday, boosting lending capacity by an estimated 350-400 billion yuan ($55.6-$63.5 billion) in a bid to crank up credit creation as the world's second-biggest economy faces a fifth successive quarter of slowing growth. The People's Bank of China (PBOC) is on the course of gentle policy easing to cushion the world's fastest-growing major economy against stiff global headwinds as Europe's debt crisis grinds on, although it has been treading warily. The cut, announced late evening, is set to boost the confidence of domestic stock investors, who have been eagerly awaiting clear signs of an easing of monetary policy.

Analysis: China bid to boost growth a surprise in timing only (Reuters) - Any surprise at the timing of China's move this weekend to spur bank lending may be misplaced. Instead, investors should recognize that China is determined to engineer a soft landing for the world's second-biggest economy. Premier Wen Jiabao had flagged that Beijing should "act quickly" following January economic data that analysts said pointed to additional economic weakness beyond what could be explained by Lunar New Year distortions. Still, many investors had not expected a cut in bank reserve ratios until March, so the timing of the decision late on Saturday announcing the second 50-basis point cut in bank reserves in three months took them by surprise. The timing may have been geared more to showing that Beijing -- not financial markets -- determine policy. "The immediate market reaction is surprise on the timing, but people were looking for an RRR cut -- it was just a question of when," said Tim Condon, head of research at ING in Singapore. "They don't want the market to push them around." The cut in the RRR -- the reserve requirement ratio -- was China's latest move to support an economy that is widely seen slowing down this quarter for its fifth consecutive quarter. Economists expect full-year 2012 growth to slip below 9 percent for the first time in a decade.

Chinese inflation is here to stay - Yiping Huang from Barclays Capital has been producing a multi-part research series on the Chinese economy.  The fifth part is on Chinese inflation.  Not surprisingly and actually quite rightly, Huang states that inflation has been understated by 1-2 percentage point at its peak.  That would put inflation at roughly 8.5% instead of 6.5% in July 2011. Parts of this note are a regurgitation of Huang’s earlier academic work (which can be found here) on the determinants of Chinese inflation in the short-run: The Huang-Wang-Hua study carried out detailed analyses of China’s monthly data for 1998-2009. The co-integration analysis of the year/year data, for instance, gave the following results: CPI = −0.073 + 0.358Eliqudity + 0.132Ogap + 0.223Phouse + 0.041PStock Where CPI is the inflation rate, Eliquidity a measure of excess liquidity, Ogap the output gap, Phouse is housing prices, and Pstock stock prices. All estimated coefficients are statistically significant at a 1% significance level.

China is not yet stimulating - Yesterday, the People’s Bank of China announced that the reserve requirement ratio (RRR) will be reduced by 50 basis points, effective on 24 Feb 2012.  The RRR is currently standing at 21% for large banks, thus the reserve requirement ratio for large banks will stand at 20.5% after the cut.  With about RMB80 trillion of total deposits, the reduction in RRR should theoretically make about RMB400 billion of deposits available for lending. This is the second RRR cut since the tightening cycle ended last year.  However, as pointed out late last year, with modest capital outflow and shrinking foreign exchange reserves (if the trend continues into the new year), monetary conditions are tightening by themselves even without the central bank attempting to withdraw liquidity.  As a result, the latest cut in RRR will probably be a measure to offset the tightening bias of these monetary conditions.  We will need to have more data points in the coming months to be really sure, but on the data we have, the cut in the RRR is to offset tighter liquidity conditions rather that to support growth outright.

The largest migration in history - LEST you miss it, please let me draw your attention to this videographic on Chinese migration: You can read more on the phenomenon here and here.

Fleeing the People's Paradise: Successful Chinese Emigrating to West in Droves -  Though the room is already overcrowded, more listeners keep squeezing in, making it necessary to bring in additional chairs for the stragglers. But above the clamor, in the quiet of this elegant office high-rise, the audience is intent on listening to a man who can help them start a new life, one far away from China. Li Zhaohui, 51, turns on the projector and photographs flicker across the screen behind him. Some show Li himself, head of one of China's largest agencies for emigration visas, which has more than 100 employees. Other pictures show Li's business partner in the United States. Still others show Chinese people living in an idyllic American suburb. Li has already successfully arranged for these people to leave the People's Republic of China. Despite their country's stunning economic growth, many successful Chinese entrepreneurs are emigrating to the West. For them, the Chinese government is too arbitrary and unpredictable, and they view their children's prospects as better in the West.

China’s Flash PMI remains weak - China’s Flash PMI for February is out and registered a small increase to 49.7, up 0.9 from January. The index increased largely on the back of resumed production, forward indicators were unchanged with domestic new orders still contracting slightly and new export orders kicking down into contractionary territory.  China’s manufacturers appear to be under pressure both internally and externally. HSBC had this to say: Growth remains on track of slowdown, despite the  marginal improvement in the headline flash PMI led by  quickened production after the Chinese New Year. With  a meaningful rebound of domestic demand not in sight,  external weakness is starting to bite, adding more  downside risks to growth. The PBoC, after delivering  this year’s first RRR cut, should step up policy easing as  inflation pressures continue to ease. So, this is an ordinary report but not horrible by any means. If anything it offers another small piece of evidence for my thesis that China is confronting a long and difficult landing rather than a severe drop in growth. There is no doubt that for those looking for a quick rebound, this report will be disappointing.

China Manufacturing Data Shows Risk of Deeper Slowdown: Economy-- China’s manufacturing may shrink for a fourth month in February, indicating the world’s second- biggest economy remains vulnerable to a deeper slowdown as Europe’s crisis caps exports and the housing market cools. The preliminary 49.7 reading of an index from HSBC Holdings Plc and Markit Economics today compared with a final 48.8 in January. A number below 50 points to a contraction. January and February economic data are distorted by a weeklong holiday. China is cutting banks’ reserve requirements from Feb. 24 to support an economic expansion that Nomura Holdings Inc. estimates may be 7.5 percent this quarter, the least since the global financial crisis. In today’s report, a measure of export orders fell to an eight-month low, underscoring Commerce Minister Chen Deming’s Feb. 9 caution that the government is not optimistic about the outlook for trade after a decline in shipments in January. “With a meaningful rebound of domestic demand not in sight, external weakness is starting to bite, adding more downside risks to growth,”

U.S. automakers face tough times in China - Recent developments suggest the bonanza promised by China becoming the world's largest auto market is in danger of shrinking dramatically -- or ending altogether. This could be a big blow to General Motors, Ford, and Chrysler. At issue is the inevitable cooling of China's overheated economy -- but also complicated social and political problems that lie at the heart of the Chinese system. Here are just a few of the red flags: LMC Automotive, the successor to J.D. Power and Associates, reports that passenger vehicle sales in China fell 23% for the first month of the year: "Although a weak market had been anticipated ... it has still come as a shock to many when solid growth has become a matter of course." That shock may include many in Detroit. GM, for instance, sells more cars in China than it does in the U.S. Sales of Buicks in China rose 2% in January, but volume for Chevrolet, a brand GM has been promoting heavily around the world, fell 16%. Ford took an even heavier beating: Its sales tumbled 42%. Results aren't expected to be this disturbing for the rest of the year, but the trend isn't encouraging. According to sales targets compiled from 13 manufacturers, the market is expected to grow 13.5% in 2012. That is well short of the 20.4% growth rate that was predicted by manufacturers a year ago for 2011.

Chinese Labor, Cheap No More - WHEN China’s vice president, Xi Jinping, visited the White House on Tuesday, President Obama renewed calls for China to play more fairly in the world economy.  But while China’s industrial subsidies, trade policies, undervalued currency and lack of enforcement for intellectual property rights all remain sticking points for the United States, there is at least one area in which the playing field seems to be slowly leveling: the cheap labor that has made China’s factories nearly unbeatable is not so cheap anymore.  China has experienced sporadic labor shortages, which in turn have driven up its once rock-bottom labor costs. This trend is particularly evident in the weeks following China’s Spring Festival, or New Year, when more than 100 million rural migrants return to the countryside to spend the year’s biggest holiday with family. Coaxing those same migrants back into the urban work force has proven increasingly difficult.  This year has been no exception. In order to lure new workers and retain the old, some companies give employees sizable bonuses just for coming back to work, while others offer cash for every new employee they bring along with them. And in many areas, wage increases ranging from 10 to 30 percent have become the norm.

Foxconn Plans to Lift Pay Sharply at Factories in China — Foxconn Technology, one of the biggest manufacturers of products for Apple, Dell, Hewlett-Packard and other electronics companies, said Saturday that it would sharply raise worker salaries at its Chinese factories. Foxconn said that salaries for many workers would immediately jump by 16 to 25 percent, to about $400 a month, before overtime. The company also said it would reduce overtime hours at its factories. Labor rights groups say that over the years, many Foxconn plants have violated Chinese labor laws by pushing workers to endure excessive amounts of overtime. . Apple and Foxconn, which is based in Taiwan, have strongly denied allegations that the workers are treated poorly. But Apple has acknowledged in its own audits that some of its suppliers in China violate Apple’s own code of conduct, with instances of child labor, forced overtime and unsafe working conditions and evidence that employees are sometimes exposed to hazardous and toxic chemicals.

The iEconomy: How Much Do Foxconn Workers Make? - Foxconn Technology, one of the world’s largest electronics manufacturers, and a major supplier for Apple, has announced that it will raise salaries and decrease overtime at its factories in China. The Times’s David Barboza wrote, “Foxconn said that salaries for many workers would immediately jump by 16 to 25 percent, to about $400 a month, before overtime.” One eagle-eyed reader noted a potential for confusion when comparing that figure to an article from The Times’s iEconomy series. That article stated that at Foxconn, “many workers earn less than $17 a day” and that workers frequently worked six days a week. Figuring that a month’s wages should equal four weeks of work, the reader suggested that The Times’s math skills were deficient. (Multiplying $17/day by 6 days/week by 4 weeks/month would seem to yield an approximate monthly wage of $408. And a second article cited a worker who made $22 a day. How then, this reader asked, could Foxconn be raising monthly wages up to $400?) The crucial distinction is overtime.

Labor Incomes Must Rise. There Is No Other Option - There’s news today that Foxconn, the huge Chinese manufacturer of many high tech components and products, will soon be raising employee incomes by as much as 25%.   From the New York Times: BEIJING — The announcement Saturday that Foxconn Technology — one of the world’s largest electronics manufacturers — will sharply raise salaries and reduce overtime at its Chinese factories signals that pressure from workers, international markets and concerns among Western consumers about working conditions is driving a fundamental shift that could accelerate an already rapidly changing Chinese economy. We’ve long argued that income inequalities have come about due to a breakdown in Capitalism.  While there is little debate the capitalist model is the best designed one for producing gains in top line wealth, it has a couple serious flaws, not the least of which is that Capitalism consolidates income at the top of the income pyramid away from the middle and bottom layers of the pyramid.   If left unattended this natural consolidation will produce severe conflicts, both economic and political:  Conflicts that can produce real productive and wealth destruction.

There is no ethical smartphone - John Wood, self-described phone geek, had a problem. He couldn’t “upgrade with confidence,” he confessed on his blog. The “ethical implications” of the globalized, labor-exploiting manufacturing process confounded him. The more he knew, the more constrained he felt. In his capacity as campaigns and new media officer for the Trades Union Congress in the United Kingdom, it was his job to be a voice for the labor movement online. But in his personal life, just getting online meant trampling all over the workers of the world. Wood’s dilemma extended far beyond the well-publicized abusive working conditions at Foxconn, the Taiwanese manufacturing giant that assembles Apple’s iPhone, along with countless other consumer electronic devices. Labor and environmental abuses are endemic throughout the global electronics industry, from the mining of the minerals used to make the basic components, through their assembly and all the way up to (and beyond) the disposal of last year’s obsolete model. There’s no getting around the hard truth: right now, there is no such thing as an “ethical smartphone.” Or, for that matter, an ethical flat-screen TV, digital camera or any kind of personal computer.

Taking the broader perspective on Foxconn - David Pogue has a very nice piece about Apple, China, and Foxconn over at the NYT that I recommend reading in full. But I want to highlight one part in particular where he quotes from a letter he received from a Chinese man whose aunt got a job at a Foxconn like factory that allowed her to leave her old job of prostitution: If Americans truly care about Asian welfare, they would know that shutting down “sweat shops” would force many of us to return to rural regions and return to truly despicable “jobs.” And I fear that forcing factories to pay higher wages would mean they hire FEWER workers, not more. What bothers me about some of the commentary I’ve been reading on this is that  many who are bothered by Foxconn are saying things that imply they don’t in fact truly care about Asian welfare, as Pogue’s correspondent put it. But I don’t think most don’t care, rather I agree with Krugman they simply haven’t thought through the implications.

Cheap Labor in Bulgaria: Chinese Open First Car Plant in Europe -  Great Wall this week became the first Chinese automobile manufacturer to open an automobile assembly plant inside the European Union in the latest move suggesting the country's carmakers are seeking to establish a beachhead into the European market.  It used to be that European carmakers opened plants to assemble their cars in China. Now the Chinese have turned the tables with the opening of their first factory in Bulgaria, an EU country with low labor costs and taxes. Increasingly, Chinese carmakers are setting their sights on the European and American automobile markets.

Misunderstanding "China's Sweatshop As Great Wall Starts Building Cars In Bulgaria" - ZeroHedge posted an interesting article called Europe Is Now China's Sweatshop As Great Wall Starts Building Cars In Bulgaria. Unfortunately the article contains many often repeated trade fallacies as well as numerous other errors.  ZH: "With China Forecast To Reach Wage Parity With The US In Five Years, Is A New Manufacturing Golden Age Coming To The US?" Mish: China's wages are rising fast. Sometimes in leaps of 20%. From where? How sustainable is it? Please consider this snip from the Reuters article HP, Dell watch rising China labor costs for Apple:  "Taiwan-based Foxconn said the pay of a junior level worker in Shenzhen, southern China, had risen to 1,800 yuan ($290) per month and could be further raised above 2,200 yuan if the worker passed a technical examination. It said that pay three years ago was 900 yuan a month."  Let's do the math. $290 a month is $3,480 a year. Assume 20% annual wage hikes, once a year for 5 years. Should that happen, at the end of that time, the salary would be 8,659.35. US minimum wage is $7.25 an hour (not sure what it will be five years from now), but that is about $14,500 assuming a 40 hour work-week and 2 weeks unpaid vacation. It would take 33% raises every year for five years just to match US wages. Is that likely?

Youth Unemployment at Crisis Level - Youth unemployment has reached crisis proportions, with more than one in five people between 15 and 29 out of work, according to a survey.  The survey by the Hyundai Research Institute showed that the real number of unemployed young people stood at 1.1 million in October last year, which translated into a rate of 22.1 percent. The number increased substantially from 990,000 in 2003, when the rate was 17.7 percent.  But government statistics put youth unemployment at a mere 7.7 percent in 2011 and showed the number of officially unemployed young people falling from 401,000 in 2003 to 324,000 in 2011 as the young population itself dwindled.  The reason for the discrepancy is that the government data do not include those who have given up looking for work altogether and those who keep returning to private training or studies to increase their chances. As a result, critics say government unemployment statistics no longer even remotely reflect reality.

The working man’s paradise - On Friday, Houses and Holes wrote an interesting article on how the Australian economy appears to have informally adopted aspects of the German ‘kurzarbeit’ system of employment rather than the ‘slash-and-burn’ approach of US laissez faire capitalism: The basic difference is that Germany has a formal system of automatic stabilisers called “kurzabeit” that revolves around private firms reducing man hours (and the government making up some of the difference in pay) versus the US approach of treating jobs as a variable cost that gets cut when trouble starts. In short, the Germans cut hours while the Americans cut people. …for the last decade the Australian labour market has been so strong that a private approximation of the German kurzabeit system has developed. Some call it labour hoarding and it is the willingness to use such approaches as reduced hours across a majority of staff rather than cut a minority owing to the fear that skill shortages will cost more in the long run if staff are let go… Certainly, Houses and Holes’ thesis is supported by the data. In the years since the global financial crisis (GFC) hit, the official Australian unemployment rate has increased only slightly, compared with the US, where the rate more than doubled:

Canadian bubble trouble - In the years following the global financial crisis (GFC), the Canadian and Australian housing markets were among the best performing in the English-speaking world. Whereas Australia’s house prices peaked in mid-2010, and have been deflating ever since, Canada’s powered on led by its third largest metropolis, Vancouver, British Columbia: By mid-2011, the Canadian authorities were growing nervous, culminating in a captivating speech by Canada’s central bank governor, Mark Carney, in which he pointed out some home truths about the bubble-like situation that had developed in Canada’s housing market. In his speech, Mr Carney showed that the growth in house prices had easily outpaced Canadian inflation and incomes, and questioned whether this growth in housing values had made Canada better off: Mr Carney also showed that Canadian house prices relative to rents were near all-time highs: Which is a view supported by the International Monetary Fund (IMF), which shows Canada’s ratio of house prices-to-rents to be the highest in the developed world:

Coal to India Beating China on Singh Decree - India is poised to surpass China as the world’s biggest thermal coal importer as Prime Minister Manhoman Singh seeks supplies for power makers that have halted plans for $36 billion of new plants because of a fuel shortage.  Purchases from abroad may exceed 118 million metric tons this year in India, compared with China’s 102 million tons, said Daniel Hynes, a director of commodity research at Citigroup Inc. in Sydney. Imports may rise after the government ordered state- run Coal India Ltd. to plug a local shortfall with foreign supplies, according to analysts at Sanford C. Bernstein & Co.  India’s forecast emergence as the world’s biggest coal buyer underscores a dearth of domestic fuel that prompted companies from billionaire Anil Ambani’s Reliance Power Ltd. to Adani Power Ltd. to mothball planned expansion of electricity capacity. India’s $1.7 trillion economy grew at the slowest pace in two years from July to September as power and factory output slowed. For its part, China is adding twice as much coal- production capacity this year as in 2011, according to the National Energy Administration, reducing its import needs.

The Two Indias: Astounding Poverty in the Backyard of Amazing Growth - "Incredible India" is the brand this country's Ministry of Tourism has been pushing in a global marketing campaign launched in 2002, and it couldn't be more fitting. Over the last decade, India has witnessed a stunning acceleration of rapid changes, both good and bad, that it began in the 1990s. The most widely noticed metamorphosis is economic. Over the last ten years, India's GDP has grown between 7-9% per year, second only to China's sustained growth rates. In 2011, Forbes counted 57 Indian billionaires, up from only four a decade before. The same period saw Indian corporations vaulting onto the international stage. Tata Motors shocked the automobile industry with an acquisition of the British Jaguar Land Rover business in 2008. India's famed business-process outsourcing industry has expanded beyond call centers and software development to medicine, law, tax preparation, animation, and even music-video production. And, several IT giants have turned the tables on offshoring: No longer are jobs only "Bangalored." Today, Indian companies employ thousands of Americans on U.S. soil. Economic change has been accompanied by a less noted, but no less significant, political inflection point. Alongside the enthralling Arab Spring and China's stillborn Jasmine Revolution, something that might be called the "Turmeric Revolution" has been bubbling over in India.

Ranking World's Largest Container Port Operators  - Among my most searched-for posts over the years this blog has been in operation have been those concerning the world's busiest ports [1, 2]. Truly, one of the underappreciated facets of globalization has been the expansion of facilities to standardize shipping merchandise throughout the world. By making containers identical to each other, loading and unloading massive amounts of goods has been made possible. However, an even more underappreciated corollary concerns the rise of container terminal operators. Just as airlines used to be nearly the exclusive preserve of flag carriers throughout the globe in the not-so-distant past, most of the world's major ports used to be run by national port authorities. However, lacking any comparative advantage in handling goods shipments, many have since outsourced this activity to commercial container terminal operators which have accumulated expertise over the years in this specific endeavour.Accordingly, a cursory look at the world's top terminal operators yields no surprises. (This compilation was prepared by the folks at Hofstra U.) At the top of the list is PSA International. formerly known as the Port of Singapore Authority. In second place is Hong Kong multibillionaire Sir Li Ka-Shing's flagship enterprise, Hutchison Whampoa.

Japan logs record trade deficit in January - Japan posted its biggest ever trade deficit in January, topping the previous record seen during the financial crisis in 2009, Ministry of Finance data showed On Monday, underlining concerns that a persistent trade gap may undermine the country's ability to finance its debt. The trade deficit stood at 1.475 trillion yen ($18.59 billion), against median market forecast for 1.468 trillion yen, marking a fourth straight month of deficit, as weak global demand and a strong yen hurt exports and robust fuel demand boosts imports. Exports fell 9.3 percent from a year earlier, down for a fourth straight month. That compared with a 9.5 percent drop expected by economists, following an 8.0 percent decline in the year to December. Japan logged an annual trade deficit in 2011 for the first time in 31 years as the March disaster, a global slowdown and a strong yen dealt a blow to an export-reliant economy.

Is Japan's Global Creditor Status at Risk? - Japan’s status as an export superpower has taken a pummeling lately. First came news last month that the country had posted a $32 billion trade deficit for all of 2011, the first time that’s happened since 1980. Then, on Feb. 20, Tokyo announced a record shortfall for January of $18.5 billion, citing a strong yen that’s depressing exports and rising prices for energy imports. Japan may well record another yearly trade deficit in 2012. Now economists are worried that the nation’s current account could turn negative, raising questions about Japan’s ability to handle its $10 trillion-plus government debt load. That burden is equivalent to about 220 percent of Japan’s total annual economic output, the highest debt-to-gross domestic product ratio in the world. (That’s right: Greece’s debt level is a more manageable 164 percent of GDP.) Bank of Japan Governor Masaaki Shirakawa and other top officials say the trade numbers reflect short-term factors such as last year’s earthquake and tsunami in Northeast Japan that disrupted factory production and hit nuclear reactor capacity. The disaster hit exports and required Japan to import more oil and gas. The unusually strong yen and weaker demand from China also conspired to depress exports. Shirakawa thinks Japanese trade deficits “won’t become a firmly established trend.”

Japan Ponders Limits of National Superindebtedness - That Japan owes over twice its annual output has been a favourite storyline for assorted end-of-the-world-economy cultists in triggering the next round of global financial meltdown. Nevermind that such predictions have proven woefully inaccurate given the yen strengthening to all-time highs in recent months, but there are of course...concerns. The main reason why Japan's economy has not keeled over despite such an onerous burden are well-understood (except to the aforementioned cultists): Persistent deflation makes it actually attractive for Japanese savers to buy its sovereign debt yielding next to nothing, coupled with a sense of duty to help the country out during these trying times. That said, solving this issue will involve probing deep-seated structural problems with their economy. It's like Japan's own series of nested dolls: How can you address deflationary pressures in the absence of significant economic growth? How do you generate economic growth with a shrinking population? How do you generate more revenues to not have to issue so many IOUs without economic growth? It's not an isolated issue of, say, raising the VAT rate but goes into why Japan Inc. no longer works as it did in its 70s and 80s heyday.

Japan Orders Pension Fund to Suspend Operations - Japanese financial authorities ordered a Tokyo-based pensions manager (AIJ) to suspend operations Friday after public investigators discovered that the company may have lost the bulk of about $2.3 billion in funds it managed for its clients.  In light of the alleged losses at the Tokyo-based pensions manager, AIJ Investment Advisors, the Financial Services Agency said it would conduct a sweeping probe into the finances of some 260 other money management companies in Japan.  AIJ Investment Advisors is unable to explain the state of its finances to investors, according to an agency statement. At the end of the fiscal year in March, AIJ managed about 210 billion yen ($2.62 billion) worth of funds for 123 clients, according to the Nikkei business daily. The Nikkei also said that AIJ long provided clients with fraudulent reports to mask its losses.

China and Japan unite on IMF resources - In a rare display of unity, China and Japan have expressed conditional support for an expansion of the International Monetary Fund’s resources to help address Europe’s sovereign debt crisis. In a meeting in Beijing on Sunday, Wang Qishan, Chinese vice-premier, and Jun Azumi, Japanese finance minister, said they were prepared to support the IMF’s “important role” in combating turmoil in the eurozone. However, they warned that the eurozone would need to lift the €500bn cap for its bail-out funds if it hoped to persuade non-European Group of 20 nations to increase their funding of the IMF. Christine Lagarde, IMF managing director, has been pushing for an extra $500bn in funding to contain the eurozone crisis and to protect economies around the world from spillover effects. Eurozone countries have so far committed $200bn, while the US has said it will not contribute additional funds. The resulting gap is “a very large number”, said a senior Japanese official. “Japan and China both believe that it will be exceedingly difficult to fill that gap unless the cap on the European Stability Mechanism is removed.”

China Pledges To Support Euro - Chinese Vice-President Xi Jinping has reiterated his country's commitment to support the euro and the Eurozone, insisting that Beijing attaches great importance to the status of the 17-member single currency bloc. "We believe, the European Union (EU) has the ability, wisdom and solution to push forward relevant reforms and adjust itself to overcome the current difficulties," China's state-run Xinhua news agency quoted Xi as telling Irish Prime Minister Enda Kenny during their talks in Dublin late on Sunday. "China will continue to support, in its own way, the efforts of the EU, the European Central Bank and the International Monetary Fund in resolving sovereign debt crisis in Europe," Xi said, adding that China views EU as a comprehensive strategic partner. Stressing that developing China-EU relations remains the top priority of Beijing's foreign policy, Xi said China would continue to support Europe's integration process and encourage the European Union to expand its role in the international arena.

A World Bank for a New World - The world is at a crossroads. Either the global community will join together to fight poverty, resource depletion, and climate change, or it will face a generation of resource wars, political instability, and environmental ruin. The World Bank, if properly led, can play a key role in averting these threats and the risks that they imply. The global stakes are thus very high this spring as the Bank’s 187 member countries choose a new president to succeed Robert Zoellick, whose term ends in July. Its central mission is to reduce global poverty and ensure that global development is environmentally sound and socially inclusive. Achieving these goals would not only improve the lives of billions of people, but would also forestall violent conflicts that are stoked by poverty, famine, and struggles over scarce resources. American officials have traditionally viewed the World Bank as an extension of United States foreign policy and commercial interests. With the Bank just two blocks away from the White House on Pennsylvania Avenue, it has been all too easy for the US to dominate the institution. Now many members, including Brazil, China, India, and several African countries, are raising their voices in support of more collegial leadership and an improved strategy that works for all.

IMF Draft Sees Greek Debt Reaching 129% of GDP in 2020 - —The International Monetary Fund now expects Greece's debt to reach 129% of the country's gross domestic product in 2020, three people with direct knowledge of a draft debt-sustainability analysis put together by the fund said on Sunday. That is even further above the level most economists consider sustainable than previously thought, making it more difficult than ever to argue that the country can ever repay its debts.  Despite this, a number of signs last week had indicated that there was still enough political will in the euro zone to go ahead with a new, enhanced rescue package.

Euro-Area Manufacturing, Services Contract - European services and manufacturing output unexpectedly shrank in February as the euro-area economy struggles to rebound from a contraction in the fourth quarter. A euro-area composite index based on a survey of purchasing managers in both industries dropped to 49.7 from 50.4 in January, London-based Markit Economics said in an initial estimate released by e-mail today. Economists had forecast a reading of 50.5, according to the median of 16 estimates in a Bloomberg News survey. A reading below 50 indicates contraction.  Budget cuts by governments may curb the pace of Europe’s recovery as countries across the region battle the sovereign- debt crisis. At the same time, China’s manufacturing may shrink for a fourth month in February, indicating the world’s second- biggest economy remains vulnerable to a deeper slowdown as Europe’s crisis caps exports.

Euro-Zone Business Activity Shrinks Unexpectedly  Business activity in the euro zone contracted unexpectedly in February, reviving fears that the region is heading for recession. Markit Economics said Wednesday its preliminary composite purchasing managers' index for the 17-nation currency bloc fell to 49.7 in February after a rebound to 50.4 in January, and way below forecasts in a Dow Jones Newswires poll of economists for 50.8. A reading below 50 signals a contraction in the index, which measures activity in the currency bloc's manufacturing and services sectors. "The euro zone is far from out of the economic woods and faces a hard slog to get back to sustained growth," . "Indeed, the surveys reinforce our belief that it is more likely than not that the euro zone will suffer a further contraction in the first quarter of 2012 which will put it back into recession," he said. The euro-zone economy shrank by 0.3% in the last three months of 2011. A recession is defined as two straight quarters of falling output.

European shares slip on euro zone recession worries - The euro zone's service sector shrank unexpectedly this month, reviving fears that the economy risks sinking into recession, a business survey showed. Markit's Eurozone Services Purchasing Managers' Index (PMI) fell to 49.4 from January's 50.4, missing even the lowest forecast in a Reuters poll. Strategists said several issues remained unresolved after the Greek bailout deal. "There are still some big questions: does Greece have enough money even now after the second bailout? Can they generate the growth required?" asked Henk Potts, equity strategist at Barclays Wealth, though he noted other factors would limit the downside for equities. "In general terms, there has been a more positive feel to markets since the start of the year. The euro zone crisis has been helped by recent measures. The U.S. (economy) is gaining momentum."

JP Morgan Uses European Weakness To Bet Billions On Non-U.S. Homeowners -- Bloomberg reports that JP Morgan has increased its holdings of non-U.S. agency mortgage securities by more than three times to $72 billion.  The additions to the bank's balance sheet have been primarily driven by mortgage products from outside the U.S., and the U.K. and the Netherlands in particular. While the U.K. and Dutch housing markets have struggled of late, JP Morgan appears to be taking advantage of the motivation of institutions in these markets like RBS and ING to trim their own balance sheets. At the same time, JP Morgan has been shrinking its exposure to U.S. agency mortgage products. The move is in contrast to the bank's competitors, such as Bank of American and Citigroup, who have increased their domestic agency holdings recently, Bloomberg writes: JPMorgan last year shrunk its investments in U.S. agency mortgage securities by $28.1 billion to $134.7 billion, according to data compiled by SNL Financial, a Charlottesville, Virginia-based financial-information and research provider. The rest of the top-25 banks, including Bank of America Corp. and Citigroup Inc., increased their agency portfolios by $121.1 billion to $947.8 billion as their non-agency investments fell $31.6 billion to $98.6 billion, according to data assembled by SNL from regulatory reports.

Occupy vs. the Global Race to the Bottom: Incorporating corporate globalization into the Occupy analysis and agenda. Ever since the first tent was pitched in Zuccotti Park in September 2011, the Occupy protests have been giving life to a “99 percent movement.” Expect to hear a lot more from them: plans for a 99 percent spring—starting as early as April—are now in the making. This still very young movement has focused attention on a well-reasoned explanation of the vast suffering in this country, an explanation that is resonating with the broader U.S. public. It is often posed this way: For thirty years, Wall Street firms have successfully lobbied the US government to give them freer reign, by removing regulations and lowering taxes. In the process, these firms became uprooted and detached from lending to Main Street businesses and instead became more like casinos making money for the one percent through risky instruments such as derivatives based in subprime mortgages. This casino Wall Street economy increased inequality, corrupted our politics and politicians, and provoked the economic crash in 2008—a crash that left tens of millions unemployed, homeless, mired in debt, and vulnerable.   This narrative is not only compelling and tragic, it is also correct. But the Occupy analysis is thus far primarily a US-centric one; it often leaves out the reality that all of us in this country are part of a corporate-driven global economy.  So here is a fuller picture:

Austerity and Growth - Paul Krugman  - Or, actually, shrinkage. Watching Europe sink into recession – and Greece plunge into the abyss – I found myself wondering what it would take to convince the chattering classes that austerity in the face of an already depressed economy is a terrible idea. After all, all it took was the predictable and predicted failure of an inadequate stimulus plan to convince our political elite that stimulus never works, and that we should pivot immediately to austerity, never mind three generations’ worth of economic research telling us that this was exactly the wrong thing to do. Why isn’t the overwhelming, and much more decisive, failure of austerity in Europe producing a similar reaction? Let me give you a picture, inspired by some of the empirical studies of fiscal policy the Romers describe in their course notes (pdf). In the chart below I compare two measures for European countries. The x-axis shows the change in real government purchases of goods and services from the first quarter of 2008 to the most recent date I could get from Eurostat, measured as a percentage of 2008Q1 GDP. (This means, by the way, that I didn’t catch the full force of Greek austerity). The y-axis shows the percentage change in real GDP from 2008Q1 to 2011Q4. Can we say that there is a clear correlation here, and not in the direction austerity advocates would like to see?

Pain Without Gain, by Paul Krugman - Last week the European Commission confirmed what everyone suspected: the economies it surveys are shrinking... It’s not an official recession yet, but the only real question is how deep the downturn will be.    Greece and Ireland have had double-digit declines in output, Spain has 23 percent unemployment, Britain’s slump has now gone on longer than its slump in the 1930s.  Worse yet, European leaders — and quite a few influential players here — are still wedded to the economic doctrine responsible for this disaster.  For things didn’t have to be this bad. Greece would have been in deep trouble no matter what policy decisions were taken, and the same is true, to a lesser extent, of other nations around Europe’s periphery. But matters were made far worse than necessary by the way Europe’s leaders, and more broadly its policy elite, substituted moralizing for analysis, fantasies for the lessons of history.  Specifically, in early 2010 austerity economics — the insistence that governments should slash spending even in the face of high unemployment — became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did.

Iceland and the Banks - Recent news on Iceland is that the ratings agency Fitch has now determined that Icelandic debt is safe: Fitch raised Iceland's sovereign rating by one notch, to BBB- from BB+, meaning that the country's debt is now "investment grade". Iceland's economy imploded under a mountain of debt in 2008, forcing an International Monetary Fund bailout. The value of the Icelandic krona plunged, which made its exports more competitive. The new government of 2009 was allowed to carry on borrowing and spending for another year before spending cuts kicked in. Ignoring the uselessness of the ratings agencies in general, the upgrade is a response to the positive trajectory of Iceland's economy. In 2011, the previously devastated economy grew by 3% overall, and unemployment has fallen by over 1% since 2011. I say previously devastated, as Iceland (as I am sure you will all remember) had the most almighty banking meltdown (in relation to the overall size of the economy). However, when confronted with the lunacy of the debts racked up by the banking system, Iceland did something very different to the majority of economies when confronted with bank failure; they did not bail out the banks. The rather odd thing is that the sky did not fall upon Iceland, there was no apocalypse, and now the economy is in recovery mode.

Spain Lending Shrinks at Record Pace as Defaults Rise - Lending fell by 3.3 percent in December from a year before, the biggest drop since Bank of Spain records started half a century ago, the regulator said on its website today. Bad loans as a proportion of total loans rose to 7.61 percent from 7.52 percent in November as borrowing considered “doubtful” jumped to 136 billion euros ($179 billion) from about 11 billion euros five years ago, before Spain’s property crash.The prospect of a protracted recession in Spain is curbing the appetite for loans and making banks more cautious about lending. The economy may shrink 1.5 percent this year, according to central bank forecasts, while unemployment stands at 23 percent. Exane BNP Paribas predicts an economic contraction could stretch through 2013. Banks piled up apartments and building land on their balance sheets as loans to property developers and mortgage borrowers soured during the crash. The government is talking to banks to try to reduce the number of people evicted from their homes for failing to pay their mortgages, Economy Minister Luis de Guindos said in an interview with state radio RNE late yesterday.

Irish Home Loans At Least 90 Days In Arrears Rise to 9.2% - Irish home loans in arrears for more than 90 days rose to 9.2 percent at the end of last year from 8.1 percent at the end of the third quarter, according to the country’s central bank. A total of 107,708 home mortgages, or 14 percent of the total, were either 90 days in arrears or had been restructured and were performing at the end of December, the central bank said in an e-mailed statement today.

Brother, Can You Spare $6 Trillion? - The Italian police on Friday arrested eight people on charges related to the seizure of $6 trillion in fake United States Treasury bonds, in a mysterious scheme that stretched from Hong Kong to Switzerland to the southern Italian region of Basilicata.  The value of the seized bonds is in the neighborhood of half of the United States’ entire public debt of $15.36 trillion, but only the uninitiated would have accepted them as real securities. Rather than counterfeit, they were what officials call fictitious, printed in 6,000 units of $1 billion each, a denomination that does not exist and the equivalent of $3 bills, American officials said.  In a statement on Friday, the United States Embassy in Rome said its experts had examined the bonds, which bore the date 1934, and determined that they were fictitious and apparently part of a scheme intended to defraud Swiss banks. It was unclear whether the bonds were ever used for that purpose..

Greece shows us how to protest against a failed system - I do not like violence. I do not think that very much is gained by burning banks and smashing windows. And yet I feel a surge of pleasure when I see the reaction in Athens and the other cities in Greece to the acceptance by the Greek parliament of the measures imposed by the European Union. More: if there had not been an explosion of anger, I would have felt adrift in a sea of depression. The joy is the joy of seeing the much-trodden worm turn and roar. The joy of seeing those whose cheeks have been slapped a thousand times slapping back. How can we ask of people that they accept meekly the ferocious cuts in living standards that the austerity measures imply? Do we want them to just agree that the massive creative potential of so many young people should be just eliminated, their talents trapped in a life of long-term unemployment? All that just so that the banks can be repaid, the rich made richer? All that, just to maintain a capitalist system that has long since passed its sell-by date, that now offers the world nothing but destruction. For the Greeks to accept the measures meekly would be to multiply depression by depression, the depression of a failed system compounded by the depression of lost dignity.We are all Greeks. We are all subjects whose subjectivity is simply being flattened by the steamroller of a history determined by the movement of the money markets. Or so it seems and so they would have it. Millions of Italians protested over and over again against Silvio Berlusconi but it was the money markets that brought him down. The same in Greece: demonstration after demonstration against George Papandreou, but in the end it was the money markets that dismissed him. In both cases, loyal and proven servants of money were appointed to take the place of the fallen politicians, without even a pretence of popular consultation. This is not even history made by the rich and powerful, though certainly they profit from it: it is history made by a dynamic that nobody controls, a dynamic that is destroying the world, if we let it.

Germany Draws Up Plans for Greece to Leave Euro - The German finance ministry is actively pushing for Greece to declare itself bankrupt and to agree a "haircut" on the bulk of its debts held by banks, a move that would be classed as a default by financial markets. Eurozone finance ministers meet on Monday to approve the next tranche of loans from the EU and the International Monetary Fund, designed to stave off national bankruptcy while the new Greek government puts the country's finances in order. But the severe austerity measures being demanded have caused such fury in Greece, and the cuts required are so deep, that Wolfgang Schäuble, the German finance minister, does not believe that any government would be able to implement them. His pessimism has been tipped into despair with a secret European Commission, Central and IMF report that even if Greece made good on its promises, it would not be enough to reach the target of bringing total debt to 120 per cent of GDP by 2020.

Germany, Greece Quietly Prepare For "Plan D" -For several weeks now we have been warning that while the conventional wisdom is that Europe will never let Greece slide into default, Germany has been quietly preparing for just that. This culminated on Friday when the schism between Merkel, who is of the persuasion that Greece should remain in the Eurozone, and her Finmin, Wolfgang "Dr. Strangle Schauble" Schauble, who isn't, made Goldman Sachs itself observe that there is: "Growing dissent between Chancellor Merkel and finance minister Schäuble regarding Greece." We now learn, courtesy of the Telegraph's Bruno Waterfield, that Germany is far deeper in Greece insolvency preparations than conventional wisdom thought possible (if not Zero Hedge, where we have been actively warning for over two weeks that Germany is perfectly eager and ready to roll the dice on a Greek default). Yet it is not only Germany that is getting ready for the inevitable. So is Greece.

How does Greece's debt swap work? - Greece has finally set a date for a €200bn (£166bn) debt swap for private bondholders, which is part of a second €130bn bailout for the country that is being presented for approval by eurozone finance ministers on Monday. Greece's cabinet approved another set of austerity measures on Saturday, paving the way for the rescue package. The swap involves private bondholders exchanging €200bn of Greek sovereign debt for a mixture of new bonds of a lower value and cash. The long-awaited debt restructuring will happen between 8 and 11 March, not long before Athens has to pay back a €14.5bn bond maturing on 20 March. The deal hammered out with private creditors will offer them new 30-year bonds with a coupon, or interest rate, of around 3.75%, which would rise if Greece achieved stronger-than-expected economic growth. The European bailout fund, the European Financial Stability Facility (EFSF), is expected to make €30bn available as a cash sweetener for bondholders, which would translate into 10-15% of their holdings. Without that cash banks and hedge funds would probably walk away, as they will be made to suffer losses, or a "haircut" of up to 70% on their bond holdings. The size of the sweetener and the final interest rate are expected to be set by eurozone officials before the finance ministers' meeting on Monday. A voluntary agreement with bondholders is crucial to avoiding a disorderly debt default, which would send shockwaves through global financial markets.

The ECB Has Opened Pandora’s Box - The ECB, on its own and without judicial or parliamentary review, has swapped their Greek debt for new Greek debt that is not subject to any “collective action clause.” They did this unilaterally and without the consent of any other sovereign debt bond owners of Greek debt. They did this without objection of any nation in Europe. They have retroactively changed the indenture, the contract made by Greece with all of the buyers of their bonds, when the debt was issued. There is no speculation involved in these statements, there is no longer any guesswork on what might be; the ECB swapped their bonds for new Greek bonds with the assent of the Greek government and it is now a done deal. Having then done this; the implications must now be considered utilizing the clear light of unadulterated reason. The issue now is no longer a one-off Greek issue but a full on ECB issue. We know now that the ECB can retroactively change the rules, change an indenture, so that if the ECB can do this with Greece then it can certainly do it with any sovereign debt in Europe. If they can exempt themselves from a “collective action clause” then they can exempt themselves from any clause, in any sovereign indenture, for any European country. The fact that they are now clearly senior to any other bond holder, or more aptly put, that any private bond owner is now subordinated to the ECB is one consideration but hardly the most important one. The incredibly grim reality now is that any European and all European sovereign debt can have their indentures changed by the ECB when it is to their advantage. It is the “collective action clause” today but tomorrow it could be the maturity or the coupon or any other terms and conditions in an indenture. It is Greece today but tomorrow it could be France or Portugal or Italy. The “Rule of Law” has been abrogated and tossed aside in the name of political contrivance.

Greek CDS to Trigger in March - Whether or not Greece stays in the Eurozone and for how long is still debatable, but Greek CDS contracts are set to trigger next month after Greek parliament retroactively inserts collective action clauses (CACs) forcing all debt-holders to participate in the next deal.  Bear in mind that forced restructuring is the trigger, not the insertion of the CAC language itself. The Financial Times reports Greece sets date for €200bn debt swap - Greece plans to launch a debt swap next month for private bondholders as part of a second €130bn bail-out expected to be approved on Monday by eurozone finance ministers, a government official said on Saturday. The official said the swap, which would cover €200bn of Greek sovereign debt, would take place between March 8 and March 11, only days before Athens is due to repay a €14.4bn bond maturing on March 20. As a first step towards completing the deal, the Greek parliament is set to pass legislation next week on so-called collective action clauses, with the aim of forcing a minority of “holdout” investors to take losses of around 70 per cent on their holdings. The debt swap would offer bondholders a cash sweetener of 10-15 per cent of their holdings, plus new 30-year bonds with a coupon of around 3.75 per cent, which could increase if Greece achieves higher than forecast growth rates.

Greece must default if it wants democracy - When Wolfgang Schäuble proposed that Greece should postpone its elections as a condition for further help, I knew that the game would soon be up. We are at the point where success is no longer compatible with democracy. The German finance minister wants to prevent a “wrong” democratic choice. Similar to this is the suggestion to let the elections go ahead, but to have a grand coalition irrespective of the outcome. The eurozone wants to impose its choice of government on Greece – the eurozone’s first colony. I understand Mr Schäuble’s dilemma. He has a fiduciary duty to his parliament and is being asked to sign off on a programme that he doubts will work. Releasing the funds before an election is risky. What is to stop a new Greek government and a new parliament from unilaterally changing the agreement?  Greece has a poor record of implementing policies it has agreed to. The mistrust is understandable. But to overcome this, the eurozone is seeking assurances that are unbelievably extreme.  The provocation of Greece has been escalating for some time. The first was the incendiary proposal, contained in a policy paper, to impose a fiscal Kommissar on Athens, with the power to veto economic policy decisions. After that was rejected, officials proposed using an escrow account, which would ensure that the eurozone can withhold funds to Greece at any time without triggering a default. But clearly the most extreme proposal is to suspend the elections and keep the technical government of Lucas Papademos in place for much longer.

Why Greece Must Exit the Eurozone, How it Will Happen (and Why Portugal and Spain Will Follow); Does the Euro Act Like a Gold Standard? - Several people have asked me about statements I have made that "Greece is in a hopeless situation until it exits the Eurozone."  Actually Greece is in a horrific condition whether or not it exits the Eurozone as the Troika literally destroyed Greece (perhaps purposely to protect French and German banks), by dragging this mess out the way they have. To understand why Greece (then Spain and Portugal and perhaps even Italy) must exit the Eurozone, one must first understand the flaws of the European Monetary Union. In general terms, the question at hand is "what makes good and bad currency unions?" The best answer I have seen written anywhere is also in the same article that explains in depth how sovereign defaults and currency devaluations happen. Please consider some pertinent snips from A Primer on the Euro Break-Up by Jonathan Tepper of Variant Perception.

Can a return to the drachma save Greece as unemployment soars? - Greece’s unemployment bomb has detonated. After a deceptive calm, the surge in job losses since last summer is shocking even for those who never believed that combined fiscal and monetary contraction could possibly lead to any result other than ruin.  A variant of this lies in store for Portugal as its "internal devaluation" starts in earnest. The young Schumpeterians in charge of the Portuguese economy insist otherwise - cocksure that shock therapy will triumph without the cushion of debt relief and devaluation - but events have a habit of demolishing dreams.  In November alone 126,000 Greeks lost their jobs in a country of 11 million, equivalent to three and a half million Americans in a single month. The unemployment rate jumped from 18.2pc to 20.9pc.  This has not yet fed through into social breakdown. Greeks receive unemployment support for an average of thirty weeks, with a ceiling of €454 a month, according to Professor Manos Matsaganis from Athens University. Those with civil service tenure are placed on labour reserve for two years at half their basic pay, or a third of their actual pay.

When Debt is More Important Than People, The System Is Evil - Ethics has no place in the Empire of Debt. The financialized Status Quo is careful to limit the language used to describe the situation in Greece to the subtexts of "obligations" and "avoiding chaos." The reality being masked is that debt is now more important than people. The suffering of the people of Greece is presented as a footnote to the financial play being staged; when the suffering is noted, it is presented with a peculiar set of unspoken subtexts: This begs further investigation. In the normal course of affairs in corrupt kleptocracies, various Elites siphon off most of the swag and the commoners get just enough shreds to buy their complicity. In other words, it may well be that the entire populace of Greece benefitted handsomely from the massive State borrowing, but it also may well be that the private-sector Greeks received little of the swag. In this case, they don't "deserve" to be forced into debt-serfdom by their Euroland overlords. The ethics of debt, at least in the officially sanctioned media, boils down to: nobody made them borrow all those euros, and so their suffering is just desserts.

Decision day for second Greek bailout despite financing gaps  (Reuters) - Euro zone finance ministers inched towards approving a second bailout for debt-laden Greece on Monday that would resolve Athens' immediate repayment needs but seems unlikely to revive the nation's shattered economy. Agreement on a 130-billion-euro rescue package on strict conditions would draw a line under months of uncertainty that has shaken the currency bloc, and avert an imminent bankruptcy. As the ministers met, officials were struggling to make the numbers add up. EU sources said they had to find a further 6 billion euros, via various options, to make the financing work, and private investors might have to take bigger losses. A report prepared for ministers by EU, European Central Bank and IMF experts, obtained exclusively by Reuters, said Greece would need extra relief to cut its debts to the official target of 120 percent of GDP by 2020. If it did not follow through on structural economic reforms and savings, its debt could hit 160 percent by that date. "Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it," the 9-page confidential report said.

Eurozone seeks central banks’ help in Greek bail-out - Eurozone governments are looking to the European Central Bank and national central banks to help pare back the cost of a second rescue package for Greece which would otherwise amount to €170bn. Figures seen by the Financial Times reveal Greece needs €136bn in fresh bail-out funding from the European Union and International Monetary Fund – in addition to the €34bn left over from Greece’s first bail-out. This is €6bn more than EU leaders agreed in October. Germany, the Netherlands and Finland have insisted on paying no more than €130bn.  Eurozone finance ministers, who meet in Brussels on Monday to hammer out a deal to save Greece from default, hope the ECB can contribute by forgoing some of the future profits it would earn on its Greek bondholdings, which it has said it is willing to do.  Senior officials said they would also discuss a possible contribution from eurozone national central banks whose bondholdings could be included in a €200bn debt restructuring to be launched alongside the bail-out. A central bank contribution would help the eurozone and IMF to keep their contribution to €130bn. It would also reduce Greece’s ratio of public debt to gross domestic product in 2020 closer to the 120 per cent the IMF deems sustainable, permitting it to take part in a second rescue.

A capital way to defuse Greek timebomb - I’m not entirely sure a Greek default/capital controls/euro departure would create such an insuperable challenge. I asked an Icelandic friend how their capital controls were imposed back in 2008. “It is dead simple. Overnight they moved all the (non-official) deposits in the country into a new (master) account called “euro n/c”, for euro non clearable. Then the deposits could only clear domestically. You had to ask the central bank’s permission for exemptions to buy fuel, or replacement parts, or to travel.”  Now Iceland had a convertible currency, but not a common one with a set of countries bound by a treaty commitment to the free flow of capital. And, it is an island, though a fairly open economy. So intra-euro-area capital controls would be more difficult, and leaky, but not impossible. Furthermore, given that all euro members share the common central banking software of the eurosystem, it should be possible for just one of the national central banks, or a small group within the ECB, to design or specify the necessary clearing and settlement programmes for capital controls with varying levels of intensity. Then it could share those with the other members. You do not really need committees from 17 countries to do the work. The question is really political: whether the euro member countries with current account surpluses are willing to commit them to cover the capital raising needs of the current account deficit countries. Guess we’ll find out.

Berlin split on bail-out for Greece - A split has emerged in the German government over whether to grant Greece a second bail-out package with Wolfgang Schäuble, finance minister, pushing to let Athens default while Chancellor Angela Merkel is firmly against, according to German and eurozone officials. Mr Schäuble was said to have come to his hardline view in the light of haggling over Greece’s fresh austerity measures under a second rescue programme and the refusal of some Greek politicians to promise to back the deal after elections due in April.  “Schäuble doesn’t think the Greeks can deliver any more,” said one official in Ms Merkel’s Christian Democratic Union, adding that the minister was worried about putting more of German taxpayers’ money into a second bail-out.  A chancellery official stressed that Ms Merkel and Mr Schäuble were united in their goal of getting Greece to sign up to eurozone demands before approving the package. But he also conceded that the finance minister was “showing more impatience” than the chancellor. The finance ministry could not be reached for comment. Mr Schäuble has angered the Greeks in recent days – and caused much head-scratching in Berlin – with public calls for Greece to postpone April elections and to install instead a technocratic government similar to that formed by Mario Monti in Italy.

Germany bows to global pressure and signals Greek rescue deal - Europe’s key powers are on the brink of a €130bn (£108bn) debt deal to rescue Greece and avert the first sovereign default in Western Europe in over half a century. Germany’s finance minister Wolfgang Schäuble toned down threats to force Greece out of the euro, bowing to intense pressure from France, Italy, and the US-led bloc of global leaders. Mr Schäuble said the country is "on the right path" and signalled that pension cuts agreed by the Greek cabinet over the weekend would be enough to secure approval for the loan package from EU ministers on Monday. "If Greece can implement all the necessary promises by the end of February and clear up any other open questions, the second aid package can be approved," he said. Austria’s finance minister Maria Fekter said Greece faced stringent conditions on new aid but said that the "majority" of EMU countries not want to risk a dangerous misadventure that would cost even more in the end.

Outfoxed by the Opposition: Defeat in Presidential Battle Leaves Merkel Isolated - At the press conference on Sunday evening where Germany's five main political parties presented Joachim Gauck as their consensus candidate for the office of German president, Merkel tried to smile bravely. But she was unable to stop herself from sporting a sour expression as she forced herself to praise the man who, less than two years ago, she had tried to prevent from becoming president with all the means at her disposal. Back then, Merkel's hand-picked candidate, Christian Wulff, succeeded in becoming president -- only to resign under a cloud last Friday following a series of scandals.In accepting the opposition's candidate for the next German president, Angela Merkel has suffered the bitterest defeat of her chancellorship. Her junior coalition partner, the FDP, teamed up with the two main opposition parties to push through their choice. The ignominious defeat could mark a turning point for the German chancellor.

Finance Ministers Look to Sign Off on Greek Deal —After months of haggling and heartache, the euro zone is finally set to push ahead with a new, enhanced rescue deal for Greece Monday that will avert—at least for the present—the threat of a potentially catastrophic default. Finance ministers from the 17 euro-zone countries will meet in Brussels at 2 p.m. GMT on Monday, looking to sign off on a deal worth at least €130 billion ($170.9 billion) that will slash Greece's debt burden and allow it to stay in the euro zone, albeit under a degree of external control and scrutiny never witnessed in Europe in modern times.

'All the elements' of new $171B Greek bailout in place - European governments are ready to agree to a new bailout package for Greece, France's finance minister said Monday ahead of a meeting with his counterparts in Brussels. Francois Baroin told Europe-1 radio that while details will have to be worked out, "the political commitments have been made" for a new €130 billion ($171 billion) bailout for Athens. "We now have all the elements of a deal — elements of a participation that remains voluntary for banks and private lenders, and for public lenders states, central banks," he said.

Venizelos: Bailout uncertainty to end - Finance Minister Evangelos Venizelos said on Monday technical issues on the country's new bailout package were still being discussed but that he expected the uncertainty to end at a meeting of eurozone finance ministers in Brussels. "We expect today the long period of uncertainty – which was in the interest of neither the Greek economy nor the euro zone as a whole – to end," Venizelos was quoted as saying in a finance ministry statement. "The Greek people send to Europe the message that they have made, and will make, the necessary sacrifices for our country to regain its position of equality within the European family." Ahead of the talks, a finance ministry official said on Monday that eurozone countries appear to have agreed on some measures to lower the country's debt burden, but are still discussing the size of losses private bondholders will be asked to take, on Monday.

Greeks hope for Eurogroup deal but Dutch raise doubts -  Finance Minister Evangelos Venizelos appeared upbeat ahead of a Eurogroup meeting on Monday that was expected to give the green light to a new bailout for Greece. However, Venizelos’s positive mood was countered by Dutch Finance Minister Jan Kees De Jager who suggested that he had yet to be convinced that Greece could meet all the commitments it had made to qualify for more loans. He also proposed greater oversight for Greece’s lenders over its budget. De Jager also said that the Netherlands would not approve the disbursement of more than 130 billion euros for Greece. It has been suggested that Athens might need more than originally planned to make its debt sustainable due to the deterioration of its economy over the last few months. "We have to listen to Greece and the troika and then see if Greece has done enough,” the Dutch finance minister told the UK’s Channel 4 economics editor Faisal Islam going into the Eurogroup meeting.

Dutch demand 'permanent' EU-IMF control in Greece - As the eurozone meets on whether to approve a 230-billion-euro ($300 billion) financial lifeline for Greece, De Jager said: "I am in favour of a permanent troika in Athens," referring to European Union, International Monetary Fund and European Central Bank officials reviewing the country's finances. De Jager, whose coalition government in The Hague has to get the bailout past an increasingly sceptical Dutch parliament, said partners committed to providing Greece money for years to come need "some kind of permanent presence" dictating policy on the ground, "not every three months." He was referring to quarterly reports produced by the "troika" which have in some instances held up disbursement of funds under Greece's initial 110-billion-euro bailout first agreed in May 2010. Dutch Prime Minister Mark Rutte recently floated the idea that the eurozone could cope with a Greek exit from the currency area much more easily than 18 months ago. With signs that key partners from Germany to the IMF are now ready to approve the latest Greek rescue package, De Jager stressed: "It is very important when you loan money that you are the boss" when it comes to deciding when and how planned loans are made available.

Euro Nations Continue to Insult, Strangle, Threaten Greece - This a.m. Atrios highlights an op ed at the Financial Times by Wolfgang Münchau pointing out that Greece now faces the bitter choice of defaulting if it wants to preserve any pretense of democracy and national sovereignty. That follows a week or more of intimidating and insulting comments by German financial minister Wolfgang Schäuble and others suggesting that it would be better for everyone if Greece just left, but if they insist on staying, they effectively have to surrender their fiscal sovereignty to the Troika representing outside creditors and even postpone elections to satisfy the Germans that a new government will honor the current government’s pledges. All of these insults were happening while Angela Merkel and Troika officials were insisting that a Greek default and leaving the Euro were out of the question, while demanding more and more austerity concessions as a condition for providing the loan funds they promised months ago. The goalposts have been moving almost daily.

Spain Sinks Deeper Into Periphery on Debt Rise - Spain’s debt load is set to double from where it was when Europe’s sovereign debt crisis began, eroding the economic advantages that distinguished it from the region’s periphery and helped shield it from Greek (1004Z) contagion. Finance chiefs meet in Brussels today in the latest effort to save Greece from default. Spain went into the crisis with public debt of 40 percent of its gross domestic product, compared with an average ratio of 70 percent in the euro region. The European Union forecasts its debt will have almost doubled by next year, as Moody’s Investors Service says Spain is losing one of its “key relative credit strengths.” Investors give Spain a discount of just 30 basis points on borrowing for a decade compared with what they charge Italy, down from 200 basis points at the end of last year. Spain’s 10- year yield is 5.18 percent, up 33 basis points since Feb. 1. “Time is working against Spain and that is why deficits have to be brought down sharply before the critical 100 percent debt-to-GDP mark is breached,”

Does Latvia Give Us Any Clues? - Rebecca Wilder - Short answer: yes, as long as global trade growth is negligible. Over the weekend I came across a December CEPR paper about the Latvian economy. Authors Mark Weisbrot and Rebecca Ray highlight the Latvian experience with internal devaluation, which may prove to be a case study for the current Eurozone model of internal devaluation by the program countries (Ireland, Portugal, and Greece). Weisbrot and Ray find the following (emphasis mine): The paper also finds that Latvia’s net exports contributed little or nothing to the economic recovery over the past year and a half. This means that “internal devaluation” cannot have succeeded in bringing about the recovery. Rather, it appears that the recovery resulted from the government not adopting the fiscal tightening for 2010 that was prescribed by the IMF, and also from an expansionary monetary policy caused by rising inflation. The data contradict the notion that Latvia’s experience provides an example of successful internal devaluation. Note: Internal devaluation is Europe’s favored prescription for any country seeking liquidity assistance; it refers to the process by which an EZ country that cannot devalue its currency reduces relative costs (wages) and prices by raising the unemployment rate in order to shift export income in favor of the deflating economy. Internal devaluation didn’t work for Latvia, as evidenced by export demand. I wondered, though, how has real export demand performed for the current program countries, Ireland, Portugal, and Greece? Have these countries followed Latvia’s path?

US Economist Kenneth Rogoff: 'Germany Has Been the Winner in the Globalization Process' - SPIEGEL ONLINE - News - International: In an interview with SPIEGEL, Harvard economist Kenneth Rogoff, 58, says it was a mistake to bring all the southern European countries into the common currency. He also argues that Greece should be granted a "sabbatical" from the euro and that a United States of Europe may take shape far sooner than many believe.

Ken Rogoff: Greece Should Be Given A "Sabbatical From The Euro" As Kicking The PIIGS Can Will Just Drag Germany Down - There is nothing new in this interview of Spiegel magazine with Ken Rogoff, but it is refreshing to listen to a person who has at least some standing in the arena of grand self-delusion (i.e., economics and capital markets), telling it like it is. While he rehashes all the old points, these bear reminding as the key one is what happens to Germany as the can kicking becomes a new default exercise in preserving bank "solvency" at the expense of the last stable economy: when asked if in 2015 the Eurozone will be the same, his response: "It may well be the case that all current members remain in the euro zone, and that Germany keeps on shouldering the ever-increasing debts of other countries. But the price of such a scenario is very high for all involved: southern Europe would become embroiled in permanent stagnation and the German economy would eventually be dragged down to a slower growth trajectory." So even though everyone knows that Europe is doomed in its current configuration, let's all just pretend things shall be well, and keep the even more doomed banks alive for a few more quarters? Is the loss of a banker bonus truly such a great catastrophe to society that countries have to remain in a state of perpetual misery until it all finally unwinds? Judging by today's market action the answer is yes.

E.U. Banks and States Caught in a Vicious Cycle - Like drunks at a bar door, the euro zone’s governments and banks are leaning unsteadily on each other for support. The banks know they have to sober up, but governments are urging them to have one more for the road. European policy makers may have managed to stop the entire building from swaying in the past few weeks, but they have not yet found a way to break the dangerous mutual dependency between overindebted states and overleveraged banks. ‘‘If you don’t cut the dependency between sovereigns and banks, inevitably states will be inhibited by the risks of their banks and banks will be inhibited by the risks of their states,’’ said Jean Pisani-Ferry, director of Bruegel, a economic research group based in Brussels. For almost a decade, European banks binged on euro zone sovereign debt, with the blessing of national regulators, making little distinction among German bunds, Italian Treasury issues and Greek government bonds. They have learned the hard way that there is no such thing as a risk-free asset. When the true scale of Greece’s public debt and deficit was disclosed at the end of 2009, the market panicked, setting off a vicious cycle of rising interest rates, credit rating downgrades and bank liquidity problems. Economists call this a ‘‘negative feedback loop.’’ Weakened governments are less able to guarantee their domestic banks, which in turn are weakened by the dwindling value of their sovereign bond holdings.

A oh, Some in Europe can't take the pressure -- Seems the austerity thingy is starting to hurt where it really counts. Just read via the AP: ... and amid growing concern in Europe that austerity aimed at cutting ballooning deficits may also be choking growth.  A dozen European Union leaders, including British Prime Minister David Cameron and Italian Premier Mario Monti, called Monday for an open-markets strategy to stimulate growth and jolt the region out of its economic doldrums. "We meet in Brussels at a perilous moment for economies across Europe," the leaders said. "Growth has stalled. Unemployment is rising. Citizens and businesses are facing their toughest conditions for years. "  Of course their solution is "Free the Kraken!*":  The letter urges European nations to deregulate their service, research and energy sectors, forge trade ties with growing markets including China, Russia and South America — and even contemplate a free trade agreement with the United States.  How scared are they? They are this frightened:  "Implicit guarantees to always rescue banks, which distort the single market, should be reduced," the letter said. "Banks, not taxpayers, should be responsible for bearing the costs of the risks they take." Be still my beating heart, be still.

Eurozone agrees second Greek bail-out  - Eurozone finance ministers reached a long-delayed €130bn second bail-out for Greece early on Tuesday after strong-arming private holders of Greek bonds to take even deeper losses than they had accepted last month. Although Greek bondholders agreed in October to accept a 50 per cent cut in the face value of their bonds in face-to-face negotiations with Nicolas Sarkozy, France’s president, and German chancellor Angela Merkel, they will now be offered a “voluntary” deal with a haircut of 53.5 per cent, eurozone officials said. Both Jean-Claude Juncker, chairman of the eurogroup of finance ministers, and Christine Lagarde, managing director of the International Monetary Fund, stressed that Greece still had to live up to a series of “prior actions” by the end of the month before eurozone governments or the IMF can sign off on the new programme. In addition, the bail-out comes with tough new terms, including a permanent team of monitors in Greece to ensure Athens lives up to the terms of the bail-out deal and an escrow account which Greece will ensure always holds three months worth of debt payments. The escrow account will be temporary, however, and Athens has agreed to change its constitution to make debt repayment the top priority in government spending.

Europe seals new Greek bailout to avert default (Reuters) - Euro zone finance ministers sealed a 130-billion-euro ($172 billion) bailout for Greece on Tuesday to avert a chaotic default next month after forcing Athens to commit to unpopular cuts and private bondholders to accept deeper losses. The agreement was hailed as a step forward for Greece, but doubts immediately emerged as to whether it would do much more than deal with its most pressing debt problems. Greece will need more help if it is to bring its debts down to the level envisaged in the bailout and will remain "accident prone" in coming years, according to a deeply pessimistic report by international experts obtained by Reuters. After 13 hours of talks, ministers finalized measures to cut Greece's debt to 120.5 percent of gross domestic product by 2020, a fraction above the target, to secure its second rescue in less than two years and meet a bond repayment in March.By agreeing that the European Central Bank would distribute its profits from bond buying and private bondholders would take more losses, the ministers reduced Greece's debt to a point that should secure funding from the International Monetary Fund and help shore up the 17-country currency bloc.The austerity measures wrought from Greece are widely disliked among the population and may present difficulties for a country which is due to hold an election in April.

Can a Second Bailout Save Greece? - After months of delays, arguments and doubts, euro-zone finance ministers agreed on a second, $170 billion bailout of beleaguered Greece in the early hours of Tuesday morning. The agreement will not only provide fresh financing for the debt-stricken government but also some much needed debt relief. A hefty chunk of the new bailout package will be used to support a restructuring of $265 billion of Greek sovereign debt, in which private creditors will take a larger-than-expected loss in a swap of their current bond holdings for longer-term replacements. This bailout also includes funds to recapitalize the shattered Greek banking system. Though some hurdles remain — all 17 euro-zone countries still must approve the bailout’s terms — the deal will put an end to fears of an unruly Greek default. The big question remaining, though, is, For how long? The first bailout, inked in May 2010, was considered by many to be dead on arrival, an unrealistic attempt to solve Greece’s debt crisis without tackling the serious, underlying problems. Doubts about that deal did nothing to stop contagion from spreading to other weak euro-zone economies, threatening the entire monetary union. Now here we are, nearly two years later, and this second deal is plagued by many of the same failings and faulty assumptions of the first. That means this latest bailout may not be a real solution to the Greek debt crisis, but merely another stopgap that prevents an immediate crisis while postponing more tough decisions to a later date.

Back To Surreality - Greek Tax Collectors Told They Need To Be 200% More Efficient - Let's put things back into perspective. Europe is lending money to Greece, which according to latest rumors will at least for the time being be in the form of the dreaded Escrow Account, which in turn means that the only recipients of bailout cash will be Greek creditors, whose claims will be senior to that of the government. In other words, it will be up to Greece, and specifically its own tax "collectors" to provide the actual funding needed to run the country as bailout or not bailout, Greek mandatory (forget discretionary) expenditures will not see one penny from Europe. As a reminder, the country is already €1 billion behind schedule in revenue collections which are down 7% Y/Y compared to an expectation of 9% rise. As a further reminder, the one defining characteristic of Greek tax collectors is that they are prone to striking. Virtually all the time. And that is assuming they even have the ink to print the required tax forms. Which last year they did not. So under what realistic assumptions are Greek tax collectors laboring in the current tax year? Why, nothing short of them having to be not 100%, but 200% more efficient. And this, unfortunately, is where the Greek bailout comes to a screeching halt, because while it is no secret that Greek "bailouts" do nothing for the country, but merely enforce ever more stringent austerity to mask the fact that all the cash is simply going from one banker pocket to another, it is the pandemic corruption embedded in generations of behavior that is at the root of all Greek evil. And there is no eradicating that. Now tomorrow, and not by 2020.

EURUSD Soars On Reuters Report That Greek Deal Is Reached... Which Is Same Deal As July 2011 - Yeah, we had the same response as our readers when we saw that freak move in the EURUSD. Apparently, despite the fact that absolutely nothing has been resolved, Reuters just ran a headline that "Euro zone reaches deal on second Greek bailout package." And that is all it took for the EURUSD headline scanning algos to surge by 60 100 pips. That there nothing substantial in it, or that this is merely a rephrasing of the actual Bailout 2 announcement from before, is irrelevant. Here is what the actual Reuters report said.

Greek Headline Reality Check - Mainstream media is desperately scrambling to fill copy with stories of collaboration, rescue, heroism, sacrifice, and altruism among the European leaders. The dismal reality facing real people and real participants is quite different and as Peter Tchir points out "How many 'untruths' have become so accepted that they are now treated as facts or axioms". In an effort to get to the facts and reality, we disentangle Bloomberg's 'Greek Rescue' story and note the increasingly Orwellian nature of the events unfolding across the pond. But anyways, the machine is grinding along towards headlines of "rescue" where Greece will have been "saved" and "default will have been avoided" and it will be "great that banks and politicians worked to save Greece" in spite of the "lingering doubts that Greece will fulfill its obligations".

The Greece deal - Please find attached the latest IMF Greek sustainability report that I mentioned earlier today and the Euro Group statement on Greece from today’s summit. Please take note of the following paragraph in the Euro Group statement. It is understood that the disbursements for the PSI operation and the final decision to approve the guarantees for the second programme are subject to a successful PSI operation and confirmation, by the Eurogroup on the basis of an assessment by the Troika, of the legal implementation by Greece of the agreed prior actions. The official sector will decide on the precise amount of financial assistance to be provided in the context of the second Greek programme in early March, once the results of PSI are known and the prior actions have been implemented. In other words… We’re not quite there yet. Greek Sustainability Report

Satyajit Das: It’s All Greek to Me! - Yves here. In case you managed to miss it, there is supposedly an agreement for Greece to get €130 billion. But then we learn that Greece will still need more dough if it meets its target of reducing government debt to GDP to 120% by 2020 (and why is debt to GDP of 120% seen as sustainable then when it is not seen as sustainable now? And leaked documents further note that Greece might not meet its targets (duh!) and its debt to GDP could instead by 160% of GDP, which would require bailouts of nearly twice the amount now contemplated. And “discussions” are continuing in Brussels into the early morning, which says this deal is about as done as the US mortgage settlement. By Satyajit Das: The Greek Prime Minister spoke of a choice between “austerity” and “disorder”. He got both, as the Greek Parliament based the European Union (“EU”) agreed to severe budget cuts and outside rioters protested the plan.In great dramas, sub-plots support the main story. The story of “hairshirts” (the Greek economic plan) and “haircuts” (the writedown of Greek debt or PSI – Private Sector Involvement) are little more an intriguing side show in the broader European debt crisis.With Greece increasingly doomed, the real significance of the negotiations is that they provide a template for future European sovereign restructurings. No one buys the oft-stated European leaders’ position that Greece’s position is unique or exceptional. Portugal is first in the line of fire, with the Irish, Spanish and Italians watching anxiously.

A Greek agreement - IN THE wee small hours, euro-zone finance ministers finally reached an agreement on how to proceed with a new bail-out for struggling Greece. The indefatigable Charlemagne provides details: As explained in my earlier post, the negotiators were working within self-imposed constraints. According to the final statement, the deal is expected to bring down Greece’s debt ratio to 120.5% of GDP in 2020, while requiring no more than €130 billion ($173 billion) in additional finance in the coming two years. To square the circle, ministers have applied the file to several aspects.

    • - Private creditors have accepted a haircut of 53.5% of the nominal value of Greek bonds they hold, plus a reduction in the coupon for new bonds, starting at 2% and rising to 4.3% from 2020. This amounts to a loss of net present value of about 75% (up from the 21% originally agreed in July).
    • - A 50 basis-point reduction in interest rate charged by euro-zone members on their bailout loans to Greece, applied retroactively. This is justified by reference to the profits that will be made by the European Central Bank (ECB) on the discounted bonds it had bought earlier in the crisis. This will be redistributed to national central banks, which will pass them on national governments. This roundabout flow is to avoid any semblance of monetary financing of Greece.
    • - By contrast, governments promise to pass on directly to Greece any profits made by their central banks on Greek bonds they currently hold.

Relief vies with sense of shame on streets of Athens (Reuters) - Greeks resigned themselves on Tuesday to a 130-billion-euro EU/IMF bailout that won their country a last-minute reprieve from bankruptcy at the price of a decade of austerity and humiliating foreign scrutiny of national finances. Agreements among euro zone ministers during all-night talks in Brussels secured a second rescue package since 2010 in return for a new round of spending cuts that have already cost thousands of jobs and eroded public services. Relief mingled with a sense of shame on the streets of Athens as Greeks who in two months could be choosing a new government digested what the deal means for a country now being treated as the sick patient of the 17-nation currency union. "We are like drug addicts who have just been given their next dose, this is what they've reduced our country to," Ioulia Ioannou, 70, a retired nurse, said of the country's politicians. "I don't know who I will vote for. I'd vote for a new party if someone had the courage to create one," said the life-long voter for the ruling Socialist PASOK party, whose popularity has been hammered by the crisis. "For the first time, I'm embarrassed to say I'm Greek."

Europe seals new Greek bailout, doubts remain (Reuters) - Euro zone finance ministers agreed a 130-billion-euro ($172 billion) rescue for Greece on Tuesday to avert an imminent chaotic default after forcing Athens to commit to unpopular cuts and private bondholders to take bigger losses.The complex deal wrought in overnight negotiations buys time to stabilize the 17-nation currency bloc and strengthen its financial firewalls, but it leaves deep doubts about Greece's ability to recover and avoid default in the longer term.After 13 hours of talks, ministers finalized measures to cut Athens' debt to 120.5 percent of gross domestic product by 2020, a fraction above the target, securing a second rescue in less than two years in time for a major bond repayment due in March."We have reached a far-reaching agreement on Greece's new program and private sector involvement that would lead to a significant debt reduction for Greece ... to secure Greece's future in the euro area," Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, told a news conference.

For Whom The Bailout Tolls - So Greece has finally been awarded a second bailout. One may wish the country will live to tell the tale. According to IMF DG Christine Lagarde, speaking at the post agreement press conference, “It’s not an easy (program), it’s an ambitious one,”. Never a truer word was said, and certainly not in jest. Not only is the program an ambitious one, it is more than probably a “pie in the sky” one too. The objective of 120% for Greek debt in GDP is totally unrealistic, not because it won’t be attained (it won’t), but because even if it were the country would still be in an unsustainable situation in  2020. So this is hardly something to be proud of, or look forward to. And then there is growth. Ah yes, growth. No one really has any idea how this will be achieved, and of course without it even the (un)ambitious 120% goal is way out of reach. But beyond the details, I have serious doubts whether Greece itself can now be rescued. I don’t mean the financial dimension, I mean whether or not the country will even raise its head again. The social fabric and the country’s reputation is being so destroyed, that it is hard to see serious investors getting back into the country again, with or without that much needed internal devaluation.

Greek Rescue Leaves Europe Default Risk Alive - Europe is still struggling to avoid the threat of default as investors warned Greece will soon risk violating the terms of its second bailout in three years.  Seven months of negotiations ended in the pre-dawn hours in Brussels with Greece winning 130 billion euros ($172 billion) in aid it needs to avoid a March bankruptcy. Any respite may prove temporary after it signed up to a program of austerity and economic reform aimed at slashing debt to 120.5 percent of gross domestic product by 2020 from about 160 percent last year.  Even with investors and central bankers chipping in to relieve the debt burden, economists from Citigroup Inc. to Commerzbank AG concluded Greece may again fail to deliver amid a fifth year of recession, looming elections and social unrest. The upshot could be the removal of aid and renewed debate over the merits of fresh assistance before year-end as policy makers shift toward doing more to inoculate the rest of Europe.

The improbable Greece plan - Greece is now officially a ward of the international community. It has no real independence when it comes to fiscal policy any more, and if everything goes according to plan, it’s not going to have any independence for many, many years to come. Here, for instance, is a little of the official Eurogroup statement: We therefore invite the Commission to significantly strengthen its Task Force for Greece, in particular through an enhanced and permanent presence on the ground in Greece… The Eurogroup also welcomes the stronger on site-monitoring capacity by the Commission to work in close and continuous cooperation with the Greek government in order to assist the Troika in assessing the conformity of measures that will be taken by the Greek government, thereby ensuring the timely and full implementation of the programme. The Eurogroup also welcomes Greece’s intention to put in place a mechanism that allows better tracing and monitoring of the official borrowing and internally-generated funds destined to service Greece’s debt by, under monitoring of the troika, paying an amount corresponding to the coming quarter’s debt service directly to a segregated account of Greece’s paying agent. The problem, of course, is that all the observers and “segregated accounts” in the world can’t turn Greece’s economy around when it’s burdened with an overvalued currency and has no ability to implement any kind of stimulus.

Greece - Krugman - We must do something. This is something. Therefore we must do it. Yes, Minister. What can I say? As Felix Salmon says, this really isn’t credible. The problem with all previous rounds here has been that austerity policies depress the economy to such an extent that it wipes out most of the topline fiscal gains: revenue fall, so does GDP, so the projected debt/GDP ratio gets, if anything, worse. Now we have another round of austerity — which is assumed not to do too much damage to growth. The triumph of hope over experience. OK, nobody here is an idiot (although see my next post). What’s happening is that nobody is prepared to take the plunge into either of the paths that might eventually lead out of this: sustained aid (not loans) to Greece, or departure from the euro, leading eventually to higher competitiveness and faster growth. Both options would be politically catastrophic, which means that they can’t be taken until there is literally no alternative. So Greece will be strung along some more.

Europe’s inevitable Greek divorce - I had a little bit of fun amidst all the seriousness on Canadian TV yesterday, laying out my genius solution to the Greek crisis: Canadians. (My segment starts at about 19:20 in.) Essentially, Germany wants Greeks to become German: to stoically accept real wage deflation while working hard and paying their taxes in a good Protestant manner. Canadians are well-educated, productive, and very good at paying their taxes; what’s more, they’d probably like somewhere warmer to live, especially in the winter. So bring all the Canadians to Greece, where they could help turn the economy around, and leave Canada to the commodity companies and the Chinese property speculators. It’s basically the Davos to Greece idea, taken to its logical conclusion. Underneath it all is the simple truth that economic growth is caused by people. Ever since the Eurozone was created, Europe has been quite clear about the fact that economic and monetary union can’t work without labor mobility. But sadly, the ability of Europeans to work in any EU country has meant an outflow of skilled professionals from Greece, when what it really needs is an inflow.

The Disorderly Default in Your Closet Eupdate - Another day, another Greek deal to end them all (more on that soon). Amid the political din, legal and financial complexity, one thing has struck me: the entire enterprise is being justified as a way to avoid "disorderly default." But what exactly is disorderly default--that scary monster in the closet keeping many Eurocrats, foreign bondholders, and Greeks awake at night--and is it really the sole unthinkable alternative to the mess of the past year and, perhaps, some years to come? Disorderly default, one that comes as a surprise to the markets, leading to contagion, capital flight, bank runs, a crashing collapse of the Euro, and widespread litigation, is surely unappetizing. But the alternative to disorderly default might also be a priced-in default with minimal contagion, a contentious restructuring with lots of litigation, or a slow-bleed near-default, complete with capital flight and bank runs, which destroys trust and political capital, depletes and redistributes resources that might have gone to finance recovery (see Roubini & Setser) ... and ends in default.

Greek bailout vote uncertain as legislators await details - Legislation in Germany to approve a 130-billion-euro aid package for Greece was hanging in the balance Tuesday, with many legislators saying they want to see the details before approving it. Next Monday, the legislation to implement the European Union‘s second bailout is likely to be introduced in the Bundestag. Not only is Germany the biggest net contributor, but its requirements for parliamentary consent are among the strictest in the EU. Chancellor Angela Merkel‘s government commands a majority of 330 in the 620-seat parliament. A debate on the package has been scheduled for February 27. Merkel herself is scheduled to set out the path ahead in a speech to the Bundestag on March 1, just before she attends the next EU summit. While both Merkel‘s own Christian Democratic political bloc and their coalition allies, the Free Democratic Party (FDP), praised the package, rebels could stage a revolt. However critics of the bailout said Tuesday it was too soon to say how they would vote.

Greek bondholders set for 74 percent loss (Reuters) - Banks are set to lose almost three-quarters of the value of their Greek government bonds under a deal agreed early on Tuesday, people familiar with the matter said, although enough are expected to agree to the write-off for it to scrape through. Investors had previously expected to suffer a 70 percent hit, so now face an extra collective loss of up to 8 billion euros (6.7 billion pounds). The big bondholders include the likes of BNP Paribas, insurer Allianz and hedge fund Greylock. Commentators expected to see the private sector squeezed more as politicians struggled to fill Greece's funding gap, since a full default could have seen them left with nothing. "Both parties knew that the ultimate recovery for private sector investors is potentially zero," said Gary Jenkins, analyst at Swordfish Research. Euro zone finance ministers sealed the 130-billion-euro bailout for Greece after another marathon session, saying the plan would cut debt to 120.5 percent of gross domestic product by 2020.

EU to Move to Suspend Funds to Hungary, EU Official Says -- The European Commission will adopt a proposal tomorrow to suspend infrastructure-development subsidies to Hungary after the country failed to curb its deficit in a sustainable way, a European official said. The commission, the European Union’s Brussels-based regulator, will propose halting the so-called cohesion funding to Hungary for one year starting on Jan. 1, 2013, the official said on condition of anonymity because the discussions are private. The decision is linked to the nation’s fiscal policy and not to recent EU infringement proceedings against the government in three areas including central-bank independence, the official said. The move, which affects funds used to finance investment and development projects, raises pressure on Hungarian Premier Viktor Orban, who is trying to revive talks with the European Union and the International Monetary Fund on a loan. Hungary stands to lose as much as 1.7 billion euros ($2.3 billion) in 2013, or about 1.5 percent of gross domestic product, said Peter Attard Montalto, an economist at Nomura Holdings Plc in London. “This will pose a significant drain on the budget as well as providing a hole in the balance of payments,” Montalto said today in an e-mail. “It may also slow the pace of investment in infrastructure by government.”

Spain’s debt load to double since start of crisis, EU forecasts - SPAIN’S debt load is set to double from where it was when Europe’s sovereign debt crisis began, eroding the economic advantages that distinguished it from the region’s periphery and helped shield it from Greek contagion, according to the EU. Finance chiefs met in Brussels yesterday in the latest effort to save Greece from default. Spain went into the crisis with public debt of 40 percent of its gross domestic product (GDP), compared with an average ratio of 70 percent in the euro zone. The EU forecasts Spain’s debt will have almost doubled by next year, while Moody’s Investors Service said the country was losing one of its “key relative credit strengths”. Investors give Spain a discount of just 30 basis points on borrowing for a decade compared with what they charge Italy, down from a 200 basis point spread at the end of last year. Spain’s 10-year yield is 5.18 percent, up 33 basis points since February 1.

Greek debt nightmare laid bare - video -- A "strictly confidential" report on Greece's debt projections prepared for eurozone finance ministers reveals Athens' rescue programme is way off track and suggests the Greek government may need another bail-out once a second rescue -- set to be agreed on Monday night -- runs out. The 10-page debt sustainability analysis, distributed to eurozone officials last week but obtained by the Financial Times on Monday night, found that even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of a new three-year, €170bn bail-out. It warned that two of the new bail-out's main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors. "Prolonged financial support on appropriate terms by the official sector may be necessary," the report said. The report made clear why the fight over the new Greek bail-out has been so intense. A German-led group of creditor countries -- including the Netherlands and Finland -- has expressed extreme reluctance to go through with the deal since they received the report.

Greek debt accord hostage to political passions - Eurozone leaders have put off the day of reckoning for a few more months but the latest €130bn rescue package for Greece offers no path out of the crisis and is hostage to explosive political passions.  Greek elections in April are likely to sweep away the political class tainted by the hated "Memorandum" of the EU-IMF Troika, with the once dominant PASOK party down to 13pc in the latest poll and votes peeling away to the Communists, the Democratic Left, and Syriza.  Alexis Tsipras, the Syriza leader, told the Greek parliament on Tuesday that his country was victim of a "terrorist" assault. "This agreement is binding only on those who signed it. The accord carries the signature of a government with no popular legitimacy. It does not bind Greek democracy, or Greek society, or the Left. Very soon the sovereign people will regain their sovereignty," he said.  Greek nationalists of all stripes are enraged by EU demands for an escrow account to dock Greek revenues at source for debt repayment, with an EU taskforce chief stationed permanently in Athens to enforce reforms. "If Europe keeps adding insult to injury, this is going to turn explosive," said Dimitris Daskalopoulos, head of the Hellenic Federation of Enterprises.

Greece Bailout 2.0 - BNN video - Marshall Auerback

CHART OF THE DAY: The Rosy Assumptions Behind The Entire Greek Bailout: Earlier we mentioned a bombshell report in the FT about a secret memo circulated in Europe, which admitted the truth about the Greek bailout: Reform measures are killing the economy, and there's a good chance that the country will never get its public debt under control. What's also interesting is that the memo is still using very rosy assumptions about Greek economic growth. FT Alphaville has posted the whole memo, and it's fairly gruesome. One chart that really shows how optimistic everyone's still being (and this was flagged by Felix Salmon as well) is simply the projected GDP path for Greece. Without any jolt, stimulus, or anything, Greece is magically set to return to growth fast (as the chart below shows). The report does acknowledge: The Greek authorities may not be able to deliver structural reforms and policy adjustments at the pace envisioned in the baseline. Greater wage flexibility may in practice be resisted by economic agents; product and service market liberalization may continue to be plagued by strong opposition from vested interests; and business environment reforms may also remain bogged down in bureaucratic delays. On the policy side, it may take Greece much more time than assumed to identify and implement the necessary structural fiscal reforms to improve the primary balance from -1 percent in 2012 to 4½ percent of GDP, and concerning assets sales, delays may arise due to market- related constraints, encumbrances on assets, or political hurdles. And of course a less favourable macro outcome would itself further hurt policy implementation prospects.

Greek Bailout Secured, But Secret Report Shows It Won’t Work - After an all-night round of talks among Eurozone finance ministers, Greece was granted its second bailout, this one for €130 billion, in a package that includes recently passed austerity measures and a debt restructuring. But confidential reports distributed to the finance ministers indicate that the deal will not work and may even be counter-productive. As Felix Salmon writes, this basically turns Greece into a colony of the European Union. Their sovereignty has been completely washed away, their elections turned into meaningless theater. And yet, the plan offers no hope for future economic growth, even though it magically assumes it by 2014. Greece keeps the euro, which is overvalued for its economy, and must cut budgets dramatically during its fifth year of recession. And even THAT doesn’t protect the debt load of the country: Where’s all this economic growth meant to be coming from, in a country suffering from massive wage deflation? And under this pretty upbeat downside scenario, Greece gets nowhere near the required 120% debt-to-GDP level by 2020: instead, it only gets to 159%. And to make things worse for the Eurozone, the report explicitly says that under the terms of this deal, “any new debt will be junior to all existing debt” — in other words, there’s no way at all that Greece is going to be able to borrow on the private markets for the foreseeable future, so long as this plan is in place. This isn’t just conjecture. A report distributed to Eurozone officials last week says the same thing – that this deal will make the debt problem worse and will lock Greece out of the credit markets.

Exclusive: Greek debt may remain at 160 percent in '20: IMF/ECB (Reuters) - Greece will need additional relief if it is to cut its debts to 120 percent of GDP by 2020 and if it doesn't follow through on structural reforms and other measures, its debt could hit 160 percent by 2020, a confidential analysis conducted by the IMF, European Central Bank and European Commission shows. The baseline scenario in the 9-page report, obtained exclusively by Reuters, is that Greece will cut its debts to 129 percent of GDP by 2020, well above the 120 percent target. "The results point to a need for additional debt relief from the official or private sectors to bring the debt trajectory down," said the report, which is being discussed by euro zone finance ministers at a meeting in Brussels on Monday to decide on a second financing program for Greece. "There is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term," says the report, dated February 15. "In this context, a scenario of particular concern involves internal devaluation through deeper recession (due to continued delays with structural reforms and with fiscal policy and privatization implementation). "This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020. Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it," it said

Greece races to meet bail-out demands -The Greek government is racing to complete a lengthy checklist of reforms demanded by international lenders before the end of February to unlock a €130bn bail-out agreed in the early hours of Tuesday morning after months of high-stakes bargaining.  The tough conditions and the short timetable reflect the collapse of trust between Greece and its trio of lenders – the European Commission, the European Central Bank and the International Monetary Fund – after Athens failed to live up to the terms of a previous €110bn bail-out agreed nearly two years ago. The latest demands include dozens of “prior actions” that Greece must deliver as a condition of the rescue – from sacking underperforming tax collectors to passing legislation to liberalise the country’s closed professions, tightening rules against bribery and readying at least two large state-controlled companies for sale by June. Greece will have just nine days to complete those and a slew of other unpopular measures to lay claim to the money and avoid a disorderly default next month that could force the country out of the single currency and trigger turmoil across the eurozone. The bail-out deal, agreed by eurozone finance ministers after more than 13 hours of talks, involves bigger than expected haircuts on private bondholders and lower rates of interest on eurozone loans to Athens. The ECB and national central banks will earmark income from their Greek bond holdings either to reduce further Greece’s debt burden or to compensate eurozone governments.

Greece Needs New Constitutional Provision Imposed by the Troika; Slight Problem, Constitutionally It Can't Do it - The sad saga of unending, even impossible demands by the Troika on Greece continues. For example, please consider this set of paragraphs listed in a Eurogroup Statement of conditions placed on Greece. The Eurogroup also welcomes Greece's intention to put in place a mechanism that allows better tracing and monitoring of the official borrowing and internally-generated funds destined to service Greece's debt by, under monitoring of the troika, paying an amount corresponding to the coming quarter's debt service directly to a segregated account of Greece's paying agent.  Finally, the Eurogroup in this context welcomes the intention of the Greek authorities to introduce over the next two months in the Greek legal framework a provision ensuring that priority is granted to debt servicing payments. This provision will be introduced in the Greek constitution as soon as possible. ....We reiterate our commitment to provide adequate support to Greece during the life of the programme and beyond until it has regained market access, provided that Greece fully complies with the requirements and objectives of the adjustment programme. Lovely, isn't it? The Troika now wants Greece to pass constitutional amendments to meet its demands to bail out Greece French and German bondholders, the IMF, and the ECB.

9 Day Race to Ecstasy; Only Way Greece Can Win Is To Lose - Hold your horses on that "finalized" deal. There are still numerous austerity measures to implement, details to wrap up, ribbons to cut, and bows to tie. Thus, the Greek Race to Unlock Bail-Out is on. The Greek government is racing to complete a lengthy checklist of reforms demanded by international lenders before the end of February to unlock a €130bn bail-out agreed in the early hours of Tuesday morning after months of high-stakes bargaining.  The latest demands include dozens of “prior actions” that Greece must deliver as a condition of the rescue – from sacking underperforming tax collectors to passing legislation to liberalise the country’s closed professions, tightening rules against bribery and readying at least two large state-controlled companies for sale by June. : “It is all an exercise in make-believe. Does anybody really believe any of the Greek debt sustainability numbers?” In addition to the sheer volume of legislation the Greek government needs to pass, it will also be working against a backdrop of social unrest that has brought thousands of demonstrators on to the streets of Athens. Leftwing politicians, who have risen in the polls, have already vowed to challenge the deal ahead of expected April elections.

Greek Bailout Or Deliverance? - The Greek government has been a complete failure. They are represented in these negotiations [by someone] who owes his job to the people he is negotiating with. His job was not to represent the Greek people, but to force a deal down their throats. No work was done on alternatives to the bailout (until recently). He didn’t explore what options Greece had other than the bailout. All he did was create fear that without a bailout Greece would fall into total chaos and used that to get his job done – passing austerity measures imposed on the people by the Troika. The situation in Greece seems awful. The economy is collapsing. The human toll is growing, yet the puppet didn’t spend time looking for alternatives, looking for paths that might be good for Greece, but instead tried to promote irrational fear and get his job done. Any attempt by Greeks to explore alternatives has been shut down. Remember when the last Greek leader had the silly idea of a referendum? Samaras mentioned that the April elections could change things, which led to some demands that the elections be changed, but ended (so far) with him just groveling for forgiveness. And that is a trend that is growing. This is no longer any attempt by one nation to help another, this is now about creating a pecking order.  The deal is in the best interest of the Troika – not Greece.

Europe's Latest Swiss Cheese Bailout Package - Needless to say, it's absolutely riddled with holes. You would think that the Eurocrats had learned by now not to announce a deal has been reached until they tied up, if not all the loose ends, most of them. It's not their fault, though - there's just no time left and an infinite number of loose ends. The money from the latest baillout package announced, the amount of which is still uncertain, is conditioned on a whole host of things that are not likely to occur. First, you have the PSI debt swap operation that is set to be concluded in the next few weeks. Greek Finance Minister Evangelos Venizelos said that "a successful PSI transaction" was required "for continued disbursements by the official sector which are essential for the implementation by Greece of its economic reform programme". The latest deal envisions a successful PSI involving a 95% participation rate by private Greek bondholders (as well as a reduction of Greek debt/GDP to 120 point 5 percent by 2020). If that doesn't happen voluntarily (it won't) and the Greek government is forced to retro-actively insert collective action clauses into its bonds, then there is a very good argument that the transaction was not successful under the conditions of the bailout agerement. Indeed, the Greek finance ministry is already preparing to submit a draft bill to Parliament that will insert these CACs. Second, the deal has introduced a new set of bankster-friendly, anti-democratic terms that cannot possibly sit well with the Greek populace. They include a "permanent Troika task force" to be situated in Greece and ensure compliance (impossible), a "segregated account" for quarterly interest payments on Greek debt, and, most ridiculously, a new constitutional provision that ensures debt servicing payments are prioritized over other government spending.

Greek Politics Turning Against Debt Slavery -- Paul Mason of BBC has done yeoman work about what’s going on within Greece.   In particular he offers commentary on the political response in Greece. No wonder the EU wants to “postpone” elections. Polls indicate that far left parties are going to be swept in. It is hard to imagine that this won’t just intensify.  These parties want nothing to do with simply taking on more debt to satisfy old debt holders, (pretty much just the Troika after PSI). On the political front, the centre-right technocrat government New Democracy (ND) had to expel a number of members who wouldn’t cooperate on water torture.  The purged ND stands at 19% in the polls, and their coalition party partner Pasok has been reduced to a mere 13%.   A  ”eurocommunist” party called the Democratic Left has gone from near zero to 16% in the polls.  The left leaning Syriza and the DemLeft are at 43.5% in the polls and the latest poll  calls this a few percent higher.  Their proposal is for Greece to declare a selective moratorium on debt repayments and use the euro bailout money for a program of social reform.  That apparently haven’t noticed that only 19% of the next round of debt enslavement is actually for Greece. They also call for the rejection of the new memorandum. Germany’s finance minister is now saying that Greece needs to default,  leave the Euro, and drive for an even deeper haircut. That haircut would have to include the Troika, which is why outright collective default is the only real option.   That way the country can hope to maintain its basic services,  and set itself up as the low cost Florida of European retirees, and the destination for beer drinking youth to help balance trade flows.  Hey, at least it is a start.

Standby for the third Greek bailout - I suppose I have to write something about the extraordinary deal that emerged out of Brussels yesterday. I tweeted at the time that the “Latest EU Bailout will not end the uncertainty. Greece will not be able to withstand a decade of repressive economic policies”. The ABC National News last night introduced the bailout in terms of “finally resolving the uncertainty” and then proceeded to interview an analyst who outlined why the deal will increase uncertainty. This is the state of confusion among the media commentators who are bullied by the Troika to mouth is the official rhetoric but who must also realise that the projections underpinning the approach are deeply flawed and that the situation in Greece will continue to deteriorate. The reality is that this “deal” only buys some more time. In the meantime, the real situation in Greece will continue to worsen. Standby for the third Greek bailout. This picture from the Sydney Morning Herald tells it all. Analysis by body language experts would tell us that the IMF boss is using “Dominant body language” and the unelected Greek PM-stooge is adopting subservient positions – (see Changing Minds for more analysis). Cap-in-hand-Mr-unelected-President do what you are told!

So, what would your plan for Greece be? - Reading the media and blogs, it seems to me that left and right are united in the view that the Greek default is being handled appallingly, that the current attempts at a solution are childishly obviously wrong and that everything is the fault of someone, probably the Germans. My own view – that it is not at all clear what the direction of policy is, and that although I don’t agree with the troika plan, it’s recognizable as a good-faith plan made by conscientious international civil servants working under unimaginably difficult political constraints in an economic context that was irreparably broken before they got there – is, as always, unpopular. I don’t have a solution myself – the more I end up discussing this with people, the more I am reminded of the London Business School proverb taught on some of the gnarlier case studies, which is “Not All Business Problems Have Solutions”. So, CT hivemind, what do you think the best outcome is? Below the fold, I note some talking points, aimed at preventing our commentariat from falling into some of the pitfalls and mistakes which appear to be dominating debate at present. Because the whole issue is a twisty turny maze which at times seems to consist of nothing but false moves, I am presenting it in the form of a “Choose Your Own Adventure”

Greece Cut to Cusp of Default as Fitch Takes First Ratings Step - Greece’s downgrade by Fitch Ratings is the first in a series of ratings cuts that the nation can expect after it negotiated the biggest sovereign debt restructuring in history. Fitch lowered Greece’s credit grade by two levels to C from CCC, saying a default is “highly likely in the near term,” and that it will cut the nation again to “Restricted Default” once a bond exchange is completed. Standard & Poor’s said in July it expected to downgrade Greece to “Selective Default” after the restructuring agreement, while Moody’s Investors Service has said it will cut the nation to its lowest rating. Greece sealed a 130 billion-euro ($170 billion) bailout package by agreeing yesterday to austerity measures while reducing its bond principal by 53.5 percent as investors swap into new securities with longer maturities and lower coupons. Fitch and S&P have both said they expect to later raise Greece’s ratings once the deal has been completed.

Fitch Cuts Greek Rating, Says Debt Exchange Equals Default - It came as no surprise, but Fitch Ratings knocked Greece’s credit rating a few notches lower Wednesday to C, from CCC, The ratings agency said the planned 53.5% haircut on the face value of the country’s bonds will “constitute a rating default” if completed. Wednesday’s action from Fitch comes a day after Greece secured a second package of bailout loans from the so-called Troika – the IMF, European Commission and ECB – worth €130 billion. The agreement with private sector bondholders on 53.5% haircuts is crucial to reduce Greek’s debt burden to a level that is manageable, at least in the short term, but still awaits creditor approval over the next few weeks. The deal is not enough to save Greece from a default though, Fitch said Wednesday: “the proposal to reduce Greece’s public debt burden via a debt exchange with private creditors will, if completed, constitute a rating default, and result in the country’s IDR being lowered to ‘Restricted Default’ (‘RD’) upon completion. The ratings of GGBs affected by the exchange, including those not tendered but restructured under CACs, which are expected to be imposed retrospectively on bonds issued under Greek law, will also be lowered to ‘D’ (‘default’) at this time.

Deal "Really" Finalized? Will Greece Survive the Ides of March? Disastrous Piecemeal Breakup of Eurozone Likely in the Cards - As a point of curiosity, the Greek 1-Year Bond Yield touched 682% today, now down to a mere 666%. Bloomberg quotes the open as 566%, if correct, the one year yield soared 116 percentage points from the open to the high. Open Europe says Many questions around the second Greek bailout remain unanswered Below we outline a few key issues (not exhaustive by any means, there are many more) and give our take on how they could play out. Greater losses for private sector bondholders: Reports suggest the Greek government was sent back to the negotiating table with bondholders at least four times during last night’s meeting. Nominal write downs for bond holders now top 53.5% (or around 74% net present value). The leaked Greek debt sustainability analysis (DSA) assumes a participation rate of 95%. Open Europe take: 95%, really? We weren’t convinced the previous threshold of 90% with a lower write down would be reached and that was while potential ECB participation was still on the table. Although this target may have been agreed with the lead negotiators for the private sector, it is far from a cohesive group, diminishing the value of the agreement. It will be interesting to see how bondholders respond to the plan but we think that hold outs could well be more than 5%.

For Greece, a Bailout; for Europe, Perhaps Just an Illusion - Even after European leaders appeared to have averted a chaotic default by Greece with an eleventh-hour deal for aid, worries persist that a debt disaster on the Continent has merely been delayed. The tortured process that culminated in that latest bailout has exposed the severe limitations of Europe’s approach to the crisis. Many fear that policy makers simply don’t have the right tools to deal with other troubled countries like Italy, Spain, Ireland and Portugal, a situation that could weigh on the markets and the broader economy. “I don’t want to be a Cassandra, but the idea that it’s over is an illusion,” said Kenneth S. Rogoff, a professor of economics at Harvard and co-author of “This Time Is Different: Eight Centuries of Financial Folly.” “I am amazed by the short-term psychology in the market.” Throughout the crisis, the European Union’s favored strategy has been to provide tightly controlled financial support to highly indebted countries, in the hope of buying them enough time to put in place policies aimed at cutting budget deficits. While such moves can deepen recessions, the goal is to eventually lower debt levels and win back the confidence of the bond markets.

Greek 1 Year Hits 763% - If it seems like it was only 5 days ago that Greek bonds could be had for the blockbuster yield of 638%, it is because it was As of today, the same bond was yielding an even more ridiculous 763% (and remember when the MSM fluffers were telling you to buy these at the bargain basement yield of 100% in September 2011?). This price has nothing to do with the Fitch action on the country which is irrelevant, and all to do with the fact that, as noted previously, the cash coupon on the post-reorg bonds was cut once again, this time from 3.6% to just 2%, and the current price on non UK-law bonds is merely indicative of the cash on cash return investors in these bonds expect to make. It also means that the market expects a redefault in just about 1 year. And yes, we realize that at bond prices in the high teens, the yield curve is absolutely meaningless but it is still highly entertaining to watch as Greek bond yields are about to hit quadruple digits, which in itself is very indicative of the recoveries one can expect in a global sovereign ponzi, and yet the powers that be tell us this is a perfectly normal phenomenon, i.e., there is no default, and thus there is no reason to hedge for it. Alas, the whole world has gone mad.

Negative Salaries, Negative Bailout And Now Negative Gold - Greece Just Became The Bankster's Paradise - While Iceland is now known as the country that is the closest earthly approximation to banker hell, it is safe to say that Greece is the terrestrial equivalent of banker heaven. Because as explained earlier today, the country's population is about to get a worse deal than your average run of the mill slave - they may get whipped, but at least never have to pay for the privilege, unlike the Greeks. Hence negative salaries. As also explained, the European bailout of Greece, is now formally a Greek bailout of Europe, funded by the country's already negative primary surplus, or better said - deficit (don't try to make mathematical sense of that - a scene out of Scanners is guaranteed). Hence, negative bailout. But the piece de resistance, and the reason why Greece is the in situ version of bankster heaven is the news from the NYT that Greece is also about to have negative gold. Ms. Katseli, an economist who was labor minister in the government of George Papandreou until she left in a cabinet reshuffle last June, was also upset that Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal.

Some Greeks Might Have to Pay for Their Jobs - It's being called the "negative salary": Due to austerity measures in Greece, it's being reported that up to 64,000 Greeks will go without pay this month, and some will have to pay for having a job. Numbers in austerity reports have usually reflected figures in the millions, since they reflect industry-wide cuts (i.e.  a 537-million euro cut to health and pension funds). And plans of cutting minimum wage by up to 32% is all but a given in the country. Today's "negative salary" deal—which could have government employees returning funds— reveals the real human impact of the austerity measures. As Zero Hedge and the Press Project report: Salary cutbacks (called "unified payroll") for contract workers at the public sector set to be finalized today. Cuts to be valid retroactively since november 2011. Expected result: Up to 64.000 people will work without salary this month, or even be asked to return money. Amongst them 21.000 teachers, 13.000 municipal employees and 30.000 civil servants.

Athens told to change spending and taxes.-European creditor countries are demanding 38 specific changes in Greek tax, spending and wage policies by the end of this month and have laid out extra reforms that amount to micromanaging the country’s government for two years, according to documents obtained by the Financial Times. The reforms, spelt out in three separate memoranda of a combined 90 pages, are the price that Greece has agreed to pay to obtain a €130bn second bail-out and avoid a sovereign default that the government feared would throw Greek society into turmoil. They range from the sweeping – overhauling judicial procedures, centralising health insurance, completing an accurate land registry – to the mundane – buying a new computer system for tax collectors, changing the way drugs are prescribed and setting minimum crude oil stocks.“The programme is much, much more ambitious than economic reform,” said Mujtaba Rahman, Europe analyst at the Eurasia Group risk consultancy. “This is state building, as typically understood in traditional low-income contexts.” Most urgency is attached to a 10-page list of “prior actions” that must be completed by Wednesday in order for eurozone finance ministers to give a final sign-off to the new bail-out at an emergency meeting scheduled for Thursday.

Paul Mason of BBC on How Austerity is Reducing Greece to Developing Country Status - (video) The BBC’s Paul Mason, fresh back from Greece, gives a report on Democracy Now of how living conditions have deteriorated as a result of the imposition of austerity measures. One of the stunners, mentioned in Atlantic Wire (hat tip Lambert), is that not only will some Greeks have to work without pay, some will have to pay for their jobs (yes, that is not a typo). The euphemism is a “negative salary.”  Mason also discusses how this program is radicalizing the public. Communists, Trotskyists and other extreme-left groups are polling at 43%. That’s a strikingly high number. This plus the level of dissent on the street suggests Greece is on its way out of the eurozone. But will the technocrats prevail? As Michael Hudson has stressed here and in other commentary, the banks are succeeding in stripping Greece of assets, an operation that used to be possible only via military force.

Euro Agonistes -  Krugman - Daniel Davies had a very good piece — written in the form of a role-playing adventure game — about Greece; the point was that there aren’t any good answers, certainly for the government of Greece, given the situation that the creation of the euro and the initial debt bubble within the euro area have created. It really is an agonizing position for all the troubled peripheral economies. At root, their problems are primarily caused by balance-of-payments rather than sovereign debt issues; they had huge capital inflows between 1999 and 2007, which led to inflation, and now they need somehow to regain competitiveness. But overlaid on this is a sovereign-debt crisis, which has forced them to seek aid — and the lenders are demanding harsh austerity in return, which is further depressing economies already suffering from severe overvaluation. It’s not too hard to see what Europe as a whole — which, in practice, means the ECB and the Germans — should be doing: less demands for austerity, much more general reflation.  It’s much harder, however, to say what the leaders of such peripheral economies should do. Unilateral default won’t solve the competitiveness problem, and at least for now would actually worsen the fiscal squeeze, since they’re all still running primary deficits.  So there’s a kind of trap. If you imagine yourself as the Prime Minister of such a country, what can you do?  I don’t see any magic bullets.

The EU Now Expects A Recession For The Eurozone: The European Union's executive branch expects the 17-nation eurozone economy to suffer a modest recession this year despite recent signs of stabilization, particularly in financial markets. In its latest projections Thursday, the European Commission's forecast forecasts a 0.3 percent contraction in the eurozone economy, with Greece leading the way downwards with a massive 4.4 percent decline. In its last forecast in November, the Commission was predicting a 0.5 percent expansion in the eurozone. The difference this time is that the Commission now expects Belgium, Spain, Italy, Cyprus, the Netherlands and Slovenia to suffer economic contraction, alongside Greece and Portugal. The wider 27-nation EU, which includes non-euro countries like Britain and Sweden, is expected to see economic performace remain unchanged this year.

All of the Euro Area Usual Competitive Suspects in One Chart…But with a Twist - Rebecca Wilder - The European Commission’s Economic and Financial Affairs initiated the Macroeconomic Imbalance Procedure (MIP) Scoreboard. The MIP Scorecard will be used to identify emerging or persistent macroeconomic imbalances in a country. In their inaugural release, the EC listed 12 EU countries in need of further review for potential imbalances (program countries are exempt from this review process). The accompanying database of the factors in the MIP score is made available at Eurostat. This database is particularly exciting for a data geek like me. Included in the MIP database is an indicator that I’ve wanted to construct for some time: country level exports as a share of world exports. World export share is a much broader measure of competitiveness than the commonly reported export share of country GDP. Belgium, which is one of the 12 countries on review for potential imbalances, has experienced an 0.5 ppt drop in world export share, 2.4% in 2002 to 1.9% in 2010. Seems like a big drop – but what does a 1.9% export share mean in terms of the size of the Belgian population in the Euro area 12 (EA 12)? In 2010, Belgium’s world export share was 2.2 times what it’s EA 12 population share implies – loss of competitiveness, yes, but still competitive.The chart below illustrates the following: (country world export share as a share of EA 12 world export share)/(country share of EA 12 population). The data can be downloaded at Eurostat: export share, and population).

The Humiliation of Greece -  “How can one speak of default in the future tense when we’re already bankrupt… Don’t you see the people scouring through garbage and sleeping on sidewalks? Those who led us to bankruptcy – the troika and the government – now claim they want to save us from bankruptcy. It’s incredible.” If Greece’s €130 billion loan was going to be used for fiscal stimulus, then it might be worth the commitment. Because that kind of money could put a lot people back to work and kick-start the economy fast. But the loan isn’t going to be used for stimulus. It’s going to be used to recapitalize the banks and pay off creditors, neither of which will do anything to boost activity or create jobs. So, why bother? Why dig an even deeper hole if it achieves nothing? If that’s the case, then Greece should just default now and start rebuilding the economy ASAP. There’s no point in putting it off any longer.

Thoughts on Greece -- Greece seems to have slipped below the front pages. We've moved on to other things. I haven't. I don't have much to say here, but I can't say nothing. This is too important. I'm just going to record my thoughts, for whatever little they are worth.

  • 1. I'm not at all sure we even have an agreement. Can Greece actually deliver on these 38 items before the end of this month? Will enough of the bondholders agree? Will the Eurozone parliaments actually ratify the deal and come up with the money?
  • 2. Even if we do have an agreement, will Greece actually stick to it? Would anybody really trust future Greek governments to stick to it? Will future Greek governments actually be able to stick to anything, even if they wanted to? Can Greece avoid becoming an ungovernable "failed state" if it tries to stick to the agreement?
  • 3. Even if we do have an agreement, and even if Greece does stick to it, will it actually start bringing the debt/GDP ratio down?

Next Up: Portugal —It looks like Greece will get its debt restructuring, which presumably delays its collapse by a few months. So now the spotlight shifts to the other functionally bankrupt eurozone countries which have no choice but to demand the same deal. Portugal, by general consensus, is next in line. It hasn’t blatantly lied about its problems the way Greece has. And it hasn’t accumulated quite as much debt as Greece, though at 105% of GDP its government is still deep in the danger zone. But for the past decade it has run truly massive trade deficits. In order to pay down its debt it will need to generate trade surpluses going forward, but without the ability to devalue its currency to make exports cheaper, that’s not likely.

Eurozone PMI "Worse Than Expected" and Back in Contraction; Expect German-Periphery Divergence to Resolve to the Downside for Germany -  Bloomberg reports Stocks Decline in Europe After Worse-Than-Expected PMI Data European (SXXP) services and manufacturing output unexpectedly shrank in February as the euro-area economy struggled to rebound from a contraction in the fourth quarter. A euro-area composite index based on a survey of purchasing managers in both industries dropped to 49.7 from 50.4 in January, London-based Markit Economics said in an initial estimate released by e-mail today. Economists had forecast a reading of 50.5, according to the median of 16 estimates in a Bloomberg News survey. A separate report showed German services and manufacturing expansion unexpectedly slowed in February amid declining orders at factories in Europe’s largest economy. Unexpected?! Exactly why anyone thought this would not happen is a mystery. The second mystery is why the data is so "good". Let's take a look at the actual data.

More zombie PMIs - Last night saw the release of the February Flash PMIs in Europe and, like the Chinese result yesterday, the pulse towards growth that was apparent in January is fading in February. The headline results were weak:

    • Flash Eurozone PMI Composite Output Index at  49.7 (50.4 in January). Second-highest in six months.
    • Flash Eurozone Services PMI Activity Index(2) at 49.4  (50.4 in January). Second-highest in six months.
    • Flash Eurozone Manufacturing PMI (3) at 49.0  (48.8 in January). Six-month high.
    • Flash Eurozone Manufacturing PMI Output  Index(4) at 50.4 (50.4 in January).

In output terms it was no surprise to see the same pattern that dominated last year with Germany OK but slowing once more and everyone else falling behind:

December European Industrial Orders - Here's a little bit of good news.  Eurostat came out with the numbers for new industrial orders in Europe for December 2011, and there was a bit of a blip upward: In December 2011 compared with November 2011, the euro area (EA17) industrial new orders index rose by 1.9%, after a fall of 1.1% in November. In the EU27 new orders increased by 1.3% in December 2011, after a decrease of 1.2% in November. Excluding ships, railway & aerospace equipment, for which changes tend to be more volatile, industrial new orders gained 2.5% in the euro area and 2.6% in the EU27.While that certainly doesn't make up for the precipitous fall in September, at least it's not still going down.

Eurozone Industrial Orders Rebound In December - Industrial new orders in the Eurozone increased more than economists expected in December, data released by statistical office Eurostat showed Wednesday. New orders received by euro area's industrial sector increased a seasonally adjusted 1.9 percent month-on-month in December, recovering from the previous month's 1.1 percent decline. Economists expected new orders to increase 0.5 percent. Orders of intermediate goods rose 1.5 percent on a monthly basis, while capital goods orders climbed 4.2 percent. There was a 0.1 percent monthly growth in orders of non-durable consumer goods in December. In EU27, new orders increased 1.5 percent monthly in Dec ember, following the previous month's 1.1 percent decrease. Year-on-year, new orders decreased a working-day adjusted 1.7 percent in December, slower than the 2.5 percent fall seen in the previous month. Economists were looking for a 2.8 percent decrease.

ECB May Allot 470 Billion Euros in 3-Year Crisis Loans  - -- Euro-area banks may tap the European Central Bank next week for almost as much three-year cash as they did in December in an operation that could prolong a rally in bond markets. Financial institutions will ask the ECB for 470 billion euros ($629 billion) in three-year funds for allotment on Feb. 29, the median of 28 estimates in a Bloomberg News survey shows. While that’s less than the record 489 billion euro take-up at the first tender on Dec. 21, it may increase total cash in the system by more than 300 billion euros, said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “Part of the increase will likely be parked, at least temporarily, in the sovereign-bond market and support mainly the performance of Italian and Spanish bonds,” said Cazzulani. Still, “expectations are at a pretty high level, which creates some room for disappointment,” he said. “Gross demand below 400 billion euros would likely put upward pressure on spreads in the short term.” Italian and Spanish bonds have risen since the ECB’s first three-year loan, suggesting banks are investing at least some of the money in higher yielding assets. That’s helped ease concern about a credit crunch and won governments time to agree on measures to contain the sovereign debt crisis

Liquidity Floodgate Set to Backfire; Transmission Broken; Shutting Down the Liquidity Spigot - The ECB's LTRO was a stunning success. Or was it? Certainly rates dropped in Italy and Spain. However, all that really happened is the ECB became the buyer of first resort in which banks front-ran the trade, buying sovereign bonds for sure profit, plowing back into the same problem that created the European mess. The ECB's balance sheet skyrocketed in the process, and banks that plowed into those 3-Year LTROs (long term refinance operations) at cheap rates will face a huge rollover problem when the program ends, if not substantially before then. Should something go wrong (and it will), then the ECB (or rather EMU member countries, especially Germany) will be on the hook for losses. Consider the enormous mess over the past few weeks caused by a measly 40 billion euro holding of Greek debt by the ECB. Now take a look at the ECB's Balance Sheet expansion recently. Since July 8 2011, the ECB's balance sheet has expanded from 1.92 trillion Euros to 2.66 trillion Euros, a rise of 740 billion euros. €489 billion of that that was taken by 523 banks in the ECB's long-term-refinance-operation LTRO. Round two is scheduled for February 29, and the ECB is rightfully getting nervous. FT Alphaville explains in the "Diagram Du Jour" How the ECB Transmission Mechanism is Broken

Dexia’s 11.6 Billion-Euro Loss in Breakup Wipes Out Equity -- Dexia SA, the lender being broken up after losing access to short-term funding, said disposal losses, additional writedowns on Greek bonds and a slide in the value of other government debt depleted shareholders’ equity. The 2011 record loss of 11.6 billion euros ($15.4 billion) compares with profit of 723 million euros a year earlier, the bank, based in Brussels and Paris, said today in a statement. Dexia’s own funds dropped to a negative 2.02 billion euros from 1.13 billion euros at the end of September. “Spreads tightening in the first quarter resulted in positive gains, so overall net equity is at minus 1.2 billion euros currently,” Benoit Petrarque, an analyst at Kepler Capital Markets in Amsterdam, wrote in an investor note. “The stock is still uninvestable.” Dexia was clinging to 18.7 billion euros of emergency loans from central banks at the end of last year and tapped 22 billion euros of temporary state guarantees to make up for a loss of unsecured funding and deposits. The lender said its future depends on support from Belgium, France and Luxembourg as well as European Union approval of a restructuring plan involving as much as 90 billion euros of state guarantees.

RBS, Commerzbank, Credit Agricole Take Greek Hit After Deal (Bloomberg) -- Royal Bank of Scotland Group Plc, Commerzbank AG of Germany and France's Credit Agricole SA booked losses on their Greek government debt two days after creditors agreed to the biggest sovereign restructuring in history. RBS, Britain's biggest government-owned lender, posted a wider-than-expected full-year loss after taking a sovereign-debt impairment of 1.1 billion pounds ($1.7 billion). Commerzbank, Germany's second-biggest lender, booked a 700 million-euro ($1.1 billion) writedown on Greek debt in the fourth quarter. Credit Agricole, France's third-largest bank, reported a quarterly loss after 220 million euros in impairments on Greek debt. Dexia SA and Allianz SE also announced Greek writedowns today. The nation's private creditors agreed to a debt swap on Feb. 21, paving the way for a second bailout and averting what Deutsche Bank AG Chief Executive Officer Josef Ackermann said would have been a “meltdown” worse than the collapse of Lehman Brothers Holdings Inc.

Europe’s credit crunch is still to come - With the Greek PSI deal fast approaching the European banks are out declaring their hands:
RBS says:The Royal Bank of Scotland has reported its fourth year of losses since the bank’s bailout in 2008. The bank posted an attributable loss of £2bn in 2011, up from a loss of £1.1bn in 2010..
Dexia says:Dexia SA, the Belgian-French bank navigating a government-orchestrated dismantling, Thursday reported a €11.6 billion ($15.37 billion) net loss for 2011, driven by a write-off of its Greek bond portfolio and costs linked to the break-up of the bank.
Allianz says:Allianz attributed the decline notably to €1.9 billion in impairments, of which €1.24 billion was for stock market investments, notably in the financial sector, and €516 million for Greek sovereign debt.
Credit Agricole says:Credit Agricole has reported a large loss for the three months to the end of December due to its exposure to Greek debt
Bank of Cyprus says:The bank, which has €37.8 billion ($50.1 billion) in assets, took a €1.3 billion ($1.7 billion) fourth-quarter hit owing to the impairment on its holdings of Greek government bonds.

The Future Is Not What It Used To Be - Krugman - I’ve been comparing the original IMF projections for Greece with the secret recent sustainability analysis that everyone has. Real GDP: Debt: Of course, everyone thinks the latest is wildly overoptimistic.

Greece’s bond exchange: it’s official - Firstly, they’re going to receive new Greek bonds, maturing in 2042. It doesn’t matter whether the bonds you’re holding mature on March 20, or whether they mature in 30 years’ time — everybody gets the same new long-dated bonds, according to the face value of what they now own. In other words, the value of Greek bonds right now is wholly a function of what their face value is, and has nothing to do with their coupon or their maturity date. The new Greek bonds have a step-up coupon: 2% through 2015, then 3% through 2020, then 3.65% in 2021, and then 4.3% from 2022 through 2042. Bondholders will receive new bonds with a face value of €315 for every €1,000 of old bonds they hold. (Again, remember that it’s face value which matters here, not market price.) What’s the market price of the new bonds going to be? Not very much; my guess is that they’ll trade at roughly 40% of face value. Which means that the “NPV haircut”, as far as the new Greek obligations are concerned, is somewhere on the order of 87%.But bondholders will get more than just Greek bonds; they will also get new EFSF notes. The new EFSF notes come in two flavors: one-year notes and two-year notes; their face value is going to be 15% of the face value of the tendered bonds. The working assumption right now is that they’re going to be worth €150 for every €1,000 of bonds tendered: in other words, if you look at the value of what bondholders are going to be receiving in exchange for their bonds, it’s going to be split roughly 50-50 between Greek bonds and EFSF notes.

Europe’s Plan to Colonize Greece -  In a previously-secret document, European countries demand Greece to institute 38 specific changes to their government structure as a condition of the bailout. The reforms, spelt out in three separate memoranda of a combined 90 pages, are the price that Greece has agreed to pay to obtain a 130 billion euros second bail-out and avoid a sovereign default that the government feared would throw Greek society into turmoil. They range from the sweeping – overhauling judicial procedures, centralising health insurance, completing an accurate land registry – to the mundane – buying a new computer system for tax collectors, changing the way drugs are prescribed and setting minimum crude oil stocks. Most urgency is attached to a 10-page list of “prior actions” that must be completed by Wednesday in order for euro zone finance ministers to give a final sign-off to the new bail-out at an emergency meeting scheduled for Thursday. This is a colonization document. The Eurozone will take over almost every aspect of Greek society. And this will be a blueprint for any other poor Eurozone member that gets itself in trouble.

Ireland – The Problem Isn’t Ignorance - Speaking with a senior figure in Fianna Fail (the party that were kicked out of government last year by the Irish people) earlier this week something dawned on me for perhaps the first time. Namely, that the leaders in Ireland might know exactly what the issues and the problems are in Europe but they remain completely powerless to solve them. “We’re probably the most pro-European party in Ireland,” said a senior figure within Fianna Fail. “But there are major problems with the way European leaders are handling this crisis.” Fianna Fail seem to broadly recognise that the cause of the current crisis is that the European Union does not have a properly functioning banking system. Specifically that the European Central Bank does not function in a capacity of being a so-called ‘lender of last resort’.  From what I could tell in saying this the senior figure meant that the ECB is not backstopping the sovereign debt of Eurozone governments. So, even though his terminology is off (as is most of the commentariat today) he is essentially correct. The senior Fianna Failer also noted that the current attempts to write austerity into the constitution is “madness” and that any serious changes that take place in Europe need to be subject to referendum, otherwise the European leaders seriously risk alienating voters and turning them toward more Eurosceptic parties.

Ukraine Fans Default Risk in Russia Bet as Vote Molds Policy -- Ukraine’s efforts to seek cheaper natural gas from Russia rather than comply with the terms of a bailout have alarmed investors, propelling the former Soviet republic’s credit risk above Argentina’s for the first time in two years. The government is shunning the International Monetary Fund as it struggles to agree on discounted fuel imports from Russia, with whom clashes halted European gas transit twice since 2006. That’s fanned concern over its ability to meet $11.9 billion in debt costs this year, with default risk rising more than any country Bloomberg tracks except Greece in the last six months. While Ukraine faces a widening current-account gap, slowing economic growth and limited access to global capital markets, President Viktor Yanukovych has refused to raise household gas tariffs to restart a $15.6 billion IMF aid package as support for his ruling party ebbs before October elections.

Spain to raise 2012 deficit target: report - Prime Minister Mariano Rajoy and Economy Minister Luis de Guindos will present the new target, above the current official 4.4 percent estimate, in Brussels within 10 days, the daily reported, citing unnamed government sources. The government has said Spain will likely log a deficit of 8.0 percent for 2011, far overshooting its 6.0 percent target for that year. In 2010 the figure soared to 9.3 percent. Since Rajoy's government took power in December it has announced billions of euros in planned savings through budget cuts, tax hikes and an anti-tax fraud drive. The deficit figure measures how far public spending exceeds revenues, a key indicator of financial stability. The government says its savings and reforms will strengthen the economy, which was stricken by the bursting of a real estate bubble in 2008 and is expected to enter a new recession in this quarter after recovering from one in 2010. Spain's unemployment rate is nearly 23 percent, the highest in the industrialised world.

EU Confirms Spain Will Relapse Into Recession, Warns on Further Austerity - Spain’s economy will relapse into a recession in 2012 and additional austerity measures may worsen the slump, the European Commission said. Spain’s economy will contract 1 percent this year after expanding 0.7 percent in 2011, the commission said in a report today. In November, the commission had forecast Spanish growth of 0.7 percent in 2012. “Additional fiscal measures in the forthcoming budget may significantly change the picture,” the commission said. Spain’s deficit-reduction efforts are being hobbled by a slump in growth since the last quarter of 2011. The International Monetary Fund expects the fourth-largest economy in the euro area to contract 1.7 percent this year, its second recession in as many years, preventing the nation from meeting its budget goals.

Delinquent Property Loans at European Banks Total $1 Trillion - European banks hold about 750 billion euros ($1 trillion) of delinquent real-estate loans, putting them under pressure to sell assets, according to a study by the European Business School. Divestments by the banks will create “attractive” opportunities for buyers of loans or properties, particularly residential and retail buildings outside of prime locations, the Oestrich-Winkel, Germany-based school said in a report presented at its annual property conference. By 2014, the shortfall in debt funding for maturing loans will rise to 200 billion euros as banks reduce their property- loan books and shrink balance sheets to meet higher capital requirements, according to the study. Non-core lending, financing not connected to a bank’s main businesses, totaled 1 trillion euros, half of it by German institutions, it found. That adds to pressure to sell loans and assets.

European Property Woes Grow With Loans Overhang of $779 Billion: Mortgages - European landlords have 582.7 billion euros ($779 billion) of commercial property debt maturing by the end of 2013 at the same time regulators are urging banks to shrink their balance sheets. The maturing loans could trigger writedowns for banks that need to meet stricter capital standards under international accords and as the region’s sovereign debt crisis threatens to dent lender balance sheets. If banks demand repayment, it may lead to a surge in foreclosures and restrain economic growth in Europe. That’s why regulators are instead encouraging gradual sales of the loans to private-equity firms including Blackstone Group LP (BX) and Dallas-based Lone Star Funds. Spanish shopping centers to Amsterdam offices have 260 billion euros of loans coming due this year, a 30 percent increase from 2011, according to research from broker DTZ Holdings Plc (DTZ), which estimates a further 322.7 billion euros will mature next year. Most European real-estate debt originated before markets plunged in 2007 is being held on bank balance sheets at 90 percent or more of face value, Potential buyers value them at 50 percent to 60 percent,

Now a Housing Bubble in Germany - Germans are practically euphoric these days—compared to the dour mood that prevailed for nearly two decades following reunification, when real wages declined in a stagnating economy beset with what appeared to be permanently high unemployment. While discontent smolders in other Eurozone countries, 88% of Germans are satisfied with their standard of living (Gallup). And 85%—a record since the beginning of the surveys—believe that they can get ahead if they work hard, up from 71% in 2007. And now, Germans have something else to be euphoric about (for a while, at least): a housing bubble. The German housing market stagnated after reunification. And if adjusted for inflation, it declined significantly, while other countries, such as Ireland, the UK, and Spain, experienced huge bubbles. Only Japan’s housing market was more morose over the same period (graph, real housing prices 1997-2008). But by mid-2009, prices began to rise. In 2010, they were up 2.5% nationwide. And in 2011, they climbed 5.5% (Bundesbank, Monatsbericht)—with the hottest locations exhibiting bubble characteristics: In Hamburg, prices of existing apartments skyrocketed 14% year over year in January. In Munich, prices of new apartments jumped 12%. In Berlin, prices of existing apartments rose 10%. In Cologne, prices of existing apartments rose 9%.

Germany fights eurozone firewall moves - The German government is set to resist or delay increasing the size of the eurozone’s financial “firewall” against contagion from the Greek debt crisis, in the face of mounting pressure from its partners, the International Monetary Fund and the US administration. Steffen Seibert, spokesman for Angela Merkel, the German chancellor, insisted on Wednesday that Berlin saw no need to increase the size of the permanent €500bn European Stability Mechanism. “The German government’s position has not changed,” he said. “That means no, it is not necessary.” Ms Merkel and her finance minister, Wolfgang Schäuble, are looking isolated in the face of strong pressure from Christine Lagarde, managing director of the IMF, and the other 16 members of the European monetary union. Mr Schäuble is likely to face further pressure on the subject this weekend at a meeting of G20 finance ministers in Mexico City.  Since expectations of an imminent increase are running high, a failure to agree one next week could undercut hard-won confidence that Europe’s leaders have finally come to grips with the scale of the crisis and are willing to commit resources to contain it. Ms Merkel fears a backlash within her own centre-right coalition, and from public opinion, if she has to argue for any increase in Germany’s financial guarantees to eurozone rescue funds. She faces a tough vote next week in the Bundestag, the national parliament, over the €130bn Greek rescue programme.

Germany softens resistance on ‘firewall’ -The German government has softened its resistance to increasing the eurozone’s “firewall” against financial-market contagion from the Greek crisis by signalling it would consider the combination of the region’s temporary rescue fund with its permanent successor.  Wolfgang Schäuble, finance minister, said using “the remaining funds” in the European Financial Stability Facility to bolster the European Stability Mechanism was “one possible solution to the question” of how to better guard against bond market sell-offs hitting Italy or Spain.  With this, Mr Schäuble broke with the German government’s official stance that there was “currently no need” to increase the size of the €500bn ESM – due to start life by mid-year – and that eurozone heads of government would discuss the issue only some time in March. He was speaking after briefing the German parliament’s budget committee about a second, €130bn aid package for Greece, and just before setting off for the weekend meeting of G20 finance ministers in Mexico, where he is set to face questions about Germany’s resistance to bolstering the firewall.  Most of the eurozone’s 16 other members, the European Central Bank, and the International Monetary Fund have called for the firepower of the ESM to be increased – most easily by running the EFSF and the €250bn it has left after allocating resources for Greece, Ireland and Portugal in parallel.

Irish Trees Earmarked for Sale in 3 Billion-Euro State Sell-Off-- Ireland may sell timber, parts of its energy companies and a stake in airline Aer Lingus Group Plc to raise as much as 3 billion euros ($4 billion), as the country seeks to regain its economic sovereignty. The government today detailed a plan to sell power stations and the energy unit of Bord Gais Eireann, and said it will consider the sale of assets belonging to state forestry company Coillte and its 25 percent stake in Aer Lingus. Ireland has “made it abundantly clear that there will be no fire sales,” Brendan Howlin, the public expenditure minister, said today at a press conference in Dublin. “We want a good price. We are not going to short-change taxpayers.” The European Commission, the European Central Bank and the International Monetary Fund demanded asset sales as a condition for Ireland’s 2010 bailout. Greece has been told to raise at least 50 billion euros by selling or renting state assets, while Portugal this month agreed to sell a 40 percent stake in REN- Redes Energeticas Nacionais SA for 592 million euros.

Lloyds Says Two-Thirds of Irish Loans May Not Be Repaid in Full -- Lloyds Banking Group Plc, Britain’s biggest mortgage lender, said two-thirds of its 24.8 billion pounds ($38.9 billion) of loans in Ireland are unlikely to be paid back in full following the country’s real-estate crash. About 16.4 billion pounds of loans to Irish borrowers were impaired at the end of last year, London-based Lloyds said in a statement today. That’s up from 53 percent at the end of 2010. Lloyds, which today reported a wider-than-estimated loss of 2.8 billion pounds for 2011, shut its Irish unit in 2010 as losses soared and is running down its remaining assets. The worst sector was commercial real estate, where 90 percent of the bank’s 10.9 billion pounds of loans were impaired at the end of 2011. “This is by far the most troubled Irish loan book that we have seen so far” among universal lenders, said Karl Goggin, an analyst at Dublin-based NCB Stockbrokers. “The level of provisioning suggests they are kitchen-sinking the loan book as Lloyds looks to exit Ireland as quickly as possible.”

No Silver Bullet to Resolve Europe Debt Crisis, World Bank’s Zoellick Says - World Bank President Robert Zoellick said there is no “silver bullet” to resolve Europe’s sovereign-debt crisis and every country has a common interest in seeing the region succeed as they debate chipping in more cash to bailout funds.  “The real big issue going forward here will be the success of Spain and Italy,” he said in a Bloomberg television interview in Singapore. “The good news is we’ve got some very reformist governments in both countries. They are not only undertaking fiscal discipline but they have started undertaking structural reforms.”  Officials from the Group of 20 and central bank governors will meet this weekend in Mexico City, where U.S., Chinese and Japanese officials say they will press euro-area countries to do more to merit outside help to end the region’s sovereign debt crisis. The International Monetary Fund has warned concerns about debt sustainability could drag the world into another recession.

European Crisis Realities - Krugman - In what follows I show data for the euro area minus Malta and Cyprus — 15 countries. I use red bars for the GIPSIs — Greece, Ireland, Portugal, Spain, Ireland — and blue bars for everyone else. There are basically three stories about the euro crisis in wide circulation: the Republican story, the German story, and the truth.  The Republican story is that it’s all about excessive welfare states. How does that hold up? Well, let’s look at public social expenditures as a share of GDP in 2007, before the crisis, from the OECD Factbook: Hmm, only Italy is in the top five — and Germany’s welfare state was bigger. OK, the German story is that it’s about fiscal profligacy, running excessive deficits. From the IMF WEO database, here’s the average budget deficit between 1999 (the beginning of the euro) and 2007: Greece is there, and Italy (although its deficits were not very big, and the ratio of debt to GDP fell over the period). But Portugal doesn’t stand out, and Spain and Ireland were models of virtue. Finally, let’s look at the balance of payments — the current account deficit, which is the flip side of capital inflows (also from the IMF): What we’re basically looking at, then, is a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe.

ECB President Draghi Declares War on Europe’s Social Safety Nets -- Yves Smith - I’m late to the remarkable interview given by ECB president Mario Draghi to the Wall Street Journal. I find the choice of venue curious, since the Financial Times has become the venue for top European politicians and technocrats to communicate with English speaking finance professionals.  But Draghi’s drunk-on-austerity-Kool-Aid message was a perfect fit for the Wall Street Journal. While he wasn’t as colorful as Andrew Mellon’s famous “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” Draghi is still a true heir in believing that his prescription, per Melllon, will result in “High costs of living and high living will come down.” The “high living” that Draghi is particularly opposed to is Europe’s social safety nets.  Not surprisingly, the Journal did not question the notion that democratic governments should take orders from an unelected finance official. But Draghi tried to make his views sound a tad more legitimate by blaming the planned ritual sacrifice as a demand of the market gods.From the Wall Street Journal: European Central Bank President Mario Draghi warned beleaguered euro-zone countries that there is no escape from tough austerity measures and that the Continent’s traditional social contract is obsolete… He said Europe’s vaunted social model—which places a premium on job security and generous safety nets—is “already gone,” citing high youth unemployment; in Spain, it tops 50%. He urged overhauls to boost job creation for young people… He argued instead that continuing economic shocks would force countries into structural changes in labor markets and other aspects of the economy, to return to long-term prosperity…

Icelandic Anger Brings Debt Forgiveness - Icelanders who pelted parliament with rocks in 2009 demanding their leaders and bankers answer for the country’s economic and financial collapse are reaping the benefits of their anger.  Since the end of 2008, the island’s banks have forgiven loans equivalent to 13 percent of gross domestic product, easing the debt burdens of more than a quarter of the population, according to a report published this month by the Icelandic Financial Services Association. “You could safely say that Iceland holds the world record in household debt relief,” . “Iceland followed the textbook example of what is required in a crisis. Any economist would agree with that.”  The island’s steps to resurrect itself since 2008, when its banks defaulted on $85 billion, are proving effective. Iceland’s economy will this year outgrow the euro area and the developed world on average, the Organization for Economic Cooperation and Development estimates. It costs about the same to insure against an Icelandic default as it does to guard against a credit event in Belgium. Most polls now show Icelanders don’t want to join the European Union, where the debt crisis is in its third year.

Evacuation warning to Britons in Greece as country prepares to sign off yet another rescue package - Britons in Greece were warned yesterday they may have to be evacuated. It comes as eurozone ministers prepare to sign off another £108billion rescue package for the crippled economy. Foreign Secretary William Hague revealed Britons were being urged to register with the consulate as officials are updating plans to evacuate citizens ‘on a daily basis’ in case Greece goes under. There has been widespread civil unrest in the country as the prospect of it defaulting on its loans and exiting the euro has grown. Last night 3,000 protesters clashed with riot police in Athens as Greek prime minister Lucas Papademos flew to Brussels for last-minute preparations to seal the bailout deal. Economists do not expect the new package to resolve Greece's economic problems which could take up to a decade to tackle.

Work experience: does it work? - The amount of political "heat" surrounding the government's Work Experience programme seems to be in inverse proportion to the amount of policy "light". Critics describe it as akin to "slavery", while the Secretary of State retorts by describing them as "modern day Luddites".  Not only is this exchange of insults neither sensible nor constructive, it obscures the more interesting and important issues. Foremost among these is surely the question of whether work experience actually works; that is, does it actually improve the job prospects and opportunities of the young people it is supposed to help.  Iain Duncan Smith is clear on this. He argues The fact is that 13 weeks after starting their placements, around 50 per cent of those taking part have either taken up permanent posts or have stopped claiming benefits. This is indeed a fact, backed up by DWP analysis here.  But it's not a very meaningful one, because in itself it proves nothing; we don't know what would have happened if they hadn't been put on the programme in the first place.  In fact, I was surprised that the number was so low.

Straight Talk and Shifting Windows - Krugman - Karl Smith, if I understand him, thinks that I should refrain from pointing out how foolish and destructive foolishly destructive ideas have been, and offer the proponents of these ideas a face-saving exit. Chris Dillow, via Mark Thoma, explains why this is wrong. Dillow points out that Labour is responding with incredible lameness to the Cameron austerity agenda, even as this agenda fails, because it allowed Cameron to shift the Overton Window, so that only varying degrees of austerity are considered “responsible”. I’m trying to shift that window back, both by relegitimizing Keynes and by delivering ridicule where ridicule is due. And I think I’m making progress.

UK House of Lords Asked to Investigate Massive International Financial Fraud -- Lord James of Blackheath spoke during a meeting of the UK House of Lords on February 16 and produced evidence of $15 trillion in what he claims are fraudulent transactions from the Federal Reserve Bank of New York, to Hong Kong Shanghai Banking Corporation (HSBC), which then transferred the funds to the Bank of Scotland. The Bank of Scotland then allegedly distributed the money among 20 banks throughout Europe allowing them to engage in a high-profit scheme which accumulated trillions more dollars over the course of eight years; and all off the books. Blackheath states that Alan Greenspan was an eyewitness to the initial transfers, and that Timothy Geitner signed off on claims that that the funds were backed by 750,000 tons of gold, despite the fact that this is more than four times the estimated total of gold ever mined from the Earth (approximately 150,000 – 160,000  tons, according to the most liberal estimates). Lord James has a reputable history with regards to the investigation of money laundering by terrorist organizations, and is known for having exposed the Iraqi “supergun” program. He lists three possible scenarios as to how the events transpired: