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

Saturday, February 11, 2012

week ending Feb 11

Fed's Balance Sheet Grows Slightly In Latest Week - The Fed's asset holdings in the week ended Feb. 8 were $2.931 trillion, up a bit from $2.927 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities fell to $1.661 trillion, down from $1.662 trillion a week earlier. The central bank's holdings of mortgage- backed securities rose slightly to $836.03 billion from $836.01 billion.  The report Thursday showed holdings of Treasury securities with a remaining maturity exceeding 5 years rose over the past week. Thursday's report showed total borrowing from the Fed's discount lending window was $8.13 billion on Wednesday, down from $8.14 billion a week earlier. Commercial banks borrowed $3 million from the discount window, down from $10 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts was $3.436 trillion, up from $3.414 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts rose to $2.706 trillion from $2.684 trillion in the previous week. Holdings of federal agency securities fell to $729.36 billion from the prior week's $729.64 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances -- February 9, 2012

The Fed's next hike will come at the end of 2014 - ON JANUARY 25th, the Federal Open Market Committee decided to keep the federal funds rate at 0% to 0.25% and said that economic conditions are likely to warrant such low levels at least through late 2014. Many observers were surprised by such a long-term commitment to low rates. Interestingly, however, historical estimates of funds-rate reactions to FOMC members’ forecasts prescribe just such a response to the forecast published on January 25th. Historically, FOMC funds-rate decisions are closely matched by a simple rule of thumb that includes the mid-points of the inflation and unemployment forecasts reported by FOMC members. This finding was reported in an article in the Federal Reserve of St. Louis Review in 2008 by Athanasios Orphanides and Volker Wieland, but goes back to their earlier unpublished work with David Lindsey at the Federal Reserve in 1997. Figure 1 shows the prescriptions from this rule of thumb together with a second version that includes interest-rate smoothing. The rule with smoothing partially adjusts to the funds rate set at the policy meeting when the preceding forecast was made.

Bullard Says Fed Bond Purchases Not Needed as US Unemployment Rate Falls - A new round of Federal Reserve bond purchases isn’t warranted because the U.S. job market and broader economy are strengthening faster than expected, according to St. Louis Fed President James Bullard.  “The economic news and economic data, including today’s data, has been surprising to the upside,” Bullard said yesterday, referring to employment gains. “I need to see significant deterioration in the economy and some threat of deflation or inflation moving significantly below our inflation target before” backing more bond buying by the Fed, he said in a Bloomberg News interview.  Chairman Ben S. Bernanke said on Jan. 25 the central bank is considering purchasing more bonds to reduce borrowing costs and spur growth. Two days later, New York Fed President William C. Dudley said the economy will probably slow this year due to “significant impediments,” and that the central bank “will continue to do its part in supporting the recovery.”

Bernanke Sticks with Low-Rate Policy at Hearing — Ben Bernanke on Tuesday reiterated the Federal Reserve’s plan to hold interest rates near record lows until at least late 2014. The Fed chairman stuck with the three-year time line at a Senate Budget Committee hearing, even after the government last week reported a surge in January hiring that drove the unemployment rate down to a three-year low. None of the senators asked Bernanke whether the encouraging job figures were reason enough for the Fed to rethink holding interest rates low for that long. And Bernanke didn’t tout the hiring data during the two-hour hearing. If anything, Bernanke maintained the Fed’s position: the economy is improving at a frustratingly slow pace and that low rates are necessary to boost growth.

Bernanke stands firm with low-rate stance – Ben Bernanke on Tuesday reiterated the Federal Reserve's plan to hold interest rates near record lows until at least late 2014. Federal Reserve Board Chairman Ben Bernanke testifies during a hearing before the Senate Budget Committee on Feb. 7, 2012 on Capitol Hill in Washington, D.C. The Fed chairman stuck with the three-year time line at a Senate Budget Committee1 hearing, even after the government last week reported a surge in January hiring that drove the unemployment rate down to a three-year low. None of the senators asked Bernanke whether the encouraging job figures were reason enough for the Fed to rethink holding interest rates low for that long. And Bernanke didn't tout the hiring data during the two-hour hearing. If anything, Bernanke maintained the Fed's position: the U.S.2 economy is improving at a frustratingly slow pace and that low rates are necessary to boost growth.

Fed’s Bullard Warns of ‘Looming Disaster’ With Output Gap Model - If the Federal Reserve doesn’t change the way it takes stock of the economy and its relationship to monetary policy, the U.S. may be facing a “looming disaster,” a top central bank official said Monday. At issue is the commonly held view that the Fed must use its policy tools to help the economy regain the ground it lost over the financial crisis and ensuing recession, in turn closing what economists see as the gap between the economy’s potential and its actual rates of growth, Federal Reserve Bank of St. Louis President James Bullard said. But the nature of the shock suffered over recent years is such that if this model continues to drive policy, “it may be very difficult for the U.S. to ever move off of the zero lower bound on nominal interest rates,” Bullard said.

Bernanke Defends Fed’s Dual Objectives - The Federal Reserve chairman, Ben S. Bernanke, continued to defend the Fed’s efforts to control inflation and unemployment during an appearance Tuesday before the Senate Budget Committee. For the first time last month, the Fed released a formal statement describing how it intends to balance those responsibilities, which are set by Congress and which sometimes pull policy in opposite directions. The core of this newly articulated doctrine, shaped by Mr. Bernanke, is that the Fed will not seek to raise inflation, but if inflation should rise, it may seek to reduce inflation more slowly in order to promote job growth. Senate Republicans, like their colleagues in the House last week3, expressed concern on Tuesday that the Fed is in practice announcing that it will prioritize job growth over inflation. “It seems to me that you care more about unemployment than about inflation,” said Senator Charles E. Grassley, Republican of Iowa. “I want to disabuse any notion that there is a priority for maximum employment,“ Mr. Bernanke responded.

Bernanke: Fed Policy’s Encouragement of Risk Is by Design - Critics of the Federal Reserve‘s super easy money policy of recent years have long argued the tidal wave of liquidity will eventually generate a new round of bubbles that will bring fresh woe to the economy. Recently retired Kansas City Fed President Thomas Hoenig was in the forefront of such warnings during his final months at the central bank last year, going so far as to argue that surging farmland prices throughout the Midwest were tied to the central bank’s zero percent interest rates and bond-buying efforts. Many outside the Fed made the case the surge in commodity prices last year was the result of U.S. Fed policies.

Fed May Need to Purchase MBS If Growth Falters, Williams Says - Federal Reserve Bank of San Francisco President John Williams said the central bank may need to buy additional mortgage bonds if the economic expansion falters or inflation slows too much. “We may still need to provide more policy accommodation if the economy loses momentum or inflation remains well below 2 percent,” Williams said in a speech today in San Ramon, California. “Should that occur, restarting our program of purchasing mortgage-backed securities would likely be the best way to provide a boost to the economy.” Williams, a voting member of the policy-setting Federal Open Market Committee this year, echoed Chairman Ben S. Bernanke, who said yesterday he sees a “long way to go” before the job market returns to normal. The Fed chief said on Jan. 25 that bond buying is an option. That day the FOMC extended its pledge to keep interest rates low through at least late 2014. “Clearly, with unemployment at 8.3 percent, we are very far from maximum employment,”

The liquidity trap, monetary policy, and inflation expectations -This post is different: I will ask readers for help with a puzzle that continues to bug me. The puzzle relates to the effectiveness of monetary policy in the liquidity trap. There are two views on this issue, let’s call them the „traditional“ and the „modern“ view.

  • The traditional view claims that in the liquidity trap monetary policy is powerless. If individuals want to hoard money rather than spend it, injecting more money won’t stimulate domestic demand. The most prominent proponent of the traditional view is of course Keynes. Among contemporary economists, this piece by Willem Buiter reads fairly traditional.
  • The modern view has been developed by economists like Paul Krugman and Michael Woodford. It claims monetary policy can overcome the liquidity trap by creating inflation expectations that drive down real interest rates. If folks fear inflation would erode the real value of their cash holdings, this creates an incentive to stop hoarding. NGDP targeting builds on this, in essence it is a policy rule obliging the central bank to target higher inflation during depressions.

My trouble with the modern view is: how can the central bank create inflation expectations when the economy is stuck in the liquidity trap?

Bernanke: Labor Market ‘Long Way’ From Normal - Federal Reserve Chairman Ben S. Bernanke repeated that the job market is still far from healthy after signs of economic improvement over the past year, and he called on lawmakers to reduce the long-term budget deficit.  “We still have a long way to go before the labor market can be said to be operating normally,” Bernanke said in testimony prepared for the Senate Budget Committee that is identical to remarks he gave on Feb. 2 to the House Budget panel. “Particularly troubling is the unusually high level of long-term unemployment.”  The jobless rate unexpectedly fell to 8.3 percent in January, a government report showed on Feb. 3. Bernanke’s testimony today indicated that his views on the health of the labor market haven’t changed, even though he didn’t refer to the January data. The economy added 243,000 jobs last month, according to the report, exceeding the most optimistic forecast in a Bloomberg News survey of economists.  In response to a question, Bernanke said the unemployment rate of 8.3% understates the weakness of the labor market. He said it’s important to also look at other gauges of the labor market, including underemployment.

QE3 and unemployment: Why the Federal Reserve needs to keep boosting the economy …Three and a half years into the Great Depression, just-inaugurated President Franklin D. Roosevelt urged Americans to believe that “the only thing we have to fear is fear itself.” Three and a half years into the worst recession since then, America is more threatened by complacency than fear. One reason for complacency is the batch of recent good news. In late January, the Bureau of Labor Statistics announced that the economy added 200,000 jobs in December on a seasonally adjusted basis. Then last week came the news that January job growth, which the vast majority of analysts had expected to be weaker than December, was actually stronger—about 250,000 jobs were added. What’s more, the latest report revised the December numbers up slightly and the November jobs figures up more. Suddenly, it appears the economy has turned a corner.  The problem is that policymakers may reach misguided conclusions from the good news. With millions of workers still unemployed, factories operating below capacity, and office and mall space vacant, the overall volume of spending in the United States is, by definition, too low. We have the capacity—the workers and the machines and the buildings—to produce more goods and services, but we don’t have the spending to call those goods into being.

An odd question - Suppose Bernanke’s right on the edge of as far as recommending a major QE3 program.  He sees good arguments either way.  He’s decided that if Congress extends the payroll tax then he won’t recommend QE3; the January employment report suggests it’s not needed.  But if Congress doesn’t renew the payroll tax cut he’ll go ahead, as he’s still worried about another growth lull like we saw during parts of 2010 and 2011.  My question is this: In that case should Bernanke tell Congress about his thought process?  If you don’t like the implicit assumption that Bernanke’s a monetary dictator, re-frame the question with the FOMC being undecided about QE3.  It seems to me this question raises some uncomfortable issues:
1.  Some might view Bernanke’s statement as interference with the legislative process, even though from a purely logical point of view it would make the legislative deliberations much more rational.  Congress could act with better estimates of the likely multiplier effect.
2.  Some might argue that he should focus on fulfilling his dual mandate.  But Bernanke believes fiscal stimulus is effective, so arguably he would best fulfill his dual mandate by making QE3 conditional on the level of fiscal stimulus.

Federal Reserve continues shadow bailout of banking industry – $947 billion of overpaid and low demand mortgage backed securities sit on the massive $2.8 trillion Fed balance sheet. The price of this hidden bailout will hit all Americans. The Federal Reserve continues a secretive bailout of the banking system by purchasing more and more questionable mortgage backed securities.  You would think that $1 trillion would catch the attention of the media but they seemed focus on other trivial items.  The Fed balance sheet is still at record levels above $2.8 trillion to be exact, but the more troubling aspect of all of this is the amount of mortgage backed securities they have purchased.  They continue to hoard toxic commercial real estate loans and a massive amount of residential mortgage backed securities.  How much?  The Fed now holds over $947 billion in mortgage backed securities.  Keep in mind that prior to this financial crisis the Fed rarely held anything else except quality paper on its balance sheet.  Yet this is the cost of the shadow financial bailout.

Sessions Criticizes Fed’s Lack of Foresight - Sen. Jeff Sessions of Alabama, the top Republican on the Senate Budget Committee, on Tuesday criticized comments that Federal Reserve officials made before the financial crisis. Mr. Sessions pointed to remarks made by now-Treasury Secretary Timothy Geithner and Fed Vice Chairman Janet Yellen in 2006 that he said showed a lack of foresight into the turmoil the U.S. economy would later experience. “Geithner’s comments at Federal Reserve meetings in 2006 seem to me to indicate that we can’t always be sure that those in positions of leadership see the problem clearly,” Mr. Sessions said at the start of a Senate Budget Committee meeting where Fed Chairman Ben Bernanke was slated to testify. Mr. Geithner was previously president of the Federal Reserve Bank of New York. “They were wrong. The minutes show you were wrong in some of these [meetings] also,” Mr. Sessions said to Mr. Bernanke. “We’re not always as good at predicting the future as we’d like to be.” Mr. Sessions emphasized that the economic recovery could be strengthened by curbing federal spending.

Bernanke Visits Alternate Universe - Well then.  Apparently not everyone agrees that the Federal Reserve is having trouble balancing its dual mandate.  Rather, I should say that not everyone agrees about the nature of the imbalance.  From the Boston Globe‘s reporting of Ben Bernanke’s appearance in front of the Senate Budget Committee, we find this: “It seems to me that you care more about unemployment than about inflation,’’ said Senator Charles E. Grassley, Republican of Iowa. “I want to disabuse any notion that there is a priority for maximum employment,’’ Bernanke responded. Bernanke deserves credit here for refraining from hitting himself over the head with a frying pan in response.  (Is this just a cynical form of “working the ref” or does the Senator really believe it?  If the latter, what more could possibly disabuse him of this notion?)  I suggested yesterday that you “don’t need to look very hard” to see that the Federal Reserve is doing much better at keeping inflation in check than at controlling unemployment—but you do need to look. I’ll outsource the rest to the The Economist (where Ryan Avent performs the literary equivalent of hitting himself over the head with a frying pan):

Sympathy for Ben Bernanke - BINYAMIN APPELBAUM reports today from a meeting of the Senate Budget Committee, which played host to Federal Reserve Chairman Ben Bernanke: “It seems to me that you care more about unemployment than about inflation,” said Senator Charles E. Grassley, Republican of Iowa. “I want to disabuse any notion that there is a priority for maximum employment,“ Mr. Bernanke responded. Instead, he told another questioner, Senator Patrick J. Toomey, Republican of Pennsylvania, that the Fed’s approach to its dual objectives is “fully balanced and symmetrical.” Mr. Toomey responded that that was exactly what he had expected Mr. Bernanke to say, but he did not seem pleased about it. The most that core consumer prices have risen in a 12-month period since Mr Bernanke took over is just 2.9%—and that was in 2006, when he'd had less than a year in the top job. Since the financial crisis of late 2008, core prices have risen no faster in a 12-month span than 2.2%. During the second half of 2010, annual inflation stood at its lowest level in over half a century. Unemployment, by contrast, peaked at 10.0%. Only once in the post-war period did the jobless rate rise above that level. Mr Grassley must say good-bye when he enters a room and hello when he leaves, and wears his shoes on his head.

I Gotta Give Ben His Props - I thought Federal Reserve chair Ben Bernanke once again showed some mettle in these remarks to the Senate Budget Committee on the economic outlook.   He’s not at all swept up in optimism about recent improvements—he’s particularly on point regarding continued weaknesses in the job market—and he clearly cites all the reasons to keep pressing on monetary stimulus. One note on taxes, because this came up on Larry Kudlow’s show last night.  Ben correctly warned, based on the same type of analysis I show here, that the fiscal drag from the tax increases under current law—full Bush sunset, AMT hits a lot more people—would be too much for a still weak economy to absorb in 2013. As the WaPo put it: …the Fed chief continued to stress that a sharp, immediate push to reduce the deficit could harm the recovery in the upcoming months. In January 2013, he pointed out, the George W. Bush tax cuts will expire, and the major spending cuts triggered by the Budget Control Act will take effect, absent any further action by Congress. As a result, “there will be sharp change in fiscal stance of the federal government. Without compensating action, it would indeed slow the recovery,” Bernanke told the committee members.

Interest Rate Forecasts: It’s not about accuracy - Charles Goodhart writes (FT-£) that “Proposals that central bankers report their expectations of official rates, beyond some short future horizon, are retrograde, pushed forward by fashionable theory without reference to empirical reality.” By short horizon here I think he means three or six months: much shorter than the recent move by the US Fed. Charles is usually right about most things, and similar comments have also been made by other experienced ex-central bankers, so I think it is important to set out carefully one important counter argument.  Charles writes that “whether the publication of central bank predictions of the future path of interest rates is likely to be beneficial depends on the relative accuracy of such forecasts.” I disagree. I’m happy to assume they are no better than those of forecasters in general. What is then gained by publication?    The key point is that central banks, or members of a central bank committee, have inside knowledge. Not about how the economy works, or of statistics a few days before they are published, but about themselves. Their forecasts for interest rates tell us what they are likely to do if events (inflation, growth etc) turn out as they expect, and if they are being consistent. So the important question is whether this information is useful.

What output gap? -  In case you haven't seen it, you may be interested in this speech given recently by Jim Bullard, president of the St. Louis Fed: Inflation Targeting in the USA. This speech is really about how to interpret the recent performance of the U.S. economy. Is the conventional interpretation, that we are far below "potential" GDP owing to "deficient demand," the correct view? Or should we instead be thinking in terms of a large negative shock to "potential" GDP, with unemployment returning slowly to its natural rate, according to its normal dynamic (see here)? I think that Bullard makes a persuasive case that the amount of household wealth evaporated along with the crash in house prices should likely be viewed as a "permanent" (highly persistent) negative wealth shock. Standard theory (and common sense) suggests a corresponding permanent decline in consumer spending (with consumption growing along its original growth path). The implication is that the so-called "output gap" (the difference between actual and "trend" GDP) may be greatly overstated by conventional measures. The view that one takes here is likely to influence what one thinks about monetary policy. The conventional view seems to support the Fed's current policy of keeping its policy rate close to zero far into the future. In his speech, Bullard worries that this may not be the appropriate policy if, in fact, potential GDP has experienced a level shift down (or, what amounts to the same thing, if conventional measures treat the "bubble period" as the economy being at, and not above, potential).

Some Thoughts for St. Louis Fed's James Bullard - David Andolfatto recently discussed an interesting speech by St. Louis Fed president James Bullard:I think that Bullard makes a persuasive case that the amount of household wealth evaporated along with the crash in house prices should likely be viewed as a "permanent" (highly persistent) negative wealth shock. Standard theory (and common sense) suggests a corresponding permanent decline in consumer spending (with consumption growing along its original growth path). The implication is that the so-called "output gap" (the difference between actual and "trend" GDP) may be greatly overstated by conventional measures. To some extent the CBO agrees with Bullard.  They have adjusted their potential real GDP estimates below pre-crisis trend path values.  Still, there remains a large output gap, one that Bullard finds questionable given the negative wealth shock.  So how much is the output gap is overstated?  And how do  we know which measure of the output gap to trust?  These are hard questions and I am not sure they are even the right ones to be asking.  I believe a more constructive approach is to consider whether there still remains monetary problems that could be addressed by monetary policy. 

Treasuries Update: Operation Twist and the 30-Year Fixed Rate Mortgage - The Federal Reserve officially announced Operation Twist on September 21 with the stated purpose of lowering longer-term interest rates. The yield on the 10-year note had been below 2.00% 5 of the 9 days prior to the much-rumored announcement, closed at a new low of 1.88% on the day of the announcement and reached the historic closing low of 1.72 the next day, September 22. What has the 10-year note done since the "Twist" announcement? The interim high daily close was 2.42 on October 27. The interim closing low was the 1.82 on December 19th. Since that time, the 10-year has danced around the 2.00 level with the latest close at 2.04. Here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of Operation Twist. The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed's website for the FFR. Here's a closer look at the past year with the 30-year fixed mortgage added to the mix

Low Interest Rates Help Borrowers, but Hurt Savers - Mark Calabria at the Cato blog makes an overlooked, but excellent point about the graph above: "One of the direct results of the Federal Reserve’s zero interest rate policies (red line above) has been a massive reduction in interest income going to households (blue line above). Since 2008, household interest income has fallen by about $400 billion annually (MP: From $1.4 trillion to $1 trillion). That’s $400 billion each year that families have not had to spend. Now of course you can also argue that families' interest expenses have also fallen, and that would be true, but that just serves to illustrate that much of monetary policy is not about creating wealth, but re-distributing it. Since interest payments are one person's expense and another’s income, Fed driven changes in the interest rate should not increase household income in the aggregate."

Can Raising Interest Rates Spark a Robust Recovery? - Could the Fed spark a robust recovery by raising its federal funds rate target?  For Bill Gross the answer is yes.  He believes a key reason holding back the recovery is that the Fed is engaged in a type of financial repression where financial intermediaries' net interest margins--the difference between their funding costs and lending interest rates--are being squeezed by the Fed's low interest rate policies.  He sees the Fed driving down interest rates across the yield curve and thus removing the incentive for lending.  If only it were that easy. Gross is correct that higher interest rates are typically associated with strong economic growth, but has the causality backwards. The economy is not sluggish because interest rates are low. Rather, interest rates are low because the economy is sluggish. The demand for credit by households and firms simply is depressed.  They see uncertainty, lower-than-expected future income paths, on-going deleveraging, and consequently have pulled back on their borrowing.  There also has been an increase in domestic private savings for the same reasons.  And to pile it on, there is this global shortage of safe assets problem which causes foreigners to channel their savings here too.  All of these developments mean lower interest rates.

Zero Bounds and Butter Mountains (Wonkish) - Krugman - Well, I see that Bill Gross is still demanding that we fight the slump by … raising interest rates. I wish I could say that he had no support; there are, in fact, a lot of Very Serious People demanding a rate rise, and a growing number of stories about the plight of savers. So let me explain how I think about zero rates and their relationship to the depression we’re in. (Yes, it is a depression, even if we’re having some job growth; there was a lot of job growth between 1933 and 1937, but it was still the Depression). Think of the supply and demand for loanable funds. The tricky thing about interest rates is that there are seemingly two theories of interest rates — loanable funds, which is about supply and demand for savings, and liquidity preference, which is about the tradeoff between money and bonds. Which is right? Both are — because savings and investment also depend on GDP, which can change. So what is happening when we’re at the zero lower bound? One way to think about it is to draw the supply and demand for savings that would prevail if the economy were at full employment. They look like this: The policy problem is that for whatever reason — in current conditions, mainly the deleveraging taking place after an era of debt complacency — the interest rate that would match savings and investment at full employment is negative. Unfortunately, that’s not possible, because rather than lend at a loss people can just hold cash.

What Has Bill Gross Been Reading? - Yves Smith - Question: what on earth has Bill Gross been reading? Gross has long been an acolyte of Hyman Minsky, or so he says. But his recent piece in the Financial Times entitled ‘Zero-Based Money Risks Trapping Recovery’ has a lot of people scratching their noodles. Look, Gross is trying tell the world that ZIRP policies might be stalling recovery and there is certainly a case to be made that the ZIRP policies are, at best, a two-edged sword – indeed, there’s the even more important case to be made that ZIRP policies may be leading inflation hedgers to pour into the commodities markets, causing both an unsustainable bubble and rising price inflation for households. So, you have to sympathise with Gross for swimming against the tide in this regard. But really, what is all this strange talk about Minsky and Keynes he throws into his piece? Poor Hyman is mentioned nine times in Gross’ thirteen paragraph article and yet, to say that Minsky has been misrepresented would be an enormous understatement.

Deja Vu All Over Again, or On the Whole...The President of the Federal Reserve Bank of Philadelphia: We have been putting out credit in a period of depression, when it is not wanted and could not be used, and will have to withdraw credit when it is wanted and can be used. But this is not Charles I. Plosser, no matter how similar the sound. It's from September of 1930,* presumably George W. Norris (PDF; see page 4).** Indeed, reviewing the Calmoris and Wheelock article from which I pulled that quote, we find the same mistakes being made: excess reserves confused with circulating money and therefore treated as harbingers of inflation, squealing for austerity,*** sterilization of shifts in reserves in a desperate attempt to avoid non-visible inflation. As Owen Wilson's Gil says in Midnight in Paris, we have antibiotics; the people in Fin de siècle Paris didn't. It's just one of our other "sciences" that appears not to have advanced.

China’s Road to Becoming a Reserve Currency - In a new Brookings Institution study, Esward Prasad and Lei Ye of Cornell University say China’s currency will become an international reserve currency within the next decade, “eroding but not displacing the dollar’s dominance.” On some key criteria for becoming a reserve currency, such as government debt, China performs well. It’s far behind on others: Its exchange rate doesn’t trade freely (as other reserve currencies do). China still maintains extensive capital controls, limiting the yuan’s trading in global markets. And the country still has “relatively shallow and underdeveloped” bond markets, the study says. But on trade, China is on pace to surpass the U.S. — though Germany and Switzerland still top China considerably on trade as a share of their economies. (China, by one measure, is ranked first in the world in overall systemic trade importance. The U.S. ranks sixth.)

Will China's Yuan Rival the Dollar? - One view is that it will soon knock the dollar off its pedestal as the dominant global reserve currency. The other is that China is taking enormous risks by letting capital account liberalization get ahead of domestic reforms.  Irrespective of government policies, China's capital account is becoming more open over time as rising trade and financial integration create more channels for getting around capital controls. Rather than resist the inevitable, the government has embraced gradual change, relaxing but not eliminating controls on both inflows and outflows. The objective is full convertibility, unrestricted capital flows but with some "soft" administrative controls and regulatory oversight. The government is also positioning its currency for a broader role in global trade and finance. Hong Kong provides the ideal testing ground for putting the yuan in play through trade settlement transactions as well as yuan-denominated deposits and bonds.  Some central banks have signed currency swaps with China's central bank and begun adding yuan to their foreign exchange reserve portfolios. Thus, given its sheer economic heft, China is successfully promoting the yuan's international use without fully opening up the capital account or allowing the currency to float.  For reserve currency status, an open capital account and a flexible exchange rate are essential. But even that is not sufficient.

Has the Euro Broken Out? - The euro has risen to about $1.3270 today, the highest level since December 12th. Some observers are attributing the euro strength to creeping optimism that a Greek deal is nearly at hand. Color me skeptical. Fed Chairman Bernanke’s comments, the first since the employment report, remains decidedly dovish and this seems to be a better explanation of the dollar’s weakness. He argued that the 8.3% unemployment rate understates the weakness in the labor market. That seems to be incontrovertible. Economists appear to be in general agreement. However, the fact of the matter is that a number of indicators do point to some improvement in the labor market, and Bernanke did recognize this too, even if his main thrust was dovish. The fact that 42.9% of the unemployed have been jobless at least six months suggests an increasingly structural problem rather than simply cyclical. This is an important distinction as monetary policy may be capable of addressing the latter but not the former. In any event, the key take away is that some observers pushed out expectations for QE3 after the jobs report. Remember the Fed forecasts unemployment to average 8.2%-8.5% this year. It was 8.3% in January, after falling for five consecutive months. And Bernanke seemed to bring it back.

Why Our Currency Will Fail - cmartenson -The idea that the very same economic forces that are currently plaguing Greece, et al., are somehow not relevant to the United States' circumstances does not hold water.  As goes the rest of the world, so goes the US.  When we back up far enough, it is clear that money and debt are there to reflect and be in service to the production of real things by real people, not the other way around. With too much debt relative to production, it is the debt that will suffer. The same is true of money. Neither are magical substances; they are merely markers for real things. When they get out of balance with reality, they lose value, and sometimes even their entire meaning. This report lays out the case that the US is irretrievably down the rabbit hole of deficits and debt, and that, even if there were endless natural resources of increasing quality available at this point, servicing the debt loads and liabilities of the nation will require both austerity and a pretty serious fall in living standards for most people.  And as Jim Puplava says, the oil price is the new Fed funds rate, meaning that it is now the price of oil that sets the pace of economic movement, not interest rates established by the Fed. 

Fed's Bullard - years of low rates can hurt growth (Reuters) - Holding interest rates near zero for many years is unlikely to bring U.S. economic output back to pre-recession levels and may instead undercut long-run growth prospects, a top Federal Reserve official said on Monday. St. Louis Fed President James Bullard said that unemployment is likely to stay high and labor markets to improve only slowly, even if rates are kept low for many years. That's because the U.S. economy is suffering not from an "output gap" that can be bridged if only borrowing costs are kept low enough for long enough, he said, but from a permanent shock to household wealth delivered by a sharp drop in housing prices. "The large output gap view may be keeping us all prisoner - tethering our expectations for output, in effect, to the collapsed bubble in housing," Bullard said in Chicago. "A near-zero rate policy stretching over may years can begin to distort fundamental decision-making in the economy in ways that may be destructive to longer-run economic growth." The Fed last month said it would likely hold interest rates at rock bottom levels until late 2014. Fed Chairman Ben Bernanke was cautious about recent improvement in the U.S. economy and left the door open to new bond purchases to boost growth. The Fed cut rates to near zero more than three years ago and has bought $2.3 trillion worth of bonds to spur economic activity. The idea that an output gap is keeping inflation at bay and that super-easy monetary policy can push production back to pre-recession output levels is "the wrong idea," Bullard said.

Jim Bullard chucks the Solow growth model! - When I saw David Andolfatto and Tyler Cowen linking to a Jim Bullard speech about wealth effects and output, I assumed that it was some sort of observation about aggregate demand. After all, wealth affects aggregate demand, so when wealth evaporates in a financial crisis, AD should fall. No surprise there. But then, via Scott Sumner, I found out that Bullard (the president of the Federal Reserve Bank of St. Louis) is saying that wealth shocks affect long run aggregate supply! What?!?!?! Intuitively, this makes absolutely zero sense. Permanent negative wealth shocks lower potential output? Well, if capital is destroyed, that's true; for example, take the effect of World War 2 on Japan and Europe. All those bombs certainly lowered productive capacity (while destroying wealth). But if the financial crisis was that sort of thing, then it should raise the trend rate of growth, as we engage in "catch-up growth" to replace the destroyed capital. Are we seeing rapid catch-up growth now? No. So how does Bullard think this works? Is he putting forth a subtle and powerful argument that I missed by skimming? Let's see what he say in his speech:

Economic conditions improving - On Wednesday the Institute for Supply Management announced that its PMI manufacturing composite index rose to 54.1 for January, its highest value since June. A reading above 50 signals that more establishments experienced improvements than saw deterioration in key measures during January, and a value above 52.7 is a weak indicator of above-average real GDP growth. ISM's non-manufacturing index came in with an even stronger reading of 56.8. Auto sales, another key cyclical indicator and early barometer for the economic effects of higher oil prices, were back up in January to the levels associated with the early months of the 2007-2009 recession. Four years ago, those levels were a drag on the economy, but compared to what we saw over the subsequent four years, they don't look so bad. The most important monthly indicator is the BLS estimate of the number of Americans on nonfarm payrolls, which was up by 243,000 workers on a seasonally adjusted basis in January. The BLS estimate of the unemployment rate also continued to improve, falling to 8.3% in January. The 0.8 percentage point drop in the unemployment rate since August is somewhat surprising-- usually we'd expect to see stronger growth in real GDP and in nonfarm payrolls than we have in order to realize that much improvement in the unemployment rate.

Bernanke: Housing problems hold back recovery -- Lingering problems in the housing market continue to restrain America's economic recovery and limit the effectiveness of Federal Reserve policies, Ben Bernanke said Friday. "The economic recovery has been disappointing in part because U.S. housing markets remain out of balance," the Fed chairman said in prepared remarks at the International Builders' Show in Orlando, Fla.  Federal Reserve policies meant to drive down long-term interest rates have had "less effect... than they otherwise would have had," he said, as even creditworthy households find it difficult to obtain mortgages or refinancing. Bernanke cited statistics that show home prices are down 40% nationally from their peak, after adjusting for inflation. He estimates the decline in home prices has resulted in more than $7 trillion in lost household wealth. "It appears the recent declines in housing wealth may be reducing consumer spending between $200 billion and $375 billion per year," he said. "That reduction corresponds to lower living standards for many Americans."

U.S. edges toward recovery without help from housing - The latest U.S. economic soundings – including stunning January job numbers that far exceeded the most enthusiastic forecasts – are pointing to something quite remarkable. The long-stumbling giant may finally be on the road to a sustained recovery without any help from housing.  Whether this rebound turns out to be real or ephemeral won’t be clear for some time. The jobless rate fell to 8.3 per cent last month, a level last seen three years ago. But that’s still high by recovery standards. And such key gauges as average hourly earnings and weekly hours worked barely budged.  Still, even the more bearish economy watchers were left momentarily speechless. “I can’t sit here and quarrel with the data,” David Rosenberg, Gluskin Sheff's expert data miner, told clients before proceeding to poke a few holes in any budding bubbles of optimism.

Things Are Not O.K., by Paul Krugman - In a better world — specifically, a world with a better policy elite — a good jobs report would be cause for unalloyed celebration. In the world we actually inhabit, however, every silver lining comes with a cloud. Friday’s report was, in fact, much better than expected, and has made many people, myself included, more optimistic. But there’s a real danger that this optimism will be self-defeating, because it will encourage and empower the purge-and-liquidate crowd.  So, about that jobs report: it was genuinely good, certainly compared with the dreariness that has become the norm.  Furthermore, it’s not hard to see how this recovery could become self-sustaining. In particular, at this point America is seriously under-housed by historical standards, because we’ve built very few houses in the six years since the housing bubble popped. The main thing standing in the way of a housing bounce-back is a sharp fall in household formation — econospeak for lots of young adults living with their parents because they can’t afford to move out.  That said, our economy remains deeply depressed. As the Economic Policy Institute points out, we started 2012 with fewer workers employed than in January 2001 — zero growth after 11 years, even as the population, and therefore the number of jobs we needed, grew steadily. The institute estimates that even at January’s pace of job creation it would take us until 2019 to return to full employment.

Illusion Of Recovery - Feelings Versus Facts - The last week has offered an amusing display of the difference between the cheerleading corporate mainstream media, lying Wall Street shills and the critical thinking analysts like Zero Hedge, Mike Shedlock, Jesse, and John Hussman. What passes for journalism at CNBC and the rest of the mainstream print and TV media is beyond laughable. Their America is all about feelings. Are we confident? Are we bullish? Are we optimistic about the future? America has turned into a giant confidence game. The governing elite spend their time spinning stories about recovery and manipulating public opinion so people will feel good and spend money. Facts are inconvenient to their storyline. The truth is for suckers. They know what is best for us and will tell us what to do and when to do it. The false storyline last week was the dramatic surge in new jobs. This fantastic news was utilized by the six banks that account for 80% of the stock market trading to propel the NASDAQ to an eleven year high and the Dow Jones to a four year high. The compliant corporate press did their part with blaring headlines of good cheer. The entire sham was designed to make Joe the Plumber pull out one of his 15 credit cards and buy a new 72 inch 3D HDTV for this weekend’s Super Bowl. When you watch a CNBC talking head interviewing a Wall Street shyster realize you have the 1% interviewing the .01% about how great things are.

Recovery Measures - The following graphs are all constructed as a percent of the peak in each indicator. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%. These graphs show that several major indicators are still significantly below the pre-recession peaks. This graph is for real GDP through Q4 2011. Real GDP returned to the pre-recession in Q3 2011, and Gross Domestic Income (not shown) returned to the pre-recession peak in Q2 - GDI for Q4 will be released with the 2nd estimate of GDP.  At the worst point, real GDP was off 5.1% from the 2007 peak. Real GDI was off 5.7% at the trough. Real GDP has performed better than other indicators ... This graph shows real personal income less transfer payments as a percent of the previous peak through December. This measure was off 10.7% at the trough. Real personal income less transfer payments is still 4.8% below the previous peak. This graph is for industrial production through December. Industrial production was off over 17% at the trough, and has been one of the stronger performing sectors during the recovery. However industrial production is still 5.4% below the pre-recession peak, and it will probably be some time before industrial production returns to pre-recession levels. The final graph is for employment. This is similar to the graph I post every month comparing percent payroll jobs lost in several recessions. Payroll employment is still 4.1% below the pre-recession peak. If the economy adds 243 thousand payroll jobs per month on average (the January report), it will take another 2 years to get back to the pre-recession employment peak. And that doesn't count growth of the working age population over the last 4+ years.

Reading the bump in inventories - Atlanta Fed's macroblog - Yesterday's wholesale trade report, with its positive surprise in December inventory accumulation, has estimates of fourth quarter gross domestic product (GDP) on the rise again. For the advance GDP release, the U.S. Bureau of Economic Analysis assumed that the book value of merchant wholesale inventories rose by $17 billion (at a seasonally adjusted annual rate, or SAAR) in December. The wholesale trade report suggests the book value instead may have risen by $56 billion SAAR. Our own calculations suggest fourth quarter GDP may be revised up from 2.8 percent to around 3.1 percent. A piece of that revision comes from positive sales activity, which would appear to be an unambiguous plus.  The inventory piece is trickier. Forecasters have a tendency—because the statistics have a tendency—to take a larger-than-expected inventory buildup in one quarter out of growth estimates for the next quarter. The implication in present tense is, of course, that 2012 may start out on the slow side as the fourth quarter inventory swell is run off. That's not how we see it. Our current read is that it is better to think of the fourth quarter inventory buildup as a payback from a decumulation in the third quarter. Here's a look at overall inventory changes over the recent past, broken down into their various industrial components:

The Case For Economic Optimism, From A Leading Pessimist…Dean Baker - Given the economy's current situation, I find the warnings of the pessimists – the double-dip gang – to be wrongheaded and seriously counterproductive. First to the economy's near-term prospects: the economy is growing and will in all probability continue to grow. Economies do generally grow. We see new investment, leading to more employment and higher productivity, which leads to higher profits and higher wages. In the past when the economy has fallen into a recession it has been the result of plunges in house sales and car sales. Neither possibility seems plausible at the moment, primarily because both remain at extraordinarily low levels that leave little room for them to fall further. Even if they did fall, it would have only a limited impact since current demand is already so depressed. It's difficult to see what else could cause another recession at this point. Cutbacks in government spending have been a drag on the economy the last two years. But state and local governments have largely adjusted to the plunge in tax revenues caused by the recession. There will be further cuts in many places, but they will likely be much smaller than the ones we have seen thus far.

Feeling Better About the Economy - Looking at the news these days, you’d be hard pressed not to acknowledge that the economy is getting better. On Thursday, the world’s investors got some reassurance that Greece will not crash headlong into disorderly default, after Greek political leaders agreed to yet more austerity measures meant to clear the way for $173 billion in new loans from the International Monetary Fund, the European Commission and the European Central Bank.American homeowners got good news, too. Federal and state authorities agreed to a $26 billion settlement with five major banks. About a million families will have access to refinancing or reduction in the principal left on their home loans. Another 750,000 families who had their homes foreclosed on will receive checks of about $2,000. That’s not all. In recent weeks, new claims for unemployment benefits have fallen to their lowest level since 2008. The jobless rate has dropped to its lowest level since February 2009. A survey of job openings is tracking up.  All those trends should help bolster what might be the most important indicator of all: optimism. The Corporate Executive Board’s latest quarterly Business Barometer report finds that executives expect a rise in consumer spending, revenue growth for their own companies and their competitors, and an increase in new orders and production.

Falling policy uncertainty is igniting the US recovery - Because economic policy affects economic outcomes, policy uncertainty matters. Reading the business press, one gets the impression that the world of policy (taxation, regulation, fiscal stimulus, etc.) is in a very uncertain state in the US, Europe, Japan, and several of the biggest emerging markets. This has led to a debate over whether policy uncertainty is holding back the recovery (Mishel 2011).In our October 2011 Vox column (Baker et al. 2011), we argued that policy uncertainty was holding back the US recovery. Compared to just four months ago, however, the volcanic US policy landscape has calmed dramatically.

  • The budget ceiling debate has passed;
  • discussions of regulatory and tax reforms have subsided; and
  • attention has moved on to the Republican primaries.

Figure 1 shows our index of economic policy uncertainty from January 1985 to January 2012, which is displaying a drop of almost 40% from its August 2011 peak to its latest January 2012 value.

Federal Budget Deficit Totaled $349 Billion for the First Four Months of 2012 - CBO Director's Blog - The federal government accumulated a budget deficit of $349 billion for the first four months of fiscal year 2012, CBO estimates in its latest Monthly Budget Review, $70 billion less than the shortfall recorded for the same period last year. Without shifts in the timing of certain payments, however, the deficit would have been only $39 billion smaller than the shortfall for the same period last year. If lawmakers enact no further legislation affecting spending or revenues, the federal government will end fiscal year 2012 with a deficit of nearly $1.1 trillion, CBO estimates, compared with $1.3 trillion in 2011. However, enactment of proposals such as pending legislation to extend the payroll tax cut could have a significant impact on the deficit for 2012. (For more details about CBO’s most recent budget projections, see The Budget and Economic Outlook: Fiscal Years 2012 to 2022.)

CBO: Federal Budget Deficit $349 Billion Through First Four Months Of FY12 - The federal government recorded a budget deficit of $ 349 billion through the first four months of fiscal 2012, a $70 billion improvement on the same period of the previous fiscal year, the Congressional Budget Office said Tuesday. The agency said however that without the timing of some payments to the Treasury, the deficit would only have been $39 billion smaller than in fiscal 2011. The CBO forecast a budget deficit of $1.1 trillion in fiscal 2012 assuming no further legislation changing federal revenues or spending policy. That would be an improvement from the $1.3 trillion recorded in fiscal 2011. In January, the budget deficit was $27 billion, according to an initial CBO estimate. The agency said the $86 billion deficit in December was $2 billion more than an earlier estimate. Due to a 3.6% cost of living adjustment that went into effect in January, spending on Social Security was $4 billion higher last month compared to a year earlier. Net payments to Fannie Mae and Freddie Mac were $11 billion higher by the Treasury, as the two troubled entities continue to be a major drain on the public purse.

U.S. January deficit fell sharply to $27 bln-CBO  (Reuters) - The U.S. budget deficit fell by nearly half in January compared to a year earlier as tax collections from individuals rose and outlays fell, the Congressional Budget Office said on Tuesday. The CBO said it expects the Treasury Department to report a $27 billion deficit for January, versus a $50 billion deficit in January 2011.

Budget deficits: changes, levels and risks - One reasonable response to arguments that the UK, or US, needs less austerity and more fiscal stimulus is ‘deficits are already large’. Now there is an obvious trap here, which is that deficits in a recession are large because of the automatic stabilisers. However it remains the case that in many countries budget deficits are large even when they are cyclically corrected. Cyclical correction is a non-trivial task, and involves making judgements about output gaps which are far from easy at present, but it is better to try than to ignore the issue. The chart below plots ‘underlying’ budget deficits as calculated by the OECD in their end November 2011 Economic Outlook. (More accurately, they are the financial balance of general government as a percent of GDP corrected for the cycle and ‘one-offs’.)    Cyclical adjustment takes a bit more than 2% of GDP off the 2010 deficit for the UK and the US, reflecting a view that the output gap was around 3.5% that year. So in 2010 cyclically adjusted budget deficits were still very large in both countries, reflecting in part a deliberate policy of fiscal stimulus. The chart also shows the underlying deficit projected for 2013. (Projected changes over these three years are smooth enough not to make the choice of particular years important.) In terms of withdrawing stimulus, or instituting austerity, the Euro area is expected to do more than the UK, and the US less than the UK. This raises a simple question: in judging the direction of policy, should we be looking at levels or changes?

Where Are The Leaks On The Obama 2013 Budget? - With the president's budget scheduled to be released next Monday, it's unusual at this point for there not to have been at least a few leaks about what's going to be proposed. This especially is the case because the release was delayed by a week and that provided a few extra days (1) for reporters to work their sources and (2) for the White House to work the reporters. There are 4 kinds of leaks when it comes to the president's budget:

  1. Planned by the White House to get some early attention for something positive
  2. Planned by the White House to take the sting out of something people aren't going to like
  3. Planned by an department or agency, usually to build opposition to a decision made by the White House that it doesn't like
  4. Unplanned because reporters are able to find out something

Government Spending: An Economic Boost? - FRBSF - The severe global economic downturn and the large stimulus programs that governments in many countries adopted in response have generated a resurgence in research on the effects of fiscal policy. One key lesson emerging from this research is that there is no single fiscal multiplier that sums up the economic impact of fiscal policy. Rather, the impact varies widely depending on the specific fiscal policies put into effect and the overall economic environment.

Policymakers are Too Anxious to Reverse Course - I am worried that policymakers are too anxious to reverse course. That is, despite recent communications suggesting that policy will remain on hold or even be eased further, I'm worried that the Fed will increase interest rates too soon. In the past, any sign of green shoots has brought inflation worries to the forefront, and this time is unlikely to be different even though those fears have been groundless to date. But I'm even more worried that large scale deficit reduction will begin before the economy is strong enough to withstand a large negative shock to demand. Congress is clearly anxious to get on with it. So here are two views of why we shouldn't relax just yet about the employment situation (beyond risks such as oil price spikes from trouble in the middle east and fallout from rekindled troubles in Europe), and why we should do more, not less, to promote recovery of employment:

Employment: Some good news, some bad news, by Julie Hotchkiss, macroblog
Still losing the war on unemployment, by Mohamed A. El-Erian

Tie U.S. Recovery Program to Economic Indicators: Peter Orszag - Bloomberg: According to early forecasts, the U.S. economy should already have recovered from the financial crisis. Despite some recent encouraging news, though, we still don’t know when things will be back to normal. What have we learned from this delay? That in devising public policy to respond to the recession, it would have been smart to minimize the guesswork by relying more on automatic economic stabilizers. This lesson is immediately applicable: Rather than simply extend the payroll-tax holiday for the rest of the year, Congress should link it to the unemployment rate. Automatic stabilizers are components of the budget that cushion the blow from an economic decline, without the need for emergency congressional action. For example, when the economy weakens, tax revenue falls and certain forms of spending -- such as unemployment insurance -- automatically increase. The net result is to attenuate the impact of a recession, by providing stimulus right when it’s needed. As the economy recovers, the stabilizers recede, mitigating the longer-term effect on the budget deficit. What’s crucial is that, once the automatic stabilizers are put in place, they do the work. They remove the need both to guess about the economy and to overcome legislative inertia.

What If We're Beyond Mere Policy Tweaks? - The mainstream view uniting the entire political spectrum is that all our financial problems can be fixed by what amounts to top-down, centralized policy tweaks and regulation: for example, tweaking policies to "tax the rich," limit the size of "too big to fail" financial institutions, regulate credit default swaps, lower the cost of healthcare (a.k.a. sickcare), limit the abuses of student loans to pay for online diploma mills, and on and on and on.  But what if the rot is already beyond the reach of more top-down policy tweaks? Consider the recent healthcare legislation: thousands of pages of obtuse regulations that require a veritable army of regulators staffing a sprawling fiefdom with the net result of uncertain savings based on a board somewhere in the labyrinth establishing "best practices" that will magically cut costs in a system that expands by 9% a year, each and every year, a system so bloated with fraud, embezzlement and waste that the total sum squandered is incalculable, but estimated at around 40%, minimum.  Does anyone really think that the lack of another centralized Federal fiefdom and thousands of pages of additional regulation is what ails sickcare? Of course not. In effect, we as a society have completely lost the ability to honestly admit a problem exists and that the solution is not to paper it all over with more regulation and insatible...

Avoiding Congress’s fiscal bombs - A grim surprise was tucked inside the Congressional Budget Office’s latest budget outlook. Economic growth, it said, would be only 2 percent in 2012, falling to 1.1 percent in 2013. That’s horrible. It’s far beneath the growth rate required for the economy and job market to recover. But it’s also probably wrong— provided that Congress wants it to be wrong. Because the CBO isn’t saying the economy can’t grow faster than that. It’s saying the economy won’t grow faster unless Congress makes some hard decisions, and soon. The CBO has to do something most of us don’t: Read the laws as they are currently written and take them seriously. If you do that, you realize there are a series of fiscal bombs set to go off over the next year. In a few weeks, for instance, the payroll tax cut and expanded unemployment benefits are set to end. On Dec. 31, all of the Bush tax cuts are scheduled to expire, and the $1.2 trillion automatic sequester from last year’s Budget Control Act is supposed to begin slicing federal spending. Many smaller policies are also set to expire or phase out this year.

Where the CBO report on federal pay went wrong - As a longtime member of the Federal Salary Council, which studies and makes recommendations to the executive branch on federal pay, I take issue with some of the methodology and conclusions in this week’s Congressional Budget Office report comparing federal employee compensation to that in the private sector. The CBO concluded that the most highly educated and highly paid federal employees are underpaid by more than 20 percent compared with employees with similar “characteristics” in the private sector. Those with college degrees — which the bulk of the federal workforce has — are about on par with their private-sector counterparts; those with less than a college degree, the lowest-paid federal employees, are overpaid by about 20 percent, it found, and have more generous benefits than do their private-sector counterparts. First, CBO compared characteristics of the federal and private-sector workforces, rather than comparing jobs done in each sector. The latter is the approach of the Bureau of Labor Statistics, which has consistently found a pay gap in favor of the private sector. The latest BLS report shows that gap to be an average of 26 percent. Many have focused on the report’s comparisons of benefits. But the CBO admits these are “more uncertain than its estimates of wages.”

Romney’s severely conservative budget promises, by Ezra Klein: In his speech to CPAC, Mitt Romney repeated a promise that he’s delivered repeatedly on the campaign trail. “Without raising taxes or sacrificing America’s critical defense superiority, I will finally balance the budget.” That sounds pretty good. And then you look at the numbers. Romney has offered enough detail that we can estimate the cuts required to meet his targets. In that spirit, the Center on Budget and Policy Priorities tried to run the numbers on Romney’s proposals. The results were so outlandish that they actually ran them two ways to make Romney look better. In the first scenario, Romney follows through on his promise to balance the budget and cuts spending to 17 percent of GDP [as promised]. If you assume Romney is balancing the budget by 2021 — the end of his second term — that requires cutting expected spending on every domestic program, including Social Security and Medicare, by 36.4 percent. If Social Security is spared, as Romney has suggested it will be for the next 10 years, that rises to 53.4 percent. In the second scenario, Romney ignores his promise to balance the budget and simply tries to cap spending at 20 percent of GDP [as promised]. Then, the required cuts to domestic programs are only 23.5 percent. And, if Social Security is spared, 34.5 percent. This is the scenario Romney tends to reference in his speeches. 

House Republicans want $260 billion for infrastructure (Reuters) - House Republicans will propose legislation on Tuesday calling for $260 billion in spending on transportation infrastructure for up to five years, an election-year proposal touted as a job creator in a tough economy. Transportation Committee Chairman John Mica was due to formally introduce the measure and unveil details for funding road, bridge, and rail improvements at a news conference, his office said. Additional elements could be tacked on by other committees in coming days, including a plan to authorize the Canada-to-Texas Keystone XL oil pipeline despite the refusal of President Barack Obama to advance the project. While both Republicans and Democrats agree that Congress must lay out a new long-term blueprint for infrastructure improvements, finding the political common ground to do so in legislation has been difficult in a charged partisan climate and with elections looming in November. Proponents say the highway bill would create tens of thousands of jobs in the hard-hit construction industry at time when unemployment is stubbornly high. Transportation and engineering experts have said that the United States is woefully behind on infrastructure spending, especially on bridge repair. States, which rely on federal reimbursements, have been clamoring for direction from Washington on how to plan and pay for big-ticket projects.

Talks Bog Down on Extending Payroll-Tax CutCongress is poised for another 11th-hour standoff over extending the payroll-tax cut, foiling an effort to avoid the kinds of bitter confrontations that engulfed lawmakers last year. A House-Senate committee charged with finding a solution is laboring over how to offset the cost of extending the tax cut, which expires at month's end. The panel's meeting Tuesday was angry and unproductive, and Senate Majority Leader Harry Reid (D., Nev.) said if a deal isn't reached within a week, Democrats would introduce their own package. "The reality is that as of today we haven't made much progress, and time's a-wastin',"

Talks Stall on How to Pay for Extending Payroll Tax Cut — Any hope for a fast and quiet resolution to the Congressional battle over a payroll tax cut seemed to dim Tuesday as members of a bipartisan negotiating committee clashed over how to pay for the extension, and Senate Democrats suggested that they would come up with their own bill to get the matter resolved.  Republicans became increasingly frustrated as Democrats shooed away one Republican proposal after the next, like a bride-to-be dismissing a long line of potential wedding gowns as too ugly. Democratic negotiators rejected $70 billion worth of spending cuts the House wanted to use to offset the cost of the package, including a one-year pay freeze for federal workers, a measure to raise Medicare premiums on some people and a proposal that would allow the government to claw back some subsidies for the purchase of health insurance under the new health care law.  Democrats, smelling a political victory, seemed uninterested in speeding along the process. The Senate majority leader, Harry Reid of Nevada, instead vowed to put forward his own bill if the negotiators could not reach a deal. His new proposal would require those earning over $1 million a year to contribute to the nearly $200 billion cost of extending a payroll tax cut to nearly every working American, renewing unemployment benefits into the next year, preventing a sharp drop in reimbursement fees for doctors who accept Medicare and resurrecting a variety of other routine business tax cuts. 

Plan to Pay for Doc Fix with War Funding Savings Rejected - House Republicans have decided against using savings from war funding offset a permanent “doc fix,” which means that Medicare doctors could see their reimbursement rates fall as much as 27% by the end of the month. In addition, this only extends the cost of a permanent doc fix over time, because the cost of health care rises with each year, and due to our peculiar budgeting system a “permanent policy change” only has budget implications in a ten-year window. Therefore, doing the doc fix today would only incorporate, in budget terms, the bottom line cost until 2021, whereas waiting a year would add the more expensive year of 2022 in while taking out the less costly year of 2012. So delay has a legitimate budgetary cost, at least for scoring purposes. The cap on war funding based on the drawdown in Iraq and Afghanistan, which is a legitimate savings, would fulfill the budgetary cost of the doc fix and then some. But Republicans have rejected the pay-for. The idea of using unspent Overseas Contingency Operation (OCO) funds from troop withdrawals Iraq and Afghanistan has the support of top Democrats as well as influential Republicans like Senate Minority Whip Jon Kyl (AZ) and GOP Doctors Caucus chairman Rep. Phil Gingrey (GA). While President Obama and Dems want to tap into the $838 billion fund for infrastructure as well, GOP backers say it shouldn’t be used for anything other than a doc fix.

Payroll Tax Committee in Partisan Snit - Linda Beale - The committee working on the extension of unemployment benefits and the payroll tax cut is not making much headway.  A number of issues set the GOP's intent to cut assistance for those at the bottom of the income distribution as much as possible against the Dems' desire to fund the needed additional aid by a reasonable increase to the taxes of those who have enjoyed the most benefit from the last decade of tax cuts--those with a million or more in income.  See Needham et al, Payroll tax, jobless benefits land on weekend agenda, The Hill. Number of weeks:  The Republicans want to limit assistance to 59 weeks, incredibly stingy when many Americans are still jobless from the Great Recession.  The Dems offered a cut to 93 weeks, but the GOP wants to cut the unemployed much more than that so they said no deal. Pay-fors:  The Democrats offered a surcharge on millionaires.  The GOP  wants federal workers to face more job cuts and  a third year of pay freezes.  Not hard to see which of those two proposals makes the most sense and is the most humance, but the GOP hasn't been into being humane for quite a while now. Whose to blame:  Dave Camp knows that the GOP's obstructionism was noticed last fall, so he wants to be sure the Dems get the blame for this round.  He's already badmouthing the Democrats, claiming that they are "dragging their feet".   One wonders how one side can drag feet when the other side is not willing to negotiate on anything that doesn't give them 95% of what they want. 

Unemployment Extension Likely to Be Less Generous Than Current Law - The federal jobless benefits that take effect when state aid expires are about to become less generous, and Democrats and Republicans in Congress are now fighting over how much to shorten the duration of aid or whether expanded benefits should continue at all. Democrats on Thursday unveiled a proposal to shorten the duration of aid to 93 weeks from 99 weeks. But Republicans reacted negatively, saying the offer was too little, especially because Democrats hadn’t proposed a way to pay for the aid. “It’s an opening position,” Sen. Jon Kyl (R, Ariz.) complained to reporters on Thursday. “We’ve got a week to go — we should be done with opening positions.” Senate Majority Leader Harry Reid (D, Nev.) said earlier this week he would develop his own package–including an extension of a popular payroll-tax cut and a new measure to avoid pay cuts for doctors who treat Medicare patients–if a House-Senate conference committee does not come up with a deal by early next week. On Thursday, the House Republican leadership also took its own step forward, saying it may consider a payroll-tax package next week that is the vehicle for expanded jobless benefits. The three items — jobless aid, the payroll-tax cut, and the fix for doctors — expire at month’s end. But Congress is working on an even tighter deadline, because lawmakers begin a week-long recess Feb. 20, which effectively means they have a week left to negotiate.

Tilting the Budget Process to the G.O.P. - The House of Representatives voted last week to tilt the budgetary process in favor of the Republican economic agenda. On Feb. 3, the House passed H.R. 3582, the Pro-Growth Budgeting Act of 2012. Innocuous on the surface, its long-term purpose is to institutionalize Republican economic policy into the very fabric of budgetary analysis. The legislation would require that the Congressional Budget Office and Joint Committee on Taxation do a “dynamic” analysis of major legislation – defined as that with a gross budgetary impact greater than 0.25 percent of the gross domestic product. Such an analysis would calculate the impact on real G.D.P. growth, the capital stock and labor supply. The dynamic calculation would be supplementary and not replace the current official scoring methodology, but the obvious long-term goal is to require official revenue estimates to incorporate “Laffer curve” effects in order to make it easier to cut taxes and harder to raise them. While no economist denies the theoretical possibility of a revenue-raising tax cut or revenue-losing tax increase, Republicans talk as if the United States is always on the high side of the Laffer curve – no matter what the tax rates are – so every tax cut will pay for itself and no tax increase could possibly ever raise net revenue and thus reduce the deficit.

Bruce Bartlett On The GOP Attempt To Make Sure Tax Cuts Don't Count - Over at Economix, CG&G alum Bruce Bartlett does a very nice job explaining how House Republicans are trying to change the congressional budget process so that cutting taxes is never a problem no matter what damage that would do to the deficit and national debt. Here's the money quote:...the Republican effort is just a smokescreen to incorporate phony-baloney factors into revenue estimates to justify unlimited tax cutting. How soon before the C.B.O. is required to incorporate estimates from the right-wing Heritage Foundation in its calculations?

Bernanke urges Congress to address Bush tax cuts (Reuters) - Federal Reserve Chairman Ben Bernanke on Tuesday warned Congress that putting off a decision on the fate of expiring Bush administration tax cuts could unsettle businesses and households, undercutting the U.S. economic recovery. With presidential and congressional elections looming in November, many analysts think Congress is unlikely to act until the final months of the year. The tax cuts expire on January 1. Bernanke told the Senate Budget Committee that lawmakers might not have the luxury of waiting. "I don't know exactly when the uncertainty would become a factor, but surely as we get closer to January 1 and Congress has not given a clear road map for how it plans to proceed, that would certainly affect planning, business decisions, household decisions, as they look ahead to the next year," he said. Bernanke did not go beyond comments he made on the outlook for the economy and monetary policy he made last week in an appearance before a House of Representatives panel and did not comment on a surprising upswing in hiring in January. Bernanke repeated that the jobs situation had improved modestly over the past year, but there was a long way to go before jobs markets return to normal.

Wall Street needs to give up its bargain tax rates - Investment managers have held on to it for years, but 'carried interest' carries an odious loophole that needs to go. Politics has moments when it's actually useful. Case in point is the uproar over Mitt Romney's tax returns, which may help rid us of a small but noxious and symbolic loophole worth several billion dollars a year to managers of investment partnerships. I'm talking about "carried interest" -- finance-speak for investment managers' piece of their investors' profits. Much of Romney's income derives from that source. Even though he left Bain Capital in 1999, Romney still collects a chunk of Bain's piece of the profits realized by investors in the firm's buyout funds. Because tax law treats carried interest as a piece of a partnership rather than as a (fully taxable) fee, Romney's carry gets the same tax treatment that the funds' investors get: as long-term capital gains, taxed at 15%. The outrage generated by Romney's returns has produced real pressure to eliminate the loophole, which is so offensive to common sense and public morality that even Pete Peterson, retired co-founder of the Blackstone buyout firm (BX) and current deficit hawk, wants it closed. (Peterson isn't offering to return the zillions the loophole saved him, but, hey, we can't have everything.)

Special Taxes for Special Wealth: Why Is Investment Income Different? - When Facebook goes public, Mark Zuckerberg will become one of the richest people in America, with shares that will probably be worth more than $20 billion. When he eventually sells those shares, his federal tax bill will only be 15 percent of the cash he receives.* Zuckerberg and Mitt Romney (who, as everyone knows, paid a 13.9 percent tax rate for 2010) both benefit from tax preferences on investment income -- in this case, the 15 percent tax rate on capital gains.** Zuckerberg founded a company, so he's owned shares in that company since day one, which counts as an investment. Romney benefits from the carried interest provision, which says that even though the managers of private equity funds, venture capital funds, and hedge funds are investing other people's money, most of their fees are taxed as if they were investing their own money. The carried interest provision is utter nonsense. If you are being paid to invest other people's money, you are working, and that's income from labor. It is a pure giveaway to small group of rich people who give huge amounts of money to politicians. For example, six of the ten millionaire donors to Mitt Romney's super PAC are from hedge funds or other investment firms. The bigger and more debatable issue is whether income from investments should be taxed at a lower rate than income from labor.

Raising Taxes on Millionaires Is a Piece of Cake–But Which Kind? - My column in this week’s Tax Notes (subscription-only access here) focuses on just a few of the different ways we could get more tax revenue from millionaires, summarized in the table above.  (The sources for all these numbers are various distributional estimates from the Tax Policy Center, referenced in the Tax Notes publication.)  The progressive nature of the federal income tax system, where tax burdens as a share of income in general rise with income through marginal tax rates that rise with income, and the implied upside-down subsidies created by poking holes in the tax base with exemptions and deductions (a.k.a. “tax expenditures”), makes it easy to raise tax burdens on the rich.  We can either make the rate structure steeper, or we can broaden the tax base for any given (already-progressive) rate structure. Some ways are better than others from an economic efficiency standpoint, in that they level out the very uneven playing field, reducing the tax distortions between fully taxed and more lightly taxed (or untaxed) activities.  These would include proposals 3 and 4 –treating capital gains and dividends like ordinary income, and limiting itemized deductions to 28 percent.  Still, my favorite tax policy option to point out is the one already in current law (#1 on the list above): letting all the Bush tax cuts expire, which scores low on “millionarity” but high in terms of total revenue raised and even the total dollar amount of higher taxes on millionaires.

Pass the Romney Rule! - The U.S. tax code: Never has so much been done by so many for so few who need so little. The recent public debate about the inequities built into the tax code—triggered by the disclosure of Mitt Romney’s tax returns—is all for the good. So is the call for a “Romney rule” mandating that capital gains be treated as ordinary income, and so be subject to the same top marginal rate of 35 percent that applies to ordinary income, rather than the current top rate of 15 percent. But we shouldn’t raise the capital gains tax just because it’s a popular idea. The rate should rise for philosophical, economic, and political reasons, as several colleagues and I argued in a recent debate at the Maxwell School of Public Policy at Syracuse University. The philosophical argument for higher capital gains taxes is not tough. Modern American political philosophy is essentially a battle between John Rawls and Robert Nozick. Rawls, whose famous dictum is that we should maximize the well being of the least well-off member of our society, is generally understood consequently to support progressive tax structures that shift income from the wealthy to the less fortunate—with the proviso that marginal rates that were disincentives to work could over time diminish the well being of the least well off. So progressivity is bounded by that practical limit.

Why I’m So Mean -- De Rugy wrote a column centered around the claim that the United States has a more progressive tax system than any other advanced country, and as her sole piece of evidence cited the fact that rich people pay a higher share of the tax burden in the U.S. than in other countries. I wrote a response, noting that this reasoning is completely idiotic. Rich Americans pay a bigger share of the tax burden because they earn a bigger share of the income, not because the U.S. tax code is more progressive. De Rugy’s reply is an incoherent collection of hand-waving that does not come close to addressing this very simple and fatal flaw with her claim. She introduces a series of other fallacies, like conflating the marginal tax rate (the percentage tax you pay on your last dollar) with the total tax rate (the overall percentage of your income paid in tax), using “income tax” as a stand-in for total taxes, and trying to broaden the debate into a bigger philosophical dispute. But it’s not a philosophical dispute. It’s a simple case of her making up false claims based on extremely elementary errors. There are just a lot of people out there exerting significant influence over the political debate who are totally unqualified. The dilemma is especially acute in the political economic field, where wealthy right-wingers have pumped so much money to subsidize the field of pro-rich people polemics that the demand for competent defenders of letting rich people keep as much of their money as possible vastly outstrips the supply. Hence the intellectual marketplace for arguments that we should tax rich people less is glutted with hackery.

Never Mind the Tax Cheats -- Go After the Tax Code - Millionaires paying an effective 15 percent tax rate because their income is from investments? Blame the tax code. Carried interest, a form of income that accrues to hedge fund and private equity managers, taxed at the more favorable capital gains rate? The tax code's the culprit. Yes, there are a lot of tax cheats out there who aren't playing by the rules. What Obama objects to -- Warren Buffett playing a lower effective tax rate than his secretary -- is ordained by the grotesque, 72,536-page tax code.  "Whenever different forms of income are taxed at different rates or different taxpayers face different rates," they write, "the public figures out how to take advantage of the differential." Bingo. I'm no tax expert -- I have trouble gathering all the necessary information to take to the accountant once a year -- but I know enough to recognize that the tax code is the problem, not the folks who capitalize on its myriad of loopholes.Whether it's a flat tax or a national retail sales tax, simpler is better: for each of us and for the economy overall. So the next time the president says he wants everyone to play by the rules, please tell him it's the rules that are broken -- not to mention the rule-makers.

How Romney would tax us - David Cay Johnston - The Republican frontrunner’s 160-page “plan for jobs and economic growth,” which he released in September, contains some sound ideas. He would encourage more Americans to save and invest. And one of his proposals would strengthen America’s status as a technological powerhouse. See the plan here. But there’s a side to the plan that would raise taxes on the poorest 125 million Americans while tilting tax cuts further toward the rich.President George W. Bush cut taxes for almost everyone who paid income taxes. Romney would make the Bush tax cuts permanent. But that’s only a first step. He would also raise taxes on poor families with children at home and those going to college. Romney does this by reducing benefits from the child tax credit and the earned income tax credit and by ending the American Opportunity tax credit for college education.Without these tax breaks, the poorest fifth of taxpayers would pay $157 more in taxes in 2015 than under current policy, the Tax Policy Center says in its analysis of Romney’s plan. The second poorest group would pay $82 more, according to the center, whose past work has been praised by Republicans and Democrats alike.

Tax Expenditures: A Way to End Budget Gridlock? - In our current impasse over crafting middle-run and long-run ways to reduce budget deficits, many conservatives would like to have a tax code with lower marginal tax rates and with fewer government efforts to micro-manage aspects of the economy, while many liberals would like to have a tax code that raises more revenue--in particular from those with high incomes. Reducing the reach of tax deductions, credits, exemptions, and exclusions--which collectively go under the name of "tax expenditures"--could offer a way to provide some satisfaction for all sides.  Tax expenditures comprise large sums. The authors of the TPC paper point out: "Despite significant variation over the years, tax expenditures impose substantial costs on the federal budget and will continue to do so. In 2011, they were projected to cut revenues and raise outlays by $1.1 trillion, more than we collected from individual income taxes and nearly half of total federal revenue collections for the year." Of course, the problem with altering tax expenditures is that people are used to them, and don't want to see them disrupted. By far the biggest tax expenditure is the fact that employer-provided health insurance isn't taxed as income: if it was, the U.S. Treasury would collect about $174 billion per year more. The second-biggest tax break is the deductibility of mortgage interest, which costs the Treasury about $89 billion per year. Other big-ticket tax expenditures include deductibility of state and local taxes, deductibility of charitable contributions, lower tax rates for capital gains and dividend income, and others.  But it's tilting at windmills to attack these sorts of provisions one at a time.

The tax expenditure of the 1 percent - EPI -The Tax Policy Center’s new report on the distribution of tax expenditures strengthens the case for increasing tax progressivity and raising needed revenue by ending the preferential treatment of capital income (subject to a 15 percent tax rate versus a top marginal income tax rate of 35 percent). TPC’s analysis looks at seven broad categories of individual income tax expenditures: exclusions, above-the-line deductions, the preferential treatment of capital gains and dividends, itemized deductions, nonrefundable tax credits, refundable tax credits, and other miscellaneous tax expenditures. Guess which category of tax expenditure provides by far the most lopsided benefit to upper-income households?That would be the way the tax code preferences capital income over wage and salary income, compounded by the heavy concentration of capital income at the top of the earnings distribution. In 2011, the top 1 percent of households by cash income received a whopping 75.1 percent of the benefit from the preferential treatment of capital gains and dividends. The broad middle class—defined here as the middle 60 percent of households by cash income—received only 3.9 percent of that benefit. Upper-income households also do well by tax exclusions and itemized deductions, but the share of these tax expenditures accruing to the top 1 percent of households—at 15.9 percent and 26.4 percent, respectively—don’t come close to the windfall afforded by a 15 percent rate on capital income.

What Tax Reform Would Mean for the States - What would fundamental changes in the federal tax code mean for state and local governments? Would it limit their ability to raise or borrow money? Would it make their revenue systems more or less progressive or even work more smoothly? Last Friday, I participated in a joint Tax Policy Center and UCLA Law School conference on what federal reform would mean to governments beyond the Beltway.  And the short answer is: A lot. Some change might be good, while other reforms might be quite disruptive. The bottom line seems to be that Congress could go a long way towards fixing the federal system without destroying state revenue codes—but only if reform is done carefully. Take, for example, the federal deduction for state and local taxes, which reduces federal revenues by more than $70 billion annually. Policymakers have been talking about repealing it at least since the Reagan Administration. Since most low- and moderate-income taxpayers don’t itemize, the deduction does them no good at all. Even many middle- and upper-middle class households who do itemize lose the benefit of the deduction if they fall into the dreaded Alternative Minimum Tax. Still, the system encourages states to rely on deductible levies such as income and sales taxes.

Raise capital gains and stop flying -- There are two totally unrelated stories I want to discuss this morning, I hope you’ll forgive me.  First, take a look at this post, written by David Brin, which argues for higher capital gains tax. He points out VC’s or angel investors, in combination with entrepreneurs, are the true “job creators”, and also invest their money in a truly risky way, whereas generic rich people who only invest in established companies are taking risks but not on the same level. Yet these two classes of people are taxed at the same rate. I guess the counterarguments would be that they, the VC’s, also get more payoff (when things work out) and that they couldn’t make their investments without the fleet of passive rich people ready to invest if and when the company succeeds. Even so I think there’s a real difference. Second, check out this fantastic article from the Wall Street Journal about how people respond to environmental impact issues by consuming more. In the article they describe what’s called the “Prius Fallacy: a belief that switching to an ostensibly more benign form of consumption turns consumption itself into a boon for the environment”. I love it, first of all because it’s completely snarky and second of all because it’s really true and annoying.

Why we don't need corporate tax "overhaul": Linda Beale - GOP poormouthing on behalf of rich corporate allies(Part I in a series) These days, one hears a great deal from politicians on the right about how a corporate tax "overhaul" is needed because our taxes are "too complex" and/or "too anti-competitive" or because our tax rates are "too high". The same GOP politicians who whine and whimper about how huge the deficit is, and accuse President Obama of driving our country to ruin with the deficit are willing to lower the tax burden paid by highly profitable corporations considerably (thus increasing the deficit and adding to regressivity of the tax system)--so long as they are appeasing their multinational constituency, the huge corporations who are the new providers of campaign funds and the new decisionmakers in elections--even though the corporate entities have no vote. Claims of revenue neutrality are generally little more than PR cover for corporate giveaways.

Tax Break Pushes Corporate Taxes to Just 12.1% of Profits, Lowest Level in 40 Years - U.S. companies are booking higher profits than ever. But the number crunchers in Washington are puzzling over a phenomenon that has just come into view: Corporate tax receipts as a share of profits are at their lowest level in at least 40 years. Total corporate federal taxes paid fell to 12.1% of profits earned from activities within the U.S. in fiscal 2011, which ended Sept. 30, according to the Congressional Budget Office. That's the lowest level since at least 1972. And well below the 25.6% companies paid on average from 1987 to 2008.

The Corporate Tax Rate Is Lowest in Decades; Is Business Paying It’s Fair Share? - As the nation frets over slow growth and large budget deficits, much has been made over how much Americas are and should be paying in income tax. President Obama and Democrats have argued that the wealthiest among us are not paying their fair share. They say the spoils of the globalization and the internet revolution have gone almost exclusively to the very wealthy, and that, in times of crisis, more should be asked of those who can afford to give. Those on the right counter that the wealthy pay their fair share and, more, that the top one percent pay a huge percentage of federal income tax receipts. But there is another source of federal revenues that receives less attention: corporate income taxes. According to the Wall Street Journal’s recent study of Congressional Budget Office numbers, corporations are paying an effective rate of 12.1%, the lowest in at least 40 years. So why are some of the biggest and most powerful entities in our society getting away with paying so little? The story is complicated, but the biggest factor in the recent collapse in corporate tax receipts appears to be a set of tax breaks built into recent stimulus efforts.

Some U.S. banks awash in ID theft tax-fraud proceeds as IRS cracks down - Despite a new federal crackdown announced this week aimed at combating tax refund fraud involving the use of stolen identities, current law enforcement efforts are not enough and fraudsters are still pumping massive sums of tax fraud proceeds through U.S. banks, sources told Thomson Reuters. “IRS and Justice should have been doing this three years ago. This widespread criminal activity is more profitable than drug dealing,” said regulatory consultant and investigator Jim Dowling, a former Internal Revenue Service criminal investigator special agent who also acted as an anti-money laundering (AML) advisor to the Office of National Drug Control Policy. The Internal Revenue Service this week said that in late January it worked with the Justice Department’s Tax Division and U.S. Attorneys’ offices across the country to target more than 100 people in 23 states suspected of involvement in the theft of thousands of identities and taxpayer refunds. The resulting indictments, arrests and raids were reportedly the result of investigations that had been underway for months or years. Identity-theft tax fraud schemes typically involve using an unwitting victim’s name, social security number and date of birth to file an online tax return in his or her name and routing the resulting IRS refund payment to an untraceable bank account. The IRS says it has stepped-up its internal reviews, including by designing new identity-theft-screening filters, to spot such scams before refunds are issued.

US JUSTICE DEPT: Switzerland’s Largest Private Bank Is A ‘Fugitive’ — The U.S. Justice Department called Switzerland's largest private bank a fugitive from justice on Friday after it didn't send any representatives to a court hearing in New York, where it has been charged with conspired with American clients to hide $1.2 billion from the Internal Revenue Service.  Wegelin & Co. is accused of helping at least 100 U.S. clients conceal huge sums of money from the IRS in overseas accounts. Federal prosecutors said the bank recruited American customers who were concerned about possible prosecution for tax violations at home, including some that had already pulled money out of other Swiss banks because of growing pressure from U.S. law enforcement. Three of the bank's client advisers were indicted in January. The bank was added as a defendant in the case on Feb. 2 U.S. officials, however, have yet to find a way to move the case forward. The three Wegelin advisers charged in the case, Michael Berlinka, Urs Frei and Roger Keller, have not been arrested and the Justice Department has decided that any attempt to extradite them from Switzerland is unlikely to succeed.

Another Campaign for Sale - Two years ago, while delivering his State of the Union address, President Obama looked the Supreme Court justices in the face and told them they were wrong to have allowed special interests to spend without limits on campaigns. “I don’t think American elections should be bankrolled by America’s most powerful interests,” he said. “They should be decided by the American people.”  On Monday, the president abandoned that fundamental principle and gave in to the culture of the Citizens United decision that he once denounced as a “threat to our democracy.” His aides announced that the Obama campaign would begin to assist the “super PAC” that can raise and spend unlimited sums to support the president’s re-election effort. Even White House and cabinet officials are expected to appear at fund-raising events for Priorities USA Action.  The announcement fully implicates the president, his campaign and his administration in the pollution of the political system unleashed by Citizens United and related court decisions. Corporations, unions and wealthy individuals are already writing huge checks — with no restrictions — to political action committees supporting individual candidates, which have become bag men for campaigns that still nominally operate under federal limits.

The Sad Spectacle of Obama’s Super PAC, by Robert Reich: It has been said there is no high ground in American politics since any politician who claims it is likely to be gunned down by those firing from the trenches. That’s how the Obama team justifies its decision to endorse a super PAC that can raise and spend unlimited sums for his campaign.  Baloney. Good ends don’t justify corrupt means.  The White House was surprised that super PACs outspent the GOP candidates themselves in several of the early primary contests, and noted how easily Romney’s super PAC delivered Florida to him and pushed Newt Gingrich from first-place to fourth-place in Iowa. Romney’s friends on Wall Street and in the executive suites of the nation’s biggest corporations have the deepest pockets in America. ... “With so much at stake” wrote Obama campaign manager Jim Messina on the Obama campaign’s blog, Obama couldn’t  “unilaterally disarm.” But would refusing to be corrupted this way really amount to unilateral disarmament? To the contrary, I think it would have given the President a rallying cry that nearly all Americans would get behind: “More of the nation’s wealth and political power is now in the hands of fewer people and large corporations than since the era of the robber barons of the Gilded Age. I will not allow our democracy to be corrupted by this! I will fight to take back our government!”

The Secret Money is Shifting to 501c4s - Rick Hasen at Election Law Blog instructs us on super pacs and 501c4s: These days, I probably spend more time speaking to reporters about Super PACs than about any other election law subject. There is a lot of misinformation floating out there about what Super PACs are, where they came from, the relationship to Citizens United, and the ability of super PACs to coordinate with candidates without running afoul of the FEC disclosure rules. For those looking for basic information from what I’ve written, I point reporters to my recent CNN oped, this blog post on whether Citizens United created Super PACs, and this blog post which highlights the kinds of coordination which are currently permissible under FEC rules. .... The Secret Money is Shifting to 501c4s, and It Demands a Legislative Response. Last night ace election lawyer Rob Kelner tweeted: “Biggest story today: Crossroads’ c4 raised more than its Super PAC. Confirming that media is missing the boat by focusing on Super PACs.”

US Treasury: Manhattan transfer - Three years ago Wall Street employees flocked to Washington, attracted by the energising rhetoric of Barack Obama, the call of public service and the sudden dearth of jobs in the financial sector. In the chaotic first days of the Obama administration, the best qualified were thrown into the Treasury department to deal with the financial crisis. Now many have left, returning to the private sector through the famous “revolving door” that separates prize jobs in government from those in business. Last week alone, Lazard announced that Ron Bloom, one of its former bankers who later managed the government’s rescue of the US car sector, was returning to the firm as a senior adviser; and it emerged that Goldman Sachs was close to hiring Jake Siewert, a former top aide to Tim Geithner, the Treasury secretary. The Treasury says the churn is a natural result of measures taken to fight the crisis, with staff hired specifically to deal with the emergency of 2008 and 2009 departing once the worst was over. But some insiders and several of the departed officials say it leaves the administration short of qualified personnel at the agency that – perhaps more than any other – stands on the front line in maintaining the stability of the global financial system.

J.P. Morgan Banker Selected for FDIC - The White House plans to nominate a former Bush administration official to the Federal Deposit Insurance Corp., a key banking regulator.  President Barack Obama said he would nominate Jeremiah Norton, currently an executive with J.P. Morgan Chase & Co., to serve on the FDIC's five-member board.  Mr. Norton served from 2007 to 2009 as deputy assistant secretary in the Treasury Department, where he was a key adviser to former Treasury Secretary Henry Paulson during the financial crisis. He also worked as a banking staffer for Rep. Edward Royce (R., Calif.) Mr. Norton is the second Republican-backed nominee for the board. Mr. Obama also nominated Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City, to become the FDIC's vice chairman. Mr. Hoenig, an independent, had been recommended for the job by Senate Minority Leader Mitch McConnell (R., Ky.).

House passes Republican-written insider trading bill that has heavy Wall Street Influence - The House passed a bill banning Congress and executive branch officials from insider trading, but brushed aside a provision aimed at reining in those who pry financial information from Congress and sell it to investment firms. Thursday’s 417-2 vote likely sends the legislation to a House-Senate conference, where supporters of the tougher regulation will try to restore the proposal that was included in the version passed by the Senate. Voting against the bill were Reps. John Campbell, R-Calif. and Rep. Rob Woodall, R-Ga. The language in dispute would require so-called political intelligence firms to register the same as lobbyists, and they would have to file public reports on their spending and contacts with federal officials. Portions of the financial industry lobbied for removal of the proposal. The Republican leadership couldn’t stomach the pressure,” said Rep. Louise Slaughter, D-N.Y., who has been trying to get an insider trading bill passed for six years. She said the bill “let the political intelligence community off the hook.”

Congressional earmarks sometimes used to fund projects near lawmakers’ properties - A U.S. senator from Alabama directed more than $100 million in federal earmarks to renovate downtown Tuscaloosa near his own commercial office building. A congressman from Georgia secured $6.3 million in taxpayer funds to replenish the beach about 900 feet from his island vacation cottage. A representative from Michigan earmarked $486,000 to add a bike lane to a bridge within walking distance of her home. Thirty-three members of Congress have directed more than $300 million in earmarks and other spending provisions to dozens of public projects that are next to or within about two miles of the lawmakers’ own property, according to a Washington Post investigation. Under the ethics rules Congress has written for itself, this is both legal and undisclosed. The review also found 16 lawmakers who sent tax dollars to companies, colleges or community programs where their spouses, children or parents work as salaried employees or serve on boards.(View the full results of the Post investigation.)

Self-Interest and the Pathology of Power: the Corruption of America Part 2 - If we ignore the lip-service showered on "reform," we find that there is really only one strategy in America: extend and pretend. Individuals, households, communities, cities, states, enterprises and the vast sprawling Empire of the Federal government and its many proxies--all are engaged in extend and pretend.  The closest analog is a seriously ill alcoholic who tells himself he just has a hang-over when it's abundantly clear he is suffering from potentially terminal cancer. With a hang-over, extend and pretend is the only strategy that works: you can try various "magic potions" to relieve the symptoms, but the only real cure is to give the body enough time to cleanse itself of the toxins you've created and pretend to be functioning in the meantime.  In the case of aggressive cancer, then extend and pretend is the worst possible strategy: ignoring the rapid progression of the disease only makes eventual treatment more difficult and uncertain.  The only way to treat cancer is to face it straight-on, learn as much as you can about the disease and the spectrum of treatments, consider the side-effects and consequences of various treatment strategies, and then get to work radically transforming your entire life, mind, body and spirit to effect the cure.

Unprecedented Regulator Complaints to Change Volcker - More foreign regulators are expected to contact US authorities with complaints about the proposed Volcker Rule's 1restrictions on sovereign debt trading. According to former regulators’ counsel, complaints by financial authorities hold more sway than market participants’ in the rulewriting process. This extra pressure makes it almost inevitable that there will be more flexibility in sovereign debt trading.Central banks and securities regulators in the UK, Japan2 and Canada3 have taken the unusual move of participating in the Volcker rule’s public comment process. And the European Commission is reported to be speaking with the US Treasury sometime this month.4 But this could be just the start of the list. Institute of International Bankers (IIB) CEO Sally Miller told IFLR that she’s heard from members and elsewhere that other countries’ officials may be formulating statements regarding sovereign debt restrictions.

Cochrane on consumer financial protection - Cochrane has two posts up about consumer financial protection. The first is about the negative impacts of anti-usury laws: Even a well-intentioned usury law has the unintended consequence that poorer, smaller, less well connected people find it harder to get credit.  And it benefits richer, well-connected incumbents, by keeping down the rates they pay, and by stifling upstarts' competition for their businesses...  The rationale for consumer financial protection in the U.S. - the main argument in favor of the Consumer Financial Protection Bureau - has always been that many modern financial products are too complex for consumers to understand (leading to either people being tricked, or markets breaking down because people fear being tricked). But high interest rates are not complex. They are very simple. People do not need government help to understand high interest rates. This means that the CPFB should ideally focus on complexity (and on behavioral effects that allow companies to repeatedly deceive consumers), not on the tightness of lending standards in general. Cochrane's second post argues that since regulators are subject to behavioral biases, the CFPB will be no better at evaluating financial products than are the consumers that the agency is meant to protect:

Payment Protection Plans - We have not talked a lot about payment protection plans, those great deals where the bank agrees to pay your credit card balance in the event of disability or death in exchange for premiums. They are great for the banks. In an article in the American Banker, Victoria Finkle and Jeff Horwitz reports that the banks only return to the consumer 21 cents of every dollar paid in premiums and earn profit margins of 50% or more on the plans. Finkle and Horwitz report that the FDIC and CFPB are looking into the plans, with a regulatory probe of Discover Financial Services already underway. The article is worth a read, especially for the surprisingly candid assessments of industry insiders. These plans are another example of "gotcha capitalism"--a business model dependent on sustained miscalculations or mistakes by the other party to the transaction. For everyone but the consumer at death's door, the premiums are way too high to justify the expense.

Do Payday Lenders Target Minorities? - NY Fed - Payday lenders make small, short-term loans to millions of households across the country. Though popular with users, the credit is controversial in part because payday lenders are accused of targeting their seemingly high-priced credit at minority households. In this post, we look at whether black and Hispanic households are in fact more likely to use payday credit. We find that, unconditionally, they are, but once we control for financial characteristics—such as past delinquency, debt-to-income ratios, and credit availability, blacks and Hispanics are not significantly more likely than whites to use payday credit.

MF Global Trustee Sheds New Light on Chaos at Firm - MF Global first misused customer money on Oct. 26, five days before filing for bankruptcy, investigators said on Monday, shedding new light on the extent of potential wrongdoing at the brokerage firm and the chaos that prompted the breach. In a statement, the trustee tasked with returning money to customers also revealed that investigators had traced most of the customer cash that vanished from MF Global. That cash, belonging to futures customers, traveled to a wide variety of destinations, including banks, clearinghouses and the firm’s own securities customers, according to people briefed on the situation. While the investigators are still tracking other assets like bonds that belonged to MF Global clients, the statement provides the first public glimpse into the three-month hunt for roughly $1.2 billion in missing money. The New York Times reported last week that investigators had traced a substantial portion of the missing money.

MF Global Trustee Sees $1.6 Billion Customer Shortfall - MF Global commodity customers whose cash vanished when the firm collapsed last year are owed $1.6 billion — up significantly from previous estimates — the trustee tasked with recovering the money said on Friday. The revised figure reflects growing concerns that the trustee will not be able to claw back $700 million in customer money trapped overseas. Until now, the trustee did not include the $700 million when projecting the shortfall, hoping to avoid a battle with MF Global’s British arm, which is holding the customer money. But now the trustee, James W. Giddens, has acknowledged that he is making little headway in recovering the money from KPMG, the court-appointed administrator for MF Global’s British subsidiary. That money, Mr. Giddens said, was held for American clients who traded on foreign exchanges.The problem echoes a cross-border fight in the Lehman Brothers bankruptcy, when customer money was trapped overseas. More than three years later, that issue remains unresolved.

Karl Denninger - Warren Pollock Open Discussion (video) We talk about the Labor-report, MZM M3, recessions, depressions, deflation, hedonic indicators, global labor value, labor arbitrage, Ben Bernake, congressmen starting to catch on, Zero Rate interest Policy ZIRP = heroin, bubbles, capital, worthless companies, housing booms and busts, collateral, medical costs, derivatives, housing stock, the printing press, minimization, rule of 72, pension plans, tea parties, medicare, multiplier, stealing capital from the private industry, destruction of savings, gold, and silver. Real economic growth only comes with economic surplus. This is a highly detailed discussion-interivew on capital and credit.

SEC Launches Inquiry Aimed at Private Equity - Federal regulators have launched a wide-ranging inquiry into the private-equity industry that examines how firms value their investments, among other matters.  The Securities and Exchange Commission's enforcement division sent letters to private-equity firms of various sizes in early December as part of an "informal inquiry," according to the letter and people familiar with the matter.  It is unclear which firms received a letter, which includes language saying it shouldn't be construed as an indication the agency suspects securities-law violations. The inquiry suggests regulators are ratcheting up the attention they pay to the $1.2 trillion industry, which typically hasn't been a focus of prior investigations.

Where Has All The Money Gone, Pt IV - Dividends - We've already seen in previous installments of this series that since about 1980, I: corporate profits have soared, II: the slice of profits going to finance has soared even more, and III:  wages have stagnated.  Here we see what corporations have done with all that money.   There is a limited selection set: pay taxes, distribute as dividends, pay down debt, invest, make acquisitions, speculate, and hold as cash. Here is a look at taxes through 2008 and dividends through 2010, as percentages of profits; data from BEA table 7.16, lines 19, 20 and 38. For my purposes, profits are divided among taxes, dividends, and all the other things mentioned above, which I'll call the Residual. Dividends/ Profits are in green; Taxes/Profits in red.  I've added 13 year moving averages to clarify the trends over time.  The Dividend percentage bottomed in 1978 at 20.6%.  I've marked that year on both curves with a yellow dot.  After that, dividend payments took off sharply and have been mostly in the 40 to 50 % range since 1989.  The tax rate on dividends was reduced to 15% in 2003, also marked with a yellow dot, but I don't think that change has had much effect on dividend payout.  Notably, 2010 profits are the highest ever. 

The mantra of some financiers - “Society always stands as the loss-absorber of last resort”  – TED “There will always be a tail of financial risk that society must absorb”  – David Murphy [David Murphy's riff on TED's latest post generated this brief reply -- using time that really should have been devoted to one of my three deadlines.  More to come, but maybe not for a week or so.] Needless to say I can’t judge the truth of David Murphy’s statement about the future, but the historical evidence is clear:  society as a whole has not always stood as the loss absorber of last resort for the financial system.  (Asteroids, I hope we can all agree, belong to a different class of events).  Our banking system was founded in an environment where the bankers absorbed the losses.  Crises were costly, because bankers’ assets were wiped out. Treating society, and not the bankers, as the financial system’s “loss absorber” is a new phenomenon, for which the seeds were laid in the reforms of the 1930s.  The evidence lies in the facts:  the Federal Reserve’s non-recourse loan supporting the purchase of Bear Stearns and the TARP legislation were unprecedented events in the nation’s history.  We are treading new ground here – and the response of the financiers is to try to persuade us that society has “always” passed bills bailing out bankers.  Nonsense.

Why Do Dangerous Financial Criminals Roam Free?  - American Public Media's "Marketplace" had a recent segment focused on why it has taken so long to bring criminal prosecutions related to the financial crisis. Reporters observed that at the beginning of the crisis, the Obama administration wanted to calm the financial industry rather than impose accountability. They speculated, along with Tea Party and Occupy Wall Street participants, many of whom have been calling for prosecutions, that Obama’s creation of a new group to prosecute mortgage fraud led by New York Attorney General Eric T. Schneiderman was likely to be politically motivated. And they indicated that financial crimes are complex and prosecutors need time to develop their cases. But here's what they didn't say: A major reason the prosecutions don’t exist is that President George W. Bush took the cops off the beat.

Why Wall Street Should Stop Whining - Matt Taibbi - Everybody on Wall Street is talking about the new piece by New York magazine’s Gabriel Sherman, entitled "The End of Wall Street as They Knew It." The article argues that Barack Obama killed everything that was joyful about the banking industry through his suffocating Dodd-Frank reform bill, which forced banks to strip themselves of "the pistons that powered their profits: leverage and proprietary trading." Having to say goodbye to excess borrowing and casino gambling, the argument goes, has cut into banking profits, leading to lower bonuses and more extreme decisions like Morgan Stanley’s recent dictum capping cash bonuses at $125,000. In response to that, Sherman quotes an unnamed banker: "I’m not married and I take the subway and I watch what I spend very carefully. But my girlfriend likes to eat good food. It all adds up really quick. A taxi here, another taxi there. I just bought an apartment, so now I have a big old mortgage bill." Quelle horreur! And who’s to blame? According to Sherman's interview subjects, it has nothing to do with the economy having been blown up several times over by these very bonus-deprived bankers, or with the fact that all conceivable public bailout money has essentially already been sucked up and converted into bonuses by that same crowd. No, it instead apparently has everything to do with the Dodd-Frank bill, and specifically the Volcker rule banning proprietary trading, which incidentally hasn’t gone into effect yet.

The SEC gets closer to regulating money-market funds - Banks need to be regulated. Depositors can’t be expected to do due diligence on their financials, so you need deposit insurance. And in turn, the government — which provides the deposit insurance — needs to make sure that the banks have certain minimum levels of capital. Otherwise, the insurance fund will go bust in no time. All of this is wholly uncontroversial — until you get to the subject of money-market funds. At heart, as they exist today, MMFs are banks. They borrow money which is repayable on demand, and they lend it out for fixed terms, taking a certain amount of credit risk while doing so. If their borrowers fail to repay the money, or if their depositors all demand their money back at once, then they’ll be left needing to be bailed out.  Wonderfully, it seems that the SEC has been listening. The WSJ article is a bit hard to follow, but the SEC seems to have a three-pronged approach to regulating these beasts.

U.S. Sets Money-Market Plan - Regulators are completing a controversial proposal to shore up the $2.7 trillion money-market fund industry, more than three years after the collapse of Lehman Brothers Holdings Inc. sparked a panic that threatened the savings of millions of investors and forced the federal government to intervene.  The Securities and Exchange Commission in the coming weeks will unveil a two-part plan to stabilize money funds, which invest in short-term debt instruments and are designed to be safe and readily accessible to investors, according to people familiar with the matter. At least three of five SEC commissioners would need to approve the proposals to submit them for public comment.  The SEC's aim is to minimize any losses for shareholders in the event of another financial panic. Investors for months have fretted over how a Greek government-bond default might affect U.S. money-market funds. In recent months, these funds have moved to reduce their exposure to European banks, especially French ones, amid fears over their financial health.  But fund-industry executives say the rules could damp returns for millions of investors, prevent them from getting all their money out during a crisis and reduce confidence instead of bolstering it.

Jobs data highlight huge potential for capital loss in Treasuries  - US Q4 2011 GDP growth was slightly disappointing, and the mix was terrible as the growth was mostly due to inventories. I took issue with that report, arguing that the weakness was due to statistical distortions in the government spending data and the PCE services data. With that disappointing Q4 GDP report, expectations for quite weak economic growth in this year’s first half were encouraged.  But today’s employment data blows the weak consensus outlook out of the water. The economy created jobs at the fastest pace in nine months in January and the unemployment rate dropped to a near three-year low of 8.3 percent, indicating last quarter’s growth carried into early 2012.  Nonfarm payrolls jumped 243,000, the Labor Department said on Friday, the most since April and beating economists’ expectations for a gain of only 150,000.  Not only are interest rates at generational lows but many high-quality companies are yielding (at 2.5% or even better) well above the yield on the 10-year U.S. note.  Speaking of the latter, the 10-year Treasury yield at a mere 1.8%, real Treasury interest rates are negative well out the maturity spectrum based on all surveys of long-term inflation expectations. The potential for capital loss if the economy achieves above-trend economic growth is simply huge.

Ranks of Low-Risk Corporate Issuers Thin - Amid concerns about a shortage of risk free-assets, Standard & Poor’s reported that the ranks of highly rated corporate securities continued to thin in 2011. S&P said the percentage of companies world-wide with speculative-grade ratings rose in 2011 from a year earlier amid continuing concerns about European debt and the global economy. The share of speculative ratings globally increased to 44.4% at year’s end, from 43% a year earlier, and showed slight growth from 44.1% reported at the end of June. The median rating remained at triple-B-minus, a notch above junk territory, where it has been since the second quarter of last year. During the fourth quarter, the portion of global ratings downgrades outpaced upgrades, at 6.76% and 4.46%, respectively. Europe had the highest percentage of downgrades at 12.3%, while emerging markets had the highest proportion of upgrades at 9.5%.

Bank Business Loans Rose $6.9 Billion in Latest Week  - U.S. banks’ commercial and industrial loans increased $6.9 billion to about $1.360 trillion in the week ended Feb. 1, the latest week for which data are available, the Federal Reserve said Friday. That followed a $2.3 billion increase the previous week. Jumbo certificates of deposit rose $200 million to about $1.513 trillion in the latest weekly data, after rising $4.1 billion the previous week. Revolving home equity loans rose $800 million to $548.0 billion after falling $400 million the previous week.

Graphic: Executive Pay - Time -  Facebook's initial public offering filings revealed the salary of its top execs as a percentage of company income, which is four times that of Apple's executive staff. How does it compare to other top American companies?For Sale: AIG’s Subprime Bonds - Five Wall Street banks have been invited to bid this week for another multibillion-dollar bundle of risky mortgage bonds held by the Federal Reserve Bank of New York as a result of its 2008 rescue of American International Group Inc. The invited firms are the U.S. securities arms of Barclays PLC, Credit Suisse Group AG, Goldman Sachs Group Inc., Morgan Stanley and Royal Bank of Scotland PLC, according to people familiar with the matter. They said the New York Fed is seeking bids by midweek for residential mortgage-backed securities with an unpaid principal balance of $6 billion, or about half the remaining bonds in a vehicle called Maiden Lane II. Selling the bonds would let the New York Fed take advantage of buoyant market conditions to dispose of more troubled assets from the financial crisis. It also would bring the central bank closer to ending a controversial chapter of its support for financial markets since 2008.

‘Bank Transfer Day’, What Really Just Happened? - James Van Dyke points to some numbers on the move to transfer funds out of big banks: Bank Transfer Day and the Occupy Movement have received tremendous attention, and for the first time we have market research data to measure the impact on the financial services industry. Javelin’s research estimates that 5.6 million U.S. adults with a banking relationship changed providers in the past 90 days. Of those switchers, 610,000 US adults (or 11% of the 5.6 million) cited Bank Transfer Day as their reason and actually moved their accounts from a large to a small institution. With a Google search of “bank transfer day” returning fully 22,000,000 responses we’re not surprised that these angry bank-switchers represent nearly a three-time increase over the amount of people who took their funds out of large banks for highly-similar reasons during the previous 90-day period in 2011.

American Foreclosure Hits Bottom With Tower Auction in Atlanta -The U.S. foreclosure crisis has risen to new heights.  Atlanta’s 55-story Bank of America Plaza, the tallest tower in the Southeast, is set to be sold at an open outcry auction on the steps of the Fulton County Courthouse tomorrow after landlord BentleyForbes missed mortgage payments. It bought the skyscraper in 2006 for $436 million from Bank of America Corp. and Cousins Properties Inc. in the city’s biggest property deal.  Since the property market peaked a year later, the 1.25 million-square-foot (116,000-square-meter) building has lost 54 percent of its value, Bank of America, its largest tenant, has reduced space and bond investors who helped finance the purchase are on the hook for losses, according to data compiled by Bloomberg.  Atlanta’s office market is a victim of overbuilding and inflated real-estate prices fueled by issuance of commercial mortgage backed securities that peaked in the U.S. at $232 billion in 2007. While investor demand for property debt surged last month by the most since March 2010 as the economy strengthened, borrowers in cities such as Atlanta outside the prime U.S. office markets of New York, Los Angeles, Washington and Boston are struggling to refinance as about $5.8 billion of five-year office loans bundled inside CMBS matures.

Bank of America Plaza In Atlanta To Be Sold In Foreclosure Auction Tuesday: You don't need to be a poet to find a metaphor in the foreclosure of Bank of America (BAC) Plaza in Atlanta. Bank of America has come to represent the U.S. property bust more than any other institution, so it is only fitting that a 55-story tower that bears its name--the tallest in the Southeast, according to a Bloomberg News report, should end up in foreclosure. The 1.25 million square foot building is to be sold in an open outcry auction on Tuesday. Or perhaps to BentleyForbes, which bought the property for $436 million from Bank of America in 2006. The tower was appraised at $202 million in March, according to the Bloomberg report.What may also be seen as fitting is that Bank of America is not be the biggest loser in this story. That misfortune may go to the city of Atlanta, which was booming just a few years ago and is now one of the cities hardest hit by the crisis. A big reason the tower is worth so much less is the diminishing fortunes of Bank of America. The bank -- which had occupied 30% of the building -- will now use just 15% of it and starve the landlord of needed tenants. To add insult to injury, the bank will pay half as much rent per square foot as it had previously, according to the report, which cites a December report from Fitch Ratings.

Bank of America Plaza sells for $235M — Atlanta's tallest skyscraper was foreclosed on and taken back by its lender on Tuesday. The 1,023-foot Bank of America Plaza was auctioned on the steps of the Fulton County Courthouse and purchased by its own lender for $235 million. Commercial real estate investment firm Bentley Forbes bought the high-rise located 600 Peachtree Street at the height of the real estate boom for an Atlanta-record $436 million in 2006. The building went up for auction after the Los Angeles-based firm missed mortgage payments. Emporis, a German company that maintains an extensive database of buildings around the world, said the 55-story skyscraper is the tallest building in the South, and the tallest building in any state capital in the U.S. The bond holders are expected to put the building back on the market. 

Admit It: Countrywide Is Bankrupt - After Brian Moynihan became CEO at the start of 2010, B of A's stock lost more than half its value. Meanwhile, the leading bank stock index, KBW, scarcely went down at all. And B of A was recently selling for about 1/3 of book, a remarkably low valuation. Evidently enormous further losses are expected. Why? The most obvious reason is Countrywide. B of A's stock was worth $75 billion recently. Under Moynihan’s leadership, it has agreed to pay out at least $25 billion for Countrywide liabilities — plus incurring many billions in continuing losses on Countrywide mortgages. There could be an additional $25 billion, or much more, to come. The obvious solution when Moynihan took over at the start of 2010 was to put Countrywide into bankruptcy. Bankruptcy still can reduce future losses but won't recover what Moynihan paid out. It will be legally and practically harder to excise Countrywide from B of A than it would have been in 2010, but no one says it's impossible. Moynihan rejected bankruptcy from the outset. In fact, he testified shortly after getting the job: "At the end of the day we will pay for the things that Countrywide did." Why did he say that? Fatalism? Thoughtlessness? Twisted moral sensitivity? 

Fannie Ignored 2006 Warnings About Widespread Mortgage Abuses (Updated) - Yves Smith - Gretchen Morgenson reports on an ugly bit of mortgage market history: that Fannie Mae was told in 2006 to address the derelict behavior of its servicers and foreclosure mills yet chose to do pretty much nothing about it. Morgenson tells the story of one Nye Lavalle, a Florida businessman who stumbled into the mortgage mess by accident. He sought to pay off a mortgage on a house he owned, and discovered that the payoff amount was inflated by $18,000 due to bogus late charges and force placed insurance. He refused to pay and the bank would not reverse the charges. The bank added more fees to the loan as Lavalle entered into a protracted court battle, which he ultimately lost.  Morgenson does not say exactly when Lavalle lost his fight or started his mission of investigating bad foreclosure and servicing practices, but by 1996 (!) he had already found evidence of the sort of chicanery that has been revealed as common, if not endemic as of 2004: apparent forged signatures, across a range of servicers: Banc One, Bear Stearns, Countrywide Financial, Freddie Mac, JPMorgan, Washington Mutual. Most ignored him, a few brushed off his charges. In 2003, he had created a compendium of abuses at Freddie and tried getting the attention of management. It did, sort of. They hired an outside law firm to investigate, which issued a detailed report which despite taking a rather dismissive tone towards Lavalle in its early pages, corroborated many of this charges, and recommended that the GSE take some corrective measures and it was firm on some basic issues...

Freddie Mac Mortgage Predator | Alan Boyce on Inverse Floaters - Below is a note from Alan Boyce at Absalon regarding inverse floaters, a subject that goes to the heart of the debate over whether Fannie Mae and Freddie Mac are preventing millions of lower income home owners from refinancing.   You can see my 2011 post on the Boyce-Mayer-Hubbard proposal for streamlined mortgage refinancing here:  Not only is the large bank-GSE cartel preventing millions of Americans from refinancing, but these same cartel players are also thwarting Fed monetary policy and hurting all our economic prospects.   Housing is the primary conduit for Fed monetary policy.  As Laurie Goodman of Amherst Securities has said over and over, there is a cost to doing nothing. Last week when ProPublica reported that Fannie Mae was managing its portfolio using specific trades to further prey upon low income borrowers in precisely the way that Boyce has described for the past three years, the Friends of Freddie sprang into action.  We first wrote on this on the IRA web site in 2009 thanks to Boyce and others in the Berlin-DC-LA mortgage thread...  Rebuttals of the Freddie predator thesis came flying.  Even the good folks at American Banker were hornswoggled into believing that Freddie was innocent of predatory behavior in managing its portfolio.   But then FHFA head Ed DeMarco publicly responded:

Meet the Obscure Federal Regulator Who’s Not Helping Homeowners - Last week, ProPublica and NPR raised questions about a risky investment strategy [1] at Freddie Mac that would pay off if homeowners stayed trapped in expensive mortgages. It's just the latest example of how government-owned Freddie Mac and Fannie Mae have frustrated many [2] by not putting homeowners first. Fannie and Freddie are required to help homeowners while earning profits so they can pay back the taxpayers who bailed them out. Here is our guide to the little-known federal regulator, Edward DeMarco, ultimately in charge of the two companies. You may have never heard of him, but as The Washington Post put it, he's "the most powerful man in housing policy." [3]

Congressmen raise new questions about FHFA resistance to principal reduction - The heat is cranking up on the seat of Edward DeMarco, acting head of the Federal Housing Finance Agency and a holdover from the last administration who has been standing in the way of a meaningful response to the mortgage crisis. FHFA is conservator of FannieMae and FreddieMac, owners or guarantors of a large percentage of US home mortgages, and thus in a position to direct the mortgage giants to take steps that would save taxpayers money, provide relief to struggling underwater homeowners, and revive the US economy. Congressmen Elijah Cummings and James Tierney yesterday released a smoking letter to DeMarco explaining that his agency's own analysis shows that a principal reduction program could save taxpayers $28 billion. Even more revealing, they say a FannieMae whistleblower has disclosed that FHFA was poised to implement a pilot program along these lines just before the November 2010 election but then pulled back for political reasons. Things seem to be getting more interesting. Could we finally see some movement on this critical issue?

FHFA's Fake $100 Billion Number - The critical point made in the Democratic Congressmen's letter to FHFA is this:  Director DeMarco's widely reported claim that principal write-downs on Fannie and Freddie mortgages will cost taxpayers $100 billion is simply false.  There are two reasons the statement is a complete misrepresentation.  First, the $100 billion is simply the aggregate amount of underwater mortgage principal on all Fannie and Freddie loans, not just those at risk of foreclosure or where borrowers are seeking modifications.  Second, Fannie and Freddie will lose more than $100 billion on underwater loans in foreclosure sales, according to their own projections, if the loans aren't given principal write-downs. The relevant comparison is between the foreclosure losses on underwater and defaulted mortgages, on the one hand, and the net payouts from modified mortgages with principal reduction on the other hand; in other words, the dollar difference between doing the write-downs and not doing them.

Chief defends mortgage fraud task force - The Department of Justice has defended a new task force on mortgage-backed securities as an effort to be “nimble” in investigating potential misconduct tied to the financial crisis.  Lanny Breuer, chief of the DoJ’s criminal division, rejected criticism of the new body, which is an offshoot of a 2009 task force focused on financial fraud and was announced by Barack Obama, the president, last month.  He said the task force would improve inter-agency communication. It will be led by Mr Breuer, Tony West, his counterpart in the civil division of DoJ; Robert Khuzami, the head of enforcement at the Securities and Exchange Commission; and Eric Schneiderman, New York state’s attorney-general.  Mr Breuer said he had spent two days with Mr Schneiderman before setting up the task force and a day with the SEC. “We keep trying to figure out ways to be more nimble. Many of us are extraordinarily committed to holding people responsible.”  However, Neil Barofsky, the former special inspector-general of the troubled asset relief programme, said he was sceptical about the task force. In a debate at New York University law school, he questioned whether it was a political rebranding in an election year, or an acknowledgment of past investigative failures.

Lanny Breuer’s Theory of Chatting Accountability for CEOs - This whole video is worth watching. Eliot Spitzer, former US Attorney Mary Jo White, and Assistant Attorney General Lanny Breuer discuss financial crimes, with SIGTARP head Neil Barofsky moderating. I was fairly troubled, in general, of the hesitations White and Breuer expressed over actually prosecuting financial crime. But I found the passage just after 46:00, where Lanny Breuer argues you don’t need prosecutions for deterrence among CEOs, to be stunning.  I don’t think we should completely discount the deterrent effect when we investigate cases even if we don’t bring them. If a CEO or CFO of a major institution feels that he or she is subject to criminal liability, when we interview them or put them in the grand jury, they have lawyers and this is hanging over their head for years and years. He returns to a discussion of “going in and out” between corporate representation and DOJ after 52:00 and he avoids talking about robo-signing at 1:00. As you read that, think about what has happened with Lloyd Blankfein. He bullshitted Carl Levin’s investigatory committee back in April 2010. Levin released a report last year stating he had lied, and referred his investigation to DOJ. And Lloyd Blankfein, who almost two years ago didn’t take Congress sufficiently seriously to tell the truth, is still running around free profiting off of European countries’ debts.

K&L Gates Launches Financial Fraud Enforcement Task ForceFollowing the recent introduction of the Residential Mortgage-Backed Securities (RMBS) Working Group as the latest strike in the Obama Administration’s enforcement response to the financial crisis, global law firm K&L Gates LLP has created a new cross-practice task force to assist clients in addressing questions and allegations relating to this joint federal and state initiative. Drawing on lawyers from the firm’s securities enforcement, white collar, litigation, financial services, internal investigation, and insurance coverage practice areas, as well as K&L Gates’ deep experience in the substantive mortgage financing issues on which the RMBS Working Group is focused, the Financial Fraud Enforcement Task Force formulates coordinated defense strategies to address allegations of RMBS fraud, mortgage fraud, securities fraud, and other types of financial fraud or discrimination alleged by the government. With a core group of more than 50 lawyers from more than a dozen of the firm’s U.S. offices, the task force serves as yet another powerful example of K&L Gates’ leading global government solutions capabilities. “Now that federal and state governments are coordinating their enforcement activities among various disciplines, it is essential for the industry to respond in kind,”

Will The Attorneys General Sell Out Pension Funds? - A shocking aspect of the proposed foreclosure fraud settlement among Bailed-Out Banks, the state attorneys general, and the Feds has rightly gotten a lot of attention, namely the Bailed-Out Banks’ ability to use other people’s money to pay their “penalty.” I confess, when I first heard about it, I figured it was a testament to the federal government’s craven capitulation to the Bailed Out Banks. (Let’s call them the B.O.B.s, rhymes with S.O.Bs.) But now I know it’s much worse than that, thanks to excellent reporting by David Dayen. The federal government really wants the B.O.Bs to use pension fund money to pay their “penalty.” Now, readers know I’m not exactly a Pollyanna, but I feel like one now. See, I thought our federal government understood that the right way to penalize someone with a fine was to actually make them pay the bill. I thought the feds realized the best way to punish the banks was to have them cough up cash into a BP spill-type fund, and have 50 special masters (one per state) use it to pay down mortgages, thereby punishing banks and helping homeowners. I just figured the Feds had rushed things so much, doing essentially no investigation, that they didn’t have the goods to leverage a better deal. But no. The Feds see the banks’ ability to spend firefighters’, teachers’ and cops’ money as a design feature, not a flaw.

Schneiderman MERS Suit and HUD’s Donovan Remarks Confirm That Mortgage “Settlement” is a Stealth Bank Bailout - 02/05/2012 - Yves Smith - In case you had any doubts about what the mortgage settlement was really about and why banks that were so keenly opposed to it are now willing to go ahead, the news of the last two days should settle any doubts.  As we had indicated earlier, one of the many leaks about the settlement showed that there had been a major shift its parameters. Of the $25 billion that has been bandied about as a settlement total for the biggest banks, comparatively little (less than $5 billion) is in cash. The rest comes in the form of credits for principal modifications of mortgages.  Originally, that was originally to come only from mortgages held by banks, meaning they would bear the costs. The fact that this meant that whether a homeowner might benefit would be random (were you one of the lucky ones whose mortgage had not been securitized?) was apparently used as an excuse to morph the deal into a huge win for them: allowing the banks to get credit for modifying mortgages that they don’t own. The first rule of finance (well, maybe second, “fees are not negotiable” might be number one) is always use other people’s money before your own. So giving the banks permission to modify loans they don’t own guarantees that that is where the overwhelming majority of mortgage modifications will take place, ex those the banks would have done anyhow on their own loans. And the design of the program, that securitized loans will be given only half the credit towards the total, versus 100% for loans the banks own, merely assures that even more damage will be done to investors to pay for the servicers’ misdeeds.  Let me stress: this is a huge bailout for the banks. The settlement amounts to a transfer from retirement accounts (pension funds, 401 (k)s) and insurers to the banks. And without this subsidy, the biggest banks would be in serious trouble

More on the Role of Second Liens and the Mortgage Settlement as Stealth Bank Bailout - Yves Smith - Re the post over the weekend entitled, “Schneiderman MERS Suit and HUD’s Donovan Remarks Confirm That Mortgage “Settlement” is a Stealth Bank Bailout,” since it provides important background and context for this piece, which clarifies some issues I skipped over.  To give a brief recap of the post: both a small group discussion with Shaun Donovan (reported by Dave Dayen of Firedoglake and separately by Shahien Nasirpour of the Financial Times) and the Schneiderman MERS lawsuit on Friday confirm our previously-stated hypothesis that the settlement is really a transfer from mortgage investors to banks. That is why the banks remain willing to participate as the release has been whittled down to appease the formerly dissenting attorneys general (remember, the old reason for the banks to go along was that it was a cash for release deal: the banks were willing to pay hard money to get a significant waiver of liability).  The reason this settlement amounts to a transfer is the banks will be given credit towards the total reported value of the settlement for modifying mortgages that they do not own, meaning that economic loss will be borne by investors. Servicers have an obvious incentive to shift losses onto other parties whenever possible, and so the only principal mods they are likely to do of loans they own are one they would have done anyhow.  In addition, default rates are higher among borrowers with second liens, and second liens are almost entirely held on bank balance sheets. Which banks? Oh, the ones that happen to be the four biggest servicers: Bank of America, Citigroup, JP Morgan, and Wells. And those second lien holdings are collectively in the hundreds of billions. Were they written down to the degree that some mortgage investors argue is warranted, it would reveal that these banks were seriously undercapitalized.

California’s Solo Mortgage Probe Complicated by 2008 Deal- California Attorney General Kamala Harris objects to giving banks broad releases of liability for predatory lending. At the same time, she may be locked into her predecessor’s 2008 settlement with the largest lender in the state during the mortgage boom that does exactly that. Facing a Feb. 6 deadline to join a proposed multistate agreement over foreclosure practices said to be worth as much as $25 billion if California joins, Harris has said she won’t sign onto a deal blocking her from investigating whether the five largest U.S. mortgage servicers misled homeowners about the terms of their loans, among other issues. One of the five lenders involved in the talks, Bank of America Corp., reached an agreement in 2008 with Harris’s predecessor, Jerry Brown, who is now governor, that bars its Countrywide Financial unit’s mortgage holders from pursuing claims of the type that Harris wants to investigate. Based on the “broad release” contained in the agreement, “it is unclear on what grounds Kamala Harris would pursue lending violations by Countrywide,”

Deal Is Closer for a U.S. Plan on Mortgage Relief - With a deadline looming on Monday for state officials to sign onto a landmark multibillion-dollar settlement to address foreclosure abuses, the Obama administration is close to winning support from crucial states that would significantly expand the breadth of the deal. The biggest remaining holdout, California, has returned to the negotiating table after a four-month absence, a change of heart that could increase the pot for mortgage relief nationwide to $25 billion from $19 billion.  Another important potential backer, Attorney General Eric T. Schneiderman of New York, has also signaled that he sees progress on provisions that prevented him from supporting it in the past.  The potential support from California and New York comes in exchange for tightening provisions of the settlement to preserve the right to investigate past misdeeds by banks, and stepping up oversight to ensure that the financial institutions live up to the deal and distribute the money to the hardest-hit homeowners. The settlement would require banks to provide billions of dollars in aid to homeowners who have lost their homes to foreclosure or who are still at risk, after years of failed attempts by the White House and other government officials to alter the behavior of the biggest banks.

Quelle Surprise! New York and California Attorneys General Look Ready to Sign on to Mortgage Settlement - Yves Smith - The New York Times reports that two attorneys general of states regarded as important for the Obama Administration to declare the mortgage settlement a success have rejoined the negotiations, which says they are likely to sign the pact.  Kamala Harris, the California AG, was widely seen as “political” and therefore was not seen as a solid holdout. I remain disappointed by the conduct of our attorney general Eric Schneiderman, who is also now participating in the talks. His decision to join a Federal task force undermined the opposition to the settlement and looks to have cleared the way for the Administration to craft a win on this deal (note it is still possible it will not get done, but the odds were low as of last week and appear to be sinking further).  Assuming a deal is inked, Schneiderman and new partners in the Administration will no doubt contend that his involvement in the negotiations resulted in an improvement in terms for homeowners and states. I’m also told that he sincerely believes he can get a serious investigation underway and take advantage of Federal statutes with longer statutes of limitations than most state level ones.  Schneiderman may think he can beat the Administration at its own game, and if he can, more power to him, but I would not bet on him coming out on top.

Seeing Through Team Obama’s False Talking Points On the Latest Bank Giveaway - Tomorrow a still secret deal will be announced and signed by the Bailed-Out Banks (B.O.B.s), our Federal Government, and an unknown but probably tragically high number of states attorneys general. You’ll hear this deal called a “Robo-signing settlement”, though it’s impossible to see how it can end the fraudulent manufacture of evidence by creditors in foreclosure cases. You might also hear it called a “mortgage servicer settlement”, because the B.O.B.’s conduct while wearing their mortgage servicing hats is supposedly the focus of the deal. But here’s how it should be known: The United States’s Latest Lavish/Slavish Gift to the Bailed-Out Banks Settlement. To help you see through Team Obama’s talking points to the reality of the deal, I’m going to post a few translations. See, any chance we have of achieving good housing policy hinges on you and your neighbors and friends not falling for their snow job, and your letting Team Obama know you’re not buying what they’re selling. This first translation focuses on the person who speaks for the United States on housing policy:U.S. Housing and Urban Development Secretary Shaun Donovan. All we need to know about Housing Secretary Donovan we can learn from Shahien Nasiripour’s coverage for the Financial Times. Here’s the first point to fixate on: U.S. Housing Secretary Donovan takes pride in allowing the Bailed-Out Banks pay their “penalty” with other people’s money.

No, the Latest Bailed-Out Bank Giveaway Won’t Help Housing - Today a still secret deal will be announced and signed by the Bailed-Out Banks (B.O.B.s), our Federal Government, and an unknown but probably tragically high number of states attorneys general. You’ll hear this deal called a “Robo-signing settlement”, though it’s impossible to see how it can end the fraudulent manufacture of evidence by creditors in foreclosure cases. You might also hear it called a “mortgage servicer settlement”, because the B.O.B.’s conduct while wearing their mortgage servicing hats is supposedly the focus of the deal. But here’s how it should be known: The United States’s Latest Lavish/Slavish Gift to the Bailed-Out Banks Settlement.To help you see through Team Obama’s talking points to the reality of the deal, I’m going to post a few translations. This one’s the second; more will be in a couple of days. See, any chance we have of achieving good housing policy hinges on you and your neighbors and friends not falling for their snow job, and your letting Team Obama know you’re not buying what they’re selling. This post focuses on just one outlandish claim, made in this piece by Robert Kuttner of the American Prospect, which appeared on the Huffington Post.

Mortgage Accord Has More Than 40 States Signed On, Iowa Says - California and New York’s attorneys general haven’t signed on to a proposed settlement with five banks over foreclosure practices that has won the support of more than 40 states. California’s Kamala Harris and New York’s Eric Schneiderman, who have been some of the most outspoken in pushing for changes to the deal, are among those who hadn’t joined the agreement as of yesterday’s deadline for states to decide. More than 40 states signed on to the accord, according to Iowa Attorney General Tom Miller, who is helping to lead talks with the banks. “Adding more numbers probably improves the political dimension of the settlement from the standpoint of the attorneys general,” “If you can say there were only a handful of diehards that didn’t sign on, that gives you some political protection.” All 50 states announced almost 16 months ago they were investigating bank foreclosure practices following disclosures that faulty documents were being used to seize homes. Officials from a group of state attorneys general offices and federal agencies, including the Justice Department, have since negotiated terms of a proposed settlement with the five banks, the nation’s largest mortgage servicers, that is said to be worth as much as $25 billion. Miller said federal and state officials continue to discuss matters with the banks involved in the talks.

How To Score A Foreclosure Fraud Settlement - Once again we're hearing that a foreclosure fraud deal is about to be announced between major banks, the US government, and most or all of the states. How will we know if it's a good deal for the American people? After all, this is an issue with a lot of moving parts. It includes all of the states and multiple agencies within the Federal government, and involves a multitude of allegations involving several different kinds of crime that come under different jurisdictions. Even the statutes of limitations are a moving target.  That doesn't mean we don't know enough to judge the deal, if and when it's announced. There are well-established facts to guide us, and the principles involved are clear.  So let's take a second to perform a moral and legal reset and put this issue in the right context. Legally, banks stand accused of securities fraud, investor fraud, racial discrimination, tax evasion, defrauding borrowers, and perjury (in the filing of false "robo-signed" documents). Each of the major banks has already settled charges with the SEC involving these crimes and more. Banks committed a number of moral offenses, too, some of which may also have been illegal. Here's a quick overview:

States With Highest Foreclosure Rates Among Bank Deal Holdouts - California, New York, Nevada, Florida and Massachusetts are among states that haven’t signed a settlement with banks over foreclosure abuses, according to state officials and two people familiar with the talks.  The holdouts include some with the highest rates of foreclosures. More than 6 percent of Nevada housing units had at least one foreclosure filing in 2011, the nation’s highest rate, according to RealtyTrac. California was third-highest with more than 3 percent, said the firm, which tracks foreclosures.  California Attorney General Kamala Harris and New York Attorney General Eric Schneiderman, who have been among the most outspoken in pushing for changes to the accord, were among those who hadn’t joined as of yesterday’s deadline. More than 40 states signed on, said Iowa Attorney General Tom Miller, who is helping to lead talks with the banks.  “Adding more numbers probably improves the political dimension of the settlement from the standpoint of the attorneys general,”  “If you can say there were only a handful of diehards that didn’t sign on, that gives you some political protection.”

Is the Mortgage Settlement Deal Starting to Unravel? (Updated) -- Yves Smith - The Administration had thrown its weight behind getting the mortgage settlement deal done shortly after the State of the Union address. Eric Schneiderman joining a Federal task force that seemed unlikely to accomplish much, given its staffing and the history of Federal investigations, seemed to secure it getting done, as Schneiderman, the de facto leader of the opposition, moved first into a neutral stance and then rejoined the talks over the weekend. The deadline had been first set as February 6, then moved to the 3rd, then late last week moved back to its original date. There was no announcement of a pact today, which in and of itself would not necessarily mean that things might be going pear-shaped. After all, the participants could be wrangling over fine points. A fresh Reuters report indicates that the Administration messaging and cheerleading (witness the Shaun Donovan interview reported by Dave Dayen and Shahien Nasiripour) may have been ahead of events. In addition, as I indicated, the Schneiderman MERS suit exposed, as I indicated, that the widely reported exclusion of MERS from the waiver in the deal allows for what amounts to robosigning suits to be filed as MERS suits. Reuters indicates that the banks aren’t happy with that. Schneiderman’s suit may have exposed a difference in views as to what certain language in the deal meant. If so, the two sides may be further apart than the cheery “We’re about to have a deal!” PR indicated.

New York AG Sues Three Largest Lenders Over MERS - New York Attorney General Eric Schneiderman filed a lawsuit Friday against the nation’s top three mortgage lenders charging that their use of the electronic registry system MERS has resulted in deceptive and fraudulent foreclosure filings throughout New York’s state and federal courts.  The lawsuit alleges that employees of Bank of America, JPMorgan Chase, and Wells Fargo, acting as “MERS certifying officers,” submitted court documents containing false and misleading information that made it appear they had the authority to foreclose when they “may not have.”  The suit also names Mortgage Electronic Registration Systems, Inc. (MERS) and its parent company Merscorp, Inc. as defendants.  Schneiderman’s complaint alleges MERS has eliminated homeowners’ and the public’s ability to track property transfers through the traditional public records system. He says instead, this information is now stored only in a private database – which Schneiderman argues is plagued with inaccuracies and errors, and is controlled solely by MERS and its members. “The banks created the MERS system as an end-run around the property recording system, to facilitate the rapid securitization and sale of mortgages,” Schneiderman said in a press statement. “Once the mortgages went sour, these same banks brought foreclosure proceedings en masse based on deceptive and fraudulent court submissions.”

Mortgage Settlement Wrangling Continues, Banks Balking at Schneiderman MERS Suit -Yves Smith - The Administration, through the nominal head of the bank settlement negotiations, Iowa attorney general Tom Miller, has moved its final deadline for a deal yet again, this time to Thursday.  New York AG Eric Schneiderman had scheduled a conference call to the media on the settlement for 6 PM, then postponed it indefinitely 10 minutes before the scheduled time. One can presume that whatever he had intended to say was rendered moot by events…but what events? The only thing one can infer is that he is presumably still negotiating. Per Reuters: Last Friday New York filed a lawsuit that conflicted with part of the settlement. His office has been in discussions with bank lawyers to move forward with both the lawsuit and the settlement, according to two other sources familiar with the matter. According to another person familiar with Schneiderman’s thinking, the tenuous nature of the talks caused the postponement. Schneiderman still is a holdout, that person said. So, reading between the lines, it looks as if Schneiderman saw his MERS lawsuit as not inconsistent with the settlement (remember, Delaware and Massachusetts both have filed MERS suits, and the Massachusetts suit targets the five biggest servicers along with MERS) and the banks begged to differ. This is consistent with the report by Loren Berlin in Huffington Post: Bank executives argue that New York attorney general Eric Schneiderman is using the lawsuit to go after claims already covered under the settlement, said the source. But perhaps the biggest news was that Florida is now among the states not yet signed up. This is pretty surprising, given that Republican AG Pam Bondi had the nerve to hector California’s Kamala Harris last week for not joining the settlement. Although some reports indicated that Florida had gotten a sweetened deal, the HuffPo story says she wants a side deal, which is what California would get.

$25 billion mortgage settlement close to being finalized - (Reuters) - California and New York, two big holdout states in a $25 billion mortgage settlement, are expected to join the deal, smoothing the way for an announcement on Thursday, according to a person familiar with the matter. Florida, with its large distressed housing market, was also close to joining the settlement that resolves civil government lawsuits over faulty foreclosures and servicing misconduct by top U.S. banks, a separate person familiar with the deal said on Wednesday. The announcement will cap more than a year of chaotic negotiations among state and federal officials, and the banks, who have been accused of using robosigners and unlawful documentation to deal with a flood of foreclosures. The Obama administration has estimated that up to 1 million homeowners could benefit from the deal through mortgage writedowns and other forms of relief. The settlement has been billed as complementing other government programs designed to boost the housing market that has been a drag on the economic recovery, a key issue for President Barack Obama as he fights for re-election in November. The settlement has been estimated at up to $25 billion in value, but federal officials have said the actual relief to homeowners could be closer to $40 billion because of the way the deal is scored. The core group of banks involved in settlement talks are Bank of America Corp , Wells Fargo & Co , JPMorgan Chase & Co , Citigroup Inc and Ally Financial Inc.

Banks Near $25 Billion Pact on Foreclosure Probe - Government officials are on the verge of an agreement worth as much as $26 billion with five major banks, capping a yearlong push to settle federal and state probes of alleged foreclosure abuses by lenders. The agreement covers five banks: Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co., and Wells Fargo & Co. Together, the five handle payments on 55% of all outstanding home loans, or about 27 million mortgages, according to Inside Mortgage Finance. Federal and state officials were planning to announce the accord Thursday morning, but the timing could be pushed back to Friday, as officials were still ironing out details in a series of conference calls late Wednesday. Among them: the precise wording of the agreement, its size and the number and identity of participating states. The Obama administration made a full-court press over the past four days to secure the support of key state attorneys general, including those from Florida, California and New York. Florida has signed on and all three are expected to be part of the announcement, people familiar with the situation said. Representatives of the banks declined to comment.The planned pact would involve about $5 billion in cash penalties, payable to borrowers, states and the federal government. That includes $1.5 billion in cash payments to borrowers who went through foreclosure between September 2008 and December 2011. Borrowers could receive $1,500 to $2,000 each, with the actual amount paid depending on the number of borrowers filing a claim.

Mortgage Settlement Pretty Much a Done Deal as New York and California Join - Yves Smith - News stories in American Banker, the Wall Street Journal, and now Huffington Post all indicate that New York and California will join the so-called mortgage settlement deal. From Loren Berlin at Huffington Post: “It’s hard to see any state staying out of the deal if California is in,” said the source…. “Even if the final settlement number is $25 billion, it pales in comparison to the scope of the problem,” said Margery Golant, a Florida-based attorney who represents homeowners and formerly served as assistant general counsel at subprime mortgage giant Ocwen Financial. “If you do the math, that’s a few hundred million per state. That’s not enough to change anything.”

FINALLY: Banks And States Set To Announce $25 Billion Mortgage Settlement On Thursday: Well, this mini-chapter in the ongoing effort to get banks to pay for faulty mortgage processing is over. According to NYT, banks and various state AGs (likely including California and New York) will announce tomorrow that major banks will pay a $25 billion settlement, with money going in various ways to help homeowners. Still, the agreement is the broadest effort yet to help borrowers owing more than their houses are worth, with roughly one million expected to have their mortgage debt reduced by lenders. In addition, 300,000 homeowners are expected to be able to refinance their homes at lower rates, while another 750,000 people who lost their homes to foreclosure from September 2008 to the end of 2011 will receive checks for about $2,000. The final details of the pact were still being negotiated Thursday night, including how many states would participate and when the formal announcement would be made in Washington.

49-State Foreclosure Fraud Settlement Will Be Finalized Thursday - Forty-nine states, every one but Oklahoma, as well as federal regulators will participate in a foreclosure fraud settlement that will release the five biggest banks (Wells Fargo, Citi, Ally/GMAC, JPMorgan Chase and Bank of America) and their mortgage servicing units from liability for robo-signing and other forms of servicer abuse, in exchange for $25 billion in funding for legal aid, refinancing, short sales, restitution for wrongful foreclosures and principal reduction for underwater borrowers.  This settlement arises from multiple abuses found in the servicing of loans and the foreclosure process over the past several years. At the height of the housing bubble, banks sliced and diced mortgages and traded them with little regard for the rules following land recording or securitization to such a sloppy extent that they lost track of the true owner on potentially millions of homes. To cover up for this massive failure, banks and their servicing units have been found to have routinely forged, back-dated and fabricated documents at county recorder offices and state courts across the country. Furthermore, they employed “robo-signers,” who signed hundreds of thousands (if not millions) of documents and affidavits without any knowledge of the underlying mortgages. In addition, investigations uncovered massive servicing abuses, including illegal fees charged to borrowers, putting borrowers into foreclosure at the same time as they were working out loan modifications, failing to honor previous settlements where promises were made on modifications, and countless other errors that maximized servicer profits and gouged homeowners. There are also cases of wrongful foreclosures where homeowners have been turned out of their homes without just cause, and servicer-driven foreclosures, where servicers illegally added late fees and applied payments inaccurately, pushing the homeowner into foreclosure. This is but a smattering of the examples of foreclosure fraud and servicer abuse found in a series of interlocking investigations, court depositions, reviews of documents in registers of deeds offices, and homeowner testimonials.

Federal Government and State Attorneys General Reach $25 Billion Agreement with Five Largest Mortgage Servicers to Address Mortgage Loan Servicing and Foreclosure Abuses - press release from the Dept of Justice - U.S. Attorney General Eric Holder, Department of Housing and Urban Development (HUD) Secretary Shaun Donovan, Iowa Attorney General Tom Miller and Colorado Attorney General John W. Suthers announced today that the federal government and 49 state attorneys general have reached a landmark $25 billion agreement with the nation’s five largest mortgage servicers to address mortgage loan servicing and foreclosure abuses.  The agreement provides substantial financial relief to homeowners and establishes significant new homeowner protections for the future.

About the Settlement | NationalMortgageSettlement

The positive mortgage settlement - The long-awaited mortgage settlement is here! And it looks like a good one. The biggest worry was that the attorneys general would give away the shop in return for big headlines. While in fact they seem to have been quite successful at limiting the immunity that the five banks (Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial) are going to receive: In the agreement’s expected final form, the releases are mostly limited to the foreclosure process, like the eviction of homeowners after only a cursory examination of documents, a practice known as robo-signing. The prosecutors and regulators still have the right to investigate other elements that contributed to the housing bubble, like the assembly of risky mortgages into securities that were sold to investors and later soured, as well as insurance and tax fraud. Officials will also be able to pursue any allegations of criminal wrongdoing. In addition, a lawsuit Mr. Schneiderman filed Friday against MERS, an electronic mortgage registry responsible for much of the robo-signing that has marred the foreclosure process nationwide, and three banks, Bank of America, JPMorgan Chase and Wells Fargo, will also go forward. If you’re a bank shareholder breathing a sigh of relief, then, don’t. The only thing you’re protected against, now, is lawsuits over robosigning. Other big-money lawsuits over securitization can and almost certainly will still be brought — which means that the big banks all still have significant litigation risk hanging over their heads.

Mortgage Plan Gives Homeowners Bulk of the Benefits - After months of painstaking talks, government authorities and five of the nation’s biggest banks have agreed to a $26 billion settlement that could provide relief to nearly two million current and former American homeowners harmed by the bursting of the housing bubble, state and federal officials said in Washington on Thursday. It is part of a broad national settlement aimed at halting the housing market’s downward slide and holding the banks accountable for foreclosure1 abuses.  Under the plan2, federal officials said, about $5 billion would be cash payments to states and federal authorities, $17 billion would be earmarked for homeowner relief, roughly $3 billion would go for refinancing and a final $1 billion would be paid to the Federal Housing Administration.   If nine other major mortgage servicers join the pact, a possibility that is now under discussion with the government, the total package could rise to $30 billion.  Because of a complicated formula being used to distribute the money, federal officials say the ultimate benefits provided to homeowners could equal a larger sum — $45 billion in the event all 14 major servicers participate. The aid is to be distributed over three years, but there are incentives for banks to provide the money in the next 12 months.

Is The Foreclosure Settlement A Shadow Bailout For Broke California - Just over a week ago we highlighted the desperate plight of cash-strapped California. With a $3.3bn short-term 'hole', they were looking for cash-management solutions under every rock and hard place they could find. Today we hear that California joins the Obama bank foreclosure settlement enabling $18bn of bank-funded cash (implicitly via Federal Reserve/Government coffers) can flow to the left coast. Los Angeles alone will receive $4bn which while eventually wending its way down to the consumer (to be spent and implicitly spurring further economic activity or perhaps more likely to pay down other debt in this balance sheet recessionary environment), as Bloomberg asks, "Why should a taxpayer in Houston or Wichita bail out irresponsible California homeowners, banks and the state’s public employees’ retirement fund?" To add to California's 'aid', BofA has become the first bank to sign up for the 'Keep your Home' program where Federal dollars are given to banks to encourage them to reduce mortgage balances on struggling (over-levered and perhaps once greedy) California homeowners. Certainly it is a happy coincidence that perhaps a short-term cash crisis could be band-aided in the Golden State by this well-timed joining of California to the settlement.

Dick Bove Goes Ballistic Over The 'Mortgage Deal From Hell' - Rochdale's Dick Bove went on a tirade this morning on CNBC's "Squawk on the Street" claiming the joint state-federal mortgage settlement, which he dubbed in a note earlier as "the mortgage deal from hell," unfairly impacts those homeowners who pay their bills.  "If you're going to do something which is going to reduce the value of existing homes where people are making their payments, every American should stop making his payments on his mortgages, send a letter to the Attorney General in his state and say 'I qualify to have my principal reduced because I'm not going to make any more payments on my house,'" Bove said.   The banking analyst also said the agreement, which is expected to be around $26 billion and could increase if more banks join, will hurt the U.S. economy rather than stimulate it. "These people were not making payments on these houses in the first place and, therefore, they're not getting the new flow of cash ... they're not getting anything other than the government has decided to pay everyone who cheated on their mortgages 2,000 bucks, right.  The second thing is, you are going to be reducing the prices of a lot of houses in the United States where payments are being made because the house next door is seeing the principal balance on the mortgage taken down," he explained.

Housing deal set to boost US economy - First, the settlement transfers tens of billions of dollars from banks to borrowers, and that will have a direct, although small, effect on consumption. Even if the entire sum were spent at shops – which will not happen – $40bn is only 0.25 per cent of gross domestic product. At the same time, the money has to come from somewhere: mostly from the pockets of bank investors and savers. The net effect on consumption should be positive, because hard-up borrowers are more likely to spend, but it will be minimal. Second, the settlement will have an effect on bank lending. On the one hand, by draining the coffers of large banks it may reduce their ability to make new loans, although the direct cash value of the deal amounts to only 2 per cent of tier one capital in the US banking system and the banks have had plenty of time to prepare for it. That leaves a third channel: the housing market, which is much the most important. One part of the settlement amount is meant to cut the amount owed by borrowers with houses worth less than the value of their mortgages by as much as $32bn. In some cases, that will allow borrowers to refinance their mortgages with lower payments, and stay in their homes. Whenever that happens, it is good news for the housing market and the economy, because it will reduce the number of forced sales and personal bankruptcies.

$26B Mortgage Settlement Good for Banks, Not So Good for Homeowners -  After months of wrangling, the long-awaited foreclosure settlement between the government and the banks appears to be at hand. The settlement is being hailed as the biggest multi-state settlement since the 1998 tobacco agreement. But as Henry and I note in the accompanying video, the settlement is too small to really help the housing market, or even do much for individual victims of fraud and abuse. The deal may, in fact, hurt housing by sending a message to people who've stayed current on their mortgages that irresponsible behavior is what gets rewarded in America. That, presumably, is not the intention of policymakers but the "moral hazard" fallout from the settlement. More Americans may "walk away" from uneconomic loans, which will put additional pressure on local housing markets. Furthermore, several experts note that for all the rhetoric about punishing corporate crimes and helping victims of abuse, the banks have once again gotten away with a slap on the wrist and may end up benefiting most of all from the settlement. According to The Wall Street Journal, the settlement will be broken down as follows:

    • $5 billion in cash payments, including $1.5 billion to borrowers who were wrongly or illegally foreclosed on between September 2008 and December 2011. Borrowers could receive up to $2,000, depending on the number filing claims.
    • $20 billion in "credits" the banks will receive for principal write-downs and other aid to homeowners at risk of default, up to $20,000 per. This tally includes $3 billion for refinancing of mortgages currently under water.

The Mortgage Deal with the Devil - The long-awaited mortgage deal between the federal government, 49 state attorneys general, and five big banks that was announced Thursday is pretty thin gruel, but it could have been a lot worse. Under the deal, the banks will provide relief to homeowners in a deal variously described as ranging from $25 billion to more than $40 billion. But a look at the fine print suggests that only about $5 billion cash will actually change hands. Some $1.5 billion will go directly to homeowners who went through foreclosure, with each receiving about $2,000. Other cash will go to states to help distressed homeowners. The rest of the money will be granted in the form of “credits” to banks that refinance loans or reduce principal amounts of underwater mortgages. But this is, in fact, funny money. Much of this write-down has already been taken by the banks, which know that an underwater mortgage is worth far less than its nominal value. In exchange for agreeing to refinance loans, the banks will get protection from penalties narrowly related to the “robo-signing” scandal, in which an assembly line of clerks certified that mortgages had been properly recorded and transferred when in fact they were not.

Schneiderman: Settlement deal a `small’ but `significant’ step towards real accountability - Since details of the big foreclosure settlement began leaking out, liberals have been watching to see how New York Attorney General Eric Schneiderman would react, as a sign of whether the deal is a giveaway to big banks — or whether it contains the promise of real accountability. In an interview with me just now, Schneiderman — who has gained a national liberal profile for his insistence on true accountability for financial institutions — conceded the settment announced today was “small” in financial terms, given the struggles of underwater homeowners and people who lost their homes. But he insisted that time will show that today’s settlement was a win — that it secured a framework that will ultimately result in a true accounting of the role big banks played in sparking the economic meltdown. “This is a small step in an economy where we have $700 billion in negative equity, but it is a significant step,” Schneiderman said, in response to criticism that the $25 billion settlement was far too small given the injuries sustained.  “This is a down payment towards the overall goal of accountability, meaningful relief for those injured by the meltdown, and getting the facts out so we can ensure that this never happens again.”

The Servicing Settlement: Banks 1, Public 0 - What are we to make of the servicing settlement announced today with much hoopla?  The short answer is not much.  The settlement is the large consumer fraud settlement ever, but it accomplishes remarkably little in terms of either alleviating the foreclosure crisis of holding to account those responsible for the housing bubble and subsequent foreclosure abuses.  As my Texas relatives say, it's “All sizzle, no steak.”  Instead, I think the settlement needs be seen as the conclusion to round one of an on-going struggle for accountability and reparations for the enormous damage the housing bubble did to the United States.  Whether we will ultimately see meaningful accountability and reparations in the end is very much in question.  Round two, featuring the Residential Mortgage-Backed Securities Fraud taskforce, could well be stillborn; the taskforce combines more motivated and more capable agencies, but it isn't clear of the motivated can leverage the more capable or will be bogged down by them. But as for this settlement, if this is all that we get, it’s a big nothing.

State AGs Cave to Banksters - L. Randall Wray - Yves Smith at Naked Capitalism has long been skeptical of the negotiations by the State Attorneys General and the banksters over the foreclosure frauds (see here). And while I had held out some hope that California and New York would either refuse to join, or would insist on good terms, today’s announcement of the settlement makes it clear that the banksters had their way. I expect that the US Attorney General, Eric Holder and HUD Secretary Shaun Donovan played important roles in making sure the bank frauds would only get little slaps on the wrist. Some of the details are not clear, but apparently the 750,000 people who had their homes stolen from them will get a mere $2000 a piece in compensation. That is how this Administration values homeownership. Yep, a bankster can take your home and you might get two thousand bucks–and with that you can pay first and last month’s rent on a cheap, run-down apartment if you are willing to live in a low rent city. It also gives you some idea of the cost of buying out 49 states: $2.75 billion. Yep, that is all that the states get out of this settlement. They’ll look the other way and let you move in, completely destroy property records and proceed to steal the homes of your citizens while destroying your economy and tax revenues–and for under 3 billion measly dollars you can buy off their chief prosecutors.

This is no bailout for Main Street America - In reality, a $25bn mortgage deal with banks is a drop in the ocean – given US homeowners' $700bn of negative equity. Big announcements of breakthrough legislative deals during election campaigns should be taken with huge grains of salt. Generally more rhetoric than reality, they sometimes contain real concessions made by politicians seeking votes. So it is with Thursday's Washington announcement of $25bn to help homeowners. Something significant is happening, but it lies below the surface of the headlines. Typically, modern governments intervene in two ways when – as has been true since 2007 – free-enterprise capitalist economies produce particularly bad versions of their recurring economic "downturns". One economic policy is aptly called "trickle down" economics. It involves throwing heaps of money at the top of the economic pyramid – to mammoth banks, insurance companies, and other corporations at or near economic collapse. Policy-makers hope that such help for these institutions will revive their activity and thereby trickle down – as credit and orders for medium-sized and small businesses, and then, finally, to jobs and maybe wage increases for the majority of workers.

Will Government Bank Mortgage Deal Help or Hinder Prosecutions? - This Real News Network segment was recorded before the deal was announced today, but the observations are still germane.

Questions and answers about what the foreclosure-abuse deal will and won't do - The mortgage settlement that government officials announced Thursday is intended to help victims of foreclosure abuses that followed the housing bust. Many companies that process foreclosures failed to verify documents. Some employees signed papers they hadn’t read. Or they used fake signatures to speed foreclosures — a step called “robo-signing.” As a result, some homes were seized improperly. Here’s a look at what the settlement will and won’t do for current and former homeowners:
Q: Who stands to benefit?
A: Most of the money would go to some homeowners who are “underwater.” That means they owe more on their loan than their home is worth. Many are struggling to make their payments and are at risk of foreclosure. Yet because they have no home equity, they’ve been unable to refinance into a lower-rate loan. For about 1 million underwater homeowners, their loan principal will be reduced by an average of $20,000. But more than 90 percent of underwater homeowners won’t be helped. Some, however, might be eligible to refinance at a rate of 5.25 percent

Foreclosure Deal to Spur U.S. Home Seizures - The $25 billion settlement with banks over foreclosure abuses may result in a wave of home seizures, inflicting short-term pain on delinquent U.S. borrowers while making a long-term housing recovery more likely.  Lenders slowed the pace of foreclosures as they negotiated with attorneys general in all 50 states for more than a year over allegations of faulty and fraudulent paperwork used to repossess homes. With yesterday’s agreement, banks are likely to resume property seizures.  “The best thing about the settlement, frankly, is that it will be done,” said Stan Humphries, chief economist for Seattle-based Zillow Inc. (Z), a provider of home-sales data. “The shadow of the settlement hung over the market for a year now.”  The backlog of foreclosures has trapped homeowners in properties they can no longer afford, depressed neighborhood prices by increasing the number of abandoned homes and led banks to tighten mortgage credit standards because of uncertainty about the cost of their potential obligations. Foreclosure starts fell 46 percent in December from October 2010, when the investigation into the so-called robo-signing of mortgage documentation began, according to Irvine, California-based RealtyTrac Inc.

Why the Foreclosure Deal May Not Be So Hot After All - Matt Taibbi - So the foreclosure settlement is through. A few weeks back, I was optimistic about it – I had been worried that it was going to contain broad liability waivers for all sorts of activities, and I was pleasantly surprised when I heard that its scope had essentially been narrowed to robosigning offenses.  However, now that the settlement is finalized, and I've had time to think about it and talk to people who know far more than I do about this, I'm feeling pretty queasy. It feels an awful lot like what happened here is the nation's criminal justice honchos collectively realized that a thorough investigation of the problem would require resources they simply do not have, or are reluctant to deploy, and decided to accept a superficially face-saving peace offer rather than fight it out. So they settled the case in a way that reads in headlines like it's a bite out of the banks, but in fact is barely even that. There will be little in the way of real compensation for stuggling homeowners, and there are serious issues in the area of the deal's enforceability. In fact, about the only part of the deal we can be absolutely sure will be honored in full is the liability waiver for the robosigning offenses. With the rest of it -- collecting on the settlement, enforcement of the decrees, all the stuff put in there to balance the deal in the consumer's direction -- there will be an uphill battle from this point forward to get the banks to comply. The banks meanwhile have no such uphill battle. They will get the full benefit of the deal (a release from costly litigation) from the moment the ink is dry.

The big banks win again - On Thursday, a group of well-connected and powerful men announced that the federal government and state attorneys general had agreed to a multibillion-dollar settlement of claims relating to falsified foreclosure documents. The image of former corporate lawyer-turned-Attorney General Eric Holder and Iowa official Tom Miller complimenting each other on their courage and bravery was a stark reminder of how little power foreclosure victims have in Washington. The terms of the settlement were still secret, but we saw hints of what is to come: The website set up to inform the public noted that homeowners may not know for up to three years whether they are eligible for help. Rather than settling anything, this agreement is simply a continuation of the policy framework of both the Bush and the Obama administrations. So what, exactly, is that framework? It is, as Damon Silvers of the Congressional Oversight Panel, which monitored the bailouts, once put it, to preserve the capital structures of the largest banks. “We can either have a rational resolution to the foreclosure crisis or we can preserve the capital structure of the banks,” said Silvers in October, 2010. “We can’t do both.” Writing down debt that cannot be paid back — the approach Franklin Roosevelt took — is off the table, as it would jeopardize the equity keeping those banks afloat.

Forged Documents Leave Title Problems Like Disease on Rotting Corpse (Wrongful Foreclosure Left Intact) - Neil Garfield at LivingLies tells us the specifics of the deal (with the five chosen banks guilty of making billions in wrongful foreclosures and paying pittance fines) . . .  Which doesn't benefit you, taxpayers, because as my buddy, Driftglass, has said over and over:There is a club. You are not in it." And never will be.

The Top Twelve Reasons Why You Should Hate the Mortgage Settlement -- Yves Smith - As readers may know by now, 49 of 50 states have agreed to join the so-called mortgage settlement, with Oklahoma the lone refusenik. Although the fine points are still being hammered out, various news outlets (New York Times, Financial Times, Wall Street Journal) have details, with Dave Dayen’s overview at Firedoglake the best thus far.  The various news services are touting this pact at the biggest multi-state settlement since the tobacco deal in 1998. While narrowly accurate, this deal is bush league by comparison even though the underlying abuses in both cases have had devastating consequences.  The tobacco agreement was pegged as being worth nearly $250 billion over the first 25 years. Adjust that for inflation, and the disparity is even bigger. That shows you the difference in outcomes between a case where the prosecutors have solid evidence backing their charges, versus one where everyone know a lot of bad stuff happened, but no one has come close to marshaling the evidence.  The mortgage settlement terms have not been released, but more of the details have been leaked:

1. The total for the top five servicers is now touted as $26 billion (annoyingly, the FT is calling it “nearly $40 billion”), but of that, roughly $17 billion is credits for principal modifications, which as we pointed out earlier, can and almost assuredly will come largely from mortgages owned by investors. $3 billion is for refis, and only $5 billion will be in the form of hard cash payments, including $1500 to $2000 per borrower foreclosed on between September 2008 and December 2011.  Banks will be required to modify second liens that sit behind firsts “at least” pari passu, which in practice will mean at most pari passu. So this guarantees banks will also focus on borrowers where they do not have second lien exposure, and this also makes the settlement less helpful to struggling homeowners, since borrowers with both second and first liens default at much higher rates than those without second mortgages. Per the Journal: “It’s not new money. It’s all soft dollars to the banks,”

Your Humble Blogger is on NBC News Tonight and Democracy Now Tomorrow - Yves Smith - When media rains, it pours. Had to turn down BBC and Cenk Uygur. Also did a recording with Harry Shearer which will run on Le Show probably this Sunday, but if not, next Sunday. NBC told me I needed to really dumb it down, and I thought what I said did sound sorta dumb, but at least they are allowing critical views to be expressed. The lighting was really harsh too, but maybe they think making guests look older confers gravitas.

Settlement Breakdown by State Plus Other Official Propaganda - Yves Smith - A little birdie sent me some settlement details. You can see how much little your state got, as well as whether your state bothered rewriting the official PR: Settlement Swiss Cheese Release (scribd doc) - click first document, use sidebar of that to navigate to the others

What the Mortgage Deal Reveals About The Obama Administration - Edward Harrison here. I was reading Yves’ excellent post on The Top Twelve Reasons Why You Should Hate the Mortgage Settlement and I thought about a post I wrote a year ago on what this was all about. I am re-posting this post verbatim below but I just want to say a few words first. Clearly, the Obama Administration is positioning itself for the 2012 general election. The goal is to do the right things and say just enough to make the Administration’s policies appear successful. The messaging is designed to build up a base from which to contrast Obama from the eventual Republican nominee in order to get out the vote. I doubt seriously that Obama’s people want any of these mortgage fraud initiatives to have teeth. After all, the President is going for the Super PAC money. This is kabuki theater for the masses. it is designed to give those people inclined to vote for a Democrat a reason to do so in November, nothing more. Original post from 8 Mar 2011 below

We Speak on Democracy Now About the Mortgage Settlement -- Yves Smith - Hope you don’t mind the spate of posts with my various media appearances on the mortgage settlement. This was my first time on Democracy Now and they do do their homework. A producer ran out to me when I was on deck to ask if the total deal was $25 or $26 billion. I said all the Administration messaging was $26 billion, but the numbers seemed to add up to more like $25 billion, so they must be rounding up on the subtotals. He came back and said they couldn’t make it add up to $26 billion and so would report it as $25 billion. Here’s the segment:

Team Obama Represents the Banks, Not You: A Call to Action - The sweetheart deal the feds just finished forcing down the throat of the state AGs is only the latest piece of evidence–evidence enough to reach ‘beyond a reasonable doubt’–that your federal government works for the banks and not you. Team Obama has placed the economic interests of the banks and the freedom of bankers above your economic interests, the rule of law, and any notion of good faith, fair dealing and justice. They won’t admit it; Team Obama will run hard as champions of the 99% on all things, including being Tough On Banks! and Helping Homeowners! But neither is true, and it’s critical that you not believe them when they say it. My slim hope for good bank and housing policy rests on you. If Team Obama is confronted with an informed and active electorate over the next several months–confronted with enough voters demanding good policy instead of easily disprovable talking points–I think it’s possible to goad a-scared-we-won’t-be-reelected Team Obama into actually doing good policy. So what can you do? Participate with CredoAction, The New Bottom Line, The Other 98%, Occupy Our Homes or any other group pushing hard for good policy, refusing to provide political cover to a weak incumbent too ??? to do the right thing. Start your own group. But participate. Be a DOER. And in an era when the Supreme Court insists corporations have the right to speak at a volume calculated to drown out everyone else, insist on being heard.

Mortgage Settlement as Attorney General Sellout: Deal is Not Done, and Final Version Guaranteed to be Worse Than Advertised - Yves Smith  - You know it’s bad when banks are the most truthful guys in the room. Remember that historical mortgage settlement deal that was the lead news story on Thursday? It has been widely depicted as a done deal. The various AGs who had been holdouts said their concerns had been satisfied.  But in fact, Bank of America’s press release said that the deal was “agreements in principle” as opposed to a final agreement. The Charlotte bank had to be more precise than politicians because it is subject to SEC regulations about the accuracy of its disclosures. And if you read the template for the AG press release carefully, you can see how it finesses where the pact stands. And today, American Banker confirmed that the settlement pact is far from done, and the details will be kept from the public as long as possible, until it is filed in Federal court (because it includes injunctive relief, a judge must bless the agreement). This may not sound all that important to laypeople, but most negotiators and attorneys will react viscerally to how negligent the behavior of the AGs has been. The most common reaction among lawyers I know who been with white shoe firms (including former partners) is “shocking”. Let me explain why.

Oklahoma get separate mortgage settlement - A $25 billion settlement reached after the mortgage madness as a result of the plummeting housing market. Nearly 750,000 Americans will receive money as part of the deal. Oklahoma wasn't part of that deal but that doesn't mean Oklahomans will be left empty handed. 49 states took part in the settlement and those who live in those states can expect $2,000 as a way to say sorry. Oklahoma was the only state to pass on the deal. That's because they reached an independent settlement worth $18.6 million, Oklahoma Attorney General Scott Pruitt said he chose to reach a separate agreement because he thought the national settlement was too broad.  He said, "We believe the national settlement was more to fix the housing market instead of misconduct and wrongful mortgage practices."

Settlement Does Not Apply To ‘Mortgage Practices Industry Wide,’ American Bankers CEO Says - The $25 billion mortgage foreclosure settlement “marks an important milestone in resolving mortgage concerns, allowing these five institutions – essential providers of mortgage services across the country – to look to the future with clarity and commitment to customers," according to a statement by Frank Keating, the president and CEO of the American Bankers Association. Keating added that the ABA “is evaluating the full settlement to ensure its enforcement does not further constrain credit availability and that its terms are not applied outside this agreement.” Moreover, Keating emphasized that the settlement “addresses a distinct group of mortgages offered during a specific timeframe. It would be a mistake to regard the settlement as applying to mortgage practices industry wide."

Settlement doesn't end all mortgage-related problems for banks - The agreement between 49 states and five large banks gives the financial giants immunity from future complaints about some aspects of their foreclosure practices. The banks had previously made changes to improve the way they foreclose on homeowners and had put aside most of the funds necessary to pay for the $25-billion settlement. Until recently, analysts thought this might put to rest many of the largest complaints about the role the banks played in the financial crisis and its aftermath. It hasn't. There are a growing number of signals that prosecutors and regulators are stepping up efforts to bring new lawsuits and criminal charges in connection with the crisis. "The mortgage foreclosure settlement in many ways is just the least of their problems," . "The banks are not going to see the bright sunlight for some time to come." The settlement releases the banks from claims involving foreclosures, mortgage customer servicing and loan originations. However, authorities can still investigate various fraud claims, including those involving the mortgage bonds whose meltdown triggered a global financial crisis.

Company Faces Forgery Charges in Mo. Foreclosures — One of the largest companies that provided home foreclosure services to lenders across the nation, DocX, has been indicted on forgery charges by a Missouri grand jury — one of the few criminal actions to follow reports of widespread improprieties against homeowners. A grand jury in Boone County, Mo., handed up an indictment Friday accusing DocX of 136 counts of forgery in the preparation of documents used to evict financially strained borrowers from their homes. Lorraine O. Brown, the company’s founder and former president, was indicted on the same charges. Employees of DocX, a unit of Lender Processing Services of Jacksonville, Fla., executed and notarized millions of mortgage documents for big banks and loan servicers over the years. Lender Processing closed the company in April 2010, after evidence emerged of apparent forgeries in these documents, a practice now called robo-signing. Chris Koster, the Missouri attorney general, will prosecute the case. “The grand jury indictment alleges that mass-produced fraudulent signatures on notarized real estate documents constitutes forgery,” Mr. Koster said in a statement. “Today’s indictment reflects our firm conviction that when you sign your name to a legal document, it matters.”

Mirabile Dictu! Missouri Attorney General Files Criminal Lawsuit on Robosiging - 02/06/2012 - Yves Smith  - “Linda Greene” has become a household word to those on the foreclosure fraud beat. And it turns out, for once, that the work of diligent investigators such as the foreclosure attorneys around Max Gardner, and investigators like Lynn Szymoniak and Lisa Epstein led to press coverage which in turn spurred prosecutors to act.  What is striking about the indictment by a Missouri grand jury is that the Missouri AG Chris Koster has decided to challenge the banks’ party line that robosigning and related abuses were mere “paperwork problems.” He’s called robosiging what it is: forgery. The 136 count indictment is for forgeries and false declarations, and the targets are LPS subsidiary and its founder and past president, Lorraine Brown. From a press release by Koster: Today’s indictment reflects our firm conviction that when you sign your name to a legal document, it matters,” Koster said. “Mass-producing fraudulent signatures on millions of real estate documents across America constitutes forgery. When you file those documents in our state, you are committing a crime under Missouri law... The open question is whether Koster intends to stop here or is using the mob prosecution strategy that Catherine Cortez Masto seems to be employing, that of going after LPS, which was the major outsourcing platform for servicers, and seeing where that trail leads.  Additional comments from Gretchen Morgenson of the New York Times:

Banks Paying U.S. Homeowners to Avoid Foreclosures - Banks, accelerating efforts to move troubled mortgages off their books, are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe.  Lenders have routinely delayed or blocked such transactions, known as short sales, in which they accept less from a buyer than the seller’s outstanding loan. Now banks have decided the deals are faster and less costly than foreclosures, which have slowed in response to regulatory probes of abusive practices. Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives, said Bill Fricke, senior credit officer for Moody’s Investors Service in New York.  Losses for lenders are about 15 percent lower on the sales than on foreclosures, which can take years to complete while taxes and legal, maintenance and other costs accumulate, according to Moody’s. The deals accounted for 33 percent of financially distressed transactions in November, up from 24 percent a year earlier, said CoreLogic Inc., a California-based real estate information company.

Mortgage workouts of the day, short-sale edition - Prashant Gopal has an intriguing story today on the way in which banks are not only doing more short sales than they used to, but are even throwing in cash sweeteners to speed things along. Why would they be doing such a thing? The banks aren’t saying, but theories abound: Lenders can often afford to forgive debt, offer the incentive and still make a profit because they purchased the loan from another bank at a discount, said Trent Chapman, a Realtor. Cecala of Inside Mortgage Finance said he wonders whether lenders are making big payments on properties with underlying title problems. Evan Berlin, managing partner of Berlin Patten, a real estate law firm in Sarasota, Florida, said representatives of a large bank told him the incentives are primarily given to borrowers when it doesn’t have the proper paperwork needed to win its foreclosure case. It certainly rings true that banks are more likely to take losses on a loan when they purchased that loan at a discount. We saw that with principal reductions, last year, and it’s no surprise that it might be moving into short sales too. More generally, it makes sense that once a homeowner has been living in their home for a year or more without making any kind of rent or mortgage payments, they start getting quite comfortable with that lifestyle, and become rather difficult to dislodge. Cash incentives can work much better than lawsuits, especially when there are title problems.

Banks Paying as Much as $35,000 Cash to Homeowners in Short Sales; Why and How Many? - In a short sale, banks forgive the difference between what is owed and the sale price of the house. Recently, however, banks have started giving cash back to the sellers. So far, the programs are a drop in the bucket. There are millions of pent-up foreclosures and JP Morgan is doing 5,000 short sales a month, hardly enough to make a dent. Still, "short sales represented 9 percent of all U.S. residential transactions in November, the most recent month for which data is available, up from 2 percent in January 2008, according to Corelogic." Please consider Banks Paying Cash to Homeowners to Avoid Foreclosures Banks, accelerating efforts to move troubled mortgages off their books, are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe.What's Really Going on Here? If the answer is "it's faster, quicker, cheaper" than foreclosures, then why don't we see more of them, lots more of them? Could it be these are the real problem loans with clouded titles, questionable practices by lenders, or huge numbers of written complaints by borrowers? Add to that a dearth of willing new borrowers and I think you have the answer.

Mortgage Settlement and Negative Equity - I don't think the mortgage servicer settlement alone will have a huge impact on housing or the economy, but I do think the settlement will lead to an increase in the number of modifications, and also an increase in the pace of completed foreclosures. I've seen several people argue the settlement is too small to have much of an impact on housing. They compare the size of the settlement to overall negative equity. As an example from the Financial TimesThe trouble is that the $32bn is small relative to estimates of a $700bn gap between house values and underwater mortgages: it is just 5 per cent of that total.  Note: the $700 billion estimate comes from CoreLogic's Q3 negative equity report. If we compare the principal reductions to total negative equity, it does seem like a drop in the bucket. However if we think of it terms of a reduction in the number of loans that are 90+ days delinquent and in the foreclosure process, this could be significant.  The FHFA estimates approximately 1 million borrowers will be offered principal reduction modifications, although that estimate may be a little high. Currently, according to LPS, there are 1.79 million loans 90+ days, and 2.07 million in the foreclosure process - or about 3.86 million total seriously delinquent. A few hundred thousand extra modifications would reduce the number of seriously delinquent loans, maybe by 10% (of course some will then re-default).  Also, since there are about 10.7 million borrowers with negative equity, this suggests around 7 million borrowers with negative equity are not seriously delinquent. And that brings us to HARP ...

Detroit squatters may be allowed to keep foreclosed homes - Wayne County will send people door to door to offer thousands of foreclosed Detroit homes for as little as $500, a move that would keep a roof over the head of squatters and possibly get properties back on the tax rolls. More than 6,000 Detroit homes, foreclosed because taxes weren’t paid, didn’t sell at auction last fall. The county treasurer’s office doesn’t want to see them abandoned and is willing to negotiate with anyone living inside, including owners who no longer have a right to the property. “A vacant house is not going to help anybody,” Deputy Treasurer Eric Sabree told The Detroit News. Charles Brown, 62, said he has been squatting in his home for about a year. He said he had installed windows and doors and uses the fireplace for heat. “I am still doing a lot of work,” Brown said. “It would mean a lot if I could keep it.”

Cleveland: City mistakenly boards up man's home - Steven Saric has lived in his home on Vineyard Avenue for seven years. One morning last July, he pulled into his driveway to find nails in his windows, his gutters stripped from the sides and his doors boarded up. ......Saric says the damage has cost him thousands of dollars and he can not afford the repairs. "A mistake was made. I'm not at fault. This has ruined my life for seven months already. Who is liable?" Saric said.

"Hidden" mortgage fee paying for payroll tax cut - Just before Christmas, American workers got a rare gift from Washington politicians - the current payroll tax cut would be extended for two more months.  At the time, both President Barack Obama and House Speaker John Boehner lauded the move to avoid a tax increase for millions of working Americans. But there's something the politicians weren't bragging about - the fact that they're paying for the two-month tax cut with what has turned into a brand new fee on home buyers. The new fee is a minimum of one-tenth of 1 percent on Fannie Mae- and Freddie Mac-backed loans, and is likely to go much higher. It will be imposed for the next 10 years on most mortgages and refinancings and it lasts for the life of the loan. For every $200,000, it amounts to an extra $15 dollars a month.

Obama Doubles Down on Housing - Last week, President Obama gave a speech highlighting his administration’s response to the ongoing crisis in the housing market. The speech material can be broken down into two broad categories: 1) a review of existing government programs (including some modest programmatic tweaks) to boost mortgage modification and refinancing opportunities; and 2) a new refinancing proposal meant to help more struggling, or at-risk, families not currently eligible for the government’s signature programs. Before diving into these two categories, it’s important to acknowledge the broader economic and political backdrop. The collapse in home values over the past five years helped spark a financial crisis, which then morphed into a broader recession with a historic number of job losses and massive declines in wealth. Today, the U.S. government finds itself either owning or guaranteeing about 72% of all outstanding (first lien) mortgages. The Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac cover roughly 56% of the market by themselves, with the third leg of the government’s housing stool – the Federal Housing Administration – responsible for about 16% (including VA loans). Banks and other private mortgage investors are responsible for remainder. In raw numbers, the government stands behind 40 million first liens, with the private sector covering around 13 million.

Why PMI Sucks: A Letter Personal Mortgage Insurance (PMI) is totally stupid. As it stands, people who can’t pay 20% down on a home loan are penalized for not having enough stockpiled cash and required to pay PMI ($200/month in our case), money that does not go toward principle and can’t be written off when you supposedly make “too much” as this support article defines.  Despite 800+ credit scores and stable jobs, this is the third year that we have paid $2,500 in PMI. Each year, I think about how this chunk of our taxed income hasn’t gone toward our debt and how we don’t “qualify” to use it as a write-off. Yet it’s mandated by the government to bail out banks when they take bad risks. The logic for PMI is this– Bank: “Hey, if you don’t have 20% to buy a home, don’t sweat it, we’ll still loan you money (never mind that the government gave a large portion to us without interest). But the big bad government (with the help of our legislation writing team and lobbyists) requires you to pay a poor-person’s fee called PMI that they put in an emergency fund in case we, the banks, decide to be totally unethical again (preying on people who will be way over their heads so we can create money from nothing by inflating a market, collect a mortgage that is 2-5 times the going rent, evict when they can’t pay, then repeat with their repo’d property). 

MBA: Refinance activity increases as mortgage rates fall to record low - From the MBA: Refinance Activity Increases as Rates Hit Survey Lows The Refinance Index increased 9.4 percent from the previous week. The seasonally adjusted Purchase Index increased 0.1 percent from one week earlier.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 4.05 percent, the lowest rate in the history of the survey, from 4.09 percent ...  The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500)decreased to 4.29 percent, the lowest rate in the history of the survey, from 4.33 percent ...The purchase index is still moving sideways at a very low level, but I expect the changes to HARP to lead to a surge in refinance activity in March.

The Housing Bottom is Here - There have been some recent articles arguing the “housing bottom is nowhere in sight”. That isn’t my view. First there are two bottoms for housing. The first is for new home sales, housing starts and residential investment. The second bottom is for prices. For new home sales and housing starts, it appears the bottom is in, and I expect an increase in both starts and sales in 2012. As the first graph shows, housing starts, both total and single family, bottomed in 2009 and have mostly moved sideways since then - with some distortions due to the ill-conceived housing tax credit. New Home sales probably bottomed in mid-2010 and have flat lined since then. And it now appears we can look for the bottom in prices. My guess is that nominal house prices, using the national repeat sales indexes and not seasonally adjusted, will bottom in March 2012. There are several reasons I think that house prices are close to a bottom. First prices are close to normal looking at the price-to-rent ratio and real prices (especially if prices fall another 4% to 5% NSA between the November Case-Shiller report and the March report). Second the large decline in listed inventory means less downward pressure on house prices, and third, I think that several policy initiatives will lessen the pressure from distressed sales (the probable mortgage settlement, the HARP refinance program, and more).

Housing: The Two Bottoms - After my post this morning, The Housing Bottom is Here I was asked to update two graphs from 2009. It is worth repeating: There are usually two bottoms for housing, the first for new home sales, housing starts and residential investment. The second bottom will be for house prices. For the first bottom, we have several possible measures - the following graph shows three of the most commonly used: Starts, New Home Sales, and Residential Investment (RI) as a percent of GDP. Click on graph for larger image. The arrows point to some of the earlier peaks and troughs for these three measures. The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.  But this says nothing about prices. The second graph compares RI as a percent of GDP with the real Case-Shiller National house price index through Q3 2011. Prices continued to fall in Q4 and probably into 2012 too. Although the Case-Shiller data only goes back to 1987, look at what happened following the early '90s housing bust. RI as a percent of GDP bottomed in Q1 1991, but real house prices didn't bottom until Q4 1996 - more than 5 years later! Something similar will most likely happen again.

Been Down So Long--Has Housing Finally Bottomed? - The economy may be poised for better days, but we’re still a long way from a genuine boom. Indeed, some folks remain skeptical generally and warn that the economy is more likely to contract than grow in the foreseeable future. A higher level of confidence that we’ll sidestep macro trouble is in order. But how? Job growth seems to be perking up, but it could use some help. Maybe we’ll catch a break with residential real estate in the months ahead too. Yes, real estate. Granted, that’s a tall order, or so the last several years suggest. It’s been a long time since housing was a positive contributor to economic momentum. Meantime, predictions of recovery have come and gone for, well, years. But while it’s easy to remain gloomy about residential real estate, there has been progress, albeit primarily as a sector that’s no longer contracting. Unfortunately, it’s not necessarily growing either. But after three years of treading water in housing starts and newly issued building permits, for instance (see chart below), are we finally at the stage for something approximating an authentic expansion? Even if--a big if--we're at a turning point, any expansion is likely to be mild at best. But if you’re willing to entertain an optimist outlook, the numbers suggest that there could be some light trickling into this tunnel.

Zillow: House prices declined 4.7% in 2011, Forecasts 3.7% decline in 2012 - Another view on house prices from Zillow: Home Value Declines Pick Up in Fourth Quarter, But Zillow Forecasts Smaller Declines in 2012 The Zillow Real Estate Market Reports, released today, show home values decreased 1.1 percent from the third to the fourth quarter of 2011 to $146,900. On an annual basis, this represents a 4.7 percent decline. December’s data show that sequential improvements in year-over-year numbers have stopped, and the pace of monthly depreciation has once again picked up, with December’s monthly depreciation rate at 0.6 percent. [W] believe 2012 will be a transitional year for real estate. Positive developments will include markets showing organic growth, and home sales increasing as the year proceeds. However, we maintain our forecast that home values will continue to fall in 2012, with the Zillow Home Value Forecast showing a 3.7 percent decline through December 2012....Based on these forecasts, we expect more home value declines nationally in 2012. However, most markets will see improved trends over the course of the year.

Home Value Declines Pick Up in Fourth Quarter, But Zillow Forecasts Smaller Declines in 2012 Zillow Real Estate Research: The Zillow Real Estate Market Reports, released today, show home values decreased 1.1 percent from the third to the fourth quarter of 2011 to $146,900 (Figure 2). On an annual basis, this represents a 4.7 percent decline (Figure 1). December’s data show that sequential improvements in year-over-year numbers have stopped, and the pace of monthly depreciation has once again picked up, with December’s monthly depreciation rate at 0.6 percent. The main culprits behind December’s weak housing numbers are increasing foreclosure liquidation rates and soft economic data. New to this quarterly report is the Zillow Home Value Forecast, a forward-looking, model-based estimate of home values one year out from the current reported period. The forecast covers the top 25 metros and the nation and is based on an ensemble of statistical and machine learning models, each with a somewhat different approach to predicting the future movements of home values in a metro region. A closer look at our forecasting methodology can be found in a separate post on Zillow Real Estate Research. Based on these forecasts, we expect more home value declines nationally in 2012. However, most markets will see improved trends over the course of the year.

January Prices Continue to Slide - Home prices are continuing their slide into the new year as January home prices fell to 2.6 percent below where they were a year ago, a decline from December, when prices were 2.1 percent below December 2010. Data provider Clear Capital today reported that national home prices bucked three months of stability and posted a loss of 1.6 percent quarter-over-quarter, more than a full percentage point in lost value compared to last month’s decrease of 0.4 percent. On a year-over-year basis, the nation lost a more significant 2.6 percent, due in part to market seasonality and an increase of REO sales as a percentage of total home sales, from 24.8 percent at the end of 2011 to 25.4% at the end of January. Regionally, the Midwest lost 4 percent quarter-over-quarter, leading the nation in quarterly losses for the first time in seven months. The Midwest saw the most significant change in overall performance of any region. These shorter term declines pulled down its year-over-year returns to -5.2 percent, a marked increase from the softer 3 percent loss reported last month. This drop in values can be partly attributed to a 1.5 percent uptick in REO saturation over the past quarter from 29.5 percent to 31 percent. “Looking at the latest data through January, home prices remained relatively unchanged with the exception of the Midwest,”

Bank Of America's Michelle Meyer Still Bearish On Home Prices: The debate over the housing market rages on. The bullish calls have been getting louder. However, we continue to hear the bearish arguments., In her latest Housing Watch note, Bank of America economist Michelle Meyer reiterates her own bearish 2012 call on the housing market. "[W]e believe those who are counting on the housing sector to save the economy this year will be disappointed," wrote Meyer in a January 27 note. She does, however, acknowledge new government efforts to bolster the housing market, and believes they are positive developments. From her note to clients today: The new year arrived with a number of new policies to support the housing market. The Obama Administration expanded the modification program – Home Affordable Modification Program (HAMP) – until the end of 2013 and increased incentives for principal reduction. It also proposed a new plan for streamlined refinancing for non-agency mortgages. While the expansion of HAMP could help to modestly support modification efforts, the refinancing proposal is highly unlikely to be implemented. It requires Congressional approval for additional funding and cooperation from the FHFA, both of which are difficult. Even more important than HAMP and HARP have been the steps taken to implement an REO-to-rental program. We believe a plan could be announced before the end of this quarter; although it will take time to implement and may be done in small pilot programs initially, it will be a step in the right direction.

Bernanke: "Housing Markets in Transition" - Here is the transcript of Fed Chairman Ben Bernanke's speech at the National Association of Homebuilders International Builders' Show, Orlando, Florida: "Housing Markets in Transition". Excerpt:  One way to understand conditions in the housing market is to focus on the balance of supply and demand. For the past few years, the actual and potential supply of single-family homes has greatly exceeded the effective demand. The elevated number of homes that are currently vacant instead of owner occupied reflects the imbalance. According to the most recent estimate, about 1-3/4 million homes are currently unoccupied and for sale. Moreover, a very large number of additional homes are poised to come on the owner-occupied market. In each of the past few years, roughly 2 million homes have entered the foreclosure process, and many of these homes have been put up for sale, crowding out much of the need for new building. At the same time, a number of factors are constraining demand. Household formation has been down, particularly among young adults. High unemployment and uncertain job prospects may have reduced the willingness of some households to commit to homeownership.

How ‘Shadow Inventory’ Is Killing the Housing Market - Recently, there have been lots of positive signs coming out of the real estate market. Foreclosure rates are down, housing starts are up, and homes have appreciated in value in some markets for the first time since 2006. Even so, two reports surfaced last week indicating that, for the nation as a whole, home prices dropped by 3.5% to 5% in 2011. And one factor hurting the prices of homes that are for sale is the enormous number of homes that aren’t for sale — but that should be. The Case-Shiller housing index was released last week, stating that home prices had dropped 3.7% in 2011, compared with the previous year. CoreLogic, a real estate research firm, also recently released a report estimating that prices had dropped in 2011 — by 5%. “While overall prices declined by almost 5% in 2011, nondistressed prices showed only a small decrease,” said Mark Fleming, CoreLogic’s chief economist. “Until distressed sales in the market recede, we will see continued downward pressure on prices.” Most housing experts agree: prices won’t rise until all distressed inventory (a.k.a. foreclosures and short sales) is moved through the market. Distressed sales keep prices low because banks want to get rid of such properties asap, and they’re willing to sell at a loss so long as the homes are out of their hands.

Existing Home Inventory declines 21% year-over-year in early February - Another update: I've been using inventory numbers from HousingTracker / DeptofNumbers to track changes in inventory. According to the for monthly inventory (54 metro areas), listed inventory is probably back to early 2005 levels. Unfortunately the deptofnumbers only started tracking inventory in April 2006. This graph shows the NAR estimate of existing home inventory through December (left axis) and the HousingTracker data for the 54 metro areas through February. Since the NAR released their revisions for sales and inventory, the NAR and HousingTracker inventory numbers have tracked pretty well. Seasonally housing inventory usually bottoms in December and January and then starts to increase again in February. So inventory should increase over the next 6 months. The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the February listings - for the 54 metro areas - declined 21% from the same month last year. The year-over-year decline will probably start to slow since listed inventory is getting close to normal levels. Also if there is an increase in foreclosures (as expected), this will give some boost to listed inventory.

America has 40 million big houses that no one wants - Americans, especially generations X and Y, want shorter commutes, walkability and a car-free existence. Which means that around 40 million large-lot exurban McMansions, built primarily during the housing boom, might never find occupants. Only 43 percent of Americans prefer big suburban homes, says Chris Nelson, head of the Metropolitan Research Center at the University of Utah. That mean demand for “large-lot” homes is currently 40 million short of the available stock — and not only that, but the U.S. is short 10 million attached homes and 30 million small homes, which are what people really want. “If we are optimistic that the world is not coming to an end and we’re going to get out of this economic trough, it’s a good time to consider, when production does ramp up, how we will be building as a country,”

Have Americans Given Up On McMansions? - After many years of dramatically increasing home size in America - from an average of 983 square feet in the 1950s up to 2300 square feet in the 2000s, despite declining household sizes - the trend appears finally to be going in the other direction.  The real estate research firm Trulia found in 2010, for example, that the median "ideal home size" for Americans had declined to around 2100 square feet. More than one-third of survey respondents reported that their ideal preference was lower than 2000 square feet. This is consistent with the forecasts of the National Association of Home Builders. (See detailed findings here.) Data from the census are also consistent in direction with those from Trulia's survey, though more subtle in the degree of change: according to the census, the median size of a new U.S. home in 2010 was 2,169 square feet, up from 1,525 sqare feet in 1973 but down from the 2007 peak of 2,277 square feet. So, while the recent change has been observed in the industry for a few years now, the graphs shown with this post are the best I've seen yet to depict both how out-of-control home sizes had become and the more recent trend toward downsizing. The downsizing trend is expected to continue even after the economy recovers, according to a spokesperson from NAHB.

Tech booms and housing supply What impact should we expect the Facebook IPO to have on housing prices in the Bay Area? Matthew Kahn sums up what we know: There are millions of homes in the greater Bay Area in California. If thousands of newly minted Facebook multi-millionaires seek their dream home in the area, how will local real estate prices change? The NY Times presents a strong article. In my 2011 piece, I present evidence that liberal cities tend to issue fewer housing permits than other communities. Albert Saiz has written an important paper documenting how  topography influences housing supply. Combining the insights from both of these paper, there won’t be much new housing supply in response to this demand shock so existing homes will be bid up in price. Bay Area foreclosures should decline and incumbent home owners will gain a windfall. Property tax revenue will soar in these counties and this should help the local public schools. This is all true but I think it paints an unduly optimistic picture of the consequences of restrictive permitting policies. Note that a house is both land and a structure. Whether or not the supply of houses increases, the value of the land is going up and so incumbent "home" (i.e., land) owners will gain a windfall one way or the other. Similarly, property tax revenue would soar even more in counterfactual scenario where the Bay Area witnesses a boom in construction since taxes are levvied on the value of both land and structures. What's more, more residents would mean more income and sales tax revenues.

NAHB: Multifamily and Remodeling expected to increase in 2012 - The NAHB 2012 International Builders’ Show is currently being held in Orlando. And the NAHB is expecting continued growth in 2012 for two components of residential investment: Multifamily and remodeling. From the NAHB Multifamily Industry Stages Strong Recovery but Still Limited by Credit Constraints, Says NAHB The apartment sector is a bright spot in the overall housing market leading the industry’s path to recovery. ... “[W]e are forecasting construction of 208,000 multifamily residences in 2012 ...”There were 167,400 5+ unit starts in 2011, and only 130,500 completions. 2012 will be another strong year. Economist Tom Lawler is forecasting 225,000 multifamily starts this year.From the NAHB today: NAHB Foresees Measured Growth in Residential Remodeling The residential remodeling market will continue to experience measured growth in 2012 after the Remodeling Market Index (RMI) rose to a five year-high at the end of 2011,  “NAHB predicts that residential remodeling will rise 8.9 percent in 2012.”

Are American Homeowners Locked into Their Houses? The Impact of Housing Market Conditions on State-to-State Migration - Boston Fed - U.S. policymakers are concerned that negative home equity arising from the severe housing market decline may be constraining geographic mobility and consequently serving as a factor in the nation's persistently high unemployment rate. Indeed, the widespread drop in house prices since 2007 has increased the share of homeowners who are underwater on their mortgages. At the same time, migration across states and among homeowners has fallen sharply. Using a logistic regression framework to analyze data from the Internal Revenue Service on state-to-state migration between 2006 and 2009, the authors discover evidence that "house lock" decreases mobility but find it has a negligible impact on the national unemployment rate. A one-standard deviation increase in the share of underwater nonprime households in the origin state reduces the outflow of migrants from the origin to the destination state by 2.9 percent. When aggregated across the United States, this decrease in mobility reduces the national state-to-state migration rate by 0.05 percentage points, resulting in roughly 110,000 to 150,000 fewer individuals migrating across state lines in any given year. Assuming that all of these discouraged migrants were job-seekers who were previously unemployed before relocating and then found a job in their new state would reduce the nation's unemployment rate by at most one-tenth of a percentage point in a given year. The cumulative effect over this period would yield an unemployment rate of 9.0 percent versus 9.3 percent in 2009. Recognizing that not all state-to-state migrants are job-seekers, not all job-seekers were previously unemployed, and not all previously unemployed job-seekers will successfully find work in their new location yields an unemployment rate that is virtually unchanged from the actual one that prevailed from 2006 to 2009.

Study Finds Lack of Mobility Not Holding Back Employment - Negative housing values haven’t prevented enough homeowners from moving to get a new job to have a big impact on overall unemployment in the U.S., a paper from the Federal Reserve Bank of Boston said. The study explores the widely held belief that holds unemployment has in part remained stubbornly high because negative home equity values are preventing the unemployed from selling their home to pursue a new job. Put another way, many have believed the challenge of selling a house worth less than its outstanding mortgage is trapping many prospective workers in their homes. The Boston Fed paper said their research finds this just isn’t true: “The reduction in state-to-state migration due to negative equity has had a negligible impact on the national unemployment rate.” In their evaluation, negative equity did prevent some job seekers from pursuing work away from their current location. But those held back by this factor must be weighed against the massive churn of those who regularly cross state lines for new employment. “The reduced mobility across states due to negative housing equity is small relative to the annual number of migrants in the United States,” the paper said.

American Migration [Interactive Map] - Close to 40 million Americans move from one home to another every year. Click anywhere on the map below: blue counties send more migrants to the selected county than they take; red counties take more than they send.

Bankruptcy Implications of AG Settlement - Even though I was up at 4am Pacific this morning, the AG and federal government mortgage settlement was nearly old news by then. While the details are still being released, I am already concerned about how the settlement will affect bankruptcy cases. Remember that bankruptcy was one of the first places we saw the misbehavior of mortgage servicers--way back in 2005 when Tara Twomey and I did our study. As of December 1, new Bankruptcy Rules of Procedure 3001 and 3002 impose new requirements on servicers of loans owed by bankruptcy debtors. Are the terms of the settlement consistent with those new rules? If so, do they add any new procedural benefits to protect bankrupt homeowners against robo-signing and legal violations? The Department of Justice participated in the settlement and the U.S. Trustee's Office apparently was at the negotiating table. Their press release,  however, is just boilerplate of the general DOJ release. The only mention of bankruptcy is that the settlement will impose "new requirements to undertake pre-filing reviews of certain documents filed in bankruptcy court." I'm not sure what to make of that. Presumably, filing claims under penalty of perjury already required a review of claims, and Rule 9011 required a significant review of motions for relief from stay to permit a foreclosure to continue. What does the settlement add? I hope the US Trustee will let us know soon, as I am sure debtors' attorneys will get calls today on the issue.

The Infamous Example of Rent Control - The latest post by Jodie Beggs rehashing the standard story about rent control has me quietly steaming.  It’s not her fault, of course: she is simply regurgitating what has become a mandatory morality tale, an unavoidable rite of passage in Econ 101.  You know the drill: in their misguided desire to be fair to the poor, the authorities have set a ceiling on rents below the market-clearing price, and the result is excess demand in the short run and reduced supply in the long run.  Now that you have mastered the supply and demand diagram, you are so much smarter than they are. There are two huge holes in the textbook argument.  The first is that it overlooks neighborhood effects—literally.  The most compelling argument for rent control is neighborhood stabilization, the idea that social capital in an urban environment requires stable residence patterns.  If prices are volatile, and this leads to a lot of residential turnover, the result can be a less desirable neighborhood for everyone.   You’ll notice that not a single textbook treatment of rent control mentions stabilization as an objective, even though this is a standard element in the real-world rhetoric surrounding this issue. 

The Backdrop for BROKE: Consumer Debt Then and Now - In the introductory chapter of the book, Broke: How Debt Bankrupts the Middle Class,  I present some data about consumer debt levels in the United States. As Bob Lawless and others have shown, levels of consumer debt are strongly correlated with bankruptcy filings. While conditions such as unemployment, rising health care costs, and skyrocketing college tuition--and recessions--all create pressures on consumers that lead to borrow, debt is the sine qua non of bankruptcy--the relief offered by the system is the reduction or elimination of debt--not the promise of a good paying job or a strong social safety net. Because bankruptcy is driven by debt, those filings help reveal whether the levels of consumer debt will create serious problems for the economy and American families. In Broke, I present a figure, courtesy of the San Francisco Fed, that shows the dramatic growth in household debt in real dollars over the last few decades. Reproduced below, the figure shows that the sharp acceleration began in the mid 1980s. This is an important point to understanding why recovery is proving difficult from the recession. As I explain in the book, "The consumer debt overhang, however, began long before the financial crisis and the recession. Exhortations about subprime mortgages reflect only a relatively minor piece of a much broader recalibration in the balance sheets of middle-class families. . . . The boom in borrowing spans social classes, racial and ethnic groups, sexes and generations."

No: Saving Does Not Increase the Supply of Loanable Funds - Or: It’s The Velocity, Stupid. I got quite a bit of blowback on my recent post suggesting that economists don’t understand accounting. In response I give you Exhibit A: the almost-ubiquitous notion that more saving increases the supply of “loanable funds” — hence that more saving causes or at least allows more investment. (The absolute classic fallacy of the S=I accounting identity.) On casual consideration, it seems like it would be right, right? You spend less than your income, so you have more money (stuffed in your mattress?), and you can lend it out. Or more likely: you “put money in the bank” – deposit more than you withdraw — so the bank has more money; it can lend more. It’s A Wonderful Life. Here’s Mankiw in his textbook, saying exactly that: Saving is the supply of loanable funds — households lend their saving to investors or deposit their saving in a bank that then loans the funds out.But:

  • 1. A little careful consideration shows that this casual consideration is logically incoherent — just plain wrong, by accounting identity. And:
  • 2. Economists are not supposed to be thinking, giving their sage advice, or corrupting our youth based on casual consideration.

Credit-Card Borrowing Surged Over Holiday Period - U.S. credit-card debt posted the second solid increase in a row during December, an indication Americans stuck with meager wage gains borrowed to pay for their holiday celebrations. The increase helped raise the level of consumer credit outstanding by a whopping $19.31 billion to $2.498 trillion, Federal Reserve data Tuesday said. Economists surveyed by Dow Jones Newswires had forecast a $7.5-billion increase. Revolving credit, which includes credit-card debt, increased in December by $2.76 billion, to $800.98 billion. November revolving credit rose $5.58 billion, the biggest increase since March 2008. Nonrevolving credit rose $16.55 billion, to $1.697 trillion. The increase, which followed a big surge in November and was the largest since November 2001, was driven by federal student loans and has been increasing a lot over the past year – -a sign high joblessness in the U.S. has led many people to go back to school.

US Consumer Credit Surges Second Month In A Row - U.S. credit-card debt posted the second solid increase in a row during December, an indication Americans stuck with meager wage gains borrowed to pay for their holiday celebrations. The increase helped raise the level of consumer credit outstanding by a whopping $19.31 billion to $2.498 trillion, Federal Reserve data Tuesday said. Economists surveyed by Dow Jones Newswires had forecast a $7.5-billion increase. Revolving credit, which includes credit-card debt, increased in December by $ 2.76 billion, to $800.98 billion. November revolving credit rose $5.58 billion, the biggest increase since March 2008. Nonrevolving credit rose $16.55 billion, to $1.697 trillion. The increase, which followed a big surge in November and was the largest since November 2001, was driven by federal student loans and has been increasing a lot over the past year--a sign high joblessness in the U.S. has led many people to go back to school.

Consumer Credit Surges, But Is It Healthy Spending?: Consumer credit posted a second straight eye-popping monthly gain in December, according to a new Fed report, which some are taking as a sign of a new surge in the economy. There are a couple of reasons to not get too excited just yet. First, the $19.3 billion jump in consumer credit in December was driven mainly by a $16.5 billion surge in "non-revolving" credit, which includes student and auto loans. "Revolving" credit, or credit cards, grew by a more modest $2.8 billion. To the extent that people are using credit cards and taking out auto loans more, that's a positive sign for economic growth -- although maybe not the healthiest growth. More on that later. But the biggest gain in "non-revolving" credit in December came from lending by the "federal government," which is student lending. That grew by $8.8 billion. A surge in student lending is not always a wholly positive sign for the economy, warns IHS Global Insight U.S. economist Gregory Daco. "It may indicate people are finding it more difficult to finance their kids’ education," Daco said in a phone interview. "That may not be such a good thing." The number might also have been skewed by seasonal adjustment factors. December is not typically a big month for student lending, so some unusually large increase in borrowing in the month, for whatever reason, might have thrown the seasonal adjustment off and amplified the increase. These numbers are volatile and can be revised dramatically.

Vital Signs: Consumers Take on More Debt - U.S. consumers ramped up borrowing in December. Consumer debt outstanding rose at a seasonally adjusted annual rate of 9.3% from November to $2.498 trillion. Behind that was a seasonally adjusted 11.8% rise in nonrevolving credit, which includes car and student loans. Revolving credit, mainly credit-card debt, climbed a seasonally adjusted 4.1% in December from the previous month.

Unadjusted Consumer Credit Soars By Most Since Peak Of Credit Bubble In August 2007, Third Highest Ever - As some may remember those long ago days of January, when the market was not still lost in the latest bout of QE-hopium induced euphoria, December sales missed expectations, following even more disappointing November sales, despite propaganda channel promises that the 2011 shopping season was the "strongest ever"... and yet, many were wondering where did the already cash-strapped US consumer procure the cash to shop as much as they did, even if it was well below a record level. Now we know: it was on credit. As the chart below shows, Non Seasonally Adjusted Credit in December 2011 exploded by $33 billion sequentially In December compared to November: the third highest in the past 18 years, and only second to August 2007, which just so happens was both the peak of the market, and the peak of the credit bubble. The SA chart shows pretty much the same: a surge in consumer credit in December, even if the bulk of it was non-revolving, or used for such purchases as offloading some of that GM channel stuffing, and paying for one's college education. What does this mean? Well, with at least 2 more years of ZIRP, the credit bubble is already back, and it is only uphill from here. US consumers will get increasingly more and more in debt as they use more debt to pay of credit card interest, leading to ever further cash injections to keep asset prices higher to give US consumers the illusion that they are wealthy, so they spend even more, and so on.

Auto and Student Loans Drive Borrowing Surge - In another sign that the credit freeze is thawing, the Federal Reserve said Americans ramped up their borrowing at the end of 2011. Household borrowing through credit cards, car loans, student loans and other installment debt—which excludes mortgages—rose at a seasonally adjusted 9.3% annual rate in December, following a 9.9% rise in November, the Fed said Tuesday. That was the biggest two-month surge since late 2001, when auto makers rolled out zero-percent financing after the Sept. 11 terrorist attacks. The most recent gains largely reflect more student loans, which at least one economist said could be a sign of financial strain. But auto loans and, to a lesser extent, credit-card use also rose. That marks a rebound in consumers' ability and willingness to borrow, which fell sharply after the 2008 crisis amid tighter credit, heavy household debt and rising unemployment. The late 2011 borrowing surge occurred outside the mortgage sector, a key channel for household debt and one which remains under stress. Still, many consumers have cut their debt in recent years and are now on sounder financial footing.

Consumer Credit and the American Conundrum - What to do? This is not as an innocuous question as one might think. Why? Because most American families, who have to balance their living standards to their income, face this conundrum each and every month. Today, more than ever, the walk to the end of the driveway has become a dreaded thing as bills loom large in the dark abyss of the mailbox. What to do? The conundrum exists because there is not enough money to cover the costs of the current living standard. The average family of four has few choices available. The burden of debt that was accumulated during the credit boom can't simply be disposed of. Many can't sell their house because 1 in 4 homes is worth less than what they owe. There is no ability to substantially increase disposable incomes because of a weak employment environment and deflationary wage pressures. Despite the mainstream spin on recent statistical economic improvements, the burdens on the average American family are increasing. Nothing brought this to light more than yesterday's release of consumer credit data, which rose $19 billion following a $20 billion increase in November.  However, after the release yesterday, the headlines were replete with commentators talking about the "end of the consumer deleveraging cycle". Joe Weisenthal at Business Insider wrote: "It's hard to think that the economy is going into any kind of recession with numbers like these. For the second straight month we just got a HUGE number on consumer credit. Consumer credit expanded by $19 billion in December. That's far more than the $7 billion that was expected by economists. Revolving consumer credit (credit cards) grew by $4.1 billion sequentially, and is basically flat from last year again (up barely).

Consumer Credit "Demolishes Expectations" Really? No Not Really! The "Non-Bounce" in Non-Revolving Credit - Joe Weisenthal writing for Business Insider reports Consumer Credit Demolishes Expectations, Grows $19 Billion. It's hard to think that the economy is going into any kind of recession with numbers like these. For the second straight month we just got a HUGE number on consumer credit. Consumer credit expanded by $19 billion in December. That's far more than the $7 billion that was expected by economists. This chart from Reuters' Soctty Barber basically tells it all...The data on which that chart was produced was the Consumer Credit - G.19 government report.  Lance Roberts of Streettalk Live demolishes the revolving credit side of Weisenthal 's story (a $4 billion December rise) in an excellent perspective Consumer Credit and the American Conundrum. Non-Revolving credit rose $11.8 billion in December. However, $8.8 billion of that is growth in federal government loans (which just happens to be where student loans are parked). Here are some charts I put together stripping out federal government loans.

Bernanke: Weak housing to hurt consumer spending for years - Ben Bernanke says declines in home prices have forced many Americans to cut back sharply on spending and warns that the trend could continue to weigh on the economy for years. Bernanke says the broader economy won't fully recover until the depressed housing market turns around. People are spending less because they are stuck in "underwater" homes, which are worth less than what is owed on the mortgage. And home values are falling because of foreclosures and tight credit — even in areas with lower unemployment. "Recent declines in housing wealth may be reducing consumer spending between $200 billion and $375 billion per year. That reduction corresponds to lower living standards for many Americans," Bernanke said. The Fed chairman said there's no "silver bullet" to rescue the housing market. Renting out foreclosed homes and reducing or modifying mortgages are among steps that could help.

Of Jobs, Debts And Budgets - Consumer confidence spiked last December. Gas prices were lower for the third straight month, a mild winter has meant that many consumers paid less to heat their houses, the auto sector posted another strong month, consumers spent more on recreation and demand for student loans increased. Consumers seemed inclined to spend and get deeper into debt. November 2011 was a bad month for consumers: evolving debt went up more than eight percent (the largest month-to-month percentage increase since 2008) and this dubious accomplishment was accompanied by the biggest month to month growth in overall consumer debt since 2001. December’s consumer credit debt increased $19.3 billion to $2.5 trillion. This rise in credit card debt was the fourth month in a row card balances grew.  Maybe the increasing dependence on borrowing is an indication consumers are relying on their credit cards to make ends meet? There were almost four unemployed Americans vying for each job vacancy in December, year over year (yoy) January’s hourly wage increase was only 1.9 percent - the smallest yoy gain since April 2011. Production workers fared worse, their 1.5 percent increase was the smallest on record going back to 1965. Food cost more in December, so did medical care.

CITI: Credit Card Delinquencies Probably Spiked In January, But Don't Worry About It: Much is being made about the expanding consumer credit balances. This should be promising to the economy as it means consumers are probably spending more. However, expanding consumer credit is bad news for banks if delinquencies and defaults also rise. Citi's specialty finance analyst Donald Fandetti warns that credit card delinquencies probably spiked in January. However, much of the rise, he notes, will have been due to seasonal factors. From his note to clients: On Wed, Feb 15, the major card issuers will release their January Master Trust (MT) results. Historically, January has shown one of the largest m/m increases in delinquency rates due to seasonality, which reflects 1) denominator effect as card holders pay down holiday balances and 2) consumers get stretched during the holidays and some tend to get sloppy on payments. We estimate that delinquencies have historically increased 10-20 bps m/m in January (see Figure 1 for monthly analysis). And card balances tend to decline 2-3% from the prior month. For perspective, if we simply hold card issuer delinquency $’s steady into January and lower balances for seasonality, it boosts delinquency rates ~10 bps just from the denominator effect alone. In summary, we recommend that investors look through the seasonal increase and buy the stocks on any weakness around Master Trust day. And remember that as we get closer to April, delinquencies improve nicely on tax refunds

Consumer Sentiment Retreats in February - U.S. consumers were slightly less confident at the start of February than they were in January, according to the Reuters-University of Michigan consumer-sentiment index released Friday, suggesting that some of the euphoria of the holiday shopping season faltered as the month began. The closely watched gauge of consumer sentiment showed a broadly based decline in conditions, which came despite new data showing a strengthening U.S. labor market. The headline index fell to 72.5 from 75.0 in January, with the economic conditions figure falling to 79.6 from 84.2. The outlook gauge edged lower, to 68.0 from 69.1. The index’s decline snapped five consecutive months of gains, which coincided with economic figures that underscored strength in the U.S. economy.

Consumer Sentiment declines in February to 72.5 - (see graph) The preliminary Reuters / University of Michigan consumer sentiment index for February declined to 72.5, down from the January reading of 75.0. Overall sentiment is still fairly weak, although sentiment has rebounded from the decline last summer. This was below the consensus forecast of a decline to 74.3.

Consumer Sentiment Dips. A Sign Of Trouble, Or Just A Temporary Setback? - Regular readers of The Capital Spectator know that the still positive but decelerating trend in personal income and spending has been a concern on these pages for some time. Among the risks to worry about when it comes to the key economic reports and the potential blowback for the business cycle, this is near the top of my list. Today’s update on consumer sentiment suggests that the crowd is also worried.  Reuters reports: Americans turned less optimistic about the economy in early February on worries about falling income even as their outlook on the jobs market rose to a record high, a survey released on Friday showed. The Thomson Reuters/University of Michigan overall index of consumer sentiment fell to 72.5 in early February from January's 75.0, which was the highest level since February 2011. The latest figure fell short of the median forecast of 74.5 among economists polled by Reuters.Even so, the latest drop is still a blip in the context of the recent revival in consumer sentiment. Yes, today’s dip could be a sign of things to come. But much depends on what happens next with personal income—disposable personal income (DPI) in particular. The latest update on DPI was a sign that falling rate of annual increases may soon stabilize... maybe.

Vital Signs: Gas Prices on the Rise - Gasoline prices at the pump have been rising. The U.S. government reported that the average price of a gallon of regular gasoline jumped more than four cents to $3.482 this week. The price has risen more than 18 cents since the first week of January. Analysts say gasoline prices could climb further given tensions in the Middle East and recent U.S. refinery shutdowns.

Average U.S. gas prices hover at record-high levels - Last month turned out to be the most expensive January ever at U.S. gasoline pumps, boosted by growing economic strength. January is typically a month of falling gasoline prices because fuel demand falters in the slower travel weeks that follow the year-end holidays. Not so this year. In January, retail gasoline prices averaged $3.37 a gallon, according to the Oil Price Information Service, a private fuel information service. That compared with the previous record average for the month of $3.095 a gallon, set last year. In 2010, January gasoline prices averaged just $2.71 a gallon. The new record meant more pain in Americans’ budgets. A typical household, burning about 50 gallons of gasoline a month, paid about $168.50 for that fuel in January, or $33 more than in January 2010. An economic pickup is behind some of the price appreciation, analysts said.

Gas Prices could spike 60 cents or more by May - Get ready for another round of pain at the pump: $4 (or higher) gasoline. After rising 19 cents a gallon in the past four weeks, regular unleaded gasoline now averages $3.48 a gallon, vs. $3.12 a year ago and $2.67 in February 2010. Prices could spike another 60 cents or more by May. “I think it’s going to be a chaotic spring, with huge price increases in some places,” says Tom Kloza of the Oil Price Information Service. Kloza expects average prices to peak at $4.05, although he and other industry trackers say prices could be sharply higher in some markets. Rising prices are an annual spring ritual, largely because of seasonal demand.

Why Is Gasoline Consumption Tanking? - Mish recently posted some intriguing charts depicting a significant decline in gasoline consumption. Then correspondent Joe R. forwarded me this stunning chart of gasoline retail deliveries, from the U.S. Energy Information Administration: (EIA)  As Joe noted, this data is interesting because it is un-manipulated, that is, it is not "seasonally adjusted" or run through some black-box modifications like so much other government data.  Retail gasoline deliveries, already well below 1980 levels, have absolutely fallen off a cliff. Is the plunge inventory-related, i.e. are storage facilities so full that retailers are simply putting off deliveries?  Though I don't have data on hand to support this, I know from one of my correspondents who is in the gasoline distribution/delivery business that gasoline is very much a "just in time" commodity: gas stations are often close to running out of fuel when they get a delivery. Stations aren't holding huge quantities of surplus gasoline; that's not how the business works.  Even if you dismiss the recent plunge as an outlier, the declines in retail gasoline deliveries are mind-boggling. If you look at the data from 1983 to 2011 on the link above, you will note that delivery declines align with recessions.

Wholesale Inventories Increased in December - U.S. wholesale inventories and sales both posted solid increases in December, as a broad restocking by businesses helped propel stronger economic growth at the end of last year. The inventories of U.S. wholesalers increased by 1.0% from the prior month to a seasonally adjusted $473.17 billion, the Commerce Department said Thursday. Economists surveyed by Dow Jones Newswires had forecast a 0.5% increase. Sales rose at the fastest pace since March, up 1.3% in December to $413.11 billion. The U.S. economy grew by 2.8% on an annualized basis during the final three months of 2011, according to the government’s preliminary estimate released last month. Much of that improvement was attributable to a buildup in business inventories. Companies restocked late in the year as demand picked up and fears of a second recession dissipated. But inventory levels tend to be highly volatile and many analysts expect a decline in the early part of this year. A give back on inventories, combined a looming recession in Europe and concerns about how Washington will handle spending cuts, has many economists expecting gross domestic product growth to slow from the pace seen in the fourth quarter.

AAR: Rail Traffic increased 0.1 percent YoY in January - From the Association of American Railroads (AAR): AAR Reports Gains for January Rail Traffic The Association of American Railroads (AAR) reported that total U.S. rail carloads originated in January 2012 totaled 1,144,800, an average of 286,200 per week and up 0.1 percent over January 2011. Intermodal volume in January 2012 was 877,637 containers and trailers, up 1.7 percent over January 2011. January’s average of 219,409 intermodal units per week was the third highest ever for a January for U.S. railroads. This graph shows U.S. average weekly rail carloads (NSA).  On a non-seasonally adjusted basis, total U.S. rail carloads in January 2012 totaled 1,144,800, an average of 286,200 per week and up 0.1% over January 2011. Rail carload traffic collapsed in November 2008, and now, 2 1/2 years into the recovery, carload traffic is still not half way back to the pre-recession levels. The second graph is for intermodal traffic (using intermodal or shipping containers): Intermodal traffic is close to the peak year in 2006.

U.S. Total Freight Shipments (Waterways, Truck, Rail, Air, Pipelines) Hit Record High in December - The amount of freight carried by the for-hire transportation industry rose 3.9 percent in December from November, the largest monthly rise in 17 years, which brought the level of freight shipments to an all-time high, according to the U.S. Department of Transportation’s Bureau of Transportation Statistics’ (BTS) Freight Transportation Services Index (TSI) released this week. The BTS reported that the level of freight shipments measured by the Freight TSI, 113.7, surpassed the previous high of 113.3 in January 2005 (see chart above).  The Freight TSI measures the month-to-month changes in freight shipments by mode of transportation in ton-miles, which are then combined into one index. The index measures the output of the for-hire freight transportation industry and consists of data from for-hire trucking, rail, inland waterways, pipelines and air freight. Shipments in December 2011 (index level of 113.7) were at the highest level in the 22-year history of the series back to 1990. After dipping to a recent cyclical low in April 2009 (94.3), freight shipments increased in 22 of the last 32 months, rising 20.6 percent during that period. For the full year 2011, freight shipments were up 6.4 percent, the highest full-year growth rate since 2002, and marked the third consecutive year with an increase.

Trade Deficit increased in December to $48.8 Billion - The Department of Commerce reportsTotal December exports of $178.8 billion and imports of $227.6 billion resulted in a goods and services deficit of $48.8 billion, up from $47.1 billion in November, revised. December exports were $1.2 billion more than November exports of $177.5 billion. December imports were $3.0 billion more than November imports of $224.6 billion. The trade deficit was slightly above the consensus forecast of $48.5 billion. The first graph shows the monthly U.S. exports and imports in dollars through November 2011. Both exports and imports increased in December. Imports stalled in the middle of 2011, but increased towards the end of the year (seasonally adjusted). Exports are well above the pre-recession peak and up 9% compared to December 2010; imports are up about 11% compared to December 2010. The second graph shows the U.S. trade deficit, with and without petroleum, through December. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil averaged $104.13 per barrel in December. The trade deficit with China declined to $23 billion, but hit an annual record in 2011. Exports to eurozone countries increased slightly in December after declining sharply in November.

Falling U.S. Share of Trade Not Due to Competitiveness Problems - New research published by the New York Fed Tuesday argues the U.S. isn’t suffering as badly on the trade front as many now believe. The paper contends while it’s true the numbers look worrisome, the U.S.’s problem has less to do with changes in the U.S., as opposed to developments in the rest of the world. By and large, perceived U.S. trade issues aren’t the result of lost ground, but of the rising economic power of the rest of the world. “The downward drift in the U.S. share of world merchandise trade stems from a number of sources, and does not appear to signal a dire loss of relative productivity for U.S. exporters as a group,” the paper said. “A substantial portion of the nation’s declining export share over the past fifteen years is explained by compositional factors — the shifting make-up of global exports and the smaller share of overall exports claimed by some key U.S. products — and by the changing size of the U.S. economy relative to that of its competitors.” Mandel allows the traditional interpretation of the issue puts the U.S. in an unfavorable light. He notes that through the 1980s and 1990s U.S. goods represented 12% of the value of total global trade, falling to 8.5% in 2010. Many have feared that lost ground is the result of declining competitiveness among U.S. exporters, as well as a move toward emphasizing services exportation, as opposed to the sale of goods.

Vital Signs: Rising Demand From Factories - U.S. factories saw an increase in demand in December. New orders for manufactured goods climbed a seasonally adjusted 1.1% from November, marking the second consecutive monthly rise. The number of unfilled orders also moved upward, indicating that factories will need to ramp up production in coming months. The increase came as companies restocked shelves late last year following a summer slowdown.

Do Manufacturers Need Special Treatment?, by Christina Romer - Everyone seems to be talking about a crisis in manufacturing. Workers, business leaders and politicians lament the decline of this traditionally central part of the American economy. President Obama, in his State of the Union address, singled out manufacturing for special tax breaks and support. Many go further, by urging trade restrictions or direct government investment in promising industries. A successful argument for a government manufacturing policy has to go beyond the feeling that it’s better to produce “real things” than services. American consumers value health care and haircuts as much as washing machines and hair dryers. And our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada. The economic rationales for a policy aimed specifically at shoring up manufacturing largely fall into three categories. None are completely convincing: Market Failures ..., Jobs ..., Income Distribution ...

Why Manufacturing Still Matters - Laura D’Andrea Tyson - As one of a rare group of economists who believe that “manufacturing matters” for the health of the American economy, I was heartened to hear President Obama emphasize manufacturing in his State of the Union address. During the last two years, the manufacturing sector has led the economic recovery, expanding by about 10 percent and adding more than 300,000 jobs. Admittedly, this is a small number compared with overall private-sector job gains of 3.7 million during the same period, but it reverses the trend of declining manufacturing employment since the late 1990s. And promising signs are emerging that American companies are shifting some manufacturing production and employment back to the United States. Policies to strengthen the competitiveness of the United States as a location for manufacturing can strengthen these nascent developments. Though there are economists who do not share my heretical view, I believe that a strong manufacturing sector matters — and deserves the attention of policy makers — for several reasons. Manufactured goods account for about 86 percent of merchandise exports from the United States and about 60 percent of exports of goods and services combined. Exports support more than one-quarter of manufacturing jobs in the United States.

Employment Trends Index Gains in January - The Conference Board Employment Trends Index (ETI) increased 0.73% in January to 105.81, from 105.04 in December (see chart above). The January figure is also up 5.9 percent from the same month a year ago. The Employment Trends Index has been improving rapidly for four straight months, suggesting somewhat more robust job growth is likely to continue in this quarter,” . “Beyond that we still remain cautious. We expect sluggish growth in economic activity in the first half of 2012 and therefore we do not foresee the strengthening of the labor market to be sustained in the second quarter of 2012.” This month’s strength in the ETI was driven by positive contributions from four of the eight components. The improving indicators include Percentage of Firms With Positions Not Able to Fill Right Now, Number of Employees Hired by the Temporary-Help Industry, Industrial Production, and Real Manufacturing and Trade Sales.  The Employment Trends Index aggregates eight labor-market indicators, each of which has proven accurate in its own area. Aggregating individual indicators into a composite index filters out “noise” to show underlying trends more clearly."

Employment Trends Signals Growth Ahead - Everyone treats employment figures as co-incident indication of an economy's status but a very useful leading economic indicator that deploys a wide range of labor market data is the Conference Board's Employment Trends Index (ETI).The figures were updated today and according to Gad Lavanon from the Conference Board, "The Employment Trends Index has been improving rapidly for four straight months, suggesting somewhat more robust job growth is likely to continue in this quarter." The ETI is one of the 9 components of our Composite SuperIndex and one of 4 leading indicators used by the SuperIndex. We deploy rate of change of the ETI for recession lead-signaling as shown below. The implied probability of recession is 0.1%. The system has an average lead of 6.5 months (5.5 months to the real-time observer) with a standard deviation of only 2 months in the 39 years since 1973. The ETI joins the Conference Board LEI in depicting low probability of recession.

Obama Economic Advisers Raise Job Creation Forecast - — Drawing on a string of improved economic data, advisers to President Obama have updated their forecasts in recent days and now project that the economy will create two million jobs this year if stimulus measures are extended, which could reduce the unemployment rate to about 8 percent by year’s end. Alan B. Krueger, chairman of the president’s Council of Economic Advisers, confirmed the revised projection for the economic figure that is the most important one to Mr. Obama’s re-election prospects. Mr. Krueger said the forecast was updated because the projection that will be published in the president’s annual budget, to be released on Monday, was already “stale and out of date.” The budget will project an average unemployment rate of 8.9 percent for 2012 and 8.6 percent for next year, based on economic conditions that prevailed in mid-November. But unemployment in January surprisingly dropped to 8.3 percent, for the fifth straight monthly decline, suggesting a downward trend that would have to reverse sharply to produce an annual average of 8.9 percent. Since the initial forecast last November, Mr. Krueger said, “we learned that the unemployment rate has fallen by an impressive 0.8 percentage point over the last six months and other job market indicators have improved.”

Unemployment Aid Applications Near a 4-Year Low - The number of people seeking unemployment aid fell to nearly a four-year low last week, an encouraging sign of continued improvement in the job market. The Labor Department says weekly applications for unemployment benefits fell 15,000 to a seasonally adjusted 358,000. That’s the second-lowest level since April 2008. The four-week average, a less volatile measure, fell to 366,250, the lowest since late April 2008.

Weekly Initial Unemployment Claims decline to 358,000 - The DOL reports: In the week ending February 4, the advance figure for seasonally adjusted initial claims was 358,000, a decrease of 15,000 from the previous week's revised figure of 373,000. The 4-week moving average was 366,250, a decrease of 11,000 from the previous week's revised average of 377,250. The previous week was revised up to 373,000 from 367,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week to 366,250. The 4-week moving average is at the lowest level since May 2008. And here is a long term graph of weekly claims: The 4-week average of weekly claims is still moving down and is now well below 400 thousand.

Charles Biderman on the US Non-Farm Payrolls Report - I spend a great deal of time looking at the various government reports, and especially the Payrolls report as you know. I keep my own spreadsheets with their data, and measure various changes in the way in which they calculate the seasonal adjustment factors, imaginary jobs, and prior revisions. If I wish to leave you with one takeway, it is that the current use of the monthly headline number is more of a Sales and PR program for Wall Street and the government, and hardly the product of serious and thoughtful analysis of statistical data. The US economy is on a flatline from all that I can tell. I suspect that if a double dip occurs it will be blamed on Europe or some other factor. but in fact there has been no real recovery as of yet.

Lies, Damned Lies, and Politics - Krugman - Recent facts have not been kind to the political right. A better-than-expected jobs report; a renewed focus on inequality, driven both by CBO research and by the gift of Mitt Romney’s candidacy. What to do? The answer is to throw a bunch of bogus numbers at the issues, in the hope that something sticks, or at least that the discussion becomes confused. First, about that jobs report: all the usual suspects have jumped on the routine BLS population adjustment to claim that the numbers were cooked. The real story here is that the BLS estimates unemployment based on a monthly survey; this tells us what fraction of workers are unemployed. To turn that into a number of unemployed, the BLS estimates total working-age population; but it updates those estimates only once a year. So there’s usually a step up or down in the totals each January, signifying nothing. Next up, inequality denial. The Census Gini figure hasn’t moved much since the early 1990s — but as Jon Chait says, we know perfectly well why: it’s because Census numbers are top-coded, that is, cut off at high income levels, and the big gains have come way up the scale.. Here’s what the IRS tells us about income shares at the top:

The Rapture (And The Left Behind) - American society and its economic "recovery" have entered an important new phase in recent months, a new Heavenly Age in which our problems have magically disappeared. I call it The Rapture. Let me explain. The Bureau of Labor Statistics says we added an astonishing 243,000 non-farm payroll jobs in January, a number well north of what we're used to. More importantly, the unemployment rate fell to 8.3%, a new post-recession low. The Good News was widely celebrated. It did not matter that after the population adjustment, the annual benchmark adjustment, the Birth-Death model adjustment, the seasonal adjustment and the often overlooked adjustment adjustment that 1,177,000 American citizens were adjusted out of the civilian labor force. This happened before the Chicago Fed attributed half of those who were not in the labor force to retiring baby boomers. Not to worry, though, I'm sure they can also explain away those new million-plus non-workers. Or at least half of them anyway.

Jobs Reports- Good News for Whom? - Revisions and all, we are 300,000 jobs richer than we were a month ago. There are plenty of blog reactions you can read to this report, all of which tease out the different cyclical and structural aspects, short and long-term implications, much better than I could. Check out Mark Thoma’s links for a smattering. My own reaction, yesterday morning, was cynical as ever- “great news for Barack Obama!”  I had a reality check this morning, courtesy of the inner city of Baltimore, while driving to a church men’s breakfast in the DC area. I was riding with two fellow congregants from Luther Place Memorial Church- one an old-timer who is something of a social justice junkie, the second a community activist in Baltimore, who works to transform vacant lots to community spaces. The old-timer began to ask for our reactions to the jobs report. Before I could say my piece about it helping Obama but not being good enough for a real recovery, the activist jumped in and said, “I don’t pay attention to that stuff. Where I work, the unemployment rate is 50 to 70 percent. These reports just aren’t relevant to them.”  Ed the activist knows that way more than 5% of Americans are very poor, and no, the safety net is not catching them.   The great recession has made things worse, and there is no such thing as an economic recovery in places like inner city Baltimore.

Could it be the Weather?  - Friday’s jobs report showed that the economy lost almost 2.7 million jobs between December 2011 and January 2012.  That’s pretty good for a January.  In the world of labor statistics and seasonal adjustments it translates into a gain of 243,000 jobs.  How does that work?  The Job loss of 2.02% in January of 2012 was better than what we have seen recently.  If we exclude the change from December 2008 to January 2009, at the depths of the recession, the average December to January change since 2006 was a decline in employment of 2.11%. We learned on Friday that employment is 9/100 of one percent higher than it would be have been if January 2012 was like the typical January in recent years.  With total employment in the U.S. of approximately 130 million, this means there were 117,000 more people working in January than we would have otherwise expected. Friday’s jobs report may be signaling that the labor market recovery is accelerating as we head into 2012.  Or it may indicate that consumer spending was a little higher during an unusually mild January.  If the latter is correct we should be prepared for smaller than usual employment gains as we head from winter into spring.

The Seasonal Factor & January's Encouraging Employment Report - January’s payrolls report looks convincingly strong to many economists, but some skeptics warn that the seasonal adjustment in first month of the year is usually quite hefty and so there's less good news in the numbers than we've been told. That inspires looking at the unadjusted data on a year-over-year basis in search of clarity. But here too the results are encouraging. As of last month, private payrolls sans seasonal adjustment are higher by 2.1% vs. the year-earlier figure. That’s the fastest rate of growth since May 2006. Let’s also note that the trend is strengthening. As recently as a year ago, this definition of the private labor market was growing by just 1.2% a year.  History suggests that when the trend in labor market growth is at a ~2% pace on an unadjusted basis--and rising--the odds of a new recession are relatively low. The qualifier that the pace of annual job growth must be rising is crucial. Job creation at or above the 2% mark alone doesn’t say much—unless the rate of increase has been strengthening, which is clearly the case. Short of a sudden and dramatic deterioration, it's hard to see the trend in nonfarm payrolls as something less than productive for the economic outlook.

Explaining Yesterday's Seasonally Adjusted Nonfarm Payroll "Beat" - Since there still is confusion regarding yesterday's whopping "surge" in non-farm payrolls, which represented a 243K jump in the Establishment survey (of which 490K was temp jobs, same as in the Household Survey where temp jobs soared by a record 699K), yet only to arrive at an employment number last seen ten years ago, when the US population was about 30 million lower (think about that: 30 million increase in population and no change in the total employed), here is the final explanation of what happened yesterday. As everyone knows by now, January is when the BLS imposes its annual seasonal adjustment revision (more on that in a second) for the previous January-December period. What this manifests itself most directly in, is the divergence between the Nonadjusted January number of the establishment survey of any given year and the Unadjusted number. And while the January adjustment is always substantial, it is the fact that the so-called beat was entirely based on assumptions that makes yesterday's NFP number so meaningless, and hardly the basis to assume that the US economy has taken off.  The chart below shows the adjusted and unadjusted employment survey data for total Nonfarm Employees. The annual January overadjustment is more than evident. Just as evident are the subsequent under-adjustments as seasonal data is lowered to account for volatility in the NSA data. What is very notable is that in January, absent BLS smoothing calculation, which are nowhere in the labor force, but solely in the mind of a few BLS employees, the real economy lost 2,689,000 jobs, while net of the adjustment, it actually gained 243,000 jobs: a delta of 2,932,000 jobs based solely on statistical assumptions in an excel spreadsheet!

The Relentless Pursuit of Meaningless Metrics - We ended last week’s newsletter, “Entering the Debt Dimension,” generally bearish and skeptical of the current rally due to a preponderance of bad news in the global economy, including the continuing European debt crisis and growing brinksmanship between Greece and the rest of the eurozone.  In spite of weakness and troubles throughout the global economy, the US economy is showing positive signs. On Monday, the Dallas Fed Manufacturing Survey business activity Index for January came in at 15.3, a huge leap over December’s reading of minus 0.3 and surpassing consensus expectations for a reading of 1.0. The production index also rose sharply, climbing from minus 1.3 to 5.8. Wednesday saw unexpectedly strong auto sales, as sales rose 11% in January year-over-year.  The real capper was the unexpectedly strong numbers in Friday’s Non-Farm Payroll Report. The report showed a gain of 243,000 jobs in January, surpassing December’s revised reading of 203,000 and beating consensus expectations of 135,000. The survey also showed the average workweek increasing from 34.4 to 34.5 hours.  Friday’s ISM Non-Manufacturing (Service) Index showed strong growth in employment and new orders.   Nevertheless, Friday’s positive employment report didn’t come without controversy. Tyler Durden of Zero Hedge pointed out that at the same time the new employment numbers were being touted, the number of people participating in the workforce dropped by 1.2 million in a single month, lowering the civilian workforce participation rate to a 30-year low of 63.7%.

Is BLS Data Skewed? - Our estimate of a slowly growing economy is based primarily upon daily income tax collections. Either there is something massively changed in the income tax collection world, or there is something very suspicious about today’s Bureau of Labor Statistics hugely positive number. We continue to check and recheck our analysis of income tax collections. We are aware that another service believes that incomes are growing faster than we do. So far we have not found any errors or discrepancies in our work, but if we do, we will let you know. I keep repeating that the BLS refuses to use the data embedded in income tax collections to be able to report real time jobs and wages. Why does it refuse? Could the reason it refuses to use real time data on jobs and incomes be because perhaps this jobs number is politically motivated? The entire world is looking at US job creation as a proxy on how well Obama is doing? Could the Obama administration be pressuring its economist employees to create the best possible new jobs number?

Fewer Nonfarm Employees Now Than December 2000; Unemployment Rate: Some Things Still Don't Add Up - The BLS labor force numbers seem suspect. The labor force is less now than when the recession ended 2.5 years ago. Current Labor Force: 154,395,000. June 2009 Labor Force: 154,730,000. Based on trends, the labor force ought to be close to 160,000,000. Boomer demographics can explain part of the "trendline failure", but not all of it. The US is adding work-aged population every year, just at a decreasing rate. In other words, the labor force should be rising, even if at a reduced rate (at least in theory). What Rate? In 2000, it took about 150,000 jobs a month to keep up with birthrate and immigration, Recently Bernanke stated the number is 125,000 jobs. Could it be lower? Certainly, but the number is not zero. There are currently 132,409,000 nonfarm employees. In December of 2000 there were 132,481,000 employees. How's that for job growth? Civilian employment is currently 141,637,000. In May of 2005 civilian employment was 141,609,000. The recession ended in June of 2009. The labor force was 154,730,000. The Labor force is now 154,395,000. Is this credible? If it's not credible, then neither is the unemployment rate! Unemployment Rate What If? At a very modest labor force growth to 157 million (a mere 90,800 a month since the recession ended), the unemployment rate would be 9.8%.

  • Labor Force 155,000,000 8.6%
    Labor Force 156,000,000 9.2%
    Labor Force 157,000,000 9.8%
    Labor Force 158,000,000 10.4%
    Labor Force 159,000,000 10.9%
    Labor Force 160,000,000 11.5%

Labor Force Participation? - I have noticed that Bank Economists, and Financial Journalists seem to be very concerned about the labor force participation rate. Moreover, this concern preceded the recent hubbub over benchmarking the labor force. My question – why?  To a first approximation I just don’t care about the labor force participation rate and I am not sure why anyone should. You could say that it reflects the size of the taxable economy moving forward and that’s important for measures of the burden of the welfare state, but lets be serious. The movements are small, the workers marginal and the general trend towards an aging nation visible for decades now. Sometimes I think I am detecting a sense that folks are concerned that Labor Force participation will affect the unemployment rate. Eh. Its complicated but there is no lump of growth nor a lump of job creation even in a recession. To put it terms now common place, the number of people who want to work affects the natural rate of interest.

Labor Force Participation Rate - Yesterday there was a post about the participation rate that displayed a widespread misunderstanding of what the data actually shows. The labor force and the participation rate have been falling since the great recession. The following table shows that for the last three years the participation rate and the labor force have been falling when long term population growth suggest that they should grow some 1% to 2% annually. In 2009 and 2010 employment actually fell, so essentially all of the fall in the unemployment rate from 10% in late 2009 to 9% in mid-2011 was due to the labor force contracting. During 2011 both employment and the labor force started growing, so that recent declines in the unemployment rate stemmed from both growing employment and a growing labor force. In January, the data was corrected to account for more recent census data that showed more rapid growth in the population and employment than had previously been estimated. But the historic data was not changed, so the January data represent a break in the data and is not exactly comparable to earlier data.But if you look at the data you can see that the participation rate actually started falling around the 1990 recession, so that the recent drops were just a more serious continuation of a trend that began some 20 years ago.

People Are Not Leaving the Labor Force - More than a little commentary on last week’s employment report asserts that the apparent good news came from people dropping out of the labor force, and thereby not being counted as unemployed. Some of that came in comments on my previous jobs post. Those making that claim have not read what the Bureau of Labor Statistics had to say. If you follow the link, go to Table C. You will learn that previously discouraged workers seem to be entering the labor force and looking for jobs. That is just what you would expect to happen when the job market is improving. Each January the bureau updates its population estimates, and this update was particularly large because it had a new census to use. The policy is to not revise the earlier unemployment survey numbers, so sometimes there are big apparent changes that are not actually there. That is what happened in January. The government says that the estimate changes reduced the labor force participation rate by 0.3 percentage points. Without the new estimates the number would have been unchanged from December to January. The changes had no effect on the unemployment rate.

Solving the ''Not in Labor Force'' Mystery - There has been much debate over the weekend regarding the 1.2 million individuals who moved into the "Not In Labor Force" category in Friday's Bureau of Labor Statistics report, which included an increase to the total population of 1.5 million. From the Wall Street Journal: Here's what happened: According to the Census Bureau, the civilian population [age 16 and over] grew by 1.5 million people in 2011. But the growth wasn't distributed evenly. Most of the growth came among people 55 and older and, to a lesser degree, by people 16-24 years old. Both groups are less likely to work than people in their mid-20s to early 50s. So the share of the population that's working is actually lower than previously believed. Taking that into account, the employment-population ratio went up. The unemployment rate wasn't affected. The adjustments had other effects, as well. They made the drop in the number of unemployed look smaller than it really was, and the rise in the number of employed look bigger. And because the Labor Department doesn't readjust its historical data to account for the new calculations, it isn't possible to compare January's figures on employment, unemployment and similar measures to those from earlier months.I want to dig a little deeper into the Not In Labor Force (NILF) category to see what is really going on.

Is the Labor Market Actually Improving? - Krugman - There’s a huge amount of confusion out there, which Floyd Norris tries to clear up. Here’s my take. My favorite measure of the labor market is the employment-population ratio, because it isn’t subject to questions about whether people not in the labor force are really just as unemployed as those in the measured labor force without jobs. But the EP ratio has its own problems right now, mainly because of demography: the baby boomer wave is now hitting the labor force statistics, and there are good reasons to expect a secular decline in labor force participation. So, these days I focus on the employment-population ratio for prime-age adults: And yes, things have really looked up over the past few months. But there’s still a huge way to go.

Why the Future Depends on Today’s Discouraged Workers - Economists, investment advisors and political strategists are closely watching the unemployment rate. But few commentators acknowledge just how faulty the employment statistics are. One key problem is that a crucial group of people can’t be tracked and measured. These are the so-called discouraged workers, who have given up looking for employment. They are the economic equivalent of astrophysicists’ dark matter – the particles scattered throughout the universe that can’t be seen but have enough mass to alter the course of everything we can see.There have always been discouraged workers, of course, but the recent recession has multiplied their number. And it has enlarged a related category, as well, those who could be described as disgruntled workers – the underemployed, who have been forced to accept jobs with fewer hours or lower pay than they would like. These two groups aren’t counted in the unemployment rate either because they aren’t listed as looking for work or because they are listed as already working.

Goldman: No Labor Force Participation Rebound in Sight - In a research note released last night, Goldman Sachs economist Sven Jari Stehn looked at the population revisions from the 2010 Census and argued that there is "No Labor Force Participation Rebound in Sight". This is a key point. Some of the recent decline in the participation rate was expected due to demographics (mostly aging of the population), but most analysts expected some rebound in the participation rate this year as the economy (hopefully) improves. Goldman is now expecting the participation rate to stay flat through 2013.  From Stehn:  The demographic structure of the population matters because participation follows a distinct life cycle: it rises with age as teens enter the labor force, reaches a plateau between ages 25 and 55, and falls sharply thereafter due to retirement. Moreover, participation is higher for prime-age men than women, mostly due to child bearing. This life-cycle pattern can be seen by splitting the working-age population into four groups: young individuals (aged 16-24 years), prime-age men (25-54), prime-age women (25-54), and older individuals (55+). Specifically, in 2011 prime-aged individuals had much higher participation rates (89% for men, 75% for women) than young (at 55%) or older individuals (at 40%). The updated population controls from the 2010 Census revealed an increase in young and older workers relative to prime-age ones, pushing down the estimate for the aggregate participation rate.

The impact of changes in the participation rate on the unemployment rate - Yesterday Goldman Goldman Sachs economist Sven Jari Stehn argued that the labor force participation rate would remain "broadly flat at 63.7% through the end of 2013". He argued there would be a cyclical boost to the participation rate this year from the recovering economy, but a structural decline in the participation rate due to demographics. The updated population controls from the 2010 Census showed a higher percentage of younger and older workers compared to the prime working age group (25 to 54), and also more women (participation rate is lower for women) than originally estimated - so the aggregate participation rate is now at 63.7%. Stehn argues that structural factors alone could push the aggregate participation rate down further to 63.1% by the end of 2012, but that this will probably be offset by more people returning to the labor force as the economy recovers. The participation rate plays a key role in calculating to unemployment rate. First a few definitions from the BLS Glossary: So a lower participation rate - with the same level of employment - would mean a lower unemployment rate.  Below is a table showing the sensitivity of the unemployment rate to three levels of the participation rate (centered around Goldman's forecast) and three rates of job creation for 2012.

What does construction have to do with it? - We often hear that our high unemployment is the result of the housing boom and the need to shift unemployed construction workers into new fields, which takes time and training. Construction employment has fallen dramatically since the housing bubble burst, but construction worker unemployment is neither what raised the unemployment rate nor what prevents it from falling as rapidly as we would want. The graph makes this clear by showing the overall unemployment rate and the unemployment rate excluding construction. In the early aftermath of the housing collapse in 2007, the unemployment rate was 4.6 percent, just one-tenth of a percentage point higher than if there were no construction sector. By 2011, the unemployment rate had risen to 8.9 percent and would have been 8.6 percent without construction. The rise in unemployment from 2007 to 2011 was 4.3 percentage points (going from 4.6 percent to 8.9 percent) and would have risen 4.1 percentage points without any construction sector (from 4.5 percent to 8.6 percent). Thus, just 0.2 percentage points of the overall 4.3 percentage-point rise in unemployment can be attributed to higher construction worker unemployment; that is, construction-sector unemployment is responsible for less than 5 percent of the overall rise in unemployment between 2007 and 2011.

BLS: Job Openings increased in December - From the BLS: Job Openings and Labor Turnover Summary There were 3.4 million job openings on the last business day of December, up from 3.1 million in November, the U.S. Bureau of Labor Statistics reported today. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the number of job openings has increased 39 percent since the end of the recession in June 2009. The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS. Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. Jobs openings increased in December, and the number of job openings (yellow) has generally been trending up, and are up about 15% year-over-year compared to December 2010.

Job Openings On The Rise - Job openings in the U.S. rose to 3.4 million on the last business day of December, up from 3.1 million a month earlier, the Labor Department reports. “Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the number of job openings has increased 39 percent since the end of the recession in June 2009,” according to the accompanying press release. The job openings data is a relatively new addition to the government’s employment analysis tool set and the history only dates to 2000. (Here’s a background paper on the data.) Intuition tells us that this series will track the business cycle and offer additional context for confirming or denying major turning points in the economy. The continued rise in job openings certainly paints an encouraging picture for thinking that the economy is expanding.The rising trend in job openings wouldn’t mean much if other labor market indicators presented conflicting information. But the news for jobs creation has been relatively encouraging lately. The labor market in January was perky, even without the seasonal adjustment, and the falling trend in initial jobless claims implies that there’s more good news down the road.

Little Room for New Workers - A humming economy usually means a high rate of "churn" in the work force: employees voluntarily leaving one job for another in search of higher pay and new challenges. One worker's exit from a job opens the way for someone else to jump on to the ladder. But through the recent recession and recovery, that churning process has slowed and shows little sign of picking up. New data released Tuesday showed fewer than two million Americans quit their jobs in December, compared with about three million a month, on average, before the recession. "People aren't willing to take a chance and take a new job and create an opportunity for someone else,". Quitting is a critical element of a flexible labor market, freeing up jobs that can be taken by new graduates, unemployed workers or employees of other companies—whose departures, in turn, create job openings. When people cease to change jobs, the system grinds to a halt. Churn, like other labor-market indicators, has recovered more slowly after the most recent recession than after the previous downturn. Quits bottomed out about a year and a half after the end of the 2001 recession, the first for which government statistics were available, and then rose sharply. The 2007-2009 recession was longer and deeper, but more than 2½ years after it ended, the quit rate has yet to rebound significantly.

Jobless want you to quit already! - Even though some employees are frustrated with their jobs because the tough economy has led to furloughs, wage freezes, and cuts in benefits, many of them aren’t upset enough to say, “I quit!” More workers are reluctant to leave their employer and it’s shrinking job opportunities for the unemployed , underemployed and those looking to find new work horizons, according to an article in the Wall Street Journal Wednesday1. Turns out, some workers are just too scared to take a chance on a new gig in this job market. U.S. Labor Department statistics showed that less than 2 million workers quit their jobs last month. That’s way less than the three million, on average, that did so before the Great Recession. With fewer workers heading out the door, there’s less churning in the work market. That churning is what’s keeping the number of job openings at low levels, said Steven Davis, a University of Chicago economist quoted in the Journal's story.

Churn for the better - IN 2000, the Bureau of Labour Statistics introduced the Job Openings and Labour Turnover Survey, a data series that added to existing figures on payroll employment and household unemployment with details on the number of job openings, hires, and job separations in the economy. This series gave economists a new and interesting look into the dynamics of business cycles during one of the deepest downturns of the century. And that, in turn, is generating a new understanding of what happens when an economy enters recession and how such times differ from the normal, healthy operation of the labour market. One thing that has clearly emerged is that net changes in employment are small relative to the gross flows through the labour market. Millions of workers move from job-to-job every quarter, in a process economists call churn. This week's Free exchange column examines how churn changed during the Great Recession and what that change has meant for the broader economy: Just 9m workers were hired in the second quarter of 2009—the last of the recession—down from 12.8m in the fourth quarter of 2007, a fall of about 30%. About 80% of this decline in hiring was attributable to a fall in churn rather than a decline in job creation (see left-hand chart). The number of workers voluntarily leaving a job fell by nearly 40%, for instance. The pace of job creation in the economy slowed sharply, it is true, but most of the hiring chill can be attributed to a decline in churn.

88 million out of work and not looking for a job - Number of the day: 88 million. That's how many working-age Americans don't have a job and aren't trying to find one. The increase in people dropping out of the labor market altogether skews the otherwise-positive unemployment numbers released last week. While the jobless rate fell to 8.3 percent in January - a three-year low - it doesn't account for this army of nonworking Americans. The percentage of people participating in the labor market dropped to 63.7 percent last month, the lowest level since May 1983.

Aging Population Eases Jobless Rate -The nation's unemployment rate may fall faster in the future than many economists assume for one simple reason: The rapid aging of the American work force is helping reduce the share of the population hunting for jobs. For more than a decade, the labor participation rate—the share of the population over 16 that is either working or looking for work—has been falling. It stood at 64.2% in October, down from its peak of 67.3% in 2000, and economists project it to continue heading lower. Part of this decline reflects aging. As workers move into their late 50s and beyond, they are much more likely to drop out of the work force.In today's job market, that could mean that many people now counted as unemployed may simply drop off the rolls and never return—making it easier to pull down the jobless rate once economic growth accelerates, since fewer new jobs will be needed to get the jobless back to work and keep up with population growth. Fifteen percent of the nearly 14 million jobless are 55 or older.

US jobs gap between young and old is widest ever - Squeezed by a tight job market, young Americans are especially struggling. They have suffered bigger income losses than other age groups and are less likely to be employed than at any time since World War II. An analysis by the Pew Research Center, released Thursday, details the impact of the recent recession on the attitudes of a generation of mostly 20- and 30-somethings. With government data showing record gaps in employment between young and old, a Pew survey found that 41 percent of Americans believe that younger adults have been hit harder than any other group, compared with 29 percent who say middle-aged Americans and 24 percent who point to seniors 65 and older. A wide majority of the public - at least 69 percent - also said it's more difficult for today's young adults than their parents' generation to pay for college, find a job, buy a home or save for the future. Among young adults ages 18 to 34, only a third rated their financial situation as "excellent" or "good," compared with 54 percent for seniors age 65 and over. In 2004, before the recession began, about half of both young and older adults rated their own financial situation highly.

Unemployment drop still leaves low skill workers behind - Bean’s predicament is not unlike that of many people who have a high school education or less. Not only were they hit especially hard by the recession but they have continued losing ground in the recovery that has followed. By disproportionate numbers, these Americans have given up looking for work, making the nation’s recovery appear better than it is. If the unemployment rate counted the 2.8 million people who want jobs but have stopped looking, it would sit at 9.9 percent rather than its current 8.3 percent. These would-be workers are falling behind as other people are gaining momentum, economists say. Employment prospects are modestly improving for college graduates, for instance, but dimming for those who have a high school diploma or less.  The number of Americans facing this predicament isn’t small. Nearly a third of the nation’s labor market has only a high school diploma. And more than one in 10 of these workers lost their jobs between late 2007 and early 2011, according to the Urban Institute, a nonpartisan think tank. About a third of those job losses occurred since the recovery began in mid-2009.

Economy toughest on young adults, study finds  - As the nation climbs slowly out of the Great Recession, young adults appear to be having the toughest time of any age group gaining a foothold in the recovering economy. Those difficulties, in turn, are shaping their decisions about careers, schooling, marriage and parenthood, according to a new report. The analysis by the Pew Research Center, released Thursday, examines the effects of the recession on the lives and attitudes of young Americans ages 18 to 34. "The economy may be improving, but in spite of the recent decline in unemployment, young people are still really struggling," . The tough times are forcing changes in young adults' daily lives and in their longer-term plans. Nearly half say that in recent years they've taken a job they didn't really want, to pay the bills. More than a third have gone back to school because of the poor economy. About a third have postponed either their plans to get married or have a child, and one in four say they have moved back in with their parents after living independently. And fewer than half of young people who are now employed say they have the education and training necessary to get ahead in their jobs.

Teens Still "Most Screwed Over" - Now that the U.S. Bureau of Labor Statistics has updated its overall count of the number of employed Americans to incorporate data recorded by the 2010 U.S. Census, with a corresponding surge of 847,000 in the number of individuals counted as being employed in January 2012 as compared to December 2011, we thought we would ask the question: "How well are teens really doing in the U.S. economy?"  The answer: "They're still the most screwed over...."  To see why, we've updated our monthly chart showing the overall change in the number of employed by selected age groupings with the latest data incorporating the BLS' statistical adjustment, which affected all data reported since January 2007.  Here, compared to when total employment in the United States peaked in November 2007 ahead of the December 2007 peak in economic expansion that marks the beginning of the most recent recession, we find that the number of individuals Age 25 or older jumped by 705,000 between the value recorded in December 2011 and January 2012, while the number of young adults between the ages of 20 and 24 counted as having jobs increased by 140,000.  But teens between the ages of 16 and 19 only saw their numbers increase from December 2011 and January 2012 by just 2,000, even with the statistical adjustment!

The New Youth Normal - Your Parents' Basement - Recent times have been particularly hard on young adults. As we look around the world at Europe and the Middle-East, it is all too often the youth that are leading the social unrest as they again and again are the hardest hit by the global deleveraging (and admittedly most socially connected). The US is not insulated from this (though perhaps more Xanax-subdued) as youth unemployment is around 20% (with 16-19 year-olds around 25%). As Pew Research Center notes though, that fully 55% of those aged 18-24 (and 4% of 25-34 year olds) say young adults are having the toughest time in today's economy. The day-to-day realities of economic hard times are somewhat shocking for a country supposedly so far up the developed spectrum as roughly a quarter of adults aged 18 to 34 (24%) say that, due to economic conditions, they have moved back in with their parents in recent years after living on their own. In the 25 to 29 age range a shocking 34% have moved back home with mom and pop (hardly likely to help with the huge shadow housing inventory overhang we discussed yesterday) Finding a job, saving for the future, paying for college, and buying a home are seen as dramatically harder for today's young adults compared to their parent's generation while Facebook saves the day as staying in touch with friends/family is the only stand out aspect of life that is 'easier' for today's youth.

Paying Your Own Bills at Age 22 - Apparently there is some truth to that stereotype of today’s 20-somethings being stuck in an extended adolescence — but if so, it seems to be mostly their own parents’ doing. A new poll from Pew Research Center finds that expectations for when young adults should be financially independent have gotten laxer over the years: As you can see, in 1993, 80 percent of parents with children age 16 or younger said they expected their children to be financially independent by age 22. As of 2011, only 67 percent of parents agreed. (The choices offered in the poll were ages 18, 22, 25, 30, and Never.) Ask that same question of young people (ages 18 to 34) today, and the expectations are about the same. But Americans who have children over 18 and Americans who are over age 50 are far more tolerant of children’s financial dependence later in life:

Rocky Recovery for Women - Three years ago, when President Obama signed the Lilly Ledbetter Fair Pay Restoration Act, he said: “It is fitting that with the very first bill I sign…we are upholding one of this nation’s first principles: that we are all created equal and each deserve a chance to pursue our own version of happiness. If we stay focused, as Lilly did, and keep standing for what’s right, as Lilly did, we will close that pay gap and ensure that our daughters have the same rights, the same chances, and the same freedom to pursue their dreams as our sons.” To which there was much rejoicing. Since then, the picture for women regarding work, jobs, chances and dreams has grown bleaker. Take those January jobs numbers. That official unemployment fell to 8.3 percent from 9.1 percent a year ago was cause for good cheer amongst the instant expert crowd, but the light at the end of the tunnel was harder to make out if you were female, young, old or a person of color. In January, black women (12.6 percent), black men (12.7 percent), Hispanic women (11.3 percent), Hispanic men (10.7 percent) and single mothers (12 percent) all had unemployment rates substantially higher than the national average. For young people 16–19, it was 23.1 percent. For young African-Americans, it was 38.5 percent. Is this the new normal?

Vital Signs: Rebounding Household Incomes - U.S. incomes rose at the end of 2011 after falling during the recession and much of the recovery. An analysis of Census Bureau data shows the Household Income Index — which measures changes in real median annual household income — rose almost 4% from August to December. That brought the index to 92.1, its May 2010 level, but left it well below prerecession readings above 95.

Incomes Rebound, but Still Have Ground to Make Up Americans saw their incomes rise steadily at the end of 2011 but have yet to make up a good deal of ground lost during the downturn and recovery. Between August and December, real median annual household income in the U.S. climbed  4%, according to a study of Census Bureau data released Thursday by Sentier Research. According to the report, median household income rose to $51,413 in December from $49,434 in August. The gains are “fairly impressive,” said Sentier Research’s Gordon Green, “but it is very difficult to maintain that rate of growth over the long haul.”In earlier analyses of Census data, Mr. Green and his colleague John Coder found that real median annual household income fell 3.2% during the recession, from December 2007 to June 2009. That decline was mild compared with the 6.7% drop in income between June 2009 and June 2011, when the recovery was under way. In August 2011, incomes appear “to have hit bottom … and bounced back quickly,” said Mr. Green, noting that income levels climbed as the nation’s unemployment rate eased, from 9.1% in August to 8.5% in December. (In January, the national unemployment rate fell to 8.3%.) At the same time, average hourly earnings and the length of the average work week have both ticked up, Mr. Green said, meaning that some people are finding jobs while those who already are employed might be working longer and earning more.

The Sources of Personal Income Since 1947 - See the blue line in the upper half of the figure above? That line shows the portion of personal income made up of wage and salary disbursements, as a percentage of total personal income.  (As the figure notes, I’ve subtracted social insurance contributions such as Social Security taxes. Also, employer contributions to Social Security, private pensions, etc., have been completely ignored in my calculations.) I have been looking into the possible effects on consumer spending of changes in the composition of income. Please click on figure if you want to see a larger version.

EPA: US needs $300B in sewer, water work - A federal study shows municipalities nationwide need more than $300 billion worth of essential upgrades to long overlooked water and sewer systems over the next 20 years. The need is acute in Northeastern states with older systems like New York, which needs $29.7 billion worth of improvements, U.S. Sen. Charles Schumer said Wednesday. But he said that price is a "just a drop in the bucket" compared to the higher cost of continuing to upgrade parts of sewer and water systems when emergencies strike. He is pushing a bill that would counter planned funding cuts in the federal transportation bill now being negotiated in Washington. "EPA found that the nation's 53,000 community water systems and 21,400 not-for-profit, non-community water systems will need to invest an estimated $334.8 billion between 2007 and 2027," stated the federal Drinking Water Infrastructure Needs Survey and Assessment, which is updated every four years. The National Association of Counties' 2008 report estimated the need for water and sewer upgrades at $300 billion to $450 billion nationwide and the federal stimulus project provided just a fraction of that as the recession reduced local governments' revenues.

Why Does Our Infrastructure Resemble a Third World Country’s? -Take a look around your community and I bet you’ll see pothole-filled roads, rusting bridges and decaying train stations. It is rare, rather than the rule, to see unblemished asphalt, gleaming railings and bright platforms. Yet we are, by all estimates, one of the richest societies in the world. What gives? Americans traveling to other developed countries notice the difference, as do foreigners when they come here. A German graduate student once told me he was amazed at the poor roads, sidewalks and other features in Cambridge, Mass., where we were both living and studying at the time. “It looks like a third-world country here,” he said. “Apparently, no one cares.” I don’t think that is the case, but I do think we have become accustomed to a lower-quality public environment, one that would not be tolerated in France, Germany or Japan. It was already ironic that Cambridge, a rich, liberal city that lavishes praises on the public sector, put up with it. Regardless, the chronic maintenance cutbacks in this country result in shoddy-looking and poor-performing infrastructure systems, more accidents and a negative impact on economic capacity. One explanation may be our budgeting process. States and cities generally pay for maintenance from annual operating budgets. You can’t borrow money to repair a pothole. That leaves the pots of money set aside as tempting targets.

Postal Service loses $3.3 billion in first quarter - The holidays weren’t merry or bright for the U.S. Postal Service. The nation’s mail delivery service lost $3.3 billion in its first quarter, which runs from Oct. 1 through Dec. 31 and encompasses the holiday shopping and shipping season. Total mail volume reached 43.7 billion pieces, a 6 percent decrease from the previous year, USPS said. Revenues on first class and standard mail dropped 3.7 percent to $650 million. Despite slumping mail volume, the Postal Service’s shipping services improved, generating $2.8 billion for the quarter, a 7 percent year-to-year climb. The rising cost of gasoline also affected revenues and forced USPS to spend 6.3 percent more on transportation expenses in its first quarter. In order to reduce overall costs, the Postal Service cut 8 million work hours, helping cut pay and benefits expenses by $180 million, or 1.4 percent. Joe Corbett, the USPS chief financial officer, warned again that the Postal Service will likely default on retirement and health benefits payments later this year, unless Congress changes the current pay formulas.

The Post Office Is Not Broke - Republican leaders in Congress are talking about dismembering the US Postal Service by cutting the number of delivery days, shuttering processing centers so that it will take longer for letters to arrive, closing thousands of rural and inner-city post offices and taking additional steps that would dramatically downsize one of the few national programs ordained by the original draft of the US Constitution. At the same time, supposedly “centrist” US Senators Tom Carper (D-DE), Joe Lieberman (I-CT), Susan Collins (R-ME) and Scott Brown (R-MA) are trying to build a “bipartisan consensus” for a death by slower cuts. Their “21st Century Postal Service Act,” a supposed compromise now being weighed by the Senate, would still force the postal service to close hundreds of mail processing centers, shut thousands of post offices, cause massive delays in mail delivery and push consumers toward most expensive private-sector services. At the behest of the Republican-controlled Congress of the Bush-Cheney era, the USPS has been forced since 2006 to pre-fund future retiree health benefits. As the American Postal Workers Union notes, “This mandate is the primary cause of the agency’s financial crisis. No other government agency or private company bears this burden, which costs the USPS approximately $5.5 billion annually.”

U.S. Postal Service Loses $3.3 Billion, Warns of Cash Drain (Bloomberg) -- The U.S. Postal Service said it lost $3.3 billion in the quarter ended Dec. 31 -- typically its strongest -- and that it expects to run out of cash in October unless Congress agrees to cuts in facilities and employees. “If the Postal Service is unable to reduce its operating costs by $20 billion a year by 2015, we may not be able to return to profitability,” Postmaster General Patrick Donahoe said at a board meeting in Washington today. “We may become a long-term burden to the taxpayers if we are not able to make these reductions quickly.” The ninth consecutive quarter of losses may increase pressure on Congress from the Postal Service and customers to approve legislation intended to return it to solvency. “We have a Postal Service that essentially is living from paycheck to paycheck, which is a very risky proposition for the American economy and the 8 million private-sector workers whose jobs rely on the mail,”

Wired’s Embarrassing Whitewash of Foxconn - Yves Smith - Wired’s Joel Johnson has written a stunning bit of PR for Foxconn, now-controversial supplier to the consumer electronics industry, duly wrapped in credibility-enhancing guilt over Western materialism. The article, “1 Million Workers. 90 Million iPhones. 17 Suicides. Who’s to Blame?” pretends to be about Foxconn’s factories. But Johnson admits he’s a tech toy writer who apparently has no knowledge of manufacturing. Yet he’s remarkably uninhibited in using his fantasies and abject ignorance as a basis for making sweeping generalizations about the Taiwanese powerhouse. For instance: In the part of our minds where Americans hold an image of what an Asian factory may be, there are two competing visions: fluorescent fields of chittering machines attended by clean-suited technicians, or barefoot laborers bent over long wooden tables in sweltering rooms hazed by a fog of soldering fumes. When we buy a new electronic device, we imagine the former factory. But when we think “Chinese factory,” we often imagine the latter. Some in the US harbor a guilty suspicion that the products we buy from China, even those made for American companies, come to us at the expense of underpaid and oppressed laborers. Huh? Is he serious about this? Anyone who has been following China even slightly would imagine Chinese factories aren’t like Japanese car-makers, heavy on robotics, but are mainly labor intensive...

iEmpire: Apple's Sordid Business Practices Are Even Worse Than You Think - Behind the sleek face of the iPad is an ugly backstory that has revealed once more the horrors of globalization. The buzz about Apple’s sordid business practices is courtesy of the New York Times series on the “iEconomy. In some ways it’s well reported but adds little new to what critics of the Taiwan-based Foxconn, the world’s largest electronics manufacturer, have been saying for years. The series' biggest impact may be discomfiting Apple fanatics who as they read the articles realize that the iPad they are holding is assembled from child labor, toxic shop floors, involuntary overtime, suicidal working conditions, and preventable accidents that kill and maim workers. It turns out the story is much worse. Researchers with the Hong Kong-based Students and Scholars Against Corporate Misbehavior (SACOM) say that legions of vocational and university students, some as young as 16, are forced to take months'-long “internships” in Foxconn’s mainland China factories assembling Apple products. The details of the internship program paint a far more disturbing picture than the Times does of how Foxconn, “the Chinese hell factory,” treats its workers, relying on public humiliation, military discipline, forced labor and physical abuse as management tools to hold down costs and extract maximum profits for Apple.

Are ‘sweatshops’ an economic necessity? - A few years back, influential New York Times columnist Nicholas Kristof shocked readers by opening a column this way: “Africa desperately needs Western help in the form of schools, clinics and sweatshops.” For Kristof, who regularly advocates better conditions for people in the developing world, this advice seems to belie his progressive views. But he’s part of a chorus of liberal economic thinkers who advocate that sweatshops –  a broad term for factories or workshops characterized low wages, long hours, sometimes underage workers and unsafe conditions – are an unsavory but necessary first step to help bootstrap the world’s poorer economies. Nobel Laureate Paul Krugman penned a 1997 piece for Slate entitled “In Praise of Cheap Labor” that argued “bad jobs at bad wages are better than no jobs at all.” That brings us to the once sleepy fishing village of Shenzhen, across the border from Hong Kong, which was the center for China's economic reforms in 1979.  In just three decades the city has grown to more than 10 million people. Shenzhen is now home for numerous technology manufacturers and a large part of the Chinese operations of Foxconn, the electronics manufacturing giant that help builds the bulk of the world’s Apple iPhones, Microsoft Xboxes and Amazon Kindles.

Charts of the day, US legal immigration edition - In general, immigration is incredibly healthy for any economy. Immigrants tend to work hard, boost GDP, fill jobs which would otherwise be hard to fill, and also create jobs of their own.  And whatever’s true of legal immigrants in general is much more true of smart, high-qualified legal immigrants. The US has various visas specifically designed to encourage the kind of skilled, legal immigration which has driven its economy for nearly all of its history. The three main ones are the O visa, the H visa, and the L visa. The O visa is a small program for “aliens of extraordinary ability”, and the H visa all but suffocated under its own popularity in 2007 and 2008. But the L visa kept on allowing people in. It’s given to employees of foreign companies, who have spent at least a year working for that company abroad, and who are only allowed to work for that company when they’re in the US. And historically it’s been quite easy to get, with Customs rejecting fewer than one in ten applicants. Until:This is bad, but it gets worse — the spike in denials seems to target specific countries over others. In 2008 the L-1B denial rate stood between 2% and 3% for India, Canada, Mexico, and the UK. In 2009, it rose: to 2.9% in Canada, and 4.1% in the UK. And 15.1% in Mexico. And 22.5% in India.

The Downward Mobility of the American Middle Class - Robert Reich - January’s increase in hiring is good news, but it masks a bigger and more disturbing story – the continuing downward mobility of the American middle class. Most of the new jobs being created are in the lower-wage sectors of the economy – hospital orderlies and nursing aides, secretaries and temporary workers, retail and restaurant. Meanwhile, millions of Americans remain working only because they’ve agreed to cuts in wages and benefits. Others are settling for jobs that pay less than the jobs they’ve lost. Entry-level manufacturing jobs are paying half what entry-level manufacturing jobs paid six years ago. Other people are falling out of the middle class because they’ve lost their jobs, and many have also lost their homes. Almost one in three families with a mortgage is now underwater, holding their breath against imminent foreclosure. The percent of Americans in poverty is its highest in two decades, and more of us are impoverished than at any time in the last fifty years. A recent analysis of federal data by the New York Times showed the number of children receiving subsidized lunches rose to 21 million in the last school year, up from 18 million in 2006-2007. Nearly a dozen states experienced increases of 25 percent or more. Under federal rules, children from famlies with incomes up to 130 percent of the poverty line, $29,055 for a family of four, are eligible.

The Minimum Wage: Time to Start Working On the Next Increase  - I’ve always thought the national minimum wage is a lot more important than most people tend to think.  By definition, it sets a floor on the low end of the job market, though to their credit, many states now set their minimums above the federal level of $7.25 (Washington state clocks in at a cool $9.04).  So it’s a floor, not a ceiling. Lots of low-wage workers and their families depend on it, and its long slide, as shown in the figure below, especially over the Reagan years, contributed to wage losses and working poverty for many who toil to this day in low-end services. Of course, when someone raises the idea of a raise, you hear a huge outcry from some in the business lobby.  Their generic argument is that the increase will lead to job losses among those low-wage workers affected by the higher wage level.  Such workers, they say, will now be “priced out of the labor market.” Yet, you hear the opposite from groups that represent low-wage workers’ interests, groups like the National Employment Law Project, or NELP (proud disclosure: I’m on their board). Hmmm…who you gonna believe?

Lower wages can be a good thing - Menzie Chinn points out that recovery in manufacturing and exports has been stronger than recovery as a whole. As an explanation, he cites America's falling unit labor costs. Unit labor cost is just the amount of wages you need to pay workers to produce one unit of output. Because America's unit labor costs are falling, it is becoming more economical for businesses to produce more tradable goods here, and so they are doing so. This is a useful reminder of a economic principle often overlooked by progressives: There is sometimes a tradeoff between wages and employment levels (which is another way of saying that labor supply curves slope up and labor demand curves slope down). If economic "frictions" or the actions of policymakers hold wages up when economic forces are trying to push wages down, unemployment will often result.  In the case of trade, what this means is that keeping American wages high can cause unemployment to rise. Starting around 2000, a huge massive glut of Chinese labor was dumped on the world market when China joined the global trade system; this created a tremendous natural downward pressure on American wages. Wages in America have stagnated since 2000, but it's difficult for wages to actually fall. This wage rigidity probably shrunk the size of America's tradable sector.

David Frum Savages Charles Murray -- And Rightly So - David Frum was excommunicated from the Righties Club a few years back because he insisted on occasionally saying sane and accurate things. He continues that aberrational behavior today in his review of AEI uber-zealot Charles Murray’s new book, Coming Apart: The State of White America, 1960-2010. Frum’s takedown is so good that I won’t try to recap it. I’ll just comment on one quote that he provides from Murray: High-paying unionized jobs have become scarce and real wages for all kinds of blue-collar jobs have been stagnant or falling since the 1970s. But these trends don’t explain why [working-class white] men in the 2000s worked fewer jobs, found it harder to get jobs than other Americans did, and more often dropped out of the labor market than they had in the 1960s. Doesn’t “textbook economics” — not to mention common sense — tell us that if you pay people less, they’ll have less incentive to work? But Murray knows better — they’ve got plenty of incentive: Insofar as men need to work to survive – an important proviso – falling hourly income does not discourage work. As long people are reduced to the level of survival — so people have to take any available job, no matter how shitty or badly compensated, or die (along with their families and children) — it’s no problem getting them to work.

Unemployment Insurance Maximum Duration Dropping To 79 Weeks - Nearly 30,000 people enduring long-term joblessness in Michigan are set to lose their unemployment insurance as a federal program that provides the final 20 weeks of benefits expires there. The lapse of the Extended Benefits program in Michigan is a reminder that, even though Congress fully reauthorized federal unemployment insurance for two months in December, lawmakers sneakily shortened the duration of benefits. Legislators did not announce benefits would be changed, but according to its complex eligibility formula, Extended Benefits will expire over the course of the year in the rest of the 32 states where the program is in effect. "This is the first wave of tens of thousands of laid-off workers losing their unemployment insurance unless the program is extended in Washington these next weeks in a sound and sensitive manner," . "If the federal extended benefit program is not fixed in the conference committee, close to 30 states will follow Michigan and lose access to this program in the first six months of 2012." States are eligible for Extended Benefits if their jobless rates are high and rising compared with a corresponding period over the previous three years. Since Michigan's rate is steadily declining -- it fell from 11.1 percent at the end of 2010 to 9.3 percent in December -- the state is "triggering off" the program.

Mean-Spirited, Bad Economics - Simon Johnson - The principle behind unemployment insurance is simple. Since the 1930s, employers have paid insurance premiums (in the form of payroll taxes, levied on wages) to the government. If people are laid off through no fault of their own, they can claim this insurance — much the way you file a claim on your homeowner’s or renter’s policy if your home burns down.  The original legislative intent, reaffirmed over the years, is clear: Help people to help themselves in the face of shocks beyond their control. But the severity and depth of our current recession raise an issue that we have literally not had to confront since the 1930s. What should we do when people run out of standard unemployment benefits — much of which are provided at the state level — but still cannot find a job? In negotiations currently under way, House Republicans propose to cut back drastically on these benefits, asserting that this will push people back to work and speed the recovery. Does this make sense, or is it bad economics, as well as being mean-spirited? The United States has lost more jobs than in any other recession in the last 70 years — and jobs have been slower to return, as this chart from Economix shows:

The One Percent Versus the Twenty Percent - Paul Krugman - The good folks at EPI are upset by my colleague David Brooks’s claims that the gap between the top 20 and the bottom 30, not the gap between the top 1 and everyone else, is what really matters. As you might guess, I’m with Larry Mishel on this; but I thought it might be useful to have a calm discussion of what someone might mean by saying that the rise of the top 1 percent isn’t important. One thing such a person might mean is that it’s unimportant in quantitative, dollars and cents terms. But this is just false. The CBO inequality report confirms what independent studies have been saying: the rise of the top 1 percent has absorbed a large fraction (almost half, by my reckoning), of economic growth, leaving a much smaller pie for everyone else. If we look at Gini indexes, a measure of overall inequality, CBO has calculated them both with and without the top 1 percent: This says that inequality has risen about 0.11 overall, but only 0.06 if you exclude the top 1 percent; so by this admittedly imperfect measure, again around 45 percent of the story is about the rise of the top 1.

America's guild culture - One of the odder things about class stratification in the U.S. is that, on the one hand, you have an enormous number of people hollering to keep thegovernment out of the economy, bemoaning statist health care and just aching and shaking for that moment when government finally becomes small enough that we are all as free as butterflies - and on the other hand, when one looks athow these people make money, a majority of them, one can reliably hypothesize,rely on Government poking its nose into our business and licencing and regulating. The doctor who, on the one hand, bitches about socialized healthcare is, on the other hand, apt at the drop of a hat to argue that doctors must be licenced, because, uh, the state, uh, has an interest in the healthcare, uh,of its citizens. Of course, the mind in contradiction to itself is has long been noted as one of the banal wonders of modern politics; but it still provides chuckles for the off line critic, watching the train wreck of the plutocracy whilst gobbling popcorn. In fact, the State has been so successfully lobbied by professions to raise bars to entry by the encouragement of guilds has now become a much bigger phenomenon in the U.S. than unions. Doctors, dentists and lawyers owe much of their fortune to their guild privileges. But the bar to entry extends from HVACwork to accounting to nursing, etc., and always not, not and never, never and not, like the bad old unions, to raise the perks and plump up the wallets of the privileged professional, but for the public good.

Marriage Is for Rich People - The rich are different from you and me: they’re more likely to get married. A new report, by Michael Greenstone and Adam Looney of the Hamilton Project, looked at the decline in marriage rates over the last 50 years and found a strong connection to income. Dwindling marriage rates are concentrated among the poor — the very people whose living standards would be most improved by having a second household income. The trend is especially pronounced among men. Forty years ago, about nine of 10 American men between the ages of 30 and 50 were married, and the most highly paid men were just slightly more likely to wed than those paid least. Since then, earnings for men in the top tenth of the income distribution have risen and their marriage rates have fallen slightly, from 95 percent in 1970 to 83 percent today. For men further down the income ladder, however, both earnings and their chances of connubial bliss have plummeted.

Jobs and Values - Krugman - Some more about the whole values and the working class thing. You can say this for Charles Murray’s Coming Apart; he did do a fair bit of data crunching, producing results like this: And he’s not the only one to note that marriage rates have fallen sharply among less-educated Americans, whites as well as minorities: But as David Frum says, it’s odd how Murray dismisses the notion that declining opportunities rather than moral turpitude coming from mysterious sources might be responsible. Real wages for less-educated workers have fallen substantially, even as average incomes have continued to rise; maybe you think this shouldn’t have had a demoralizing, family-values-undermining effect, but the reality is that it does. And Larry Mishel points me to an even more striking example of how the payoff to working hard and playing by the rules has fallen off a cliff, the collapse of employment benefits:

Wages and Values --Krugman - Let me talk some more about the sudden fashionability of bemoaning the deteriorating values of working-class Americans, by documenting the points David Frum made.So, as Pew says, there really has been a drastic decline in marriage rates among less educated Americans:What could be causing that? Well, it could be some kind of cultural contagion from liberalism, or something; as Mike Konczal says, there’s kind of an odd absence of causal stories in the latest “values” thing.But it could also be this, from EPI:Should we really be surprised that young men, confronting the reality that they won’t earn anything near as much in real terms as their fathers did — and that they will be even further from having what society sees as an adequate income, because even Adam Smith acknowledged the importance of social norms in defining prosperity — don’t marry and raise families the way the previous generation did?

A Strange Form of Social Collapse - Krugman - Reading Charles Murray and all the commentary about the sources of moral collapse among working-class whites, I’ve had a nagging question: is it really all that bad? I mean, yes, marriage rates are way down, and labor force participation is down among prime-age men (although not as much as some of the rhetoric might imply), But it’s generally left as an implication that these trends must be causing huge social ills. Are they? Well, one thing oddly missing in Murray is any discussion of that traditional indicator of social breakdown, teenage pregnancy. You can see why — because it has actually been falling like a stone:  And what about crime? It’s soaring, right? Wrong: So here’s a thought: maybe traditional social values are eroding in the white working class — but maybe those traditional social values aren’t as essential to a good society as conservatives like to imagine.

Money and Morals, by Paul Krugman - Lately inequality has re-entered the national conversation. Occupy Wall Street gave the issue visibility, while the Congressional Budget Office supplied hard data on the widening income gap. And the myth of a classless society has been exposed: Among rich countries, America stands out as the place where economic and social status is most likely to be inherited.  So you knew what was going to happen next. Suddenly, conservatives are telling us that it’s not really about money; it’s about morals. Never mind wage stagnation and all that, the real problem is the collapse of working-class family values, which is somehow the fault of liberals. But is it really all about morals? No, it’s mainly about money. To be fair, the new book at the heart of the conservative pushback, Charles Murray’s “Coming Apart: The State of White America, 1960-2010,” does highlight some striking trends. Among white Americans with a high school education or less, marriage rates and male labor force participation are down, while births out of wedlock are up.  Still, something is clearly happening to the traditional working-class family. The question is what. And it is, frankly, amazing how quickly and blithely conservatives dismiss the seemingly obvious answer: A drastic reduction in the work opportunities available to less-educated men.

Different Slopes for Different Folks -  Krugman - So Murray is suggesting that a lower wage should not lead to any decline in work effort, and maybe even to an increase, since it takes more hours to achieve a given standard of living. In effect, he’s saying that the supply curve for labor, instead of sloping upward, slopes downward — or at any rate that it should. This is not a crazy position: “backward-bending” labor supply is a staple of economics textbooks, because income effects work against substitution effects. Raise my wage rate, and the payoff to working more increases; but I also get richer; and one of the things people consume more of when they get richer, other things equal, is leisure. So a higher wage could lead either to a rise or fall in labor supply, and a lower wage similarly could work in either direction. So far so good — although it’s one thing to assert this as a possibility, another to just assume it so that you can skip all the economic data and go straight to condemning moral values.But this argument applies just as much to the rich as to the poor. And strange to say, you never do find conservatives arguing that we shouldn’t worry about higher tax rates on the rich, because they’ll just work harder to be able to afford those luxury goods; or that a higher inheritance tax probably expands work effort, because it would force the Paris Hiltons of this world to go out and get real jobs. Funny how that works.

The White Underclass - Persistent poverty is America’s great moral challenge, but it’s far more than that.  As a practical matter, we can’t solve educational problems, health care costs, government spending or economic competitiveness so long as a chunk of our population is locked in an underclass. Historically, “underclass” has often been considered to be a euphemism for race, but increasingly it includes elements of the white working class as well.  That’s the backdrop for the uproar over Charles Murray’s latest book, “Coming Apart.” Murray critically examines family breakdown among working-class whites and the decline in what he sees as traditional values of diligence.  Liberals have mostly denounced the book, and I, too, disagree with important parts of it. But he’s right to highlight social dimensions of the crisis among low-skilled white workers.  One scourge has been drug abuse. In rural America, it’s not heroin but methamphetamine; it has shattered lives in Yamhill and left many with criminal records that make it harder to find good jobs. With parents in jail, kids are raised on the fly.  Then there’s the eclipse of traditional family patterns. Among white American women with only a high school education, 44 percent of births are out of wedlock, up from 6 percent in 1970, according to Murray.

Mind-Blowing Charts From the Senate's Income Inequality Hearing - In another sign that Democrats have embraced income inequality as a cause célèbre, the Senate Budget Committee held a hearing on the subject today. The committee's ranking Republican, Jeff Sessions of Alabama, managed to look concerned during two hours of testimony about the kneecapping of the Middle Class—not that it should have been all that difficult. Here are some of the hearing's most striking charts:

Will Inequality Keep Getting Worse? - Last October, after a conversation with Chicago Booth professor Steve Kaplan, I posted this graph showing that the share of national income going to the top 1% had fallen dramatically.  This confirmed what I had expected--the taxable income of the wealthy generally tends to fall in recessions.  But since earlier census data had seemingly contradicted that expectation, I thought it was worth blogging.  As I explained:   The larger question is "how much does it matter"? I doubt Occupy Wall Street will be assuaged by learning that the top 0.1% now only receive 8% of the income earned in the US, even if that number is the lowest it's been since 2003. But I think it does matter. We don't want to spend years focused on income inequality, only to learn that the financial crisis fixed it for us. Tim Noah, who I believe is working on a book about the growing problem of inequality, shot back: No, we don't. Nor do we want to spend years trying to cure cancer, only to learn that the financial crisis fixed it for us. The likelihood of that happening would be roughly the same.

Thirty More Years of Hell - Generational analysis is bullshit. Or so I’m told. Fit for netroots liberals and horoscope clippers, maybe. And to be fair, it’s mostly thinktank types who’ve been profiting off that whole Millennials Rising genre. One of the authors of that book is a former writing partner of Pete G. Peterson’s, the octogenarian billionaire who has spent the last couple of decades trying to kick over the Social Security ladder before us young’ns can scamper up and collect. Most of it reads like a debriefing after a recon mission—you can feel them sizing us up, drawing up blueprints for the generational counterrevolution that we’re living through right now. So if you want to screech about the trappings of generational politics and the careless demonization of everyone born in a twenty-year stretch in one particular country, fine. I hear you. But this piece isn’t for you. You’re okay. This is for my fellow Millennial. The one who gets his or her rocks off to visions of a glorious Boomer-hegemonic extinction, like those old claymation movies of dinosaurs getting nuked by meteor-fire. This is for those of you who, like me, need a vision of that mighty Boomer Brontosaurus keelin’ over for good—and the furry little dino-eating Repenomamuses scurrying across all the corpses to claim the planet once and for all.

What Dollar Store Locations Reveal About America - How does the concentration of dollars stores correlate with various socio-economic factors?  Here are some interesting results from a study featured in The Atlantic:
1. The correlation between dollar stores and median income is significant and negative (-.57).
2. Dollar stores are concentrated in states with lower levels of education or human capital. The correlation is again significant and negative, even greater than for income (-.77).
3. The geography of dollar stores also tracks to the country's political divide. Dollar stores are positively correlated with the share of voters who backed McCain (.52) and negatively associated with Obama voters (-.47).
4. Obesity, smoking and crime also come into the picture. They are positively associated with the percentage of adults whose body mass index is greater than 30 (.72) and the percentage that smoke (.6).
5. Dollar stores states are also positively associated with property crime (.34), especially burglary (.54), and violent crime (.3), especially murder and manslaughter (.49).
6. Religion too plays a role. Dollar stores are positively and significantly associated with the percent of people who say religion plays an important role in their daily life (.71).

Homeless Families, Cloaked in Normality - Of New York’s more than 40,000 homeless people in shelters — enough to fill the stands at Citi Field — about three-quarters now belong to families like the Lewises and are cloaked in a deceptive, superficial normalcy. They do not sleep outside or on cots on armory floors. By and large, their shoes are good; some have smartphones. Many get up each morning and leave the shelter to go to work or to school. Their hardships — poverty, unemployment, a marathon commute — exist out of sight. Underlying this transition is a cascade of events, both economic and political. For the past three years, city officials say, 30 percent of New Yorkers seeking shelter have done so because of evictions, many connected to the financial crisis. (Domestic violence and overcrowding were other chief reasons.) At the same time, a disagreement over money between city and state officials last spring led to the cessation of a rent-subsidy program designed to shift the homeless from shelters into apartments. For the first time in 30 years, there is no city policy in place to help move the homeless into permanent homes.

Hipsters, Food Stamps, and the Politics of Resentment - Recently, a friend of mine became the object of the Internet’s daily Two Minutes’ Hate. An artist who’s been unemployed and down on his luck, he had the misfortune of appearing in a story which decided to call “A Hipster on Food Stamps.” The article followed some college-educated but poor and underemployed people trying to eat tasty, nutritious meals while relying on food stamps. To me, it was a poignant commentary on both the failure of American capitalism and the deep pathologies of our food system. But what the article seemed to call forth in its readers was unending bile and rage directed at people deemed insufficiently deserving of a public benefit. The title certainly didn’t help. Calling someone a “hipster” is a license to spew all kinds of demented hate. Since the term carries connotations of slackers and trust funds, the image of “hipsters on food stamps” is designed to provoke the conclusion that someone is lazily taking advantage of the system. Certainly that was how things played at the blog of the libertarian Reason magazine, which mocked the notion that someone might both deserve economic assistance and make art and wear odd clothes.  Consider the following comment, left under my friend’s response to the article about him:

The shame and pride of joining food stamp nation - I walk through the pasty government-issue fluorescent light and bureaucratic cinderblock waiting room, ushered into the inner sanctum of welfare benefits review. I feel oddly privileged, striding past rows of glum, tired, bored and frustrated faces; how have I been picked out so quickly, after just 15 minutes of sitting? Getting inside doesn’t mean you’ll get approved, but, like waiting in a doctor’s lobby, sheer movement into a different room gives one hope.  Progress. My benefits counselor, a tall, stocky, healthfully heavyset Indian man, speaks like a machine gun.  ”Fifty-five,” he says brusquely as he waves his arm at a numbered booth in a long row of numbered booths.  I’m still non-caffeinated so it takes me a moment to realize what “55″ means, then I take my seat across from him.  It looks (and feels) like I’m in prison. The caseworker, whom I’ll call Chakim, is vigorous and businesslike.  ”ID?  Social Security card?”I quickly hand him everything:  He asks me, rat-a-tat-tat: “Unemployed?  How much per month?  Self-employed?  Pay by cash or personal check?” “I am self-employed,” I tell him, “payment is very inconsistent.  Maybe $750 or $800 a month.” I show him a few scattered check receipts from a folder.  Four hundred and fifty dollars here, $100 there, another for $200, another for $500.  This is the writer’s life today.

Supporting Bad Habits With Public Money - Florida and a few other states are considering additional restrictions on food stamp and welfare payments to the poor, such as prohibiting the purchases of snacks and sweets with food stamps and prohibiting withdrawals of welfare cash at casinos and strip clubs. Economists have two basic principles they use in these cases: fungibility and screening, and both point to unintended consequences of the sin-based restrictions. The principle of fungibility says that dollar bills are equivalent, regardless of their source. If a customer brings in his wallet $100 he received from the government and another $100 from a job, the cashier at the store cannot tell whether the customer is spending his government money or his employer money. For many years, the Department of Agriculture tried to affect this situation by making the government “money” a different color – that’s why they were called food stamps – and merchants were not permitted to accept food stamps for alcoholic beverages, tobacco and other prohibited items. But there is hardly any difference between giving somebody $20 to buy beer and giving that same person $20 earmarked for food, because the earmarked funds allow her to spend $20 less of her own money on food, leaving $20 left to buy beer, if she wants. Earmarked funds can be as good as unrestricted money.

In Fuel Oil Country, Cold That Cuts to the Heart - With the darkening approach of another ice-hard Saturday night in western Maine, the man on the telephone was pleading for help, again. His tank was nearly dry, and he and his disabled wife needed precious heating oil to keep warm. Could Ike help out? Again?  Ike Libby, the co-owner of a small oil company called Hometown Energy, ached for his customer, Robert Hartford. He knew what winter in Maine meant, especially for a retired couple living in a wood-frame house built in the 19th century. But he also knew that the Hartfords already owed him more than $700 for two earlier deliveries.  The oil man said he was very sorry. The customer said he understood. And each was left to grapple with a matter so mundane in Maine, and so vital: the need for heat. For the rest of the weekend, Mr. Libby agonized over his decision, while Mr. Hartford warmed his house with the heat from his electric stove’s four burners.  “You get off the phone thinking, ‘Are these people going to be found frozen?’ ” Mr. Libby said. No wonder, he said, that he is prescribed medication for stress and “happy pills” for equilibrium.

Repairing the Safety Net - Mitt Romney said last week that if the safety net “needs a repair, I’ll fix it.”  It does need some repair, as our recent blog series explained.  That is, the safety net works but still has some serious gaps.The positive news is that the safety net, bolstered by temporary expansions enacted during the recession, has helped hold the line against poverty and hardship in the past few years.  Without safety-net programs, the poverty rate would have been 28.6 percent in 2010, nearly twice its actual 15.5 percent rate. Moreover, under broader measures of poverty, the poverty rate rose only modestly between 2007 and 2010 despite the tremendous increase in unemployment.  This outcome reflects the strength of the safety net, as bolstered by temporary measures enacted in the Recovery Act that Census data show kept 7 million Americans out of poverty in 2010. But the safety net also has significant holes.  For example:

  • Medicaid coverage for poor parents has large gaps. Most low-income children are eligible for either Medicaid or the Children’s Health Insurance Program.  But for adults, the story is very different.
  • Temporary Assistance for Needy Families (TANF) has weakened at the very time that the need for it has increased.
  • Supplemental Security Income (SSI) provides vital cash assistance to the nation’s poorest elderly and disabled people but leaves many of them well below the poverty line. SSI provides monthly   SSI benefits bring a single elderly or disabled individual to $8,376 a year — 75 percent of the poverty line.  
  • Federal rental assistance enables millions of low-income households to rent modest housing at an affordable cost, but the need far outstrips available funding. Only one in four low-income households that qualify for housing assistance receives it, due to limited funding.

Soaking the Poor, State by State - You have heard, perhaps, that rich people in America are egregiously overtaxed. And the poor? They're the lucky duckies! Why, 47 percent of Americans pay no taxes at all! (This is not true, of course. Many poor and elderly Americans pay no federal income tax, but they pay plenty of other taxes.) Still and all, it's true that the federal income tax is indeed progressive. Conservatives are right about that—though it's not as progressive as it used to be, back before top marginal rates were lowered and capital gains taxes were slashed in half. But conservatives are a little less excited to talk about other kinds of taxes. Payroll taxes aren't progressive, for example. In fact, they're actively regressive, with the poor and middle classes paying higher rates than the rich. And then there are state taxes. Those include state income taxes, property taxes, sales taxes, and fees of various kinds. How progressive are state taxes? Answer: They aren't. The Corporation for Enterprise Development recently released a scorecard for all 50 states, and it has boatloads of useful information. That includes overall tax rates, where data from the Institute on Taxation and Economic Policy shows that in the median state (Mississippi, as it turns out) the poorest 20 percent pay twice the tax rate of the top 1 percent. In the worst states, the poorest 20 percent pay five to six times the rate of the richest 1 percent. Lucky duckies indeed. There's not one single state with a tax system that's progressive. Check the table below to see how your state scores.

Monday Map: Sales Tax Exemptions for Groceries - Today's Monday Map shows how each state's sales tax treats groceries. In many states, groceries are exempt, in others, they are taxed at a reduced rate, and a small number include them fully in the tax base. (Five states, Alaska, Delaware, Montana, New Hampshire, and Oregon, have no sales tax.)

The privatization trap - Privatizing the government is one of the most active projects of the early 21st century. Everything we once expected the government to do — from education to regulatory rule-writing to military operations to healthcare services to prison management — it now does less of, preferring to support markets in which these services are done through independent, profit-maximizing agents. Tools such as contracting out, vouchering and the selling-off of state assets have been used to remake the government during our market-worshipping era. Privatization is one of the few political projects that enjoys bipartisan support: Conservatives cheer the rollback of the state, and liberals like to claim that the virtues of the free market are being used towards the egalitarian ends of public policy. The fraud and waste that often come with outsourcing these services has been well-documented. The private management in Iraq and the aftermath of Hurricane Katrina, and the lobbying efforts of corporate prisons have all provided horror stories of what happens when cronyism guides decision-making on behalf of the state. But privatization as standard government practice has problems that go far beyond the abuses of any single incident.

Elected as a Democrat, Now Governing the City Like a Republican - Privatization is not just for conservatives any longer. The basic concept of finding out whether a private-sector company can perform a public service more cheaply and efficiently than government workers has been embraced by many liberals, including the mayors of Chicago and New York and a long list of other cities. That hasn’t made everyone happy. In recent months, liberal bloggers have argued that it’s a myth that big cities are still bastions of progressive policies, because so many Democratic mayors have gone down the corporatist path. There’s no question that cities are feeling the pinch and need to save money, says David Sirota, an author and talk radio host in Denver. But privatization, he argues, just isn’t the way. “Saving doesn’t mean corporatizing; it doesn’t mean privatizating,” Sirota says. “But it is a way to create a revolving loop of money going out of the city and into the contracting community, and money from that community going into the political process.”

Michigan Must Decide What to Do With an Unexpected Surplus -  Over most of the past decade, budget deliberations in Michigan have taken on a glum and familiar monotony: What do we cut now? But the state that experienced an economic downturn earlier, deeper and longer than most of the rest of the country has made an unlikely discovery as its officials closed out its latest financial books: Michigan has a $457 million surplus. Even more surprising: Revenues, which had sunk or had been mostly flat for all but one year since 2000, have grown. Not a lot, but grown. Michigan is the most unlikely example of a phenomenon that was unimaginable in most states in recent years. Though nearly all states are required by law to balance their budgets, most have been able to do so only through rounds of painful spending cuts to make up for deep shortfalls in revenue. Now, however, as a majority of states have begun collecting tax revenues that are on par with or even above expectations, they face some measure of Michigan’s situation — trying to sort out whether the worst is really over, whether it is safe to start spending again, or whether a rainy day fund may be the prudent course.

U.S. States Prepare for Hyperinflation, End of Dollar - CNN reports that 13 states seek approval to issue money in preparation for a U.S. dollar collapse. “In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System … the State’s governmental finances and private economy will be thrown into chaos,” stated North Carolina Representative Glen Bradley in a bill he drafted in 2011. Sensing that the Europe’s crisis has bought the Fed and U.S. Treasury some time, for now, State legislators have already begun to prepare for the eventual rejection of the U.S. dollar as a viable means for exchanging goods and services. According to the U.S. Constitution, Article 10, Clause 1 (Contract Clause), States can issue their own money as long as they are in the form of gold and silver coins. How much time the U.S. dollar has left as a trusted currency is unknown, but the countdown has begun.

How the Occupy Movement Changed Urban Government - As the dust settles on the closure of some of the major "Occupy” encampments, the question of legacy remains. At its core, Occupy Wall Street was a place-based movement. In commandeering urban public spaces as sites of protest, the movement marked an implicit challenge to the reigning model of urban governance in which place is irrelevant.    The Occupy movement challenged cities’ attachment to mobile capital by making place central to its worldview. In establishing flimsy tent-cities in actual urban spaces and refusing to leave, the Occupy protests mocked the idea of mobility peddled by urban officials. More than that, they implicitly advocated the notion that urban areas are places bound up with the identity of local communities, rather than disposable products in a global marketplace.  To illustrate, contrast the Occupy movement’s commitment to particular public spaces with urban officials’ treatment of those same spaces. After years of losing business to outlying suburban shopping malls, city officials have lured middle-class shoppers back to urban downtowns with the promise of an excitement and vitality absent in the cloistered suburbs. The worry is that mobile consumers will again flee to the suburbs if downtown areas are perceived as shady or menacing.

Detropia: Documentary Paints a Bleak Picture of Former City of the Future - “This is coming to you,” declares Tommy Stevens, owner of a blues bar in Detroit. By that he means the decay, deflation, and defeat of the middle class that has comprised the last decade of Detroit’s history. That painful story and its meaning for the rest of America is the subject of Detropia, an important, heartbreaking, and yet still occasionally hilarious documentary directed by Heidi Ewing and Rachel Grady, which premiered this past week at Sundance. There’s something special about Detroit. It has always been a city of the future. From the 1930s through the 1950s the city was among the fastest growing in the world, the land of opportunity for regular workers, particularly black men leaving menial jobs in the south.  “Detroit,” Ewing says, “is where the middle class was invented.”  But, as the film shows, things went terribly wrong. In a striking sequence the filmmakers play old footage featuring “the highway of the future”: A tuxedo-clad man and his companion drive a gleaming car down a sleek, elevated highway. The film cuts to the real future, where broken-down American cars drive down a street populated by feral dogs, littered with garbage, and surrounded by decaying buildings. Detropia presents a preview of what America could look like if the divide worsens between “have” and “have-not” cities, where men of working age, as in the video above, spend their time combing industrial ruins for scrap metal. At times, watching the film is like watching the ultimate American nightmare. It can be hard to believe it’s a documentary.

AP: First 10 States Granted Waivers From 'No Child Left Behind' : The Two-Way : NPR: Following up on a plan he unveiled last September to let states apply to be exempt from basic elements of the Bush-era No Child Left Behind education law, President Obama will today announce the first 10 states that have qualified for such exemptions. The Associated Press, citing "a White House official ... who spoke on condition of anonymity because the states had not yet been announced," says the states are: Colorado, Florida, Georgia, Indiana, Kentucky, Massachusetts, Minnesota, New Jersey, Oklahoma and Tennessee. One state, New Mexico, has been denied a waiver but is working with the administration to see if it can soon qualify, according to the wire service. The goal of the waivers is to give states more flexibility as they seek to reach educational achievement goals set by the federal government when George W. Bush was president

Education Gap Grows Between Rich and Poor - Education was historically considered a great equalizer in American society, capable of lifting less advantaged children and improving their chances for success as adults. But a body of recently published scholarship suggests that the achievement gap between rich and poor children is widening, a development that threatens to dilute education’s leveling effects.  It is a well-known fact that children from affluent families tend to do better in school. Yet the income divide has received far less attention from policy makers and government officials than gaps in student accomplishment by race.  Now, in analyses of long-term data published in recent months, researchers are finding that while the achievement gap between white and black students has narrowed significantly over the past few decades, the gap between rich and poor students has grown substantially during the same period.  “We have moved from a society in the 1950s and 1960s, in which race was more consequential than family income, to one today in which family income appears more determinative of educational success than race,” said Sean F. Reardon. Professor Reardon is the author of a study that found that the gap in standardized test scores between affluent and low-income students had grown by about 40 percent since the 1960s, and is now double the testing gap between blacks and whites.

How America made its children crazy - Now we know that computers don't help children learn and that drugs don't help them concentrate, because the establishment mandarins who sold us the computers and drugs have conceded failure. In the January 29 New York Times, [1] a prominent professor of child development shows that attention-deficit-disorder drugs only harm the three million children who take them. One out of 10 American children have been diagnosed with so-called Attention Deficit/Hyperactivity Disorder and most of them have been medicated. [2] Some months ago, the Times reported that test scores lagged in school districts that invested massively in digital education. [3] It does not seem to have occurred to the mandarins that computers cause attention deficit disorder. The brain is a machine, in the enlightened secular model, and so-called brain science teaches us to tweak its functioning with pharmaceuticals, or stimulate its development through digital approximations of intelligence. The grand result of a generation's worth of brain-science application is a generation of schoolchildren who are disproportionately illiterate, innumerate, anxious, angry, and unhappy. Professor L Alan Sroufe's debunking of ADD medication in the New York Times contains this admission: ''Back in the 1960s I, like most psychologists, believed that children with difficulty concentrating were suffering from a brain problem of genetic or otherwise inborn origin. Just as Type I diabetics need insulin to correct problems with their inborn biochemistry, these children were believed to require attention-deficit drugs to correct theirs. It turns out, however, that there is little to no evidence to support this theory.'' That is an astonishing statement: in the mainstream view of the academic psychologists, the brain is another pancreas, except that its function is to secrete thoughts as opposed to insulin. That is to say that the psychologists have a pancreas where their brains should have been.

Book Burning in Arizona - There is more at work in the attack on ethnic studies and the banning of books considered dangerous to children in the Arizona schools than the rise of Tea Party politics and specific acts of censorship (this would be a typical liberal interpretation of these events). There is also the emergence of deeper structures of a systemic racism and the increasing mobilization of neoliberal ideology to justify the ongoing attacks on people of color, immigrants and those considered other by virtue of their class and ethnicity. In the first instance, race is not ignored. On the contrary, it is either coded as a style, a commodity, or devalued as a criminal culture and defined as a threat to a supposedly under-siege white, Christian nation. What follows, then, is that race is more and more erased as a political category and reduced to the narrow parameters of individual preference, psychology or prejudice. Privatizing race preserves the dominant power structures that produce modes of structural racism that extend from racial discrimination to racial exclusion practiced by schools, governments, banks, mortgage companies and state policies, among others.   Within this type of privatized discourse, racism survives through the guise of neoliberalism as a kind of repartee that imagines human agency as simply a matter of individualized choices - the only obstacle to effective citizenship and agency being the lack of principled self-help and moral responsibility. Privatizing racism functions as a racial mythology that both encourages individual solutions to socially produced problems and reveals a false sense of conceit used by those who claim that racism is nothing more than "a psychological space free of racial tension."[21] Even worse is when racism is disavowed, yet appears in another guise through a language of punishment that persecutes and demonizes anyone who even raises the charge of racism.

Who really benefits from putting high-tech gadgets in classrooms? - Something sounded familiar last week when I heard U.S. Education Secretary Arne Duncan and FCC Chairman Julius Genachowski make a huge pitch for infusing digital technology into America's classrooms. Every schoolchild should have a laptop, they said. Because in the near future, textbooks will be a thing of the past. As an inventor of motion picture technology, Edison stood to profit from its widespread application. And the leading promoter of the replacement of paper textbooks by e-books and electronic devices today is Apple, which announced at a media event last month that it dreams of a world in which every pupil reads textbooks on an iPad or a Mac. That should tell you that the nirvana sketched out by Duncan and Genachowski at last week's Digital Learning Day town hall was erected upon a sizable foundation of commercially processed claptrap. Not only did Genachowski in his prepared remarks give a special shout out to Apple and the iPad, but the event's roster of co-sponsors included Google, Comcast, AT&T, Intel and other companies hoping to see their investments in Internet or educational technologies pay off.How much genuine value is there in fancy educational electronics? Listen to what the experts say.

U.S. State Science Standards Are “Mediocre to Awful” - A new report from the Thomas B. Fordham Institute paints a grim picture of state science standards across the United States. But it also reveals some intriguing details about exactly what’s going wrong with the way many American students are learning science. Standards are the foundation upon which educators build curricula, write textbooks and train teachers– they often take the form of a list of facts and skills that students must master at each grade level. Each state is free to formulate its own standards, and numerous studies have found that high standards are a first step on the road to high student achievement. “A majority of the states’ standards remain mediocre to awful,” write the authors of the report. Only one state, California, plus the District of Columbia, earned straight A’s. Indiana, Massachusetts, South Carolina and Virginia each scored an A-, and a band of states in and around the northwest, including Oregon, Idaho, Montana and Nebraska, scored F’s. (For any New Yorkers reading this, our standards earned a respectable B+, plus the honor of having “some of the most elegant writing of any science standards document”).

Pa. universities face steep cuts in gov's proposed budget; student aid also on chopping block - State universities still trying to recover from deep cuts last year would have their public funding slashed even further under a budget plan unveiled Tuesday, leading some institutions to warn of a choice between maintaining buildings and offering academic programs students need to graduate. Students also would receive less financial aid under the $27.1 billion spending plan for 2012-13 put forth by Gov. Tom Corbett. He called the proposal "lean and demanding" as the state grapples with tepid revenues and higher costs. It still requires legislative approval. The Republican governor seeks to cut $330 million, or 20 percent, from 14 state-owned universities. He also wants to reduce aid to Penn State, the University of Pittsburgh and Temple University by about 30 percent. Yet Corbett seemed to acknowledge the distress such cuts could cause by simultaneously announcing the creation of a panel to examine higher education funding — a problem he said needs to be addressed "without rancor and dramatics."

Middle-Aged Borrowers Pile on Student Debt -  (Reuters) - Middle-aged borrowers are piling up student debt faster than any other age group, according to a new analysis obtained by Reuters. Educational borrowing is up for every age group over the past three years, but it has grown far more quickly among those between 35 and 49, according to the analysis of more than 3 million credit reports provided to Reuters by the credit score tracking site CreditKarma ( That group saw its school debt burden increase by a staggering 47 percent, according to the analysis. The average student loan debt for those aged 38 to 41 was the biggest of that group -- about $12,000, up from just under $9,000 in 2009. Young people still carry the biggest student loan burdens; those aged 26 to 29 have an average of $14,000 in student debt. But the increased levels in middle-aged student debt is a new phenomenon.

U.S. Student Debt Could Be Next ‘Bomb’ - Almost half of U.S. bankruptcy attorneys representing consumers say that potential clients with student-loan debt have “significantly increased” over the past three to four years, a survey found. The National Association of Consumer Bankruptcy Attorneys, a group that represents consumer debtors and their lawyers, released a survey today of 860 bankruptcy attorneys in the U.S who are members of the organization. Federal and private student-loan debt is approaching $1 trillion and surpassed credit-card debt for the first time in 2010, according to Mark Kantrowitz, publisher of, a college grant and loan website. The borrowing represents a threat reminiscent of the mortgage crisis, the attorneys group said in a statement. Under U.S. law, student-loan debt -- unlike credit-card borrowings -- can rarely be discharged in bankruptcy court. “Take it from those of us on the frontline of economic distress in America,” William E. Brewer, Jr., president of the group, said in a statement. “This could very well be the next debt bomb for the U.S. economy.”

NACBA warns of student loan "debt bomb" - At its annual Capitol Hill Day in Washington this week, the National Association of Consumer Bankruptcy Attorneys sounded an alarm about the growing student loan problem, calling it a “debt bomb.” NACBA released a survey of its members indicating that more potential clients these days have unmanageable educational loans and are facing aggressive collection efforts. See It has become common for people to have two mortgage-size debts, one for a home and another for an education. The educational loan problem is looking something like the one a few years back with subprime mortgages. Absent “undue hardship,” very hard to establish, student debt can be a life sentence because these loans are not dischargeable in bankruptcy. NACBA supports making private students loans dischargeable again (as they were before the 2005 law). Beyond that, it favors going back to the pre-1990 approach of allowing discharge of any student debt after five years. If the education isn’t paying off enough to make the loan repayable after that much time, something has to give so that people can get on with their lives--and some day buy a home, start a family, and save for their kids’ education and their own retirement.

Pension liabilities to hit earnings of US blue-chips - US blue-chip companies face a hit to earnings from greater pension contributions, with charges related to rising liabilities pushing groups such as Verizon and US Steel into losses during the fourth quarter.  The funding gap for pension plans of S&P 500 companies almost doubled in 2011, analysts say, to around $450bn, as bond yields dropped, causing the size of future liabilities to grow. Stock market performance has also failed to keep up with rising liabilities. “In addition to higher contributions this year, it looks like pension funding may become more of an ongoing drain on cash than it has been in the past,” . He estimates that S&P 500 companies will have to contribute $90bn to their pension plans in 2012, a rise of 74 per cent on planned contributions for 2011.  The bank has identified seven companies where pension contributions are estimated to be more than half of average annual cash flow from operations over the past five years: AK Steel, Goodyear Tire, Weyerhaeuser, Boeing, Northrop Grumman, Lockheed Martin and US Steel.

State pension fund shortfall grows - The gap between the promises Iowa has made for public employees’ retirement benefits and the money set aside to pay for them has grown to $5.7 billion – a 1,643 percent increase over 11 years, State Auditor David Vaudt said Monday. “We had just a $327 million liability at the end of 2000. That has now grown to $5.7 billion, and that’s equal almost to one year’s general fund budget,” Vaudt said. “We’re going to need substantial resources in the future to improve the funded status of this particular plan.” A report last year by State Budget Solutions, a national nonprofit advocating for fundamental reform of state budgets, pegs Iowa’s unfunded liability as even larger – $21.3 billion as of last March. “The official estimate of the unfunded liability is based upon the state’s promise to get a return on investment that is literally impossible,” said State Budget Solutions editor Frank Keegan. “Taxpayers have to make up the difference, and that’s going to cost a lot of money ... I’m worried that governors and legislatures don’t really realize the magnitude of it.”

Double Double -- The Absolute Simplest Look at Wages and Pensions - Canadian workers need more than coffee to see them through. They need wages and pensions. How big do they need to be? In a time of drooping wages and wavering pensions, we need to know. Let’s approach the wages, retirement and pension discussion by simplifying it as much as possible. Let’s assume that the work life extends from age 20 to 60. The work that people do before and after those ages is balanced by people who are not able to work at all, for whatever reason. We’re talking averages here, spread across 33 million Canadians. So for half your life you work, and for half (birth to 20, and 60 to 80) you don’t. As you can see, on average every person working must earn double what it costs him to live. That extra money pays for the child the worker is before he goes to work, and the senior he is afterwards. For the population of Canada to stay level, each Canadian must raise one child, and he must support himself once he retires. What it costs to do that is the “lifetime wage.” How can we calculate that? Well, to start we can set a lower limit. Each individual must earn or somehow acquire no less than what he needs to stay alive. A rough guess for that number is around $800/month. That’s in the range of what single welfare recipients receive. I have no idea how they live on that, but thousands of them do.

LES MISERABLES: SOCIAL SECURITY - From a message from the National Consumer Law Center (reference  "It’s perfectly fine for a person who failed to pay their child support to end up penniless and living in their car, and to die that way.– High Ranking U.S. Treasury Official, in response to a request for help with Treasury’s rules which allow 100% of Social Security benefits to be taken to pay for decades-old child support. February 3, 2012. As the result of the concurrence of two new Treasury rules, elderly and disabled Social Security recipients will soon lose all of their benefits to old child support orders.

  • As of March, 2013, all recipients of federal benefits must receive benefits through electronic deposit, either through deposit directly into a bank account, or using the Treasury authorized Direct Express Card. (31 CFR § 208.4.)
  • Treasury’s new garnishment rule, intended to protect benefits in bank accounts from garnishment allows child support orders to garnish all of the funds in the accounts. (31 CFR 221.4.)   As a result, 65% of the recipient’s benefits will be withheld pursuant to administrative seizures and paid directly to the child support office. The remaining 35% will be deposited into the beneficiary’s bank account, where it will be seized in full through a bank garnishment. Most SS recipients who owe child support are old and or disabled.  Their children are grown and the child support is owed to the state. The amounts of the orders have ballooned to tens of thousands because of annual 10 or 12% interest rates applied.

Rhode Island’s Worst-Funded Local Health Plans -Ten communities combine to make up nearly 85 percent of the $3.5 billion unfunded liability for municipal other post-employment benefits (OPEB) in Rhode Island, an amount some experts say could force cities and towns across the state to go belly up. The city of Providence has seen its unfunded OPEB (mostly retiree healthcare) liability balloon to nearly $1.5 billion – by far the largest in the state— according to a report issued by the Auditor General’s office last fall. Pawtucket, Warwick, Johnston and West Warwick round out the top five. Sasse said the problem communities are facing is that it is too difficult to address every issue at once, which is why most are focusing on tackling pensions first. He said the difference is that cities and towns haven’t been required to fund their OPEB system the way they should have been funding their pension system, but that if they don’t take on the OPEB in the near future, they’ll face real problems.

About my ‘spilled semen’ amendment to Oklahoma’s Personhood bill - As a woman and a 31-year veteran of the legislative process in Oklahoma, I am increasingly offended by state law trends that solely focus on the female's role in the reproductive process. With Oklahoma's new, never-before-experienced Republican majority, we are seeing enactment of more and more measures that adversely affect women and their rights to access safe medical procedures when making reproductive healthcare decisions.  My action to amend the so-called "Personhood" bill – SB 1433, introduced by Senator Brian Crain (Republican, Tulsa) – represents the culmination of my and many other Oklahomans' frustration regarding the ridiculousness of our reproductive policy initiatives in Oklahoma. I have received overwhelmingly positive responses from men and women in Oklahoma – and worldwide. The Personhood bill would potentially allow governmental intrusion into families' personal lives by policing what happens to a woman's eggs without any similar thought to what happens to a man's sperm.

Government health spending seen hitting $1.8 trillion (Reuters) - Government spending for Medicare, Medicaid and other healthcare programs will more than double over the next decade to $1.8 trillion, or 7.3 percent of the country's total economic output, congressional researchers said on Tuesday. In its annual budget and economic outlook, the non-partisan Congressional Budget Office said that even under its most conservative projections, healthcare spending would rise by 8 percent a year from 2012 to 2022, mainly as a result of an aging U.S. population and rising treatment costs. It will continue to be a key driver of the U.S. budget deficit. Medicare, the federal healthcare program for the elderly, accounts for about half the projected growth, with Medicaid at roughly one-third and the remainder attributed to new federal subsidies to help lower income Americans purchase insurance under President Barack Obama's 2010 healthcare overhaul. Spending is expected to dip this year to $847 billion, from $856 billion in 2011, because extra federal money to help cash-strapped states pay for Medicaid ended last July. The healthcare program for the poor, Medicaid is jointly funded by federal and state governments. But researchers warned that the longer term prospects for rising healthcare spending could have dire consequences for the U.S. deficit when combined with the cost of Social Security, if current revenue levels remain unchanged. "The resulting deficits will increase federal debt to unsupportable levels," the CBO report said.

Jonathan Gruber on Public Finance - A key figure behind the Massachusetts and Obama healthcare reforms tells us about the purpose and uses of public finance economics, and explains how Romneycare and Obamacare are both different and alike. Let’s start by defining the term that we’re discussing. What is public finance, otherwise known as public economics?Public finance is the study of the role of government in the economy. It is defined around four questions: When should governments intervene? How should governments intervene? What is the impact of government intervention on the economy? And why do governments intervene in the way that they do?

Keep taking the testosterone - Until a few years ago, doctor Lionel Bissoon, who practises what he calls integrative medicine on Manhattan’s smart Upper West Side, mostly treated middle-aged women for what is politely known as cellulite. Then the financial crisis hit Wall Street and a strange thing happened: a stream of financial executives and traders began coming to him in the hope of being turned into alpha males. Dr Bissoon, a doctor of osteopathic medicine, now specialises in treating men for testosterone deficiency. While impotence is often thought of as the main symptom of low levels of the hormone, it turns out that financial executives are hoping the hormone will sharpen their faculties and make them more competitive in the workplace at a time when many companies are sending underperforming employees into early retirement. “Since the recession started, more guys want to be on top of their game,” says Dr Bissoon. “All of these men are under tons of stress, and stress will reduce their levels of testosterone. As one patient told me: ‘There’s a whole bunch of whizz-kids beneath me who are ready to take my place.’ ” America’s inventive medical industry has even coined a new term to describe this ailment: andropause. Its reported symptoms include a lack of energy, drive and enthusiasm, not to mention a lower libido. One pharmaceuticals company, Abbott Laboratories, is even running TV adverts that ask viewers if they suffer from “Low T”. It shows a middle-aged man un­able to keep up with the hectic pace of the modern world in both the office and on the dance floor.

Farmers Plan Biggest U.S. Crop Boost Since 1984, Led by Corn: - U.S. farmers will plant the most acres in a generation this year, led by the biggest corn crop since World War II, taking advantage of the highest agricultural prices in at least four decades.  They will sow corn, soybeans and wheat on 226.9 million acres, the most since 1984, a Bloomberg survey of 36 farmers, bankers and analysts showed. The 2.5 percent gain means an expansion the size of New Jersey, as growers target fields left fallow last year and land freed up from conservation programs.  Crop prices, some of which reached the highest averages ever in 2011, bolstered the economies of Midwest growing states, sent net farm income up 28 percent to $100.9 billion and pushed the value of farmland to a record $2,350 an acre, the U.S. Department of Agriculture estimates. Global food costs are down 11 percent from a peak a year ago as grain output rises from China to Canada, United Nations data show.  “There is unlikely to be any ground that won’t be planted this year,”  “Farmers know that they have to plant more when prices are high because they may not last.”

Beef prices expected to climb for next 2 years - The smallest cattle herd since the 1950s likely will mean higher beef prices at the supermarket for the next two years. Experts said beef prices could climb as much as 10 percent a year in 2012 and 2013, and the increase could be even greater if demand from other countries increases. Those higher prices would follow steady increases that have seen the average retail cost of a pound of hamburger rise 23 percent, from $2.38 in December 2010 to $2.92 last December, according to the U.S. Department of Agriculture. Last month the USDA reported the U.S. herd had declined to 90.8 million cattle, 2 percent less than the previous year and the lowest inventory since 1952, when there were 88.1 million. Ranchers have sold more of their cattle in recent years to meet increased costs for feed, fuel and other expenses. The soaring feed costs come amid heightened demand for corn to produce ethanol and to meet a growing export market.The situation has been worst in Texas, the nation's leading cattle producer, and other parts of the southern plains and southwest, where a record drought caused pastures to wither, leaving ranchers with few options but to sell their cattle or pay top-dollar for feed.

A Suit Airs Debate on Organic vs Modified Crops - SILENT in flannel shirts and ponytails, farmers from Saskatchewan and South Dakota, Mississippi and Massachusetts lined the walls of a packed federal courtroom in Manhattan last week, as their lawyers told a judge that they were no longer able to keep genetically modified crops from their fields. The hearing is part of a debate that is coming to life around the country, in courtrooms and Occupy sites, in boardrooms and online, with new petitions, ballot initiatives and lawsuits from California to Maine. Last year, according to the Department of Agriculture, about 90 percent of all soybeans, corn, canola and sugar beets raised in the United States were grown from what scientists now call transgenic seed. Most processed foods (staples like breakfast cereal, granola bars, chicken nuggets and salad dressing) contain one or more transgenic ingredients, according to estimates from the Grocery Manufacturers Association, though the labels don't reveal that. (Some, like tortilla chips, can contain dozens.) Common ingredients like corn, vegetable oil, maltodextrin, soy protein, lecithin, monosodium glutamate, cornstarch, yeast extract, sugar and corn syrup are almost always produced from transgenic crops.

New Campaign Urges Labeling Of Genetically Modified Foods - A new campaign, Just Label It, has been launched to require that the U.S. Food and Drug Administration (FDA) label foods from genetically modified organisms (GMOs).  An accompanying video, Labels Matter, was also just released to educate people about the risks of eating genetically modified foods and to encourage people to fight to know what’s in their food.   Produced through a collaboration between the Just Label It campaign and Food, Inc. filmmaker Robert Kenner, Labels Matter “captures the conviction that consumers have the right to know what is in their food,” said Kenner. Many countries, including the European Union, Australia, Japan, Russia, Brazil, and China, require genetically engineered foods to be labeled, but the U.S. does not have such a law in place.  Even though the FDA requires labels to include all significant information about a product under the Federal Food, Drug, and Cosmetic Act in order to prevent consumer deception, it considers GMO products to be “substantially equivalent” to non-GMO foods, so it doesn’t require companies to label whether their foods contain GMOs.

Plantings of Biotech Crops Grew Globally in 2011 - The United States remained the primary backer of biotech crop technology in 2011, but adoption spread internationally as the total global planted area of genetically modified seeds grew 8 percent from a year ago, according to a report issued Tuesday. Roughly 160 million hectares, or 395.2 million acres, were planted with biotech crops in 2011, up 8 percent from 2010, said the International Service for the Acquisition of Agri-Biotech Applications (ISAAA) in its annual report on biotech seed use. The biotech crops were planted by 16.7 million farmers in 29 countries, up from 15.4 million farmers in the same number of countries in 2010. (A full copy of the report can be found here:"I was a little surprised that the growth was as strong as it is," said Clive James, chairman of the ISAAA board of directors. "Millions of farmers around the world in both industrial and developing countries are adopting the technology."

The seed emergency: The threat to food and democracy -The seed is the first link in the food chain - and seed sovereignty is the foundation of food sovereignty. If farmers do not have their own seeds or access to open pollinated varieties that they can save, improve and exchange, they have no seed sovereignty - and consequently no food sovereignty. The deepening agrarian and food crisis has its roots in changes in the seed supply system, and the erosion of seed diversity and seed sovereignty. Seed sovereignty includes the farmer's rights to save, breed and exchange seeds, to have access to diverse open source seeds which can be saved - and which are not patented, genetically modified, owned or controlled by emerging seed giants. It is based on reclaiming seeds and biodiversity as commons and public good. The past twenty years have seen a very rapid erosion of seed diversity and seed sovereignty, and the concentration of the control over seeds by a very small number of giant corporations. In 1995, when the UN organised the Plant Genetic Resources Conference in Leipzig, it was reported that 75 per cent of all agricultural biodiversity had disappeared because of the introduction of "modern" varieties, which are always cultivated as monocultures. Since then, the erosion has accelerated. The introduction of the Trade Related Intellectual Property Rights Agreement of the World Trade Organisation has accelerated the spread of genetically engineered seeds - which can be patented - and for which royalties can be collected. Navdanya was started in response to the introduction of these patents on seeds in the General Agreement on Tariffs and Trade - a forerunner to the WTO - about which a Monsanto representative later stated: "In drafting these agreements, we were the patient, diagnostician [and] physician all in one."

Genetically Modified Foods Not Served in Monsanto Cafeteria - The fight to ban genetically modified foods has won more converts — some employees of Monsanto the company that is doing the most to promote GM products. The Independent newspaper reports that there is a notice in the cafeteria of the Monsanto pharmaceutical factory is High Wycombe, Buckinghamshire, advising customers “as far as practicable, GM soya and maize (has been removed) from all food products served in our restaurant. We have taken the steps to ensure that you, the customer, can feel confident in the food we serve.” The notice was posted by the Sutcliffe Catering Group. Monsanto confirms the authenticity of the notice, but company spokesman Tony Coombes says the only reason for the GM-free foods is because the company “believes in choice.” Coombes says in other Monsanto locations employees are happy to eat GM foods because they are “sprayed with fewer chemicals.”

Agent Orange and the GMO War - Agent Orange is a weapon of war. In Vietnam it was used to destroy the environment, in order to help the aggressors better destroy the people. (Environmental domination is always intended to render social domination more effective.) Now, in the guise of the USDA, the government and corporations are literally waging war on the American people, using the same iconic weapon. The USDA is in the process of approving a GM corn variety resistant to Dow Chemical’s 2, 4-D herbicide, a poison derived from Agent Orange. This product is in response to the collapse of Monsanto’s Roundup as an effective herbicide. There are now dozens of superweeds which are resistant to glyphosate, the active ingredient in Roundup. This is proof of the Big Lie of GMOs. In the case of herbicide-resistant varieties, the promise was that use of Roundup Ready crops would simplify the application of herbicides and result in less overall use of them. This should have seemed suspicious from the start, since the business model of Monsanto and others was to sell as much herbicide as possible.

Hungary Destroys All Monsanto GMO Corn Fields - Hungary has taken a bold stand against biotech giant Monsanto and genetic modification by destroying 1000 acres of maize found to have been grown with genetically modified seeds, according to Hungary deputy state secretary of the Ministry of Rural Development Lajos Bognar. Unlike many European Union countries, Hungary is a nation where genetically modified (GM) seeds are banned. In a similar stance against GM ingredients, Peru has also passed a 10 year ban on GM foods.  Planetsave reports: Almost 1000 acres of maize found to have been ground with genetically modified seeds have been destroyed throughout Hungary, deputy state secretary of the Ministry of Rural Development Lajos Bognar said. The GMO maize has been ploughed under, said Lajos Bognar, but pollen has not spread from the maize, he added. Unlike several EU members, GMO seeds are banned in Hungary. The checks will continue despite the fact that seek traders are obliged to make sure that their products are GMO free, Bognar said. During the invesigation, controllers have found Pioneer Monsanto products among the seeds planted.

Monsanto sets its sights on “honeybee health” acquiring a company manipulating gene expression. Bee afraid. Bee very afraid.  - There was quite a stir among beekeepers and anti-GMO activists last fall when chemical and seed giant Monsanto purchased Beeologics, a small company best known for its  “groundbreaking research” applying RNAi technology to honeybees, a process that blocks gene expression. This was Monsanto’s first acquisition of a pest control biotech company. Since its inception in 2007, Beeologics has been developing Remebee®, an anti-viral treatment for use in honeybees affected with Israeli Acute Paralysis Virus (IAPV), a bee-specific virus which originated from Australia and was found and named in Israel in 2002. To put things in context, many scientists were all abuzz about IAPV at the time. Many firmly believed that it was a primer for Colony Collapse Disorder (CCD). Remembee®, meanwhile, was regarded as a first line of defense to control the virus and its effect on bee mortality.

Agribusiness Fights to Allow Children to Work in Manure Pits - Most child labor was prohibited in 1938, but there are a few exceptions for certain industries where children are still allowed to work.  One of the biggest loopholes is the agricultural industry. The Department of Labor recently issued new proposed regulations restricting child labor on farms, regulations which are drawing intense opposition from politicians and agribusiness groups like the American Farm Bureau Federation. The rules have been held up by administration official Cass Sunstein. These rules are complex, and the opposition to them is varied. Some politicians, such as Jon Tester, Debbie Stabenow, and Tom Harkin, want to ensure that children can work on farms in which their family’s own a stake.  The Department of Labor has recently revised the rules to allow that.But other politicians just seem to want children to be put to work. For instance, Republican Congressional candidate Tom Cotton has argued against child labor restrictions in the agricultural sector, saying “We need more young people who’ve worked all day in the fields, not less.” And Republican Congressman Danny Rehberg believes that modern farm equipment cannot hurt children.  Rehberg added that he’s previously employed a 10-year-old neighbor to herd cashmere goats with what he described as a Kawasaki youth motorcycle. “

Era of Falling Food Prices Seen at End on Growth in Population -- The era of falling food prices has come to an end with the world population set to add another 2 billion people, according to Cargill Inc., the U.S. farm commodities trader. The United Nations’ Food and Agriculture Organization has said global food output must rise 70 percent by 2050 to feed a world population expected to grow to 9 billion from 7 billion now and as increasingly wealthy consumers in developing economies eat more meat. Food prices tracked by the FAO climbed to the highest ever a year ago on surging grain prices. “You don’t have to be a reviving bull on commodities to believe that the era, which went from the 50’s, 60’s to 70’s and early 80s, of ever decreasing food prices in real terms has probably come to an end,” Paul Conway, vice chairman of Cargill, said at the Kingsman sugar conference in Dubai yesterday. The FAO food-price index averaged 228 points last year, 23 percent more than in 2010 and above the 200 points recorded in 2008, when food riots erupted from Haiti to Egypt. Prices since then have declined 11 percent by December.

Glencore, Xstrata Agree to $90 Billion Merger — Anglo-Swiss mining group Xstrata PLC announced plans Tuesday to merge with commodities trading giant Glencore International PLC in a deal that will create the world’s fourth largest natural resources group. The combined company, to be called Glencore Xstrata with a combined market value of $90 billion, will control a chain of businesses from mining to refining, storage and shipping of basic commodities like coal, copper and corn. The new group would be the world’s largest producer of thermal coal — which is used to fire power stations — as well as becoming major a force in the mining and production of copper, used in electronic cables, and other metals including ferrochrome, a key ingredient in the production of stainless steel.

As ‘Yuck Factor’ Subsides, Treated Wastewater Flows From Taps -Almost hidden in the northern hills, the pilot water treatment plant here does not seem a harbinger of revolution. It cost $13 million, uses long-established technologies and produces a million gallons a day.  But the plant’s very existence is a triumph over one of the most stubborn problems facing the nation’s water managers: if they make clean drinking water from wastewater, will the yuck factor keep people from accepting it?  With climate change1 threatening to diminish water supplies in the fast-growing Southwest, more cities are considering the potential of reclaimed water. A new report2 from the National Academy of Sciences3 said that if coastal communities used advanced treatment procedures on the effluent that is now sent out to sea, it could increase the amount of municipal water available by as much as 27 percent.  San Diego’s success, 12 years after its City Council recoiled from the toilet-to-tap concept, offers a blueprint for other districts considering wastewater reuse.

Oil, Food, Water: Is Everything Past Its Peak? - An unprecedented crisis faced America. Oil production was going to peak in just three to five years, resulting in foreign oil addiction and economic calamity. The scientist responsible for slapping the nation into consciousness implored industry and government to act: "The smug complacency that habitually blinds the American public must be torn," wrote David White, chief geologist of the U.S. Geological Survey. It was 1920.  More than 90 years later, tempers still flare over the prospect of global "peak oil." Last week a commentary in the prestigious journal Nature argued, "oil's tipping point has passed." It's the most recent high-profile salvo about whether, or how soon, the petroleum extraction that drives the global economy will reach a plateau and then, inevitably, decline.  "Peak" alarms going off aren't unique to oil. There's peak coal: Production could top out around 2025, according to the Energy Watch Group, an international group of legislators and scientists studying long-term trends. Peak food: The U.N.'s Food Price Index reached a new high in February 2011, exacerbating poverty in developing countries and creating potential for civil unrest. "Peak water" entered the popular lexicon in 2010, after two scientists classified threats to human use of rivers and underground aquifers, and to ecological stability.

Doomsday Capitalism: Just Getting Started or Going Out of Style? -- MarketWatch's Paul B. Farrell had an interesting article on Tuesday regarding a "doomsday capitalist's winning strategy". Farrell's commentary was quite ominous: "Plan now for 'a breakdown of the civilized infrastructure'." Citing a book from 2008 written by "hedge fund guru" Barton Biggs, Farrell suggested that consumers should seek to become self-sufficient and capable of growing their own food. One's own doomsday shelter should be "well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc. Think Swiss Family Robinson." Farrell took the predicament a step further in that consumers should "[a]lso think about apocalyptic films like 'Mad Max' and 'The Day After Tomorrow.'" Aside from food, wine, clothing, and medicine, Farrell also suggested stocking "an arsenal of guns and ammo." As if such a scenario would be the ultimate end of human civilization, Farrell commented with confidence, "Yes, that's how the 'Final Days of Earth' look to the world's leading Doomsday Capitalist."

U.N. Says Somalia Famine Has Ended, but Warns That Crisis Isn’t Over - The United Nations said on Friday that the famine that has killed tens of thousands of people in Somalia this past year has ended, thanks to a bumper harvest and a surge in emergency food deliveries.  But conditions are still precarious, United Nations officials warned, with many Somalis dying of hunger and more than two million still needing emergency rations to survive. Somalia has lurched from disaster to disaster in the past 21 years, since the central government basically collapsed. Year after year it is ranked as one of the poorest, most violent countries, plagued by warring militias, bandits, warlords and pirates.  Last year, a punishing drought killed livestock and turned once-fertile farms into fields of dust. Malnutrition and death rates soared, and hundreds of thousands of impoverished Somalis embarked on desperate treks across the desert, seeking help. Some starving mothers arrived at refugee camps in Kenya with dead children strapped to their backs. The few working hospitals in Mogadishu, Somalia’s capital, were soon so besieged with dying people that they resembled morgues.

Somali famine ‘will kill tens of thousands’ - The UN in Somalia says tens of thousands of people will have died of starvation by the time the famine in the Horn of Africa ends. The food crisis was declared in Somalia six months ago and levels of need are expected to remain high until July or August. UN aid chief in Somalia, Mark Bowden, told the BBC malnutrition rates there were the highest in the world. He said a quarter of a million Somalis were still suffering from the famine. "We know that tens of thousands of people will have died over the last year," Mr Bowden, said, describing the rates of malnutrition as "amazingly high". "Children will have suffered the most, malnutrition rates in Somalia were the highest in the world, and I think the highest recorded... up to 50% of the child population suffered from severe or acute malnutrition."

Should Plastic Bags Be Banned? - Will banning plastic shopping bags make the roadways and oceans cleaner? Or will it merely annoy shoppers and harm factories that use recycled bags to make things like fence posts?  Those were among the questions being fiercely debated at a public meeting here in Texas’s capital city last week, as Austin considers whether to impose a wide-ranging ban on plastic bags.  Exchanges like this are increasingly common around the world, as communities wrestle with questions about regulating shopping bags distributed at checkout counters. Already countries including China and Ireland and cities including Mexico City have adopted bans or taxes in some form on plastic bags. On Tuesday, officials in San Francisco voted to expand a ban already in place on plastic bags and to require shoppers to pay 10 cents each for paper bags.

Texas Water District Acts to Slow Depletion of the Ogallala Aquifer - A group of farmers in northwest Texas began 2012 under circumstances their forbearers could scarcely imagine: they faced a limit on the amount of groundwater they could pump from their own wells on their own property. The new rule issued by the High Plains Underground Water Conservation District, based in Lubbock, declares that water pumped in excess of the “allowable production rate” is illegal. In Texas, a bastion of the free-market Tea Party, such a rule is hard to fathom.  Most of the state abides by the “rule of capture,” which basically allows farmers to pump as much water as they want from beneath their own land.  But irrigators in northwest Texas rely on the Ogallala aquifer, an underground water reserve that is all-too-rapidly disappearing.  If the region is to have any future at all, water users must find a way to curb the pumping. The Ogallala is one of the nation’s largest and most productive underground water sources.   It makes up more than three-quarters of the High Plains aquifer, which spans 175,000 square miles and underlies parts of eight U.S. states — Colorado, Kansas, Nebraska, New Mexico, Oklahoma, South Dakota, Texas, and Wyoming.  Water drawn from it irrigates 15.4 million acres of cropland, 27 percent of the nation’s total irrigated area.

Ohio EPA pulls proposed rules for streams - The Ohio Environmental Protection Agency withdrew proposed regulations meant to strengthen protections for streams after business groups complained that they might cost too much. The package of regulations included a system to grade the ecological value of thousands of small, mostly unnamed “headwater” streams in Ohio. Conservationists say those streams frequently are filled in or polluted by strip mines, roads and housing subdivisions. Under the new system, the higher the value of a stream, the more work a developer would have had to do to avoid or repair damage. First proposed in 2006, these standards and other enhanced protections of streams and wetlands never got past the proposal stage. They were instead mired in opposition from business, manufacturing and homebuilder groups. During a public hearing on Wednesday, Ohio EPA Director Scott Nally announced that he was withdrawing the rules so that they could be reviewed under Gov. John Kasich’s Common Sense Initiative.

States Sue to Block Smog-Pollution Rules to Help Polluters Avoid Cleanup Costs - Today 16 states and numerous power companies that oppose new pollution-reduction rules must file their petitions with the U.S. Court of Appeals in D.C. In response to their initial suit, the court granted a motion to temporarily “stay,” or halt, the implementation of the Cross-State Air Pollution Rule, or smog pollution rule, which the Environmental Protection Agency, or EPA, promulgated last summer. These “good neighbor” pollution-reduction standards will require power plants to slash their sulfur dioxide and nitrogen oxide pollution. These substances are the key ingredients in acid rain and smog, and they can travel hundreds of miles and contaminate other states. Once implemented the rule will annually save thousands of lives and prevent thousands of illnesses. Not surprisingly, the 16 states that sued EPA to block these rules include 7 of the 10 highest-polluting states in the country. And their governors and attorneys general, who decide whether to file a lawsuit to stop these safeguards, received a combined $5 million in campaign contributions from big utilities and coal companies that benefit from higher-pollution levels.

Jeff Masters: there have been way too many strange atmospheric events in the past two years  - Our calendars may say it's February, but Mother Nature's calendar says it's more like May in the waters of South Florida, where the year's first significant tropical disturbance is drenching the Keys. The disturbance, designated Invest 90L by NHC late Sunday morning, has dumped 1-3 inches of rain over much of the Florida Keys this morning, with Key West receiving 4.34" of rain on Sunday, a record for the date. Obviously, strong tropical disturbances capable of developing into named storms are very rare in February, and I've never seen one in my 30 years as a meteorologist. However, ocean temperatures are warm enough year-round to support a tropical storm in the waters of the Western Caribbean. Water temperatures today in the region were 26.0-26.5 °C (79-80 °F), which is near average for this time of year. If an unusual configuration of the jet stream allows wind shear to drop below about 25 knots in the Western Caribbean, there is the opportunity for a rare off-season tropical storm to form in February.

On NPR, Jeff Masters explains the Arctic Oscillation and that we are on pace to have our warmest winter ever - Before we describe what is the arctic oscillation, we need to understand the jet stream because the jet stream is that band of high altitude winds that circles the entire globe, blowing from west to east. And it really influences our winter weather very strongly because the jet stream axis the boundary between cold polar air to the north and warmer subtropical air to the south. So if that jet stream boundary is south of you, you're going to have very cold wintery weather and potentially heavy snow. And if it's to the north of you, well, like it's been most of this winter over the U.S., then you tend to have a very dry, snowless, warm winter. Now, the arctic oscillation is essentially a pressure pattern that drives the jet stream and controls how strong its winds are and where the jet stream position is.

Without Its Insulating Ice Cap, Arctic Surface Waters Warm To As Much As 5 C Above Average — Record-breaking amounts of ice-free water have deprived the Arctic of more of its natural "sunscreen" than ever in recent summers. The effect is so pronounced that sea surface temperatures rose to 5 C above average in one place this year, a high never before observed, says the oceanographer who has compiled the first-ever look at average sea surface temperatures for the region. A comparison of 2000 and 2007 shows how the ice edge has retreated as the ice cap has shrunk and how surface waters have warmed compared to the 100-year average. For example, parts of the Bering Strait and Chukchi Sea were 3 and 3.5 degrees warmer than the historical average. The spot that was 5 degrees above average was found at the center of the 4 degree area of water north of the Chukchi Sea. (Credit: Applied Physics Laboratory/UW) Such superwarming of surface waters can affect how thick ice grows back in the winter, as well as its ability to withstand melting the next summer, according to Michael Steele, an oceanographer with the University of Washington's Applied Physics Laboratory. Indeed, since September, the end of summer in the Arctic, winter freeze-up in some areas is two months later than usual. The extra ocean warming also might be contributing to some changes on land, such as previously unseen plant growth in the coastal Arctic tundra, if heat coming off the ocean during freeze-up is making its way over land.

1st Contender for Scariest Animation: Northern Hemisphere Atmospheric Water Vapor Circulation

From 2 Satellites, the Big Picture on Ice Melt - Melting glaciers and ice caps are perhaps the most striking illustrations of the effects of global climate change. Surprisingly, however, there is relatively little data on just how fast the ice is disappearing. Now, a new paper from researchers at the University of Colorado, Boulder offers the most up-to-date and comprehensive numbers on glacier and ice cap melt worldwide. The research, published in the journal Nature, calculates that from 2003 to 2010, the world’s glaciers and ice caps lost about 150 billion tons of ice each year. This ice loss was responsible for an average rise of four-tenths of a millimeter in sea level every year over the eight-study period. The new numbers come from measurements made by the two Gravity Recovery and Climate Experiment satellites, or Grace, a joint project of NASA and German scientists. The tandem satellites, which are usually 137 miles apart, are sensitive to regional changes in the Earth’s mass and gravitational pull caused by the distribution of water and ice on the planet. When the lead satellite flies over an area of increased mass, it will sense the increase in gravity and pull slightly away from the trailing satellite. Researchers can detect changes of just one micron changes between the two satellites, giving them new insights into the dynamics of the Earth’s aquifers and glaciers. While the loss from glaciers and ice caps certainly isn’t trifling, over the same time period, Antarctica and Greenland and their peripheral glaciers and ice caps lost about 385 billion tons of ice annually.

Science behind the big freeze: is climate change bringing the Arctic to Europe? A loss of sea ice could be a cause of the bitter winds that have swept across the UK in the past week, weather experts say - The bitterly cold weather sweeping Britain and the rest of Europe has been linked by scientists with the ice-free seas of the Arctic, where global warming is exerting its greatest influence. A dramatic loss of sea ice covering the Barents and Kara Seas above northern Russia could explain why a chill Arctic wind has engulfed much of Europe and killed 221 people over the past week. The death toll from Arctic blast has been particularly severe in the Ukraine, where many of the dead have been people sleeping on the streets. Heating and food tents have been set up to ease their hardship. In Romania 24 people are known to have died and 17 in Poland. A growing number of experts believe complex wind patterns are being changed because melting Arctic sea ice has exposed huge swaths of normally frozen ocean to the atmosphere above. In particular, the loss of Arctic sea ice could be influencing the development of high-pressure weather systems over northern Russia, which bring very cold winds from the Arctic and Siberia to Western Europe and the British Isles, the scientists believe. An intense anticyclone over north-west Russia is behind the bitterly cold easterly winds that have swept across Europe and some climate scientists say the lack of Arctic sea ice brought about by global warming is responsible.

Is Climate Change Bringing the Arctic to Europe?  - [T]he probability of cold winters with much snow in Central Europe rises when the Arctic is covered by less sea ice in summer. Scientists of the Research Unit Potsdam of the Alfred Wegener Institute for Polar and Marine Research in the Helmholtz Association have decrypted a mechanism in which a shrinking summertime sea ice cover changes the air pressure zones in the Arctic atmosphere and impacts our European winter weather. That’s the news release for yet another new study examining what will inevitably be the huge implications for extreme weather from the massive amount of heat released by the declining Arctic sea ice cover. Arctic sea ice in September 2007 reached its lowest extent on record, approximately 40% lower than when satellite records began in 1979. Sea ice loss in 2011 was virtually tied with the ice loss in 2007, despite weather conditions that were not as unusual in the Arctic. Such a large area of open water is bound to cause significant impacts on weather patterns, due to the huge amount of heat and moisture that escapes from the exposed ocean into the atmosphere over a multi-month period following the summer melt.”  Image: Cryosphere Today.  You may recall the recent repost of the discussion by meteorologist Dr. Jeff Masters (see “Our Extreme Weather: Is Arctic Sea Ice Loss Partly to Blame?” the source of the figure above): “The question is not whether sea ice loss is affecting the large-scale atmospheric circulation…. It’s how can it not?”

Greenhouse Pollution Melts Arctic, Sending Killer Winter Weather Into Europe - As the United States has a freakishly warm and calm winter, Europe has been experiencing a frighteningly cold and dangerous season. Hundreds have died in frigid temperatures, snow and ice storms, and floods. This freakish weather in the Northern Hemisphere is connected by unusual behavior in the jet stream, which scientists are attributing to the dramatic changes in the Arctic caused by global warming pollution. In a new paper published in Tellus, scientists at the Alfred Wegener Institute for Polar and Marine Research find that declines in summer Arctic sea ice are a factor in changing the Arctic Oscillation, the circulation pattern that dominates winter weather: Scientists say the frigid, snowy European winter has its origins in a warm Arctic summer. The U.S. National Oceanic and Atmospheric Administration reported that July 2011 was the fourth-warmest July on record. A warm summer in the Arctic cuts the amount of sea ice. NOAA reports that sea-ice levels last July were the lowest in three decades. The effect is twofold, the Wegener scientists report. First, less ice means less solar heat is reflected back into the atmosphere. Rather, it is absorbed into the darker ocean waters. Second, once that heat is in the ocean, the reduced ice cap allows the heat to more easily escape into the air just above the ocean’s surface. Because warmer air tends to rise, the moisture-laden air near the ocean’s surface rises, creating instability in the atmosphere and changing air-pressure patterns, the scientists say.

The sea is rising? Island nations will see you in court - If the globe keeps warming and the seas keep rising, the country of Palau could be wiped off the map. So the Pacific island is teaming up with other small island nations to fight the threat of climate change — in court. The countries want the International Court of Justice to offer an opinion on whether countries that pollute have a responsibility to other countries that get hurt by that pollution. Ecological damage that crosses borders could be seen as a violation of international law, a legal cudgel against climate change. “It is not an exaggeration to say that climate change is, for us, a matter of life and death,” Sprent Dabwido, president of the Pacific state of Nauru, said at a climate change conference in December. Some island nations have already begun planning to go underwater: Maldivian President Mohamed Nasheed recently told the Sydney Morning Herald that his countrymen might need to relocate to Australia as climate refugees. The president of Kiribati, another Pacific island nation, has mused that they might need to build artificial floating islands to cope. Several South Pacific islands have already disappeared.

Earth's Polar Ice Melting Less Than Thought -Nearly 230 billion tons of ice is melting into the ocean from glaciers, ice caps, and mountaintops annually—which is actually less than previous estimates, according to new research by scientists at the University of Colorado, Boulder. If the amount of ice lost between 2003 and 2010 covered the United States, the whole country would be under one-and-a-half feet of water, or it'd fill Lake Erie eight times, researchers say. Ocean levels worldwide are rising about six hundredths of an inch per year, according to researcher John Wahr. While vast quantities of ice melting into the ocean is not exactly good news, Wahr says, according to his team's estimates, about 30 percent less ice is melting than previously thought. The team used data from the Gravity Recovery and Climate Experiment satellite, which was launched as a joint project between NASA and Germany in 2002. The GRACE satellite measures gravity, which is related to mass, in 20 distinct regions worldwide. Wahr says that gives the team more accurate estimates, because previous teams had to measure ice loss at "a few easily accessible glaciers" and then extrapolate it to the 200,000 glaciers worldwide.

Corporate/shareholder value, energy market and global warming - I just read the following in an article by a Mr. Bill McKibben and thought it to be an interesting perspective on why climate change/global warming is being so vigorously denied.  If we spew 565 gigatons more carbon into the atmosphere, we’ll quite possibly go right past that reddest of red lines. But the oil companies, private and state-owned, have current reserves on the books equivalent to 2,795 gigatons -- five times more than we can ever safely burn. It has to stay in the ground. Put another way, in ecological terms it would be extremely prudent to write off $20 trillion worth of those reserves. In economic terms, of course, it would be a disaster, first and foremost for shareholders and executives of companies like ExxonMobil (and people in places like Venezuela). If you run an oil company, this sort of write-off is the disastrous future staring you in the face as soon as climate change is taken as seriously as it should be, and that’s far scarier than drought and flood. It’s why you’ll do anything -- including fund an endless campaigns of lies -- to avoid coming to terms with its reality. Never thought of the resistance to moving way from carbon fuels as an issue of having to write off company value in order to save the planet. As shown with the housing bubble, writing off inflated value (inflated for what ever reason) is a rather difficult thing to do. I mean, when you have so much down stream of that artificial value dependent on it (think currency based on oil), the engineering challenge is like playing Jenga only no one will be laughing if you fail and the tower falls.

Antarctica's Frozen Lake Vostok, Isolated for 20 Million Years, Breached By Russian Drills - The Russian scientists drilling into ancient buried Antarctic Lake Vostok have reached their destination, the Russian news agency Ria Novosti reported today. If true, this is a feat several decades in the making. Russian scientists have been attempting to drill into Antarctic ice since the 1970s, and they discovered Lake Vostok in 1996. In 1998, the Antarctic Treaty Secretariat, which protects the frozen continent, forced them to stop drilling until environmental concerns could be addressed. They started up again last winter (the austral summer) but had to cut and run just 30 meters from the lake source, as the Antarctic winter bore down.  Last week we thought that might happen again — if anyone could even hail the scientists — because conditions are getting worse, but no one heard from the team in several days. Then on Monday, the Russian news agency announced the team's success.

Louisiana officials establish formula for anticipating sea-level rise - State coastal restoration and levee projects should be designed to anticipate an average 3.3 feet increase in sea level over the next 100 years, according to a new Coastal Protection and Restoration Authority report. But the project designs must also consider whether changing circumstances, including a reduction in the speed in which coastal land is sinking or a possible catastrophic increase in atmospheric temperatures, could produce sea levels rises of only 1.6 feet or as high as 4.9 feet by 2112. The report released this week by the Louisiana Applied Coastal Engineering and Science Division (LACES) provides planners with a formula for anticipating the rate of “relative sea level rise” — the combination of the effects of sinking soils and rising water levels — at varying locations along the coast.  Louisiana is unique among the nation’s coastal states in having some of the world’s highest rates of soil subsidence in the footprints of present and past deltas of the Mississippi River that make up the eastern two-thirds of the state’s coastline. Rising water levels are caused by a combination of natural and human-caused warming of the atmosphere, often referred to as climate change.

Bill Gates backs climate scientists lobbying for large-scale geoengineering - A small group of leading climate scientists, financially supported by billionaires including Bill Gates, are lobbying governments and international bodies to back experiments into manipulating the climate on a global scale to avoid catastrophic climate change. The scientists, who advocate geoengineering methods such as spraying millions of tonnes of reflective particles of sulphur dioxide 30 miles above earth, argue that a "plan B" for climate change will be needed if the UN and politicians cannot agree to making the necessary cuts in greenhouse gases, and say the US government and others should pay for a major programme of international research. Solar geoengineering techniques are highly controversial: while some climate scientists believe they may prove a quick and relatively cheap way to slow global warming, others fear that when conducted in the upper atmosphere, they could irrevocably alter rainfall patterns and interfere with the earth's climate. Geoengineering is opposed by many environmentalists, who say the technology could undermine efforts to reduce emissions, and by developing countries who fear it could be used as a weapon or by rich countries to their advantage. In 2010, the UN Convention on Biological Diversity declared a moratorium on experiments in the sea and space, except for small-scale scientific studies.

Tar sands magnate, Bill Gates stump for geoengineering ---Geoengineering — the notion that we might blunt some of the effects of climate change by, for example, creating an artificial volcano to shade earth’s surface and cool the planet — is picking up steam among rich people. And not just Montgomery Burns! Philanthropists too! The latest to join the fray are Bill Gates, Richard Branson, and “tar-sands magnate Murray Edwards,” reports the Guardian. Just goes to show you what strange bedfellows geoengineering makes. A small group of leading climate scientists, financially supported by billionaires including Bill Gates, are lobbying governments and international bodies to back experiments into manipulating the climate on a global scale to avoid catastrophic climate change. The motivation for doing these experiments is straightforward: There’s already good evidence that geoengineering works (from models and natural experiments like volcanic eruptions), and it could be done fairly easily, but we’d better mess around with it a little so that we understand its negative consequences. Because the last thing we want is for it to be 2050, with the world’s leaders feeling like their backs are against the wall, and somebody decides to unilaterally start geoengineering the planet without knowing the potential consequences. Which are myriad.

The Problem With Going Green - A favorite trick of people who consider themselves friends of the environment is reframing luxury consumption preferences as gifts to humanity. A new car, a solar-powered swimming-pool heater, a 200-mile-an-hour train that makes intercity travel more pleasant and less expensive, better-tasting tomatoes—these are the sacrifices we're prepared to make for the future of the planet. Our capacity for self-deception can be breathtaking. In 2010, a forward-thinking friend of mine took me for a ride in a Ford Fusion, a gas-electric hybrid that gets more miles per gallon than comparable cars with conventional engines. His dashboard fuel gauge filled with images of intertwining green foliage, a symbolic representation of the environmental benefits we were apparently dispensing from the tailpipe as we aimlessly drove around. I felt a twinge of idiotic virtue while in that car, as I also do when I leave an especially large pile of cans, bottles and newspapers at the end of my driveway for the recycling truck. Like many concerned Americans, I'm susceptible to the Prius Fallacy: a belief that switching to an ostensibly more benign form of consumption turns consumption itself into a boon for the environment.

Activists Fight Green Projects, Seeing U.N. Plot - Across the country, activists with ties to the Tea Party are railing against all sorts of local and state efforts to control sprawl and conserve energy. They brand government action for things like expanding public transportation routes and preserving open space as part of a United Nations-led conspiracy to deny property rights and herd citizens toward cities. They are showing up at planning meetings to denounce bike lanes on public streets and smart meters on home appliances — efforts they equate to a big-government blueprint against individual rights. “Down the road, this data will be used against you,” warned one speaker at a recent Roanoke County, Va., Board of Supervisors meeting who turned out with dozens of people opposed to the county’s paying $1,200 in dues to a nonprofit that consults on sustainability issues. Local officials say they would dismiss such notions except that the growing and often heated protests are having an effect. In Maine, the Tea Party-backed Republican governor canceled a project to ease congestion along the Route 1 corridor after protesters complained it was part of the United Nations plot. Similar opposition helped doom a high-speed train line in Florida. And more than a dozen cities, towns and counties, under new pressure, have cut off financing for a program that offers expertise on how to measure and cut carbon emissions. 

China Bans its Airlines from paying EU Carbon Tax, ratcheting up Global Dispute - China announced Monday it will prohibit its airlines from paying European Union charges on carbon emissions, ratcheting up a global dispute over the cost of combatting climate change. The charges are aimed at curbing emissions of climate-changing gases but governments including China, the United States and Russia oppose them. The ratings agency Fitch warned in December the conflict could spiral into a global trade dispute. The Chinese air regulator said China’s carriers are barred from paying the charges or other fees without government permission, the official Xinhua News Agency reported. It said Beijing will consider unspecified measures in response to protect Chinese companies. There was no indication there would be any immediate impact on flights between China and Europe or penalties for Chinese airlines. The charges took effect in January but money will not be collected until next year.

China bans its airlines from paying EU carbon tax - On 1st January this year, the EU introduced an Emissions Trading Scheme (ETS) which levies a charge on flights in EU airspace based on carbon emissions. They estimate that this will add between 2 and 12 euros to flight tickets. Airlines are required to purchase emissions permits, like utilities and heavy industry in the EU, and airlines that do not comply face fines of 100 euros for each tonne of carbon dioxide emitted for which they have not surrendered allowances. In the case of persistent offenders, the EU has the right to ban airlines from its airports.The Chinese Air Transport Association says the scheme would cost Chinese airlines 800 million yuan ($123 million) in the first year and more than triple that by 2020, and today the Chinese government has “banned” all airlines in the country from joining the ETS and also barred the airlines from increasing their fares or adding new charges for the scheme. The Chinese are not alone; last year a group of US airlines challenged the EU law and although the European Court of Justice ruled against them, more than two dozen countries, including India, Canada and Russia as well as China and the United States, have opposed the move, saying it violates international law and is an unfair trade barrier. As the BBC report points out, given the global economic conditions and an uncertain outlook for the travel industry, airlines see the extra tax eating further into their profits and are not convinced that this increase in the costs of production (SRAS) can be passed on to passengers.

Airline industry split widens over EU carbon 'tax' row - A split widened within the aviation industry Tuesday over EU charges for carbon emissions, as Europe's low-cost carriers accused Chinese and US rivals of "gunboat" diplomacy against the system. A day after China barred its airlines from complying with what many consider a tax, the head of the International Air Transport Association (IATA) warned that several nations view the EU scheme as an "attack on sovereignty". "Non-European governments see this extra terrestrial tax as an attack on their sovereignty," International Air Transport Association (IATA) director general Tony Tyler said in a speech to the European Aviation Club. Airlines have denounced the system as a new tax and warn that it would cost the industry 17.5 billion euros ($23.8 billion) over eight years. The IATA claims to represent 84 percent of global passenger and cargo traffic. But the head of the European Low Fares Airline Association, who claims to account for 43 percent of flights within the EU, said the United States and other opponents should work harder to develop their own plans to reduce harmful emissions -- which would then trigger exemptions.

Sacrificing the desert to save the Earth - Construction cranes rise like storks 40 stories above the Mojave Desert. In their midst, the "power tower" emerges, wrapped in scaffolding and looking like a multistage rocket. Clustered nearby are hangar-sized assembly buildings, looming berms of sand and a chain mail of fencing that will enclose more than 3,500 acres of public land. Moorings for 173,500 mirrors — each the size of a garage door — are spiked into the desert floor. Before the end of the year, they will become six square miles of gleaming reflectors, sweeping from Interstate 15 to the Clark Mountains along California's eastern border. BrightSource Energy's Ivanpah solar power project will soon be a humming city with 24-hour lighting, a wastewater processing facility and a gas-fired power plant. To make room, BrightSource has mowed down a swath of desert plants, displaced dozens of animal species and relocated scores of imperiled desert tortoises, a move that some experts say could kill up to a third of them. Despite its behemoth footprint, the Ivanpah project has slipped easily into place, unencumbered by lasting legal opposition or public outcry from California's boisterous environmental community.

Texas's Electrical Power Predicament - Before talking about EPA rules and the loss of the coal-fired power plants as an electricity source, I first will survey the longer term trend for Texas’s electricity sources, expressed in Figure 5 as a percentage relative to the totals such as shown in Figure 3 in Part 1. The data for Texas from 1990-2009 were taken from the EIA’s Table 5: Electric Power Industry Generation by Primary Energy Source, 1990 Through 2010 and the 2010 data for Texas and the other states are from the EIA’s State Electricity Profiles 2010, released January 2012 For simplicity, I lumped Natural Gas (CH4) and Other Gases (mostly propane) together. “Other Renewables” includes wind, solar (thermal & PV), geothermal sources and biogenic municipal solid waste, wood, landfill gas, etc... “Other” includes non-biogenic municipal solid waste, batteries, chemicals, hydrogen, pitch, purchased steam, sulfur, tire-derived fuels and miscellaneous technologies. As you can see, the relative contributions from coal have gone down from 43% in 1990 to 36% in 2010, Natural Gas has also gone down from 51% in 2000 to 46% in 2010. Nuclear (mostly in the early 1990s) and Other Renewables (mostly in the 2000s) have proportionally gone up.

What If The Lights Go Out? -  In much of the developing world, even in large cities, people expect that at some point during the day, the power will cut out, no matter your location or your station in life. Sue Tierney, one of the nation’s leading energy analysts, recalls a trip to India she made in the 1990s while serving as US assistant secretary of energy. She was part of a delegation meeting with India’s energy minister, in a government office, when the lights went out. There was some uncomfortable laughter and then a few apologetic comments from ministry officials about how this kind of stuff happens all the time. The grid, for a host of reasons, may be ill-equipped to meet all the enormous challenges it faces. For so long, the market for doomsday scenarios of powerlessness has been cornered by survivalists prattling on about Mayan calendars and end of days. Rest assured that these are not my people. In my basement, you won’t find 6,000 rounds of ammo or floor-to-rafters stacks of MREs. My level of preparedness tops out at 4 gallons of bottled water, a 6-volt flashlight, and a four-pack of Bumblebee tuna, and each of those items is actually a holdover from last summer, when I briefly succumbed to the pre-Hurricane Irene frenzy.

AEP chief: Coal’s elimination ‘just not going to happen’ - Although the amount of energy produced by coal will decrease in the nation — from 45 percent today to 39 percent by 2020 — a top electric utility company CEO said there is definitely a future for coal. “Coal is naturally going to come down, natural gas will be the choice, but they’re really marginal,” said Nick Akins, president and chief executive officer of American Electric Power. “Once technology is proven, you’ll start to see coal come back. We still need coal . . .  . If someone is trying to eliminate that, it’s just not going to happen.”… “We provide the basic necessity of life as we know it….  What’s counterproductive is not to have an energy policy.”

Why the Energy-Industrial Elite Has It In for the Planet - Bill McKibben - If we could see the world with a particularly illuminating set of spectacles, one of its most prominent features at the moment would be a giant carbon bubble, whose bursting someday will make the housing bubble of 2007 look like a lark. As yet -- as we shall see -- it’s unfortunately largely invisible to us. In compensation, though, we have some truly beautiful images made possible by new technology.  Last month, for instance, NASA updated the most iconic photograph in our civilization’s gallery: “Blue Marble,” originally taken from Apollo 17 in 1972. The spectacular new high-def image shows a picture of the Americas on January 4th, a good day for snapping photos because there weren’t many clouds. It was also a good day because of the striking way it could demonstrate to us just how much the planet has changed in 40 years. As Jeff Masters, the web’s most widely read meteorologist, explains, “The U.S. and Canada are virtually snow-free and cloud-free, which is extremely rare for a January day. The lack of snow in the mountains of the Western U.S. is particularly unusual. I doubt one could find a January day this cloud-free with so little snow on the ground throughout the entire satellite record, going back to the early 1960s.” In fact, it’s likely that the week that photo was taken will prove “the driest first week in recorded U.S. history.”

While Digging Up 1,235 Acres For His Golf Course, Donald Trump Says Wind Farms Are ‘Destroying’ Scotland - A bulldozer flattens out coastal sand dunes to make way for Donald Trump's golf course in Aberdeenshire, Scotland. Trump says the Scottish First Minister is "hell-bent on destroying the Scottish coastline." Real estate mogul and former Republican presidential candidate Donald Trump has outdone himself this time. After starting construction on a 1,235 acre coastal golf course on rural land in Scotland that will feature two golf courses, 950 houses and a luxury hotel, Trump is now complaining that the Scottish Minister is “hell-bent on destroying Scotland’s coastline” with offshore wind projects. Last summer, Trump vowed to fight an 11-turbine offshore wind project proposed for waters 1.5 miles away from his sprawling complex where bulldozers have been ripping up untouched grasses and flattening coastal sand dunes to make way for an artificial golf course.

Glasgow solar study: 'We could put oil back in ground' - The sun gives its energy away for free. We can harvest it with solar cells and wind turbines to make electricity. That's the good news. The bad? It's electricity. It's difficult stuff to store and sometimes, just when you need some, it's dark or the wind's stopped blowing. That's why Glasgow University's Solar Fuels Group want us to make the leap from solar power to solar fuel. It's a multidisciplinary, multi-million pound effort which aims to convert renewable energy into fuel that's simple to store. It might look a lot like diesel - and we could use it in much the same way we use fossil fuels now. Professor Richard Cogdell is a botanist whose inspiration for converting solar power into fuel comes from plants. He said: "When you make electricity you essentially have to use it straight away. "What fuel gives you is stored energy that you can access whenever you want to."

Video: Debris from Japan tsunami washing up onto Washington shores – ‘Unprecedented in recorded history; a debris field the size of California’– Debris from last year's earthquake and tsunami in Japan is already washing up on Washington beaches, and much more is expected. Oceanographer Dr. Curtis Ebbsmeyer said chunks of wood and plastic and other pieces of flotsam from the tsunami will continue to show up on local beaches for years or even decades. "Debris from Japan, from the tsunami of last March, started arriving last September," he said. "It's unprecedented in recorded history. We have a debris field the size of the state of California." A number of fishing buoys have already made land, and Ebbsmeyer said that is to be expected. The idea is that the buoys stick up out of the water, so they travel the fastest, catching the wind and current. They buoys followed what is called the Aleut Gyre, which flows to Washington, or the Turtle Gyre, which cuts across the Pacific and heads south. The objects traveled 20 miles per day, and after nearly 5,000 miles, some of them were spit out onto the Washington coast by winter storms.

US ex-diplomat pulls no punches on Japan — US diplomats typically are unfailingly polite and reverential towards their countries of expertise and, upon retirement, go away quietly into research or business. Not so with Kevin Maher. Since he was unceremoniously removed from his position last year, the veteran US diplomat on Japan has gone on the offensive with biting criticism on issues from Tokyo's political paralysis to the Fukushima nuclear disaster. To his own surprise, he has found an eager audience. A book he wrote in Japanese, "The Japan That Can't Decide," has sold more than 100,000 copies and for weeks topped the country's best-seller list for non-fiction paperbacks. Maher's main thesis is that Japan -- which has had six new prime ministers since 2006 -- has been crippled by a failure of its politicians to accept responsibility and, hence, to make hard decisions. Maher pointed to the crisis at the Fukushima Daiichi nuclear plant, which was devastated by the March 11 tsunami, and dismissed the government's declaration last month that it had stabilized the leaking reactors. "It's not stable," Maher said recently at the Heritage Foundation in Washington. "Tokyo is safe, but Fukushima Daiichi is in really bad shape."

Rising temperatures at Fukushima raise questions over stability of nuclear plant - Workers at the Fukushima Daiichi nuclear power plant say they are regaining control of a reactor after its temperature rose dramatically this week, casting doubt on government claims that the facility has been stabilised. The plant's operator, Tokyo Electric Power [Tepco] was forced to increase the amount of cooling water being injected into the No 2 reactor after its temperature soared to 73.3C earlier this week. By Tuesday night, the temperature had dropped to 68.5C at the bottom of the reactor's containment vessel, where molten fuel is believed to have accumulated after three of Fukushima Daiichi's six reactors suffered meltdown after last year's tsunami disaster. The temperature at the bottom of the No 2 reactor vessel had risen by more than 20C in the space of several days, although it remained below the 93C limit the US nuclear regulatory commission sets for a safe state known as cold shutdown. Tepco said it had also injected water containing boric acid to prevent a nuclear chain reaction known as re-criticality.

Prospects for Nuclear Power - The prospects for a revival of nuclear power were dim even before the partial reactor meltdowns at the Fukushima nuclear plant. Nuclear power has long been controversial because of concerns about nuclear accidents, proliferation risk, and the storage of spent fuel. These concerns are real and important. In addition, however, a key challenge for nuclear power has been the high cost of construction for nuclear plants. Construction costs are high enough that it becomes difficult to make an economic argument for nuclear, even before incorporating these external costs. This is particularly true in countries like the United States where recent technological advances have dramatically increased the availability of natural gas. [open link to paper.]

New nuclear reactors set to be OK'd for Georgia - The U.S. Nuclear Regulatory Commission is set to approve licenses to build two new nuclear reactors Thursday, the first approvals in over 30 years. The reactors are being built in Georgia by a consortium of utilities led by Southern Co.  They will be sited at the Vogtle nuclear power plant complex2, about 170 miles east of Atlanta. The plant already houses two older reactors. Although new nuclear reactors have come online in this country within the last couple of decades -- the last one started operation in 1996 -- the NRC hasn't issued a license to build a new reactor since 1978, a year before the Three Mile Island accident in Pennsylvania. The reactors that have opened in the last decades received their initial license before 1978. The combination of the Three Mile Island incident and the high costs of nuclear power turned many utilities away from the technology.  There are currently 104 operating nuclear reactors at 64 plants across the country that provide the nation with roughly 20% of its power. Half are over 30 years old3.

Nuclear Regulatory Commission Ignores Fukushima, Green-Lights First New Reactors in 34 Years -The Nuclear Regulatory Commission has granted a construction and operating license to Southern Co. for two reactors to be added to its Plant Vogtle facility in Georgia. The OK is the first granted by the US regulator since 1978. The NRC approved the license over the objections of its chairman, Gregory Jaczko, who wanted the license to stipulate that the units would meet new standards recommended by the agency’s Fukushima Near-Term Task Force (NTTF) report: “I think this license needed something that ensured that the changes as a result of Fukushima would be implemented,” Jaczko said in an interview after the vote. “It’s like when you go to buy a house and the home inspector identifies things that should be fixed. You don’t go to closing before those things are fixed.” The NTTF recommendations, geared toward improving safety and preventing another disaster like the one still evolving at Japan’s Fukushima Daiichi nuclear power facility, have still not become official government rules–some are projected to take up to five years to draft and implement–and so, for now, the new reactor construction will get to pretend the Tohoku quake and tsunami, and the resulting core meltdowns and widespread radioactive contamination, never happened.

Landowners fight eminent domain in Pa. gas field - A pipeline operator assured federal regulators it would minimize using eminent domain against private landowners if given approval to lay a 39-mile natural gas pipeline in northern Pennsylvania's pristine Endless Mountains. Yet the company was readying condemnation papers against dozens of landowners even as the Federal Energy Regulatory Commission was considering its application for the $250 million MARC 1 pipeline. Within two days of winning approval, Central New York Oil & Gas Co., LLC went to court to condemn nearly half the properties along the pipeline's route - undercutting part of the regulatory commission's approval rationale and angering landowners who are now fighting the company in court. Eminent domain would give the company the right to excavate and lay the 30-inch diameter pipeline on private property. Landowners would not lose their properties and would be compensated. Some of the complaining landowners say the company steamrolled them by refusing to negotiate in good faith on either monetary compensation or the pipeline's route. The dispute could foreshadow eminent domain battles to come as more pipelines are approved and built to carry shale gas to market in states like Pennsylvania, New York and Ohio.

Pennsylvania Set to Approve Fracking Regulations - Pennsylvania's state senate has passed a law allowing the state to tax shale gas drilling, so long as local zoning laws don't get in the way of drillers. A lot of people are unhappy with the compromise bill, but according to The New York Times, it's still expected to pass the state's House on Tuesday. The bill would set up Pennsylvania's first statewide regulation on the controversial natural gas drilling technique, and could bring in taxes worth about $211 million this year, Bloomberg BusinessWeek reports. The drilling, known as hydraulic fracturing, or fracking, has become a divisive issue because it's been shown to pollute groundwater. Pennsylvania's got a lot of natural gas trapped in its shale rock and proponents of a statewide bill said it had to streamline its approach to the many gas companies trying to come and drill. But opponents say they've been sold out to gas companies, and a lot of towns argued they would lose control of what happened on their land if the bill passed.

Pennsylvania Set to Allow Local Taxes on Shale Gas -  The Pennsylvania Senate on Tuesday passed legislation that would authorize a tax on the shale gas industry and set uniform standards for development, changes that critics said would leave many municipalities with little control over the use of their land.  The bill had been the subject of bitter controversy for months, pitting a number of municipalities against a powerful industry and state legislators eager to increase jobs and revenue. The measure was pushed by Gov. Tom Corbett, a Republican, who pledged to sign it into law.  Lawmakers in Pennsylvania had been trying to agree on how to harness the development of the Marcellus Shale, a gas deposit under a large area of New York, Pennsylvania and Ohio. The industry is booming here, and supporters of the bill say it is high time to focus government’s approach, or risk losing out on a valuable revenue stream.  Critics, among them some municipalities and environmental groups , said the bill was a capitulation to the energy industry and would all but eliminate their ability to decide where gas development could happen. The measure would limit it in densely populated urban areas but not in suburban spaces, critics said. They also said the environmental and safety standards, like the requirement that wells be at least 500 feet from any house, were weak.

Geoscientists call for honest dialogue on fracking — Better industry oversight, an honest dialogue with the public about controversial drilling methods and a clearer explanation from companies about how clean, natural gas can be extracted from wells drilled hundreds of feet underground is desperately needed from energy companies, two geoscientists said. The two spoke as part of a panel on hydraulic fracturing, or “fracking,” a controversial process that uses water, sand and other additives to free natural gas underground. Critics worry about water and other environmental contamination and point to hundreds of earthquakes that have hit Oklahoma since fracking was introduced. But supporters say those fears are overblown. One prominent proponent, billionaire energy magnate T. Boone Pickens, recently boasted that out of the 800,000 wells that have been fracked in the Southwest, he didn’t know of a single lawsuit or complaint that arose from the process — even offering that he had fracked “over 3,000 wells” himself.

With deep concerns over fracking, a Va. county says no to more gas drilling - Carrizo Oil and Gas had every reason to believe this rustic town in the foothills of the Blue Ridge Mountains was an ideal place to build Virginia’s first well to explore for natural gas in the state’s Marcellus Shale. Carrizo liked Bergton’s location — eight miles from the West Virginia border, not far from where other operations are extracting gas. Carrizo bet that gas was locked in the shale under the town and put up tens of thousands of dollars for landowner leases as collateral. All it needed to start the job was a special land-use permit from the four Republicans and one Democrat on Rockingham County’s Board of Supervisors.Carrizo didn’t even come close. Concerned about controversial drilling methods, the supervisors never voted on the permit, and recently the company shelved its application following a two-year pursuit, ending its immediate hopes of exploring for gas.

That falling feeling: Shale gas estimates continue downward - Estimates for recoverable shale gas just keep falling. Last year, the Potential Gas Committee, an industry consortium that focuses on long-term projections, estimated that recoverable natural gas from shale deposits in the United States would amount to 687 trillion cubic feet (tcf). (This optimistic appraisal laid the groundwork for the oft-repeated notion that the United States has 100 years of natural gas supply at current rates of consumption. The estimate was also based on so-called "speculative resources" of another 615 tcf.) But, in its early release of the Annual Energy Outlook for 2012, the U.S. Energy Information Administration (EIA) cut its estimate of technically recoverable resources of U.S. shale gas from 827 tcf to 482 tcf. (That says little about whether all those resources will be economically recoverable.) Much of the decline in the EIA estimate comes from a downgrading of the Marcellus Shale, by far the largest of the U.S. shale gas deposits spanning vast areas of New York, Pennsylvania, and West Virginia as well as sections of Ohio, Kentucky and Tennessee. The downgrade resulted from extensive drilling results now available as the rush to extract gas from the Marcellus Shale accelerates. The EIA cut its estimated technically recoverable resources from 410 tcf to 141 tcf. This estimate remains well in excess of last year's estimate from the U.S. Geological Survey which put those resources at 84 tcf.

Gas Boom Goes Bust - Gas shale wells are expensive to drill and complete as well are the cost of the leases on which they are drilled. Even though initial gas production from shale wells is huge, the low price has depressed the amount of cash companies are receiving. As a result, producers are spending well in excess of their cash flows. To supplement cash flow, producers have engaged in every known trick in the finance book to boost available funds. These tactics include hedging forward future production whenever high prices are available, tapping Wall Street to raise equity and debt, and seeking out relationships such as joint ventures with larger, and often foreign, oil and gas companies. In order to access Wall Street capital, producers have needed to demonstrate that they are being successful in exercising a strategy for aggressive wealth creation. That means aggressively buying acreage and drilling wells. Exercising a successful strategy often creates a vicious cycle – more acreage and wells equals increased production and depressed prices. This cycle will continue as long as the music (Wall Street’s money) continues to flow. Once that stops, we will see how many producers can find a chair in the room. In the meantime, the fun continues!

Cheap natural gas jumbles energy markets, stirs fears it could inhibit renewables - For the past three years, promoters of shale gas and environmentalists opposed to coal-fired power plants have hailed the sudden abundance of U.S. natural gas as a bridge to a renewable-energy future. But natural gas has become so cheap that many energy experts and environmentalists now wonder whether it will turn into a long, bumpy detour. U.S. natural gas prices, which hit more than $13 per thousand cubic feet in 2008, have tumbled to about $2.50 per thousand cubic feet. Rapidly rising production of shale gas and a warm winter have created a glut and pushed supplies in storage to 21 percent above the average of the past five years. That has been good news for consumers, whose gas and electric bills have declined slightly.  And since burning natural gas emits half the greenhouse gases of burning coal, it could cut the quantity of climate-changing emissions. But cheap gas has also thrown energy markets into turmoil. It is impossible for almost any other source of electric power to compete, especially coal and nuclear. By trimming fuel bills, cheap gas has reduced incentives for energy conservation and efficiency. And it has left solar and wind, despite their own falling costs, heavily dependent on government mandates in California and roughly 30 other states, including Maryland.

Canadian Government Poisoning Wolves to Slow Rapid Declines in Caribou Population Near Tar Sands - Canada’s caribou population are in steep decline.  That’s due in part to the destruction of habitat through logging, expanding tar sands production, and other industrial development in the province of Alberta. But rather than focus on habitat conservation efforts to protect threatened caribou populations in the province, Canadian officials are poisoning and shooting wolves that prey on caribou. The practice is not new in Alberta. But the stunning decline in Caribou herds is forcing the Canadian government to ramp up culling efforts around Alberta’s oil sands — potentially resulting in the death of 6,000 wolves over the next five years, according to the Pembina Institute, a Canadian environmental think tank. Government officials didn’t confirm those figures, but one Canada’s environment minister admitted it would be “very large numbers.”

Keystone Kops - Beneath the bombast, both sides should learn important lessons from this clash. The oil industry should learn that one cannot steamroll over clean-water concerns by pithily pointing out that tens of thousands of miles of existing energy pipelines already traverse the Ogallala Aquifer. Engaging the public is going to be critical for other energy producers seeking licenses to operate, as Shell's successful bid to drill in Alaska's Chukchi Sea indicates. The international major has said that it has paid $350 million for two ice-breaking disaster-preparedness ships to respond to any potential accident as part of the $4 billion it has already spent on the process.  But there is also a lesson for Americans who care about the environment: Vital infrastructure is not a good choice for a political litmus test. America's energy future is inextricably linked with its northern neighbor. Canada is the largest crude oil exporter to the United States, supplying 22 percent of imports, and its production is expected to increase by 1 million to 2 million barrels a day over the next decade. That's in sharp contrast with Mexico, the next-largest U.S. supplier at 11 percent, which is facing steep production declines and could become a net oil importer over the next decade, according to a study published last year by the Baker Institute.

Do Americans Really Support Shipping Toxic Sludge (Strip-Mined from a Forest) Through a Major Aquifer For Export to China?  - First of all, you won’t find tar sands mentioned in any of the polling.  And in most polls, you won’t even find oil.  It’s just the Keystone XL pipeline, no context, no mention of what it will carry, and certainly no mention of the environmental risks of building a massive pipeline to carry toxic tar sands sludge through the heartland of America to the gulf of Mexico, where it would be exported out of the U.S. The question asked by two recent polls, one by Rasmussen and the other by the National Journal, was more or less, “Do you support or oppose building the Keystone XL pipeline?”   And the Rasmussen poll also asks if job creation is more important than protecting the environment, posing these two goals as  oppositional. Most Americans don’t see it that way.  In our opinion research and other opinion research, such as the major new survey in the West, Americans overwhelmingly believe that a strong economy and the environment can go hand in hand.  And they show a real concern for protecting resources, such as our water supply, from degradation.  But both the Rasmussen and the National Journal polls show a majority of Americans in favor of the Keystone XL pipeline.

US bill would block export of Keystone fuels - (Reuters) - U.S. Democrats unveiled legislation on Friday that would block export of any oil transported by the Keystone XL pipeline, as they challenged claims that the delayed project would boost U.S. energy security.TransCanada's $7 billion Keystone pipeline has become a political lightning rod this election year, with Republicans arguing that the pipeline will provide a critical link to Canada's vast oil sands crude and lessen U.S. dependence on oil from more hostile regimes. But critics of the project charge that "dirty" oil sands crude will exacerbate climate change and leaks on the pipeline could harm sensitive ecosystems. They also question how much oil transported through the 1,700 mile pipeline would actually remain in the United States. Democrats sponsoring the bill blocking exports of oil and refined fuels from Keystone said their measure would ensure that Americans benefit from the pipeline if it is constructed. "Without my bill this pipeline will not do a thing to enhance the security of our country," said Congressman Edward Markey, an outspoken opponent of the pipeline, at a House energy committee hearing on the project. The bill would allow waivers to the rule if the president certifies that selling the fuel to other countries would not increase imports of fuel from hostile countries and would not raise costs for U.S. consumers.

Warren Buffett Exposed: The Oracle of Omaha and the Tar Sands - On January 23, Bloomberg News reported Warren Buffett's Burlington Northern Santa Fe Railway (BNSF), owned by his lucrative holding company Berkshire Hathaway, stands to benefit greatly from President Barack Obama’s recent cancellation of the Keystone XL pipeline.  If built, TransCanada's Keystone XL (KXL) pipeline would carry tar sands crude, or bitumen (“dilbit”) from Alberta, B.C. down to Port Arthur, Texas, where it would be sold on the global export market.  If not built, as revealed recently by DeSmogBlog, the grass is not necessarily greener on the other side, and could include increased levels of ecologically hazardous gas flaring in the Bakken Shale, or else many other pipeline routes moving the prized dilbit to crucial global markets. Rail is among the most important infrastructure options for ensuring tar sands crude still moves to key global markets, and the industry is pursuing rail actively. But transporting tar sands crude via rail is in many ways a dirtier alternative to the KXL pipeline. “Railroads too present environmental issues. Moving crude on trains produces more global warming gases than a pipeline,” explained Bloomberg.  With or without Keystone XL, Warren Buffett stands to profit enormously from multiple aspects of the Alberta Tar Sands project. He also, importantly, maintains close ties with President Barack Obama.

Are There Holes in Pipeline Transparency? - An assistant attorney general in Montana announced this week he was trying to decide whether or not to move ahead with claims against Exxon Mobil for a July oil spill in the Yellowstone River. Exxon had agreed to a million-dollar settlement for environmental damage that resulted from the rupture of its Silvertip oil pipeline that, at the time, was buried just four feet below the riverbed. A state attorney general was quoted by local media as saying all of the environmental issues weren't resolved yet but statements last year suggested all was well, so what gives? Is there something lacking when it comes to pipeline transparency? More than 1,000 barrels of oil spewed into the Yellowstone River after Exxon Mobile's Silvertip pipeline burst during heavy flooding in the region in July. The Billings Gazette, in its comments on the attorney general's statements, noted quietly this week that less than 1 percent of the total amount of oil spilled from Silvertip was ever recovered, however. Does that mean there's still about 1,000 barrels of oil floating around somewhere? So far, this decade seems to be the decade of the broken oil pipeline, kicking off in stellar fashion with the rupture of Line 6B of the Lakehead pipeline system in southern Michigan. Crews there are still cleaning up that mess two years later because Lakehead was carrying tar sands oil and tar sands oil sinks.

After US Oil Snub, Canada Focuses on China - Canada will focus on exporting oil and other goods to China and other booming Asian economies even if Washington overturns its decision to block a pipeline that would have sent more Canadian crude to the United States. Speaking ahead of Canada's most high-powered trade mission to Beijing for almost 15 years, Prime Minister Stephen Harper told Reuters that Canada must focus on markets that are growing, regardless of the fate of the Keystone XL pipeline, which is proposed to carry crude from the Alberta oil sands to Texas refineries. The U.S. State Department blocked Keystone last month, saying the didn't have time for a thorough environmental review. "I think we need to be clear. As much as I want to see that Keystone project proceed, I think this incident ... underscore(s) the fact that it is in this country's national interest to be able to sell products beyond the United States," Harper told Reuters in an interview. "And I don't think a reversal of an American decision can change that fundamental reality. So I think it is absolutely essential that we find ways of being able to sell our products to the biggest growing markets in the world, and those are in Asia."

Canada PM vows to ensure key oil pipeline is built - Canada’s prime minister on Friday made his strongest comments yet in support of a proposed pipeline from oil-rich Alberta to the Pacific coast, saying his government was committed to ensuring the controversial project went ahead. Enbridge Inc’s Northern Gateway pipeline, which is strongly opposed by green groups and some aboriginal bands, would allow Canada to send tankers of crude to China and reduce reliance on the U.S. market. An independent energy regulator — which could in theory reject the project — last month started two years of hearings into the pipeline.In remarks that appeared to cast some doubt on the regulator’s eventual findings, Prime Minister Stephen Harper said it had become “increasingly clear that it is in Canada’s national interest to diversify our energy markets”.

BP Made $3 Million An Hour In 2011, While Spill Victims Continued To Suffer - BP’s 2010 Gulf of Mexico spill is still affecting the lives of many Americans, particularly the tens of thousands that have not settled lawsuits with the company. Yet the company has bounced back from the billions it lost in the wake of the spill. BP announced today that its 2011 profit totaled $26 billion, a 114 percent jump from the year before, when the company’s “failure of supervision and accountability” caused the worst oil spill in U.S. history. As the company prepares for its upcoming criminal trial, let’s take a look at how BP has made out after the Deepwater Horizon disaster:

  • BP earned $3 million every hour in 2011. Its fourth-quarter profits reached $7.69 billion, which is up 38 percent from 2010.
  • The company is sitting on another $14 billion in cash.
  • The company continues to scale back its production in the wake of the spill, producing 10 percent less than 2010 levels.
  • BP contributions to federal candidates totaled more than $98,000 in 2011, with more than half (65 percent) to Republican candidates.
  • BP spent $8 million lobbying Congress in 2011, down from the record $15 million the company lobbied in 2009 – one year before the oil disaster.
  • For every dollar the big five oil companies use in lobbying, they effectively receive $30 in subsidies.

Florida Researchers plan for Cuba Oil Spill Threat - As the China-built, Cuba-operated Scarabeo 9 water oil rig has started drilling for oil off the coast of Cuba, experts based in two Florida universities and others are concerned an oil spill could cause catastrophic damage to the coast from South Florida to the Carolinas. Researchers at Nova Southeastern University (NSU) and Florida International University (FIU) are researching steps to prepare for the risk of a spill, and develop and implement a long-term response plan. “This is a very serious issue to the U.S.,” said Dodge. “There are gaps in prediction and should there be an oil spill, we need to know how to handle it, take mitigation measures and be ready. Without the information, we’d be reactive instead of proactive.”

Huge Plunge In Petroleum and Gasoline Usage - Inquiring minds are watching a plunge in Petroleum Distillates and Gasoline usage. Reader Tim Wallace writes As I have been telling you recently, there is some unprecedented data coming out in petroleum distillates, and they slap me in the face and tell me we have some very bad economic trends going on, ... This past week I actually had to reformat my graphs as the drop off peak exceeded my bottom number for reporting off peak - a drop of ALMOST 4,000,000 BARRELS PER DAY off the peak usage in our past for this week of the year. I have added a new graph to my distillates report, a "Graph of Raw Data" to which I have added a polynomial trendline. You can easily see that the plunge is accelerating and more than rivals 2008/09 and in gasoline is greatly exceeding the rate. An amazing thing to note is that in two out of the last three weeks gasoline usage has dropped below 8,000,000 barrels per day. The last time usage fell that low was the week of September 21, 2001! And you know what that week was! Prior to that you have to go back to 1996 to have a time period truly consistently below 8,000. We have done it two out of the last three weeks. The second graph once again shows the year on year change in usage of distillates. The third and final graph shows the changes in usage off the peak year of 2007. Looking at these numbers I believe we are about to have a surge in unemployment - by the end of April latest, possibly as early as beginning of March.

Oil and Gas Boom Lifts U.S. Economy - There is no oil and gas production in Idaho, but that doesn't mean the U.S. energy boom has bypassed this bedroom community west of Boise. Fleetwood Homes of Idaho, a subsidiary of Cavco Industries Inc., has increased production by 25% since last fall at its Nampa factory, hiring 40 workers and adding hours for employees. It is building the extra-insulated "Dakota" model for shipment 1,000 miles east to the Bakken oil fields. An energy boom is revving up the U.S. economy. The use of new drilling techniques to tap oil and gas in shale rocks far underground helped add about 158,500 new oil and gas jobs over the past five years, and economists think it has created even more jobs in companies supplying the energy industry and in the broader service industry. U.S. oil production is rising for the first time in decades. Natural gas has become so plentiful that prices recently plunged to a 10-year low.  The economic benefits of rising energy production are spreading far beyond the traditional oil patch, to Ohio and Pennsylvania, Nebraska and New York, North Carolina and Idaho.

Glut sinks Canadian crude prices - Canadian crude oil is being sold at a steep discount over concerns that pipelines and refineries are unable to keep up with rising production. Western Canada Select has fallen steadily over the last month, closing on Monday at its lowest level in a year at just US$61.41 a barrel. Even after recovering on Tuesday to US$65.91, Canadian crude was trading at little more than half of the global benchmark. “A barrel of Western Canadian Select crude is one of the cheapest barrels of heavy, sour crude available in the world, as the Canadian market grapples with increases in production, pipeline constraints and lack of adequate refinery demand,” said a report by Platts, an energy market news service based in New York. “The bulk of Canadian crude is moved on pipelines, so that is a factor — the lack of capacity,” . “If this crude could be put on a boat and sent off to Asia, it would get a very good price.”

Value added - How could we boost American employment and GDP? One philosophy is to try to do more of what's already working. In January 2012, there were 4.7 million fewer Americans working than in January 2007. But one sector that has bucked the trend is oil and gas production. A story in today's Wall Street Journal notes that if you look at oil and gas extraction and its support activities, oil and gas pipeline construction, and oil drilling and machinery, you'll find 158,500 more people working today compared to 5 years ago, or a 33% increase. The article goes on to point out that employment benefits extend well beyond those working in the oil patch itself: There is no oil and gas production in Idaho, but that doesn't mean the U.S. energy boom has bypassed this bedroom community west of Boise. Fleetwood Homes of Idaho, a subsidiary of Cavco Industries Inc., has increased production by 25% since last fall at its Nampa factory, hiring 40 workers and adding hours for employees. It is building the extra-insulated "Dakota" model for shipment 1,000 miles east to the Bakken oil field in North Dakota.And the cheaper natural gas brought on by new drilling methods offers a big competitive advantage to manufacturing firms locating near the energy source:

Why We Can't Drill Our Way to Oil Autonomy - American energy independence makes for great political rhetoric. And not much else.  These days, though, it's not just politicians who are dreaming. Over the last year, it's become respectable -- even chic, in a geeky, Washington think-tank sort of way -- to suggest that the United States might indeed be close to kicking its foreign energy habit. Take this Bloomberg headline from Monday: "America Gaining Energy Independence." Or this Financial Times article from October: "Pendulum Swings On American Oil Independence." Daniel Yergin, the renowned oil analyst and Pulitzer Prize winner, now argues that the center of world oil production may be moving from the Middle East to the Western hemisphere. It may theoretically be possible for the U.S. and Canada to more than double our oil output, as the NPC suggests. To put that in perspective, we'd be adding the rough equivalent of another Saudi Arabia to the world oil market. But to do it, the countries would have to pretty much tap every resource they have, both onshore and off. Obviously, the old "drill baby drill" crowd would love that approach. But it's' still controversial in coastal swing states like Florida. Beyond that, accessing some of the resources would require technology we don't have yet.

Oil Prices - My gut feeling on oil prices has shifted to thinking they are more likely to rise than fall in coming months.  The factors going into that thinking are:

  • The ECB LTROs seem to suggest a willingness and ability on the part of the ECB to prevent failure of major financial institutions.   That in turn suggests continued gradual recession in the European economy, rather than abrupt contraction.  Thus the continued loss in European oil demand would be gradual.
  • Rather strong US economic numbers in recent months seem like more than just a failure of seasonal adjustment post-great-recession and suggest that the US really is recovering at a slightly better pace.  Auto sales are recovering well, and all this is bullish for US oil demand.
  • The Saudis have suggested that $100 is a fair price for oil.  Brent is not far above that now (and Saudi grades generally trade at a discount to that).  This suggests there is not much room for oil prices to fall further without triggering a reduction in Saudi production.  In turn, I doubt the Saudis have much capacity to expand production.
  • The situation between Iran and the rest of the world continues to deteriorate.

Ex-Shell president sees $5 gas in 2012 —The former president of Shell Oil, John Hofmeister, says Americans could be paying $5 for a gallon of gasoline by 2012. In an interview with Platt's Energy Week television, Hofmeister predicted gasoline prices will spike as the global demand for oil increases. "I'm predicting actually the worst outcome over the next two years which takes us to 2012 with higher gasoline prices," he said. Tom Kloza, chief oil analyst with Oil Price Information Service says Americans will see gasoline prices hit the $5 a gallon mark in the next decade, but not by 2012. "That wolf is out there and it's going to be at the door...I agree with him that we'll see those numbers at some point this decade but not yet." Kloza said.

Petroleum 3-Month Rolling Average Turns Sharply Lower; Negative Shipping Rates; Collapse in Global Trade - On February 6, I noted (with huge thanks to reader Tim Wallace) a Huge Plunge In Petroleum and Gasoline Usage. Tim used weekly numbers, which show, much week-to-week volatility. Instead, I proposed using rolling three-month averages, compared to the same three months in prior years. Today I received some updated charts that are much easier to see precisely what is happening.Wallace willing, each month I will post the "Petroleum Rolling Three-Month Average Index". Hopefully we can get a derivative of that first chart, "Percent Change From a Year Ago".  At the end of February the comparison will be December - January - February vs. the same three months in prior years. Amazingly, shipping rates have dropped so low, shippers will pay you to ship, just to get the cargo vessels to better locations.  Bloomberg reports Charter Rates Go Negative Glencore International Plc paid nothing to hire a dry-bulk ship with the vessel’s operator paying $2,000 a day of the trader’s fuel costs after freight rates plunged to all-time lows.

Iraqi Oil Production - It's been over six months since we checked in on Iraqi oil production.  After going to the trouble of updating the spreadsheet this morning with four different data sources, I see why.  Watching Iraqi oil production grow is like watching paint dry.  It is growing, but very, very slowly.  At this rate it will take another couple of years just to reach the Saddam-era level.  Although production in the modern era is characterized by being much more stable than during the pre-invasion timeframe.  It's also striking that all the data sources agree much more tightly than is the case for other OPEC countries - suggesting Iraq is somewhat more transparent and thus it is easier to estimate oil production. Maybe I'll check back in another six months...

Obama Freezes Iranian Government, Central Bank Assets - Businessweek: -- President Barack Obama ordered a freeze on all Iranian government and central bank assets held in the U.S. or any foreign branch of a U.S. entity, the White House said today. The president cited “deceptive practices” of the Iranian central bank and an “unacceptable risk” to the international financial system from Iranian activities. Previously, only assets belonging to sanctioned Iranian entities or individuals were frozen. The order, signed by the president yesterday, blocks all property and interests in property belonging to the Iranian government, its central bank, and all Iranian financial institutions, even those that haven’t been specifically designated for sanctions by the U.S. Treasury. Longstanding U.S. regulations already prohibited American citizens or entities from virtually all direct and indirect transactions involving Iran or its government, aside from those exempted under general licenses for transactions involving food, medicine, remittances and humanitarian relief. The measure was mandated as part of Iran sanctions legislation that was passed by Congress and signed by the president Dec. 31.

Iran Sanctions Plan Targets Oil Companies, Tanker Fleet to Slash Business -  A U.S. proposal to sanction Iran’s state-owned oil company and its main tanker fleet may ensnare any person or business in the world involved in purchasing or shipping Iranian oil.  Proponents say hobbling the oil revenue of Iran, the No. 2 producer in the Organization of Petroleum Exporting Countries, is the best way to forestall military action by Israel or the U.S. Iran says its nuclear program is for civilian energy and medical research only.  While President Barack Obama’s administration shares the lawmakers’ goals, it is concerned that adding more U.S. sanctions -- before other recent penalties have been implemented -- may make some oil buyers unwilling to comply and strain the coalition against Iran, according to U.S. officials who spoke on condition of anonymity because of the issue’s sensitivity.

Iran sanctions already hitting oil trade flows: IEA (Reuters) - Sanctions on Iran are already hitting global oil flows even though a European ban on imports from the Islamic Republic does not come into effect until July, the International Energy Agency (IEA) says. The IEA said the sanctions, designed to curb Iran's nuclear program that Washington and its allies say aims to produce an atomic bomb, could affect far more Iranian oil than the 600,000 barrels per day (bpd) sold last year to the European Union. The agency, adviser to the world's most industrialized nations on energy policy, cited industry estimates that up to 1 million bpd of Iran's 2.6 million bpd of oil exports may be replaced by alternative supplies once sanctions go into effect. Iran could be forced to place unsold barrels into floating storage or even shut in production in the second half of this year, the IEA said on Friday in its monthly Oil Market Report. "International sanctions targeting Iran's existing oil exports do not come into effect until July 1, but they are already having an impact on crude trade flows in Europe, Asia and the Middle East," it said.

Saudi Arabia Will Not Let Oil Go Above $100: Prince - An "element of fear" is playing into the price of oil despite higher supply and decreasing demand, Saudi Prince Alwaleed bin Talal al Saud told CNBC Monday. Bin Talal, the billionaire member of the Saudi Arabian royal family who runs the Kingdom Holding Co., said the fear comes from "what may happen with Iran and the possibility of closing the Hormuz Strait." But Saudi Arabia has already said it will not let the price of oil, which closed Monday around $97 a barrel, go above $100, bin Talal said. "We can use our leverage, our excess capacity to be sure to pump more [oil] if needed so it will not impact the consumer countries while they’re getting out of their recessions slowly but surely," the prince said. As for Iran, he said it is important for the U.S. and other nations to put sanctions on the "renegade country" to force its government to negotiate. Issuing an ultimatum of war would push Iran to the "desperate move" of blocking the vital oil shipment waterway. "I believe a solution is not impossible with them," bin Talal said of Iran. "A dialog is the best way to do it." But if the strait is blocked he believes the U.S. can reopen the strait "very quickly." He added he wants a "nuclear-free" region, which means Israel should give up its nuclear arsenal, too. 

Businessweek gets it wrong - Everything you know about peak oil is NOT wrong - On January 26, Bloomberg Businessweek printed an editorial by Charles Kenny titled, “Everything You Know About Peak Oil Is Wrong“. This editorial reflects several common misunderstandings. Given present resource consumption rates and the projected increase in these rates, the great majority of non-renewable resources will be extremely costly 100 years from now. In fact, high cost is precisely the issue with oil right now, and we are still ten years away from 2022. A graph of recent crude oil production is shown below. The amount of production has not been able to rise above about 75 million barrels a day (MBD) since 2005. At the same time, price is very high. If we look at gold production and prices, it shows pretty much the same story: stalled out production and very high prices. The problem is a two-fold problem: it is a price problem, and a problem of not being able to increase extraction as much as one would like. The issue is one of declining quality of resources, as lower grade ores are found, and more difficult to extract oil is found. There are plenty of resources available; the issue is that we cannot afford the high cost of extracting them.

Winter weather sends Brent crude to six-month high - Brent crude hit a six-month high on the back of the continuing severe European winter weather, while concerns of rising tensions in Iran also added to supply concerns.With temperatures plunging across Europe and Russia, Moscow has diverted its natural gas for exports to domestic usage, causing a shortage. European energy groups are turning to gas-oil for heating, and in Italy, power plants are to switch from gas to fuel oil, as a way of reducing gas consumption.  ICE March Brent hit $117.10 a barrel, its highest level since last August. In European afternoon trading, the global benchmark was up 46 cents at $116.39 a barrel. The rise in heating oil demand has meant that refining margins have increased. The price differential between gas oil and Brent crude widened by 54 cents to $17.22 a barrel, suggesting a further rise in crude oil prices as refiners turn to buy more crude oil to meet demand. “While a late season cold snap tends to pack less of a punch and gas oil stocks are generally healthy, a more severe cold period or consumer rush to buy may strain the European gas/oil balance given a heavy first quarter refinery maintenance period,” said analysts at Deutsche Bank.

Russia’s monopoly power over gas supplies - It has been a bit chilly in the UK for the last few days, but nothing compared to the temperatures as low as -35 which have hit parts of central and eastern Europe. Of course, they are used to far colder winters than us, and have different ways of dealing with the weather, but reliance on gas supplies from Russia for the majority of their heating fuel leaves countries including Bulgaria, Serbia and Bosnia vulnerable to disruption in that supply. Gazprom, the Russian gas export monopoly, said on Friday it was supplying as much gas as it could spare. However, higher demand for the gas in their domestic market means that less is available for export than usual, with a consequent reduction in supply to other countries. An EU spokeswoman has confirmed that there has been a decrease in gas deliveries in various member states - Poland, Slovakia, Austria, Hungary, Bulgaria, Romania, Greece and Italy, and although this is not yet a crisis, it is a notable change.  There have been similar disruptions to supply in the past during particularly cold spells, and notably in 2009 when political tension between Russia and Ukraine led to a cut in supplies to parts of Europe, which pass through Ukraine, for about two weeks.

China's Oil Imports From Iran Reduced Again - China will reduce its crude oil imports from Iran for a third month, sources said today, as the two remain divided over payment and price terms, although they plan to meet again for talks as early as this week. China is the top buyer of Iranian oil and also the fastest expanding major oil importer, putting it in a strong position to negotiate for better terms after it more than halved imports for both January and February. The reductions for March-loading supplies will be largely the same, if not deeper, than the previous two months, industry officials with direct knowledge of the supply situation told Reuters. China, which buys around 20 percent of Iran's total crude exports, cut its January and February purchases by about 285,000 bpd, just over one half of the total average daily amount it imported in 2011. 

India Explores Economic Opportunities in Iran, Denting Western Sanctions Plan - India emerged as a major new irritant on Thursday in Western efforts to isolate Iran, announcing that it was sending a large trade delegation there within weeks to exploit opportunities created by the American and European antinuclear sanctions that are increasingly disrupting Iran’s economy. The trade delegation announcement coincided with new reports that India, an important consumer of Iranian oil, had eclipsed China3 for the first time as Iran’s No. 1 petroleum customer last month, subverting efforts by the United States to persuade other countries to find non-Iranian sources for their energy needs or risk onerous penalties under a new American sanctions law. The announcement also came ahead of a planned visit to India by Herman Van Rompuy, the European Union president, who was quoted in an interview with The Times of India as saying that he intended to seek the Indian government’s help in pressing Iran to give up its nuclear program. It was unclear whether Mr. Rompuy knew at the time of the interview that India’s commerce secretary, Rahul Khullar, was about to announce a big economic push into Iran that could serve to counteract the effects of the very sanctions Mr. Rompuy has helped to promote.

IMF cuts China 2012 growth forecast to 8.25% - The International Monetary Fund cut its forecast for China's economic growth this year to 8.25% from 9.0% projected in September, citing the threat of weakening exports amid an uncertain global environment.  In its China Economic Outlook report released Monday, the IMF said China's growth rate, which stood at 9.2% last year, would drop abruptly if the euro zone experienced a sharp recession.  The organization's assessment comes as investors brace themselves for a fresh slew of Chinese economic data, which are expected to show steadily easing inflation but further weakness in the country's export sector.  Despite the expected slowdown, "China has room for a countervailing fiscal response and should use that space" to provide more stimulus to the domestic economy, the IMF said, adding that it expects world's No. 2 economy to gather speed next year and grow at 8.75%.

China growth could halve if Europe crisis worsens: IMF (Reuters) - China's annual economic growth could be cut nearly in half this year if Europe's debt crisis tips the world economy into a recession, putting pressure on Beijing to unveil "significant" fiscal stimulus, the International Monetary Fund said. The Fund outlined its central scenario for China's 2012 growth outlook in its global outlook in January, cutting its forecast for 2012 growth from 9 percent to 8.2 percent. The China Economic Outlook published on Monday showed that under the IMF's "downside" forecast for the global economy, China's growth rate may be cut by around 4 percentage points from the fund's current forecast of 8.2 percent in 2012. "In the unfortunate event such a downside scenario becomes reality, China should respond with a significant fiscal package, executed through central and local government budgets," it said. Stimulative measures could include cuts in consumption taxes, subsidies for consumers, corporate incentives to expand investment, fiscal support for smaller firms and more spending on low-cost housing social safety nets, the fund said. Such fiscal stimulus, adding up to 3 percent of GDP, would help mitigate declines in economic output, it said.

IMF takes its gloom to China - Here’s the detail of the IMF’s overnight call that China would be in the direct line of fire in the event of a European credit event:

Should  such a tail risk of financial volatility emanating from Europe be realized, it would drag China’s growth lower.  The channels of contagion would be felt mainly through trade, with knock-on effects to domestic demand. In the downside scenario outlined in the WEO Update—which  would see global growth falling by 1¾ percentage points relative to the baseline—China’s  growth  would fall by around 4 percentage points (Box 1). The risks to China from Europe are, therefore, both large and tangible.

From 8.25% to 4.25% that is:

Chinese electricity consumption smacked? - China Securities Journal yesterday reported that China’s electricity output may have dropped 7.5% in January, citing sources close to the China Electricity Council. It is well known that the electricity output/consumption of China is a good proxy for economic activity.  Particularly for people who are skeptical about the Chinese statistics numbers, power output is an alternative gauge. As always, one should be cautious about reading too much into January and February macro data because the Chinese New Year distorts the picture (and the Chinese New Year came early this year).  However, a drop of 7.5% in power output/consumption is huge and cannot be explained by Chinese New Year alone, as the chart below illustrates.  The last instance of a drop of comparable magnitude was during the post-Lehman crisis:

Chinese Electricity Consumption Fell Massively In January, And The Chinese New Year Doesn't Explain It Ultra-brief note here from Nomura's Zhiwei Zhang : According to the China Securities Journal, China's electricity consumption in January fell by 7.5%. We estimate this may be the first decline since 2002 (excluding the financial crisis period in 2008-09), indicating industrial production may have slowed sharply in January.  They don't have any more answers here at the moment, except they say that if you're thinking it has something to do with the New Year, then you are incorrect.For now it's just one of those things that make you go hmm...

Holiday hits China auto sales in January - The year of the dragon rolled in with a whimper instead of a roar for China's auto industry. Car sales in the world's biggest auto market fell 24 percent in January from a year earlier, industry figures show. The China Association of Automobile Manufacturers said Thursday that 1.16 million passenger cars were sold in China in January, down from a monthly record 1.5 million a year earlier. It said total vehicle sales, including trucks and buses, dropped 26 percent from a year earlier to 1.39 million. Total vehicle sales in January 2011 were 1.89 million. China's weeklong Lunar New Year holiday, which usually falls in February but began in mid-January this year, was the main reason for the sharp drop. Such factors can play havoc with year-on-year comparisons of data, and sales in February may be similarly distorted, upward.

China Central Bank Vows Housing Support - China’s central bank pledged support for first-home buyers as a crackdown on real-estate speculation threatens to trigger a property slump in the world’s second- biggest economy. Officials will increase support for construction of affordable housing and ensure that “loan demand from first-home families” is met, the People’s Bank of China said on its website yesterday evening. Policy makers aim to limit public discontent by making housing more affordable, with Vice Premier Li Keqiang, a possible contender to be the next premier, describing the distribution of low-cost homes as a key test of government credibility. At the same time, the ruling Communist Party aims to avoid the economic “hard landing” that Fitch Ratings said yesterday is a key global risk. "The government doesn’t want to see home transactions slide too fast -- that may hurt economic growth,”

Chinese inflation jumps to 4.5%  - Chinese inflation jumped in January, breaking a streak of five straight monthly declines, but seasonal factors were largely to blame and price pressures were expected to weaken in the coming months. The consumer price index rose 4.5 per cent from a year earlier, up from December’s 4.1 per cent pace. The main cause of the rebound was a shopping blitz before last month’s Chinese New Year holiday, which pushed up food prices, an effect which has regularly been seen in the past and is likely to be temporary.  Core inflation, stripped of food costs, rose much more slowly, giving Beijing some room to stimulate the slowing economy if necessary.“It is very likely that after the holiday, prices will come down, especially for food. Next month’s number should be lower and that will ease concerns,” said Ken Peng, an economist with BNP Paribas. But even if January’s rebound was a seasonal aberration, the fact that it was well above market expectation for steady inflation may reinforce the caution of policymakers. Beijing has been reluctant to take aggressive action to prop up growth, with the economy slowing only very gradually so far. The government is also wary of repeating the massive debt-fuelled stimulus it used in 2009 to rescue the economy from the global financial crisis.

China's hard landing odds, updated - Remember Nomura last year estimated there was a 1-in-3 chance of a hard landing in China? Anyway, they’ve updated the index on which it was based. Nomura’s chief Asia economist, Rob Subbaraman, says the 1-in-3 odds indicated by the China Stress Index remain, but the hard landing is less likely: In June 2011, the CSI rose to its highest level since it was first compiled, but in Q3 it eased, and our latest update shows that it eased slightly further in Q4. The main reasons for the CSI falling are highlighted in Figure 2. Overall, the unwillingness to ease macro policies aggressively despite slowing GDP growth seems to be starting to pay dividends in lessening longer-term macro risks. However, it is still early days and policy errors cannot be ruled out amid still-large macro imbalances and high global uncertainty. We retain our one-in-three likelihood of a hard economic landing commencing before the end of 2014, but now have a bias to think it less likely.

The Renminbi’s Role in the Global Monetary System - Brookings - Of the currencies of the world’s six largest economies, China’s renminbi is the only one that is not a reserve currency. In this study, we consider three related but distinct aspects of the renminbi’s role in the global monetary system:

  • Internationalization: its use in denominating and settling cross-border trade and financial transactions, that is, its use as an international medium of exchange.
  • Capital account convertibility: the country’s level of restrictions on inflows and outflows of financial capital. A fully open capital account has no restrictions.
  • Reserve currency: whether the renminbi is held by foreign central banks as protection against balance of payments crises.

South Korea Plans to Buy Chinese Equities to Diversify Reserves - South Korea's central bank is considering buying several hundred million dollars worth of Chinese equities and a greater amount of the nation's bonds to diversify its foreign-exchange reserves. "The Chinese yuan has the potential to become a key reserve currency in the long term and thus we are building a channel to invest there," Choo Heung Sik, 53, director general at the Bank of Korea's Reserve Management Group, said in an interview in his office yesterday in Seoul. He said the bank may invest in Chinese shares in the second half of this year, after purchases of debt in the first six months. The diversification plans for South Korea's $306 billion of foreign-exchange holdings underscore increasing international interest in yuan assets as China's global economic stature rises and its government promotes international use of its currency. A slide in yields on U.S. Treasuries has diminished interest income for the world's largest reserve currency, the dollar. "Our China investment will be done from a long-term perspective and as part of our asset diversification plan," Choo said. "Our confidence in the U.S. dollar is still strong. We will move like a snail as for diversification."

Chinese banks cut exposure to euro zone -paper (Reuters) - Chinese banks and companies in the northern port city of Tianjin have cut their exposure to Europe as the euro zone debt crisis festers, the official Financial News reported on Tuesday. In a recent survey of 53 banks and 15 firms done by the local foreign exchange regulator, 11 banks said they had cut or stopped trade finance for European countries with high debt risk, suspended derivatives business with European banks, cut or stopped lending to foreign peers, particularly those from Europe, the newspaper said. They also reduced the issuance of euro-denominated wealth management products as a weakening euro resulted in negative earnings last year. The pullback by Chinese companies comes as European leaders have appealed to the Chinese government to support debt bailout funds. Although Chinese leaders have expressed confidence in European nations, they have also refrained from making firm financial commitments, urging Europe first to take further steps on its own.

Japan Machine Orders Fall More-Than-Estimated 7.1% as Yen Climbs - Japan’s machinery orders fell at the fastest pace in three months in December as a faltering global economy and gains by the yen dimmed the outlook for exporters. Bookings, an indicator of capital spending, decreased 7.1 percent from the previous month, the Cabinet Office said in Tokyo today, after surging 15 percent in November. The median estimate of 29 economists surveyed by Bloomberg News was for a 5 percent decline. Japan’s exports fell for three straight months through December as European leaders grappled with the debt crisis that is driving the euro region into a recession. Spending may rebound as earthquake reconstruction work kicks in and today’s report showed companies forecasting a 2.3 percent increase in orders this quarter. Japan’s lower house of parliament on Feb. 3 approved Prime Minister Yoshihiko Noda’s 2.5 trillion yen ($32 billion) recovery package from the earthquake and tsunami, the fourth supplementary budget since the disaster. The government forecast in December that Japan’s economy will grow 2.2 percent in the year starting April after a projected 0.1 percent contraction this fiscal year.

Japan Adopts Stealth Intervention as Yen Gains Hurt Growth - Japan used so-called stealth intervention in November as the government sought to stem yen gains that hammered earnings at makers of exports ranging from cars to electronics. Finance Ministry data released today showed Japan conducted 1.02 trillion yen ($13.3 billion) worth of unannounced intervention during the first four days of November, after selling a record 8.07 trillion yen on Oct. 31, when the yen climbed to a post World War II high of 75.35 against the dollar. The currency’s strength has eroded profits at exporters such as Sharp Corp. and Honda Motor Co., just as faltering global growth undermines demand. “Japan has clearly shown its intention to stop a further appreciation of the yen, and there is a high chance” for more yen selling. “Caution against intervention has increased in markets.”

Shame on you, Mr Obama, for pandering on trade - President Barack Obama infamously killed the multilateral Doha Round last December by instructing his representative at the World Trade Organisation to be a “rejectionist” negotiator. He compounded the folly by instead floating the trans-Pacific Trade Initiative that is conceived in a spirit of confronting China rather than promoting trade, and is also a cynical surrender to self-seeking Washington lobbies that would have made John Kenneth Galbraith blush. Not content with these body blows to the world trading system, which his predecessors had built up over decades of US leadership, Mr Obama pulled off the remarkable feat of making things yet worse with his State of the Union address. In particular, he decried outsourcing: “We will not go back to an economy weakened by outsourcing.” He also celebrated manufacturers: “Tonight, I want to speak about an economy that’s built to last an economy built on manufacturing.” Both are costly fallacies that deserve no quarter from our leadership. They hurt the US economy; they also guarantee that the US will undermine further the world trading system. Outsourcing is a bogeyman. The fact is that Mr Obama is guilty of promoting at least two wrong but prevalent notions. When companies are denounced for “losing” jobs by outsourcing, the fallacy is one of looking at only primary impacts.  Second, there is already evidence that significant insourcing is occurring in parallel.

‘We the People’ Loses Appeal With People Around the World - In 1987, on the Constitution’s bicentennial, Time magazine calculated1 that “of the 170 countries that exist today, more than 160 have written charters modeled directly or indirectly on the U.S. version.”  A quarter-century later, the picture looks very different. “The U.S. Constitution appears to be losing its appeal as a model for constitutional drafters elsewhere,” according to a new study. The study, to be published in June in The New York University Law Review, bristles with data. Its authors coded and analyzed the provisions of 729 constitutions adopted by 188 countries from 1946 to 2006, and they considered 237 variables regarding various rights and ways to enforce them. “Among the world’s democracies,” Professors Law and Versteeg concluded, “constitutional similarity to the United States has clearly gone into free fall. Over the 1960s and 1970s, democratic constitutions as a whole became more similar to the U.S. Constitution, only to reverse course in the 1980s and 1990s.

Brazil privatises operations at three airports - Brazil's government has awarded contracts to privatise operations at three of its most important state-owned airports. They include the country's largest in Sao Paulo. Private companies paid a total of 24.5bn reais ($14bn; £8.9bn) for the concessions sold at auction. The move by the government aims to get the country's overcrowded airports ready for the 2014 World Cup and the Olympics in 2016. Infraero, the state-run agency that has long operated airports, retains a 49% stake in the consortiums that will run the newly-privatised airports. A consortium of Brazilians and South Africans paid about $9bn to operate Sao Paulo's Garulhos airport for 30 years. The other airports involved are: Viracopos airport in Campinas - sold to French and Brazilian firms; and the concession for a new terminal in the capital's President Juscelino Kubitschek airport, which went to a Brazilian and Argentine consortium.

Baltic Dry Index: Why Is Global Shipping Slowing Down So Dramatically? - If the global economy is not heading for a recession, then why is global shipping slowing down so dramatically?  Many economists believe that measures of global shipping such as the Baltic Dry Index are leading economic indicators.  In other words, they change before the overall economic picture changes.  For example, back in early 2008 the Baltic Dry Index began falling dramatically.  There were those that warned that such a rapid decline in the Baltic Dry Index meant that a significant recession was coming, and it turned out that they were right.  Well, the Baltic Dry Index is falling very rapidly once again.  In fact, on February 3rd the Baltic Dry Index reached a low that had not been seen since August 1986.  Some economists say that there are unique reasons for this (there are too many ships, etc.), but when you add this to all of the other indicators that Europe is heading into a recession, a very frightening picture emerges.  We appear to be staring a global economic slowdown right in the face, and we all need to start getting prepared for that. 

Shipping Rates Go... Negative - Following the endless collapse in the Baltic Dry, it was only a matter of time before the shipping industry one-upped the Chairsatan, and was the first to introduce, dum dum dum, negative rates. That's right: you are now paid to hire a ship. Via Bloomberg: Why is this happening? Perhaps because ships have to be kept seaworthy and in motion or else they become scrappage in as little time as 3 months. Think sharks. Needless to say, this will play havoc with shipping company (and affiliated entities') liquidity, as the biggest default wave in the history of the industry is about to be unleashed and tens if not hundreds of billions of European secured loans are about to be "impaired."

Glencore Gets Free Ship With a Fuel Discount as Charter Rates Go Negative - Glencore International Plc paid nothing to hire a dry-bulk ship with the vessel’s operator paying $2,000 a day of the trader’s fuel costs after freight rates plunged to all-time lows.  Glencore chartered the vessel, operated by Global Maritime Investments Ltd., a Cyprus-based company with offices in London, Steve Rodley, GMI’s U.K. managing director, said by phone today. The daily payments last the first 60 days of the charter, Rodley said. The vessel will haul a cargo of grains to Europe, putting the carrier in a better position for its next shipment, he said.  “Our other option was to stay in the Pacific and earn poor revenues or ballast to the Atlantic and pay the fuel ourselves,” Rodley said. Ballasting refers to sailing without a cargo. Charles Watenphul, a spokesman for Glencore, declined to comment in an e-mailed response to questions.

ET, the New Alien Scaring Global Markets - The United States is coming to be seen as a global threat, acting unilaterally with aggressive new market rules that critics say will hurt U.S. firms, foreign banks, and international markets in one swoop. The new buzzword in the financial world is "extraterritoriality", or ET. The idea that a government can exercise its authority beyond its borders. The fear is that after the 2007-2009 financial crisis that roiled global markets, some countries will engage in an arms race of tough financial reforms in order to be seen as the safest capital markets, and will haphazardly foist their own rules on other nations. Despite its talk of a global level playing field, the United States is being portrayed as a rogue country, with its unmatched Volcker rule to curtail banks' risky trades and its accelerated timetable to put in place new derivatives reforms. The backlash has gained force in recent weeks.

Global manufacturing steadies as she goes, or does she? - The year got off on a much better foot than might have been expected, at least as far as global manufacturing is concerned.  As the JP Morgan report puts it:  “The global manufacturing sector continued to record belowtrend growth at the start of 2012. At 51.2 in January, the JPMorgan Global Manufacturing PMI™ rose to a sevenmonth high, but remained below its long-run average (51.8). Manufacturing output expanded for the second successive month in January, as new orders rose for the first time since last August”.  “Growth of production was recorded in the US, Japan, Germany, the UK, India, Eastern-Europe, the Netherlands, Austria, Canada, Switzerland, Turkey, Brazil, South Africa and Denmark”. “International trade volumes improved for the first time in six months during January. Growth of new export orders was led by India, the US and Turkey. China, Japan and the UK all reported modest increases, in contrast to the declines seen in the Eurozone, Russia, Canada, South Korea, Taiwan and Brazil”. So the fall in global manufacturing has flattened out, even though the bounce back has more of a dead cat look about it than anything else. As usual in recent months the report was very much a mixed bag.

Germany: A Bric, or just stuck in a hard place? - Angela Merkel has just been to Beijing, in a year when China is about to displace France as Germany’s largest trading partner. When that happens, it will be a symbolic moment. It will also encourage those currently posing the following question: should Germany detach itself from the eurozone mess and become a Bric – a mid-sized global economic power, like Brazil, Russia, India and China, whose initials constitute the Bric acronym? I first heard the notion of Germany as a Bric from Ulrike Guerot of the European Council on Foreign Relations, who is vehemently opposed to the separatist anti-European tendencies in Germany. Probably the clearest expression of this idea came recently from Wolfgang Reitzle. The CEO of Linde, a German industrial group, said that Germany should consider leaving the eurozone. This might bring some short term pain, he acknowledged, but it would increase Germany’s competitiveness in the long term.  I have always found Germany’s obsession with competitiveness to be one of the deep causes of the eurozone crisis. The active pursuit of large current account surpluses has contributed to the eurozone’s internal imbalances. For a country the size of Germany, it may be feasible – albeit misguided – to formulate policy this way. For a large economy like the eurozone, it is unsustainable.

German Industrial Production Unexpectedly Dropped in December - German industrial output unexpectedly dropped the most in three years in December as Europe’s debt crisis weighed on confidence and the global economic slowdown damped demand. Production fell 2.9 percent from November, when it stagnated, the Economy Ministry in Berlin said today. That’s the steepest decline since January 2009. Economists had expected output to remain unchanged, according to the median of 41 forecasts in a Bloomberg News survey. In the year, production rose 0.9 percent when adjusted for working days. While the German economy probably shrank 0.25 percent in the final three months of last year, data this year suggest it may avoid recession, which is commonly defined as two consecutive quarterly contractions. Business sentiment jumped to a five-month high in January and factory orders gained 1.7 percent in December, driven by demand from outside the 17-nation euro area.  “Today’s industrial production data confirm the slowdown of the German economy,”

German Manufacturing Orders Rise - German manufacturing orders rose more than expected in December, driven by a surge in demand from outside the euro zone, in the latest sign that Europe's largest economy may yet avoid recession despite the euro zone's debt crisis.  New orders rose 1.7% on the month in adjusted terms, after slumping by a downwardly revised 4.9% in November, data from the economics ministry showed Monday.  While German orders data are "very volatile", the latest figures "seem to suggest that factory activity has not collapsed," even after German economic growth moderated in the fourth quarter "as demand from abroad was hit by the global slowdown," . "If anything, a slight pick-up is expected in the first quarter of 2012,"

Temporary Employment: A New Ugly Rearing its Head in Europe? - Rebecca Wilder - Last week Clive Crook opined on some fallacies of labor reform, specifically related to the unions and through the Spanish experience. Labor reform is a highly contentious subject, given its close ties to welfare and politics. Based on Clive Crook’s article, I delved into global temporary employment using OECD data and noticed two things: (1) not only is it too ‘simple-minded’ to attribute labor problems to one or two broad agents (unions, in the case of Europe), but it’s impossible to compare one country’s problem to another; and (2) other global economies – Ireland being the most worrisome candidate – saw respective shares of temporary employment surge in recent years. To me, this highlights the fact that known labor issues are just the beginning – new problems are surfacing that will require attention in the future.As highlighted by Clive Crook via Bentolila, Dolado, and Jimeno (or the Vox version), the cyclical aspect of Spain’s two-tier labor market – the two tier system consists of a large share of temporary workers ‘outside’ the permanent employment positions – can explain in part the boom in employment during the bubble and its crash during the recession. But that doesn’t explain the experience of the US. In 2005 (the last measured date for the US), temporary workers accounted for just over 4% of employment compared to 33% in Spain; however, like that in Spain, the US unemployment doubled during the crisis. What’s one country’s problem is not necessarily another country’s structural issue.

Greece in last minute austerity talks- Lucas Papademos, the Greek premier, failed to make party leaders accept harsh terms in return for a second €130bn bail-out, pushing Athens closer to a disorderly default as early as next month. Greek television reported that Mr Papademos has set a deadline of midday on Monday for the three leaders to let him know whether they agree in principle with the proposed austerity measures, before he meets them again later in the day. After five hours of discussions, the three leaders of Greece’s national unity government had not accepted demands by international lenders for immediate deep spending cuts and labour market reforms as part of a new medium-term package. Mr Papademos said the political leaders had agreed on some “basic issues”, including making spending cuts this year of 1.5 percentage points of gross domestic product, or about €3bn, according to a statement from his office. George Karatzaferis, the head of the small rightwing Laos (People’s) party said as he left the prime minister’s office, that he expected the talks to continue on Monday. There was no immediate announcement by Mr Papademos. It was clear however that the talks had reached a dangerous deadlock. “They’re asking for more recession than the country can take,” said Antonis Samaras, leader of the centre-right New Democracy party as he left the meeting.

Art Cashin: Beware The Ides Of March—Or Maybe A Few Days Later - As a Greek/Debtor deal has been dangled before markets day after day for over three weeks, rumors of a different deal have begun to circulate.  That rumor is of the EU finding a way to engineer a structured default of Greek debt, keep them in the Euro-zone and restructure Greek debt and finances in the post-default environment. On March 20th, Greece is obliged to redeem 14.5 billon Euros in debt.  Even after pulling all the coins out from under the sofa cushions, Greece is a bit short of this amount.  How short?  About 14.5 billion Euros short. So, right now with an empty piggy bank and a calendar due date coming up fast, the Greeks are stuck pacing up and down in front of the EU offices with a bag reading “Friends help friends”.But the giving friends, particularly the Germans, are reluctant to pour gold dust into a badly leaking container.  The Greek economy is moving in reverse.  The IMF says it shrank about 6% in 2011 and nearly the same amount in 2010.  If things go really well, the IMF thinks the Greek may only shrink 5% in 2012.  And, with the economy shrinking every day, even a static debt load means your debt to GDP keeps rising - the last thing a debt-holder wants to hear. So, in the opinion of almost everyone, Greece can’t be saved - at least not in their current state.  That leads to the growing speculation that, behind the scenes, the EU and the IMF are scrambling to find some way to structure a controlled, structured default.

Greece says faces 24-hour deadline to clinch rescue - Greece has just one day left to strike a deal with impatient lenders and reluctant political party leaders on a 130 billion rescue plan before the country is pushed towards a chaotic default, its finance minister warned on Saturday. In an apparent warning to Greek political leaders opposing key reforms, Finance Minister Evangelos Venizelos said the patience of European partners and the International Monetary Fund footing the bill for Greece's bailout was wearing thin. Technocrat Prime Minister Lucas Papademos was due to continue talks with lenders on Saturday in a bid to clinch agreement before calling in the socialist, conservative and far-right party leaders in his coalition to seek their blessing. That meeting of party chiefs, initially scheduled for Saturday, has now been put off until early Sunday afternoon, a government source said.

Greek Talks at a Delicate Point, Official Says - The Greek finance minister, Evangelos Venizelos, said on Saturday that talks between the government and its foreign creditors on a second rescue deal were “on a razor’s edge,” adding that though progress had been made on some levels, crucial issues were unresolved. Agreement was reached on issues like recapitalizing Greek banks and the privatization of state assets, Mr. Venizelos said. “Two major, interrelated issues remain unresolved — labor relations and wages in the private sector, and the fiscal measures that must be taken to ensure we are within the target for 2012,” Mr. Venizelos said after a two-hour conference call with euro zone officials. Despite the barriers, a deal must be reached in bailout talks by Sunday night, he said. 

Greece on ‘Razor’s Edge’ as Debt Talks Drag On  - Greece’s efforts to win a second bailout from international creditors teetered in the balance as negotiations in Athens failed to clinch an agreement. “The distance between success and failure, which could come from misfortune or misunderstanding, is very small,” Greek Finance Minister Evangelos Venizelos told reporters in Athens yesterday after consultations with euro area finance ministers. “We are on razor’s edge.” While agreement had been found on issues such as bank recapitalization and state asset sales, the government and the so-called troika of international creditors are still at odds over labor reforms and fiscal measures for this year. The talks with euro-area finance ministers were “very difficult,” Venizelos said yesterday. With the country’s stability at stake, the government is racing to clinch agreement on a plan that’s been in the works since July, with talks between international monitors and Greek officials running in parallel with discussions among caretaker Prime Minister Lucas Papademos’s coalition members and Greece’s government and its private creditors.

Crucial meeting of coalition partners - The crucial negotiation of the coalition political party leaders over the EC-ECB-IMF troika's ultimatums and shock measures has been set for 13:00 on Sunday. [update: meeting postponed by three hours]. In this new meeting of the leaders of the three parties backing the interim government led by Lucas Papademos which will take place on Sunday, the prime minister is expected to present them with a document detailing the rigid positions of the troika. The document is the result of recent painstaking negotiations between representatives of the country's lenders with finance minister Evangelos Venizelos and other ministers. The party leaders will be required to take a stand on these issues, under pressure and reactions within their parties, given the large number of deputies who refuse to vote for lower wages in the private sector, layoffs of thousands of employees in public enterprises and the public sector, including policemen, firemen, army personnel and teachers, or the recapitalisation of banks with preferred shares. The proposed measures also include reductions in supplementary pensions, fair market value increases ​​and privatisations, although it is estimated that a three party agreement on these issues will be easier to reach. 

Strike Looms As Greek Party Leaders Push For Deal on Reforms  —Signs of popular protest loomed over Greece's political leaders as they raced to agree on painful reforms, including private-sector pay cuts, needed to win a new bailout agreement to keep the country from defaulting on its debts next month.  Unions representing both Greece's public sector and private industry have scheduled a nationwide strike for Tuesday, as the coalition of parties backing interim Prime Minister Lucas Papademos faced bitter choices about either slashing incomes or losing a chance at a second bailout from international lenders.

Greece takes step closer to default - Lucas Papademos, the Greek premier, failed to make party leaders accept harsh terms in return for a second €130bn bail-out, pushing Athens closer to a disorderly default as early as next month. Greek television reported that Mr Papademos has set a deadline of midday on Monday for the three leaders to let him know whether they agree in principle with the proposed austerity measures, before he meets them again later in the day. After five hours of discussions, the three leaders of Greece’s national unity government had not accepted demands by international lenders for immediate deep spending cuts and labour market reforms as part of a new medium-term package.  Mr Papademos said the political leaders had agreed on some “basic issues”, including making spending cuts this year of 1.5 percentage points of gross domestic product, or about €3bn, according to a statement from his office.  George Karatzaferis, the head of the small rightwing Laos (People’s) party said as he left the prime minister’s office, that he expected the talks to continue on Monday. There was no immediate announcement by Mr Papademos.

Greece is the word - According to various news sources over the weekend today is Greece’s D-Day. I doubt very much whether that is actually the case due to the seriousness of the situation, but there is no doubt that time is running out for all parties involved to make a decision about Greece’s immediate future: Euro zone ministers had hoped to meet on Monday to finalize the second Greek bailout, which has to be in place by mid-March if Athens is to avoid a chaotic default. But the meeting was postponed because of Greek reluctance to commit to reforms. Instead, the ministers held a conference call on Saturday to take stock of progress on the second financing package, which euro zone leaders set at 130 billion euros back in October."There was a very clear message that was conveyed from all participants of the teleconference … to the Greeks that enough is enough,”  “There is a great sense of frustration that they are dragging their feet. Dragging their feet, or being dragged by the feet? I guess it depends on your perspective as Greece is caught in a deadlock between a deal with private and official creditors. The trouble is that the private sector do not appear to want to accept a deal that satisfies the demands of the official sector, which means Greece is required to make even greater cuts to satisfy Europe in order to get its next bailout.

Greek Leaders Agree on a Rescue Framework - Greek Prime Minister Lucas Papademos struck a tentative deal with political parties on austerity measures demanded by international creditors as European leaders maintained pressure to complete terms for a 130 billion-euro ($171 billion) rescue package.  Chiefs of the three parties supporting Papademos’s interim government were due to meet with the premier at about midday to hammer out details after setting a framework for recapitalizing banks, ensuring the viability of pension funds and reducing wages and non-wage costs to boost competitiveness. They agreed in a five-hour meeting yesterday to make additional reductions this year equal to 1.5 percent of gross domestic product.  With the country’s stability at stake, the accord marked a step forward as Athens played host to parallel negotiations over the weekend to secure the domestic consensus needed to win a second bailout while persuading Greece’s private creditors to accept bigger writedowns on their debt holdings.

Another Experiment?, by Tim Duy: In the fall of 2008, US authorities conducted a financial market experiment. They allowed a large and heavily interconnected firm, Lehman Brothers, to file for bankruptcy, apparently under the belief that the consequences should be limited as everyone knew this was coming. I think that, in retrospect, US policymakers wished they had pursued an alternative path. The experiment was not exactly successful. Now it seems that European policymakers are willing to risk yet another such experiment. To be sure, they could still pull the rabbit out of the hat, but it is starting to look like the Troika and Greece have was they call in divorce court "irreconcilable differences." Via the Financial Times: Lucas Papademos, the Greek premier, failed to make party leaders accept harsh terms in return for a second €130bn bail-out, pushing Athens closer to a disorderly default as early as next month......After five hours of discussions, the three leaders of Greece's national unity government had not accepted demands by international lenders for immediate deep spending cuts and labour market reforms as part of a new medium-term package.The Troika does not look ready to back down either: Patience with Greek politicians has evaporated among its creditors. During a conference call on Saturday, eurozone finance ministers bluntly told Athens to deliver on its promises and agree to reforms or face default next month.

Euro zone loses patience with Greece (Reuters) - Euro zone finance ministers told Greece on Saturday it could not go ahead with an agreed deal to restructure privately-held debt until it guaranteed it would implement reforms needed to secure a second financing package from the euro zone and the IMF. Euro zone ministers had hoped to meet on Monday to finalize the second Greek bailout, which has to be in place by mid-March if Athens is to avoid a chaotic default. But the meeting was postponed because of Greek reluctance to commit to reforms. Instead, the ministers held a conference call on Saturday to take stock of progress on the second financing package, which euro zone leaders set at 130 billion euros back in October. "There was a very clear message that was conveyed from all participants of the teleconference ... to the Greeks that enough is enough," one euro zone official said. "There is a great sense of frustration that they are dragging their feet. "They should get their act together and start talking honestly, decisively and speedily with the Troika on the aspects of the programme that remain to be finalized - on fiscal and labor market reforms," the official said. 

Greek talks end without agreement, will meet again on Monday - From the Athens News: Lengthy and difficult negotiations A five-hour meeting between prime minister Lucas Papademos and the leaders of the three parties supporting the government ended without agreement on Sunday. Pasok leader George Papandreou, main opposition New Democracy party leader Antonis Samaras and Popular Orthodox Rally (Laos) party leader George Karatzaferis failed to reach agreement with Papademos concerning the demands of the EU-IMF troika for private-sector wage cuts, further pension cuts, large-scale firing of public-sector staff and major downsizing of the public sector....Main opposition New Democracy leader Antonis Samaras made no statements as he left the meeting but indicated the deadlock reached during the meeting during a brief statement to television cameras when he returned to ND's headquarters. "For the first time, a negotiation is taking place. The country cannot stand more recession. I am fighting with every means to prevent this," he said

Postponed Till "Tomorrow"; Juncker Issues ultimatum "Comply or Default" It's Groundhog Day once again as Greek crisis talks for debt deal pushed to Monday: Coalition backers held a five-hour meeting late Sunday with Prime Minister Lucas Papademos to hammer out a deal with debt inspectors representing eurozone countries and the International Monetary Fund — but again failed to reach an agreement.  Leaders of parties supporting the Greece's coalition government say crisis talks for massive new debt deals will continue Monday. The theater of the absurd continues for yet another day with Juncker's ultimatum: Comply or default :Jean-Claude Juncker, the head of the Eurogroup, warned Greece through an interview to a German magazine that it will either comply with its creditors’ requirements or default, as it should not expect any additional support from its peers. Earlier, the head of the ruling coalition’s third partner, Giorgos Karatzaferis, stated in Thessaloniki that he would not tolerate any ultimatums. "We need to examine whether the creditors' demands are in favor of growth for the sake of the Greek people, otherwise we will not get the support package. I am not going to sign up to that,»

Citigroup: Risk of Greek Exit From Euro Has Risen to 50% - Citigroup on Monday raised its estimate of the likelihood of a Greek exit from the euro area over the next 18 months to 50% from a prior range of 25% to 30%, according to the bank’s latest “Global Economics View” analysis by economists Willem Buiter and Ebrahim Rahbari. “This is mostly because we consider the willingness of [euro area] creditors to continue providing further support to Greece despite Greek non-compliance with programme conditionality to have fallen substantially,” the report writes. Buiter and Rahbari believe the cost of Greece leaving the 17-nation currency bloc would be “moderate” because policy makers would act to protect other weak euro-zone economies from further contagion following the unprecedented exit. They also expect that Greece’s long-negotiated private-debt restructuring will be done in an orderly, albeit coerced, manner. They also believe the European Central Bank will end up restructuring its holdings of Greek bonds, a proposal that has proved very controversial over the last few weeks.

Get the Hellas out of here - CITI economists Willem Buiter and Ebrahim Rahbari write: First, we raise our estimate of the likelihood of Greek exit from the eurozone (or ‘Grexit’) to 50% over the next 18 months from earlier estimates of ours which put it at 25-30%. Second, we argue that the implications of Grexit for the rest of the EA and the world would be negative, but moderate, as exit fear contagion would likely be contained by policy action, notably from the ECB. Not "Grout"? Exposure to Greece among European financial institutions was always relatively small given the relatively small size of the country. Banks have been working furiously to reduce even that, and with the European Central Bank now directing a flood of money toward euro-area banks it looks, to these fellows at least, as if the economic and financial risks of a Greek departure are mostly contained. As this paper acknowledged recently, the cost of a Greek exit to the broader euro zone is falling

When Greece Defaults, the Credit Default Swap Dominoes Fall -For your reading, here is a brief summary of the situation in Europe:

  • 1. Greece is poised to default, the end-game everyone anticipated in 2011. It is not a matter of if but when.
  • 2. That default will trigger credit-default swap contracts, derivatives known as CDS that protect the owner from events such as default.
  • 3. This will implode the shadow-banking system and the visible banking system, as those who sold the CDS (financial institutions) do not have enough cash or assets to pay the owners of the CDS.
  • 4. The general idea is that sovereign default is very unlikely, so you can sell protection (CDS) against that possibility for a low premium, and cover that bet by buying your own protection from another player.
  • 5. If that player (counterparty) can't pay you off, then you can't meet your obligations on the CDS you originated and sold.
  • 6. So the failure of one counterparty can trigger a systemic failure akin to a row of dominoes being toppled by the fall of one domino.
  • 7. To avoid such a CDS-triggered collapse, the European Union and its proxy agencies (European Central Bank, etc.) are attempting to call a default by Greece something other than "default."
  • 8. This will theoretically keep the first domino--a credit-default swap--from falling. In other words, if we call a default by some other name, then it isn't a default.
  • 9. Those absorbing the losses caused by a Greek default (and let's stipulate that this references owners of Greek debt who bought CDS as insurance, not speculators who leveraged CDS at 30X the actual bond value) will want to cash in their insurance, i.e. the CDS they own against a Greek default. They have every incentive to demand a default be recognized as a default. If they accept the official plan to avoid calling a default a default, then all the losses will be theirs and none will fall to the counterparties who sold them the CDS.
  • 10. How is this fair?

Here's Who Gets Clobbered If Greece Defaults  - All eyes are on Greece again as the country continues its negotiations with private creditors and foreign leaders.  The parties must agree to reforms that Greece must take before the debt-laden country can get access to desperately-needed bailout funds. On March 20, Greece will have to make a €14.5 billion repayment. Without the bailout funds, Greece risks going into default. And a default has been described by many as being chaotic. What follows is a look at the entities exposed to Greece.

Another tiny detail from Switzerland - Back in June of last year (2011) I wrote about how there was such a demand for safe deposit boxes in Switzerland that, …if you want a bank box in Zurich today, they will require that you have a minum of half a million swiss francs on deposit in the bank, before they will even consider you. That is how short of space they are. The same person,who told me that contacted me today to tell me that the demand for Safe deposit boxes has grown so hugely that in the area bordering Italy, hotels are now renting out their own safety deposit boxes.  First the Greeks now the Italians. Capital Flight in full effect. But don’t worry I am sure Mr Monti has it all under control.

How Europe Has Evolved From A Democracy To A Bankocracy And Why Austerity Will Lead To Chaos - In one of the clearest (and most optically pleasing) discussions of recent months, David McWiliams (of Punk Economics) succinctly explains how Europe has evolved from a democracy to a bankocracy, the implications of which lead to austerity for the people and a Franco-German imposition (the 'fiscal compact') that can only lead to social unrest and chaos. In this brief (and expertly illustrated) video, the Irish economist clarifies Europe's 'dirty little secret' where economic policy is being run almost exclusively for the banks which, as we see in Greece and Ireland, means the political elite are becoming more and more detached from the people. The terror of the r-word (referendum) looms large as McWilliams analogizes the two ways out of a debt crisis (squeeze the debtor or forgive the debtor) with the catholic and protestant perspectives on sin and forgiveness. While falling short of calling for governments to go full-Keynesian (everyone knows you never go full-Keynesian), he (focusing on the problems of the current hopeful solution) summarizes the fiscal union as envisaged by France and Germany (which actually penalizes countries that are in trouble, rather than help them) as not a friendly-union but a vindictive strait-jacket put in place to help banks, not countries.

Is Greece still viable? (Is Europe?): Our current destitution and indignity are the natural repercussions of our own past errors of commission and fallacies of omission. Modern Greece has been skirting the edge of a debt crisis since its inception. After its mini postwar industrial revolution unravelled during the 1970s, it kept pulling back from the abyss through frequent devaluations and bursts of austerity. Entry into the eurozone removed the main instrument of containment in exchange for the empty promise of some alternative shock absorbing mechanism. For almost a decade after the euro’s birth, Northern European commercial capital kept flowing into countries like Greece in search of returns higher than those the stagnant core economies could deliver. A semblance of convergence was thus founded on a series of bubbles that kept the underlying structural imbalances well hidden. In countries like Ireland, the bubble inflated within the private sector (with the connivance of the state). In Greece, the same bubble sprang up within the state sector (aided and abetted by the developers and the private banks). Once the bubbles started bursting (first in Wall Street and Europe’s larger banks, then in Dubai, later in Greece and, finally, in the rest of the periphery), a postmodern 1930s was upon us.

A Revised Portrait of Hungary’s Right-Wing Extremists - The leader of Hungary's right-wing extremists rarely expresses himself so clearly. Speaking before a crowd of a few thousand supporters in Budapest's Sportmax complex on Saturday, Jan. 21, Gábor Vona announced the end of liberal democracy in the world. In the speech traditionally delivered before party members in January, the 33-year-old politician demanded "no compromising" either with or as part of the ruling political system, calling instead for "fighting, fighting and still more fighting." "We are not communists, fascists or National Socialists," Vona said. "But -- and this is important for everyone to understand very clearly -- we are also not democrats!"  Though largely ignored by the national media, Hungary's right-wing extremist Jobbik party operates within a surprisingly well-developed and self-sustained online universe. What's more, recent studies have found that the party's supporters aren't the "losers" that many experts thought they were.

Corporate defaults set to jump in Europe - European corporate defaults are widely expected to climb sharply this year despite the recent improvement in credit market sentiment as bank lending cuts and a deteriorating economic backdrop put many smaller or indebted companies under pressure. Analysts have markedly increased their 2012 default forecasts for European companies rated below investment grade, or junk, and some restructuring advisers warn the pain could rise close to levels seen at the nadir of the financial crisis. European banks are under immense pressure to raise capital or shrink their loan books to meet new regulations with most choosing the latter course.  A European Central Bank survey showed that credit conditions tightened sharply in the last three months of 2011, with banks reporting that they expected lending conditions to deteriorate further this year. “We haven’t seen it trickle into the default rate yet, but I think it will soon,” said Peter Briggs, a senior restructuring adviser at boutique firm Alvarez & Marsal. “Companies are going to find it hard to operate in this macroeconomic environment, and banks are becoming increasingly selective over who they are willing to support.”

Which Economy Is Pursuing Procyclical Fiscal Policy?Rebecca Wilder - Today the BLS reported that the US unemployment rate dropped to 8.3% in January 2012. This is the lowest measured rate since February 2009 – a local trough. Also this week, Eurostat reported that the Euro area (EA) unemployment rate stabilized in December at 10.4%. This is the highest level since inception of the euro – a global peak (so far). It’s pretty easy to see through relative labor performance which economy is pursuing procyclical fiscal policy, namely deficits rise when the economy is booming and fall when the economy is contracting: the EA.

The Greek Vise - Krugman - How much is the troika demanding from Greece? How tight is the squeeze? Here’s a look based on the most recent IMF report (pdf). The current plan calls for Greece to move into large primary surplus — that is, surplus not counting interest payments on the debt: That’s a huge swing — and it’s supposed to happen in the face of a deeply depressed economy. Here’s what it implies for real government spending: Can I say that this looks basically inconceivable? And here’s the thing: when this started, Greece was running a large primary deficit — which meant that even if it repudiated all its debt, it would still have been forced to make a major fiscal contraction. This is no longer true. So we’re now looking at a scenario in which Greece is forced into killing levels of austerity to pay its foreign creditors, with no real light at the end of the tunnel.This is just not going to work.

Greek talks descend into finger-pointing -- This isn’t good; the Greece talks have now moved past their clear deadline and have reached the finger-pointing stage. The broad outline of the dynamics here is now very clear: you need three different parties to agree on a deal for the whole thing to have a chance of success. Private-sector bondholders need to agree to a very deep cut in the value of their bonds; the Greek government needs to agree to enormous spending cuts over and above the 1.5% of GDP that they’ve already offered; and the Troika of the EU, ECB, and IMF needs to agree to pony up extra bailout money to cover the larger-than-expected deficits that Greece is running. Of the three, the bondholders are the least of anybody’s problems. In fact, almost everything they’ve done in recent months can be viewed as a way of showing that if and when everything goes pear-shaped, it’s not their fault. They will talk to anybody, agree to pretty much anything, and be perfectly reasonable all along; it’s the various governments, here, which are finding it impossible to come to terms.

Tinkerbell Economics—The Confidence Fairy, Pixie Dust, and a Sleeping Dragon -  While we may be hours away from a partial (and certainly a stopgap) agreement in the talks among the Greek government, the troika, and private sector creditors, it is doubtful that a deal will emerge in fully constructed fashion that will survive its application in the real economy. It is likely that the only common view amongst participants in the various talks is a desire to try to avoid a disorderly default. Beyond that, there is a severe disconnect fostered by parallel realities that seem unable to intersect. Accordingly, a deal that can hold up both in the streets of Greece and in the markets is both illusive and unlikely. Here’s why I think so. Recently, I have had opportunities to meet with and question senior members of economics establishment within the German government and the broader German intelligentsia. Our meetings were held under Chatham House rules so I can’t name names, but—after several meetings with policy delegations from Germany over the past 60 days—I am prepared to sum up what appears to be the pretty universally held German policy position as follows (my apologies if the below evidences some degree of frustration—but these encounters leave me quite chagrined):

Oliver Blanchard, IMF Chief Economist: Haircut On Greek Debt Will Be 'Very Large': (Video) - The IMF's chief economist, Olivier Blanchard, said on Monday it looks like the 'haircut' on Greek private debt will be "very large" as negotiations between bondholders and the government drag on to cut Greece's debt burden. "With respect to private creditors at this stage it looks like the haircut will be very large," Blanchard told an event at the Carnegie Endowment for International Peace.

Greeks delay bailout talks as Merkel demands action -(Reuters) - German Chancellor Angela Merkel told Greece Monday to make up its mind fast on accepting the painful terms for a new EU/IMF bailout, but the country's political leaders responded by delaying their decision for yet another day. Failure to strike a deal to secure the 130 billion euro ($170 billion) rescue - much of which Germany will fund - risks pushing Athens into a chaotic debt default which could threaten its future in the euro zone. EU officials say the full package must be agreed with Greece and approved by the euro zone, ECB and IMF before February 15 to allow time for complex legal procedures involved in the bond swap to be completed in time for a March 20 bond redemption. In some euro zone countries, including Germany and Finland, parliamentary approval is required to raise the bailout money. Greek Finance Minister Evangelos Venizelos, who met the lenders for another round of talks to reach compromise on wage, pension and job cuts, warned the stakes were rising as time ran out. "A failure of the negotiations, a failure of the program or a default by the country means even greater sacrifices," he said. "Unfortunately, the negotiations are so tough that as soon as one chapter ends another one opens."

New Merkozy Proposal "I will Give You Money If You Give It Right Back"; Mathematical Scam to Prevent CDS Triggers - The Merkel proposal for Greece to cede budget sovereignty to a European commissioner has finally been trashed. In its place is a Spaghetti-O loop proposal to give Greece money only if Greece earmarks the funds to immediately pay back bondholders. Please consider Greece bail-out funds could be split European officials are insisting any new Greek bail-out programme specifically earmark funds to pay off remaining holders of Greek debt, giving lenders the freedom to withhold aid to Athens without risking a messy default that could reignite panic in financial markets. Under a new Franco-German plan that senior European officials said is likely to be included in a new Greek rescue, eurozone officials would create an escrow account to accept new bail-out funding instead of paying it all directly to Athens as in the past. The new fund would then ensure bondholders are paid off, while additional cash to run the Greek government could still be withheld if Athens did not live up to tough new reform demands. Eurozone officials said they believed the escrow account would give European Union and International Monetary Fund lenders strong control over Greece’s use of bail-out funds without stripping Athens of its budgetary sovereignty.

SURPRISE, SURPRISE: It Appears Greece Still Doesn't Have A Draft Of A Deal: Greek leaders just announced that they will push back a meeting to approve austerity cuts until tomorrow. There's some confusion about where exactly they stand on those measures right now. CNBC first reported that coalitions have a draft accord on the reforms, according to a Bloomberg blast. Markets began to move higher around the time that was announced. Then Bloomberg followed that announcement with a blast citing a government spokeswoman who said that talks have actually been delayed until tomorrow. Reuters then reported that this postponement has happened because politicians have not yet drafted a final agreement. This would suggest that any agreement is still in the works. CNBC finally conceded that Greek political leaders postponed a meeting on the bailout package until tomorrow. It remains unclear what provisions politicians have agreed to so far, however we are unlikely to hear more about any deal or agreement until tomorrow. Surprise, surprise.

In Case You Forgot, This Greek Deal Is Probably Worthless: Markets have appeared enchanted by reports coming out of Greece recently that Greek politicians are about to approve a new round of austerity measures and happily ignorant of the fact that negotiations about private sector involvement are still dragging on. But even if the Greek government were suddenly to reach agreements with both the troika and its private creditors, it appears unlikely that both deals will actually be worth anything. That's primarily based on the fact that the debt swap deal officials agree to with the private sector will likely never be implemented, particularly if the European Central Bank doesn't join in on sharing losses. As it stands participation in the plan will have to be "voluntary" in order not to provoke a credit event. However, investors will fight tooth and nail not to bear the full brunt of the 70 to 75 percent losses they will likely take under the agreement if they can't collect on the insurance contracts (credit default swaps) they purchased to hedge against the possibility of a Greek default. Thus there are two probable outcomes:

Greek unions set to strike over new austerity demands -  Greek union members are expected to go on a daylong strike Tuesday to protest new austerity measures sought by foreign lenders as the country negotiates to keep its finances afloat. Officials in Greece are under pressure to reach an agreement on a new bailout package with the threat of a default hanging over the country. Prime Minister Lucas Papademos met with officials from the European Union, International Monetary Fund and European Central Bank on Monday to try and hammer out the details of a €130 billion bailout deal. Greece needs the money to avoid defaulting on a €14.5 billion bond redemption in March. The concern is that a so-called disorderly default could force Greece out of the euro monetary union and shock the global financial system. Papademos must also convince the leaders of Greece's three main political parties to back a package of fiscal and economic reforms that are a condition of the bailout.

Postponed Due to "Political Suicide"; Flag of Germany Burned, Could This be a Trigger? - Greece bailout talks that were postponed on Friday to Saturday, then Saturday to Sunday, then Sunday to Monday, then Monday to Tuesday. They have been postponed again, this time for a reason that makes perfect sense "Political Suicide". The New Work Times reports Greece Puts Off Decision on Austerity Measures Amid a Strike Protesting Them As thousands of Greeks walked off the job in a general strike on Tuesday to protest stringent new austerity measures, there was a growing sense that the country was reaching a critical point in its efforts to survive the debt crisis.  Greek political leaders postponed for yet another day a decision on an austerity package — including 20-percent cuts to base pay for workers in private companies and a loosening of public sector job protections — in exchange for the billions in loans Athens needs to prevent a default in March. With elections looming as soon as April, the parties fear that they are essentially being told to commit political suicide to save the country. If that indeed is the case, analysts here say, it is not clear what will replace them, making Greece a potential laboratory for a volatile mix of austerity, populism and social unrest. Not that the old order, widely derided as corrupt and inefficient, is likely to be deeply mourned.

Portugal sounds out advisers on debt restructuring (IFR) - Portugal has been discreetly sounding out advisers on options to restructure its debt. Although the government has yet to formally appoint any firm, IFR has learnt that ministers have been watching developments in Greece closely with a view to replicating elements of any final agreement. Some of those consulted are understood to have advised Portugal to follow a similar path to Greece's private sector involvement (PSI) plan, to persuade private sector bondholders to take a voluntary haircut on their bonds, if the latter proves successful over the next six weeks. "If there is success with PSI in Greece, then it could open the eyes of some governments," said one sovereign debt adviser involved in such preliminary discussions. "It would show that after all debt reduction is possible and not the end of the world. That could create an interesting precedent." Advocates of a Portuguese debt restructuring urge that a decision be taken swiftly. Such procrastination has made the Greek experience far more complicated than it needed to be. "The lesson from Greece is that getting money from the official sector and letting the financial sector escape, with at least 40 billion euros in bond repayments (made by the official sector to investors), means you have fewer restructuring options,"

Portugal union leader wants debt renegotiation - Portugal must renegotiate its debts rather than impose harsh austerity measures to overcome its economic crisis, the head of the country's largest trade union said on Wednesday, threatening to step up strikes if the government pushed on with cuts. Armenio Carlos, head of the CGTP union, told Reuters Portuguese workers would take a stand against attacks on labor rights, which he said were part of the government's sweeping economic reforms promised under a 78 billion euro ($103.29 billion) bailout. "What we defend is the renegotiation of debts, in terms of deadlines, in terms of interest and in terms of the amount," Carlos said in an interview, adding that the country's bailout had made it impossible to meet its obligations. Portugal's debt currently equals about 105 percent of gross domestic product.

Europe’s Banks Reluctant to Lend to Companies in Need of Cash — European governments are not the only ones struggling with debt. So are some of the region’s companies. As profits and sales slip, some European businesses are scrambling to pay their bills. Because banks are reluctant to lend, the fear is that companies will not be able to borrow the cash they need and will be forced to take drastic action, further weighing on the economy. “There’s a lack of business confidence across Europe” said Jonathan Loynes, chief European economist in London at the research organization Capital Economics. “Lending to the private sector is deteriorating, and there’s enormous stress on the European economy.” The pressure is mounting. Insolvency — when a company’s debts exceed its assets and cash flow — is expected to rise 12 percent this year in the euro zone. Countries including Greece, Spain and Italy are expected to record the highest annual increases. In the United States, the number of insolvencies is falling.

Banks' overnight ECB deposits near record-- Use of the European Central Bank's overnight deposit facility surged to its second-highest level on record Friday, amid a surfeit of liquidity in the euro-zone banking system.  Financial institutions parked EUR511.438 billion Friday at the overnight facility, which pays an interest rate of 0.25%, up from EUR488.689 billion deposited on Thursday.  The amount banks deposit overnight at the ECB has risen sharply since banks tapped the central bank for nearly half a trillion euros at its first three-year loan operation in December. The level of overnight deposits susbsequently hit an all-time high of more than EUR528 billion in mid-January.  The amount banks deposit with the ECB tends to rise towards the end of the central bank's reserve maintenance period, which falls Feb. 14.

Capturing the ECB, by Joseph Stiglitz -  Nothing illustrates better the political crosscurrents, special interests, and shortsighted economics now at play in Europe than the debate over the restructuring of Greece’s sovereign debt. Germany insists on a deep restructuring – at least a 50% “haircut” for bondholders – whereas the European Central Bank insists that any debt restructuring must be voluntary.  The ECB’s stance is peculiar. One would have hoped that the banks might have managed the default risk on the bonds in their portfolios by buying insurance. And, if they bought insurance, a regulator concerned with systemic stability would want to be sure that the insurer pays in the event of a loss. But the ECB wants the banks to suffer a 50% loss on their bond holdings, without insurance “benefits” having to be paid. There are three explanations for the ECB’s position, none of which speaks well for the institution and its regulatory and supervisory conduct. The first explanation is that the banks have not, in fact, bought insurance, and some have taken speculative positions. The second is that the ECB knows that the financial system lacks transparency – and knows that investors know that they cannot gauge the impact of an involuntary default, which could cause credit markets to freeze, reprising the aftermath of Lehman Brothers’ collapse in September 2008. Finally, the ECB may be trying to protect the few banks that have written the insurance. None of these explanations is an adequate excuse for the ECB’s opposition to deep involuntary restructuring of Greece’s debt.

Europe’s “Bankers First” Approach - “…while Europe’s leaders haven’t hit upon a way to forestall a years-long span of catastrophically high unemployment and falling living standards, they do appear to be really really really really committed to saving banks.”  That’s Slate‘s Matthew Yglesias, who notes that this (seemingly exclusive) focus among European elites on saving their banks likely ends up protecting the US economy from eurozone contagion more effectively than would policies focused on growth and easing the plight of those whose wellbeing depends on the “real” economy. The reason is that, as Gennaro Zezza points out here, the US economy is not overly exposed to a slowdown in European growth; not overly exposed, that is, compared to the fallout from a European financial panic.  As Dimitri Papadimitriou and Randall Wray indicate, US finance is still entwined with the fate of European finance; at least in part due to the roughly $1.5 trillion invested in European banks by US money market mutual funds. In other words, comparatively speaking, the US economy will not suffer much from European policy elites’ apparent relative disinterest toward the fate of their people, but may dodge a bullet if current efforts to save the European banking system work out.

Europe's debt rose to 82 percent of output at end-Q3 (Reuters) - The European Union's total government debt rose slightly to 82.2 percent of economic output in the third quarter of 2011, the EU's statistics agency said on Monday, lower than the United States but still a burden that could take decades to pay down. For the euro zone, government debt fell slightly to 87.4 percent of gross domestic product, compared with the 87.7 percent level at the end of the second quarter of last year. The 27-nation's EU's debt stood at 81.7 percent in the second quarter, Eurostat said in the first release of such data, as the bloc steps up the monitoring of its debts and tries to prevent any recurrence of the two-year sovereign debt crisis. In comparison, U.S. debt-to-GDP hit 100 percent in 2011 and under its current trajectory would exceed 115 percent of GDP by 2016, according to International Monetary Fund figures. Europe's debts soared after the introduction of the euro in 1999 as countries indulged in massive borrowing at very low rates of interest. But with economic growth stalling, the EU faces very slow progress in lowering the debt burden, even as it cuts spending across the bloc to bring down its fiscal deficits. The World Bank said last month that Europe's debts may not reach manageable levels until 2030. That could potentially erode Europe's leadership in the world, while less-indebted emerging countries expand their economies and their influence.

Germany To Vote On Greek Bailout Next Week - Think the ECB announcement to do undergo a pseudo OSI impairment is a done deal? Not so fast - Germany may yet throw a wrench in there. According to Bloomberg, next week German lawmakers will conduct three votes on Greece among which:

  1. the €130 billion Greek bailout package... Wasn't it €145 billion by now?
  2. the empowerment of the EFSF to guarantee Greek government bonds held by the ECB
  3. the guarantee of Greek government bonds held by private sector after the debt swap

So while according to "sources" the ECB has already reached an "agreement in principle" to provide Official Sector debt relief, Germany may once again come out of left field with a blocking veto after German taxpayers realize that once again the ECB is throwing money down the drain on its Greek bond holdings, because as pointed out earlier, someone sure is taking a loss on those very same Greek bonds, no matter how convoluted the ECB-EFSF non-arms length and incestuous relationship.

Federal Statistical Office - German exports in 2011: +11.4% on 2010: Germany exported commodities to the value of Euro 1,060.1 billion and imported commodities to the value of Euro 902.0 billion in 2011. Hence, as further reported by the Federal Statistical Office (Destatis) on the basis of provisional data, German exports increased by 11.4% and imports by 13.2% in 2011 on 2010. In 2011, the value of German exports for the first time exceeded a trillion Euros. Imports, too, exceeded by far the previous maximum of Euro 805.8 billion (reached in 2008). The foreign trade balance showed a surplus of Euro 158.1 billion in 2011. In 2010, the surplus amounted to Euro 154.9 billion. According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of Euro 135.9 billion in 2011, which included the balance of services (–Euro 7.8 billion), factor income net (+Euro 40.9 billion), current transfers (–Euro 35.6 billion), and supplementary trade items (–Euro 19.7 billion). In 2010, the German current account showed a surplus of Euro 141.5 billion.

Falling Unemployment In Germany - German unemployment dropped to a two-decade low in January, bolstering economic growth as the sovereign-debt crisis prompted companies from Spain to Greece to cut jobs. Germany’s economic expansion has helped soften a slowdown across the region as companies boost output and hiring. Still, Europe’s largest economy is cooling as slower global growth and weaker demand from debt-stricken euro-area neighbors erode sales. Siemens said last month that meeting targets for this year has become harder and predicted that Europe will slip into recession.

Insight: The dark side of Germany’s jobs miracle - Wage restraint and labor market reforms have pushed the jobless rate down to a 20-year low, and the German model is often cited as an example for European nations seeking to cut unemployment and become more competitive. But critics say the reforms that helped create jobs also broadened and entrenched the low-paid and temporary work sector, boosting wage inequality. Labor office data show the low wage sector grew three times as fast as other employment in the five years to 2010, explaining why the "job miracle" has not prompted Germans to spend much more than they have in the past. Pay in Germany, which has no nationwide minimum wage, can go well below one euro an hour, especially in the former communist east German states. "I've had some people earning as little as 55 cents per hour,"

Germany’s Hidden Economic Weaknesses - WITH Greece once again nearing default, calls are going out this week for Germany to step in to help. And many Germans are, once again, responding with indignity, saying they shouldn’t have to bail out their profligate neighbors. But there is another reason Germany should resist demands to intervene, one that Chancellor Angela Merkel can hardly express publicly. Though Germany is undeniably Europe’s strongest economy, its outlook is not nearly as rosy as people imagine. And while a bailout might seem to help in the short term, it would make it harder for Germany to lead in the place where it really matters: creating a fiscal union, a United States of Europe. A quick checkup of Germany in early 2012 would give the country a clean bill of health: it grew at about 3.5 percent in 2010 and 2011, outperforming the rest of the Group of 8 countries, as well as the consensus forecasts. Moreover, despite the recession, the number of people unemployed, well above five million just a few years ago, has been cut by almost half.

Angela Merkel’s Desperate And Risky Gamble - Following the German-French council of ministers in Paris on Monday, Chancellor Angela Merkel and President Nicolas Sarkozy gave a joint press conference about the crisis in Greece, among other topics. They agreed on everything. They urged the Greek government and all political parties to implement structural reforms and meet the Troika’s demands for deeper budget cuts. Without them, the next bailout tranche would be blocked. Then they headed to the Elysée Palace, the official residence of the French president, where they gave a joint TV interview amidst gilded splendor. Merkel berated socialist François Hollande, Sarkozy’s top challenger in the upcoming presidential election. Among her peeves: his campaign promise to renegotiate the new fiscal-union pact that 25 EU member states had already signed, and that she was pushing towards ratification. Then Sarkozy lashed out against Hollande. However, the most recent polls (BVA and Ipsos) gave Sarkozy little chance: he would survive the first round, but during the second round, Hollande would trounce him with 58% of the vote against 42%—and Merkel’s most cherished oeuvre would be at risk. Sarkozy has been her most powerful ally during the debt crisis. Without him, she couldn’t have pushed through her policies, which have been a resounding success, in Germany: in a recent poll, 64% of Germans have a favorable opinion of her, and 90% were satisfied with her crisis management.

Swiss central banker warns on slowing economy — Switzerland's economy is expected to "slow considerably" this year and might require more central bank intervention to steady it despite the Swiss franc falling back against the euro, the Swiss National Bank's vice chairman said Tuesday. In a speech to the Swiss-American Chamber of Commerce, Thomas Jordan said the nation's economy will probably "grow only weakly over the next few quarters of 2012" as it continues to suffer from turmoil in the global economy and particularly the escalating sovereign debt crisis in the eurozone. Jordan said it was "uncertainty over the debt crisis" in the eurozone that led to the massive appreciation of the Swiss franc, which rose to an all-time high against the euro in early August. That export-sapping rise, he said, "posed an acute threat to the Swiss economy and carried the risk of deflationary developments." Switzerland's biggest trading partner is the European Union, but the overvalued franc also cut into business with the United States and the developing world.

Italian Recession Accelerating - Yesterday we dedicated a quick post to the glaringly obvious - the complete decimation-cum-implosion of the Greek economy. Today we learn that the obvious apparently continues, following a Reuters report that according to an Italian source, Q4 GDP declined more than the 0.2% drop in Q3, and that there was no improvement in Q1 of 2012. In other words, Italy's economy is now contracting at an at least 0.3% annualized run rate. More as we get it, but it's not like any details will make the news any less bulllish, because this is obviously great news: the accelerating recession is far better than the "priced in" apocalyptic depression that the market was expecting. In other words, by simple inversion worse than expected is better than unexpected. Or something. From Reuters: Italy's economy shrank in the fourth quarter of last year, probably more steeply than the 0.2 percent decline in gross domestic product posted in the third quarter, a govermnent source told Reuters on Wednesday. If the data is confirmed by national statistics office ISTAT when it issues Q4 preliminary GDP data on Feb. 15, it will mean Italy is officially in a recession which is widely expected to continue for most of this year.

TIME’s Interview With Italian Prime Minister Mario Monti

The Elephant in the Room is Spain, Not Italy - Another day andthe markets remain fixated on whether Greece comes to a “voluntary” arrangement with its creditors. The key word is“voluntary” because the myth of “voluntary compliance has to be sustained so that those deadly credit default swaps avoid being triggered.  But let’s face it: Greece is a pimple. If the rest of the euro zone could cut itlose with a minimum of systemic risk, Athens would have long gone the way of Troy. The real issue is whether the credit default swaps trigger such a huge mess with the counterparties that it creates renewed systemic stress which more than offsets the benefits to the holders of the CDSs.  The more interesting question is: suppose Greece finally does get a deal? I realize everybody says it is a “one-off”, but do you really think the Irish, Portuguese, or even the Spanish and Italians will go along with that, particularly if (as is likely) they continue to experience double digit unemployment and minimal growth? Now you could argue that Portugal and Ireland, like Greece, are but small components of the European Union and could well be covered in one form or another via the existing backstops established over the last several months, notably the European Financial Stability Fund (EFSF) and the European Stability Mechanism(ESM).  But you can’t say this about Spain, which remains the real elephant in the room – not Italy – even though Spain’s borrowing costs remain lower than Italy’s. This is perverse.

Data Show Greece’s Debt Ratio Growing as Economy Shrinks - Greece’s debt rose to 159.1 percent of its gross domestic product in the third quarter of 2011 from 138.8 percent a year earlier, according to data released Monday that illustrates the country’s worsening economic straits after two years of austerity budgets. The data1, reported by the European Union statistics agency Eurostat in Luxembourg as part of a new series, underscored the urgency of the talks continuing Monday in Athens, where Greek officials and international lenders were trying to reach agreements that would make possible the release of new financing to stave off a Greek default next month. It was the realization in late 2009 that Greece had been hiding the true state of its public finances that set the European sovereign debt crisis2 in motion and left the future of the euro3 currency itself in jeopardy. Two years of austerity measures have weighed on employment, with the jobless rate at 19 percent, and hurt government tax revenues. The economy is expected to show a contraction of 6 percent in 2011, the International Monetary Fund has estimated. Shrinking the G.D.P. side of the equation makes it harder to bring down Greece’s debt ratio to a more manageable level, and adds pressure for additional taxes and spending cuts.

Dramatic drop in budget revenues - Budget revenues were found to be lagging by a considerable 1 billion euros in the year’s first month, provisional January data compiled by the Finance Ministry showed on Tuesday. Revenues posted a 7 percent decline compared with January 2011, while the target that had been set in the budget provided for an 8.9 percent annual increase. Worse still, value-added tax receipts posted an 18.7 percent decrease last month from January 2011 as the economy continues to tread the path of recession: VAT receipts only amounted to 1.85 billion euros in January compared to 2.29 billion in the same month last year. The VAT revenue data represent a particular worrying sign regarding the depth of recession for 2012, while even more painful measures are expected to lead to a reduction in salaries and therefore a further drop in consumption. This is the vicious cycle that the government will have to tackle by way of additional fiscal measures this summer. According to the current data, the 2012 budget will certainly have to be revised soon, given that the original estimate for a contraction of 2.8 percent is now raised to 3.5-4 percent of gross domestic product.

Greek Economy Implodes: Budget Revenues Tumble 7% In January On Expectation Of 9% Rise - While hardly surprising to anyone who actually paid attention over the past two months to events in Greece (instead of just reacting to headlines) where among those on strike were the very tax collectors tasked with "fixing the problem", we now get a first glimpse of the sheer collapse in the Greek economy, which also confirms why Germany is now dying for Greece to pull its own Eurozone plug (predicated by a naive belief that Greece is firewalled as was discussed before. As a reminder Hank Paulson thought that Lehman, too, was firewalled on September 15, 2008). And what a collapse it is: according to just released data from Kathimerini, budget revenues lagged projections by €1 billion in the very first month of the year. "Revenues posted a 7 percent decline compared with January 2011, while the target that had been set in the budget provided for an 8.9 percent annual increase. Worse still, value-added tax receipts posted an 18.7 percent decrease last month from January 2011 as the economy continues to tread the path of recession: VAT receipts only amounted to 1.85 billion euros in January compared to 2.29 billion in the same month last year." This it the point where any referee would throw in the towel. But no: for Europe's bankers there apparently are still some leftover organs in the corpse worth harvesting.

For Greece a tear, for Brussels a blush - Very quickly: some of you will have seen that Greece’s tax revenue from VAT collapsed by 18.7pc in January from a year earlier. Nobody can seriously blame tax evasion for this. It has happened because 60,000 small firms and family businesses have gone bankrupt since the summer. The VAT rate for food and drink rose from 13pc to 23pc in September to comply with EU-IMF Troika demands. The revenue effect has been overwhelmed by the contraction of the economy. Overall tax receipts fell 7pc year-on-year. This is a damning indictment of the EU-imposed strategy. Greece is chasing its tail. The budget deficit is stuck near 8pc to 9pc of GDP because the economic base is shrinking so fast. Let me just add that it makes little difference whether or not Lucas Papademos secures triparty agreement today – or soon – for a debt deal. The Greek parliament still has to vote and there is a sauve qui peut mood among MPs who don’t want to be stoned to death (metaphorically) by the polloi – hoi or otherwise.

Europe’s Tobin Tax Distraction, by Barry Eichengreen -  At last, European leaders have revealed their top-secret plan for solving the euro’s crisis. And it is – drum roll – a version of the “Tobin tax,” a levy on financial transactions first suggested in 1972 by the Nobel laureate economist James Tobin. Now, 40 years later, the European Commission has proposed – and French President Nicolas Sarkozy and German Chancellor Angela Merkel have endorsed – a turnover tax on all financial transactions, varying from 0.1% on stocks to 0.01% on financial derivatives like futures and credit-default swaps. If the tax can’t be imposed globally or even Europe-wide, France and Germany will go it alone. Given Sarkozy’s enthusiasm for the tax, there is even talk of France adopting it unilaterally. European leaders claim that they can create mechanisms to ensure that their residents pay the tax, regardless of where trades are booked. But banks are widely reported to be devising new instruments to enable their clients to avoid the tax. On whom would you bet – the tax authorities or the financial engineers? If the aim is to augment revenues, a Tobin tax is the wrong tool. Indeed, Tobin designed it to solve an entirely different problem: excessive volatility in currency markets. By discouraging foreign-exchange transactions, Tobin’s proposal sought to promote exchange-rate stability by preventing national currencies from coming under speculative attack.

Fiscal adjustment: Too much of a good thing? - Almost everyone agrees that the fiscal accounts of several advanced economies are in a pretty bad shape and need to be strengthened. But how rapid should the adjustment be in the present circumstances? At times over the last couple of years the IMF called on countries to step up the pace of adjustment when we thought they were moving too slowly. This column says that in the current environment, some might be going too fast.

IMF’s Cottarelli: Some Governments May Be Trying to Cut Debt Too Quickly - Some governments, including the U.S., may be trying to cut their budget deficits too quickly, putting the economic recovery at risk, the head of the International Monetary Fund‘s fiscal affairs department warned on Wednesday. In a posting on the policy website VoxEU, Carlo Cottarelli repeated the IMF’s view that efforts to cut high levels of public debt should be gradual. “At times over the last couple of years, the IMF called on countries to step up the pace of adjustment when we thought they were moving too slowly,” Cottarelli wrote. “Instead, in the current environment, I worry that some might be going too fast.”The IMF estimates that average budget deficits in developed economies will fall by two percentage points of gross domestic product in 2011 and 2012. In the euro zone, it estimates the decline will be three percentage points. “In a reasonably good growth environment this pace of adjustment would be fine,” Cottarelli wrote. “But in the current weaker macroeconomic environment, bringing deficits down this quickly could pose a risk for the economic recovery.”

EU Commissioner Says Austerity Focus Feeding Recession - An over-reliance on slimming government budgets is feeding the euro zone’s recession, European Union Labor Commissioner Laszlo Andor warned in an interview. “We need a smarter fiscal consolidation than before, which means that the wrongly calibrated fiscal consolidation measures probably contributed to the deceleration of growth and this second dip,” the EU Commissioner for Employment, Social Affairs and Inclusion said after meetings with the Obama administration, International Monetary Fund and World Bank officials this week. Although the job of labor commissioner isn’t one of the heavyweight roles within the commission, Andor’s comments are one of the first times a top European Union official has publicly suggested that the broad focus on austerity has been harmful to the European economy. The “timing, composition and distribution” of budget belt-tightening “makes a difference,” Andor said. Washington and the IMF have been pushing Europe to take greater care of how it reduces government debt burdens, fearing that too much consolidation too fast would undermine desperately needed growth in the euro zone.

Unfounded Obsession With the Greek Minimum Wage - Rebecca Wilder - The Greek minimum wage is apparently a point of contention between the Troika (ECB/EU/IMF) and the Greek government. The NY Times cites competitiveness gains as a rationale for the minimum wage cut: The goal of any pay cuts would be to help make Greek workers, who are generally less productive than workers elsewhere in Europe, able to compete more effectively inside the euro zone, where countries share a common currency that does not allow devaluations to help even out differences in labor costs. Huh? See below. The going line seems to be that the Greeks are lazy. They earn minimum government-negotiated wages without actually doing a whole lot because they’re uncompetitive. This is wrong; the data do not support this view. First, the Greek people aren’t lazy at all. In fact, Greek workers spent more hours working 2010 (in annual hours actually worked per worker) than those in Chile, Hungary, Czech Republic, Poland, Estonia, Turkey, Mexico, Slovak Republic, Italy, the US, New Zealand, Japan, Portugal, Canada, Finland, Iceland, Australia, Ireland, Slovenia, Spain, the UK, Sweden, Luxembourg, Austria, Belgium, Germany, Norway, and the Netherlands – and in that order. Marc Chandler also highlighted this fact back in January. Sure, one could argue that the Greek workers work a lot of hours, but it’s for less output. Furthermore, labor costs have risen substantially relative to other Euro area countries, so the country’s worse off. That’s the uncompetitiveness route. If you care about productivity and relative wage gains, why not look at the drop in Greece’s relative unit labor costs?

Greece: 'There's no more left to cut' - That's enough, we can't take it anymore." That was the popular chant coming from protesters in Athens yesterday during the latest 24-hour general strike against the country's austerity measures. Teachers and doctors joined bank employees to demonstrate against a new round of expected cuts as the cash-strapped country continued to negotiate new reductions in spending to help keep the economy afloat. Several thousand demonstrators from the public and private-sector unions braved the heavy rainfall, gathering outside Parliament to voice their opposition at the latest proposed measures to secure a €130bn (£108bn) bailout package. Minor clashes broke out when protesters tried to remove a cordon near the parliament building. Police sprayed tear gas and at times clashed with strikers, whose anger intensified overnight when a further 15,000 job cuts were announced. Since the onset of the crisis, the austerity drive has sent unemployment to a record high of 18.2 per cent and the country's finances into a spiral of recession. Despite the deepening pain, crowds at protests have increasingly dwindled. "People are scared and haven't really realised what's happening yet," George Pantsios, an electrician for the country's public power corporation, said. He has only been receiving half of his €850 monthly wage since August. "But once we all lose our jobs and can't feed our kids, that's when it'll go boom and we'll turn into Tahrir Square."

Greece misses bail-out deadline - Greece missed another deadline to approve conditions for a second €130bn bail-out on Tuesday night, after a meeting with political leaders was postponed until Wednesday because of last-minute haggling with international lenders over emergency spending cuts. Party officials said on Wednesday they had only just received the 50-page document that leaders need to approve and that they would need several hours to study it before any meeting could take place. An official in the office of Lucas Papademos, the technocrat prime minister, said the leaders’ meeting had been scheduled for 4pm (2pm GMT). Mr Papademos is hoping a deal can be presented for approval at a meeting of eurozone finance ministers later this week. But the delay over agreeing €3bn of extra spending cuts fuelled anxieties that Athens may be forced into a messy default next month. It also triggered concern over whether Greece remains committed to fiscal and structural reform after two years of failing to implement measures agreed in return for billions of euros in financial support.Greece has already missed two deadlines this week because of the politicians’ brinkmanship, further exasperating its European paymasters and jeopardising its second bail-out along with a voluntary restructuring of €200bn of government debt.

Mario blinks - MOST adolescent boys grow out of playing chicken when they realise the winner of the game is not the bravest, but the one too stupid to be aware of the consequences of continuing to play. During the euro-zone crisis, the European Central Bank (ECB), along with Germany, have excelled at the game, allowing the sovereign-debt crisis to teeter on the edge of disaster in order to push Greece (and Italy) to make deep fiscal cuts and undertake structural reforms. The tactic has worked—in large part because the ECB seemed credible in its role as the fearless lunatic. Most believed that the bank is so bound by its doctrine that it would rather risk calamity than start the printing presses. As a result, Italy ejected its government and started the long, hard climb back to competitiveness. Greece has been pushed to the very limits of what it can do. After both Italy and Greece have blinked, will Mario Draghi, the president of the ECB, now blink too?

Modest Mario - GREECE was the word on everyone’s mind as Mario Draghi, president of the European Central Bank (ECB), sat down to his regular monthly press conference on February 9th. Mr Draghi was quick to say he had only just taken a telephone call from Lucas Papademos, Greece’s interim prime minister, who confirmed that an agreement had been struck on a new bail-out package for his beleaguered country. The ECB (though not a party to negotiations) had also picked up “vibrations” that suggested Greece was close to a deal with its private-sector creditors, too. Further details are likely to emerge after a meeting of the euro-zone finance ministers later today. Yet what kind of role the ECB will play in the new deal remained unclear. The central bank has bought around €40 billion-worth of Greek bonds (with a face value of perhaps €55 billion) as part of its efforts since May 2010 to stabilise the euro zone’s sovereign-bond markets. One hope in Athens is that the ECB might forgo the profits it would make if the bonds were held to maturity (and if they were paid off in full) to help Greece stabilise its public debt. Mr Draghi was non-committal. He did say that the ECB would not be prepared to lose money on its bond purchases. That would amount to the monetary financing of governments, which is forbidden.

The ECB starts getting helpful with Greece - Stephen Fidler reports that the ECB is kindasorta going to tender its bonds into the Greek debt exchange, thereby helping the country achieve some €11 billion in extra savings. The details are sketchy, but to a first approximation, it seems to work like this: the ECB has €50 billion of Greek bonds, which it bought for €39 billion. It will sell those bonds to the EFSF for €39 billion, which in turn will “return the bonds to Greece”, whatever that means. Greece, in turn, “will then agree to repay the EFSF” — which may or may not mean issuing new bonds to be held by the EFSF. Since Greece will now have €39 billion of debt rather than €50 billion, that’s an €11 billion savings. The ECB, under this plan, ends up breaking even, without monetizing any debt. As Zero Hedge says, The ECB could have taken the loss directly and just printed money for that loss. So this demonstrates an unwillingness to print money. The ECB could take the loss and get capital from the member states. By using the EFSF rather than new capital calls, it is a sign that countries are at the limit of what they will contribute. Hoping for new money is unrealistic – since this was the perfect opportunity to put up new money and tell the world that Europe is truly united and willing to contribute. This just uses up money that was already allocated.

Irish want debt concession if ECB aids Greece (Reuters) - Ireland would see any European Central Bank contribution to the restructuring of Greek debt as a precedent that would boost Dublin's efforts to ease the burden of its own sovereign debt, the country's finance minister said on Wednesday. ECB policymakers on Wednesday were divided as to what contribution the central bank might make to a restructuring of Greece's sovereign debt amid efforts to close a complex deal to unlock a second bailout for Athens. Ireland, widely seen as the poster child among bailed-out euro zone countries, has been lobbying the ECB to help it reduce the burden of its sovereign debt by cutting the cost to the government of bailing out its banks. "If the ECB are prepared to make this kind of concession to Greece it would encourage me to think that they might be ready to make concessions on the promissory note to Ireland," Finance Minister Michael Noonan told state broadcaster RTE. "I see it, if it occurs, as a strengthening of our negotiating position."

(Broke) Monkey See, (Broke) Monkey Do - Irish Finance Minister saying that whatever the ECB does with Greece would be of interest to Ireland.  So if ECB forgives Greek debt (directly or through EFSF), Ireland is going to want the same deal.  Portugal won't be far behind.  And why stop at ECB and not go for PSI as well? They continue to negotiate in Athens, but the reality is they should step back from the table.  They are locked into positions and slowly coming to the middle for some agreement,  yet they should be stopping and asking themselves if what they are doing is right. On top of that, they are negotiating long term plans when Greece just missed January numbers by an astronomical 1 billion euro!  That is a massive miss on data that should have been relatively easy to predict.  What is the probability of future calculations being accurate when things that were estimated only a couple of months ago fail so miserably?

Concession Smooths Way Toward a Greek Debt Deal - The European Central Bank has made key concessions over its holdings of Greek government bonds, which will contribute to a reduction of the country's debt burden and smooth the path toward a new bailout for the country, said people briefed on Greece's debt-restructuring negotiations. The decision by one of the Greek government's biggest creditors will narrow a gap in Greece's finances, helping pave the way for a debt-restructuring agreement with Greece's private-sector creditors and a new €130 billion ($170 billion) bailout from other euro-zone governments and the International Monetary Fund. But it is still unclear whether Greek politicians, facing public outrage, will accept the tough austerity policies pushed by European authorities. The ECB has agreed to exchange the government bonds it purchased in the secondary market last year at a price below face value The idea is for the ECB, in effect, to exchange its Greek bonds for bonds of the European Financial Stability Facility ... The EFSF ... will return the bonds to Greece, and Greece will then agree to repay the EFSF for the price at which the fund bought the bonds from the ECB ... officials said the ECB's concessions could contribute a maximum €11 billion to fill a gap estimated at some €15 billion

The ECB's Scary Carry Trade, Or How The ECB Will Forego Greek Bond... PROFITS? - According to the WSJ, the “ECB is willing to forego profits on their Greek bonds”. That statement strikes me as one of the scariest things that a central banker could say (and there is some tough competition for that one). Forego profits? Here is the chart of a typical Greek bond over the past 2 years. The ECB started buying Greek bonds in May 2010, and stopped sometime in 2011. How do they possibly have “profits” to give up? They have “profits” because they live in an accrual accounting world. They buy bonds, don’t mark them, and accrue the interest. The accrued interest counts as “profit”. That is the carry trade. That is what everyone is so excited about for the banks. Banks can buy bonds, not mark them, and book the interest accrual (and payments) as profit. The problem with accrual accounting is when a sale is forced. Whatever the reason

The Upcoming Greek ‘Deal’ – Recognition of Reality or Complete Evasion of the Truth? - Well, it looks like the Greeks are going to get a deal on their debt. Provided they continue to destroy their economy through austerity measure, of course. But then why should it be otherwise – why on earth should logic rule when crass moralising is so much more palatable? But there are a couple of problems with the current ‘arrangements’. As Marshall Auerback wrote yesterday: Suppose Greece finally does get a deal? I realize everybody says it is a ‘one-off’, but do you really think the Irish, Portuguese, or even the Spanish and Italians will go along with that, particularly if (as is likely) they continue to experience double digit unemployment and minimal growth? Marshall’s focus in that piece was Spain as the proverbial elephant in the room. And his argument should be seriously considered. However, there’s another important angle on this. And in truth, it’s rather obvious – less the elephant in the room than the floor, ceiling and walls. Simply put: if Greece gets a deal and if other countries begin to increase the pressure to have their debt burdens alleviated, should potential investors in European government bonds not come to see that they’re just disposable playthings that can be tossed over the side of the crib the moment the ECB and the Germans find it politically convenient to throw a temper tantrum and do so?

Greece Talks Stall as Venizelos Heads to Brussels - Greek Finance Minister Evangelos Venizelos headed to Brussels today as politicians in Athens narrowed their differences to the single issue of pension cuts needed to secure a 130 billion euro ($173 billion) bailout.  Talks stumbled over pensions and officials from the European Union and the International Monetary Fund gave Greece 15 more days to identify measures totaling 300 million euros. A euro region official said a Greek default will not be on the agenda of today’s emergency finance ministers’ meeting, which starts at 6 p.m. in Brussels.  “There are issues outstanding that must be resolved,” Venizelos told reporters in Athens today after a meeting with Prime Minister Lucas Papademos and EU and IMF officials that ended just before 6 a.m. “As the prime minister said, there is agreement on all the issues bar one.”  The latest hitch came after six days of talks as the political parties battled to complete a package that’s been on the table since July. Greece faces a 14.5 billion-euro bond payment on March 20 and is struggling to secure financing to avert a collapse of the economy that could spark a new round of contagion in the euro area.

Rubber ducks explain the Greek negotiations  - Is there really a done deal in Greece? I hope so — but it’s pretty clear that nothing’s in the bag quite yet. In terms of my video above, the Greeks consider themselves in the boat at this point — but the Europeans worry that the Greeks might go back on their promises, so they want not only the Greek executive but also the Greek legislature to sign on. (I didn’t even have a duck for the Greek legislature, I thought the only legislatures we needed to worry about were in Germany and Finland.  And the IMF duck isn’t in the boat either — Christine Lagarde, too, is demanding further “assurances Greece would stick to the agreed policies whatever the outcome of looming elections”. It seems that the bondholders are in the boat, however — or as far in the boat as they can credibly get absent a formal bond exchange offer. And that’s why I’m not sold on Floyd Norris’s idea that the money Europe is providing for Greece will instead end up in an escrow account, to be used first to pay bondholders and only second to cover the Greek budget deficit. If that were the case, the value of the exchange offer would rise markedly: the new bonds would certainly be repaid, and would be worth 100 cents on the dollar, rather than the 60 cents or less that everybody’s expecting right now.

The Tumblin' Default - Got to roll debt baby, call it the tumblin' default.  That's the theme for the week as Greece gets yet another final deadline extension to come up with more and more concessions so it can borrow even more money that it will never be able to pay back.  "Honey, got no money" is the line that should be obvious to EU Stones fans as the IMF's chief economist insisted that Greece must cut wages to boost competitiveness and pull the country out of its economic quagmire.  "Either you basically increase productivity growth a lot and quickly, and you keep wage growth moderate, or you decrease wages," said Olivier Blanchard.  "It is a pretence that the measures are taken to forestall bankruptcy," Communist party leader Aleka Papariga told the gathering crowds at today's National Strike.  "On the contrary, they will lead the people to misery to benefit the plutocracy and capital," she said. Sadly, only the Communists are telling the people the truth in Greece - the people are being sold into decades of wage slavery as a population that has already voluntarily accepted 25% wage cuts is now being forced to accept additional 30% wage cuts while the ECB and IMF shove another $192Bn worth of debt down their throats that is ONLY to be used to pay off bondholders who took advantage of them in their time of weakness to force them to roll over their debt at record high rates. 

Greek Political Leaders Reach Austerity Deal - Greek Prime Minister Lucas Papademos said Thursday that political parties backing his interim government agreed on new austerity measures set by international creditors for a second bailout package.  The deal came after the party leaders resolved differences over pension cuts that led to a €300 million ($397.8 million) shortfall in the country's budget target for this year.  The agreement in Athens makes it easier for euro-zone countries to decide whether to push ahead with new aid for Greece, but some euro-zone officials have shed doubt on whether that decision will come already at a meeting of the 17 euro-zone finance ministers in Brussels later Thursday. A German government source said that the fresh austerity program at this stage lacked detailed paperwork to support a decision.German Finance Minister Wolfgang Schäuble said Thursday he is confident that Greece can complete its debt restructuring in time for a March 20 debt repayment, but that an agreement isn't likely to be finalized Thurday.

Greece to cut 15,000 civil service positions - Greece's coalition government on Monday caved in to demands to cut civil service jobs, announcing 15,000 positions would go this year, amid mounting international pressure to agree on austerity measures needed to secure major new debt agreements. The announcement signals a shift in Greece's policy, as state jobs have so far been protected during the country's acute financial crisis, which started about two years ago. Public Sector Reform Minister Dimitris Reppas said the job cuts would be carried out under a new law that allows such firings. Unions have called a 24-hour general strike for today, in response to the new austerity measures, while about 4,000 protesters braved torrential rain late Monday to join protest rallies organized in central Athens by left-wing opposition parties. Greece is racing to push through the painful reforms — which have yet to be agreed by Greece's coalition partners — to clinch a $170 billion bailout deal from its European partners and the International Monetary Fund and avoid a March default on its bond repayments.

The Wages of Austerity: Superbug Runs Wild in Greek Hospitals - Yves Smith -Many writers tend to depict the effects of austerity in purely economic terms: loss of wealth and income, lesser income/social mobility. But depressions and accompanying changes in social norms can and do have more serious consequences.  A story in Bloomberg illustrates how the combination of budgets slashed thanks to austerity policies leads directly to deaths. The Wall Street Journal described last year how distress in the Greek economy had produced a significant increase in suicides. A new Bloomberg story recounts how severe cutbacks in hospital staffing have enabled superbugs that is hard to combat even under normal circumstances to inflict even more fatalities than usual in Greek hospitals. An ugly side to this problem is that overreliance on antibiotics in Greece created the conditions that helped these potent infectious agents to develop.  From Bloomberg: Greek doctors are fighting a new invisible foe every day at their hospitals: a pneumonia-causing superbug that most existing antibiotics can’t kill.. The hospital-acquired germ killed as many as half of people with blood cancers infected at Laiko General Hospital, a 500-bed facility in central Athens.The drug-resistant K. pneumoniae bacteria have a genetic mutation that allows them to evade such powerful drugs as AstraZeneca Plc’s Merrem and Johnson & Johnson’s Doribax. A 2010 survey found 49 percent of K. pneumoniae samples in Greece aren’t killed by the antibiotics of last resort, known as carbapenems, according to the European Antimicrobial Resistance Surveillance Network. Many doctors have even tried colistin, a 50-year-old drug so potent that it can damage kidneys…

Greek coalition party won't back austerity: report -- The leader of Greece's nationalist LAOS party, a junior member of the country's coalition government, said Friday the party won't back new austerity measures demanded by the euro zone in return for a second bailout package, the Associated Press reported. George Karatzaferis said he would vote against the proposal, which is expected to face a parliamentary vote on Sunday, the report said. LAOS has 16 parliamentary members, AP said. The three-party coalition government holds 252 of the parliament's 300 seats. Euro-zone finance ministers demanded late Thursday that Greece's parliament approve a controversial austerity package by next week in order to receive a 130 billion euro ($172 billion) bailout seen as crucial for Greece to avoid a default by mid-March.

Greece fails to agree EU bailout terms - Greece failed to finalize terms for a crucial euro130 billion ($173 billion) bailout Thursday, but Finance Minister Evangelos Venizelos headed to Brussels to meet top EU officials, hoping to rescue the agreement and stave off bankruptcy. The Athens talks stalled after leaders of the three parties backing Greece's coalition government approved sweeping new austerity measures but failed to agree to creditors' demands to make euro300 million ($398 million) in pension cuts. Venizelos issued a dramatic plea to the coalition leaders to swiftly resolve their differences, warning that Greece's "survival over the coming years" depends on the bailout and a related debt-relief agreement with private creditors."It will determine whether the country remains in the eurozone or whether its place in Europe will be endangered," he said.

Greek Debt not Sustainable with 70% Haircut: S&P -- Greece will likely fail to achieve sustainable debt levels if it only resorts to a 70 percent reduction in the value of bonds held by private creditors, Standard & Poor's warned on Wednesday, putting pressure on the ECB to also take losses. Private-sector bond holders currently account for only a small part of Greece's creditors since most of the country's debt has migrated to the hands of the European Central Bank1 and other official institutions, S&P2 analyst Frank Gill said in a webcast with clients. Though pressure on the ECB to take losses on its holdings is rising, policymakers remain divided on what contribution the bank could make to the debt restructuring, two euro zone monetary policy sources said. If Greece had negotiated losses of 50 percent to 70 percent with private creditors two years ago, then it would have been able to put its public debt in a "far more sustainable level,"

Eurozone crisis live: Greek bailout deal reached, but euro finance ministers cautious - as it happened -

ECB Statement on Expansion of Acceptable Collateral for Loans - The European Central Bank announced the approval of new eligibility criteria for some euro-zone countries seeking to use its liquidity operations. Here’s the central bank’s statement. The Governing Council of the European Central Bank (ECB) has approved, for the seven national central banks (NCBs) that have put forward relevant proposals, specific national eligibility criteria and risk control measures for the temporary acceptance of additional credit claims as collateral in Eurosystem credit operations. Details of these specific national measures will be made available on the websites of the respective NCBs: Central Bank of Ireland, Banco de España, Banque de France, Banca d’Italia, Central Bank of Cyprus, Oesterreichische Nationalbank and Banco de Portugal.

Keeping the Sharks at Bay – More than One Way to Do a Bailout - While I was writing on the unsustainability of the haircut deals yesterday, the peripheral bond markets in Europe rallied. My argument was that when other countries started getting uppity and demanding haircuts, European government bond investors would slowly but surely come to realise that they were the ones on the end of the hook and that politicians didn’t give a damn about them. This would eventually result in their piling out of the bond markets, sending yields into the stratosphere. The ECB would then be forced to step in and buy up bonds in the secondary market – or perhaps do something even more responsible, who knows?And indeed, as the Greek deal began to solidify, Ireland quickly joined the queue:Ireland would see any European Central Bank contribution to the restructuring of Greek debt as a precedent that would boost Dublin’s efforts to ease the burden of its own sovereign debt, the country’s finance minister said on Wednesday.  In the meantime, however, the markets for peripheral company and bank debt rallied – and rallied rather hard at that. The FT reports: For all the uncertainty over Greece, Europe’s bond markets have been rallying strongly. Now the ‘risk on’ sentiment has spilled over into markets for company and bank debt, with investors snapping up a wave of bond issues from Italy, Ireland and Spain.

Why the Greek Bailout Doesn’t Change Much of Anything - Thursday’s deal is supposed to allow Greece to avoid default and prevent the Eurozone from breaking up – but the deal isn’t final, it can’t work, and the real problems lie elsewhere. - With time running out, Greece reached a deal yesterday with European institutions that could start 130 billion euros (more than $170 billion) in bailout funds flowing. If that money isn’t on the way soon, Greece might default when its next bond refinancing takes place in late March. Despite all that money, however, little has really changed. You could argue that progress toward saving Greece – and thereby postponing a global banking crisis – is one of the factors that boosted the U.S. stock market some 20% since October. But I’d attribute those gains instead to moderate improvements in the U.S. economy at a time when expectations were low and the stock market was depressed. Of course, saving Greece is important for financial markets around the world, not only for the Eurozone. And while it isn’t really possible to quantify the potential losses if things go wrong, one analytical firm guesstimates the following: A controlled Greek default would cost stocks 5% to 10% in the U.S., as well as in Europe. Two countries defaulting – Greece and Portugal, say – could result in 15% market declines. The total unraveling of the Eurozone could knock stocks down 30% or more.

Eurozone dismisses Greek budget deal  - Eurozone finance ministers dismissed as incomplete a reputed €3.3bn package of Greek budget cuts presented to them in the hope of securing a €130bn bail-out and sent the country’s finance minister back to Athens with a fresh set of demands and an urgent deadline. In exchange for signing off on the loan, which Greece is depending on to avoid a potentially chaotic default next month, its lenders are demanding €325m in further cuts to this year’s budget, parliamentary approval of a sweeping reform package and a pledge from the country’s political leaders to ensure they will maintain their commitment after April elections. They also warned of more intensive involvement in the Greek economy to improve tax collection and accelerate the sale of state-owned assets. ‘In short, there is no disbursement before implementation,’ said Jean-Claude Juncker, the prime minister of Luxembourg and head of the eurogroup, bemoaning a succession of broken promises from Athens. If those conditions were met, then Mr Juncker said finance ministers would reconvene on Wednesday to sign the loan agreement, and set in motion a private sector bond swap that is expected to cut some €100bn from Greece’s €350bn debt pile and help restore its finances. The details of that exchange were virtually complete, officials said.

German financial minister: Greek deal on cuts appears to not yet fulfill bailout conditions - - Not long after Greece made the politically unpopular decision to slash government spending to ease its debt crisis, Germany's finance minister questioned whether the deal goes far enough to earn approval of a crucial €130 billion bailout. Greece's new austerity plan would make deep cuts to jobs and wages and it ignited fresh criticism from unions and the country's labour minister, who resigned in protest. Finance ministers from the 17 countries that use the euro are meeting in Brussels to scrutinize the plan. Greek prime minister Lucas Papademos earlier Thursday said that all major party leaders in the country's coalition government had given their backing to a new round of painful spending cuts he had worked out with the European Union, the European Central Bank and the International Monetary Fund and that the talks "were successfully concluded." However Germany's Finance Minister Wolfgang Schaeuble on Thursday warned that the new round of spending cuts appears to not yet fulfil all the conditions for a €130 billion bailout.

The World from Berlin: 'Without a New Beginning, Athens Is Lost'  - It was supposed to be a breakthrough. But the deal that was reached on Thursday by the Greek government received a lukewarm reception in Brussels. The Gordian knot of the Greek debt crisis remains as intractable as ever. On Thursday, Greek party leaders had announced that, following weeks of talks and delays, they had finally agreed to accept the stark austerity conditions imposed on them by the troika of the European Commission, European Central Bank and International Monetary Fund. But German Finance Minister Wolfgang Schäuble reacted by saying that the news from Athens was still not enough to trigger the release of the second bailout package for Greece, worth €130 billion ($172 billion).  Facing more painful cuts, Greek citizens are back on the streets as resentment boils over. German commentators say it's time to finally face the truth.

Sovereign Bond Risk Soars as Greece Plan Rebuffed, Aid Withheld - The cost of insuring European sovereign debt soared after finance ministers rebuffed a Greek austerity plan being demanded in exchange for a 130 billion-euro ($173 billion) rescue package. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments climbed nine basis points to 331 at 1 p.m. in London. The gauge is headed for the first weekly increase in five weeks, signaling deterioration in perceptions of credit quality. Resolution of the aid talks, which have dragged on since July, is needed for Greece to avoid defaulting next month. The nation must pass its latest austerity package into law and identify 325 million euros in extra spending cuts before euro- area governments endorse a second bailout for the country, Luxembourg Prime Minister Jean-Claude Juncker said. “Time is obviously running out for Greece,” A leader of Greece’s coalition government today pushed back against German demands for deeper budget cuts as the price of the bailout needed to stave off a financial collapse.

Greek cabinet approves EU/IMF bailout bill Reuters: (Reuters) - The Greek cabinet approved a draft bill spelling out reforms required by the EU and the IMF on Friday, taking Athens closer to getting a new 130 billion-euro bailout after the prime minister warned the alternative was "catastrophe." All eyes will now be on parliament, which is scheduled to vote on the bill on Sunday. Analysts expect the deeply unpopular package to be adopted but Greek politics remain highly unstable. Even after this is done, the EU also wants a further 325 million euros of spending cuts and clear commitments by main party leaders that the reforms will be implemented before it agrees to release the aid. Technocrat Prime Minister Lucas Papademos told his turbulent coalition government earlier on Friday to accept the harsh international bailout deal or condemn the nation to disaster. "We cannot allow Greece to go bankrupt," he told a cabinet meeting. "Our priority is to do whatever it takes to approve the new economic program and proceed with the new loan agreement." Papademos, the sole technocrat in a coalition of feuding politicians, tried to assert his authority after six cabinet members resigned over EU and IMF demands for yet more pay, pension and job cuts in return for the financial rescue.

Parties delay crisis meetings, but Venizelos meets minister - Pasok and New Democracy pushed crisis meetings at their parties back by a day to Saturday, as the coalition government grappled with cabinet resignations and a fierce backlash against minimum wage cuts and other new austerity measures. But Finance Minister met with Pasok cabinet colleagues to try and curb the crisis in the face of growing European Union frustration over the slow pace of structural changes and difficulty in cut high deficits. Venizelos met at his office with the minister of Civil Protection Christos Papoutsis, Education Anna Diamantopoulou, Health Andreas Loverdos and Agriculture Costas Skandalidis. The finance minister got a hostile reception in Brussels on Thursday, when top eurozone officials told Greece to finalize austerity measures, provide written commitments from the three coalition parties, and push the new measures through parliament before the 130bn deal is approved.

Greece Plunged Into Political Turmoil Over Austerity Measures - Greek workers walked off the job for the second time this week on Friday in a snap 48-hour general strike called to protest new austerity measures the country must take to avert a disastrous default next month. The walkout came a day after the government reached a provisional deal with the so-called troika of foreign lenders — the European Commission, the European Central Bank and the International Monetary Fund — on the terms of a new loan program. The government of Prime Minister Lucas Papademos pledged to cut private sector wages by more than 20 percent, lay off thousands of civil servants and slash public spending. But skeptical creditors have demanded additional cuts to cover a $430 million shortfall created by the refusal of political leaders to slash supplemental pensions as well parliamentary approval and written commitments to the terms of the deal from the leaders of the three parties in Mr. Papademos’s coalition before additional funding is released. Condemning the new barrage of measures as “a tombstone” for Greek society, the country’s two main labor unions called the action on Thursday immediately after government officials announced the deal with creditors on the new austerity measures, which are expected to be voted on in Parliament on Sunday or Monday.

Greek police union wants to arrest EU/IMF officials (Reuters) - Greece's largest police union has threatened to issue arrest warrants for officials from the country's European Union and International Monetary Fund lenders for demanding deeply unpopular austerity measures. In a letter obtained by Reuters Friday, the Federation of Greek Police accused the officials of "...blackmail, covertly abolishing or eroding democracy and national sovereignty" and said one target of its warrants would be the IMF's top official for Greece, Poul Thomsen. The threat is largely symbolic since legal experts say a judge must first authorize such warrants, but it shows the depth of anger against foreign lenders who have demanded drastic wage and pension cuts in exchange for funds to keep Greece afloat. "Since you are continuing this destructive policy, we warn you that you cannot make us fight against our brothers. We refuse to stand against our parents, our brothers, our children or any citizen who protests and demands a change of policy," said the union, which represents more than two-thirds of Greek policemen.

Venizelos, uncut - Having been Schäubled late on Thursday, here’s the actual statement issued early on Friday by Greek finance minister Evangelos Venizelos.  We’ve emphasised the rousing, emotional stuff… (Via Google translate; original here if you read Greek)

Papademos Gets Cabinet Approval for 2nd Bailout - Greek Prime Minister Lucas Papademos won Cabinet approval for deeper budget cuts needed to secure a second package of international aid, preparing the way for parliamentary vote in his race to prevent financial collapse. The 287-page document was approved unanimously, said a government official who declined to be named. The backing means parliament will probably vote tomorrow on budget measures equal to 7 percent of gross domestic product over the next three years and a debt swap to cut 100 billion euros ($132 billion) off more than 200 billion euros of privately-held debt. “The social cost this program implies will be limited compared to the economic and social catastrophe that would follow if we don’t adopt it,” Papademos told his ministers earlier, according to a transcript of his comments. “The completion of the program and financial support will cement our country’s future in the euro area.” The support capped a week of tension as European Union and International Monetary Fund officials argued with Greek officials over the conditions to secure a 130 billion-euro ($172 billion) rescue package. Papademos on Feb. 9 reached an accord with leaders of the three parties supporting his interim government hours before a crucial meeting of euro-area finance ministers in Brussels, only to be told it needed more work.

Greeks inflamed by bail-out demands -- Greek workers erupted in fury and the government wobbled after the country’s foreign creditors demanded more budget cuts in exchange for a bail-out that is needed to ward off what could be a disorderly default next month. Financial markets were hit and the mood darkened before a parliamentary vote on Sunday that Greek political leaders have cast as a referendum on whether the country would remain a member of the single European currency As the vote drew near, Lucas Papademos, the Greek premier, scrambled to shore up his coalition. Late on Friday the cabinet finally approved the bill. Earlier, five ministers had resigned in protest at the wage and pension cuts that international lenders have demanded before they will sign off on a €130bn bail-out. Four were from the rightwing Laos party, whose leader, George Karatzaferis, said he would oppose the measures in Sunday’s vote. He blamed Germany, the eurozone’s biggest economy, for trampling on the countries of the southern Mediterranean. “We were robbed of our dignity, we were humiliated. I can’t take this. I won’t allow it,” Mr Karatzaferis said, adding that Greece “could do without the German boot.”

Violent Protests in Greece; 6 Cabinet Members Resign; LAOS leader "I Would Rather Starve Than be Under German Jackboot"; Controversy Over Missing Paragraphs - Imagine you are asked to sign a document but three pages were missing. Further imagine the documents you were asked to sign were written in English but you only speak Greek. Would you sign? That is exactly the predicament Greek officials were placed in by the Troika. Here is the story sent to me by Demetri Kofinas at Capital Account. George Karatzaferis leader of LOAS political party gave a speech today addressing why he refused to sign this latest agreement. In his speech, he said that he asked for a translated document of the agreement so that he could read it and sign it since his English is not as good as Papademos'.  When he got a copy, it was not only smaller than the English version, but was also missing pieces, including the last paragraph! He refused to sign it because he felt pressured and wants more time. The video is in Greek so not many can understand it. Moreover, the video was somewhat garbled and some things do not easily translate, so I do not have a good account of the missing paragraphs, but it is clearly absurd that anything should be missing.

Greece vows to push through austerity warns of default 'chaos'  Greece's future in the eurozone came under renewed threat Friday as popular protests again turned violent and dissent grew among its lawmakers after European leaders demanded deeper spending cuts. The country's beleaguered coalition government promised to push through the tough new austerity measures and rescue a crucial euro130 billion ($170 billion) bailout deal after six members of the Cabinet resigned. Prime Minister Lucas Papademos promised to "do everything necessary" to ensure parliament passes the new austerity measures that would slap Greeks with a minimum wage cut during a fifth year of recession. He also promised to replace any other Cabinet members who did not fully back his efforts.  Earlier Friday, the small right-wing LAOS party in Papademos' coalition said it would not back the new measures and four of its officials in the cabinet resigned, including the country's transport minister. Two Socialists cabinet members have also quit. LAOS leader George Karatzaferis said rescue creditors had humiliated Greece. "Of course we do not want to be outside the EU, but we can get by without being under the German jackboot," he said. "I would rather starve."

Greek premier says default would lead to 'chaos' - Greece's future in the eurozone came under renewed threat Friday as popular protests again turned violent and dissent grew among its lawmakers after European leaders demanded deeper spending cuts. In central Athens, clashes erupted outside Parliament between dozens of hooded youths and police in riot gear. Police said eight officers and two members of the public were injured, while six suspected rioters were arrested. The violence broke as more than 15,000 people took to the streets of the capital after unions launched a two-day general strike that disrupted transport and other public services and left state hospitals running on emergency staff.Scores of youths, some in gas masks, used sledge hammers to smash up marble paving stones in Athens' main Syntagma Square before hurling the rubble at riot police.

Greek Endgame in Sight - We have been hearing about the oncoming endgame to the Greek saga for almost two years now. Several developments have occurred in the past few months that may make the prediction come true sooner rather than later.  The first is a seeming shift in the attitudes of European leaders. They are not blinking in the face of Greek government resistance to the punitive conditionality of the loan agreement. In fact, they are asking for such extreme measures in the face of a complete collapse of the Greek economy that one is forced to wonder whether their aim is rather to “volunteer” Greece for a default and, perhaps most of all, a euro exit. In any case, the tone of the debate has changed considerably, with many more European voices openly discussing the scenario of a default and euro exit, some confidently asserting that Greece’s collapse will not be Lehman. The second development is the dramatic, but unsurprising deterioration in economic and social conditions in Greece. Contrary to the media echo chamber rumors, Greece has managed to comply with the “internal devaluation” imperative quite well. The fiscal adjustment has been in the magnitude of 6% GDP in the course of a year and in the middle of a continued recession. Wages and pensions have been reduced, even though they are still higher than Bulgaria-as the troika indignantly points out. Consumer prices have remained stable, as nothing has been done to bust retail cartels and monopolies. Real wages have thus decreased significantly.

Banks Come First in a Greek Rescue Plan — It now appears that Europe is prepared to pay what it needs to pay to save its banks. But not to rescue Greece. Once again, there is optimism that a new round of European talks are going to result in an announcement of a Greek bailout. On Thursday, the Greek political parties caved in and agreed to a new austerity package that will satisfy the latest European demands. When other loose ends are tied up, it appears the Greeks will have given up their principal bargaining chip — the threat that if they are allowed to collapse, they will take the European financial system with them. If that happens, then at some point down the road, when it turns out that Greece has again fallen short of its deficit reduction targets, Germany will again demand more sacrifices. If the Greeks refuse, then the rest of Europe could be in a position to let Greece go.

Marshall Auerback: Greece and the Rape by the Rentiers - Here’s the draft of the supposed agreement to “sort out” the Greek debt problem once and for all. According to Bloomberg, here are the essentials:

    • Greece’s 2012 GDP will shrink by as much as 5%.
    • • Greece is expected to return to growth in 2013.
    • • Greece will cut 15,000 in state jobs in 2012.
    • • Minimum wage will be cut by 20 percent.
    • • There will be no increase to sales tax.
    • • The government will cut medicine spending will fall from 1.9% to 1.5% and merge all auxiliary pension funds.
    • • It will also sell stakes in six companies—in particular, energy companies and refineries.

Of course, the current thrust of fiscal policy will almost certainly guarantee that there still will be a default, involuntary or otherwise, in spite of this agreement. If you don’t have a mechanism to allow growth, then how can the Greeks service their debt, even with the reduced debt burden?

The Grexit is coming sooner or later - Edward Harrison - I wrote this outline for Italy in November before the ECB’s Italian job. I didn’t and still don’t see an Italian exit or default as a baseline. However, a Greek exit for the eurozone has been my baseline for a number of months. Citigroup’s Willem Buiter has talked a lot about this recently. He and his colleagues call it "Grexit". Business Insider’s Simone Foxman has a good synopsis of that view. Here’s how I see it happening, based on my Italian default post.

  1. Plan. The Greek government can plan for a redenomination into New Drachma in secret that takes advantage of the Greek law jurisdiction over their sovereign debt obligations.
  2. Law. “Euroization” would remain in place and the euro would continue as the currency of physical payment. However, New Drachma would become the national currency, pegged at 340.75, exactly the same rate as the Drachma was fixed on 19 June 2000 and converted into euros on 1 January 2002. All debt under Greek law would be redenominated into New Drachma at the 340.75 New Drachma exchange rate peg. This would effectively bring us back to 31 December 2001 for Greece.
  3. Taxes. The government would announce that henceforth it will tax exclusively in New Drachma. All municipal governments would be required by law to tax in New Drachma. 
  4. Banks. Like the Argentines before them, the Greek government would convert all euro bank accounts legally into New Drachma.
  5. Retail. Retailers, all sellers of Greek goods, would then be forced to return to the double accounting treatment of pre-2002 whereby they denominate all transactions in both Drachma and Euros.
  6. Float. On day one, immediately after redominating, the Greek government would drop the 340.75 New Drachma exchange rate peg and float the new Drachma as a freely floating currency.
  7. Physical currency. New Drachma would be printed by the Bank of Greece and introduced to replace euros.

A Job Creation Strategy for Greece - No matter what happens on Sunday, when the Greek parliament is scheduled to vote on the latest bailout package, on Monday Greece will wake up in the grip of an employment crisis (20 percent unemployment, with a near 40 percent youth unemployment rate).  In the Huffington Post Dimitri Papadimitriou tells us what we can (and can’t) do about it. Depending on the Greek private sector alone to produce enough jobs to stave off these socially corrosive levels of unemployment is unrealistic.  Drawing from a report on the Greek labor market recently produced by the Levy Institute, Papadimitriou lays out the case for direct public service job creation.  As Papadimitriou points out, Greece is currently experimenting with a similar, small-scale version of the idea: … a better option is being tried on a small scale: A labor department direct public service job creation program with an initial target of 55,000 jobs. Participants are entitled to up to five months of work per year, in projects — implemented by non-governmental organizations — that benefit their communities. A similar, streamlined, Interior department program, this one without NGO participation, will generate up to 120,000 openings. Read the whole thing here at HuffPo.

Spain sees economic slump deepening in 1st quarter 2012 - Spain warned Thursday its jobs-starved economy will shrink at an even faster rate in the first quarter of 2012, plunging the country back into recession. Economy Minister Luis de Guindos gave the grim forecast, piling on the agony after the economy shrank 0.3 percent in the final quarter of 2011 with a soaring unemployment rate of nearly 23 percent. "The first quarter will be tough, very tough, this quarter could probably be the worst, worse than the final quarter of last year," the minister told Onda Cero radio. "Nevertheless I hope that the second quarter will be a bit less bad and that in the second half of the year we will already have a situation of stabilisation." A recession is broadly defined as two consecutive quarters of economic contraction. Spain emerged only at the start of 2010 from an 18-month recession triggered by a global financial crisis and a property bubble collapse that destroyed millions of jobs and left behind huge bad loans and debts.

Spain’s leader says towering jobless rate to rise further - Spain’s right-leaning Prime Minister Mariano Rajoy warned yesterday that the country’s near 23% unemployment rate will rise even further this year. Spain’s unemployment rate hit a 17-year record of 22.85% at the end of 2011 – the highest in the industrialised world – as the number of job seekers shot above the 5mn barrier. “It is hard to imagine a worse starting point for this session,” Rajoy, who took power in December after his Popular Party won by a landslide in November 20 elections, told parliament’s lower house. “For unemployment, the situation could not be worse,” the grey-bearded, 56-year-old Spanish leader said. “We find ourselves in a critical situation with an unemployment rate of 22.9%,” he said. “Unfortunately, these figures will not get better in the short term. More than that; in 2012 they will get worse.”

In Europe, Stagnation as a Way of Life - Because of the various, often incremental, steps European officials have taken during the nearly three-year debt difficulties that began in Greece, the crisis fever has cooled considerably in recent months — including fears that the euro currency union might suddenly fall apart.  But crisis has given way to a grinding reality for Europe: economic stagnation and even, for much of the Continent, the specter of another downturn less than three years after the last recession ended.  Greek leaders on Thursday agreed to a new set of tough austerity measures, in hopes of receiving a new 130 billion-euro bailout package from the European Union and International Monetary Fund, aimed at avoiding a debt default in March. That agreement, though, is in some ways a microcosm of Europe’s broader quandary, as similar measures are being embraced by other debt-saddled countries in the euro currency union, including Portugal and Ireland.  Many analysts say the belt-tightening can only push those and other nations further into recession, sap the economies of their European trading partners and do little to address the systemic weaknesses plaguing Europe’s banks.

What's next for Europe? - The European Central Bank has thrown cold water on the sovereign debt crisis by injecting billions of euros into the banking system, but the embers of the crisis are still smoldering. S&P says the eurozone has a 40% chance of entering a severe recession this year, with the economy projected to shrink by as much as 2%. Unless comprehensive reform creates a much tighter fiscal union, uncertainty will continue to cast a dark cloud over Europe's economic future. It may seem as if Europe is out of the woods. Bond yields for Italian, Spanish and French debt have come off their record highs from last year, allowing the countries to issue more debt at lower interest rates. Greece has received some much needed breathing room and has been able to negotiate massive haircuts on its debt with its private creditors, many of which are hedge funds and investment banks here on Wall Street. And most importantly, European banks are no longer facing an imminent liquidity event, sparing the continent of a Lehman-like shock to its financial sector. The root of all this easing comes from the European Central Bank's decision in December to flood the eurozone banking system with cheap cash. The ECB's long-term refinancing offering (LTRO) saw nearly half a trillion euros injected into the banking system in one major slug. A second LTRO auction is scheduled for the end of the month, which is anticipated to be as large as the December auction.

Britain Prepares for Worst as EU Strives to End Euro Crisis -- As a debt-crisis remedy eludes European leaders, Britain is readying its economic defenses amid warnings that a breakup of the euro would spell havoc for the U.K. economy. Though Britain has long refused to join the single currency, deep financial, trade and investment ties mean an escalation of the crisis might “snowball” and hurt the U.K., according to economist Philip Rush at Nomura Holdings Inc. in London. Almost half of British exports go to the 17 euro nations and U.K. banks are exposed to more than $1 trillion of borrowings in the region. “What happens in the euro zone effectively determines what happens in the U.K.,” Rush said in a telephone interview. “You look at how correlated euro-area and U.K. growth are historically and it is clear how integrated the U.K. is with the euro area.”

British pensions face 85 bln pound deficit-study - British companies with defined benefit pension schemes are likely to face rising pressure to plug deficits that could grow by 85 billion pounds ($134 billion) this year against a backdrop of falling bond yields and prolonged market volatility, a survey on Tuesday showed. If equity markets drop 10 percent more, UK gilt yields fall another 30 basis points and inflation stays just below 5 percent, UK defined benefit pension funds could see deficits spiral, pension liability insurer Pension Insurance Corporation (PIC) estimates in its latest Pension Risk Tracker Index. Benefits under these schemes are pre-determined using a formula based on salary and duration of employment. "The possible impact on funding positions of QE (quantitative easing), tension in the Middle East and a Greek default might be expected to be significant. Combined, they could prove devastating," said David Collinson, Co-Head of Business Origination at PIC. The Bank of England looks set to plough on with a third round of quantitative easing this week to shore up Britain's economy. This will further depress the yield of UK gilts, a pension fund's staple investment, making it more expensive for funds to match income to liabilities unless they add riskier, higher-yielding assets to portfolios.

Fears of recession return as retail sales fall - RETAIL sales fell last month, making it the second-worst January since 1995 and raising fears that Britain is poised to return to recession. According to the latest British Retail Consortium (BRC) data, only January 2010 was worse after food sales slowed sharply following a boost over Christmas. Like-for-like retail sales fell by 0.3 per cent last month. In January 2011 they rose by 2.3 per cent, picking up after the snow disruption in December 2010. Including new space, retail sales rose by 2.1 per cent last month, against a 4.2 per cent increase in January 2011. The BRC said that on both measures it was the second-worst January since the survey began in 1995. The trade body blamed a sharp slowdown in food sales as consumers reined in their belts after the Christmas festivities.

48,000 empty shops blight UK high streets - Britain's high streets are blighted by 48,000 vacant shops, according to the latest figures to highlight the problems afflicting the retail sector. During 2011, 14.3pc of all shops stood empty, equating to 48,000 units on shopping centres, retail parks and high streets, Local Data Company figures showed. This is a very modest improvement on the 14.5pc rate recorded a year ago, but nonetheless significantly worse than in 2009, when the average rate was 12pc, and 2008 when it was 5.5pc. The figures come just three days after Mary Portas, the Government's High Street "tsar" announced that 12 rundown high streets could bid to share a £1m fund to help revitalise their areas. Matthew Hopkinson, director at LDC, said: "I do worry that 2011 will prove to be a false dawn of stability. We know that 50pc of all shops' leases are up for renewal between now and 2015 and many just won't be renewed."

Cameron and the Confidence Fairy: An Update - Krugman - Back in June 2010, when George Osborne unveiled the Cameron government’s austerity plan, it was all about confidence: Higher interest rates, more business failures, sharper rises in unemployment, and potentially even a catastrophic loss of confidence and the end of the recovery. We cannot let that happen. This Budget is needed to deal with our country’s debts. This Budget is needed to give confidence to our economy. This is the unavoidable Budget. So how’s it going? The Cameron government likes to point to low British interest rates — which are not just the result of safe-haven flight into the bonds of every advanced-country government that still has its own currency. Except, actually they are: Still, the government’s commitment to fiscal responsibility has led to rising consumer confidence. Or, actually, not: Business confidence! That’s the ticket! Or, well, no: Still, Serious People are sure that the policy was necessary and is yielding results. I wonder what it would take to convince them otherwise.

To QE or not to QE? That is the question - The ducks, it seems, are all lined up in a row. Gross domestic product fell in the final quarter of last year, inflation is falling and the money supply is weak. Sir Mervyn King gave a broad hint in his first big speech of the year that he and colleagues on the Bank of England’s monetary policy committee (MPC) stand ready. It will be s surprise if there is not an announcement on Thursday at noon. I am talking about the Bank deciding to increase its asset purchases, to add to the £275 billion of quantitative easing (electronically creating or “printing” more money) to boost the economy. Since October, when the MPC announced an additional £75 billion of quantitative easing (QE), in response to “increased downside risks” for both growth and inflation, the markets have been waiting for this moment.

Bank of England restarts QE with £50bn stimulus - Bank of England policy-makers have moved to inject life into Britain's ailing economy by announcing additional £50bn stimulus through quantitative easing. The Bank's Monetary Policy Committee's decision takes the total spent on QE to £325bn, since the beginning of the programme in March 2009. Interest rates were unchanged at 0.5pc. Further quantitative easing (QE) is likely to spell bad news for people set to retire this year as annuity rates plummet, leaving pensioners facing high living costs and low returns on their savings. Dr Ros Altmann, director-general of Saga, said the "short-term stimulus" of QE has "very dangerous long-term consequences".

Money, like hat-wearing, depends on convention, not laws - The Scottish pound already exists. Royal Bank of Scotland, Bank of Scotland and Clydesdale Bank issue their own notes. These notes circulate widely in Scotland, alongside those of the Bank of England. These Scottish bank notes are not legal tender in Scotland or anywhere else. The Bank of England notes are not legal tender in Scotland either. The only legal tender for the settlement of a debt in Scotland is coins from the Royal Mint. But if you try to buy a house in Scotland with pound coins, your offer will not be well received. Legal tender is a concept with no practical relevance. The currency that is accepted is the currency people are willing to accept. The issue of legal tender in Scotland was clarified when a Scotsman, presumably trying to make a point, attempted to pay a local authority in Scottish banknotes. The local authority, presumably also trying to make a point, rejected his offer. The court told them all not to be silly. A debt can be settled by an offer any reasonable person would accept. This is the practice, and probably the law, everywhere, including Scotland. Scottish banknotes are widely accepted in London, because Marks and Spencer – and cabbies – knows what they are and can treat them as cheques, which their bank will readily accept. But they are not a medium of exchange because many people, unfamiliar with or suspicious of the signature, are reluctant to accept them. The currency that is accepted is the currency people are willing to accept.

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