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

Saturday, February 18, 2012

week ending Feb 18

Fed To Buy Treasurys Due 2036 To 2042 - The Federal Reserve is scheduled to buy Treasury securities on Thursday for its stimulus plan that extends the average maturity of the U.S. government debt sitting on its balance sheet. The central bank plans to purchase $1.5 billion to $2 billion in long-dated bonds due between February 2036 and February 2042. There will be six purchase operations left this month following Thursday morning's action. In total, the so-called Operation Twist accommodation effort will have the Fed exchange $400 billion of its short-term Treasury securities for longer-dated ones. This month, the central bank will purchase $45 billion in U.S. government debt through 15 operations and sell about $43 billion via six sales.These purchases are aimed at keeping the Fed's balance sheet size steady. By purchasing longer-term Treasurys, the Fed hopes to push long-term borrowing costs lower for consumers and businesses to facilitate the economic recovery.The Fed funds rate was last at 0.115%, within the central bank's 0%-0.25% target range.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--February 16, 2012

SF Fed President Williams: "Vital that we keep the monetary policy throttle wide open" - From San Francisco Fed President John Williams: The Federal Reserve’s Mandate and Best Practice Monetary Policy. Excerpt: What does this tell us about where monetary policy should be now? Inflation in 2012 and 2013 is likely to come in around 1½ percent, below the FOMC’s 2 percent target. And clearly, with unemployment at 8.3 percent, we are very far from maximum employment. At the San Francisco Fed, our forecast is that the unemployment rate will remain well over 7 percent for several more years. This is a situation in which there’s no conflict between maximum employment and price stability. With regard to both of the Fed’s mandates, it’s vital that we keep the monetary policy throttle wide open. This will help lower unemployment and raise inflation back toward levels consistent with our mandates. And we want to do so quickly to minimize total economic damage. The longer we miss our objectives, the larger the cumulative loss to the economy. QE3 is coming.

Fed's Plosser calls for halt to more easy money‎ - (Reuters) - Federal Reserve policymakers are turning to cars to illustrate just how split they are over what if anything to do about the U.S. economy, with some eying the brake pedal and others the gas. Philadelphia Fed President Charles Plosser on Tuesday decried the "accelerationist approach to monetary policy" among some of his colleagues, pointing to signs of economic improvement as reason enough for the U.S. central bank to stand pat on rates for now. The comments step up Plosser's longstanding opposition to the Fed's ultra-easy policies, and came less than a day after San Francisco Fed President John Williams said it "is vital that we keep the monetary policy throttle wide open" to reduce unemployment and bring inflation back up to more desirable levels. Yet the mixed messages can confuse investors and underscore the difficulty Fed Chairman Ben Bernanke faces in assuring markets that the Fed is committed to supporting the economy for as long as it takes, even while some policymakers disagree on how long that will be.

Plosser Says Further Easing Would Put Fed on 'Treacherous Path'-- Philadelphia Federal Reserve Bank President Charles Plosser said that further efforts to boost economic growth could increase risks of rising prices and instability in financial markets. “Despite the extraordinary steps taken to support the economy, many argue that monetary policy should do more,” Plosser said. “I disagree and believe that doing so would lead us down a very treacherous path -- one that would be ever more difficult to navigate and one that would increase the already substantial risk of higher inflation.” Plosser said he opposed the Federal Open Market Committee’s January announcement that economic conditions may warrant holding interest rates near zero through at least late 2014, replacing an earlier pledge to keep borrowing costs low through mid-2013. “The problem is not just inflation risk down the road,” Plosser said. “Prolonged efforts to hold interest rates near zero can lead to financial market distortions and the misallocation of resources.”

US Fed Ready to Stimulate - More US Fed money printing will flow on any weakness in the US economy or Stock market. The minutes of January's Federal Open Market Committee released Wednesday leave little doubt IMO that the US Fed is ready, willing, and able to print more money: A few members observed that, in their judgment, current and prospective economic conditions-including elevated unemployment and inflation at or below the Committee's objective; could warrant the initiation of additional securities purchases before long. Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2% over the medium run. Shayne and I expect any weakness in the US economy or the stock market will be followed by more money printing by the Fed, which has some catching up to do with the European Central Bank. In the past 6 months, the Fed's balance sheet expanded only US$60-B, while the ECB's balance sheet ballooned the equivalent of US$640-B.  What is more, we believe that the ECB will do another big cash-for-paper swap on 29 February. The ECB will accept credit card receivables, residential mortgages, leasing contracts, foreign currency loans, and other stuff as collateral.

Fed’s Fisher Dismisses QE3 as ‘Wall Street Fantasy’ -- Dallas Federal Reserve President Richard Fisher on Wednesday described the potential for a new round of stimulus from the central bank a “Wall Street fantasy,” adding the chances of it happening are almost nil. There won’t be a new round of Fed stimulus “unless there is some extreme crisis that none of us can presently foresee,” he said, speaking to reporters after a speech to a manufacturing group here. “In my view, it’s not going to happen,” he said. “It’s a fantasy. Wall Street keeps dangling QE3 out there [but] I just don’t see it happening.” Fisher, a critic of the Fed’s previous stimulus effort, known as QE2, said economic data has been on the upswing, albeit at a slow pace. He also noted that the Fed received significant political “blowback” on Capitol Hill after its previous stimulus effort but has since built back some goodwill. He said the Fed is unlikely to risk jeopardizing that “unless it were glaringly necessary.”

FOMC Minutes: A few members argued current conditions "could warrant" QE3 "before long" - From the Fed: Minutes of the Federal Open Market Committee, January 24-25, 2012. Excerpts: In light of the economic outlook, almost all members agreed to indicate that the Committee expects to maintain a highly accommodative stance for monetary policy and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014, longer than had been indicated in recent FOMC statements. In particular, several members said they anticipated that unemployment would still be well above their estimates of its longer-term normal rate, and inflation would be at or below the Committee's longer-run objective, in late 2014.The Committee also stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability. A few members observed that, in their judgment, current and prospective economic conditions--including elevated unemployment and inflation at or below the Committee's objective--could warrant the initiation of additional securities purchases before long.

Fed Watch: Will They Or Won't They? - Calculated Risk reads this passage in a recent speech by San Francisco Federal Reserve President John Williams: This is a situation in which there’s no conflict between maximum employment and price stability. With regard to both of the Fed’s mandates, it’s vital that we keep the monetary policy throttle wide open. and concludes: QE3 is coming. Dallas Federal Reserve President Richard Fisher states:“In my view, it’s not going to happen,” he said. “It’s a fantasy. Wall Street keeps dangling QE3 out there [but] I just don’t see it happening.” I guess we are going to see who knows more about monetary policy - CR or Fisher. My instinct tells me CR, but Fisher seems just a little too certain to dismiss entirely. Reviewing the most recent minutes, one find to the now oft-repeated line: A few members observed that, in their judgment, current and prospective economic conditions--including elevated unemployment and inflation at or below the Committee's objective--could warrant the initiation of additional securities purchases before long. Presumably, Williams is among the few.  In my book that is three or less, which is well short of the the majority necessary to shift policy. That said, the next line of the minutes is: Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.

A Few Head Scratchers In Some Fed Statements - Documents released by the Federal Reserve this week left Fed watchers struggling to divine the difference between phrases like “a few” and “a number.” It’s the type of head-scratching the central bank’s carefully-crafted statements and minutes have long produced and continue to generate, despite the Fed’s recent push to communicate more clearly. Economists parsing the “summary of economic projections” released Wednesday along with the minutes of the Fed’s Jan. 24-25 policy meeting puzzled over the descriptions of how many Fed officials were prepared to start buying more bonds this year to boost the recovery, compared with how many wanted to wait to see if the economy weakened before taking more action. “A few participants’ assessments of appropriate monetary policy incorporated additional purchases…,” the minutes said, while “a number of participants indicated that they remained open to a consideration of additional asset purchases if the economic outlook deteriorated.” Several Fed watchers thought “a few” translated into a smaller group of officials than “a number.” “In Fedspeak, ‘a number’ is greater than ‘a few,’”  A “few” probably means in the range of three officials, while “a number” is more in the ballpark of five, . “There clearly was information being transmitted in those two different phrases,”

How are we doing? - Atlanta Fed's macroblog - Near the beginning of the minutes of the January meeting of the Federal Open Market Committee (FOMC), released yesterday, you'll find a reiteration of the FOMC's historic decision explicitly endorsing a numerical definition of long-run price stability: "The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." The minutes include the motivating force behind this decision:"The Chairman noted that the statement was intended to help enhance the transparency, accountability, and effectiveness of monetary policy." Atlanta Fed President Dennis Lockhart provided his interpretation of this numerical inflation objective: "The 2 percent inflation target is an aid to understanding how the FOMC will react to developments in the economy within an overarching approach that can be called 'flexible inflation targeting.' "The word 'flexible' describes and qualifies the committee's exercise of judgment in reaction to adverse developments. The word 'flexible' also reflects the principle that it is not always feasible or desirable to hit the target in the short run. Short-lived shocks to the economy can temporarily move measured inflation well away from the 2 percent target." The thinking behind that statement can be clearly seen in the following chart, which illustrates the volatility of annualized inflation rates as the horizon extends from one to five years:

Tug of war at the Federal Reserve - The release of the minutes from the January 24-25 monetary policy meeting at the Fed highlighted the divide on the central bank's rate-setting committee. On one side are the "doves," who would like to ease monetary policy further to try and bolster the recovery. At the very least, this group would like to push forward with the current commitment to keep interest rates at near-zero levels through the end of 2014. On the other side of the debate are the "hawks" on the committee, who would like to begin tightening policy with interest-rate hikes as soon as possible. Why can't the two sides agree on the direction rate-policy should take? One problem is that the Fed is in unknown territory. It's quantitative easing policies to date have pushed far beyond anything that has ever occurred in the past. Thus, there is no precedent to turn to when assessing the inflation risks these policies have created.  The uncertainty over risk leaves room for disagreement. Hawks believe inflation risks are high, while doves believe they are low. The doves seem to have the better argument. Presently, the Fed is running below its stated inflation target and financial markets do not appear to be concerned with the longer run inflation outlook. The yields on long-term Treasurys, for example, remain historically low, indicating the bond market isn't expecting much in the way of future inflation.

Federal Reserve Unlikely to Buy More Assets -— The Federal Reserve is not inclined to begin a round of asset purchases unless economic conditions deteriorate, according to the minutes of the most recent meeting of its policy-making committee. The Fed’s leaders did not see evidence that growth is accelerating, according to the minutes of the committee’s Jan. 24-25 meeting, released Wednesday. The central bank continued to forecast that the domestic economy would grow only modestly over the next year. But most members of the Fed’s policy-making committee agreed that slow growth was not a sufficient reason to expand the central bank’s economic aid campaign. Only “a few” argued the Fed should try harder to address problems like the persistently high rate of unemployment, the minutes said. The Fed has not expanded its portfolio in more than half a year, and the minutes suggested it was unlikely to do so unless “the economy lost momentum” or inflation fell below 2 percent and seemed likely to stay for a while.

NY Fed Survey: Most Prim Dealers See Fed 1st Hike Q2 2014 - The following are excerpts from the New York Federal Reserve Bank's January survey of primary dealers published Thursday:  Do you expect any changes in the FOMC statement and, if so, what changes? Nearly all dealers expected the FOMC's forward rate guidance language in the FOMC statement to be revised at the January meeting. Several dealers expected that the statement would reference or be consistent with FOMC participants' federal funds target rate projections to be provided in the advance projection materials from the Summary of Economic Projections (SEP). Several dealers believed that the Committee would drop the phrase "at least through mid-2013" from the statement entirely, while some predicted that the calendar-based guidance would remain, but be pushed out further into the future. A couple of dealers expected the statement to include guidance on the Federal Reserve's balance sheet.  A few dealers expected an upgrade to the Committee's assessment of economic conditions in the statement, with a couple specifically citing expectations for language pointing to improved labor market conditions. However, a few dealers expected the statement to continue to focus on strains in the labor market, while a couple expected the statement to contain a reference to the state of the housing market. A few dealers did not expect the assessment of economic conditions to change materially from the December statement.

Fed hasn’t silenced markets, Williams says - Federal Reserve policymakers have long watched markets to gauge what investors think is in store for interest rates and the economy. Some – like former Fed Governor Kevin Warsh – have worried that the Fed’s unprecedented purchases of trillions of dollars of U.S. Treasuries and its long-term guidance on the future path of interest rates shuts off a key source of policy-guiding information. The Fed’s recent decision to publish policymakers’ interest-rate forecasts will make the problem worse, he predicted in a speech at Stanford University last month. In some sense I have partially been made blind by these asset purchases. I, for one, consider financial markets an incredibly useful source of information. If the markets take the Fed’s projections and build that into their own, then the Fed won’t have a full set of gauges in front of them. The markets will simply be a mirror to what they say. Now comes San Francisco Fed President John Williams with a research paper that argues, to put it bluntly, that Warsh is wrong – that markets are providing just as much information about expectations for Fed policy as they did in the days before the Fed had bought $2.3 trillion in long-term securities and began signaling short-term rates would stay low for years.

New York Fed to Take More Direct Role in Repo Market - The bond market’s inability to reform the market where Wall Street goes to borrow and lend fixed-income securities is leading to more direct involvement from the Federal Reserve Bank of New York. At issue is the state of the triparty repo market. This sector is the backbone of bond trading and its high-volume trades are very short term in nature. Since the financial crisis, the market has been beset by problems, among them issues with the documentation of trades. And because the market is dominated by short-term activity, a loss of confidence in a particular firm can kill its access to credit and potentially kill the institution, which can, in turn, create problems for the broader functioning of financial markets.

Fed Official: Swaps Lines Have Eased Market Strains - The Federal Reserve‘s action to provide emergency access to dollar funding for foreign central banks has helped ease market strains, but the situation will only be resolved if European officials follow through on plans to address their debt troubles, a Fed official told senators Thursday. Steven Kamin, director of the Fed’s division of international finance, sought to allay lawmakers’ concerns that the swap lines could hit taxpayer wallets. The Fed hasn’t “lost a penny,” he said, stressing that the financing carries no exchange rate or interest rate risk to the central bank.

Bernanke: Low Rates Boost Banks’ Long Run Profitability - Federal Reserve Chairman Ben Bernanke said Thursday the central bank’s ultra-low interest rate policy should boost banks’ profitability in the long run, but that monetary policy decisions do take into account how financial institutions are affected. Bernanke told community bankers the Fed understands concerns that low rates may be squeezing net interest margins and that more stringent regulations may hamper lending activity, but he defended both monetary and regulatory policies undertaken by the central bank in the wake of the financial crisis.

The New York Fed Acknowledges the Fed's Superpower Status - I have made the case many times that the Fed is a monetary superpower.  It controls the world's main reserve currency and many emerging markets are formally or informally pegged to dollar. Consequently, its monetary policy gets exported across much of the globe. The other two monetary powers, the ECB and the Bank of Japan, are therefore mindful of U.S. monetary policy lest their currencies becomes too expensive relative to the dollar and all the other currencies pegged to the dollar. As as result, the Fed's monetary policy gets exported to some degree to Japan and the Euro area as well.  This understanding also weaves nicely into the shortage of safe assets story.  Back in the early-to-mid 2000s the Fed's loose monetary policy meant dollar-peggers had to buy up  more dollars to maintain their pegs.  These economies then used the dollars to buy up U.S. debt. This increased the demand for safe assets and further drove down yields.  Now these developments are only the cyclical part of the safe asset problem--there was also a structural shift in demand for safe assets coming the emerging world--but it is an important part of the story. I bring this up because Andrea Ferrero of the New York Fed has a new paper that makes a similar argument.  He, however, uses more formal modeling than me and notes the implications for the current account deficits.  He is careful not to say the Fed's monetary superpower status was the only factor, yet finds that it was quantitatively important.

Bubbles and Economic Potential - Krugman - The ongoing discussions of economic policy and principles since the Great Recession struck have, I have to say, been a source of continuing revelation. Again and again one sees people with seemingly sterling credentials — Federal Reserve presidents, economists with Ph.D.s from good schools — propounding views that I thought were obvious fallacies, at least to anyone who had studied the subject a bit. And the hits just keep coming. The latest, via Scott Sumner, is St. Louis Fed president James Bullard’s suggestion (pdf) that the bursting of the housing bubble has permanently reduced U.S. potential output: A better interpretation of the behavior of U.S. real GDP over the last five years may be that the economy was disrupted by a permanent, one-time shock to wealth. In particular, the perceived value of U.S. real estate fell substantially with the 30 percent decline in housing prices after 2006. This shaved trillions of dollars off of the wealth of the nation.  This has lowered consumption and output, and lower levels of production have caused a significant disruption in U.S. labor markets. Wow. I often encounter the fallacy of confusing supply with demand, where people say, “spending was boosted by the bubble, so the GDP you see then was greater than potential”. But Bullard goes even further, seeming to say that a drop in asset prices is itself a destruction of output capacity. What? And yet we have David Andolfatto apparently endorsing this view, and Tyler Cowen at least expressing sympathy. What is going on?

The Great Sectoral Non-Shift - Krugman - Brad DeLong replies to my point about bubbles and potential output by arguing for some possible effects on labor force participation. I guess that’s possible, although the housing bubble years were not, in fact, marked by especially high participation. And it’s also clearly not at all what Bullard, Cowen, or Andolfatto are saying; Bullard in particular is clearly talking about the disappearance of paper wealth as somehow dealing a blow to physical capacity. But I’d also like to stress a related point. Brad doesn’t actually fall into this fallacy, but you often find people writing about the Great Recession and subsequent Lesser Depression as if they were largely about trying to find a place for all the people formerly employed in construction. And the fact is that this just isn’t right. As Larry Mishel shows, the unemployment rate would be almost as high as it is even if we ignore everyone in or formerly in construction. Here’s another take, looking at the decline in total employment and the role of construction in that decline: This has been a very broad-based slump, with employment declining across the board, not just in construction. Which is clear evidence that it’s about a general deficiency of demand, not the need to move workers out of the wrong sectors into the right ones.

Fed Watch: It's Worse Than You Think - Tim Duy - The last few days have seen a number of reactions to St. Louis Federal Reserve President James Bullard's recent speech, inflation targeting in the USA. Critical reactions came from Scott Sumner, Noah Smith, Mark Thoma, and Paul Krugman. I think so far the only real support for Bullard comes from David Andolfatto here and here. Bullard was moving in this direction last month, but he really didn't outline his thinking. Now he has, and sadly revealed that there really wasn't that much thinking at all. Bullard attempts to argue against the "output gap" framework shaping monetary policy: The recent recession has given rise to the idea that there is a very large “output gap” in the U.S. The story is that this large output gap is “keeping inflation at bay” and is fodder for keeping nominal interest rates near zero into an indefinite future. If we continue using this interpretation of events, it may be very difficult for the U.S. to ever move off of the zero lower bound on nominal interest rates.  I want to now turn to argue that the large output gap view may be conceptually inappropriate in the current situation. First off, Bullard just flat out does not understand the definition of potential output: The key to the large output gap story is the use of the fourth quarter of 2007 as a benchmark for where we expect the economy to be today. The idea is to take that level of real output, assume the real GDP growth rate that prevailed in the years prior to 2007, and project out where the “potential” output of the U.S. should be. Estimates of potential GDP are not simple extrapolations of actual GDP from the peak of the last business cycles. They are estimates of the maximum sustainable output given fully employed resources. The backbone of the CBO's estimates is a Solow Growth model.

More On the Sectoral Non-Imbalance - Paul says But I’d also like to stress a related point. Brad doesn’t actually fall into this fallacy, but you often find people writing about the Great Recession and subsequent Lesser Depression as if they were largely about trying to find a place for all the people formerly employed in construction. And the fact is that this just isn’t right. As Larry Mishel shows, the unemployment rate would be almost as high as it is even if we ignore everyone in or formerly in construction. The basic story is one of misallocation of resources, but you can slice the resource picture dozens of ways and not get anything that could plausiable be called mal-investment. You can see this in part by the fact that the price of houses didn’t even rise that much. The price of land rose. Further, renovations are hitting record highs even as new construction is hitting record lows. This story is all about land as the option value and collateral value of land – not fungible real resources.

Chucking the Solow growth model, cont. - A few posts back, I wrestled with Jim Bullard's hypothesis that a fall in asset prices caused a permanent negative shock to GDP. Since then, a whole bunch of people have weighed in with interesting comments. Scott Sumner and Paul Krugman raise the first of the two issues I had raised: It is tough to interpret housing price changes as destruction of the capital stock. I can actually think of a few ways that housing price changes might affect productivity, and so can Brad DeLong, but I think we both agree that the change would be second-order. David Andolfatto conjectures that regime-switching models of productivity growth - a sort of modified RBC model - could produce the kind of effects Bullard is talking about. But I don't think that's quite right, at least not the models that Andolfatto is talking about. In those models, asset prices fall because productivity falls; asset price changes are not the cause of changes in output, as Bullard hypothesizes. What I find more interesting is this older Andolfatto post, which David kindly linked me to in the comments. It points to a model by Robert Shimer in which real wages are sticky. In that model, destruction of part of the capital stock does, in fact, lead to a permanent fall in GDP. (It does represent a chucking of the Solow growth model, because in the Solow model, real wages are not sticky. Shimer's model will not exhibit the conditional convergence that is the Solow model's main result.).

James Bullard Responds to Tim Duy - Dear Tim, I appreciate your commentary, and all the commentary, on my Chicago speech from last week. I take the gist of these comments to be "you didn't show us a model." That is fair enough, I did not. (Readers may also wish to check Scott Sumner, Noah Smith, Paul Krugman, David Andolfatto, Brad DeLong, David Beckworth, and Steve Williamson at their respective blogs, and possibly others I have not seen yet.) As you know, I am not too keen on "output gap" ideas as they are knocked around in the business press and in policy circles. I just do not think the output gap rhetoric matches up very well with the state of knowledge in the macroeconomics literature, either conceptually or empirically. Neil Irwin at the Washington Post does an excellent job of telling the standard story concerning the output gap.  I know you like this story, and you have a lot of company, because it dominates much of the discussion about the U.S. economy.  I said this potential output calculation is basically an extrapolation of real GDP from 2007Q4 using growth rates from the years immediately preceding.  Of course it is not, it is just ... statistically indistinguishable from an extrapolation of real GDP from 2007Q4 using growth rates from the years immediately preceding!    For more detail on approaches to measuring potential output, see the St. Louis Fed's 2008 conference "Projecting Potential Growth: Issues and Measurements," published in 2009.

Bullard On Duy On Bullard On Potential Output - Mark Thoma at economists view has provided a reply by James Bullard, President of the St. Louis Fed, to Tim Duy's commentary on his speech at the Union League Club in Chicago on how he thinks that the housing bubble collapse could have reduced the growth of potential output, along with his criticisms of the standard public projections of potential output,  . I would like to comment on this given the nearly universal perception (including posts here by several folks) that Bullard does not seem to understand that the projections are based on the Solow growth model, particularly given that Bullard is one of the more open-minded and knowledgeable figures involved in decisionmaking at the Fed. What is going on here? To get at this one needs to read the links Bullard provides, most notably the 2009 paper by Basu and Fernald published by the St. Louis Fed on potential output. He notes that they argue that there are competing definitions of potential output. One is essentially long run growth, which should be tied to a growth model of some sort. The other is a shorter run one that they argue should be the equilibrium of a flexible price New Keynesian DSGE model. They argue that rather than the standard one-sector Solow model, what fits the data better is a two-sector model that focuses on technological change the capital goods sector...

Again With Potential Output, by Tim Duy: St. Louis Federal Reserve President James Bullard graciously responded to my most last post regarding his much considered speech. I actually do not enjoy drawing Bullard's attention, in that it makes me fear that one day I will find that my access to FRED has been disabled. On what Bullard and I agree on is this: There are different estimates of potential GDP. I discussed this point last year: Now, before you roll your eyes, as I am inclined to do, note the CBO estimate of potential output is not the only estimate. Menzie Chinn reminds us of the variety of estimates of potential output, some of which suggest that, at the moment, the output gap is actually positive. In that post I discussed some possible reasons we might consider a downward shock to potential GDP. Near the end, I concluded with this: While not discounting the probability that some structural factors are at play, the primary challenge facing the US economy is insufficient demand. Optimally, I think the best solution to this challenge is that demand emerges from the external sector – and here I mean NET exports, export and import competing industries. This source of demand would support needed structural change, ultimately for the good of the US and global economies. This adjustment requires a relatively complicated expenditure-switching story on a global basis. Bullard takes a different approach. First, he rejects the CBO estimate offhand because it is not the outcome of "full DSGE model" and "there is nothing about the CBO potential calculation that allows "bubble" levels of output." Before we reject the CBO model outright, it is worth considering it basic effectiveness as a guide:

Duy on Bullard on Duy on Bullard - Krugman - Tim Duy offers the latest entry in the dispute over whether we should accept a permanently lower track for output in the aftermath of the housing bubble. It seems to me that Bullard has shifted his position. In the first version, which I discussed here, Bullard seemed to be arguing that the wealth loss from the burst bubble represented a real destruction of economic capacity. Now he seems to be making a quite different case: that the economy in 2005-2007 was operating at an unsustainably high rate of capacity utilization, driven by the bubble. I don’t buy this version either. One reason not to buy it is the reason Duy cites: if the economy was so overheated in the mid-naughties, where was the inflation? Where were the labor shortages? But there’s another reason I don’t believe it: demand in the mid-naughties was not, in fact, at fever pitch. Yes, we had very residential construction and high consumer spending. But we also had record-high trade deficits, so that overall demand wasn’t that vigorous, after all. Here are residential investment and net exports as a percentage of GDP:

Where Bullard is right and where he is wrong - Via Mark Thoma, James Bullard has a reply to Tim Duy that sheds further light on his argument.  In this piece he concentrates his criticism on the concept of “potential output.”  Here I actually agree with Bullard; potential output is hard to measure, may move around at times, and can easily lead monetary policy astray.  But I still have major problems with his overall argument: So, what Irwin’s picture is doing is taking all of the upside of the bubble and saying, in effect, “this is where the economy should be.”  But that peak was based on the widespread belief that “house prices never fall.”  We will not return to that situation unless the widespread belief returns.  I am saying that the belief is not likely to return–house prices have fallen dramatically and people have been badly burned by the crash.  So I am interpreting your admonitions on policy as saying, in effect, please reinflate the bubble.  First, I am not sure it is possible, and second, that sounds like an awfully volatile future for the U.S., as future bubbles will burst once again. Now we can see the damage to monetary policy by the widespread (but false) view that this recession was caused by the bursting of the housing bubble, and the resulting financial crisis.  Interestingly, this is exactly that same argument that the Fed used in the 1930s; “Do you mean you want us to go back to the false prosperity of 1929?”  Most economists would now say; “Yes. 

Potential Output - The recent debate between Bullard, Smith, Duy, our own Barkley Rosser, Krugman and others has been interesting and has caused me to reconsidered some of what I thought I knew on this topic.  In fact, this is the fourth time I have sat down to write a post; my first three are all deleted. What I now think is this: the purpose of a potential output measure is to offer guidance to macropolicy.  Bluntly put, a sizeable output gap tells us we can and should use monetary and fiscal measures to boost demand; an output surplus tells us to cool it.  This is loosely associated with a notion of productive potential, in the sense that, as an economy approaches or exceeds this potential, extra demand is increasingly diverted into either price level increases, trade deficits or both.  In this sense, what we want from an estimate of potential GDP is that it performs adequately as a guide to demand management. That said, is there a case that the collapse of the housing bubble in the last decade could lower the trajectory of potential GDP?  The answer, I think, is yes, possibly.

Bullard on the Output Gap - Bullard writes If households and businesses had ignored the house price developments as a sort of amusing side show, it would not have been so important. But our rhetoric about the decade suggests otherwise.  Households consumed more through cash-out refinancing, developers built more, borrowing increased, Wall Street produced new financially-engineered products to feed the boom, and ancillary industries like transportation thrived.  Output went up, and labor supply was higher than it otherwise would have been. If I am correct this paragraph is the crux of his point on the output gap.  I want to examine further 1) What the rhetoric actually suggests 2) What the data from the period tells us about that rhetoric and our current situation. Lots of things were said about the boom both during it and immediately after, however, a single phrase stands out to me as particular well used: “Lived beyond their means.” This was said both about households and about government. It was said about middle-class suburban America in particular and the American polity in general. What does it mean? Or, more precisely what did people mean by it?

When Models Trump Common Sense - More evidence that U.S. economists are particularly ill-suited to run the U.S. economy comes via the fascinating exchange in recent days between St. Louis Federal Reserve President James Bullard and a small army of bloggers with PhDs in economics, nearly all of the latter ganging up on Bullard after he suggested that the “output gap” theory for what ails the U.S. economy may be fundamentally flawed and that attempts to boost overall demand to close that gap through freakishly low interest rates and other super accommodative Federal Reserve policies might end up doing more harm than good. Recall that I’ve railed on this subject a number of occasions over the years, the last time being this offering from about six months ago when it was noted: The theory posits that it is not important what level of overall demand an economy has reached or how it got there, but that, when all the wheels fall off the wagon as they did back in 2008, the imperative is for the government to somehow restore that level of demand. Otherwise, you get another Great Depression.

The professor versus the chairman - IN THE early 2000s, economist Ben Bernanke was a fierce critic of the Bank of Japan's response to prolonged weakness and deflation in the Japanese economy, a dynamic Mr Bernanke attributed to the central bank's self-induced paralysis. As his work made clear, a central bank had plenty of effective tools available to fight insufficient demand and deflation, even when nominal interest rates fell to near zero, depriving central bankers of their policy weapon of first resort. Among the options: aggressive currency depreciation, targets for long-term interest rates, money-financed tax cuts (the "helicopter drop"), and higher inflation. Fast forward a decade, however, and Mr Bernanke, having made his way to the helm of the Federal Reserve, has distanced himself from all of these possibilities. By the Fed's own diagnosis, the American economy is suffering from a prolonged period of growth below potential, and accompanying disinflationary pressures. But its chairman rejects the use of the tools he once energetically supported. Instead, the Fed has adopted milder and less effective interventions, which featured nowhere in Mr Bernanke's earlier admonitions of the Bank of Japan.  This puzzling about face left observers of the economy scratching their heads. What changed?

Measuring the consequences of the zero bound constraint - In a period of deleveraging such as the U.S. has been going through, it is possible for the natural rate of interest to become negative. Since cash is always an option for earning at least a yield of zero, no asset should ever pay less than zero. This lower bound of zero on nominal interest rates can put a constraint on the ability of the economy to self-correct or the Fed to provide stimulus in such a situation. The Fed still has some tools to try to reduce longer-term yields, namely large-scale asset purchases and signaling the Fed's future intentions. A new research paper by Federal Reserve Bank of San Francisco President John Williams and Senior Research Advisor Eric Swanson proposes a creative new approach to measuring when and to what extent the zero lower bound is a relevant constraint on interest rates of any maturity. Market watchers are familiar with the observation that bond yields often are moved by economic news. For example, when the Bureau of Labor Statistics released a better-than-expected employment report two weeks ago, the yield on 10-year bonds jumped 10 basis points. In their new paper, Swanson and Williams measured the average response over 1990-2000 in the n-period bond yield to a dozen different economic news releases such as nonfarm payrolls, new home sales, retail sales, and the CPI. They summarized that historical response in the form of a regression:

Practical Monetary Policy: Examples from Sweden and the United States - In the summer of 2010, the Federal Reserve’s and the Swedish Riksbank’s inflation forecasts were below the former’s mandate-consistent rate and the latter’s target, respectively, and their unemployment forecasts were above sustainable rates. Given the mandates of the Federal Reserve and the Riksbank, conditions in both countries clearly called for policy easing. The Federal Reserve maintained a minimum policy rate, soon started to communicate possible future easing, and in the fall launched QE2. In contrast, the Riksbank started a period of rapid tightening. I examine the arguments that were raised in opposition to the Federal Reserve's easing, and those for the Riksbank's tightening. Although the Swedish economy subsequently performed better than expected, probably an important reason was that the market implemented much easier financial conditions than were consistent with the Riksbank’s policy rate path. Without the policy tightening, performance would have been even better. The U.S. economy meanwhile performed worse than expected because of factors other than monetary policy. Without the policy easing, performance would have been even worse.

The pain of zero interest rates - The current economic environment of low—virtually zero—interest rates has hit savers hard, but the US Federal Reserve’s accommodative monetary policy is actually having a stabilizing effect on the economy. Abruptly raising interest rates could harm economic growth and the housing market. Until the economy stabilizes enough that the Fed can start to slowly raise interest rates, savers have several less-than-ideal options, including adjusting their lifestyles; dipping into their savings; and taking on riskier investments, such as gold and stocks. Key points in this Outlook:

  • By holding interest rates at zero, the Fed has forced many households to accept painfully low returns on their savings.
  • Amid high volatility and with memories of the Lehman crash still fresh, savers are understandably reluctant to invest in stocks or gold.
  • Like it or not, the economy needs the Fed’s easy-money drug. Withdrawing it now could kill the patient.

Inflation Watch: Highest Core Inflation Since September 2008 - The Bureau of Labor Statistics released the CPI data for November this morning. Year-over-year Headline CPI came in at 2.93%, which the BLS rounds to 2.9%, down from 2.96% last month (BLS rounded to 3.0%). Year-over year-Core CPI came in at 2.28%, which the BLS rounds to 2.3%, up from 2.23% last month. Headline inflation posted the highest annual rate since September 2008. Here are excerpts from the BLS summary: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.9 percent before seasonal adjustment.  The indexes for food, energy, and all items less food and energy all rose in January, each increasing 0.2 percent. Within the food group, the index for food away from home increased while the index for food at home was unchanged; within the energy group the gasoline index increased while the index for household energy declined.  Within all items less food and energy, the apparel index rose sharply, and the indexes for shelter, recreation, medical care, and tobacco increased as well. The indexes for used cars and trucks and for airline fares both declined, while the new vehicles index was unchanged.

Key Measures of Inflation in January - Earlier today the BLS reported: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in January on a seasonally adjusted basis ... The index for all items less food and energy increased 0.2 percent in January. The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning: According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index 0.2% (3.0% annualized rate) in January. The 16% trimmed-mean Consumer Price Index rose 0.2% (2.9% annualized rate) during the month. . The CPI less food and energy increased 0.2% (2.7% annualized rate) on a seasonally adjusted basis. The Cleveland Fed has the median CPI details for January here. On a monthly basis, the rate of increase was above the Fed's target. Click on graph for larger image. This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.4%, the trimmed-mean CPI rose 2.6%, and core CPI rose 2.3%. Core PCE is for December and increased 1.85% year-over-year.  These measures show inflation is still above the Fed's 2% target.

Inflation & The New Abnormal - The trend in headline inflation slowed last month, the Labor Department reports. Consumer prices rose 2.9% for the year through January—a slightly slower pace than the annual 3.0% rise as of December. Meanwhile, core inflation—consumer prices less food and energy—inched higher on an annual basis, advancing 2.3% for the year through last month, or up slightly from December's 2.2% rate. What does it all mean? For the moment, nothing much has changed relative to the previous update. But because we’re still in the new abnormal, higher inflation remains a positive. By that standard, today’s CPI offers a mixed bag of news on the margin. Meantime, until the economy has transitioned to a robust and sustainable state of growth, and the crowd recognizes the transition as durable, it's best to assume that the new abnormal rolls on. That means that we should be wary of a persistent round of disinflation.

Cleveland Federal Reserve: Ten-Year Expected Inflation is Only 1.34%, the Lowest in 30 Years - "The Federal Reserve Bank of Cleveland reported today that its latest estimate of 10-year expected inflation is 1.34 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade. The Cleveland Fed’s estimate of inflation expectations is based on a model that combines information from a number of sources to address the shortcomings of other, commonly used measures, such as the "break-even" rate derived from Treasury inflation protected securities (TIPS) or survey-based estimates. The Cleveland Fed model can produce estimates for many time horizons, and it isolates not only inflation expectations, but several other interesting variables, such as the real interest rate and the inflation risk premium."

Why not abolish the Fed and return to the gold standard? - Via Mike Shedlock, this item from MarketWatch caught my eye: Newt Gingrich said that if elected president, he'd name [James] Grant to help run a commission looking at a possible return to the gold standard. And Ron Paul said, if elected president, he'd go all-in and name Grant-- one of Wall Street’s best-known gold bugs-- as the new chairman of the Federal Reserve.... "Unfortunately, I haven't heard from Mr. Romney yet," joked Grant when I called on him in his offices down on Wall Street. "I'm sitting by the phone, I'm ready."  I presume that Grant would be advising any would-be policy-makers who listen to him the sort of thing that he wrote in 2010: The classical gold standard, the one that was in place from 1880 to 1914, is what the world needs now. In its utility, economy and elegance, there has never been a monetary system like it.  I thought it would be worthwhile reviewing some of the reasons why I disagree with Grant on this point.

So many choices (but none of them are good) No, dear reader, not my Valentine’s day, but rather macroeconomic models. Volker Wieland and Maik Wolters has a nice post on VoxEU where they look at the performance of a goodly number of the leading macroeconomic models. This picture in particular struck me: In other words, of the models studied, none – zero, nada, niente – predicted anything like the recession we got, and all the models predicted a materially stronger and swifter recovery than we got. Honestly given this performance shouldn’t there be rather more wailing and knashing of teeth from the economics profession than (with a few honourable exceptions) we have seen?

U.S. growth won't be strong this year: Fed's Williams (Reuters) - U.S. economic growth is likely to remain slow this year, San Francisco Fed President John Williams said on Monday, despite recent stronger data on the jobs market. "I'm sticking with my story that economic growth won't be that strong this year," Williams told reporters after a speech at Claremont McKenna College. Continued high unemployment and low inflation could set the stage for a new round of Fed bond purchases, he told a group of professors and students earlier in the evening. With 10-year Treasury yields already under 2 percent, there's a limit to how much more the Fed can stimulate the economy through asset purchases, he said.

Leading Economist: “We’re In a No Win Situation… This Is End of the World Type Stuff” *Video* - If you’re not yet convinced that the path we’re on leads to catastrophe, then consider watching the following interview with Daniel Ameduri (Future Money Trends) and John Williams (Shadow Stats). Ameduri asks the questions no mainstream reporter would dare to ask about the state of our economic, financial and monetary system and what the end result will look like. Economist John Williams responds by laying out a grim picture of how we got here and the impact we’ll soon experience in every facet of our lives. This is an interview that shouldn’t be missed. One of the leading experts on statistical analysis and economic theory in our country is giving us an outline of what’s coming and how to get ready for it. Williams: We’re in a no win situation. This is end of the world type stuff.I hate to say that. Go back to September of 2008. The system was on the brink of collapse. That was in the end of the world as we know it – the financial world. They pulled out every stop-gap measure that they could. They graded whatever they had to do to keep the system afloat. That’s the type of environment we’re dealing with. We’ve been living through some replays of that, nothing quite as serious. The end of the line fundamentals are not getting better. You’re in a situation now where the rest of the world increasingly has lost its confidence in the US dollar.

Why Going 'Back To Normal' Is No Longer An Option for the American Economy -- And Where We're Headed Now Visions - Former IMF chief economist Joseph Stiglitz has a message for everybody who's sitting around waiting for the economy to "get back to normal." Stop waiting. ‘Cause that train’s gone, and it ain’t coming back. And the sooner we accept that “normal,” as post WWII America knew and loved it, will not be an option in this century, the sooner we’ll get ourselves moving forward on the path toward a new kind of prosperity. The only real question now is: What future awaits us on the other side of the coming shift? In a don't-miss in this month’s Vanity Fair, Stiglitz argues that our current economic woes are the result of a deep structural shift in the economy — a once-in-a-lifetime phase change that happens whenever the foundations of an old economic order are disrupted, and a new basis of wealth creation comes forward to take its place. The last time this happened was in the 1920s and 1930s, when a US economy that was built on farm output became the victim of its own success. Advances in farming led to a food glut. As food prices plummeted, farmers had less money to spend. This, in turn, depressed manufacturing and led to job losses in the cities, too. Land values in both places declined, impoverishing families and trapping them in place.

A key driver of a US recovery -To date I have not seen any reason to believe that the US is on the verge of an accelerated recovery path. The housing recovery meme is true to the extent that construction has bottomed but any rebound in prices looks a wanton hope. The stock market is levitating as usual but at levels first reached in 1999 is unable to provide much ballast for consumer wealth. As I’ve argued before, that leaves the consumer relying exclusively upon income growth to fund his wealth accumulation with the obvious knock-on effects to his spending habits. Moreover, so long as the asset side of consumer balance sheet doesn’t expand, neither will the liabilities. That is, he won’t borrow. Hence, we have seen oscillating growth as the consumer alternately breaks out for a spending quarter then retrenches for savings the next. That only leaves external demand to drive faster growth. Kelly provides a chart that offers hope for ongoing recovery at least in exports:

Oil and the Structural Recession - First, this chart from Calculated Risk. Nothing had or has me doubting the basics of the Smith/Yglesias growth thesis than this chart. That smack down looks awful structural. It looks like something happened to driving big time. The only reason I persisted in making aggressive calls on auto sales was because I just couldn’t think of a convincing narrative about this as permanent structural. There were many candidates, I don’t have time to go through, but none of them really convinced me.  This has to be temporary I thought – even if its an age of driving shift thing – that’s not permanent.  If its just cash constrained households economizing on trips and businesses economizing on shipping then we are going to see a roar back and that means huge auto sales. The thing is a roar back will also mean very rapid increases in gasoline consumption which in turn means much higher prices. What does that mean for the recovery.

The Uptick’s Downside - Nouriel Roubini - Since late last year, a series of positive developments has boosted investor confidence and led to a sharp rally in risky assets, starting with global equities and commodities. But at least four downside risks are likely to materialize this year, undermining global growth and eventually negatively affecting investor confidence and market valuations of risky assets. First, the eurozone is in deep recession, especially in the periphery, but now also in the core economies, as the latest data show an output contraction in Germany and France. The credit crunch in the banking system is becoming more severe as banks deleverage by selling assets and rationing credit, exacerbating the downturn. Second, there is now evidence of weakening performance in China and the rest of Asia. In China, the economic slowdown underway is unmistakable. Export growth is down sharply, turning negative vis-à-vis the eurozone’s periphery. Import growth, a sign of future exports, has also fallen. Third, while US data have been surprisingly encouraging, America’s growth momentum appears to be peaking. Fiscal tightening will escalate in 2012 and 2013, contributing to a slowdown, as will the expiration of tax benefits that boosted capital spending in 2011. Moreover, given continuing malaise in credit and housing markets, private consumption will remain subdued; Finally, geopolitical risks in the Middle East are rising, owing to the possibility of an Israeli military response to Iran’s nuclear ambitions. While the risk of armed conflict remains low, the current war of words is escalating, as is the covert war in which Israel and the US are engaged with Iran; and now Iran is lashing back with terrorist attacks against Israeli diplomats.

How the Economy Looks From the White House - Today, the White House released its annual economic report of the president, a ranging overview of how President Obama and his Council of Economic Advisers view the economy – everything from housing policies to the aging of the workforce to the debt crisis in Europe.  Alan Krueger, the chairman of the council, said the recovery had been strengthening even faster than he and other economists expected recently and the report notes that the “sharp drop” in unemployment this winter took them “by surprise.” For that reason, he said, the report’s forecast of the unemployment rate in 2012 and beyond was out of date, given that it was made in November. But the council did update its estimates of job growth to account for the recovery’s recent strength. It expects the economy to create 167,000 jobs a month in 2012, up from 146,000 a month in 2011. The report stresses the dismal condition of the labor market and anemic job growth during the recovery. But in some ways, Mr. Krueger said, the recession was less severe than economists might have predicted. “Growth in private nonfarm jobs in the current recovery began nine months after the business-cycle trough,” the report says. “By comparison, payrolls first began expanding consistently 12 months into the 1990–91 recovery, and sustained private-sector job growth in the 2001 recovery did not begin until 21 months after the official end date of the recession.”

Payroll tax deal could boost U.S. economy - A congressional deal to extend both a payroll tax cut and jobless benefits through year-end is unlikely to provide a major jolt to the U.S. economy, but it should help support the recent upturn in growth.  Under the agreement, which lawmakers were expected to announce as early as Wednesday, employees' share of the Social Security tax on earnings would remain at 4.2 percent, rather than the usual rate of 6.2 percent. That will result in lower taxes for 160 million Americans, providing a tax cut of roughly $960 for a typical worker making $50,000 a year and more than $1,900 for anyone with annual income of $100,000. Despite the fierce partisan conflict in Washington over the payroll tax extension, many experts say the cut will help stimulate the economy even as it temporarily shrinks federal revenue. A 2011 report by Moody's Analytics estimated that every $1 decrease in revenue from reducing the payroll tax for workers expands the economy by $1.27. Reducing payroll taxes is also a more effective way of boosting growth than most other fiscal measures, including offering housing tax credits, an employer-side payroll tax cut, and even an across-the-board tax cut, according to the research firm.

America Is Spending Less On Debt Payments Than It Was In The '90s: (3 charts) This is kind of remarkable. America is currently paying less on an annual basis to finance its debt than it was paying in the '90s. And as a percentage of GDP, we're REALLY getting off cheap these days. Of course, the big variable here is interest rates, but if we're on the Japan path, then we've got nothing to worry about that on front. And if we're not on the Japan path, then that's good too.  And here's one more. Interest payments as a percentage of tax receipts. The good news is that fewer and fewer of your tax dollars are gong to pay the debt.

China Reduces Holdings of U.S. Treasuries to Lowest Level Since June 2010 - China, the largest foreign lender to the U.S., reduced its holdings of Treasuries in December to the least since June 2010 amid efforts to assist Europe in addressing its debt crisis. The world’s second-largest economy decreased its U.S. debt securities by $31.9 billion from November, or 2.8 percent, to $1.11 trillion, according to Treasury Department data released yesterday. Its position in longer-term notes and bonds also fell $32.5 billion, or 2.8 percent, to $1.1 trillion, the least since June 2010. Japan, the second biggest buyer, increased its holding by $3.5 billion to $1.04 trillion. “We continue to see Chinese Treasury holdings trending lower as they are acting on their desire for diversification and as they may get more involved in the situation in Europe,” China’s policy makers have advocated diversification of the nation’s foreign exchange reserves away from U.S. assets. China may support Europe through channels such as the International Monetary Fund, the European Financial Stability Facility and the European Stability Mechanism, said People’s Bank of China Governor Zhou Xiaochuan.

U.S. to hit debt limit before election day - The United States Department of Treasury will reach the the statutory limit it is allowed to borrow money before election day, according to a new study by Sen. Rob Portman, R-Ohio., former director of the U.S. Office of Management and Budget. “Following the contentious debt ceiling last August, President Obama promised that he would take action to address the country’s fiscal crisis. He has failed to do that," Portman said. "In fact, his new budget increases spending and projects that Washington will be hitting the debt ceiling again in mid-October – burning through a $2.1 trillion debt limit increase in just over 14 months." Portman's office notes that according to Obama's budget, total debt subject to the statutory debt will reach limit will reach $16.334 trillion by September 30, 2012. This is just $60 billion below the 16,394,000,000,000 debt limit. Since the federal government is adding to the national debt at a rate of $132 billion a month, the debt ceiling is on schedule to be reached by October 15, 2012.

Another Debt Ceiling Debacle Before The Election? - When Congress and the President finally reached a debt ceiling deal at the last minute back in August, the intention was that we would not have to relive the showdown we saw throughout the Summer of 2011 again before the 2012 elections. Now, however, it appears that there is  a growing concern on Capitol Hill that we could have to deal with debt ceiling concerns before the Presidential election in November: In what one top congressional aide calls a “nightmare scenario,” the federal government could wind up hitting the debt ceiling at the height of the presidential campaign. The Treasury Department is now contemplating the prospect of invoking “extraordinary measures” to keep the government funded through November. Barring a major economic shock — a financial meltdown in Europe, for instance — the emergency measures should be enough to get the federal government past the election. But even under a rosy scenario, the next Congress will be forced to raise the debt ceiling as one of its first orders of business in 2013. And if the Treasury does have to invoke “extraordinary measures” before the election, it’s easy to imagine a re-run of last year’s political circus, magnified many times over. The failure of the Super Committee means that several trillion dollars in expected long term deficit reduction are off the table, for one thing. For another, the extension of the Payroll Tax Cut, even with offsets, would still require the Federal Government to borrow money, thus adding to the total debt. And finally, there’s the fact that economic growth is not what analysts expected it to be back in August:

Geithner: No debt limit hit until quite late '12 - The United States won't reach the debt ceiling until "quite late" in 2012, Treasury Secretary Timothy Geithner said Thursday. "We do not expect to hit the debt limit until quite late in the year, significantly after the end of the fiscal year [Sept. 30] but before the end of the calendar year," Geithner told the Senate Budget Committee. There has been lingering concern in financial markets that the U.S. would hit the $16.4 trillion debt limit before the Nov. 6 presidential election, when tension between the two political parties is expected be intense. Last month, the debt ceiling was raised by $1.2 trillion after Congress did not pass a resolution opposing it. The debt-limit is one of a series of important fiscal issues that may have to be decided by the lame duck Congress. Geithner also told the committee that he would not support extending the payroll tax cut into 2013. Congressional negotiators have reached a deal to extend the tax break for the rest of 2012.

Christina Romer Advised Obama To Push $1.8 Trillion Stimulus: Scheiber writes.. The $1.8 trillion figure was included in a December 2008 memo authored by Christina Romer (the incoming head of the Council of Economic Advisers) and obtained by Scheiber in the course of researching his book. "When Romer showed [Larry] Summers her $1.8 trillion figure late in the week before the memo was due, he dismissed it as impractical. So Romer spent the next few days coming up with a reasonable compromise: roughly $1.2 trillion," Scheiber writes…. [W]hen the final document was ultimately laid out for the president, even the $1.2 trillion figure wasn't included. Summers thought it was still politically impractical. Moreover, if Obama had proposed $1.2 trillion but only obtained $800 billion, it would have been categorized as a failure. "He had a view that you don't ever want to be seen as losing," a Summers colleague told Scheiber…. The most persistent internal division inside the White House, however, was between the deficit hawks and those who believed more stimuli were needed…. Orszag, writes Scheiber, "worried that the sheer size of the stimulus could undermine the confidence of businessmen and money managers." In the subsequent year, when other advisers argued that an additional dose of stimulus would prop up a staggering economy, he downplayed the potential impact….Summers fought Orszag's pursuit of a deficit reduction commission…. He also pushed back on Orszag's idea of a domestic spending freeze, insisting the cuts would be too close to the bone.

Obama Faces Task of Selling Dueling Budget Ideas - With the election-year budget he unveils on Monday, President Obama more than ever confronts the challenge of persuading voters that he has a long-term plan to reduce the deficit, even as he highlights the stimulus spending and tax cuts that increase deficits in the short term. On Sunday, the job of making the argument for job-creation measures now and budget austerity later fell to Jacob J. Lew, Mr. Obama’s chief of staff and until recently his budget director, who made the rounds of five television talk shows. “The challenge,” Mr. Lew added, “is how do you do two things at the same time? How do you put money forward for things like the payroll tax holiday, for things like getting a jump-start on infrastructure, for building schools, and make the decisions for long-term deficit reduction? The president has proposed a plan that would do that.” That combination — temporary, immediate stimulus measures, together with spending cuts and tax increases that would take effect only after 2012, when the economy presumably is stronger — is one that many economists and business leaders endorse. But as Mr. Obama starts his fourth year in office, explaining the two-track approach continues to test him and his administration.

Obama's New Budget: Spend $3.8 Trillion in 2013 -- President Obama unveiled a $3.8 trillion budget request Monday that hikes taxes on the rich, spends new money on infrastructure and education, but does little to reform the entitlement programs that pose the biggest long-term threat to the federal budget. "We built this budget around the idea that our country has always done best when everyone gets a fair shot, everyone does their fair share and everyone plays by the same rules," Obama said in his budget message. But the budget forecasts a deficit for fiscal year 2012 that will top $1.3 trillion, before falling in 2013 to $901 billion, or 5.5% of gross domestic product. The deficit projections, which have hovered near $1 trillion for each year of the Obama presidency, mean that Obama will not satisfy his 2009 promise to half the deficit by the end of his first term.

Obama Budget Unique Source for $3 Trillion - President Barack Obama’s budget outlines his ideas for how the government may spend $3.8 trillion in fiscal 2013. There’s no similar document accounting for where taxpayers’ money actually goes.  At least three federal sources tally spending, each following its own rules to produce a different total. For the 15 Cabinet-level agencies and Social Security, the White House Office of Management and Budget put expenses at $3.18 trillion in fiscal 2010, the last year for which data are complete. Ask the Census Bureau, and the amount rises by $13.1 billion to $3.19 trillion., a website Obama championed as a senator, accounts for $2.23 trillion of spending.  (For an interactive graphic, click here.)  The nation’s budget has more than doubled in the past decade, pushing the annual deficit to more than $1 trillion and the national debt to $15.2 trillion. Spending dominates the political agenda, with at least three presidential candidates advocating the elimination of entire Cabinet agencies, while billionaires and street protesters debate raising taxes on the wealthy. Yet government institutions that track expenses differ in their estimates by billions of dollars, making the budget process less transparent to taxpayers.

Obama Sends $3.8T Budget to Congress - President Barack Obama sent Congress a $3.8 trillion budget plan today with stimulus spending and tax increases for the wealthiest Americans, spelling out election- year priorities that are certain to draw Republican opposition.  Obama is proposing more money for jobs, highways and bridges, schools, student aid and manufacturing research as well as higher taxes for corporations, banks and oil, natural gas and coal companies.  “This budget is a step in the right direction” and provides a “roadmap for how we can grow the economy, create jobs” and maintain the nation’s security, Obama said in a message to Congress accompanying the budget for fiscal 2013, which begins Oct. 1. “In the year ahead, I will continue to pursue policies that will shore up our economy and our fiscal situation.” The fourth budget of Obama’s presidency is largely a repackaging of September’s jobs and deficit-reduction proposal that Republicans in Congress largely blocked or rejected as unworkable or unnecessary. Obama faces a re-election campaign, and the budget lays out his priorities for the economy as the Republicans vying to face him question the direction of the federal government.

White House Bets on Revenue Surge in 2013 - The White House, in its fiscal year 2013 budget, is projecting a huge surge in new tax revenue compared with fiscal 2012. The boost is one of the reasons the White House believes the deficit will fall to $901 billion in the fiscal year that starts on Oct. 1, 2012, compared with $1.3 trillion in the current year. In purely mathematical terms, more revenue means less deficit. The nearly 18%  increase in revenue, from $2.469 trillion in 2012 to $2.902 trillion in 2013, would be the third largest percentage increase since 1953, according to White House data. In 1977, tax revenue increased 19.29% and in 1969 revenue increased 22.16%. Where does the White House see this jump in revenue coming from? Partly due to economic growth, and partly due to new tax increases. For example, the budget expects that corporations will pay $354 billion in income tax in  2013, compared with $281 billion in 2012. It also expects to bring in $83 billion in new revenue by allowing tax cuts for high-income families to expire.

Thoughts on the President’s Budget - Here is a sort of data dump (sorry) of various reactions I’ve had to the President’s FY2013 budget proposals in the past week. My organization, the Concord Coalition, put out this statement on Monday, accompanied by the video summary above that my colleague Josh Gordon and I made. (I also did this radio interview on Patt Morrison’s show on southern CA’s NPR station, KPCC, on Monday.) I was most intrigued by what is new in the President’s proposals in terms of tax policy:  there’s actually a bolder move to combine the “Buffett Rule”–raising taxes on the rich so that their effective (average) tax burdens aren’t any lower than those of middle-class households–with a more fundamental tax reform strategy (which economists like) of broadening the tax base.  I’ve said before that there are lots of different ways to raise taxes on millionaires, but I’d prefer to see it done by reducing tax expenditures (which disproportionately benefit higher-income households and are also economically inefficient) rather than by (just) raising marginal tax rates on the currently rather narrow definition of taxable income. I wrote on Concord’s blog about the itemized deduction proposal here.

Tax and build - WASHINGTON wonks are focused today on the release of the Obama administration's budget proposals for the 2013 fiscal year.  For now, a few things stand out. First, the president's proposals generate a federal deficit of $900 billion in fiscal 2013. If it is verified, that would be America's first deficit of less than $1 trillion since the 2008 fiscal year. It would also represent a reduction in the deficit, as a share of GDP, from 8.5% to 5.5%. Overall, the budget calls for a reduction in the deficit to 2.8% of GDP by 2019, where it is projected to remain through the end of the ten-year budget window. That's close to primary balance—the government's books would nearly balance net of interest costs. The 2013 budget's proposals result in less deficit reduction than the plan produced (but not agreed upon) by last fall's bipartisan budget "Supercommittee". In the short term, much of the president's deficit reduction can be attributed to economic improvement. The budget envisions a recovery that accelerates, in real terms, through 2015, after which growth settles down to 2.5%. That's certainly an optimistic forecast, though it's not entirely unreasonable. Given the scope for catch-up growth back to potential, we would expect, in the presence of appropriate macro policy and absent severe shocks, for growth to be above trend for a few years. Of course, both policy and unexpected headwinds have constrained recovery since 2009.

Taxes in Obama’s Budget: Few Specifics but Some Big Principles - When it comes to taxes, President Obama has proposed what might best be called a conceptual budget—a powerful call for tax reform that is long on principles but, at least when it comes to individual levies, woefully short on specifics. This is understandable with what is effectively a reelection manifesto. In high campaign season, specifics get a candidate in nothing but trouble. Still, this framework is at once disappointing and illuminating. It sets up a powerful contrast with whomever the GOP nominates to replace Obama: Should tax reform be used to raise revenues, an explicit goal of this budget, or should it be a vehicle to cut taxes and increase the deficit—the specific aim of every remaining GOP presidential contender? Yet, Obama’s fiscal plan is disappointing because it is so vague. There is simply no chance Congress will make the tough votes necessary to enact any serious tax reform without a president who is prepared to take the heat for specific, deeply controversial cuts in popular middle-class tax preferences.

Debt, Taxes and Politics: The President's Budget for 2013 - Earlier today President Obama released his Budget for Fiscal Year 2013. Let's take a moment to reflect on the history of U.S. federal debt and personal taxation, the latter of which began in 1913.The first chart is a snapshot of federal debt based on data from the U.S. Treasury and the 2013 Federal Budget issued by the Office of Management and Budget (OMB). The chart also shows the OMB six-year forecast through 2017. As the chart clearly illustrates, the tax cuts in the early 1980s coincided with the beginning of an acceleration in real federal debt from a relatively consistent level over the previous three decades. The next chart replaces real debt with the debt-to-GDP (Gross Domestic Product) ratio, which gives us a better idea of the true debt burden. Against Debt-to-GDP soared with the U.S. entry into World War I, as did the personal tax rates. After the war the ratio gradually dropped, this time against the backdrop of the "Roaring Twenties." The Crash of 1929 and Great Depression triggered a rise in the ratio to levels exceeding the peak in World War I.  War costs drove the ratio to a peak above 120% in 1946. Here is another view of the federal debt-to-GDP ratio, this time with major wars and the Great Depression highlighted. I've added markers to the debt ratio series to identify individual years. As we can readily see, only once in U.S. history, the WWII debt peak of 1945-46, have we had a higher Debt-to-GDP ratio than the current six-year forecast:

The ratio of spending cuts to tax increases in the President’s budget - The Obama Administration claims their new budget contains $2.50 of spending cuts for every $1 of tax increases.  Here is White House Chief of Staff and former Budget Director Jack Lew on Meet the Press yesterday: We’ve seen from Republicans in–particularly Republicans in the House, but with Republicans generally, that they don’t want to be part of any plan that raises taxes at all. The president’s budget has $1 of revenue for every $2 1/2 of spending cuts. This can be done, but it can only be done when we work together. Their 2.5:1 ratio is bogus. The President’s team is (1) playing a timeframe game and (2) counting interest savings from tax increases as spending cuts. Contrary to Mr. Lew’s assertion, the President is proposing at least $1.20 of tax increases for every dollar of proposed spending cuts. The President’s budget locks in historically high spending levels and relies more on tax increases than spending cuts for the limited deficit reduction it proposes.

President calls for cuts to defense spending in budget request for 2013 - President Obama’s budget request for the Pentagon cuts America's military budget in absolute terms for the first time in more than a decade. The cuts come from both war spending and the department's base budget and include a reduction in armed forces and the cancelation of several weapons programs. The 2013 total defense budget is $614 billion, which includes $525 billion for the base budget and $88 billion in overseas contingency operations (OCO) funding. Together, that’s a reduction of $32 billion from the 2012 budget: $5 billion from the base and $27 billion from war spending with the end of the Iraq war and drawdown in Afghanistan.The cuts were expected and Defense Secretary Leon Panetta previewed them in a press conference at the end of January. But they became official with the release of Obama's 2013 budget blueprint on Monday. The Republican chairman of the House Armed Services Committee criticized the proposal, saying it reduces resources for the military while redirecting them “to exploding domestic bureaucracies.”

The President's Plan: Higher Taxes, Deep Defense Cuts, and the Entitlement Status Quo - In the budget President Obama proposed yesterday, he once again chose to placate constituencies and promote an activist government agenda at the expense of getting the nation’s fiscal house in order. The budget forecasts a $1.3 trillion deficit for the current fiscal year -- the fourth year in a row of trillion dollar deficits. The president is thus on track to pile up an astonishing $5.3 trillion in deficits during his first term, for fiscal years 2009 to 2012. For those who say he shouldn’t be held accountable for 2009 since he assumed office one-third of the way through it (and then promptly pushed through an $800 billion spending program), the cumulative deficit for the four year period 2010 to 2013 is nearly as bad -- $4.8 trillion. The fundamental problem in the federal budget is the relentless increase in entitlement spending. The administration’s apologists like to say that our fiscal problems stem from tax cuts, the Medicare drug benefit, and unfinanced wars. But this is not so. Over the past four decades, the federal government has collected revenue that has averaged 18 percent of GDP annually. In 1972, when total spending on Social Security, Medicare and Medicaid was 4.4 percent of GDP, there was plenty of revenue left over for other priorities of government, like national security. But today, the situation is very different. Spending on Social Security, Medicare, Medicaid, and the entitlements created in the health care law are expected to reach 10.2 percent of GDP in 2012, well over half of the normal tax take of the government. That’s the primary reason the government is now experiencing massive fiscal pressure

Military Cuts and Tax Plan Are Central to Budget Proposal… President Obama’s final budget request of his term amounts to his agenda for a desired second term, with tax increases on the affluent and cuts in spending, especially from the military, both to reduce deficits and to pay for priorities like education, public works, research and clean energy. While Republicans issued the usual declarations that the package was dead on arrival at the Capitol on Monday, Mr. Obama harbors hope of winning some victories yet. The likelihood of a post-election lame-duck session and a raft of laws expiring at year’s end — including the Bush-era tax cuts — could give him leverage to force compromises even on taxes. Both parties are already calculating for the prospect of a December showdown. The budget request for the 2013 fiscal year, which starts Oct. 1, and its projections for the years that follow, reflect Mr. Obama’s vision for another term in which he would switch from years of temporary stimulus measures to promoting long-term initiatives to spur new business and manufacturing activity and help educate Americans for new skills that businesses demand. After winding down two wars overseas, Mr. Obama proposed to make good on his often-repeated call to bring troops back and start nation-building at home in symbolic fashion: The budget would use projected military savings — a gimmick, Republicans say — to help pay for a six-year, $476 billion program to modernize the nation’s transportation network.

The Narrative of the “Slimmed-Down” $614 Billion Pentagon Budget - Defense Secretary Leon Panetta and General Martin Dempsey, Chair of the Joint Chiefs of Staff, had to go before Congress today and defend the $614 billion proposed budget for the military in the coming fiscal year. Not because that’s a staggering amount, especially with spending caps all over the government. Because it’s too small for Congress’ tastes. Sen. Carl Levin, D-Mich., the panel’s chairman, insisted that the military look to closing bases in Europe and overseas before targeting installations in the United States. Sen. John McCain of Arizona, expressed reservations with the budget and complained that it “continues the administration’s habit of putting short-term political considerations over our long-term national security interests.” Note the narrative at work here. Almost everyone involved – the members of the Armed Services Committee, the Defense Secretary, the Chairman of the Joint Chiefs, the AP writer putting together the article – are so invested in the idea that this is an austere military budget, that nobody questions the notion that $614 billion is a staggering amount of money. Even in the context of a large overall budget, it’s a hefty percentage, and remember, that doesn’t include Homeland Security or NSA or CIA or a host of other agencies that do at least some of our war-fighting these days. But because it’s a stitch smaller than last year, this total absurdity – “slimmed-down, $614 billion budget” – passes without comment. Incidentally, almost all of the savings come from the fact that we’re not fighting a war in Iraq anymore.

Administration Calls for $450 Billion War Funding Cap - Did you know that the federal government expects to spend $450 billion on fighting wars over the next decade? This, despite the removal of all troops fron Iraq, and the transition of combat missions over to the Afghans by 2014, if not a year earlier? That’s what we can take from the numbers in the President’s FY 2013 budget. There’s a war-fighting fund for “overseas contingency operations” (OCO) that the Administration proposes capping in this document. But instead of capping it at the amount required to continue combat operations in Afghanistan for another year (remember the 2012 budget is already funded on OCO) and support operations thereafter, it keeps $450 billion in that kitty over the next 10 years. This is from the budget document, on page 26: Leaving OCO funding unconstrained could allow future Administrations and Congresses to use it as a convenient vehicle to evade the fiscal discipline that the BCA [Budget Control Act of 2011] caps require elsewhere in the Budget. With the end of our military presence in Iraq, and as troops continue to draw down in Afghanistan, this Budget proposes a binding cap on OCO spending as well. From 2013 through 2021, the Budget limits OCO appropriations to $450 billion.

Obama 2013 Budget: White House Shows Some Political Smarts - My column from today's Roll Call , Obama’s Budget: It’s More Than Math Calculations explains why the politics behind the Obama 2013 budget that was released yesterday are a sharp departure from what the White House has tried to do with its previous budgets. After three years of trying to propose something that would be at least marginally acceptable enough to get a conversation started, this year's budget is based on an assumption by the Obama administration that nothing it proposes will be accepted so it might as well propose the spending and tax plans it prefers. It's just the latest sign that nothing is going to happen this year on the budget. It's also an indication that the Obama administration is now playing tougher politically than it has before.

Obama Budget Seeks to Ramp Up Trade Enforcement - The Obama administration is putting more emphasis on getting tough on trade in its budget proposal released Monday, highlighting the need to stay competitive globally a day before a visit by Chinese Vice President Xi Jinping. Pledging a more-aggressive stance on trade enforcement against China and other competitors, the fiscal 2013 budget would devote $26 million for a new Interagency Trade Enforcement Center, an administration official said. The proposal, which President Barack Obama highlighted in his State of the Union address last month, would “significantly enhance the administration’s capabilities to aggressively challenge unfair trade practices around the world, including in China,” the official told Dow Jones Newswires.The funding would be channeled through the Commerce Department‘s International Trade Administration and the U.S. Trade Representative’s Office.

An American budget for the rich and powerful - Jeff Sachs - President Barack Obama’s budget for 2013 will set off a vitriolic battle. Republicans will rail against the Democrats’ “class warfare” and Democrats will rail against the Republicans’ “coddling of the rich”. Yet it is mostly for show. The rich will win in their fund balances while probably losing at November’s presidential polls, and the poor and working class will probably re-elect Obama but suffer a continuing decline in relative and perhaps absolute incomes. Consider the bottom line of the Obama budget. The policy is to cut total primary (non-interest) federal spending from about 22.6 to 19.3 per cent of gross domestic product from 2011 to 2020, while revenues would rise from recession lows of about 15.4 per cent of GDP in 2011 to some 19.7 by 2020. Compare that with Republican congressman Paul Ryan’s budget a year ago. Mr Ryan’s budget aimed for about 17 per cent of GDP in primary outlays by 2020, with revenues at about 18 per cent of GDP. The difference is modest, but the important fact is this. Both sides are committed to significant cuts in government programmes relative to GDP. These cuts will be especially swingeing in the discretionary programmes for education; environmental protection; child nutrition; job re-training; transition to low-carbon energy; and infrastructure. The entire civilian discretionary budget will amount to only 2 per cent of GDP, or less, as of 2020, in the budget plans of both Obama and the Republicans. There are far better alternatives for America’s future. Successful northern European countries spend much more as a share of GDP on early childhood development, family support, job training, science and technology, and infrastructure, and they raise higher tax revenues to pay for them. Through a better balance of private and public investments they achieve lower unemployment, lower trade deficits, lower budget deficits, less poverty, longer holidays, better child care, higher life expectancy and higher reported life satisfaction.

Obama plan will end dozens of business tax breaks: Geithner (Reuters) - The Obama administration's corporate tax reform plan will end "dozens and dozens" of tax breaks, U.S. Treasury Secretary Timothy Geithner said on Tuesday as he defended the White House's election-year call for higher taxes on the wealthy. Within days, the administration is set to unveil a blueprint for revamping the corporate tax system aimed at leveling the playing field for all companies, which pay wildly differing levels of taxes, while lowering the top corporate tax rate. Companies are clamoring for a cut in the top 35 percent corporate tax rate but disagree about how to how eliminate special tax preferences that benefit selected industries. Geithner spoke before the Senate Finance Committee a day after President Barack Obama unveiled a $3.8 trillion budget-and-tax proposal that called for aggressive government spending to boost the economy and higher taxes on the rich. "We think they can handle it. We think they can afford it," Geithner said. The budget proposal is seen as a campaign document, with few elements expected to win approval this year in a divided U.S. Congress as elections approach in November. Republicans criticized Obama's budget, saying it chooses winners and losers and moves away from tax reform. 

Taxes, Entitlements and the Growing Federal Debt Crisis - Earlier this week I shared my historical perspective on Debt, Taxes and Politics. Let's now take a closer look at Uncle Sam's balance sheet for last year and the official government projections for 2012 and the decade beyond. With the intensifying election year debates on the federal budget, it seems particularly appropriate to understand the broader context. For a quick review of 2011, here is a slide I've created for a presentation I'll make at the Retirement Income Industry Association (RIIA) spring conference in Chicago next month. As we can see, 2011 entitlement costs exceeded the entire tax revenue for the year — personal, corporate, and social. However, according to the Congressional Budget Office (CBO), entitlements accounted for only about 59% of 2011 spending. Defense spending took another 19%, nondefense discretionary 18%, and interest payments 6%. We ended 2011 with an on-budget deficit of $1.363 trillion.The gross federal debt for 2011 was $14.762 trillion. For 2012 the CBO projects an increase to $16.002 trillion. Now let's put the current deficit into the larger pattern of federal spending. I created the next two charts from a combination of CBO historical data since 1971 and their budget projections for 2012-2022. The first chart shows the astonishing growth of entitlements.

Fact check: Obama's budget gimmicks - When a president introduces a budget, there are always phantoms flitting around the room. President Barack Obama's spending plan sets loose a number of them. It counts on phantom savings from the wars in Iraq and Afghanistan. It's underpinned by tax increases Republicans won't let happen and program cuts fellow Democrats in Congress are all but certain to block. And it assumes rates of growth that the economy will have to become strikingly undead to achieve. A look at three budget ghosts, sometimes known as gimmicks: --- BUDGET: Claims about $850 billion in savings from ending the wars and steers some $230 billion of that to highways. REALITY: There is no direct peace dividend from ending the wars because the government borrowed to pay for them. : Forecasts healthy growth in years ahead, with GDP growth predicted to reach 4 percent in 2014 and 4.2 percent in 2015. REALITY: It's obviously too soon to know, but reputable private forecasts are not nearly as rosy as the administration's assumptions, and their track record tends to be better. Assumes taxes will go up on the rich, tax breaks will end for the oil and gas industry, and spending will be cut for programs the president is willing to sacrifice.  

President’s 2013 Budget Would Enable Almost All Americans to Save for Retirement - The new 2013 budget unveiled by President Obama on Monday again contains the Automatic IRA, which was developed by Brookings’ Retirement Security Project in conjunction with The Heritage Foundation. This year’s  version includes an important change that will also encourage more employers to offer a 401(k) account to their workers. However, important changes to the Saver’s Credit that  had been in previous budgets failed to make it this year. Nearly half of American workers – an estimated 78 million- currently have no employer-sponsored retirement savings plan. The Automatic IRA is a simple, easy to administer and understand system that is designed to meet the needs of small businesses and their employees. Employers facilitate employee savings without having to sponsor a 401(k)-type plan, make matching contributions or meet complex eligibility rules. Employees are enrolled automatically into an IRA with a simplified system of investment choices and a set automatic savings level. However, they retain complete control over all aspects of the account including how much to save, which investment choice to use, or even whether to opt out completely.

Starter Savings Accounts - So, here’s a thing I think we should do. The Federal government should offer inflation-protected savings accounts to individual citizens, but with a strict size limit of, say, $200,000. These accounts would work like bank savings accounts, and might even be administered by banks. But deposits would be advanced directly to the government (reducing borrowing by the Treasury), and the government would be responsible for repayment. The accounts would promise a tax-free real interest rate of 0% on balances up to the limit. Each month, accounts would be credited with interest based on the most recent increase in the Consumer Price Index (adjusted for any revisions to estimates for previous months). The purpose of this plan would be to offer a no-frills, low risk savings vehicle for middle-class workers. Ordinary bank savings accounts no longer do the job. They already pay negative real interest rates, and those rates might well get worse if we experience more inflation. TIPS don’t do the job. They expose savers to interest rate risk and liquidity risk. Small savers must compete with large savers for the same very limited pool of securities, resulting in negative yields. The option implicit in the floor on principal isn’t easy to price. It takes a degree of risk-tolerance and sophistication to manage a portfolio of TIPS that we ought not demand of waitresses and schoolteachers. They should be able to just open an inflation-protected savings account at their local bank.

Obama Budget Cuts Bacteria Testing For Produce — President Barack Obama's proposed budget would eliminate the nation's only program that regularly tests fruits and vegetables for deadly pathogens, leaving public health officials without a crucial tool used to investigate deadly foodborne illness outbreaks. The budget plan the president sent to Congress Monday would ax the Agriculture Department's tiny Microbiological Data Program, which extensively screens high-risk fresh produce throughout the year for bacteria including salmonella, E. coli and listeria. If samples are positive, they can trigger nationwide recalls, and keep tainted produce from reaching consumers or grocery store shelves. Food safety advocates and a top-ranking U.S. Centers for Disease Control and Prevention official said the information also can help pinpoint foods tied to illness outbreaks, and would not easily be replaced by companies' internal tests or more modest federal sampling programs. "It's the radar gun that keeps the industry honest and if that's eliminated, we don't have a program that will keep the industry in check,"

Geithner Says ‘Modest’ Tax Increases Better Than Deeper Cuts -- U.S. Treasury Secretary Timothy F. Geithner endorsed the “modest” tax increases proposed by President Barack Obama and opposed by congressional Republicans, saying they would be preferable to spending cuts. Reducing the U.S. budget deficit over the next decade without raising taxes would require damaging cuts to Medicare benefits and national security, Geithner said in testimony today before the Senate Finance Committee. In the budget plan released yesterday, Obama called for $1.4 trillion in fresh revenue from Americans at the top of the income scale, including higher taxes on wages and investments and limits on tax breaks for retirement savings and health insurance. “We think the economics are quite good, quite sound,” Geithner said in his testimony. Geithner said he would prefer to see additional revenue raised through a comprehensive rewrite of the U.S. tax code. The administration hasn’t made such a detailed proposal, and Geithner said that one won’t be forthcoming. He described that decision as a realistic nod to House Republicans’ unwillingness to agree to the same broad framework.

How Not to Revive an Economy — THE polarized rhetoric of the 2012 election cycle presents voters with a false choice of whether the government can create jobs or should just get out of the way. The real debate should be about which policies work and which don’t. I spent three years reporting on the $840 billion stimulus plan that the Obama administration pushed through Congress in 2009. My conclusion: government can create jobs — it just doesn’t often do it well. The stimulus — a historic package of tax cuts, safety-net spending, infrastructure projects and green-energy investments — certainly did a lot of good. As the economists Alan S. Blinder and Mark Zandi have noted, it’s one of the key reasons the unemployment rate isn’t in double digits now. But the stimulus ultimately failed to bring about a strong, sustainable recovery. Money was spread far and wide rather than dedicated to programs with the most bang for the buck. “Shovel-ready” projects, those that would put people to work right away, took too long to break ground. Investments in worthwhile long-term projects, on the other hand, were often rushed to meet arbitrary deadlines, and the resulting shoddy outcomes tarnished the projects’ image.

NY Times Identifies New Disease: Federal Budget Schizophrenia - It's been almost exactly a year since I posted about this poll that showed definitively that tea party supporters not only wanted to keep the federal spending they like, but in many cases wanted it to increase. They did this at the same time they were insisting the federal budget should be balanced primarily through spending cuts. This excellent story from yesterday's The New York Times by Binyamin Appelbaum and Robert Gebeloff may use anecdotes to say the same thing, but it does so in an extremely well-written and highly convincing way. The bottom line is the same as what the poll showed: The number of people who get federal assistance is much, much greater than is commonly admitted and those that get the assistance think they're "entitled" (Yes, I'm using that word very intentionally) to it. But these same recipients of federal benefits seldom, if ever, admit it (and never use the words entitled or entitlement) and often refuse to acknowledge that they take advantage of the spending. In some cases they even deny that it is federal spending. And if you ask them directly they want federal spending cut because, they say, the deficit and debt are killing them.

ABC Does Unpaid(?) Commercial Announcement for the Republicans on the Evening News  - Dean Baker  ABC News took budget reporting to new levels of irresponsibility last night telling its viewers to think of the federal budget like the family budget by knocking off 8 zeros to make spending $38,000, instead of $3.8 trillion. While this approach could be useful to put some items in context, it is fundamentally misleading in explaining the significance of the deficit and debt. Unlike ABC's family, the government is expecting to be around in perpetuity. This means that it never has to pay off its debt. At the least, it would be more appropriate to make a comparison to a corporation, which may forever add to its debt as it grows. No shareholder would complain if General Electric borrowed a huge amount of money to expand a profitable division. Government spending fosters growth by financing education, infrastructure and other public investments which will make the country richer in the future. However, there are even more fundamental differences between the government and a family. The U.S. government's debt is in notes printed by the government. If ABC wants to make the family analogy, its family has an obligation to pay off the $9,000 it has borrowed in 9000 sheets of paper that say "I owe you $1, payable in notes that say 'I owe you a note saying that I owe you a note'."

What if Eisenhower’s budget were your (grandparents’) family’s? - What if Eisenhower’s budget were your (grandparents’) family’s? What if Kennedy’s were? How about LBJ’s?  Nixon’s? What if Reagan's were your parents' or you own family's? How about G.H.W. Bush’s? Clinton’s? G.W. Bush’s? One of my pet peeves is the use by political reporters and pundits of sophistic or downright imbecilic supposed analogies.  (Like last week’s classic from Politco’s Jim VandeHei, analogizing Obama’s justification for agreeing to team up with a Super PAC, notwithstanding his opposition to the Citizens United decision, to a teenager’s refrain that he wants to what “everyone else” is doing—as if what the teen’s friends are doing would have a profound effect on the teenager and others unless that teenager went along.) So when I clicked on the Yahoo News page, my opening page for one of the web browsers I use, this morning and saw that one of the featured videos was a clip from last night’s ABC Nightly News broadcast, titled “What if Obama's Budget Were Your Family's?”, I shook my head in dismay at the sheer persistence of this ridiculously false analogy. 

UPDATE to “What if Eisenhower’s budget were your (grandparents’) family’s?” - In my first of two posts yesterday, “What if Eisenhower’s budget were your (grandparents’) family’s?”, about an ABC News item from the evening before discussing Obama’s proposed 2013 budget, and propagating the truism, so popular among pols and pundits, that the federal budget is like a family’s, only with eight zeroes following total expenditures, income receipts and carried debt, I mentioned that the piece contained a February 2009 clip of Obama promising that his final first-term budget would halve the deficit that his administration inherited.  I saw the video because it was highlighted on the Yahoo News pages yesterday morning. Jake Tapper, ABC’s White House correspondent said Obama was now breaking that promise. I pointed out that the promise probably was based in part on Obama’s intent to end some of the Bush tax cuts (the clip shown was just a few words of Obama’s comments).  Dean Baker also posted a takedown of the ABC News report and of the silly federal-budget-and-family-budget analogy.  Baker also mentioned Tapper’s inclusion of the clip of Obama’s February 2009 promise to halve the deficit, and points out that the main reason that the promise is unfulfilled is that the economic downturn proved far more severe than Obama and most mainstream economists recognized at the time, and so the tax revenues have been correspondingly lower than anticipated. 

By Request: Why Eating A Cupcake is Like "Off-Budget" Federal Spending - The managing editor of Roll Call -- the guy who keeps me on as a weekly columnist for the great metropolitan newspaper about Congress -- asked me to explain what it means when something is said to be "off-budget."Here's the best way to think about it. Supposed you're on a 1300 calorie-a-day diet (I'm talking from personal experience here: I've been on a diet like this for the past 5 months) and to keep track of how much you're eating you write down every morsel that goes in your mouth in a little book. Let's call it "the budget."It's going well. Combined with an exercise program, your diet is producing good results and you're losing weight. But today at 4 pm you walk past one of those cupcake stores that, like the donut and cookie shops in years past, now seem to be everywhere. And because this particular cupcake emporium is featured in a reality series on cable, you get an impossible-to-ignore craving for that large tiramisu cupcake with extra espresso icing in the window. The only problem is that the cupcake is at least 500 calories and at this point in the afternoon you've already eaten 850. You eat the cupcake with the extra 500 calories but don't write it down in your little book. That way at the end of the day it looks as if you've stayed at or below 1300 calories.

Why the Senate hasn't passed a budget - Republicans have relentlessly harangued the Senate's Democratic leadership for failing to pass a budget resolution. "1,000 days without a budget," was the title of a typical missive last month. On the weekend Jack Lew, who has just been named Barack Obama's chief of staff after serving as his budget director, defended the Senate by saying it couldn't pass a budget without 60 votes, i.e. without the cooperation of some Republicans. Republicans jumped on Mr Lew, pointing out that under Congress' budget procedure, a budget resolution cannot be filibustered and thus only needs a simple majority vote - typically 51 votes - to pass. Glenn Kessler, The Washington Post's fact checker, awarded Mr Lew four Pinocchios, the top score, for fibbing.  In fact, Mr Lew, while wrong on the narrow wording, is right on the substance. It is true that the Senate can pass a budget resolution with a simple majority vote. But for that budget resolution to take effect, it must have either the cooperation of the house, or at least 60 votes in the Senate.

Expanding a Safety Net Program - The federal budget proposed Monday by the Obama administration would continue the trend that Robert Gebeloff and I wrote about Sunday: the expansion of government benefits for middle-class families. One program that the president wants to expand is the earned income tax credit, which played a prominent role in our article. The earned income credit is intended to encourage people with low-paying jobs to remain in the work force. Many of those workers do not pay income taxes, but they still pay taxes for Medicare and Social Security. The credit offsets those costs, allowing workers to keep more of their paychecks. It typifies the shift in government benefits from the “jobless poor” to working families, as the Center for Budget and Policy Priorities described the trend in a recent analysis that we blogged about this morning. From our Sunday article: “When the earned-income credit was introduced in 1975, eligibility was limited to households making the current equivalent of up to $26,997. In 2010, it was available to families making up to $49,317. The maximum payout, meanwhile, quadrupled on an inflation-adjusted basis.” What we did not note is that the current situation is temporary. The government expanded the maximum payment that families with three or more children could receive as part of the 2009 stimulus, and has since extended the measure through the end of 2012. Last year the provision lifted the maximum payout, recalculated annually, to $5,751 from $5,112.

Entitlements Hysteria, by Jeff Sachs: One of the unshakable myths of the punditariat is that the federal government is going bankrupt because of entitlements spending, especially spending on Medicare and Medicaid. Each day we hear the drumbeat saying that either we cut entitlements now or we are finished as a nation. This is a stampede of unreason, contradicted by the facts.  So what is the source of the hysteria? Some of it is simply propaganda, by those with the political agenda to gut the country's social safety net. But there is something else. Confusion! The punditocracy is repeating the results of forecasts that indeed suggest calamity, but calamity in the late 21st century, not now. These long-term forecasts are arbitrary but have been repeated as an immutable fact by those who don't read the fine print. The most frequently quoted forecast is that of the Congressional Budget Office. The CBO's long-term forecast assumes that health care costs will continue to rise steeply during the next 70 years, though at a diminishing rate. Yet somehow I'm not ready to panic about the health care costs as of 2085.  Why should we assume failure decade after decade to use the new information technologies to lower the costs of health-care delivery and administration?

Comparing taxes under Obama's and Romney's budgets - As I wrote a year ago, President Obama’s 2012 budget showed that the federal government had become an insurance conglomerate protected by a large, standing army. About 40 percent of its spending went to the three major social insurance programs — Medicare, Medicaid and Social Security — and another 23.8 percent of federal dollars went to the military.   His 2013 budget shows much the same thing. So this year, I want to focus on the other side of the ledger: how we’re paying for our insurance conglomerate/army right now, and how the two parties propose we do so in the future. Right now, we’re not paying for it. In 2011, federal spending was 24.1 percent of GDP. Tax revenue was 15.4 percent of GDP. That’s a slight rise from 2009 and 2010, when revenue was 14.9 percent of GDP, but all three are near-record lows: Before this financial crisis, the last time federal revenues were below 16 percent was 1950 — which is to say, before Medicare and Medicaid were law, and before Hawaii was even a state. For comparison’s sake, federal revenues averaged 18.2 percent of GDP in the Reagan years, and 19 percent of GDP in the Clinton years.

Romney’s severely conservative budget promises - Romney has, essentially, made four significant fiscal promises: He has pledged to cap federal spending at 20 percent of GDP. He has pledged to cut taxes to about 17 percent of GDP. He has pledged to a floor on defense spending at 4 percent of GDP. And he has pledged to balance the budget.  So let’s add it all up: Romney has to cut federal spending down to 17 percent of GDP. Federal spending is currently at 24 percent of GDP, and the Congressional Budget Office predicts that it will be around 22 percent for the next decade. For comparison’s sake, Paul Ryan’s budget would keep spending above 20 percent of GDP for at least the next 20 years.  That’s a lot of numbers, so here’s the bottom line: Romney is proposing to cut more than twice as much from the budget as Ryan. And Ryan’s budget, as you’ll remember, was already quite austere.  Romney is clearer in his goals for the federal budget than he is in how he’ll achieve them. But he 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.

Severe Conservative Syndrome - Mitt Romney has a gift for words — self-destructive words. On Friday he did it again, telling the Conservative Political Action Conference that he was a “severely conservative governor.” As Molly Ball of The Atlantic pointed out, Mr. Romney “described conservatism as if it were a disease.” ... That’s clearly not what Mr. Romney meant to convey. Yet if you look at the race for the GOP presidential nomination, you have to wonder whether it was a Freudian slip. For something has clearly gone very wrong with modern American conservatism. Start with Rick Santorum ..., best known for 2003 remarks about homosexuality, incest and bestiality. But his strangeness runs deeper than that. ... Mr. Santorum made a point of defending the medieval Crusades against the “American left who hates Christendom”..., he has also declared that climate change is a hoax ... on the part of “the left” to provide “an excuse for more government control of your life.” You may say that such conspiracy-theorizing is hardly unique to Mr. Santorum, but that’s the point: tinfoil hats have become a common, if not mandatory, GOP fashion accessory.

Pavlina R. Tcherneva: Why the Job Guarantee is Superior (Wonkish) - Randall Wray defines a Job Guarantee this way: “A job guarantee program is one in which government promises to make a job available to any qualifying individual who is ready and willing to work. Qualifications required of participants could include age range (i.e. teens), gender, family status (i.e. heads of households), family income (i.e. below poverty line), educational attainment (i.e. high school dropouts), residency (i.e. rural), and so on. The most general program would provide a universal job guarantee, sometimes also called an employer of last resort (ELR) program in which government promises to provide a job to anyone legally entitled to work.” I feel that with 8% (nominal) unemployment stretching as far as the eye can see, a humane society needs to be looking for alternatives to the current regimen. A few weeks ago I called for a technocratic debate on the merits of the Jobs Guarantee (JG), relative to other fiscal policies. A number of bloggers took the charge but the debate was not immune to ideological biases, which proved the starting point of my piece that one cannot separate fact from theory or ideology (and by ideology I do not mean the derogatory use of the word, but that which signifies ‘ontology’ or a ‘world view’). What I didn’t expect is for friends and sympathizers to resurrect one particularly invidious charge we have long heard from MMT deniers, namely that MMT is pushing authoritarian policies. Oh, boy. How did we even get here? I thought this was going to be a technocratic debate.  Let me deal with just a few issues here: 1) the seeming resurrection of status quo fiscal policies, 2) the merits of JG compared to other fiscal policies, 3) some additional real-world evidence on the benefits of direct job creation, and 4) offer a vision for a JG in a free and democratic society.

Reforming the Payroll Tax: We Need More Than Another Temporary Cut. We Need a Permanent Fix -- President Obama’s 2013 budget includes a proposal to extend the current 2 percent payroll tax cut, first put in place last year, for the balance of 2012. Congress will probably go along after another round of grandstanding. Yes, the payroll tax is too high. In itself, even a small, temporary cut might be welcome, but it is not what we really need. We need a permanent fix of the payroll tax, yet another broken part of our broken tax system. Here is why. Tax laws divide the statutory burden of the payroll tax between employers and employees, each of whom pays 6.2 percent for Social Security and 1.45 percent for Medicare, or 15.3 percent in all. Starting in 2011, Congress cut the employee portion of the Social Security tax to 4.2 percent. At the end of the year, it extended that temporary reduction for two more months. In one of the great frauds embedded in our tax system, Congress chose this pattern of statutory rates to make it look like the government is going easy on workers. The arrangement may fool a few people, but statutory rates are not what matter. The important thing is who actually bears the economic burden of the tax—what tax wonks call the question of tax incidence. Economists are as close to unanimous as our contentious profession ever gets in placing the economic burden of the payroll tax 100 percent on workers.

Permanent Cut to Payroll Tax Unrealistic, Geithner Says - As Congress wrestles with how to extend a payroll-tax cut through 2012, one Democratic lawmaker raised an issue that is lurking below the surface of the debate: why not permanently reduce the tax? At a Senate Finance Committee hearing on Tuesday, Sen. Jeff Bingaman (D, N.M.) said that a permanent reduction in the payroll tax, which funds Social Security, might prompt more employers to hire. But Treasury Secretary Timothy Geithner shot the idea down. “I don’t think that’s realistic,” Geithner said. Permanently cutting the payroll tax could potentially open up a big new debate about the Social Security entitlement program, at a time when Congress is already gearing up for other fights. House Republicans earlier this week already backed down in a standoff with Democrats over the payroll-tax cut, which was first put into law under a deal between the GOP and U.S. President Barack Obama in late 2010.

Republicans propose not paying for payroll tax – Republicans in Congress on Monday proposed extending a tax cut for 160 million workers through the rest of the year without offsetting the cost with spending cuts elsewhere in the budget. As first reported by Reuters, Republican leaders in the House of Representatives issued a statement saying they have decided to move forward with a plan to simply extend the payroll tax cut without offsetting spending reductions. Negotiations would continue on separate proposals to extend jobless benefits for the long-term unemployed and to avert a 27 percent pay cut for doctors treating elderly Medicare patients, the statement said.

GOP Drops Demand For Offsetting Payroll Tax Cut - Facing emboldened Democratic negotiators and a quickly thinning legislative calendar, House Republican leaders have offered to extend the payroll tax holiday through the end of the year without paying for it. The development represents a dramatic reversal for GOP leaders, who nearly allowed the payroll tax cut to lapse in December in part because of their insistence that the package be financially offset.  “Because the president and Senate Democratic leaders have not allowed their conferees to support a responsible bipartisan agreement, today House Republicans will introduce a backup plan that would simply extend the payroll tax holiday for the remainder of the year while the conference negotiations continue regarding offsets, unemployment insurance, and the ‘doc fix,’” said GOP leaders in an official statement Monday afternoon. That’s a huge concession to legislative and political realities, and a tacit admission that Republican leaders desparately want to avoid another no-win fight over renewing a tax cut that overwhelmingly benefits the middle class.

Tea Party Gets Hosed...Again - Today's announcement by House GOP leaders that the GOP is no longer insisting that the payroll tax extension be offset with spending cuts is just the latest in what now has to be considered to be a series of failures by the tea party to exert any significant influence on a final spending or tax decision. First, the continuing resolution approved last April for all of 2012 reduced spending by only millions of dollars when the tea party had been insisting on $100 billion. Second, the debt ceiling deal increased the government's borrowing limit when the tea party initially demanded that it not be increased at all. And at least some of the spending cuts it included, which were a fraction of what the tea party wanted, could be reduced further if the sequester is modified or canceled. Third, the payroll tax cut was extended in December over the tea party's objections. And fourth is today's announcement that offsetting spending cuts for extending the payroll tax cut again will no longer be required. Is it really possible the tea partiers in the House don't realize that they're not as important as they say they are?

Was This The Best Day For The White House Since Bin Laden? - This was a big day for the Obama administration on the budget...and it had nothing to do with the budget it submitted to Congress. What in the world were House Republicans thinking when they announced today that they had reversed themselves and agreed that spending cuts weren't needed to pay for the extension of the payroll tax cut that will expire at midnight on February 29? There were two huge political implications for this beyond the dramatic flip-flop on the need for offsets,  First, from a pure PR standpoint, the GOP stomped all over the story it wanted to get the media to cover about its opposition to the Obama 2013. That was trumped and then some by the GOP announcement .The story of the day is now about how the GOP capitulated to the congressional Democrats' demands about the payroll tax cut extension, how this is a win for the president, etc. Second, the GOP's agreement to extend the payroll tax cut without getting anything in return meant that it voluntarily gave up the only legislative leverage it was going to have until Election Day to get the White House to do something it doesn't otherwise want to do.

Republicans Cave on Payroll Tax Cut, Propose Full-Year Extension Without Offsets - In an impressive bit of caving, the House Republican leadership has given up on finding offsets for the payroll tax cut, proposing a bill that would extend the current cut to the end of the year without any funding. However, the other two pieces that were tied to the overall legislation at the end of last year, extended unemployment benefits and the “doc fix” to avoid a reset of Medicare reimbursement rates, would not be included. Here’s the full statement from Speaker John Boehner, Majority Leader Eric Cantor and Majority Whip Kevin McCarthy. Afterwards we will parse it. Democrats have refused virtually every spending cut proposed – insisting instead on job-threatening tax hikes on small business job creators – and with respect to the need for an extension of the payroll tax cut, time is running short.Because the president and Senate Democratic leaders have not allowed their conferees to support a responsible bipartisan agreement, today House Republicans will introduce a backup plan that would simply extend the payroll tax holiday for the remainder of the year while the conference negotiations continue regarding offsets, unemployment insurance, and the ‘doc fix.’

How Not to Make Public Policy: The Payroll Tax Cut -It is rare that an act of legislation encompasses nearly every feature of poor public policy making in the manner of the current “temporary” Social Security payroll tax cut. Imperfect legislation is of course the norm in any system that brokers compromises between competing interests, but more typically even the worst outcomes advance the general policy objectives of one side even as they may be fiercely condemned by the other. The payroll tax cut, by contrast, serves almost no productive purpose while causing severe adverse consequences from almost any conceivable policy vantage point. The following is but a partial list of the problems associated with the policy.

    • 1. Instability, uncertainty and brinksmanship.
    • 2. Undermining Social Security finances.
    • 3. Worsening budget problems.
    • 4. Undermining budget transparency.
    • 5. Destruction of the historical Social Security compact.

Geithner To Congress: Extend The Payroll Tax Cut & Unemployment Benefits -  Treasury Secretary Tim Geithner told the Senate Finance Committee on Tuesday that Congress "must extend the payroll tax cut and unemployment insurance by the end of this month" or 160 million Americans will see their taxes rise and 5 million Americans will lose or be denied unemployment insurance -- which he said would cause a hit to the economic recovery.

Lawmakers near deal to extend payroll tax break - One day after House GOP leaders announced they would abandon their insistence that a payroll tax break be paid for with spending cuts, negotiators are now close to a broader deal that would also extend unemployment benefits and ensure Medicare doctors don't see a pay cut, sources said. The possible breakthrough Tuesday comes after a tumultuous 24-hour period when House Speaker John A. Boehner (R-Ohio) and other GOP leaders in the House said they would no longer force the $20-a-week payroll tax break to be paid for -- reversing their position on the issue, which has left the GOP battered in the polls.   But the shift has not been embraced by the Republican rank-and-file in the House, who have been reluctant to give up their fight against a proposal that does not include spending cuts and adds to the deficit. And Senate Republicans have been noncommittal. As talks continued, both Democratic and Republican sources familiar with the private negotiations Tuesday said a comprehensive deal now appeared to be in reach. All three provisions -- the payroll tax cut, long-term unemployment benefits and the pay rate for doctors who treat Medicare patients -- expire Feb. 29. And with Congress scheduled to adjourn Friday for a weeklong Presidents Day recess, all sides want to avoid the appearance of being on vacation while workers see a tax hike, jobless Americans go without benefits or doctors face a pay cut.

Senate Dems Could Add UI and Doc Fix to Unfunded Payroll Tax Cut Bill - Senate Democrats have a plan for the payroll tax cut legislation that House Republicans basically gave up on yesterday. When we last left our story, Republicans said that they would offer a bill in the House extending the payroll tax cut to the end of the year without an offset. This would mean that the extensions of unemployment insurance and the doctor’s fix to avoid a 27% cut to Medicare reimbursement rates would get orphaned, making it more difficult to pass them without the tax cut that has bedeviled the House GOP for weeks. So Senate Democrats hit upon a solution: A senior Senate Dem aide explains how Democrats might well proceed from here. “We might amend it [the unpaid-for payroll tax cut] with UI and doc fix over here and…the amends would be hard for Republicans to vote against, because we have worked with Republicans to find pay-fors for those pieces that are attractive to them.” The doc fix and UI extensions cost together about $60 billion — Dems think they can cover that cost over 10 years in ways that Republicans will have to accept. If that’s correct, the whole saga could end with a quick ping pong game between the House and the Senate. The key to this would be finding the $60 billion in a way that Senate Republicans would accept. After that, it’s just a jam job to throw it to the House and dare them to block it as the clock runs down.

Congressional negotiators near deal on payroll tax, unemployment benefits - Congressional negotiators reached a tentative deal Tuesday to extend a payroll tax holiday, unemployment benefits and Medicare payment rates for doctors, while finding more than $50 billion in cuts to reduce the effect on the federal deficit. While President Obama and congressional leaders publicly jousted over the negotiations, senior Democrats and Republicans worked behind the scenes toward a compromise that would extend the tax and unemployment benefits through the year. A deal also would mean that doctors would not see a drop in rates paid by Medicare, according to senior aides in both parties. Lawmakers and aides stressed that final details are still being ironed out — including which cuts would be used to finance the unemployment and Medicare provision — but they were optimistic that a broad deal would be announced Wednesday and approved by Friday. Republicans left a meeting Tuesday night in which House Speaker John A. Boehner (R-Ohio) and his leadership team outlined the emerging deal with few dissenters and several key supporters among the sometimes-volatile GOP freshman class.

Congress Adds Payroll Tax Cut to Gov’t Credit Card - So much for Congress’s vaunted“pay as you go” concept. In the same week that Republicans skewered President Obama for unveiling a new budget that will keep the deficit well above $600 billion a year for the next decade,  House and Senate GOP leaders are ready to whip out their credit cards and add the $100 billion cost of a major payroll tax cut extension to the national debt.  This stunning turnabout likely will occur this week, following a tentative agreement Tuesday evening by House and Senate negotiators on a bipartisan framework that includes extending a two percentage-point reduction in the Social Security payroll tax cut for an additional ten months, but without approving offsetting spending cuts or tax increases. Instead, House Republican leaders, with the Democrats’ blessing, will likely declare an “emergency” and approve the tax cut extension by simply adding it to the burgeoning deficit. The tentative agreement will also include a continuation of long-term unemployment benefits and a measure to avert deep cuts in Medicare reimbursement rates for physicians, but lawmakers must still decide on spending cuts to offset the cost. A final agreement could be announced as soon as Wednesday and approved by Friday.

Tentative Deal Reached to Preserve Cut in Payroll Tax — Members of a House-Senate committee charged with writing a measure to extend a payroll tax reduction and provide added unemployment benefits reached a tentative agreement Tuesday evening, with Republicans and Democrats claiming a degree of political victory in a fight with significant election-year implications. One day after House Republican leaders said they would offer a bill to extend the $100 billion payroll tax rollback for millions of working Americans without requiring spending cuts to pay for it, the Congressional negotiators struck a broader deal that would also extend unemployment benefits and prevent a large cut in reimbursements to doctors who accept Medicare.  A vote on the measure would most likely happen by Friday, when Congress is set to recess for a week. But senior aides warned that negotiators still had to sign off formally on the agreement and that obstacles could surface given the long-running tensions over the measure. Democrats said they had also been able to beat back new conditions that Republicans had wanted on jobless pay, like requiring beneficiaries to seek high school equivalency degrees, and had found middle ground on Republican attempts to significantly reduce the number of weeks in which the unemployed could draw benefits.

Congress Figures Out How to Finance a Payroll Tax Cut: Borrow the Money - It looks like Congress is about to assume its default position: In the face of an intractable partisan dispute over how to pay for a government initiative, don’t. If Democrats won’t cut spending, and Republicans refuse to raise anybody’s taxes, there is always the solution they both can agree upon—just borrow the money and increase the deficit. The matter at hand is the payroll tax, of course. And after months of squabbling, it looks as if Congress is about to extend a “temporary” tax cut for another 10 months. And it will borrow $100 billion to do it.  This wouldn’t bother me if I thought the payroll tax cut was really going to expire in 10 months. But I don’t.  Given the Democrats’ politically successful claim that allowing the tax break to expire was akin to a tax increase, it is hard to imagine them abandoning the provision–or the issue– anytime soon.

Geithner: Payroll Tax Rate Should Rise Back to Normal in 2013 - Treasury Secretary Timothy Geithner said Thursday he wouldn’t support another temporary payroll-tax cut extension next year. “This has to be a temporary tax cut. I don’t see any reason to consider supporting its extension” in 2013, Geithner said at a Senate Budget Committee hearing. A tentative deal outlined earlier this week among lawmakers would extend the tax break, which reduces workers’ payroll taxes to 4.2% from 6.2%, until the end of this year. Geithner said he supports the extension through the end of 2012, saying lawmakers had taken a “critically important” step toward helping the economy when they struck a deal to extend jobless benefits and a payroll-tax cut, and urged Congress to approve additional measures to bolster the recovery. “Let’s try to build on this bipartisan moment of cooperation on something good for growth and move beyond that to do things that will help get construction workers back to work with investments in infrastructure, help Americans refinance their homes, and strengthen the incentives we create for companies to invest here in the United States,”

Can Congress Ever Restore Payroll Taxes To Their Usual Levels? : It's All Politics - Republicans rarely meet a tax cut that they don't like. Now that they have found one, they are finding it politically impossible to stop it. On Tuesday, President Obama called on Congress to extend a 2 percentage point reduction in payroll taxes, which fund Social Security. The cut, enacted last year, is otherwise set to expire at the end of the month. The current cut means a savings of about $20 a week to a worker who earns $50,000 a year and about $2,000 a year to someone making $100,000. House Republicans have already signaled that they will allow an extension through the end of the year. They were badly burned at the end of 2011, when the tax cut was originally set to expire and GOP members of Congress found themselves accused of wanting to raise taxes on working Americans. That raises the question of when it's ever going to be OK to restore payroll tax rates to their usual levels — and what that will mean for Social Security's financing over the long haul. Most Republicans still think the payroll tax cut is a bad idea precisely because it will eventually eat into Social Security's already precarious finances. They think it also has a limited benefit in terms of stimulating the economy. But they have calculated that the political costs would be too high to make a stand now

Dems To GOP: Keep Birth Control Out Of Highway Bill - Sensing a political upper-hand in the brewing culture war, Senate Democrats had their guns blazing against the GOP’s birth control amendment Tuesday, vowing to fight Republicans’ best efforts to tack it on to the bipartisan highway bill and warning that the measure would take women’s health in America back to the “dark ages.” “In 2012, I stand here in complete amazement,” said Sen. Barbara Boxer (D-CA), “that in a country known for its medical breakthroughs and advancements, Republicans would have us go back to the medical dark ages.” She said the energy and transportation bill otherwise has strong bipartisan support, and deemed the contraception amendment both a poison pill and irrelevant. The amendment by Sen. Roy Blunt (R-MO) purports to focus on contraception, but it goes well beyond that. As written, it would permit all employers to deny any health services in their insurance plans that aren’t in accordance with their “religious beliefs and moral convictions.” The measure states no limitations or criteria, which means employers have free rein to decide what medical care their employees may or may not receive.

Payroll Tax Cut Negotiations: Unemployment Benefits Set to Drop from 99 to 79 or Less Weeks - House Minority Leader Nancy Pelosi released a statement that probably secures passage for a standalone, unfunded payroll tax cut: “The House Republican leadership plans to bring to the floor a stand-alone payroll tax cut extension bill tomorrow. “We continue to call upon the conferees to resolve the remaining issues — extending unemployment benefits and ensuring seniors can continue to see their doctors under Medicare — by February 17. If the Conference Committee is unable to complete its work on a comprehensive bill by that date, the Republican leadership should cancel the recess and remain in Washington next week.” As I understand it, the House GOP may try to pass this on the suspension calendar, which would require a 2/3 vote. With Pelosi’s blessing, I would expect the vast majority of Democrats would provide support, meaning that the bill could get 2/3 even without a majority of Republicans. I’ve heard plenty of Republican grumbling, but not quite enough to occasion a revolt. The real question here is in the Senate. If Democrats can hit upon $50-$60 billion in offsets, they can attach an extension of unemployment insurance and a “doc fix” to the unfunded payroll tax cut bill coming from the House, and then send it back, putting the House in the same precarious position it was in just a couple months ago, on the clock with the payroll tax cut extension on the line. Politico reports that a deal is imminent. And it’s really not good. Under the potential plan, the two-percentage point payroll tax cut would be extended until the end of the year — and the $100 billion cost would be added to the deficit. Unemployment benefits would be extended for the next 10 months, at a cost of $30 billion, and doctors who serve Medicare patients would avoid seeing their payments cut at a cost of $20 billion.

Deal on payroll tax includes pension contributions - A deal struck late Wednesday to extend a payroll-tax break, give extra jobless benefits and not cut payments to doctors serving Medicare patients will include more pension contributions made by federal employees.  While Republicans earlier this week dropped their insistence that a two-percentage-point drop in the payroll tax, to 4.2%, be offset by an additional $100 billion of revenue or spending cuts, the roughly $50 billion needed to extend unemployment benefits and the so-called doc fix will be paid for.  We have established an important precedent that any future extensions of unemployment insurance must be paid for with genuine spending cuts,” said Rep. Kevin Brady, a Texas Republican.  According to published reports, the $50 billion will come from federal employees contributing more to their pensions, the sale of spectrum and cuts made to Medicare hospital and specialist fees.

What Happens if Congress Doesn’t Continue Emergency Unemployment Benefits? -  The emergency federal unemployment insurance (UI) program is set to expire at the end of the month.  If Congress fails to extend it:

  • The number of weeks of available benefits for unemployed workers will shrink dramatically, to fewer than 26 weeks in some states (see the maps below).
  • Nearly 4.5 million jobless workers will lose UI benefits before the end of the year (see the table below).
  • The economic recovery will slow.

Besides the obvious benefit of supporting unemployed workers and their families at a time when there is still only one job opening for every four unemployed workers, UI is one of the most cost-effective ways to support the economic recovery.  CBO ranked it first in its bang-for-the-buck effectiveness among the measures it examined.  Mark Zandi, Chief Economist of Moody’s, estimates that failure to continue emergency UI benefits could reduce GDP by 0.3 percentage points this year and cost hundreds of thousands of jobs.

Payroll Tax Cut/UI Details Released - Talking Points Memo snagged the details, written up by the House Ways and Means Committee, of the payroll tax cut/unemployment insurance/”doc fix” bill. So let’s go over it. We know the topline stuff: it’s a $150 billion piece of legislation, and $52 billion will be paid for. The payroll tax cut, extended to the end of 2012, will not have an offset. But the offsets for the unemployment extension include a sell-off of wireless spectrum, and an increase in the contribution to pension benefits for new federal employees. For the doc fix, the offsets include a variety of health care-related items, including a damaging 33% cut to the Health Care Prevention Fund (called a “slush fund” in this document). Then there’s the changes to the unemployment system. Under the bill, unemployment beneficiaries in every state will lose anywhere between 19 and 36 weeks of unemployment benefits by September of this year. It breaks down like this (previous maximum benefit in parentheses): States with unemployment rate under 6%: 40 weeks (60 weeks)
6.0%-6.4%: 54 weeks (73)
6.5%-6.9%: 54 weeks (86)
7.0%-7.9%: 63 weeks (86)
8.0%-8.4%: 63 weeks (93)
8.5%-8.9%: 63 weeks (99)
9.0% and above: 73 weeks (99)

These are significant drops in the numbers, and more people – I don’t have a precise number, but I would put it in the hundreds of thousands, considering that the average length of unemployment right now is around 43 weeks – will see their benefits expire. In addition, states will be allowed to mandate drug testing as a condition of receiving unemployment benefits. Similarly, the bill will extend welfare benefits for the rest of the year but ensure that ATMs at casinos, liquor stores and strip clubs will not pay out those benefits. Up to 10 states, under the plan, could institute demonstration re-employment projects like Georgia Works.

Payroll Tax/UI Bill Passes the House; Senate Vote Will Not Face a Filibuster - The House passed the payroll tax/UI/doc fix bill this morning by a count of 293-132. 91 Republicans and 41 Democrats voted against the bill, but the combination of Democrats and Republicans in support were more than enough to carry the bill across the line. Republicans voting against it were mostly hardliners philosophically opposed to things like unemployment insurance and newly exercised about tax cuts for working families, particularly without an offset. Democrats voting no opposed some of the pay-fors – particularly the increase in pension contributions for new federal employees, and cuts to health care programs – and the reduction of weeks of eligibility for unemployment benefits. But despite this, the bill got across the line. I’m more interested in the little deal cooked up in the Senate to ensure passage:The Senate is expected to take up the agreement later Friday. Though aides expect it to pass, they also predict significant Republican opposition, reflecting the GOP’s underlying opposition to the payroll tax cut as policy, and the fact that the party’s negotiators were frozen out — or claim they were frozen out — of the discussions. To accommodate those objections, Senate leaders agreed in a last-minute development that the conference report would be immunized from a filibuster — meaning it can pass with a simple majority.

Tax Cut Extension Passes; Everyone Claims a Win - With each party claiming that it had pocketed an election-year victory, Congress on Friday voted to extend payroll tax cuts and unemployment benefits and sent the legislation to President Obama, ending a contentious policy fight that left lawmakers with the political bruises to show for it. House Republican leaders were forced to turn to Democrats for passage; of the 293 who voted for the roughly $140 billion package, 147 were Democrats, carrying the proposal over the top Friday morning with the acquiescence of almost as many Republicans. It was only the second House bill in the 112th Congress to be split roughly in half along party lines; the other was a spending bill. The Senate followed within minutes and approved the measure on a vote of 60 to 36. Mr. Obama has said he would sign the bill as soon as Congress passed it. The bill would maintain a two percentage-point payroll tax cut for 160 million working Americans, provide added unemployment benefits for millions and protect doctors who accept Medicare from a large cut in reimbursements.

State Socialism versus State Capitalism - In comparative economic systems -- to some extent a dying field -- a distinction is often drawn between state capitalism and state socialism. Both are capitalistic at heart, but under each system the government owns industries such as railroads and the post office. State socialists run these enterprises to maximize social good, e.g. the post office might be forced to deliver to unprofitable areas if the social good from doing so is large enough. Thus, profit maximization is not necessarily the main goal of state socialist governments. State capitalists would operate these enterprises to maximize profit. A railroad would only go to areas where it is profitable, social considerations are off the table. It seems to me that at least some aspects of the debate between Democrats and Republicans on how to run the government is really a debate over how the government should operate the enterprises it has control over (e.g. public goods). Should the government maximize profit, including outsourcing to the private sector whenever it might save a penny, or should social goals play a large role in how these entities are operated?

Obama Administration Would Tax Dividends at Same Rate as Top Earnings - I’m loath to dive into the numbers of the Administration’s FY 2013 budget, because it won’t be used as anyone’s baseline, and to the extent that it will, that was baked into the cake by the debt limit deal. If you want the hard numbers, the surprisingly best source I’ve found comes from the Guardian. So why cover this at all? Aside from the fact that little else is going on, there is one new wrinkle, or at least new to me, that would represent as significant a change to income inequality as anything the Administration has yet proposed. In his new budget blueprint, President Obama is proposing to tax dividends of the wealthiest taxpayers as ordinary income subject to their top income-tax rate, which was the practice until the Bush administration lowered the rates. The proposal, released on Monday morning with other parts of the budget, would raise about $206 billion over 10 years.

Five Principles for Fixing America’s Tax System -The International Economy recently invited me to contribute to a forum on how best to fix America’s tax system. Here’s my piece; for eleven other views, check out the complete forum. Tax reform will involve a prolonged political struggle, as reformers seek some compromise that can attract enough support to overcome the inevitable inertia against change. That won’t be easy, but given our sky-rocketing debt, weak recovery, and flawed tax system, it’s clearly worth the effort. Even as they seek a reasonable compromise, reformers should continue to articulate their visions of an ideal tax system. Mine would reflect five principles. First, the government should raise enough money to pay its bills. That likely means higher revenues, relative to GDP, than we’ve had historically. Second, it’s better to tax bads rather than goods. That means greater reliance on energy and environmental taxes. Third, it’s better to tax consumption than income; policymakers should thus limit how much they tax saving and investment. Fourth, the tax burden should be shared equitably both across income levels and among people of similar means who make different choices (for example, renting versus owning a home). Finally, the best tax systems have a broad base and low rates. Policymakers should thus emphasize cutting tax breaks rather than raising tax rates. Indeed, some rates, like the 35 percent rate on corporate profits, should come down.

Another Comprehensive Approach: The Fair Share Tax Reform Proposal -- I just came across a fellow internet econocrank’s tax proposal, and find it quite interesting — especially its proposed progressive tax on net worth, which echoes the flat tax on financial assets that I’ve bruited. It also reflects many of the notions I suggested I’d implement if I was the Dictator of America. The basic problem with this and all comprehensive tax reforms, of course, is that the political system doesn’t work this way, can’t work this way, never has worked this way. We only move forward, improve the system, over centuries — with fitful, stumbling, fumbling steps, forward and backward, never addressing the whole economic ecosystem. It makes biological evolution look downright intentional and speedy, by comparison. All that said, I like this proposal. See what you think.

Raising Revenue in a Progressive Manner Without Raising Tax Rates - Amidst the myriad proposals in President Obama’s budget are two “big ideas” that would raise revenue in a progressive manner without raising taxes. These important ideas should be emphasized in the discussion of tax and fiscal reform that the country should be having and will have to have sooner or later.  The first “big idea” is a specific proposal in the budget – to limit the benefit from itemizing deductions to 28 cents on the dollar.  Current itemized deductions are expensive, regressive, and often ineffective in achieving their goals.  The mortgage interest deduction, for example, does not seem to raise home ownership rates.  Limiting the benefits of the deductions for top income households is a way of reducing the distortions created by the tax code, making taxes more progressive and raising revenue.  All good ideas. The second “big idea” is to repeal the alternative minimum tax and replace it with the so-called Buffett rule, which would establish a 30 percent tax rate for taxpayers with income above $1 million. The alternative minimum tax was originally designed to stop taxpayers from taking excessive amounts of deductions or tax-preferred income, chiefly in the form of capital gains.  However, as the tax has evolved, it now increasingly falls on middle-income taxpayers, and liability is mainly due to having many children or living in a high-tax state, hardly what most people think of aggressive tax sheltering techniques. 

Why Tax Policy Assumes People Are Richer Than They Think - The deceptively simple term “income” is at the heart of much of the debate about taxation. That was illustrated in a recent column in The New York Times, which provocatively reported that a certain James Ross of New York City paid 102 percent of his income in taxes in 2010. But to be precise, that rate was what he paid on his taxable income — a figure considerably less than the definition of income used to calculate federal income taxes, which is “adjusted gross income.” (Taxable income is adjusted gross income minus personal and dependent exemptions and various deductions, such as for mortgage interest and state and local taxes.) Looking at Mr. Ross’s taxes as a share of adjusted gross income yields a much lower effective tax rate of 20 percent, which is actually on the low side for someone whose income is probably in the top 1 percent. According to the Tax Policy Center, those in the top 1 percent paid an average of 24 percent of their adjusted gross income in federal income taxes alone in 2011.  My point is that one’s “tax rate” is very much a function of what concept of income one is using. Changing the definition can radically alter one’s concept of whether a given tax payment is high or low relative to other taxpayers’.

Misleading Tax Rhetoric Abounds - I got the same piece of mail that my colleague and fellow blogger Jim Maule got--a disturbingly misleading rant trying to make a case for zero taxation of unearned income. I started to write a post about it, since this is the kind of material that gets my ire up. It is written with what appears to be an intent to confuse or mislead.  Maule beat me to it. He has an excellent post on Issue 9.04 of Tax Bytes, put out by the Institute for Policy Innovation (a think tank on the right): When Double Taxation Doesn't Exist, Mauled Again The problem with the IPI starts with the title of the piece--"when investment earns you additional--not lower--taxes". Right there they are conflating two things--the original amount earned that was put into the investment, creating a "tax basis" that will not be subject to tax on any disposition of the investment; and the return on the investment when it is sold (or when dividends are paid on it), creating additional "gross income" that will be subject to tax, though at the preferentially low, low rate currently applicable for capital gains. As Maule points out, the piece seems to be written to try to make the unknowing reader think that all the proceeds of a disposition of an investment will be taxable, not just the NEW income represented by the gain --the increase in value of the investment over the original basis.

It's the Wealth Gap, Stupid - When Mitt Romney bowed to political pressure and released his 2010 tax return, it showed, to no one's great surprise, that the Romneys are rich. Really, really rich. They reported income of more than $21 million, itemized deductions of over $4.5 million, and a total tax bill of just over $3 million. They made charitable contributions of almost $3 million, although more than half of that went to their church. But what really stood out in the tax return—beyond the presidential candidate's 13.9 percent tax rate—is not that Mitt makes a lot of money, it's that he has a lot of money. Romney's finances are illustrative of the growing gulf between haves and have-nots. It's not about income equality; it's about the widening wealth gap. In recent years, the fortunes of the Romneys and others in their cohort have continued to grow, notably diverging from the majority of Americans still struggling to deal with a slow economic recovery. The Occupy Wall Street protesters stole the media spotlight this past fall by creatively highlighting these discrepancies. President Obama has taken notice and, as reflected in his State of the Union address, is teeing up inequality as a major campaign theme for the fall. But it is not enough to highlight the gap between incomes of the top 1 percent and the bottom 99. What's more alarming—and consequential over the long haul—is the growing concentration of wealth.

Wealthy at $250,000? Depends on Where You Live - Rich is in the eye of the wage earner. Within President Barack Obama‘s budget released Monday are proposals to end the 2001 and 2003 tax cuts and limit itemized deductions for households making more than $250,000 a year and individuals making more than $200,000 a year. Obama has spoken about having the rich pay their fair share, and $250,000 is a lot of money. But to characterize those households that earn that sum as “rich” depends very much on where they live. Thanks to regional differences on costs, $250,000 does not go so far in places like New York City and Honolulu, compared with cities in Texas or Tennessee. The Council for Community and Economic Research calculates cost of living indexes for U.S. cities based on goods and services bought by households in the top-income quintile, which nationally covers incomes of about $100,000 and above according to U.S. Census data. What the data show is that the cost of living in Manhattan is 118% higher than the national average. On the other hand, a household in towns like Harlingen, Texas, or Memphis, Tenn., has a cost of living 85% less than the U.S. average.

Levin proposed carried interest bill (HR 4016) - Sander Levin has proposed H.R. 4016, which would characterize allocation of partnership profits in respect of a "profits interest" received for services--i.e., carried interest compensation-- of investment fund managers as ordinary income subject to employment taxes rather than allowing it to be treated as a share of the profits of a partnership, often garnering capital gains treatment if the partnership has mostly capital gains items. The technical description provides both a good brief description of the issue and the way this bill addresses it.  There is absolutely no reason why income earned for managing other people's money shouldn't be taxed in the same way as income earned teaching or working in a factory. This loophole for years has unfairly enabled some of the highest-paid individuals in the country to sharply reduce their tax bills and it is time to close it once and for all. Partnerships that hold investments assets or real estate held for rental or investment would be covered. Let's hope Congress does the right thing here.

Obama budget would double bank tax size - President Obama's budget plan calls for a bank tax twice as big as the one he proposed last year, a further sign he wants to make anti-Wall Street sentiment a major part of his re-election campaign. The bank tax, also known as the "Financial Crisis Responsibility Fee," first appeared in Obama's 2011 budget and was projected to raise $90 billion over 10 years. A year later, in the wake of the mid-term elections and accusations from executives that Obama was "anti-business," the White House cut the proposal by two-thirds to just $30 billion. In this year's budget, the bank tax is back up to $61 billion. The plan states: "Many of the largest financial firms contributed to the financial crisis through the risks they took, and all of the largest firms benefited enormously from the extraordinary actions taken to stabilize the financial system. The Budget asks these firms to compensate Americans for benefits they received from these actions and to recoup TARP costs." The bank tax targets financial firms with more than $50 billion in assets.

U.S. Chamber and corporations fighting for low preferential capital gains rates – Linda Beale - A coalition of the U.S. Chamber of Commerce and large multinational corporations such as Altria Group Inc. and Excel Energy Inc. is trying to pressure Congress to retain the extraordinarily low current tax rates on unearned income that will expire at the end of 2012 without action.  The alliance sponsored a report by Robert Carroll and Gerald Prante of Ernst & Young that develops the idea of an "integrated tax rate on dividends" that includes the taxes paid by the dividend-paying corporation, the federal income taxes paid by the recipient, and the state taxes paid by the recipient. See Carroll & Prante, Corporate Dividend and Capital Gains Taxation: A Comparison of the United States to other developed nations , Higher Capital Gains and Dividend Taxes Would Put U.S. Further Behind International Competitors, Corporate Coalition Says Obama investment taxes Near World High,). The report claims that the U.S. has an "integrated" rate of 50.8%. The report claims that such a rate "discourages capital investment, particularly in the corporate sector, reducing capital formation and, ultimately, living standards." Robert Carroll is a former Bush administration official who regularly presents on behalf of corporatism's Holy Grail of lower corporate taxes, lower dividend rates, and/or change to a territorial tax system for U.S. corporations.

Crony Capitalism On A Grand Scale - An article in yesterday’s New York Times, which I think deserves much more notice than it seems to be getting,  says that last week, “Mr. Romney’s campaign held an elaborate “policy round table” fund-raiser at a Washington hotel, featuring panel discussions run by lobbyists [who are] former cabinet officials or members of Congress.” Today in the Detroit News, that very same Mr. Romney has an op-ed piece complaining that the GM and Chrysler bailouts were “crony capitalism on a grand scale.”  The reason for the epithet?  That by prior agreement heading into the managed bankruptcies of those companies—bankruptcies that in fact were “managed” ones rather than just plain bankruptcies, and that therefore allowed the companies to emerge from bankruptcy and continue operating—union jobs received more protection than non-union jobs, and because Chrysler’s secured creditors were not protected.   Okay, well actually, he doesn’t acknowledge that the two companies did file for bankruptcy, and instead claims that they should have been forced to do so.  To file for "managed bankruptcy," that is.  At least if I understand him correctly.  And actually, he claims (again, if I understand him correctly) that GM’s secured creditors will, by fiat of the Obama administration, not be repaid in full.  And he says that were it not for the bailouts, the companies would have survived without layoffs, or without as many layoffs, or without non-union layoffs … or ….  What?

BREAKING NEWS: Bain Capital Wanted to Lend GM and Chrysler Money For Their Managed Bankruptcies! --Ah!  Mystery Solved! Yesterday, in my post “Crony Capitalism On A Grand Scale”—the titled of the post borrowed from an op-ed piece by Romney in yesterdays’ Detroit New characterizing the auto bailouts that way—I noted that Romney seems unaware that both companies filed for bankruptcy.  Romney says, as apparently he says often when forced at gunpoint to explain his opposition to those bailouts, that he was for the idea of “managed bankruptcy” for both companies, and never actually acknowledges that that is what happened.  Much less that these bankruptcies were “managed,” and therefore were able to emerge from bankruptcy as ongoing enterprises rather than as pieces of physical assets, machinery and the like, for a Bain Capital-owned company in the process of being restructured, to scavenge and resell.

New Bill Clouds Legality Of Tips—The political-intelligence industry thought it scored a great success last week when Republicans yanked a provision from a bill that would have forced firms to register their activities. Now it is confronting the possibility that the legislation—more broadly aimed at banning insider-trading in Congress—could put the entire industry in jeopardy. As securities lawyers and industry executives examine the legislation more closely, they say it could prohibit lawmakers and their staffs from divulging market-moving information to individuals who could trade on it—neutering a major purpose of political intelligence.

Obama Campaign To Wall Street: We'll Go Easy On You Guys: President Obama's campaign manager has a message for Wall Street: This time around, we'll lay off. Jim Messina, Obama's campaign manager, told the hosts of a $38,500 per-plate fundraiser geared towards investment bankers and hedge fund managers that the president wouldn't make Wall Street look bad during his re-election campaign, Bloomberg reports. The assurance follows Obama's call to raise taxes on the rich in his latest budget proposal. The current attempt at appeasement also comes as Obama attempts to win back the donors that provided him with so much last election. Despite criticizing Wall Street during a 2007 speech at the Nasdaq stock exchange, financial industry donations to Obama outpaced Wall Street cash to his GOP rival John McCain two-to-one at certain points in that campaign, according to the New York Daily News. This time, Wall Street donors are instead favoring Republican candidates, their dollars going to the GOP by a five to one margin. And Mitt Romney, the Republican front runner and a former Wall Street man himself, is netting most of that cash, according to campaign finance data.

America’s billionaire-run democracy - The obstacles facing the millennial generation didn’t just happen. Take an economy skewed to the top, low wages and missing jobs, predatory interest rates on college loans: these are politically engineered consequences of government of, by and for the 1 percent. So, too, is our tax code the product of money and politics, influence and favoritism, lobbyists and the laws they draft for rented politicians to enact. Here’s what we’re up against. Read it and weep: “America’s Plutocrats Play the Political Ponies.” That’s a headline in “Too Much,” an Internet publication from the Institute for Policy Studies that describes itself as “an online weekly on excess and inequality.” Yes, the results are in and our elections have replaced horse racing as the sport of kings. Only these kings aren’t your everyday poobahs and potentates. These kings are multi-billionaire, corporate moguls who by the divine right, not of God, but the United States Supreme Court and its Citizens United decision, are now buying politicians like so much pricey horseflesh. All that money pouring into Super PACs, much of it from secret sources: merely an investment, should their horse pay off in November, in the best government money can buy.

The Politics of the Super Rich - America has a serious air pollution problem. Kathleen Hall Jamieson is hell-bent on fixing it. "Air pollution," in this case, doesn't mean CO2, methane, or anything else in the poisonous cocktail of gases helping warm our planet. Jamieson, a University of Pennsylvania communications professor and long-time media critic, is talking about the error-riddled attack ads flooding the TV airwaves this campaign season, specifically the ones funded by super PACs, the juiced-up political outfits that can raise and spend unlimited amounts of money as long as they don't coordinate with candidates. Jamieson wants to de-smog the airwaves, and her strategy amounts to a one-word formula: shame.

Bill Black: On Why White Collar Crime is on the Rise, How to "Hotspot" Elite Financial Crimes, and Why Republicans and Democrats are Not Interested (video) On why we have high and rising levels of white collar crime: Bush and Obama both cut prosecutions of white collar criminals. It has been a unilateral disarmament. On why Republicans and Democrats are not pursuing elite white collar crime: It would hurt campaign contributions. Finance is the leading source of campaign contributions for both parties. On how to "hotspot" white collar crime: Going after issuers of "liars' loans" would have been the obvious way to go. You always have insufficient resources so you always look for choke-points. There are only 3 credit rating agencies, for example. If you investigated even one of them for the frauds they were committing - giving AAA ratings to liars' loans - you would have shut down the entire secondary market and the fraudulent loans. There are also only 5 investment banks. If you had gone after one of them... Lehman Brothers, for example. Or Aurora - where they  fired the fraud guy because he made a criminal referral. With very few resources you could have prevented the entire crisis. On how hotspotting would have stopped the fraud: Hotspotting puts a shot across the bow of the rest of the industry. You have to have the regulatory cops on the beat... and they took the cops off the beat.

Mind-Boggling Nonsense from John Cochrane - After reading John Taylor and John Cochrane's analyses Lehman's failure, I'm beginning to understand how it's possible for economists to say that "we're still arguing about the causes of the Great Depression." It's generally hard to come to an agreement when one side simply lies, or refuses to acknowledge undeniable facts. I've already dealt with John Taylor's ridiculous claim about Lehman's derivatives counterparties. John Cochrane's "analysis" of Lehman's failure is equally fictitious: Why would Lehman's failure cause a panic? Why, after seeing Lehman go to bankruptcy court, would people stop lending to, say, Citigroup, and demand much higher prices for its credit default swaps (insurance against Citi failure)? We did not see a secondary wave of creditors forced into bankruptcy by Lehman losses. Most of Lehman's operations were up and running in days under new owners. Lehman credit default swaps (CDSs) paid off. Sure, there was some mess — repos in the United Kingdom got stuck in bankruptcy court, some money market funds "broke the buck" and had to borrow from the Fed — but those issues are easy to fix and they do not explain why Lehman's failure would cause a widespread panic. What is more, Lehman's failure did not carry any news about asset values; it was obvious already that those assets were not worth much and illiquid anyway. This is just mind-boggling nonsense. It's genuinely frightening that a prominent professor of finance can be so utterly clueless about modern financial markets.

Volcker to Push Back on Banks' Trading - Paul Volcker is about to fire back at critics of the proposed rule that bears his name. The former Federal Reserve chairman is expected to file a comment letter on the Volcker rule before a Monday deadline, contending that the U.S. financial system will be safer and healthier with a ban on proprietary trading by banks, according to people familiar with the situation. Mr. Volcker also is likely to resist recent attacks on the Volcker rule from money managers, financial firms and foreign governments, including claims that banning banks from trading with their own money could reduce liquidity in the financial markets. Critics of the proposed rule contend that corporate borrowing and trading might cost more as a result. According to people familiar with Mr. Volcker's thinking, his comment letter will argue that too much liquidity in the market can cause investors to bid up asset prices with the expectation that there will always be a buyer.

Foreign critics should not fear ‘my’ rule - Paul Volcker - I confess total surprise about the complaints by some European and other foreign officials about the restrictions on proprietary trading by American banks embedded in the Dodd-Frank Act – now dubbed the “Volcker” Rule. It made me think – think all the way back to my years in the US Treasury and Federal Reserve, when the Glass-Steagall Act was in full force. The practical effect was to ban all securities trading by US banks – not just “proprietary” trading, but also “market making” and “underwriting” (except in US government and certain municipal securities). I do not recall – and I am morally certain it never happened – receiving a single complaint that US law was discriminatory, that it damaged other sovereign debt markets or that it limited the ability of foreign governments to access capital markets. There is a certain irony in what I read. In Europe, there are plans to introduce a financial transaction tax, justified in part by officials because it puts “sand in the wheels” of overly liquid, speculation-prone securities markets. For reasons analogous to those behind the Volcker Rule, the UK is planning to “ring fence” trading and investment banking from retail banking, creating airtight subsidiaries of larger organisations. The commercial banks responsible for what are deemed essential services to the economy will be insulated from all trading and only then will they be protected by the official safety net of access to the central bank, deposit insurance and possible assistance in emergencies.

Paul Volcker vs. the Bank of Canada - Simon Johnson - The Volcker Rule is intended to curb “proprietary trading” – specifically, high-risk bets placed by our largest banks. The Dodd-Frank financial reform act put it into law, and the relevant regulators have proposed a detailed and credible set of regulations to make it work. In accordance with typical administrative procedure in the United States, comments on these regulations were solicited. The deadline was this past Monday. Congress rightly decided that excessive risk-taking by very large banks had to be curtailed. Responsible regulators around the world are cheering from the sidelines, and that’s why I was shocked to see the recent comment letter from the Bank of Canada that criticized the American law. The legislative intent behind the Volcker Rule is clear – and reaffirmed in detail in the comment letter by Senators Jeff Merkley of Oregon and Carl Levin of Michigan, the co-authors of the relevant part of the Dodd-Frank legislation. The big banks and their allies are naturally fighting back. They like the implicit too-big-to-fail subsidies and are apparently offering to split those with people who will support their positions in public (including some of my academic colleagues). Their collective lack of concern for the public interest is also natural, if somewhat callous.

4:00 TODAY: Occupy the SEC March to the Fed and the SEC: Enforce the Volcker Rule! - February 13th marks the deadline for Public Comment on the draft version of the Volcker Rule. The Volcker Rule is a new regulation that aims to curb risky behavior at banks that have enjoyed bailouts and cheap funding from the Fed. It does so by prohibiting big banks from doing two things:

1. Proprietary Trading
2. Owning Hedge Funds or Private Equity Funds

Between now and the summer, the SEC, The Fed, the FDIC and the OCC will be deciding on what the final rule will look like. The banking lobby would love for the rule to be watered down. We want to march on the Fed and the SEC to let them know that we are watching, and we are asking them not to bow to the banks, but to draft a strict, loophole-free version of the Volcker Rule. Monday, February 13th is the deadline for the public to submit comment on the draft of the Volcker Rule. To learn more about how to comment, visit Occupy the SEC.

Occupy the SEC’s Comment Letter Objects to Excuses for Watering Down Volcker Rule (#OWS) - (Yves here. No one should be surprised that Bloomberg is reporting today that Goldman is aggressively lobbying for a Volcker Rule waiver for its role as a sponsor of and investors in “credit funds.” Update: Andrew Ross Sorkin predictably parrots industry talking points.) Today is “Volcker Day” and Paul Volcker was on a tearMr Volcker added in a formal submission to regulators Monday that “proprietary trading is not an essential commercial bank service that justifies taxpayer support,” and that banks should stop “stonewalling.” He went on to say,  “There should not be a presumption that evermore market liquidity brings a public benefit,” Volcker, 84, wrote in a letter submitted yesterday to regulators in defense of the rule curtailing banks’ bets on asset prices with their own money. “At some point, great liquidity, or the perception of it, may itself encourage more speculative trading (See here and here for the full story.)  But then Jamie Dimon came along and bitch slapped Tall Paul. Ouch. "Paul Volcker by his own admission has said he doesn’t understand capital markets,” Dimon told Francis in the Fox Business interview. “He has proven that to me.” SIFMA, on behalf of the industry, took over to explain in detail just what it is that Mr. Volcker doesn’t understand in their comment letter. The SIFMA comment letter runs to 175 pages. I haven’t read all the other financial company letters, but the ones I’ve skimmed conform to SIFMA’s position. The Occupy the SEC comment letter logs in at 325 pages and oddly enough draws the exact opposite conclusions to each of SIFMA’s objections. It’s an interesting contrast. Occupy the SEC Comment Letter on the Volcker Rule

Occupy’s amazing Volcker Rule letter - One of the saddest aspects of the financialization of the US economy is the way in which America’s best and brightest found themselves working on Wall Street, rather than in jobs which improved the state of the world. Proof of this comes from the absolutely astonishing 325-page comment letter on the Volcker Rule which has been put together by Occupy the SEC; it’s pretty clear, from reading the letter, that the people who wrote it are whip-smart and extremely talented. If you can’t read the whole thing, at least read the introductory comments, on pages 3-6, both for their substance and for the panache of their delivery. A taster: During the legislative process, the Volcker Rule was woefully enfeebled by the addition of numerous loopholes and exceptions. The banking lobby exerted inordinate influence on Congress and succeeded in diluting the statute, despite the catastrophic failures that bank policies have produced and continue to produce… The Proposed Rule also evinces a remarkable solicitude for the interests of banking corporations over those of investors, consumers, taxpayers and other human beings.The Administrative Procedure Act requires that, prior to the enactment of a substantive regulation, an agency must give “interested persons” an opportunity to comment. The Agencies seem to have lost sight of the fact that “interested persons” could include human beings, and not just banking corporations.

Occupying the SEC for a Stronger Volcker Rule - On Monday evening, around one hundred people gathered in Liberty Square in downtown Manhattan, preparing to march to the Federal Reserve and Securities and Exchange Commission buildings nearby. Protesters carried signs reading, “We don’t make demands so this is a suggestion: Enforce the Volcker Rule.” Occupy the SEC, a working group of Occupy Wall Street that includes former financial industry professionals, lawyers and concerned citizens, had been up until 5am the night before, editing and formatting a letter they had prepared as a public comment to the SEC. For months, OSEC met twice weekly to review the 298-page proposed Volcker Rule, conducting a diligent, line-by-line analysis of the document. Proposed as part of the Dodd-Frank Act, the Volcker Rule essentially aims to ban proprietary trading and ownership of hedge funds by banks. Between now and July, the regulating bodies involved—the SEC, the FDIC, the OCC, the CFTC and the Fed—are required to read public comment letters and issue final details on the Volcker Rule. When members of OSEC viewed their letter on Monday on the SEC’s website, they were elated to see that at 325 pages, it was the longest letter by far. In comparison, the longest letter by the Securities Industry and Financial Markets Association (SIFMA), a group that represents the interests of securities groups, banks and asset managers, was 173 pages—although SIFMA submitted five letters in total.

Occupy the SEC Weighs In on the Volcker Rule - The Occupy movement is turning up in surprising places. Yesterday was the deadline for comments to regulators about the Volcker Rule, the part of the Dodd-Frank financial reform act that limits the bets financial firms can make with their own money. In the flurry of comments from all corners of the financial industry, one 325-page letter came from an unlikely source: Occupy the SEC. The group’s detailed response won quick praise from some financial bloggers. Felix Salmon calls it “absolutely astonishing” and Naked Capitalism says: “The group seems to have understood and articulated Volcker’s (and the electorate’s) intent pretty effectively.” Occupy the SEC is a working group from the New York General Assembly, the coalition of people that organized the occupation of Zuccotti Park last fall. Other Occupy groups focus on topics ranging from sustainability and labor to health care and “alternative” banking systems. The Securities and Exchange Commission team has been developing a response to the Volcker Rule since soon after regulators released a draft, says Alexis Goldstein, who says she worked at Wall Street firms that include Deutsche Bank (DB), building IT systems for traders. The team of seven people held a biweekly “book club” to examine the proposed rule. They initially met at a diner, but their sessions lasted so long that the diner grew unhappy, Goldstein recalls. She said they moved their meetings to the atrium of a building in the financial district. The group went through the questions proposed by regulators, ultimately dividing up responsibility for drafting sections of their response. On Jan. 12, six members of the Occupy group held a conference call with 11 SEC staffers to clarify questions such as: “Do you believe § _. 13(d)(2)) can be interpreted to include credit default swaps, total return swaps and repurchase agreements?” In the end, the group responded to 244 of the 395 questions regulators asked.

Boston Review — What We Owe to Each Other (David Graeber, Debt) - An Interview with David Graeber, Part 1 - David Graeber leads a busy double life. By day, he is an anthropologist at Goldsmiths, University of London. By night, he is an anarchist and activist, best known for being the “Anti-Leader of Occupy Wall Street,” as Bloomberg Businessweek dubbed him. In his latest book, Debt: The First 5,000 Years, Graeber marries his academic and activist selves by dissecting our moral confusion about debt, showing both how contingent our intuitions are in the light of anthropology and how our obtuseness has led to the mass suffering of austerity programs and financial crashes. In part one of his two-part interview, Web Editor David Johnson talks to Graeber about why we don’t put babies’ lives ahead of Citibank’s shareholders, what it means to be a conservative nowadays, and whether we should renew the tradition of debt jubilees. To read part 2 of the interview, click here.

New Bill to Weaken Protections, Incentives for Whistleblowers Sneaks Through Committee - Thanks to a lobbying effort from the US Chamber of Commerce, New York Rep. Michael Grimm's attempt to eviscerate hard-fought whistleblower reforms included in the Dodd-Frank Act is gaining steam. This news should be seriously troubling to anyone hoping to stop wrongdoing on Wall Street - the kind that led to the 2008 financial meltdown. Grimm introduced the Whistleblower Improvement Act of 2011 (H.R. 2483) in July, but despite its deceptive name, this bill does absolutely nothing to improve whistleblower protections. It's easy to confuse Grimm's bill with the separate Whistleblower Protection Enhancement Act, which deserves full Congressional support. Grimm's bill, in contrast, guts the whistleblower provisions included in the Dodd-Frank financial reform legislation and puts whistleblowers at grave risk.These provisions are in the Dodd-Frank Act for a reason: Congress recognized that whistleblowers play a crucial role in exposing corporate wrongdoing, but may not come forward because they fear retaliation and have no incentive. The idea behind the Dodd-Frank whistleblower program was to create protections in the spirit of the highly effective False Claims Act.

[AV meets Naked Capitalism] Bankers and bonuses - In the first post about our meeting with Yves Smith, purveyor of the blog Naked Capitalism, we discussed the blogosphere and what prompted her to join it. Here we ask Ms Smith about her involvement with the Occupy movement and her opinions about banking and the contentious topic of bonuses. AV: Naked Capitalism has a badge on it: “We support Occupy”. What drew you to the Occupy movement?  Y:I may be a bit biased because I go to the meetings of the Alternative Banking Group, which is a small subgroup that has a bunch of finance and ex-finance people, as well as ex-regulators, and then some people who don’t know about finance. But two thirds or three quarters of the people have real domain expertise. If nothing else, though, it has changed the nature of the conversation in America in a very serious way. I don’t think you would have seen anything like as big of a backlash against Mitt Romney’s private equity fund background come to pass if Occupy hadn’t seeded the ground by questioning the way that people in the top percent, and particularly those in finance, make their money.

The Dodd-Frank act: Too big not to fail - SECTIONS 404 and 406 of the Dodd-Frank law of July 2010 add up to just a couple of pages. On October 31st last year two of the agencies overseeing America’s financial system turned those few pages into a form to be filled out by hedge funds and some other firms; that form ran to 192 pages. The cost of filling it out, according to an informal survey of hedge-fund managers, will be $100,000-150,000 for each firm the first time it does it. After having done it once, those costs might drop to $40,000 in every later year. Hedge funds command little pity these days. But their bureaucratic task is but one example of the demands for fees and paperwork with which Dodd-Frank will blanket a vast segment of America’s economy. After the crisis of 2008, finance plainly needed better regulation. Lots of institutions had turned out to enjoy the backing of the taxpayer because they were too big to fail. Huge derivatives exposures had gone unnoticed. Supervisory responsibilities were too fragmented. Dodd-Frank, named after its co-sponsors, Senator Chris Dodd and Congressman Barney Frank, attempted to address these issues (section 404 is one of those aimed at excessive risk exposure). But there is an ever-more-apparent risk that the harm done by the massive cost and complexity of its regulations, and the effects of its internal inconsistencies, will outweigh what good may yet come from it.

Are We Already Planting the Seeds of the Next Financial Crisis? - The wreckage of the housing bubble and the banking crisis haven’t yet been cleared away completely, but already there are hints of renewed speculation – warning signs of a problem that often arises when central banks try to bolster weak economies. Expanding the amount of money in circulation is, of course, beneficial in the short run because it stimulates business activity and takes some of the pressure off overextended borrowers and banks. But easy money also encourages risk-taking and temporarily pushes the prices of safe investments up to unsustainable levels, thereby creating the potential for future financial crises. This problem last occurred – with catastrophic results – in the years following the 2000 technology stock crash, when Federal Reserve Chairman Alan Greenspan repeatedly stoked the money supply. That did help revive the U.S. economy, but it also fueled a bubble in home prices that contributed greatly to the 2008 banking crisis. Moreover, Fed officials seemingly failed to recognize this side effect as it was happening. Around the time the housing bubble peaked in 2006, Fed Vice Chairman Timothy Geithner (now the Secretary of the Treasury) summed up the official outlook: “This, on balance, still leaves us with what looks like a relatively balanced set of risks around what is still a quite favorable growth forecast.”

Break Up the Banks? Here’s an Alternative — BAILING out financial institutions deemed “too big to fail” has become wildly unpopular, as people across the political spectrum are now talking about splitting up America’s large banks. But such breakups are probably not the best way forward, because they would penalize size instead of failure. In light of the financial chaos after Lehman Brothers’ collapse in 2008, companies of its size are now often considered too big to fail. Yet before its collapse, Lehman had a capitalization of about $60 billion, compared with the $143 billion capitalization of JPMorgan Chase last week. So the logic of cutting down huge institutions could mean splitting the largest ones into several pieces. Yet banks do not always come in easily divisible parts. Such a move could amount to eradicating the largest banks rather than splitting them up — and eradication is both politically unlikely and potentially disastrous for the economy. In short, if the resulting parts of a divided bank cannot turn a profit, the split-up may prompt the very bailout it was trying to avoid. There is a better alternative: expanding the liability for major financial institutions. If a shareholder invests a dollar in a big bank, why not make that shareholder liable for the first $1.50 — or more — of losses as insolvency approaches? In essence, we would be making the shareholders liable for the costs that bank failures impose on society, and making the banks sort out the right mixes of activities and risks.

Dodd-Frank and the Credit Rating Industry - - NY Fed - Credit rating agencies have been widely criticized in recent years for the poor performance of their ratings on mortgage-backed securities (MBS) and other structured-finance bonds. In response to the concerns of investors and other market participants, the 2010 Dodd-Frank Act incorporates a range of reforms likely to significantly reshape the rating industry. In this post, we discuss these reforms and their implications for investors, regulators, and the rating agencies themselves.

Consumer Bureau Gets Its Money From NY Fed Account - Republicans and Democrats on Captiol Hill continue to fight over whether the new Consumer Financial Protection Bureau should be subject to the congressional appropriations process — that is, whether Congress should directly control how much money the fledgling agency can spend each year. In the meantime, the CFPB funds itself through a bank account at the New York Fed. Under the Dodd-Frank law, the CFPB gets its money from transfers from the Federal Reserve System, up to specific caps set by the law. The Fed can’t turn down requests under that cap. The caps are fixed percentages of the Fed’s operating expenses, which works out to the following: –10% of Fed operating expenses in fiscal 2011 or $498 million –11% of Fed operating expenses in fiscal 2012 or $547.8 million –12% in fiscal 2013 or $597.6 million –12% each fiscal year thereafter, subject to annual adjustments for inflation If the CFPB thinks it needs more money it can ask for an extra $200 million through fiscal 2014, but the CFPB says it won’t.

CFPB Circles Debt Collectors and Credit Reporting Agencies  - Here is an startling fact from the Consumer Financial Protection Bureau: some 30 million Americans have an average of $1,400 debt in collection. The CFPB proposed a rule on Feb. 16 that would subject companies with more than $10 million in annual receipts from debt collection to fall under its supervision. Why is this significant? In the past, the Federal Trade Commission has stood up for consumers besieged by unscrupulous debt collectors. But since their ranks swelled following the recession, the agency’s enforcement has not kept up with consumer complaints, despite some high-profile recent settlements. The Wall Street Journal has lifted the veil on the burgeoning debt collection business in its insightful and in-depth series, “The Debt Collectors.” To give you an example of how many complaints the FTC is dealing with, the Journal reported that the FTC database drew a record 164,361 complaints through Dec. 8, 2011. “The total is 17% higher than the 140,036 debt-collection complaints the FTC got for all of 2010,” it said. In a 2010 report, “Repairing a Broken System,” the FTC concluded: “neither litigation nor arbitration currently provides adequate protection for consumers. The system for resolving disputes about consumer debt is broken.”

Collection and Credit Firms Facing Broad New Oversight - Debt collectors and credit reporting companies are bracing for intense scrutiny after the government’s consumer finance watchdog unveiled a broad plan to regulate financial firms that have largely evaded federal oversight. On Thursday, the Consumer Financial Protection Bureau proposed regulations that would allow the agency to supervise those two controversial corners of the finance industry, which have drawn complaints of aggressive tactics and unfair practices. The draft rule is the most significant proposal yet to emerge from the consumer agency — a symbol of the government’s new regulatory powers and a favorite target of Congressional Republicans — and the first of several efforts to police financial companies that are not banks. “Debt collectors and credit reporting agencies have gone unsupervised by the federal government for too long,” Richard Cordray, the bureau’s director, told reporters on Thursday. “It is time to provide the kind of oversight of these markets that will help ensure that federal laws protecting consumers in these financial markets are being followed.”

Consumer Financial Protection Bureau Launches “Make Life Easier for Lobbyists” Tool - Yves Smith - I’m pretty gobsmacked by the link to a webpage at the Consumer Financial Protection Bureau which says it is written by Richard Cordray: “We want to make it easier for you to submit comments on streamlining regulations." There is more than a little bit of NewSpeak in this idea. “Streamlining regulations” is generally right wing code for “eliminating/relaxing regulations.” Admittedly, Elizabeth Warren during her brief time as de facto head of the nascent CFPB, proposed and launched a project to simplify mortgage disclosure forms to combine two required forms into one and make them easier to understand. Banks, needless to say, opposed the idea. Warren has long believed that improved disclosure for retail products was a win-win for consumers and financial services firms. I saw her speak in March 2010 and she mentioned how a standard credit card agreement in 1980 fit on one piece of paper. Today, with all the various riders, they come in at 30 pages. While greater clarity is obviously beneficial to the borrower, it also saves the banks’ costs. However, this opening of the door by Cordray does not look as likely to produce such happy outcomes. Maybe this is a means for the CFPB to force lobbyists to provide their input in a format that makes it easier for CFPB to process. But I can’t imagine the Cordray or Raj Date would say to the American Bankers Association: “We are trying to create a level playing field, so we won’t meet with you. Put it in writing and we’ll give it due consideration.” So if this portal is a supplemental channel, who exactly is it intended to serve?

Big Banks Accused of Manipulating Key Interest Rates - Just what banking industry needs – another scandal. The Wall Street Journal reported this morning that Canada’s Competition Bureau is investigating several multinational banks regarding allegations that traders attempted to manipulate a key benchmark interest rate that is used to set prices on a wide array of financial products from auto loans to corporate debt. According to the Journal report, no banks or individuals have yet been accused of wrongdoing, but that a “cooperating party” thought to be the Swiss bank UBS has told the regulator that, “people involved in the alleged scheme ‘were able to move’ interest rates.” The six banks fingered in the report are Citigroup, Deutsche Bank, HSBC Holdings, JPMorgan Chase, Royal Bank of Scotland and the aforementioned UBS. Reports earlier in the week revealed that other regulators in the U.S., Japan, and the U.K. are looking into the matter as well. The London Interbank Offered Rate, or LIBOR, is set daily by a panel of sixteen banks through the British Bankers Association. It’s basically an average of the rates at which these banks can borrow from each other.

Is This the End of Wall Street As They Knew It? -- On Wall Street, bonus season is a sacred ritual. It is the annual rite where net worth and self-worth get elegantly reduced to a single number. During the 25-year boom that abruptly ended in 2008, the only principle that really mattered come bonus time was how you ranked against the guys to your right and left. The system was governed by a kind of atavistic justice: You eat what you kill. From the outside, the seven- and eight-figure payouts that star bankers earned could seem obscene, immoral even. But on the inside, the outlandish compensation reflected a strict, almost moral logic. “Wall Street is a meritocracy, for the most part,” as a senior Citigroup executive put it to me recently. “If someone has a bonus, it’s because they created value for their institution.” The sanctity of the bonus was built on the idea that Wall Street pay was simply the natural order of capitalism. And so, among the many dislocations Wall Street has suffered since 2008, none may have been more destabilizing than the headlines that flashed across Bloomberg terminals on the afternoon of January 17, when news leaked that Morgan Stanley would cap cash bonuses at just $125,000. A week later, Bank of America announced that it would be cutting the cash portion of its bonuses by 75 percent, giving the rest in stock. All across Wall Street, compensation is crashing. Goldman Sachs, coming off a lackluster fourth quarter, slashed compensation by 21 percent.

Reports of Wall Street’s Death - Gabriel Sherman wrote what I would call a hopeful article last week called “The End of Wall Street As They Knew It.” The basic premise is that the end of the credit bubble and the advent of Dodd-Frank mean lower profits, more boring businesses, and smaller bonuses on Wall Street—permanently (or at least for the foreseeable future). Sherman also says that the former masters of the universe are now engaged in “soul-searching”: “many acknowledge that the bubble­-bust-bubble seesaw of the past decades isn’t the natural order of capitalism—and that the compensation arrangements just may have been a bit out of whack.” Call me a skeptic, but I’m not convinced. For one thing, there are few people quoted in the article who actually seem to be engaged in anything that might be called soul-searching (as opposed to complaining—like the now-clichéd banker who watches his spending carefully but has a girlfriend who likes to eat out). The story’s featured voices are ones that are not on Wall Street and have been critical of it for a long time, such as Paul Volcker and John Bogle. Another example of “self-criticism” comes from Bill Gross—but’s he’s on the buy side, not Wall Street.

Special report: The twilight of the Bond King - Over more than three decades, Bill Gross, co-founder of asset-management giant PIMCO, has made so much money for clients that he has become the barometer by which other bond traders are judged. His West Coast perch, prescient calls on the U.S. economy and devotion to yoga only added to the mystique. But the very recipe that enabled Gross to dominate his industry may now be conspiring against him. He's coming off his worst year in the business after making a huge bet against U.S. Treasuries that backfired. Last year, for the first time in nearly two decades, investors pulled more money out of PIMCO's flagship fund than they put in. More troubling, U.S. regulators are now considering whether PIMCO should be deemed a "systemically important financial institution" - that is, too big to fail, and thus subject to tighter regulatory oversight. The concern: The juggernaut manages so much money for pension funds that it could hammer the economy if it ever went under. The firm has doubled in size to $1.36 trillion in assets since the collapse of Lehman Brothers in 2008. The firm is lobbying hard to fend off the "systemically important" designation, according to regulatory disclosures. Like other financial firms, it also objects to impending rules that could make some of its derivatives trading more costly.

Study: Working on Wall Street Is Bad for Your Health - What does working 120 hours a week get you? Hopefully, a pretty good paycheck and bonus. According to a new study, though, there are other, less welcomed side effects that accompany a demanding, high-pressure job on Wall Street, including alcoholism, insomnia, weird facial tics and depression. A new study from University of Southern California business professor Alexandra Michel indicates there’s some truth behind what most people accept as common sense: there’s an emotional and physical price to be paid for working too much, living at the office and being obsessed with making money. Michel focused on the cultures at two banks’ “boot camps” or “grind mills” — the investment-banking departments, where young workers endure especially long hours and an especially high-pressure environment.  For the first few years an employee is on the job, Michel writes, the “banks benefited from bankers’ hard work,” aided by the system of “socialization” and “organizational control.” By around Year 4 on the job, though, Michel notes that, despite what seemed to be the best efforts of the bankers, their bodies “turned antagonistic.” By Year 6, physical and emotional breakdowns tended to intensify, and worker performance clearly declined.

Wall Street Has A Sad :-( - Charles Wallace tells us that many older Wall Street men are resorting to hormone therapy to get their mojo back. They’re seeking testosterone shots from a few doctors who apparently know a gold mine when they see it. The hope? That the shots will help turn the traders back into “alpha males” who can compete with the younger, fresher meat that’s threatening to take their jobs. Welcome to the age of “man-opause”. One hates to see any human being going through real psychic pain, but this new trend is an irony that we may not be able to afford. Here’s an industry whose aggressiveness has caused an incredible amount of pain to people all over the world. After bouncing back at warp speed in 2009 and 2010, it’s now suffering lower profitability from rules that have been introduced to rein it in. The lower profitability means that a huge amount of bankers, traders, salespeople and support staff have lost or will lose their jobs. But rather than go quietly into the night, some of these folks are instead resorting to treatment that will make them…even more aggressive. It’s not just speculation: there are quite a few studies that have found that high testosterone may have played a role in causing the financial crisis. Apparently men with more testosterone risk more money on their trades than men with less.  But of course these trades will not always go the right way; when they blow up they may do so spectacularly.

Is Wall Street ‘Castrated’ — Or Just Lying Low? - Gabriel Sherman lends a sympathetic ear to the newly meek Masters of the Universe in his cover story in New York magazine, which appears under the ridiculously over-the-top headline "The Emasculation of Wall Street."  "On Wall Street, the misery index is as high as it’s been since brokers were on window ledges back in 1929, " he writes. And more, unprodded by prosecution or even any serious civil cases, the onetime bad boys of the Street are proving themselves endearingly conscience-stricken: along with the complaints about reduced pay "is something that might be called soul-searching" about Wall Street's many sins and its wildly overcompensated contribution to the U.S. economy, he writes.OK, there is a lot to what Sherman says. Despite the holes in Dodd-Frank, reduced compensation and increased capital requirements are going to snuff out or marginalize some of the riskier businesses that got us into this mess. And perhaps the most hopeful sign in his article is that Wall Street has become so unexciting that the best minds in the nation may think about going into real engineering--or Silicon Valley--rather than financial engineering. As Liaquat Ahamed, the Pulitzer-winning author of the great "Lords of Finance," put it to me in a conversation today: "Banks and bankers are going to become boring."  For the moment, yes. But what worries me is not what happens this year or next--but ten and 15 years from now.

Bad Week For Freedom - With each passing week it seems this country spirals further into the depths of a frightening dystopian fantasy reminiscent of Huxley and Orwell’s dark world of isolation, fear and government brutality portrayed in their masterpieces Brave New World and 1984. I keep speculating whether it’s me that’s crazy and not the things I’m witnessing on a daily basis. The President signs the National Defense Authorization Act, passed by an overwhelming majority of Congress, which allows the government to imprison American citizens indefinitely without charge. And there is barely a squeak from the docile masses as they are soothed by Obama promising to never use that part of the law. I bet you $10,000 a President will invoke that portion of the NDAA in the very near future. Jon Corzine, a card carrying member of the ruling elite .01%, remains free to roam one of his five palatial estates after stealing $1.6 billion from the accounts of farmers, widows, and thousands of other “clients” of MF Global. In his spare time he raises money for Obama’s re-election campaign. The Federal government, Federal courts and Wall Street banking cabal have circled the wagons and declared the money just vaporized, even though it sits in Jamie Dimon’s vaults at J.P. Morgan. No one is being prosecuted for this deliberate thievery. The psychopathic Wall Street criminals have been getting away with murder for so long they act invulnerable to societal mores and scoff at our laws, rules and regulations. Those are for the 99%. When you control the politicians, regulators, courts, and mainstream media, it’s easy to get away with murder. The jackals and hyenas are laughing in their NYC penthouse suites as they continue to collect $20 million bonuses for a job well done.

After MF Global, Traders Hold Tight To Excess Collateral (Reuters) - Until last October, farmers and fund managers rarely lost sleep over the extra money that they habitually maintained in their brokerage accounts, confident that it would be there the next morning. Now, stung by the loss of customer money from the failure of MF Global Inc, many cannot sleep soundly without transferring every spare cent into their own banks overnight. It is a sea change in the way that traders manage their "excess collateral" -- cash on account that is over and above the margin required to guarantee their trades. It means that floor traders and corn growers are spending more time, and in some cases money, moving cash in a process known as "sweeping." It is also one the clearest examples of the damaged trust between futures commission merchants and their customers in the wake of MF Global, which had been the country's most active commodity broker. Former clients are still missing over $1.5 billion of their MF Global funds, much of that "excess."

Lehman and Its Creditors Seek to Subpoena Geithner -- Lehman Brothers‘ bankruptcy estate and its official committee of unsecured creditors asked a court late on Thursday to compel Treasury Secretary Timothy F. Geithner to testify about the investment bank’s collapse. The request for a subpoena comes as part of the estate’s lawsuit against JPMorgan Chase, which asserts that the bank illegally took $8.6 billion in collateral from Lehman, precipitating that firm’s demise. The lawsuit’s main argument is that JPMorgan, apprised of Lehman’s fragile condition, improperly profited from making its collateral demands — and also pushed Lehman into bankruptcy.Lawyers for Lehman’s creditors wrote in a court filing that they and the estate served Mr. Geithner with a subpoena last August, ordering him to testify about conversations he had held with both JPMorgan and Lehman over the former’s calls for collateral in early September 2008. Mr. Geithner, then president of the Federal Reserve Bank of New York, spoke with JPMorgan’s chief executive, Jamie Dimon, 10 times in the week before Lehman fell, according to the filing. Many of those conversations, the lawyers contend, must have been about JPMorgan’s collateral demands.

Ritholtz Has the Main Theme Right, But Gets a Few Specifics Wrong About MF Global -For the record, I am an admirer of Barry Ritholtz, and have been so for quite a long time. He is smart, honest, and what the old folks used to call a mensch. In a recent piece titled MF Global Reveals You Are a Bank Counter-Party he makes a very strong case that financial institutions that trade for their own accounts place everyone who has money with their firm at counter-party risk. He uses this to reinforce his opinion, with which I heartily agree, that when private speculation becomes mingled with public funds and government guarantees, a moral hazard results that quite often leads, some might say almost inevitably, to fraud, the mispricing of risk, and bailouts. But in making his case, that the MF Global situation proves this rule even though they were not a bank, he characterizes some of the things regarding the MF Global scandal in a way that could be misconstrued, and has been misconstrued in that way by some of the main stream financial media.

MF Global: Where’s the Cash? David Woolley on the Risk of Defective Commercial Land Titles - Readers of The IRA will recall Woolley's August 2011 comment, "David Woolley on the MERS land title chain fiasco", wherein he stated: "What none of the experts are analyzing (in specific terms) is the destructive effect that the MERS system will have on 400 years of recorded property rights in the United States. Most articles mention lost chain of title but stop short of explaining what this means, or how these problems will affect homeowners with or without mortgages in the MERS system. These problems deal with determining (1) property boundaries (senior and junior property rights) and (2) proof of ownership in order to obtain title insurance and financing. Because MERS is utilized for transferring title and these transfers are not publically recorded (thereby imparting constructive notice), MERS does not comply with race (first in time) or (constructive or actual) notice statutes and therefore, senior/junior property rights cannot be determined when a discrepancy arises in property boundary lines." The Commercial Mortgage Backed Securities ("CMBS") market is bracing for record levels of defaults on commercial loans in 2012. According to Trepp, LLC, in October, 2011, troubled commercial real-estate loans accounted for more than 65% of failed banks' $617 million in problem loans.  What if there was a way out of these commercial loans so that owners, lenders and CMBS holders could recover 100% of their loan values rather than the 40% to 60% of purchase price that these commercial properties are currently worth in the marketplace?  What if the way to recover 100% of a commercial property's purchase price was through the property's title insurance policy?

MBIA tells judge of newly uncovered Countrywide fraud database - I sure hope the Securities and Exchange Commission and other members of the new joint mortgage-backed securities task force are paying attention to the docket in MBIA's New York State Supreme Court fraud and breach-of-contract suit against Countrywide. On Wednesday, MBIA's lawyers sent a letter to Justice Eileen Bransten requesting that she order Countrywide to produce discovery on an internal fraud-tracking database "which MBIA had not previously known to exist." MBIA said it needs the discovery to prepare for upcoming depositions of former Countrywide employees who tried to expose its allegedly fraudulent mortgage underwriting practices, including the well-known whistleblowers Eileen Foster and Mari Eisenman. I've said it before and I'm sure I'll say it again: Everyone pursuing mortgage-backed securities issuers owes a big debt to bond insurers, who were the first to file MBS suits and have fiercely litigated them for the last three years. In addition to records of the mortgage-fraud database, known as FACTS, MBIA wants Countrywide to turn over the employment files of "two former Countrywide loan officers whose fraudulent activities were initially covered up due to their profitability," and records of senior executive committee meetings that "should show that Countrywide deliberately passed on riskier loans to the secondary market while retaining safer loans for itself, again in violation of its representations and warranties."

The Countrywide Complaint and the Capitalization of Trust - In December 2011 the Department of Justice filed suit against Countrywide Financial Corporation alleging discrimination on the basis of race and national origin in its mortgage lending operations over the period 2004-2008. The result was a record settlement for $335 million with Bank of America, which had acquired Countrywide in 2008. The complaint was based on a review of "internal company documents and non-public loan-level data" on more than 2.5 million loans and is worth reading in full. In addition to providing evidence of disparate impact, it describes in detail the set of incentive structures under which loan officers and mortgage brokers were operating. These compensation schemes left considerable room for individual discretion in the setting of fees and rates, and for steering borrowers towards particular loan products. The manner in which this discretion was exercised had significant effects on overall levels of compensation, resulting in strong incentives for brokers and loan officers to act against the interests of borrowers.

Citigroup pays $158 million in mortgage fraud pact (Reuters) - Citigroup Inc (C.N) has agreed to pay $158.3 million to settle U.S. civil claims that it defrauded the government into insuring thousands of risky home loans made by its CitiMortgage unit. Wednesday's settlement resolves claims under the federal False Claims Act against the third-largest U.S. bank, and arose from a "whistleblower" lawsuit brought by Sherry Hunt, a CitiMortgage employee in Missouri. CitiMortgage "admits, acknowledges and accepts responsibility" for misleading the government into insuring risky home loans, according to settlement papers filed in U.S. District Court in New York. Investigators said the misconduct lasted for more than six years. The civil fraud case is part of a crackdown by the Department of Justice against lenders it believes contributed to the housing crisis by originating risky home loans that should not have been made, insured or sold.

Unofficial Problem Bank list declines to 956 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Feb 17, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  As expected, the OCC released its enforcement action activity through mid-January 2012 this week, which contributed to several changes to the Unofficial Problem Bank List this week. Given that the FDIC played nice with community banks by hosting an outreach conference in D.C. this week, it is not surprising they kept the closing teams grounded. In all, there were seven removals and five additions that leave the list with 956 institutions. However, assets were virtually unchanged at $389.56 billion. A year ago, there were 951 institutions with assets of $418.6 billion.

If I Only Had a Bank - How to Make California Prosper - California Public Bank - YouTube - Go visit our website to find out more! Or read the book "Web Of Debt" by Ellen Brown, at for an eye-opening look at what's really going on with your money!

Obama Housing Plans vs. Reality - The Obama administration recently unveiled a string of proposals to help struggling homeowners [1] and get the housing market back on its feet — part of the administration’s “We Can’t Wait” election year to-do list [2]. Of course, the White House has made big promises before about helping homeowners, only to see them disappoint time and again.Here are the latest proposals, whether they are anything new and whether they stand a chance of going anywhere.  President Obama wants to allow homeowners whose mortgages are backed by private-sector companies to refinance at lower rates through the Federal Housing Administration. (The FHA insures many mortgages [3], and it is not the same as the FHFA, the regulatory agency in charge of Fannie Mae and Freddie Mac [4].) The president stressed that the proposal would help only “responsible” homeowners who were current on their payments — to counter Republican complaints that his housing policies reward foolhardy borrowers. This is only the latest in a long series of attempts by Obama to help homeowners refinance. There have been a few, minor attempts to push refinancing through the FHA. Via a separate program [5] launched in 2009 that used Freddie and Fannie, more than 900,000 homeowners have refinanced [6], substantially fewer than the goal of 4 million homeowners. This plan needs to get through a Congress that is staunchly opposed. “How many times have we done this?” [7] said House Speaker John Boehner, R-Ohio.

Bank Bailout 2: Obama Lets Mortgage Abusers Off the Hook -The Obama Administration has followed a predictable pattern: Leave No One Accountable - The Obama administration announced this morning that the five largest U.S. banks have agreed to a $26 billion 'settlement' to end lawsuits over abusive practices that forced millions of families from their homes and helped bring about the nation’s financial meltdown.After months of talks with state and federal officials, the banks have reportedly agreed to help some homeowners reduce their mortgage debt or refinance their homes at lower rates. Over 4 million familes lost their homes to foreclosure yet just 750,000 people who lost their homes to foreclosure will receive a one-time check for just $1,800 to $2,000, which for many will barely cover the cost of moving. The deal will only help a fraction of the struggling homeowners affected by the bank’s practices. New York and California have reportedly signed off on the deal after initially holding it up in protest of lenient treatment of the banks. The deal gives banks immunity from civil lawsuits for "robosigning," a practice whereby homeowners were rapidly evicted without proper vetting.

Is the $25 Billion Foreclosure Settlement a Stealth Bank Bailout? - Thursday’s $25 billion foreclosure settlement received praise from some consumer groups, but the reaction was not all positive. One detail of the deal that has raised questions and concerns is reports that the five major U.S. banks will get credit for principal reduction of mortgages they do not own. While the fine print of the plan has yet to be released, mortgage investors fear they will be forced to write down the value of their holdings. So how would the big banks get credit for using other people’s money to pay for principal write-downs? The answer lies in the evolution of the way mortgages are financed. In the 1990s more and more lenders began to “securitize” mortgages; that is, they would sell the cash flows from their mortgages — the monthly principal and interest payments — to investors, while continuing to “service” those payments in exchange for fees. Yes, these are the mortgage-backed securities that we’ve heard so much about for the past few years — but their affect on the recent foreclosure settlement is a new wrinkle. The problem is that the five major banks involved in the settlement service many mortgages, but it is unclear how many of these loans the banks actually own. Any kind of large scale principal write-down would have to include some cooperation with the investors that own the mortgages. But these investors were not responsible for the misdeeds that precipitated the settlement, so it seems unfair — and may not be legal — to force them to take losses when they weren’t the ones committing fraud.

Mortgage Settlement Fight Not Over, Say Organizers - Not everyone is cheering the foreclosure abuse settlement reached today with five of the nation's biggest banks. Activists say the suit does too little to stem the continued financial hemorrhage of the housing market and leaves most affected homeowners behind. So, where did it go wrong in the eyes of advocates? Firstly, said Gordon Whitman, policy director at the Pacific Institute for Community Organizing (PICO) National Network and organizer with The Bottom Line, it will only help a handful of homeowners. Of the estimated four million Americans that have been foreclosed on since 2007 only one or two million will qualify for monetary reimbursement, which will be between $1,800 to $2,000. Whitman and the PICO National Network, along with National People's Action, are part of The New Bottom Line, a coalition of community groups that have come out to say that the settlement reached Tuesday is not adequate. "The payments to families who have lost their homes will be perceived by many people as a slap in the face," said Whitman. Secondly, of the $26 billion, only $1.5 will be put toward the cash penalties for homeowners. "We've now set a price for forgeries and fabricating documents. It's $2000 per loan," writes Yves Smith in Naked Capitalism. The money put toward principal loan reduction, which would erase money that homeowners owe to banks on their mortgages, is also seen as inadequate. "If you look at the ... dollars in principal reduction, it's just a drop in the bucket," said Whitman, of the $17 billion put toward reductions. "This is not enough money and it is not big enough." In addition, Smith predicts that most of the principal loan reductions "almost assuredly will come largely from mortgages owned by investors," again bypassing individual homeowners. And, then, there are the housing market issues upon which that the settlement does not touch, The enforcement of the settlement "is a joke," writes Smith, as "the first layer of supervision is the banks reporting on themselves.".

HUD’s Donovan Tells Remarkable Whoppers About Settlement to Mortgage Investors -- Yves Smith - If you are going to lie, it appears the Obama Administration believes there is nothing to be lost by telling a Big Lie. Late Tuesday afternoon, HUD Secretary held a conference call with member of the Association of Mortgage Investors. His remarks were consistent with previous rumors we have heard about how the settlement deal is supposed to work.  Several items stood out. The first is that Donovan claimed that the settlement respected the creditor hierarchy, when that is a patent falsehood. He has, in other calls, described the treatment of second liens as “at least pari passu”. As we have discussed, second liens are to be written off when they are more than 180 days delinquent, but banks can pretty much arrange that that does not happen (they can put the loan into negative amortization or increase the credit line on HELOCs, so the borrower is paying with newly-lent money). The treatment of second loans is set forth starting on p. 3 of this “General Framework” document from late January.  All you need to know is anything other than “second liens are extinguished before undertaking any modification of a first lien” is contrary to the payment priority of second liens. And that is most decidedly not what is happening. Second is that Donovan claimed that the servicers would not violate their existing agreements with investors. There is verbiage to that effect in the General Framework document: This is taken in some circles to mean that mods are not likely to take place, per Structured Finance News: So why does Donovan say otherwise?

Missing Settlement Document Raises Doubts on $25B Deal - More than a day after the announcement of a mammoth national mortgage servicing settlement, the actual terms of the deal still aren't public. The website created for the national settlement lists the document as "coming soon." That's because a fully authorized, legally binding deal has not been inked yet. The implication of this is hard to say. Spokespersons for both the Iowa attorney general's office and the Department of Justice both told American Banker that the actual settlement will not be made public until it is submitted to a court. A representative for the North Carolina attorney general downplayed the significance of the document's non-final status, saying that the terms were already fixed. "Once the documents are finalized, they'll be posted to," the representative said in an email to American Banker. Other sources who spoke with American Banker raised doubts that everything is yet in place. A person familiar with the mortgage servicing pact says that a settlement term sheet does not yet exist. Instead, there are a series of nearly-complete documents that will be attached to a consent judgment eventually filed with the court. That truly final version will include things such as servicing standards, consumer relief options, legal releases, and enforcement terms. There will likely be separate state and a federal versions of the release.

Mortgage deal is great — for politicians and banks - I hate a parade. And the parade of rosy self-congratulation staged last week by the creators of the $25-billion mortgage fraud settlement with five big banks is the kind of parade I really hate. There certainly are some big winners in the deal, which has the approval of 49 of the 50 state attorneys general. Start with its godfathers. President Obama took to the podium a couple of hours after the deal's announcement to declare that it will "speed relief to the hardest-hit homeowners." Then there are the banks. The signatories to the deal are Bank of America, Citibank, Wells Fargo & Co., JPMorgan Chase and Ally Financial (formerly GMAC), which handle payments on more than half the nation's outstanding 27 million home loans and therefore have been at the center of the servicing and foreclosure abuses the settlement is supposed to end.If you don't listen too closely, it sounds as if they're putting up the $25 billion. Not so. The only cold cash the banks are paying is a combined $5 billion, including $1.5 billion to compensate borrowers whose homes were foreclosed on from 2008 through the end of last year, with the rest going to the federal and state governments to pay for regulatory programs.Most of the balance is in mortgage relief for stressed or underwater mortgage holders, including principal reductions, refinancings and other modifications.

The Deal Is Done, but Hold the Applause - FIVE big banks finally reached a deal with government authorities last week over dubious mortgage practices and foreclosure abuses. After months of talks, Ally Financial, Bank of America, Citibank, JPMorgan Chase and Wells Fargo agreed to pay a total of $5 billion in cash to try to remedy this fiasco. They will also help homeowners who are underwater on their mortgages by reducing the principal on their loans by a combined $17 billion over the next three years. Borrowers who qualify will get $3 billion in refinancing arrangements. Those who were improperly foreclosed on will get a combined $1.5 billion. That probably nets out to less than $2,000 a person. The banks crowed that this settlement would help the economy and the reputation of the mortgage industry. .” But it’s hard to imagine that this one settlement will be enough to restore trust in loan servicers. Given what we know about their questionable practices — how they larded improper fees on struggling homeowners, for example, and forced people to buy home insurance at three times market rates — restoring confidence in these firms will take some doing. There’s no doubt that the banks are happy with this deal. You would be, too, if your bill for lying to courts and end-running the law came to less than $2,000 per loan file.

On the Mortgage Settlement: There Is No Political Solution to a Math Problem - This week officials from the Obama administration, the banking regulators, and state Attorney Generals announced a settlement of claims stemming from the financial crisis. The nominal amount put forward as the cost of the settlement is $26 billion, and in return the banks will be released from civil claims on origination of mortgages and the falsification of documents in the foreclosure process, or “robosigning”. This caps off a month of political noise on the housing situation which started at the State of the Union, when the president announced a task force on financial fraud headed by officials from his administration as well as New York Attorney General Eric Schneiderman. An investigation, and a multi-billion dollar settlement. That sounds like a lot, until you put it into perspective. Here are the numbers. Roughly half of homeowners with mortgages are underwater, which means they owe more than they own, to the tune of $1 trillion or so. And housing values are still declining so far in this “recovery”, throwing more homes underwater. In terms of an investigation, the Savings and Loan crisis used roughly 1000 FBI investigators to uncover fraud — this task force taking on a crisis forty times more severe will employ 10 FBI agents. There’s a reason this is so inadequate to the problem at hand. For the last three years, the policy has been to impose a political solution to a math problem. It hasn’t worked. America simply has too much mortgage debt to pay back.

Economic Analysis and Inaccurate Numbers - Someone sent me an article by Dylan Ratigan in the HuffPo: On the Mortgage Settlement: There Is No Political Solution to a Math Problem  Unfortunately some of the numbers are incorrect. Ratigan wrote: "Roughly half of homeowners with mortgages are underwater, which means they owe more than they own ..." This is way too high. According to Zillow, 28.6 percent of all single-family homes with mortgages had negative equity in Q3 2011. And according to CoreLogic, "10.7 million, or 22.1 percent, of all residential properties with a mortgage were in negative equity at the end of the third quarter of 2011". And on the employment-population ratio and the participation rate: [T]his is by far the worst recovery we've had since the end of World War II. The best way to measure this is not through traditional unemployment indices (which can be gamed), but by asking the question of how many Americans are working as a percentage of the population. In 2007, this was 63 out of 100. Today, it's a full five percentage points lower. Ratigan is referring to the employment-population ratio, but as I've pointed out several times, this ratio is being impacted by demographics. A decline in the participation rate has been predicted for years, and a decline in the participation rate pushes down the overall employment-population ratio. So the employment-population ratio is not "the best way" to measure the recovery, and the decline in the participation rate is not a "crisis".

The Foreclosure Deal - Unanswered Questions and Little Relief… The $26 billion foreclosure settlement between the big banks and federal and state officials is a wrist slap compared with the economic damage wrought by the banks in the housing bubble and bust, and the hardships faced by the 4 million homeowners who have lost their homes and 3.3 million more who are in or close to foreclosure.  The big redeeming feature is that the deal was crafted to allow for further investigation into mortgage abuses that led to the financial meltdown. At best, this round of relief will reach about two million former and current homeowners. Under the agreement, banks will grant some $10 billion worth of principal reduction, $3 billion in refinancings and $7 billion in other mortgage relief, like forbearance for unemployed borrowers, covering roughly one million borrowers in total. Another $1.5 billion will be cash payments of about $2,000 to some 750,000 borrowers who were treated unfairly in foreclosures from 2008 through 2011.  And $3.5 billion will go to state and federal governments for what has been described as resources for legal aid and other counseling for borrowers facing foreclosure. Such aid is vitally important, but it appears that the earmarked money also could be used to plug state budget holes, rather than empower homeowners in their fights against the banks.

Hidden Gems in the Mortgage Deal - In the end, as at the start, Thursday’s deal between five big banks, the Department of Justice, and the attorneys general of 49 states came down to New York, the center of mortgage securitization and securities misrepresentation, and California, the center of mortgage mis-origination. Those states’ attorneys general—New York’s Eric Schneiderman and California’s Kamala Harris, both progressive Democrats elected in 2010—weren’t about the give the banks a pass. Which is why it wasn’t until two a.m. Thursday that the deal was finalized. Schneiderman’s chief concern was to preserve and enhance his and other law enforcement agencies’ ability to investigate the banks. Harris’s foremost interest was to secure the best deal for the hundreds of thousands of California homeowners who were struggling to make the payments on their devalued homes. Together, they compelled the banks and the Obama administration to come up with a better deal than the one that the banks and the Justice Department had initially sought.  Looked at in vacuo, it’s not much of a deal.The $26 billion is a little less than 4 percent of the estimated $700 billion in underwater mortgage debt in the U.S. Most of that money will be offered as principle write-downs to the roughly one million homeowners on whose devalued homes those banks hold the paper—an average reduction estimated at about $20,000 per homeowner. The approximately 750,000 homeowners whose homes were already foreclosed by those banks will be getting checks of about $2,000 each.

Amazing Diary at Kos by Donovan and Holder re Settlement - The title is, believe it or not,  HOLDING BANKS ACCOUNTABLE. I’ll give you a few moments to stop laughing and collect yourselves. Ok? Ready? Then steel yourselves and proceed to: Holding Banks Accountable by Shaun Donovan (note authorship on article says Shaun Donovan and Eric Holder:Some have asked why we don’t address these actions by taking the banks to court. But rather than pursuing hundreds of lawsuits with varying degrees of success, the goal of this settlement has been to benefit struggling homeowners and to do so now – not sometime in the future, when it may be too late to help many families.Well, at least it’s clear from their own mouths that it had nothing to do with the actual pursuit of justice. Check out this statement: In response to thousands of mortgage servicing complaints fielded by the U.S. Department of Housing and Urban Development (HUD), state attorneys general, and banking regulators across the country, HUD initiated a large-scale review of the Federal Housing Administration’s (FHA) ten largest servicers in the summer of 2010. I find this downright deceptive. They are referencing an investigation that was in progress before the 50 State task force was even formed . The task force was announced in October of 2010 and Miller was named as it’s head in Dec. I think this paragraph is a smokescreen to  disguise the fact that no investigation went on under the umbrella of the task force itself. But,  do you want to know what is JUST  INCREDIBLE? This settlement DOESN’T COVER  the FHA loans referenced above!!!! Should someone tell Shaun Donovan and Eric Holder?

CNBC’s Diana Olick’s Wrongheaded Analysis of the Foreclosure Fraud Settlement - We’re going to have to endure this line of argument from those savvy business reporters, and Diana Olick is at the head of the pack, so we might as well take on this argument about the foreclosure fraud settlement directly. The idea that one low-paid guy sitting in a room was signing his, or perhaps somebody else’s, name to thousands of foreclosure documents was appalling. It is appalling, no question. But let us not forget that the vast, vast majority of those foreclosures being processed were in fact legitimate foreclosures; it was the documentation process that was fraudulent. Banks didn’t foreclose on borrowers for no reason, they foreclosed because borrowers weren’t paying their mortgages. It continues to amaze me how this “no harm, no foul” argument gets employed, when it would not fly in any other context in jurisprudence. Let’s rewrite that claim slightly, with a different scenario but the same spirit.The idea that one rogue cop sitting at the police station was fabricating evidence was appalling. It is appalling, no question. But let us not forget that the vast, vast majority of criminal suspects are in fact legitimately guilty of some crime; it was the evidence gathering that was fraudulent. Cops didn’t pick up suspects for no reason, they picked them up because they did something wrong.

The foreclosure fraud settlement: An amnesty for Wall Street criminals  - Last Thursday, the Obama administration announced its latest windfall for Wall Street—a settlement of charges of rampant law-breaking committed by major banks in their rush to foreclose on families and seize their homes. The agreement, largely dictated by the perpetrators, quashes investigations by state governments that threatened to expose a cesspool of corruption and crime. It frees the banks from future prosecution or financial liability for forgery, lying to the courts and illegally evicting homeowners. In return, the firms—Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial—are required collectively to pay a relative pittance in cash ($5 billion) to the states and the federal government and allocate $20 billion more, over three years, to ease the terms for a small fraction of the 11 million homeowners who owe more on their loans than their homes are worth. Not a single family whose home was seized (4 million since 2007) will get a new house. Instead, an estimated 750,000 foreclosed homeowners will receive a check for $1,500 to $2,000, if they can show that they were improperly evicted. This derisory sum—assuming it is ever paid out—provides a measure of the contempt of the banks and the government for working people. In what has become his trademark, Obama presented this amnesty for lawlessness and predation by the financial aristocracy as a boon to the people. He called the deal a “landmark settlement” that will “speed relief to the hardest-hit homeowners.”

Our interview at Le Show last weekend - Yves Smith - Feb 12th audio file

Dividing the Mortgage Settlement Dollars - Details are still forthcoming about the settlement between the federal government and attorneys general and the five largest servicing banks but one interesting twist that is already emerging is how the dollars are being divvied up and distributed.  Iowa's Attorney General, Tom Miller, who led the 50-state investigation, has described a division of Iowa's money that would look quite different from the above-described distribution. He says Iowa's slice of the total $25 billion is likely to be $40 million. Make sense to me; Iowa has a small  population. But of that estimated $40 million, Iowa will get $15.3 million in cold hard cash.  That is 38% of Iowa's relief coming in hard dollars to the state, whereas $5 billion of the $25 billion estimated for the nation suggests a 20% cash payout. Iowa is taking almost twice the percentage of its haul in cash as in "credit" for principal write-downs/refinancings. Then there is the issue of what the states are going to do with their cash. Attorney General Tom Miller suggests the money should go to the groups directly aiding homeowners in trouble. But other states have other ideas. Missiouri's governor has proposed using at least a chunk of its money to support higher education. Read about it here, which also contains a list of the cash payment going to each state. And Ohio seems to be planning to use at least some of its cash to demolish blighted property. These variations in how much cash states get and what they'll do with it are just one reason that consumers may have to struggle to make sense of this settlement and benefit from it.

In foreclosure deal, California, Florida come out on top -  Soon after details of a multibillion-dollar foreclosure settlement became public, banks and state attorneys general outlined the expected financial impact of the deal. The states that saw their housing markets hardest hit during the financial crisis stand to benefit the most.  The accounting in the settlement is somewhat confusing. The much-quoted $25 billion figure includes $17 billion that banks must spend on a variety of programs to help beleaguered borrowers. Banks will receive credits for each dollar spent. "Sometimes they get a dollar for dollar credit, sometimes they get 45 cents on the dollar, sometimes they get 10 cents on the dollar," Iowa Attorney General Tom Miller explained during a press conference. "The benefit to homeowners on the full dollar amount is $32 billion." In addition, the deal includes $3 billion dedicated to refinancing loans and $5 billion to be paid to federal and state governments.Using these figures, the settlement totals closer to $40 billion. California will receive up to $18 billion — a large proportion of the overall settlement and far more than the estimated $4 billion in relief that the state was set to receive when California Attorney General Kamala Harris walked away from negotiations in September 2011.  Harris insisted on "more relief for the most distressed homeowners, meaningful enforcement, and the ability of California and other states to pursue investigations into misconduct."

For California, Attorney General Insisted on Better Terms in Foreclosure Deal - Kamala D. Harris, the attorney general of California, could have derailed a nationwide settlement with big banks over home foreclosure abuses when she walked out of talks last September. Last week, though, she emerged with a prize and a little vindication. Ms. Harris announced that California would receive by far the largest share of the benefits in the deal, which is expected to climb beyond the $26 billion in the initial announcement. Along the way, Ms. Harris charted a lonely course, keeping her distance from potential allies and angering some of her peers in other states, who saw her as grandstanding. On one side, Ms. Harris, a close Obama ally, faced increasing pressure from the administration to return to the negotiating table. On the other, liberal groups mounted a concerted push to get her to wring more from the banks. But Ms. Harris wagered that holding out until the end in the settlement talks would give her the most leverage. In the end, she walked away with far more than California was slated to receive in the early days of the talks and a little more than was on the table as recently as January. Beaming into the cameras last Thursday, she said California homeowners were guaranteed $12 billion in debt reduction, while most other states received only promises. Not only did she get the guarantee, she said, but the “California commitment” includes special penalties if the banks do not fulfill their part of the deal. Furthermore, she maintains the right to pursue claims on behalf of the state’s pension fund.

Will states use foreclosure money for other purposes? - Even before state attorneys general put the final touches on a $25 billion settlement with five major banks over improper mortgage practices on Thursday (February 9), Missouri Governor Jay Nixon announced that he wanted to use some of his state’s proceeds for an unexpected purpose: to help fund higher education. Colleges and universities in Missouri have gone through several rounds of painful budget cuts in recent years, and Nixon, a Democrat, proposed using $40 million from the state’s share of the settlement to help offset the 12.5 percent cut to higher education that he initially proposed in his budget this year, The Kansas City Star reported. Republicans who control the state legislature expressed support for the plan, with the chair of a key budget committee saying he was “glad the governor is finally starting to listen to legislators and the people of this state who make education a priority.”The budget discussion in Missouri is emblematic of what may happen in other states now that the long-awaited bank settlement is a reality. While the vast majority of the $25 billion will go to distressed homeowners in the form of restitution, refinancing, loan forgiveness and other assistance — as housing advocates have demanded — as much as $2.6 billion can be used by the states for a variety of purposes, including some that have nothing to do with housing, Iowa Attorney General Tom Miller acknowledged during a conference call with reporters on Thursday.

Maine Becomes Third State to Divert Foreclosure Fraud Settlement Cash into General Fund -  You can now add Maine to the roster of states planning to use at least some of the money distributed by the five leading banks as part of the foreclosure fraud settlement for the purposes of patching up its budget rather than helping homeowners. In an interesting story by Bill Nemitz of the Portland Press-Herald chronicling Tom Cox, the foreclosure defense attorney who did the original deposition against Jeffrey Stephan that uncovered robo-signing, we get this:. Contacted late Thursday, Attorney General Schneider said the $8.2 million will be carved up three ways — $500,000 for Pine Tree Legal, $2 million for the Maine Bureau of Consumer Credit Protection, and $5.7 million for the general fund.) Maine joins Wisconsin and Missouri as states that have announced their general fund will benefit from a settlement meant to help homeowners. There’s nothing illegal about this; the new executive summary posted at the National Mortgage Settlement site says this about payments to the states: The funds may be distributed by the attorneys general to foreclosure relief and housing programs, including housing counseling, legal assistance, foreclosure prevention hotlines, foreclosure mediation, and community blight remediation. A portion of the funds may also be designated as civil penalties for the banks robo-signing misconduct.

Florida Homeowners Find Little to Cheer -- Florida, the U.S. state with the highest percentage of troubled mortgages, may collect almost one-quarter of the national $25 billion foreclosure settlement. For Cheryl Alexander, who had a court halt the forced sale of her home, that’s not enough.  “We’re not sheep that can be led to the slaughter,” said Alexander, a 61-year-old who has been fighting to keep her Cape Coral house for four years. “These are fraudulent bankers and Wall Street gangsters who have to pay for what they’ve done.”  The deal includes 49 states and ends a probe into five U.S. mortgage servicers over abuses stemming from the housing bubble’s collapse. It requires the banks to pay $20 billion in mortgage relief and $5 billion to state and federal governments. The settlement may mean as much as $8.4 billion in benefits for Florida homeowners, said Attorney General Pam Bondi, who helped negotiate the agreement.  While Bondi described the deal yesterday as a historic win, interviews around the Sunshine State revealed anger among homeowners stuck in foreclosure cases that last longer than in any other state, and skepticism from real-estate professionals leery of banks’ promises.

Tammy Baldwin Attacks Scott Walker for Diverting Foreclosure Fraud Settlement Money to Fill Budget Hole - Let’s contrast two lawmakers from the Upper Midwest and their reactions to the still-without-terms foreclosure fraud settlement. Al Franken has a video out toeing the party line on the settlement, really just informing borrowers that, over the next 6-9 months, they may be contacted if they’re eligible for a cash payment from a wrongful foreclosure or the opportunity to refinance or get a principal reduction on their loans. He does say that “the specific terms of the settlement are still coming to light,” which is correct. It’s more of a public service announcement than anything. Contrast this with Tammy Baldwin, the Wisconsin Democratic Congresswoman who is running for US Senate. Baldwin did agree with the “small but important step” construction, but she also reacted to one of the first negative consequences of the settlement. In her home state of Wisconsin, Scott Walker and the Attorney General, JB Van Hollen, announced they would take a large portion of the cash payment to states made available through the settlement, and instead of applying it to forelcosure mitigation programs, they would apply it to the General Fund to fill their budget hole. Baldwin spoke out loudly about this:

Fun With Numbers: Foreclosure Fraud Settlement Figures Tough to Add Up - Almost a week after the announcement of a foreclosure fraud settlement, experts are trying to determine what’s in it, given the absence of a term sheet. This chart at analyst SNL’s site shows one problem: it has a total settlement listed at $25 billion, but just California and Florida’s numbers add up to $26.4 billion. The accounting, as we discussed, goes this way: The accounting in the settlement is somewhat confusing. The much-quoted $25 billion figure includes $17 billion that banks must spend on a variety of programs to help beleaguered borrowers. Banks will receive credits for each dollar spent. “Sometimes they get a dollar for dollar credit, sometimes they get 45 cents on the dollar, sometimes they get 10 cents on the dollar,” Iowa Attorney General Tom Miller explained during a press conference. “The benefit to homeowners on the full dollar amount is $32 billion.” In addition, the deal includes $3 billion dedicated to refinancing loans and $5 billion to be paid to federal and state governments. Using these figures, the settlement totals closer to $40 billion. But this is not as cut and dried as Harris or Miller make it, and the giveaway is the line that “up to” the various dollar amounts will be collected. We cannot possibly know what the $17 billion in short sales and principal reduction will end up as in real value. It’s largely at the discretion of the banks to determine what types of principal reduction they will undertake. They get certain “credits” for certain types of write-downs, and I don’t believe they have even formulated a strategy as to what write-downs to target. Moreover, media reports have alternately said that banks will write down a “substantial” amount on private-label mortgage-backed securities loans, or that they have no authority to do so without the consent of the investors and will thus opt against it.

Bizarre Department of Justice Disclaimer for Mortgage Settlement Website -  - Yves Smith  - Dave Dayen pointed out how peculiar that the mortgage settlement propaganda website, , is a .com and not a .gov. And it turns out the Department of Justice disavows its content (hat tip April Charney):

Quelle Surprise! Administration and State Attorneys General Lied, Mortgage Settlement Release Described as “Broad” - Yves Smith - North Carolina has posted an executive summary of the foreclosure settlement (hat tip Abigail Field), and it is a a troubling document. The first aspect is the very fact that an executive summary, rather than actual text of an agreement, is what is being released. And it’s not being released for the worst of reasons: the deal has not been finalized. We explained in an earlier post why this is completely outside the pale, and we’ll turn the mike over to Frederick Leatherman for a recap: David Dayen mentioned that the settlement agreement has not been reduced to writing.That is astonishing.Let me repeat. That. Is. Astonishing.The biggest problem with settlement agreements in particular, and all agreements in general, is reaching a so-called ‘meeting of the minds’ regarding the details and ‘chiseling them into stone’ by reducing them to writing. As I used to warn my clients when I was practicing law, we do not have an agreement until it has been reduced to writing, thoroughly reviewed, and signed by each of the parties. That has obviously not happened in this case. That, my friends, is why we have a law called the Statute of Frauds, which requires that certain types of agreements be in writing or they are invalid and unenforceable. Needless to say, the odds of misunderstanding rise when you have many parties participating, and when some are very likely to be acting in bad faith (the banks and the Administration). Second, and even worse, the description of the release in this summary is at odds with what various attorneys general have said about it. See Section VII: Mortgage Settlement Executive Summary

AGs weeks from filing foreclosure settlement documents - The state attorneys general and federal prosecutors will likely file the actual $25 billion foreclosure settlement documents in court by the end of the month, according to a source familiar with the deal. The top five servicers agreed to general terms in the settlement last week, which would include billions in principal reduction, refinances, and even pay outs to homeowners affected by missteps in the process. Questions arose recently over whether the finalization of the deal would its change the scope. Rich Andreano, who co-leads the mortgage banking group at law firm Ballard Spahr, said while it will be difficult for analysts and officials to anticipate precisely how much aid each state will get from the deal until the documents are filed, results should not vary too significantly from the announcement made last week. "I got the sense last week that they weren't really ready. They weren't done. It was one of those things where they were moving so fast that they had to announce it because it was getting leaked out," Andreano said in an interview. "We just reached a very large and complicated joint state-federal settlement," said a spokesman for Iowa AG Tom Miller, who led the investigation and talks. "We are now preparing the materials we must file in court to formalize this agreement."

Weeks Before Foreclosure Fraud Settlement Terms to Be Released - Housing Wire reports that we’re not going to see foreclosure fraud settlement terms until the end of the month, at best: The state attorneys general and federal prosecutors will likely file the actual $25 billion foreclosure settlement documents in court by the end of the month, according to a source familiar with the deal. The top five servicers agreed to general terms in the settlement last week, which would include billions in principal reduction, refinances, and even pay outs to homeowners affected by missteps in the process. Questions arose recently over whether the finalization of the deal would its change the scope. They certainly did. It’s really amazing to me that nobody bothers to address this. We are a week removed from every Attorney General in America, save Oklahoma, “agreeing” to a landmark “settlement” on a raft of fraud-related issues, with all the attendant assurances on the financial compensation and the tight liability release and the stiff enforcement monitoring. And a week later, there is no piece of paper to point to as the settlement. It was all an agreement in principle. Lawyer Rich Andreano, quoted in the Housing Wire piece, claims that “I got the sense last week that they weren’t really ready [...] It was one of those things where they were moving so fast that they had to announce it because it was getting leaked out.” But the negotiators had 16 months of talks on this deal, it’s not like they put it together over a weekend

Housing Settlement To Be Taxpayer Funded Confirming Big Five Banks Are Beyond The Law - Plunging deeper into the farce-hole, the FT reports tonight that Obama's foreclosure settlement with the banks over their improper seizure of tax-paying US citizens' homes will in fact be subsidized by those very same US taxpayers. It is a hidden clause (that has not been made public yet) that allows the banks to count future loan modifications under the $30bn (taxpayer funded) HAMP initiative towards their $35bn agreement to restructure obligations under the new settlement. As the FT goes on to note, BofA will be able to use future mods made under HAMP towards the $7.6bn in borrower assistance it is committed to provide - which means, in a (as TARP inspector general Neil Barofsky describes) 'scandalous' turn of events the bank will receive payments for averting a borrower default and be reimbursed by the taxpayer for the principal write-down. We have much stronger words for how we are feeling about this but Barofsky sums it up calmly "It turns the notion that this is about justice and accountability on its head". Are the Big Five banks truly beyond the law?

Quelle Surprise! Taxpayers Will Be Paying for Part of Mortgage Settlement -- Yves Smith - The whole purpose of a settlement is that a party pays damages to rid themselves of liability, and the amount they pay (and “pay” can include the cost of reforming their conduct) is less than what they expect to suffer if they were sued and lost the case (otherwise, it would make more sense for them to fight). But in the topsy-turvy world of cream for the banks, crumbs for the rest of us, we have, in the words of Scott Simon, head of the mortgage business at bond fund manager Pimco, in an interview with MoneyNews, lots of victims paying for banks’ misdeeds: “A lot of the principal reductions would have happened on their loans anyway, and they’re using other people’s money to pay for a ton of this. Pension funds, 401(k)s and mutual funds are going to pick up a lot of the load… “Think about this, you tell your kid, ‘You did something bad, I’m going to fine you $10, but if you can steal $22 from your mom, you can pay me with that.’” So not only is the settlement designed to shift the costs of the banks’ misdeeds onto already victimized investors, but taxpayers will also be picking up some of the widely touted $25 billion tab. Shahien Nasiripour tells us in the Financial Times that banks will be able to count future mods made under HAMP towards the total: However, a clause in the provisional agreement – which has not been made public – allows the banks to count future loan modifications made under a 2009 foreclosure-prevention initiative towards their restructuring obligations for the new settlement, according to people familiar with the matter. The existing $30bn initiative, the Home Affordable Modification Programme (Hamp), provides taxpayer funds as an incentive to banks, third party investors and troubled borrowers to arrange loan modifications. Neil Barofsky, a Democrat and the former special inspector-general of the troubled asset relief programme, described this clause as “scandalous”.

Confirmed: Banks Can Use HAMP, and Reap HAMP Incentive Payments, in Foreclosure Fraud Settlement - Shahien Nasiripour has posted two stories for the Financial Times about the intersection of the foreclosure fraud settlement and HAMP. I wrote previously about how HAMP modifications could count toward the settlement, meaning that banks would get partially paid out. Shahien confirms this. The agreement in principle between state prosecutors, federal agencies and five leading US banks allows the lenders to take advantage of the federal home affordable modification programme when reducing distressed borrowers’ loan balances as part of the settlement, officials said. Last month, the Treasury department announced it was tripling the incentive payments to owners of mortgages who agree to reduce loan balances. By reducing those balances under Hamp, investors – including the banks who agreed the settlement – now will receive cash payments of up to 63 cents on the dollar for every dollar of loan principal forgiven. They also will receive additional funds when borrowers keep current on their restructured mortgages. So if a bank reduces principal on a loan on their books, and they do it through HAMP, that bank will get, under the new HAMP rules, 63 cents on the dollar for the principal reduction, and more if the borrower stays current. And if they do them in the first year of the settlement, they get even more money as incentive.

Pressure Rises on FHA - While delinquencies and defaults slowly improve in the housing economy as a whole, FHA’s portfolio has grown consistently worse over the past nine months, creating increased pressure on the agency to reduce risk and increase costs to its borrowers, most of whom are first-time buyers. In December, about one out of every 10 FHA mortgages, 9.73 percent, was seriously delinquent, or 90 days past due. Compare that to all mortgages, whose seriously delinquent rate fell to 7.3 percent in December from 7.8 percent a year earlier. For nine straight months, FHA delinquencies have risen while mortgages in general have improved. From September through November, FHA serious delinquencies rose a full percentage point and in 2011, the number of seriously delinquent loans increased by 100,399. As of December 31, 2011, the FHA insured a total of 7,415,002 loans and the prior fiscal year showed a total of 598,140 mortgages seriously delinquent. The number of mortgage defaults from the previous year increased by18.9 percent.

FHA Pronounces Budget Problems Gone, Thanks to Foreclosure Fraud Settlement - The Administration’s FY 2013 budget predicts a large shortfall for the Federal Housing Administration, which has predictably suffered during the housing crisis. But the FHA’s Acting Director (what a surprise, an acting director at a key regulatory agency) says that shortfall has been wiped away by the foreclosure fraud settlement deus ex machina: A budget plan sent to Congress today projected that the FHA would require as much as $688 million from the U.S. Treasury Department. It would be the first cash draw in the agency’s history. That estimate is “obsolete,” (Carol) Galante said in an interview, because five of the nation’s largest banks last week agreed to inject about $1 billion into the agency’s capital reserve fund to settle fraud and foreclosure claims. Pardonez? This is a case where it really hurts not to have settlement terms. Because the total amount in the foreclosure fraud settlement that gets delivered to the federal government, and that includes every agency, is $750 million. Nick Timiraos pointed me to this separate settlement with the FHA from Bank of America on Countrywide underwriting claims:As part of the global resolution between the United States of America and the five largest mortgage servicing banks in the country, the government will also resolve its claims against the Bank of America, Countrywide Financial Corporation and certain Countrywide subsidiaries and affiliates (Countrywide) for underwriting and origination mortgage fraud

California Audit Finds Broad Irregularities in Foreclosures - An audit by San Francisco county officials of about 400 recent foreclosures there determined that almost all involved either legal violations or suspicious documentation, according to a report released Wednesday.Anecdotal evidence indicating foreclosure abuse has been plentiful since the mortgage boom turned to bust in 2008. But the detailed and comprehensive nature of the San Francisco findings suggest how pervasive foreclosure irregularities may be across the nation. The improprieties range from the basic — a failure to warn borrowers that they were in default on their loans as required by law — to the arcane. For example, transfers of many loans in the foreclosure files were made by entities that had no right to assign them and institutions took back properties in auctions even though they had not proved ownership. Commissioned by Phil Ting, the San Francisco assessor-recorder, the report examined files of properties subject to foreclosure sales in the county from January 2009 to November 2011. About 84 percent of the files contained what appear to be clear violations of law, it said, and fully two-thirds had at least four violations or irregularities.

Quelle Surprise! San Francisco Assessor Finds Pervasive Fraud in Foreclosure Exam (and Paul Jackson Defends His Meal Tickets Yet Again) - - Yves Smith  One of our big beefs about the pending mortgage settlement has been the failure of prosecutors and regulators to do anything remotely resembling serious investigations. You don’t settle on known, easy to prove abuses (particularly when you choose not to know their extent) and leave yourself with a grab bag of mainly more difficult to ferret out ones to consider going after later. We’ve seen repeatedly that small scale investigations in the servicing and foreclosure arena have found widespread problems. For instance, one by Abigail Field of foreclosures in two counties in New York found a complete fail by Countrywide of transferring notes to trusts in its own securitizations. Registers of deeds Jeff Thingpen in Guiford County, North Carolina found widespread evidence of robosigning. John O’Brien of Southern Essex County, Massachusetts, conducted an audit and found, per Dave Dayen:

‘• Only 16% of assignments of mortgage are valid
• 75% of assignments of mortgage are invalid.
• 9% of assignments of mortgage are questionable
• 27% of the invalid assignments are fraudulent, 35% are “robo-signed” and 10% violate the Massachusetts Mortgage Fraud Statute.
• The identity of financial institutions that are current owners of the mortgages could only be determined for 287 out of 473 (60%)
• There are 683 missing assignments for the 287 traced mortgages, representing approximately $180,000 in lost recording fees per 1,000 mortgages whose current ownership can be traced.

So the latest report from San Francisco county should come as no surprise. From Gretchen Morgenson of the New York Times, emphasis ours: An audit by San Francisco county officials of about 400 recent foreclosures there determined that almost all involved either legal violations or suspicious documentation, according to a report released Wednesday…. The improprieties range from the basic — a failure to warn borrowers that they were in default on their loans as required by law — to the arcane. For example, transfers of many loans in the foreclosure files were made by entities that had no right to assign them and institutions took back properties in auctions even though they had not proved ownership.

85% of Mortgage Transfers Were No Good  - That’s a pretty startling headline, isn’t it? Yet, that was the conclusion reached by study of 400 foreclosure files commissioned by San Francisco County assessor-recorder Phil Ting. You can read the data in a report authored by the auditors called “Foreclosure in California- A Crisis in Compliance.” It’s only 21 pages long and written in plain language. Gretchen Morgenstern at the NYTimes is all over this story. She writes: In a significant number of cases — 85 percent — documents recording the transfer of a defaulted property to a new trustee were not filed properly or on time, the report found. And in 45 percent of the foreclosures, properties were sold at auction to entities improperly claiming to be the beneficiary of the deeds of trust. In other words, the report said, “a ‘stranger’ to the deed of trust,” gained ownership of the property; as a result, the sale may be invalid, it said. This is not the first time an audit has produced these kinds of results. Law Professor Katherine Porter conducted a similar survey of 1700 mortgage foreclosures in the context of bankruptcy court proceedings. She published her findings in a law review article in the University of Texas Law Review back in 2008. She found: Using original data from 1700 recent Chapter 13 bankruptcy cases, I conclude that mortgage servicers frequently do not comply with bankruptcy law. A majority of mortgage claims are missing one or more of the required pieces of documentation for a bankruptcy claims. Fees and charges on claims often are poorly identified and do not appear to be reasonable. The bankruptcy data reinforce concerns about the overall reliability of the mortgage service industry to charge homeowners only the correct and legal amount of the debt and to comply with applicable consumer protection laws .

Why No Investigation? - Here's a bombshell: the San Francisco City Assessor commissioned a serious audit of foreclosure documentation filed in the past few years. The audit examined 400 foreclosures.  It found problems with 85% of them, often multiple problems. What's more, some of the problems are pretty serious as they implicate not only borrowers' rights, but the integrity of mortgage-backed securities and the property title system.   The San Francisco City Assessor's audit also serves as a benchmark for evaluating the Federal-State servicing settlement.  The San Francisco City Assessor managed to accomplish in a few months what the Federal government and state Attorneys General weren't able to do in nearly a year and a half with far greater resources at their disposal:  perform a credible investigation of foreclosure documentation with serious implications about the securitization process in general.  That's a lot of egg on the face of Shaun Donovan, Eric Holder, Tom Miller, et al.  The SF City Assessor report shows that it really wasn't so hard for a motivated party to undertake a serious investigation. And that raises the question of why the largest consumer fraud settlement in history proceeded with virtually no investigation.

Fed, OCC extend deadline for foreclosure review - People seeking a review of their mortgage foreclosures under the Federal banking agencies' Independent Foreclosure Review now have until July 31, 2012, to submit their requests.  The Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System (Federal Reserve) announced that the deadline for submitting requests for review under the Independent Foreclosure Review has been extended. The new deadline, July 31, 2012, provides an additional three months for borrowers to request a review if they believe they suffered financial injury as a result of errors in foreclosure actions on their homes in 2009 or 2010 by one of the servicers covered by enforcement actions issued in April 2011.  The deadline extension provides more time to increase awareness of how eligible people may request a review through the Independent Foreclosure Review process and to encourage the broadest participation possible.

New York Creates New Foreclosure Courts to Clear Backlog - Yves Smith - Given the horrible history of special foreclosure courts in Florida, which as we recounted (see here and here for some past discussions) resulted in a bank-friendly travesty of justice, one has good reason to regard dedicated foreclosure courts with more than a modicum of concern. The variant that is planned to be implemented in New York appears to be more fair-minded in intent than its Florida cousin. And while it appears unlikely to produce the sort of kangaroo court outcome that occurred there, it is not hard to see that this initiative is likely to fall well short of its objectives. Let’s start with the overview from Reuters:A new court initiative will allow all New York homeowners facing foreclosure to obtain legal representation and streamline the process of settling mortgage disputes out of court, Chief Judge Jonathan Lippman said Tuesday during his annual State of the Judiciary speech. The “unprecedented” deal between the state, legal service groups and four large banks — Wells Fargo, Citibank, Chase and Bank of America — includes the creation of a new court part that will hear only foreclosure settlement conferences, Lippman said. Each week of the month will be dedicated to a different bank, with one attorney assigned to handle all cases for that lender. The court system, Lippman said, is seeking to avoid scenarios that can delay settlement conferences for years, including homeowners being told their paperwork is out-of-date and lawyers for banks claiming to have incomplete sets of documents.

Foreclosures on the Rise Again - After a year-long reprieve from rising foreclosures, the numbers are going up again. One in every 624 U.S. households received a foreclosure filing in January, up 3 percent from the previous month, according to a new report from RealtyTrac. Foreclosure activity froze in many states in 2011, due to processing delays after fraud, or so-called "Robo-signing," were uncovered in the fall of 2010. The thaw is now on. "We expect the pattern of increasing foreclosures to continue in the coming months, especially given the finalized mortgage and foreclosure settlement reached in early February between 49 state attorneys general and five of the nation's largest lenders," said RealtyTrac's CEO Brandon Moore in a written release. "Foreclosure activity increased on a year-over-year basis for the first time in more than 12 months in Florida, Illinois, Indiana and Pennsylvania, following a pattern we saw in late 2011 in states such as California, Arizona and Massachusetts." While states that do not require a judge to preside over foreclosure proceedings, like California, saw a jump in filings toward the end of last year, judicial states have all but stalled. That will now change, thanks to the $26 billion dollar government-lender/servicer settlement. There will still be some delays on individual state levels, but the wheels are turning again, and that means more bank repossessions and more foreclosed properties heading to the re-sale market.

10 States That Are Getting Pummeled By Foreclosures - Foreclosure filings across the U.S. rose three percent in January from the previous month. One in every 624 U.S. housing units received a foreclosure filing, according to the latest data from RealtyTrac.  Foreclosure activity (on a year-over-year basis) increased in Florida, Illinois, Indiana and Pennsylvania for the first time in over 12 months. And foreclosures are expected to climb in coming months. We went through RealtyTrac's data and ranked the 10 states with the highest foreclosure rates.  We also listed the total number of properties with foreclosure filings and the worst counties. Nevada had America's highest foreclosure rate for the 61st consecutive month. Note: Rankings are based on the foreclosure rate, not total foreclosure filings. Foreclosure rate is defined as a foreclosure filing for 1 in every x homes.

Percent of mortgage loans In-Foreclosure by State - The MBA noted that judicial states generally have the most loans in the foreclosure process. The graph below shows the percent of loans in the foreclosure process by state and by foreclosure process. Red is for states with a judicial foreclosure process. Because the judicial process is longer, those states typically have a higher percentage of loans in the process.  Nevada is an exception. But Nevada had the largest quarterly decline, and for the first time in years is not in the #2 spot behind Florida - Nevada has dropped to #4. Other hard hit states, like California and Arizona, have also seen significant improvement. California and Arizona started 2011 in the 6th and 7th spot (respectively) with percent of loans in foreclosure, and have fallen all the way to 23rd and 17th by Q4. Florida, New Jersey, Illinois, Nevada, Maine, New York and Connecticut are the top seven states with percent of loans in the foreclosure process. And Vermont, Maryland, Hawaii, Maine, Connecticut and New York saw the largest increases in Q4.

Unbroken homes: Five creative reuses for foreclosed houses - Last week, big banks agreed to fork over $26 billion to make up for some of the bungling and malfeasance that led to the massive national mortgage meltdown and economic implosion. Their misdeeds included everything from sloppy paperwork to cases where banks actually foreclosed on homes that they did not own. Seriously. Most of the money will go to people who are “underwater” with their home loans, meaning that they owe the banks more than the house is now worth. Never mind that hundreds of thousands of people have already been booted from their homes, or have thrown up their hands and walked away. This leaves the obvious question: What do we do with all these empty houses? I did a little poking around, and found quite a few creative reuses for these places. Here are my five favorites:

Late payments on mortgages rise again in 4th qtr  (AP) -- Late payments on mortgages ticked up in the last three months of 2011, the second straight quarter-to-quarter increase after nearly two years of steady decline. Credit reporting agency TransUnion said 6.01 percent of mortgage holders were behind on their payments by 60 days or more in the October-to-December period. That compared with 5.88 percent for the third quarter of 2011. To be sure, the rate is down significantly from the fourth quarter of 2010, when 6.41 percent of mortgage holders were behind by two or more months. But the uptick is still unwelcome news. "We were hoping for better, because delinquencies remain very high," said Tim Martin, group vice president of U.S. Housing in TransUnion's financial services business unit. Prior to the housing bust, the mortgage delinquency rate typically hovered around 2 percent. What's more, while the national rate fell from the prior year, 18 states showed delinquency increases from the 2010 period. Leading the increases was a big jump in New Jersey, where the rate went to 8.32 percent from 7.43 percent.

MBA: Mortgage Delinquencies decline in Q4 - The MBA reported that 11.96 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q4 2011 (delinquencies seasonally adjusted). This is down from 12.41 percent in Q3 2011 and is the lowest level since 2008. From the MBA: Delinquencies and Foreclosures Decline in Latest MBA Mortgage Delinquency Survey: The delinquency rate for mortgage loans on one-to-four-unit residential properties decreased to a seasonally adjusted rate of 7.58 percent of all loans outstanding as of the end of the fourth quarter of 2011, a decrease of 41 basis points from the third quarter of 2011, and a decrease of 67 basis points from one year ago. The non-seasonally adjusted delinquency rate decreased five basis points to 8.15 percent this quarter from 8.20 percent last quarter. The percentage of loans on which foreclosure actions were started during the third quarter was 0.99 percent, down nine basis points from last quarter and down 28 basis points from one year ago. The percentage of loans in the foreclosure process at the end of the fourth quarter was 4.38 percent, down five basis points from the third quarter and 26 basis points lower than one year ago. The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 7.73 percent, a decrease of 16 basis points from last quarter, and a decrease of 87 basis points from the fourth quarter of last year.

Debtor’s prison 2.0: Jail for delinquent homeowners? - While we can’t be sent to a federal prison for ignoring bills, many states allow citizens to be popped into state or local lockups for unpaid debt. Savvy collection agencies use this process to do an end run around the Fair Debt Collection Practices Act8. Here’s how it works:

  • The collection agency sues the debtor, often in small claims court, with perhaps only a mailed summons (legal in some states, Illinois for example) or, worse, an imaginary notice referred to as “sewer service”
  • The debtor tosses the paper threat unread or misunderstands its implications. The debtor automatically loses the case because he doesn’t show up in court. He’s ordered to pay the collection agency, and the judge issues a arrest warrant for failing to appear and/or make the court-ordered payments
  • Mr. Debtor is dragged out of a PTA meeting on the outstanding warrant and goes to jail
  • He makes bail, which is (amazingly!) set at the exact amount owed
  • The bail is turned over to the creditor. Taxpayers foot the bill for arresting and jailing the “evildoer”
  • If unable to come up with the money owed, Mr. Debtor rots in jail. According to a Minnesota Star Tribune article9, an Illinois man was sentenced “to indefinite incarceration” until he paid his $300 lumber yard debt

Occupy and Land Redemption - Occupy is usually called a movement, but it’s really a strategy and set of tactics toward certain goals. It’s the most visibly vibrant element of the longer arc of the democratic movement. One of the most promising Occupation actions is direct action against bank foreclosures, literally occupying beleaguered and abandoned homes. Occupy Our Homes is a broad coalition of actions around the country. Occupy Minneapolis is an excellent example, occupying homes in order to prevent eviction of foreclosed residents. This Occupy action supplements older actions like Take Back the Land, which since 2006 has been identifying idle bank- and government-”owned” houses and “moving homeless people into peopleless homes”. They call it “liberating homes”. Organizer Max Rameau explains the movement philosophy.

Housing: Short Sales increase, Foreclosure Sales down Year-over-year - There are only a few areas where the MLS breaks down monthly sales by foreclosure, short sales and conventional (non-distressed) sale. I've been tracking the Sacramento market to watch for changes in the mix over time. (here was my post this morning: Distressed House Sales using Sacramento Data) Economist Tom Lawler sent me the following table today for several other areas. For most of the areas (with the exception of Reno), the distressed share of sales is down from January 2011. The share of short sales has increased in most areas, while the share of foreclosure sales are down - and down significantly in some areas.The table is a percentage of total sales. The general trend is short sales are up, and foreclosure sales are down - and total distressed sales are down too, although this could be related to the foreclosure process issues.

Lawler: Short Sales increased significantly in Q4 - Hope Now released its December report which estimates delinquencies, foreclosure starts, completed foreclosure sales, loan modifications, and other loan “workout” plans for the US first-lien residential mortgage market. According to the report, Hope Now estimates that completed foreclosure sales totaled 842,777 last year, down about 21.2% from 2010. While Hope Now does not explicitly release estimates for short sales/DILs, it does release estimates for (1) “other workout plans,” which is the sum of repayment plans initiated, “other” (non-mod) retention plans completed, and “liquidation plans” – which are short sales and DILs; and (2) separate estimates for repayment plans and other retention plans. One can thus “solve” for Hope Now’s estimates for short sales/DILs. Using my proprietary “subtraction” software, I was able to derive Hope Now’s estimates for short sales/DILs in 2011 – 397,280, up over 12% from 2010. HN’s short sales/DILs estimate hit an all-time monthly high of 40,533 in December, and last quarter’s estimate of 110,123 was the highest quarter on record. Other industry data suggest that DILs in both years were “diddly,” so bottom line short sales appear to have increased significantly last quarter.

Walk Away 90210 - Reuters reports that more of the Beverly Hills crowd are walking away from their underwater mansions.  Despite most of the mortgages in this tony zip code exceeding $1 million, buyers are walking, not because they have to, but because it makes financial sense.  “It’s a business decision, not an emotional one which it is for normal people,” said Deborah Bremner, owner of the Bremner Group at Coldwell Banker, which specializes in high-end properties in the Los Angeles area. “I go to cocktail parties and all people are talking about is whether it is time to walk away, although they will never be quoted in the real world.”  California is a non-recourse state. So, handing the keys to the lender means “That’s All Folks” as lenders cannot pursue borrowers for deficiencies (the shortfall between what is owed and what the house brings at the foreclosure auction).  Those with jumbo loans are more likely to strategically default. ”Now that these homeowners with jumbo loans are finding out you can do this, more and more are doing strategic foreclosures,“ says Jon Maddux the CEO of Foreclosures on jumbo loans have increased 579% since 2008, greater than any other form of loan, according to a report by Lender Processing Services, Inc.

FHA REO Inventory declines to four-year low in December - FHA released the December Report to the FHA commissioner, and according to the report FHA’s SF REO inventory plunged to 32,170 at the end of December – the lowest REO property count since December 2007, and 47% lower than at the end of December 2010. Here is a table derived from the latest and past reports. I don’t rightly know what the “adjustments” category is, save that it is needed to make the report “stock/flow” consistent.The level of property conveyances is astonishingly low, especially given the rising level of seriously delinquent FHA-insured SF loans (711,082 at the end of December, up from 598,140 at the end of December 2010). The report also showed a continuation of the recent downward trend in FHA loan modification activity.  It is not clear why both property conveyances AND loss mitigation activity slowed so dramatically in the latter part of last year, but the sharp slowdown in problem loan “resolutions” contributed to the significant rise in the number of seriously delinquent FHA-insured SF loans in the second half of last year. This graph shows the REO inventory for the FHA through Q4 2011. There has been a sharp decline in REO inventory over the last year and FHA REO is at the lowest level since 2007.

The decline of US housing inventory - Depending on how you look at it, you would probably be justified in reacting to this chart from SocGen with either optimism or pessimism: Optimism because the decline in overall inventory has recently fallen fast, pessimism because it is still higher than at any time since the late 1980s and there remains a big gap between visible and total inventory. The most recent data for both existing home inventory and shadow inventory shows them declining. Today Calculated Risk writes that months of supply for existing home sales could soon fall below six months for the first time in six years, and yesterday’s decent delinquency and foreclosures report from MBA suggests that shadow inventory will continue to fall, even if there is some ways to go before it is cleared. As to the impact on prices, here’s RBC Capital focussing on shadow inventory exclusively:

Report: Existing Home inventory down 23.3% year-over-year - Here is another report on inventory ... from Real Estate Trends for January 2012 According to real estate data released today by, the national inventory of for-sale single family homes, condominiums, townhouses and co-ops (SFH/CTHCOPS) declined -6.59% from December to January, and is now down -23.20% compared to a year ago. The median age of the inventory also declined on both an annual and monthly basis, and is now -4.80% below the levels observed in January 2011...For-sale inventories of SFH/CTHCOPS in January 2012 declined in all but one of the 146 MSAs monitored by compared to a year ago when for-sale inventories in more than half of all markets (85) dropped by 20% or more. ... Springfield, IL, was the only market to register a year-over-year increase in for-sale inventory. However, areas that showed the least signs of improvement tended to be concentrated in the Northeast corridor. The NAR report doesn't always match up with other inventory reports - and there is some variability in how inventory is reported (some report include contingent short sales, some don't) - but it does appear inventory is down sharply in most areas. (Contingent short sale inventory is also down sharply).

The Decline In Housing Inventory Is NOT A Good Sign For The Housing Market: There was a 21.2% decline in listing inventory from December 2010 to December 2011. Relying on typical housing market scenarios and reasonable logic, a decline in listing inventory nearly always meant a tightening market was developing – fewer houses coming on line matched against steady demand meant housing prices were more likely to stabilize or rise. Declining inventory is the variable in the housing equation that usually makes conditions improve. During the mid-decade housing boom, falling inventory was caused by the insatiable demand by buyers – product could not get out to the market fastest enough. Listing inventory was simply “worked off” by (artificially) inflated demand. Listing discounts approached zero, days on market fell to record lows and prices rose rapidly. However over the last year, listing inventory fell sharply in many markets yet sales were generally anemic or showing nominal increases. In the NAR numbers, non-seasonally adjusted sales were up 1.4% year over year (using NSA since inventory is also NSA) yet inventory was down 21.2%. Inventory was clearly not declining because sales were overpowering the amount of listing inventory that was available.

Credit Standards May Finally Be Loosening For Housing - As of June 2011, one in six real estate deals were falling apart due to financing, according to a survey by the National Association of Realtors, whereas before it was one in 25 in good years. During the Recession, 760 became the standard credit score for approved mortgages.  And sometimes even 30% down wasn’t enough to qualify for a jumbo loan — banks were denying small-business owners who had more than that on deposit.  While FHA loans only mandate a credit score of 580, many borrowers were turned away because of “overlay” requirements they initiated. The Fed has tried to return banks to normal lending practices by promising to keep interest rates low until 2014.  According to the Freddie Mac Index, the average 30-year fixed rate is 3.87%, the lowest it’s been in 40 years of the index.  Perhaps these low rates combined with lower credit standards are finally enabling borrowers to borrow.

Home Builder Sentiment at Nearly 5-Year High - U.S. home builders’ sentiment rose in February to the highest level in nearly five years, a clear sign of improvement for an industry trying to climb out of a deep slump. The National Association of Home Builders said Wednesday its housing market index grew to 29 from 25 in January. The increase was the fifth in a row and carried the index to its highest since May 2007. The results were better than expected. Economists polled by Dow Jones Newswires had forecast a reading of 26. Historically, the reading still is low. A reading above 50 in the NAHB index would mean more builders view conditions as good rather than poor. The gauge has not been in positive territory since April 2006. “This is the longest period of sustained improvement we have seen…since 2007, which is encouraging,” said David Crowe, the NAHB’s chief economist. But he noted foreclosures are still competing with new-home sales. “Many builders are seeing appraisals come in at less than the cost of construction,”

Expecting More From Housing - Last week I wondered if the housing sector had finally hit bottom. There's a good case for arguing "yes," although the bigger question is whether housing will be a contributor to overall economic growth? That's still a mystery in terms of timing, but the odds are looking better for the optimistic outlook is increasingly relevant. Perhaps we'll find some fresh clues in the update for January's housing starts, scheduled for release later this morning. The consensus forecast calls for a moderate increase over December, according to  The continued rise in home builder confidence, via yesterday's update on the NAHB/Wells Fargo Housing Market Index (HMI), suggests that we should expect a recovery in housing starts. “Builder confidence has doubled since September as measured by the HMI,” says NAHB chairman Barry Rutenberg, a home builder, in a press release. “Given the recent improvements in new home starts and the increasing number of markets included in the NAHB/First American Improving Markets Index, this consistency suggests that the housing market is moving toward more sustainable growth.” A graph from Calculated Risk implies that the sharp rise in HMI will soon lead to a jump in housing starts.

Chart of the day - CALCULATED RISK provides a chart that nicely captures the strengthening tailwinds at the back of the American economy: The rather large rise in the red line there at the end corresponds to a substantial improvement in the National Association of Home Builders' index of builder confidence. It has doubled since September and, if history is any indication, it presages a surge in construction. That, in turn, should translate into a steady contribution to GDP from residential investment and a rise in construction employment. And that might well keep the American economy on track for a decent-to-great fourth quarter performance.

Housing Starts increase in January - From the Census Bureau: Permits, Starts and Completions: Privately-owned housing starts in January were at a seasonally adjusted annual rate of 699,000. This is 1.5 percent (±16.8%)* above the revised December estimate of 689,000 and is 9.9 percent (±14.2%)* above the January 2011 rate of 636,000. Single-family housing starts in January were at a rate of 508,000; this is 1.0 percent (±19.0%)* below the revised December figure of 513,000. The January rate for units in buildings with five units or more was 175,000. Single-family starts were revised up for November and December (by 43 thousand in December). Total housing starts were at 699 thousand (SAAR) in January, up 1.5% from the revised December rate of 689 thousand (SAAR). Note that December was revised up from 657 thousand. Single-family starts declined 1.0% to 508 thousand in January, however December was revised up by 43 thousand from 470 thousand. There were the first two months above 500 thousand since the expiration of the tax credit. The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that total housing starts have been increasing lately after sideways for about two years and a half years.. It now appears both multi-family and single-family starts are moving up, but from very low levels.

US Housing Starts, Permits Up Modestly From Depressed Levels; Tentative Signs of a Bottom in Construction - Housing starts are near three-year highs, but that is in comparison to extremely weak numbers for the past few years. Builders began just 430,900 single-family homes last year, the fewest on records dating back a half-century.  Moreover, home prices are still dropping. Yet, signs of a bottom in construction, not prices, may be at hand.  Yahoo! Finance reports US housing starts rise modestly to start new year The Commerce Department said Thursday that builders broke ground on a seasonally adjusted annual rate of 699,000 homes in January. That's up 1.5 percent from December and nearly matches November's three-year high for starts. Construction began work on 508,000 single-family homes last month. That's a 1 percent drop from December and the first decline in four months. A big rise in volatile apartment construction helped offset the decline in single-family homes.  Single-family home construction rose in each of the final three months of last year, bringing the pace of those starts to the highest level since April 2010. The modest but steady gains helped boost confidence among builders after the worst year for single-family home construction on record.

Multi-family Starts and Completions, and Quarterly Starts by Intent - With the recent increase in single family housing starts, a key question is: Are the home builders starting too many homes? The answer is no. Part of the increase for starts in December and January can be explained by the unseasonably warm weather in most of the country. The reported number is seasonally adjusted, so nice weather can make a difference. Building activity will pick up in March, and that will be a key month for starts. However the builders are also responding to sales. As I've noted before, we can't directly compare single family housing starts to new home sales. However it is possible to compare "Single Family Starts, Built for Sale" to New Home sales on a quarterly basis. The Q4 2011 quarterly report was released today and showed there were 64,000 single family starts, built for sale, in Q4 2011, and that was slightly below the 68,000 new homes sold for the same quarter. This graph shows the NSA quarterly intent for four start categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale. Single family starts built for sale were down seasonally in Q4 compared to Q3, but starts were up about 10% compared to Q4 2010. The second graphs shows the difference (quarterly) between single family starts, built for sale and new home sales. And here is an update to the graph comparing multi-family starts and completions. The blue line is for multifamily starts and the red line is for multifamily completions. The rolling 12 month total for starts (blue line) has been increasing since mid-2010. Completions (red line) are now following starts up.

Housing Starts and the Unemployment Rate - The following graph shows single family housing starts (through January) and the unemployment rate (inverted) also through January. Note: there are many other factors impacting unemployment, but housing is a key sector. You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold. Housing starts (blue) increased a little in 2009 with the homebuyer tax credit - and then declined again - but mostly starts moved sideways for two and a half years and only started increasing recently. This was one of the reasons the unemployment rate has remained elevated. Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also additional household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recover. However this time, with the huge overhang of existing housing units, this key sector hasn't been participating. The good news is single family starts should increase modestly in 2012, and construction employment should also increase.

Despite Gains, Housing Still Faces Problems - Housing has been down so long that any gain is welcome. But the 1.5% rise in January starts was less positive than meets the eye. First, economists expected a bigger advance. After all, the mild weather should have allowed builders to break ground on many more projects than in a typical January. Economists at IHS Global Insight warn the building activity pulled forward into the tepid winter months could mean a payback in starts come the spring. Second, the mix of projects suggests demand for new homes is coming from renters, not buyers. All the increase was in multifamily buildings. Single-family housing starts actually fell 1.0% last month. For the last few years, housing’s problem has been insufficient demand to clear out the overhang of supply. For whatever reason–lack of downpayment, financing problems, the inability to sell a currently owned house–buyers are still largely missing from the housing equation. That’s evident in consumers’ plans and mortgage activity.

Residential Remodeling Index increases 22.8% year-over-year in December - The BuildFax Residential Remodeling Index was at 127.4 in December, down from 137.9 in November, but up 22.8% from December 2010. This is based on the number of properties pulling residential construction permits in a given month.  From BuildFax Remodeling Index The Residential BuildFax Remodeling Index is up 22.8% year-over-year in December 2011 at 127.4 points. Residential remodels in December were down month-over-month 10.5 points (7.6%) from the November value of 137.9, and up year-over-year 23.6 points from the December 2010 value of 103.8. Although the index declined in December from November, this is the highest level for a December since the index started in 2004, even above the levels from 2004 through 2006 during the home equity ("home ATM") withdrawal boom. Starting next month, BuildFax will release a seasonally adjusted index.  Permits are not adjusted by value, so this doesn't mean there is more money being spent, just more permit activity. Also some smaller remodeling projects are done without permits and the index will miss that activity. Since there is a strong seasonal pattern for remodeling, the second graph shows the year-over-year change from the same month of the previous year.

Student Loans Near $1 Trillion Hurting Young Buyers: Mortgages - Roshell Schenck has a PhD in pharmacy and earns $125,000 a year, yet can’t qualify for a mortgage for a house for herself and her 9-year-old daughter. The 2008 graduate of Lake Erie College of Osteopathic Medicine, in Erie, Pennsylvania, has more than $110,000 in student debt. As outstanding student debt approaches $1 trillion, it’s one more reason record-low interest rates aren’t doing more to boost housing. The tighter lending standards that have emerged in the wake of the recession weigh particularly on younger, first-time home buyers, according to a Federal Reserve study sent to Congress on Jan. 4. These households tend to be younger, often have relatively new credit profiles, lower-than-average credit scores and fewer economic resources to make a large down payment, the report said. “Potential first-time homebuyers have been disproportionately affected by the very tight conditions in mortgage markets,” Federal Reserve Chairman Ben S. Bernanke said at a homebuilders conference last week. “First-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly.”

New American Dream is renting to get rich - "It's the American Dream to own a home, but whoever said that didn't do the analysis on it," says Arzaga, knowing he's taking a contrarian stance to conventional wisdom. Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor in personal finance at the University of California at Berkeley, found that, "100 percent of the time it was better to rent, rather than own." That's right: 100 percent. The reason is simple. While a home is the main repository of wealth for many Americans, it comes with numerous hefty expenses. The carrying costs - what's needed to hold and maintain the asset - range from property taxes and home insurance to emergency repairs and renovations. In a rental situation, the landlord covers those costs, leaving the occupant free to invest revenue in other areas. "I don't have the emotions a lot of people do surrounding real estate," Arzaga says. "I have steely eyes for how investing in real estate works, and I'd better be a prudent investor for my clients."

Housing Crisis: Lowest-Income Renters Left Behind - The foreclosure crisis has been a four-year nightmare for many homeowners, more than 3 million of whom have lost their homes. Many of these ex-homeowners are middle class people with jobs and safety nets, and have become renters or traded down for more inexpensive homes after losing their primary residences. But for the very poor, options are limited, and the situation is dire, according to a report out Wednesday from the National Low Income Housing Coalition. Using data from the Commerce Department’s American Community Survey, the advocacy group found that for every 100 extremely low income families, there are only 30 affordable units available for rent nationwide. The number of these ELI renters grew by 200,000 between 2009 and 2010, to 9.8 million, or nearly a quarter of all the renters in the U.S. Extremely low income renters are defined as families that earn less than 30% of the median income in their metropolitan area. These people typically depend on government assistance to buy food and health care as well. But the danger with these types of renters is that after paying their rent, these households will have less than 50% of their income remaining to spend on food, medicine, transportation and childcare.

Rent Control, Redux - There's been a small dustup on rent control lately on the blogosphere. Peter Dorman has been pointing out that the theory everyone knows may not fit the facts. I myself covered the topic before here. Its worth a read, I think, but here's the takeaway Now, I haven't been in NYC in decades, but I do know this. After a few decades, there's time for a market to adjust. If it doesn't pay to be a landlord, expect fewer people to want to be landlords – the supply of dwellings for rent relative to dwellings for sale will dwindle. If it doesn't pay to be a renter, expect fewer people to want to be renters – the demand for dwellings for rent relative to dwellings for sale will dwindle. Either way, if rent control "ruined New York City real estate markets" and has been doing so since 1943, one thing we should expect is that the percent of occupied housing units that are owner-occupied (as opposed to renter occupied) in NYC is much higher than in places where the real estate markets were not ruined by rent control.Following a look at the data:  Put another way, in NYC, where generations of rent control has destroyed the rental market, two thirds of all occupied dwellings are rentals. In the rest of the US, two thirds of all occupied dwellings are not rentals. By the numbers, it seems the rental market is extremely healthy in NYC relative to the rest of the country.

Armageddon at the Strip Mall - Remember 2007? Glory days, right? Everything was booming, and nothing was booming quite as much as real estate — especially commercial real estate. Malls, hotels, warehouses, industrial parks: Everything was being built, and everything was being financed on ridiculously generous terms. Remember interest-only loans? Good times. But commercial real estate is different from residential in one important way: Your standard residential mortgage goes 20 to 30 years. Your standard commercial loan goes for five years, at the end of which you either make a big balloon payment (what it is that balloons remind me of?) or you refinance, the idea being that five years is long enough to get your project built or developed, to secure tenants and leases, get your cash flow flowing, etc. Five years: Seems like it was only yesterday. By my always-suspect English-major math, that means that a whole bunch of commercial mortgages written at that poisonous sweet spot when prices were highest but lending standards were lowest are coming due . . . oh, any minute now.

Anxiety over incomes hits consumer morale (Reuters) - Americans felt worse about their personal finances in early February, but rising confidence in the labor market's prospects should help to support spending and the broader economy. The Thomson Reuters/University of Michigan overall index of consumer sentiment fell to 72.5 in early February, data showed on Friday, from 75.0 in January. It was the first drop in six months and reflected households' anxiety over their finances. The ebb in morale comes despite the recent run of relatively strong data, including solid job growth and manufacturing activity. "While there is plenty of positive momentum in the economy there is still plenty to worry about," said Lindsey Piegza, an economist at FTN Financial in New York. The Conference Board's survey of consumer attitudes published last month also showed a fall in sentiment. Households continue to struggle under the weight of huge debt loads and a sustained decline in house prices also is not helping. While consumers worried about incomes, they reported a record level of optimism about job prospects. "This pattern of responses - less favorable current assessments and more favorable prospects - is not surprising. It simply indicates that consumers find their current situation all the harder to bear when improvement is finally in sight,"

A January Thaw For Retail Sales - Retail sales rose 0.4% last month, the government reports. That’s below what many economists were forecasting, but predictions aside there’s nothing particularly troubling with the latest numbers. Indeed, the revival in January’s retail sales growth after December’s sluggish pace is welcome news. But there’s always something to worry about, of course, especially these days, and one potential dark cloud is the slowdown in the year-over-year trend in consumption. Granted, the annual rise in retail sales is still quite robust, but it continues to decelerate. On the other hand, looking at January’s numbers suggests that the American consumer remains willing and able to buy. If we consider the latest retail sales update with other economic reports of late—the surge in transport activity, for instance, as Ed Yardeni notes—the case for expecting moderate economic growth in the foreseeable future remains intact, or at least plausible. That said, the ongoing descent in the rate of annual growth in retail sales, which mirrors the slowdown in disposable personal income growth, is worrisome, if only at the margins at this stage.

Retail Sales Rebound as Consumers Step Up - Americans rebounded from a weak holiday season and stepped up spending on retail goods in January, an encouraging sign for the strengthening economy. Retail sales rose at a seasonally adjusted 0.4 percent last month, the Commerce Department said Tuesday. Consumers spent more on electronics, home and garden supplies, sporting goods, at department and general merchandise stores and at restaurants and bars. Consumers spent less on cars in January, the report showed, even though automakers have previously reported higher sales in January. That suggests dealers offered discounts in order to boost sales. Low interest rates, better loan availability and new car models have helped drive sales higher in the last three months. The January retail sales figures were an improvement from December, which were downwardly revised to show a flat reading. And excluding autos, building materials and gasoline station sales, core retail spending jumped 0.7 percent.

Retail Sales increased 0.4% in January - On a monthly basis, retail sales were up 0.4% from December to January (seasonally adjusted, after revisions), and sales were up 5.8% from January 2011. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for January, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $401.4 billion, an increase of 0.4 percent (±0.5%)* from the previous month and 5.8 percent (±0.7%) above January 2011. ... The November to December 2011 percent change was revised from 0.1 percent (±0.5)* to virtually unchanged (±0.3%)*. Sales for December were revised down from a 0.1% increase to "virtually unchanged". This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 20.7% from the bottom, and now 6.1% above the pre-recession peak (not inflation adjusted) The second graph shows the same data since 2006 (to show the recent changes). Excluding gasoline, retail sales are up 17.3% from the bottom, and now 5.6% above the pre-recession peak (not inflation adjusted). The third graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 5.6% on a YoY basis (5.8% for all retail sales). Retail sales ex-gasoline increased 0.3% in January.

Number of the Week: Five Cents of Every Retail Dollar Spent Online - 5.5%: E-Commerce’s share of total retail sales in the fourth quarter of 2011. It’s no secret that more Americans are shopping online, but the speed at which sales are moving to the Web is striking. According to a recent report from the Commerce Department, $61.8 billion of retail sales were transacted on the Internet in the fourth quarter of last year. That represented a 16% increase from 2010 and accounted for 5.5% of all retail activity over the holiday period. E-commerce’s market share has soared eightfold since 1999, and even over the deep recession only experienced a brief lull not a retreat. Online shopping is particularly popular during the holidays, but even accounting for seasonal variation nearly 5 cents of every retail dollar spent went online. And that figure leaves out money spent on services like travel, financial brokers or ticket agencies.

United States of Dollar Storesdollar stores see a rise in households making $70,000 a year or higher as a customer base. What does the rise of dollar stores say about the middle class? Before 2000 dollar stores were largely seen as a bazaar of quirky trinkets and plastic oddities.  Many sold excess volume of products, even selling old Super Bowl t-shirts of teams that did not win.  Yet the dollar store of today is not the one of even one decade ago.  The disillusionment of the middle class and the rise of a low-wage American worker base have created a booming business for dollar stores.  Customers from more affluent backgrounds are now shopping at these stores because of an economic caution about their declining purchasing power.  Even in the midst of the boom in the stock market we still have over 45,000,000+ Americans receiving food assistance.  I talked about this large segment of our population in EBT Nation.  What does the rise of the dollar store tell us about the future of the American economy?

Something Doesn't Make Sense About That Retail Sales Report: January retail sales just came out, and it was kind of a strange report. Headline retail sales for January came in at just 0.4 percent, well below the 0.8 percent growth that analysts had expected. But retail sales excluding autos beat nicely (0.7 percent vs. the 0.5 percent that was expected). So obviously the weakness came form the auto part of the report. This chart of sequential growth by category confirms that auto sales were the sore thumb sticking out. And yet... This data runs contra to other January data. According to Commerce Department data, auto sales gained in January over December. Other measures also indicate robust January car sales. Here's a chart of auto shipments via rail put on Twitter by @bourbon_meyer. Does anyone have a good guess for what's amiss here?

Unadjusted January Retail Sales Post Biggest Sequential Plunge In History - The topic of BLS propaganda seasonal adjustments has been discussed extensively here especially in light of January's NFP beat. We'll leave it at that. However, we were rather surprised to note that the Census Bureau may have also ramped up its seasonal adjustment "fudge factoring" because when looking at the January headline retail sales data, which naturally was a smoothly continuous line on a Seasonally Adjusted basis, rising from $399.9 billion in December to $401.4 billion in January, something rather odd happened in the Unadjusted data set: the plunge from $459.8 billion in December to $361.4 billion in January, or -$98.5 billion in one month, was the biggest one month drop in retail sales in history. Now we won't say much on this topic, suffice to say that it would be far more useful if the BLS and Census Bureaus were to open up their models and explain in nuanced detail just what "old normal" adjustments they still incorporate into data sets. Because as many have already noted, seasonal adjustments used for data from 1980 to 2008 when "up" was the only allowed direction for everything, are completely irrelevant and misleading in the New Deleveraging Normal.

Odd Retail Data Aren’t as Worrying as Rising Gas Prices - Data released Tuesday showed shoppers were less responsive to retailers’ come-ons in December and January. Retail sales increased just 0.4% in January, less than the 0.9% forecast. December’s numbers were revised to flat sales instead of the 0.1% gain reported earlier. The numbers, however, look odd given other reports and trends. For instance, auto makers said they sold 14.2 million vehicles in January, the best annual rate showing since May 2008, according to Autodata. Yet, the Commerce Department said sales at car and parts dealers (which measures dollar value, not unit sales) fell 1.1%. Also, Internet sales dropped in December and January. Those were the first back-to-back declines since late-2008, at the depths of the recession, but it runs counter to the growing popularity of online shopping. Those quirks may get erased or moderated in later revisions. For now, the report shows spending had less momentum heading out of 2011. Coupled with a small gain in business inventories, the weakness means fourth-quarter real gross domestic product looks to be lowered when the revisions are reported February 29.

US Retail Sales - The price of gasoline is making the evening news again. Yesterday, NBC made a big deal about rising gasoline prices. The national average pump price rose to $3.40 a gallon during the week of February 1 from a recent low of $3.22 during the week of February 21. Last year, it peaked at $3.96 in mid-May, and seems to be heading there based on the jump in gasoline futures prices in recent days. The evening news segment didn’t report that natural gas prices are trading near record lows. Instead, the next story after the one about rising gasoline prices was about the tensions in the Persian Gulf between American and Iranian naval forces.  That sort of anxiety might be creeping into the Consumer Sentiment Index, which edged down during mid-February to 72.5 from 75.0 during January. On the other hand, Bloomberg’s Consumer Comfort Index increased for the fifth week in the past six weeks. Retail sales of gasoline service stations did climb by 1.4% during January to $539.4 billion (saar), but they’ve been around that level for the past year. They currently account for 11% of retail sales. Americans have been responding to high gasoline prices by driving less. The Federal Highway Administration reports that vehicle miles traveled in the US fell to 2.96 trillion in the 12 months through November, the lowest since May 2009. This series actually peaked at a record 3.04 trillion miles back during November 2007. The 52-week average of gasoline usage fell in early February and the lowest since February 2004.

U.S. Import Prices Climbed 0.3% in January on Higher Costs for Autos, Fuel - Prices of goods imported into the U.S. rose in January for the second time in six months, reflecting higher costs for automobiles and petroleum. The 0.3 percent gain in the import-price index follows a 0.1 percent decrease in December, Labor Department figures showed today in Washington. The increase matched the median projection of economists in a Bloomberg News survey. The cost of imported consumer goods excluding cars fell by the most since October 2010. Slower global growth means commodity costs will probably show little change in coming months, helping limit price pressures. Federal Reserve policy makers project they’ll keep interest rates low at least until late 2014 amid forecasts that inflation will fail to accelerate. “Prospects of slower global growth suggest that import inflation should continue to moderate,” Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said before the report. “Moderating commodity prices, slower Chinese inflation and a strengthening U.S. dollar should keep import inflation contained over the coming months.”

Weekly Gasoline Update: Up 29 Cents in Eight Weeks - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump, both regular and premium, increased 4 cents over the past week, continuing their steady increase since mid-December. Both are up 29 cents from the interim low in the December 19th EIA report. WTIC closed today at 101.91. It is 11.4% off its 2011 interim high, which dates from early May 2011. As I write this, shows only one state, Hawaii, with the average price of gasoline above $4. But four states, Connecticut, California, New York, and Alaska are above 3.75.  The next chart is an overlay of WTIC, Brent Crude and unleaded gasoline (GASO). Over the past year saw an increasing disconnect between WTIC and Brent Crude, but over the last quarter that spread has shrunk considerably.  The price volatility in crude oil and gasoline have been clearly reflected in recent years in both the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE). For additional perspective on how energy prices are factored into the CPI, see What Inflation Means to You: Inside the Consumer Price Index.

Dear petrol, back again - THE last few years have been full of ups and downs for the American economy, but one unpleasant trend has been a constant. Each year since 2008, an economy seemingly regaining its footing after a difficult winter has found itself facing the drag from rising petrol prices. American output switched from contraction to expansion in early 2008, only to sink under the weight of spiking oil prices, which added greatly to the pain of the housing and financial crises. The green shoots of 2009 struggled to sprout amid a more than 50% increase in the cost of a gallon of petrol between January and July. The same pattern played out again in 2010. In February of 2011, private employers added 257,000 workers—the same as they did in January of this year—but the recovery nearly collapsed as unrest in Libya sent petrol prices back above $4 a gallon. Journalists are already writing stories on the possibility of a repeat performance in 2012, even without a major crisis in Iran. The cost of a gallon of petrol has risen more than 20 cents from the beginning of the year (it now sits at about $3.58), and much more of a rise is likely as summer approaches.

Don’t expect gasoline prices to go down any time soon - As the price of gasoline at the pump continues to soar nationally, Houston motorists can breathe a sigh of relief as prices remain a bit lower here. ut for how long, that’s a different question. Nationally, the average price for unleaded regular gasoline at the pump topped $3.51 a gallon, a cent higher than the record average price last year, according to AAA gas gauge. Houston drivers are paying on average $3.43, or or 4 cents more than last week. Gasoline prices have been slowly climbing to the $4 mark in 2012 as three northeast refineries close, high oil prices and tensions in the Middle East drive up the price at the pump. So far, gasoline prices have risen more than 20 cents in the past month, and those prices are likely to climb even higher.

What's Driving U.S. Fuel Efficiency? - We recently tapped the U.S. Department of Transportation's Traffic Volume Trends report to use the data it provides on the total miles accumulated by Americans on the nation's roads as a measure of the health of the U.S. economy, but it occurred to us that we can also use the data to get a sense of how the overall fuel efficiency of the nation's road vehicles is changing over time!  Since the DOT's data only covers the period since January 1986, our first chart shows the number of miles accumulated by all U.S. ground-based vehicles in the 12 months prior to the reported month: Next, we went into the U.S. Energy Information Administration's data on the amount of motor gasoline, distillate (aka "Diesel") and residual fuel oil distillate to find out how much of these petroleum products were supplied to American vehicles for each month since January 1986: So now that we have the number of miles driven by Americans each month (which we can approximate by dividing the rolling 12-month figure provided by the U.S. DOT by 12), and also the number of gallons of motor gasoline and distillate products supplied to Americans, which we'll assume all went into the nation's vehicle gas tanks, we can just divide the miles by the gallons to find the nation's average fuel economy for each month since January 1986. Our results are below....

It's Not Just Gasoline Consumption That's Tanking, It's All Energy - It's not just gasoline consumption that's declining--petroleum and electricity consumption are also dropping. Is that indicative of economic growth? A number of readers kindly forwarded additional data sources to me as followup on last week's entry describing sharply lower deliveries of gasoline. (Why Is Gasoline Consumption Tanking? February 10, 2012) The basic thesis here is that petroleum consumption is a key proxy of economic activity. In periods of economic expansion, energy consumption rises. In periods of contraction, consumption levels off or declines. This common sense correlation calls into question the Status Quo's insistence that the U.S. economy has decoupled from the global ecoomy and is still growing. This growth will create more jobs, the story goes, and expand corporate profits which will power the stock market ever higher.

THIS Is The Point Where Gas Prices Start Changing People's Behavior - As we pointed out earlier this week, the hot new meme is that gas prices are rising, and may torpedo the recovery/Obama's re-election. We've seen various attempts to connect the price of gas (or oil) with a certain decline in GDP, but it's always suspect. And though this table from Jefferies isn't scientific, it is interesting nonetheless. Basically, it just asks at what point gas prices would start changing consumer behavior. Again, it's not a sure thing that these prices WOULD change behavior, but it does tell you something about the kind of numbers that various consumers start to think they'd see a problem.

Has America Lost it's Drive?  - Yesterday,  Karl Smith posted on Oil and the Structural Recession.  This seems to be one of Karl's thinking-out-loud posts, with more questions than answers, some convoluted reasoning, and a conclusion that higher gasoline prices are in our future.  If I read him right, this will be due to a demand pull. He included this graph from Calculated Risk: U.S. Vehicle Miles. The number of miles driven tends to flatten during a recession, then recover quickly when the recession is over.  At least, that's the way it used to be.  The Miles Driven curve seems to have been losing slope since the late 90's, and was close to flat-line during the housing bubble last decade, when everyone supposedly felt rich.  There has been no recovery after the recent Great Recession, which officially ended 32 months ago. The same CR post cited above also includes this next graph. This confirms my eye-ball assessment that the slope in the first graph has been in decline since long before the oil price bubble of recent years. Truck traffic is way up, but total miles driven, per graph 2, has been mostly in decline for four years. This suggests that discretionary personal driving has been sharply curtailed.  I'm having a hard time coming up with any alternative explanation.  Can anybody suggest one?

Consumer prices rise 0.2 percent in January  - Consumer prices rose the most in four months in January as the price of gasoline jumped, highlighting a growing concern that higher energy costs could slow the economic recovery.  In a report that might also give the U.S. Federal Reserve some pause over the possibility of easing monetary policy further, the Labor Department said on Friday its Consumer Price Index rose 0.2 percent last month. The gain was just below analysts' expectations of a 0.3 percent increase. Stripping out food and energy for the so-called core reading, prices rose 0.2 percent, which was in line with expectations. However, the report showed the rate of core price increases in the twelve months through January unexpectedly climbed to 2.3 percent.

Inside the Consumer Price Index - The Fed justified the previous round of quantitative easing "to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate" (full text).  But what does an increase in inflation mean at the micro level — specifically to your household? Let's do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I'll refer to hereafter as the CPI.  The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the traditional order of urgency: food, shelter, and clothing. Transportation comes before Medical Care, and Recreation precedes the lumped category of Education and Communication. Other Goods and Services refers to a bizarre grab-bag of odd fellows, including tobacco, cosmetics, financial services, and funeral expenses. For a complete breakdown and relative weights of all the subcategories of the eight categories, see the link to table 1 near the bottom of the BLS's monthly Consumer Price Index Summary.  The chart below shows the cumulative percent change in price for each of the eight categories since 2000.

Pulse of Commerce Index Increased 0.2 Percent in December - The Ceridian-UCLA Pulse of Commerce Index® (PCI®), rose 0.2 percent in December following the 0.1 percent increase in November and the 1.1 percent increase in October. Although December’s news is positive, the combined effect of the three consecutive positive months was not enough to offset the weakness of trucking last summer and the PCI in December 2011 is 1.2 percent below its June 2011 level. In the past three months, compared to the prior three months, the PCI increased at an annualized rate of 0.5 percent. On a year-over-year basis, the PCI was down 0.7 percent in December compared to the 0.9 percent year-over-year increase in the prior month. “Many Wall Street economists have jacked up their ‘backcasts’ for fourth quarter GDP growth to 3 percent but the PCI does not support this view,” said Ed Leamer, chief economist for the Ceridian-UCLA Pulse of Commerce Index. “The PCI measures inventories destined for factories, stores and homes, and the decline in the PCI in the third quarter correctly anticipated the large negative contribution of inventories to GDP growth.” With all three months of the fourth quarter now available, the PCI suggests fourth quarter GDP growth of 2.0 percent or less. “With real retail sales growing more rapidly than the PCI over the last two quarters, however, the first half of 2012 may be an inventory-rebuilding period, allowing inventories to make a substantial contribution to GDP growth,”

Ceridian Fuel Index Down 1.7% from December, Down 2.2% from Year Ago; Delay in Trucking Activity or Global Trade Slowdown? - In a video, Ed Leamer, Chief PCI® economist hypothesizes "delay in trucking activity". Chief PCI® economist, Ed Leamer, explains the disappointing month-over-month and year-over-year numbers for the January PCI in the face of other indicators that suggest that the economy is turning around. In this month’s report, Ed explores several hypotheses for the disconnect and concludes that trucking activity is delayed, expecting to see a surge in the coming months. For more charts and commentary please see Ceridian-UCLA Pulse of Commerce Index®  I do not buy the economy is turning around and the falloff in diesel demand represents "trucking delayed" any more than I believe the overall plunge in petroleum is "driving delayed". Instead I propose something far more serious has started - a global trade slowdown.

Trade Deficit in U.S. Rose in December to Six-Month High on Import Growth - The trade deficit in the U.S. widened in December to a six-month high as a strengthening economy prompted bigger gains in imports than exports. The gap increased 3.7 percent to $48.8 billion from $47.1 billion in November, Commerce Department figures showed today in Washington. Purchases of goods and services produced overseas were the strongest in more than three years on record demand for capital equipment like machinery and semiconductors.Imports advanced 1.3 percent to $227.6 billion, the most since July 2008. In addition to capital goods, American companies also bought more consumer household items, automobiles and parts and crude oil from overseas. Exports increased 0.7 percent to $178.8 billion, boosted by record sales of petroleum to buyers overseas. That caused the trade gap excluding petroleum to widen even more than the deficit overall, rising to $21.9 billion in December from $19.4 billion the prior month.

LA area Port Traffic mostly unchanged year-over-year in January - The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for January. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.  On a rolling 12 month basis, inbound traffic is up 0.1% from December, and outbound traffic is flat.  On a rolling 12 month basis, outbound traffic is moving "sideways" for the last 4 or 5 of months, and it appears inbound traffic has halted the recent decline. The 2nd graph is the monthly data (with a strong seasonal pattern for imports).  For the month of January, loaded inbound traffic was up 1% compared to January 2011, and loaded outbound traffic was flat compared to January 2010.  On both a rolling 12 month and year-over-year basis, imports and exports were mostly unchanged.

Vital Signs: January Rise in Import Prices - The overall price of goods entering the U.S. rose slightly last month. Import prices climbed 0.3% in January, after a modest decline in December, the Labor Department said. The rise was driven by higher petroleum prices — which now stand 23.7% above where they were a year ago. Excluding petroleum, import prices were flat, suggesting inflation pressures remain in check.

Port Tracker Says Container Imports Will Decline This Month - Analyst says containerized import traffic will grow 0.5 percent by mid-year-  Containerized imports at the major U.S. gateways will decline in February, but volumes will pick up in the spring, according to the Global Port Tracker. The analyst expects trade volume by mid-year to be up a modest 0.5 percent compared to the same period last year. Consumer confidence is strengthening, which indicates that imports from Asia should increase, but retailers remain cautious about building their inventory levels. “Merchants want to be sure that growth will be sustained and that demand will be there to meet supply,” said Jonathan Gold, vice president for supply chain and customs policy at the National Retail Federation.. Containerized imports in February are projected to be down 6.8 percent from February 2011. However, imports will increase 8.6 percent in March and 2.4 percent in April from the same months last year. May is projected to be down 0.7 percent while imports will increase 3 percent in June compared to the 2011 numbers.

Vital Signs: 2011 Machinery Purchases - U.S. factories stepped up their purchases of machinery during 2011. Orders of manufacturing technology, a broad category that includes advanced machine tools and other production equipment, rose 66% from 2010 to $5.51 billion. Orders spiked in the summer as companies raced to take advantage of tax breaks on new equipment that were reduced at the start of the current year.

Industrial Production Was Flat In January - Industrial production was basically unchanged last month, the Federal Reserve reports. Economists were expecting a substantial rise and so today’s update was a negative surprise. Is that a sign of trouble for the economy? No, not really, at least not yet. Industrial production alone isn’t all that valuable as a forward-looking measure of the business cycle, although it does tend to confirm other warning signs when recession risk is rising. By that standard, there’s not much going on here since the annual pace of industrial production is still growing at a healthy clip. If you're looking a smoking gun that the economy's set to tumble, you won't find it here. Sure, it could be the start of something worrisome, but it might just as easily turn out to be noise, and so the net result at the moment is that today's data point is more or less a wash. Even after last month’s flat performance, industrial production rose 3.4% over the past 12 months. As the chart below shows, that’s a fairly high rate relative to the pre-recession economy. It’s down from post-recession rebound rates of 2010, but those elevations weren’t sustainable once the economy moved closer to something approximating normality.

Industrial Production unchanged in January, Capacity Utilization declines - From the Fed: Industrial production and Capacity Utilization  : Industrial production and Capacity Utilization Industrial production was unchanged in January, as a gain of 0.7 percent in manufacturing was offset by declines in mining and utilities. Within manufacturing, the index for motor vehicles and parts jumped 6.8 percent and the index for other manufacturing industries increased 0.3 percent. The output of utilities fell 2.5 percent, as demand for heating was held down by temperatures that moved further above seasonal norms; the output of mines declined 1.8 percent. Total industrial production is now reported to have advanced 1.0 percent in December; the initial estimate had been an increase of 0.4 percent. This large upward revision reflected higher output for many manufacturing and mining industries. At 95.9 percent of its 2007 average, total industrial production in January was 3.4 percent above its level of a year earlier. The capacity utilization rate for total industry decreased to 78.5 percent, a rate 1.8 percentage points below its long-run (1972--2011) average. This graph shows Capacity Utilization. This series is up 11.3 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 78.5% is still 1.8 percentage points below its average from 1972 to 2010 and below the pre-recession levels of 81.3% in December 2007. The second graph shows industrial production since 1967.

Vital Signs: Warm Weather Mutes Utility Output - The output from U.S. utilities has dropped sharply. The Federal Reserve said its index of utilities output fell 2.5% in January from the previous month to a reading of 95.6. The index is 7.5% lower than it was a year ago. Economists attribute the drop to unseasonably warm weather in the winter months that has required less heat and electricity.

Produer Price Inflation Remains Moderate - Some highlights of the BLS report today on Producer Prices for January:
1. The annual inflation rate for crude goods (including crude energy materials and crude foodstuffs and feedstuffs) fell to 4.5% in January, the lowest rate in more than two years, since a 4.8% rate in November 2009.  As recently as June 2011, inflation for crude goods was more than 26% (see chart).
2. The annual inflation for intermediate goods fell to 4.2% in January, the lowest rate since December 2009, and down from a recent high of 11.5% in July (see chart).  On a monthly basis, the prices for intermediate goods have fallen or remained flat for five out of the last six months.  
3. Producer price inflation for finished goods fell to 4.1% in January on an annual basis, the lowest rate in a year, since a 3.6% inflation rate in January 2011 (see chart).  The annual inflation rate for finished goods reached a three-year high of 7.1% last July, and has fallen in five out of the last six months since then.   The price index for finished goods in January 2012 at 193.5 was slightly below the index level in September 2011 of 193.6, so there has been a very slightly downward pressure on prices for finished goods over the last quarter.

Manufacturing rebounds, but is it a renaissance? - Don't tell Michael W. McLanahan that manufacturing in the United States is dead. His family-owned, privately held company has made mineral processing and farm equipment since its founding way back in 1835 — and is enjoying a boom.  McLanahan builds equipment to help mining companies separate product from waste, the dairy industry to remove manure from sand and the energy sector to segregate gravel from silica sand used in fracking — the process of drilling through shale deposits thousands of feet below ground to reach natural gas.  McLanahan Corp. boomed even as U.S. economy struggled to gain momentum in 2011 and the global economy was panicked and fearful that Europe's debt problems would drag everyone down. One important reason for McLanahan's success — and for U.S. manufacturing's rising luster — is an export revival.

New York Factory Activity Expands - New York manufacturing activity in February expanded for the third consecutive month, and a substantial number of businesses expect to increase capital spending this year, according to the Federal Reserve Bank of New York‘s Empire State Manufacturing Survey released Wednesday.The Empire State’s business conditions index increased to 19.53 this month from 13.48 in January. The February index was the highest in more than a year, the New York Fed said. Economists surveyed by Dow Jones Newswires had expected the index to rise to 15.0.

Empire State Manufacturing Survey - NY Fed: The February Empire State Manufacturing Survey indicates that manufacturing activity in New York State expanded for a third consecutive month. The general business conditions index rose six points to 19.5, its highest level in more than a year. The new orders index, at 9.7, was positive but down slightly, and the shipments index was little changed at 22.8. The prices paid index held steady at 25.9, while the prices received index fell eight points to 15.3, suggesting that selling prices rose at a slower pace. Employment indexes were positive and close to last month’s levels, indicating that employment levels and the average workweek continued to rise at a modest pace. Indexes for the six-month outlook, while somewhat lower than last month, remained at fairly high levels, signaling considerable optimism about the future.

Despite Two Thirds Of Components Declining, Empire Fed Prints At Highest Since June 2010 Chalk this one to "seasonal adjustments" or something, cause we no longer have any clue what is going on with the data fudging in America. When it comes to banana republic economic indicators the US is rapidly eclipsing China - case in point the Empire State Manufacturing Survey, which despite seeing the majority, or 6 out of 9 sub indices, declining in February, managed to not only rise, but beat the highest Wall Street estimate, printing at 19.53, the highest since June 2010, on expectations of 15.00, and compared to a previous print of 13.48. What lead to this epic surge? Why nothing short of a decline in just about two thirds of the components: New Orders declined from 21.69 to 22.79, Unfilled Orders declined from -5.49 to -7.06; Inventories declined from 6.59 to -4.71, Prices Paid declined from 26.37 to 25.88; Prices received declined from 23.08 to 15.29, and Number of Employees declined from 12.09 to 11.76. What increased? Shipments, Average Employee Workweek, and, drumroll, Delivery Times. And somehow this disaster of a report is supposed to bring peace and comfort to the market that things are getting better? Perhaps at the Fed's data manipulation department. And just like a 2.9 million seasonal NFP adjustment in January has resulted in an ebullient market tone, we wonder just how high 3 out of 9 subindices improving will send the market today?

Philly Fed Index Points to Improved Conditions - Mid-Atlantic manufacturers see better business conditions this month, according to a report released Thursday by the Federal Reserve Bank of Philadelphia. The Philadelphia Fed said its index of general business activity within the factory sector rose to 10.2 in February from 7.3 in January. Economists surveyed by Dow Jones Newswires expected the latest index to rise to 10.0. Readings under zero denote contraction, and above-zero readings denote expansion. Within the Philly Fed survey, the subindexes were mostly higher this month. The new orders index rose to 11.7 from 6.9 last month while the shipments index jumped to 15.0 from 5.7. The important hiring index slowed sharply to 1.1 from 11.6 in January, but the workweek index increased to 10.1 from 5.0. The prices-paid index in February increased to 38.7 from 31.8 in January, while the prices-received index rose to 15.0 from 11.2 last month.

Philly Fed "Regional manufacturing activity continued to expand in February" - Earlier from the Philly Fed: February 2012 Business Outlook Survey The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged higher from a reading of 7.3 in January to 10.2, its highest level since October. ... The new orders index was positive for the fifth consecutive month and increased from 6.9 to 11.7. The current employment index, which has been positive for six consecutive months, fell from a reading of 11.6 in January to 1.1 this month, suggesting little overall growth in employment. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through February. The ISM and total Fed surveys are through January. The average of the Empire State and Philly Fed surveys increased again in February, and is at the highest level since April 2011.

Great Lakes’ manufacturing job loss in perspective - Residents of the Great Lakes states have been long familiar with the ups and downs of manufacturing jobs and with the shocks to local economic conditions when factories close and whole industries all but evaporate. There are many policy issues attendant to these events revolving around responses such as work force training, industry assistance, and community efforts to diversify these communities’ industry bases. Rather than addressing such issues, we’d simply like to offer a perspective on the extent and nature of manufacturing job loss from the most recent decade to date. The data on job counts in manufacturing show that these losses have been unparalled in many respects. The data in the chart below display total jobs in the manufacturing sector since 1969 (as constructed by the Bureau of Economic Analysis of the U.S. Department of Commerce).[1] The geography of these jobs (counted in millions) is defined by the BEA as the “Great Lakes Region,” which includes the states of Ohio, Indiana, Michigan, Wisconsin, and Illinois. These five states have long been considered to be the core of the “industrial belt” that more broadly ranges westward from Western New York and Pennsylvania into eastern Iowa and Missouri. And so, the experience of these five states should describe the experience of the nation’s industrial belt.

Manufacturing Sector Is Doing Fine - The flat reading on industrial production was a head fake. The factory sector is doing fine. Steep but likely temporary declines in utility use and mining activity held industrial production unchanged in January. Unseasonably warm weather caused less demand on utilities, and the drop in mining was the first in almost a year. Manufacturing output alone–74% of all industrial production–increased 0.7% last month. Auto makers led the gain, with vehicle output jumping 6.8% after a 3.8% increase in December. The Federal Reserve also revised total December industrial output much higher, to show an increase of 1.0% rather than 0.4% reported earlier. [That refiguring makes a nice counterpoint to Tuesday's downward revisions to December retail sales. Perhaps instead of shopping, more factory workers were at their jobs.] Economists at Nomura Securities said that according to one Fed economist “roughly 0.45 percentage points reflected new data received on vehicle assemblies and a number of other industries that had previously been estimated due to a low response rate. In addition, upwardly revised data from the Bureau of Labor Statistics on production worker hours accounted for another 0.15 [percentage point] of December’s upward revision.”

Chart of the Day: Another Milestone in the Resurgence of the American Auto Industry – Treasury Blog - Today, we learned that each of the Big Three automakers posted a yearly profit for 2011. For the first time since 2004, all of those companies are operating in the black.  But those aren’t the only milestones we’ve seen recently in the resurgence of the American auto industry. Or in the comeback of the American manufacturing sector.  The January 2012 jobs report released earlier this month included another little-noticed milestone. The number of auto industry jobs added since GM and Chrysler emerged from bankruptcy after June 2009 now exceeds 200,000 — marking the strongest period of auto jobs growth since the late 1990s. That positive trend is particularly strong in the motor vehicle and parts manufacturing sector, which has added 121,900 jobs – a nearly 20 percent increase – since June 2009. And that growth is particularly notable given that some experts estimated that at least 1 million jobs could have been lost if GM and Chrysler had been liquidated.

Manufacturing Illusions - Robert Reich - American consumers’ pent-up demand for appliances, cars, and trucks have created a small boomlet in American manufacturing – setting off a wave of hope, mixed with nostalgic patriotism, that American manufacturing could be coming back. Clint Eastwood’s Super Bowl “Halftime in America” hit the mood exactly. But American manufacturing won’t be coming back. Although 404,000 manufacturing jobs have been added since January 2010, that still leaves us with 5.5 million fewer factory jobs today than in July 2000 – and 12 million fewer than in 1990. The long-term trend is fewer and fewer factory jobs. Even if we didn’t have to compete with lower-wage workers overseas, we’d still have fewer factory jobs because the old assembly line has been replaced by numerically-controlled machine tools and robotics. Manufacturing is going high-tech.  Bringing back American manufacturing isn’t the real challenge, anyway. It’s creating good jobs for the majority of Americans who lack four-year college degrees. Manufacturing used to supply lots of these kind of jobs, but that was only because factory workers were represented by unions powerful enough to get high wages. That’s no longer the case. Even the once-mighty United Auto Workers has been forced to accept pay packages for new hires at the Big Three that provide half what new hires got a decade ago. At $14 an hour, new auto workers earn about the same as most of America’s service-sector workers. GM just announced record profits but its new workers won’t be getting much of a share.

General Motors posts record earnings; workers to get $7,000 in profit-sharing - General Motors earned $7.6 billion last year, the best results in its history and a figure that will generate the biggest profit sharing checks its workers have ever received - about $7,000 each. "We will build on these results as we bring more new cars, crossovers and trucks to market, and make GM a far more efficient global team," GM Chairman and Chief Executive Dan Akerson said in a written statement. The $7,000 profit-sharing checks will be the first GM's 47,500 U.S. hourly workers will receive as a result of changes last year to the contract between the automaker and the United Auto Workers. Checks should start going out next month. During contract talks last year, GM and workers agreed to a new formula that more closely tied worker pay to the company's performance in North America. Workers effectively get $1 for every $1 million in GM North American profits, excluding its finance activities. Last year, workers received $4,300 in profit sharing, the first such checks they had received in nearly a decade. Until its government-funded bankruptcy in 2009, GM had been losing billion of dollars per year in North America as it struggled under huge debts and inefficient operations

Chrysler Pulls Loan Request - Chrysler Group LLC on Thursday withdrew its application for a $3.5 billion low-interest loan from the U.S. Department of Energy to be used to fund research and tooling for more fuel-efficient vehicles.  "The DOE's proposed terms were very restrictive and compliance would have negatively affected our operational flexibility," a Chrysler spokeswoman said on Thursday. The decision won't impact Chrysler's ability to achieve its previously announced business targets, she said. The decision to drop the loan request comes as Auburn Hills, Mich.-based Chrysler finds itself on solid financial footing and the Obama administration faces criticism over a loan program troubled by investment missteps.

“Do Manufacturers Need Special Treatment?” — They Both Need It and Deserve It - In one of the most uninformed -- and counter-productive -- op-eds we've read in the last five years, President Barack Obama's first chairwoman of the Council of Economic Advisors, Christina D. Romer, just spent 1,200 words arguing that we should do nothing about the crisis in American manufacturing. She meticulously constructed three straw men -- market failures, jobs and income distribution -- and then proceeded to knock the stuffing out of each of them. It was a heroic, if not faintly humorous, performance given Ms. Romer's recent position in the administration and the fact that few others in the country misread more the depth and the duration of the still largely ongoing Great Recession of 2007. She was an architect of the administration's stimulus package, its auto bailout, and its policies that led to the "green shoots" and "recovery summer" fiascos. But none of that stopped her from eviscerating arguments meant to do something about the crisis in manufacturing.  Ms. Romer concluded her op-ed by admitting that manufacturing was "the engine of growth that allowed us to win two world wars and provide millions of families with a ticket to the middle class." And yet she felt that public policy regarding manufacturing should be "based on hard evidence of market failures, and reliable data on the proposals' impact on jobs and income inequality", for which, in her opinion, "a persuasive case for a manufacturing policy remains to be made."

Industrial Policy Still Doesn’t Work - The failures of the Administration’s industrial policy in the energy sector have been recently documented. It’s not just an unlucky streak for the Department of Energy that Solyndra and other targets for subsidies have failed, but a fundamental problem of the government trying to do a better job than the market in directing investment flows. Economist Michael Boskin looked at the government’s decades-long track record of failed industrial policy and made a principled case against the government picking winners and losers in the free market in The Wall Street Journal. Like the mythical monster Hydra—who grew two heads every time Hercules cut one off—President Obama, in both his State of the Union address and his new budget, has defiantly doubled down on his brand of industrial policy, the usually ill-advised attempt by governments to promote particular industries, companies and technologies at the expense of broad, evenhanded competition. Despite his record of picking losers Mr. Obama appears determined to continue pushing his brew of federal spending, regulations, mandates, special waivers, loan guarantees, subsidies and tax breaks for companies he deems worthy.

Manufacturing jobs, automation, and future assumptions - Anyone who is interested in how manufacturing jobs are evolving (and disappearing) should be sure to read Adam Davidson’s excellent article in the current issue of The Atlantic: “Making it in America.”  The article is based on interviews with workers and executives at Standard Motor Products, a manufacturer and distributor of auto parts with a factory in Greenville, South Carolina. Here’s a a quote from the article, focusing on the future prospects for an unskilled worker named Maddie: Tony [the factory manager] points out that Maddie has a job for two reasons. First, when it comes to making fuel injectors, the company saves money and minimizes product damage by having both the precision and non-precision work done in the same place. Second, Maddie is cheaper than a machine. It would be easy to buy a robotic arm that could take injector bodies and caps from a tray and place them precisely in a laser welder. Yet Standard would have to invest about $100,000 on the arm and a conveyance machine to bring parts to the welder and send them on to the next station. Maddie makes less in two years than the machine would cost, so her job is safe—for now. If the robotic machines become a little cheaper, or if demand for fuel injectors goes up and Standard starts running three shifts, then investing in those robots might make sense.

Desperately Seeking Americans For Manufacturing Jobs - U.S. factories are creating many new jobs. But owners are hard pressed to find skilled American workers to fill them. There is a "critical shortage of machinists," a common and crucial position in factories, said Rob Akers, vice president at the National Tooling and Machining Association. "Enrollment in this field in technical schools has been down for a long time." The problem comes at a terrible time. Domestic contract manufacturers -- known as "job shops" -- are seeing a boom in business. In the case of Win-Tech, a Kennesaw, Ga., manufacturer, orders are coming in fast and furious from its customers in the defense and aerospace industries. But the company's owner Dennis Winslow is more concerned than elated. Winslow's been trying to add 12 more workers to his staff of 42 to meet the increased demand, but he's struggling. "I am coming to the conclusion that this [situation] has become the new normal," said Winslow. "Being a machinist once was considered a respectable trade. But young Americans just don't consider manufacturing to be a sexy vocation."

Small Business Optimism Increases - Small-business owner confidence in January rose for a fifth consecutive month, but that hasn’t translated into more jobs, according to data released Tuesday. The National Federation of Independent Business‘s small-business optimism index rose 0.1 point to 93.9 in January from 93.8 in December. It was the fifth consecutive increase. Ignoring the spike posted last January and February, the latest index is at its highest reading since December 2007, when the U.S. was slipping into recession. Subindexes covering expectations improved. The subindex of expected business conditions in the next six months rose 5 percentage points to -3% last month, and the expected higher real sales subindex increased 1 point to 10%. The better sentiment didn’t translate into expansive business decisions. “Owners became less pessimistic about the outlook for business conditions and real sales growth, but that optimism did not show up in hiring or spending for more inventories,” the NFIB said.

24% of Small Businesses Not Hiring Because They May Not Be In Business a Year From Now; 76% Simply Don't Need More Employees - The question of the day is "Why Aren't Small Businesses Hiring?" Most of the answers should be obvious, but let's take a look at a recent Gallup Poll on Hiring to confirm.  85% of those surveyed -- are most likely to say the reasons they are not doing so include not needing additional employees; worries about weak business conditions, including revenues; cash flow; and the overall U.S. economy. Additionally, nearly half of small-business owners point to potential healthcare costs (48%) and government regulations (46%) as reasons. One in four are not hiring because they worry they may not be in business in 12 months.That 76% have no need for more employees is not at all surprising. Who wants to hire in this environment? Healthcare costs are a genuine concern. We have heard that story time and time again. That nearly half cite healthcare costs should not be surprising. One number however, did stand out. That 24% cannot and will not hire because they fear going out of business within a year says quite a lot.

STUDY: Businesses Who Employ Undocumented Workers Do Better - Employers suffer a distinct economic disadvantage if they choose not to employ undocumented workers, especially when their competitors continue to do so, according to researchers at the Atlanta Federal Reserve.  Examining a sample of Georgia-based firms, they found that the ones initially employing undocumented workers in their first years of existence showed greater initial volatility. But the move pays off in the long-run if the firm survives, they found, as it cuts its "exit hazard" — the likelihood it fails — by half.Overall, these firms were 1.5 times more likely to survive than firms that did not employ undocumented workers.The underlying reason the researchers found for this phenomenon is fairly obvious: undocumented workers keep wages low and allow firms to be more competitive. As the researchers put it in delicate, federal employee-speak: "Firms may inherently wish to obey the law. But if breaking the law can give firms a competitive advantage, some may be tempted to do so."

Employment Graphs - Selected graphs and summaries from the Federal Reserve Bank of Atlanta "Financial and Economic Highlights", released February 8, 2012. The highlighted graphs are "Contributions to Change in Nonfarm Payroll Employment", "Diffusion Index of Private Nonfarm Payrolls", "Unemployment and Labor Force Participation Rates" and"U3 and U6 Unemployment Rates", respectively.  Contributions to Change in Nonfarm Payroll Employment: The January payroll employment report indicated that the U.S. economy added 243,000 jobs over the month.  Diffusion Index of Private Nonfarm Payrolls: The spread of job growth across industries improved in January.  Unemployment and Labor Force Participation Rates: The unemployment rate decreased to 8.3 percent in January, and the labor force participation rate decreased to 63.7 percent.

Jobless Claims Fall Again...To A New Four-Year Low - Initial jobless claims dropped again last week, slipping 13,000 to a seasonally adjusted 348,000, the Labor Department reports. That’s the lowest number of new filings for unemployment benefits since March 2008. The trend, in other words, is still sending a strong signal that the labor market recovery—and economic growth—will roll on.  The jobless claims indicator has predicting recovery for months now and the embedded prediction in today’s update is the strongest yet that the economy will expand for the foreseeable future. You have to ignore quite a lot of cyclical history with this data series to dismiss its record as a leading indicator. As economist Ed Yardeni reminds, the encouraging outlook via claims follows a clear pattern and so pessimists should think twice before rejecting the implied forecast.

Not the Whole Story - Not surprisingly, there was plenty of hoopla over today's larger-than-expected drop in first-time applications for unemployment insurance compensation. "U.S. Jobless Claims Drop Points to Spending Gains" (Bloomberg) Americans filed the fewest claims for jobless benefits since 2008, surprising forecasters and signaling that an improving labor market will give the world’s largest economy a boost. Claims dropped by 13,000 in the week ended Feb. 11 to 348,000, less than the most optimistic estimate of 45 economists surveyed by Bloomberg News. Other reports today showed consumer confidence improved, housing starts climbed and manufacturing in the Philadelphia area accelerated. Unfortunately, the initial claims data doesn't tell the whole story. While weekly tallies of first-time applicants for unemployment benefits have drifted back towards the lower end of their historical range, those figures do not include Americans who have been out of work for more than a week. If you take the sum total of initial, continuing, extended, and emergency claims -- which runs the gamut of insurance programs for the unemployed - it remains more than 70% above the high end of the range that prevailed during the past two-and-a-half decades.

OH CRAP: Is This A Bad Sign For Jobs? -Everyone cheered when the Bureau of Labor Statistics told the world that the U.S. had added 243k jobs and the unemployment rate fell to 8.3 percent in January.  On Thursday, we learned initial weekly unemployment claims fell to 348k, the lowest level since March 2008.  We also learned that the Philly Fed Index jumped to 10.2, beating economists' estimates. But Harris Private Bank's Jack Ablin took a closer look at the Philly Fed Index data and raised a red flag.  Ablin spoke to Politico Morning Money's Ben White.  From today's Morning Money: The index, based on a survey of employers’ hiring plans, has been tightly correlated with the NFP numbers. And on Thursday the Philly employment index tanked from 11.6 to 1.1 ... This suggests February jobs gain of just 50,000, a huge drop from January’s 243,000.... Ablin: “I’m not sure where economists’ estimates are yet for February jobs. But they were 100K short last month and now they may wind up overestimating the number. ... What [the Philly Fed] is doing is asking respondents if they are going to add or get rid of jobs. “It looks like they are saying they are still adding, but very few.  ... And if you look at corporate income statements, they have cut pretty much everything they can cut, cost-wise.  I won’t worry about one 50,000 jobs month too much ... But I do hope the Philly Fed is wrong this time.”

Gallup Reports Unemployment in February Increases to 9%, Up From 8.6%; Underemployment Increases to 19% - The latest Gallup survey finds U.S. Unemployment Increases in Mid-February - The U.S. unemployment rate, as measured by Gallup without seasonal adjustment, is 9.0% in mid-February, up from 8.6% for January. The mid-month reading normally reflects what the U.S. government reports for the entire month, and is up from 8.3% in mid-January. Gallup also finds 10.0% of U.S. employees in mid-February are working part time but want full-time work, essentially the same as in January. The mid-February reading means the percentage of Americans who can only find part-time work remains close to its high since Gallup began measuring employment status in January 2010. Seasonal forces typically cause unadjusted unemployment rates to increase at this time of year. In this regard, some of the sharp increase Gallup finds in unemployment and underemployment may result from seasonal factors. Although the government seasonally adjusts the U.S. unemployment rate, and the workforce participation rate could decline, it still seems likely that the BLS will report an increase in the seasonally adjusted U.S. unemployment rate for February.

Bad News Coming On The Employment Front? - A mid-month survey from Gallup suggests that the February Jobs Report could hold some bad news for the economy, and the President: The U.S. unemployment rate, as measured by Gallup without seasonal adjustment, is 9.0% in mid-February, up from 8.6% for January. The mid-month reading normally reflects what the U.S. government reports for the entire month, and is up from 8.3% in mid-January. Gallup’s mid-month unemployment reading, based on the 30 days ending Feb. 15, serves as a preliminary estimate of the U.S. government report, and suggests the Bureau of Labor Statistics will likely report on the first Friday of March that its seasonally adjusted unemployment rate increased in February. Gallup found that unemployment decreased to 8.3% in its mid-January report, and suggested that the U.S. unemployment rate the BLS reported for January would decline. Gallup also finds 10.0% of U.S. employees in mid-February are working part time but want full-time work, essentially the same as in January. The mid-February reading means the percentage of Americans who can only find part-time work remains close to its high since Gallup began measuring employment status in January 2010.

Fewest Young Adults in 60 Years Have Jobs - How hard has the Great Recession hit young adults in the U.S.? According to a report released Thursday by the Pew Research Center, only 54.3% of young adults aged 18 to 24 have a job. It’s the lowest rate since the government started keeping records in 1948. Young Americans graduating from high school and college over the last several years have been confronting one of the worst job markets in decades. And while the recession has hurt almost every demographic in the U.S., those at the beginning of their working lives have found that, even more than other age groups, there just isn’t any work for them. The grim unemployment picture for young adults is clearly seen in Pew’s new report, which shows that slightly more than half of all 18- to 24-year-olds were employed at the end of 2011. That rate is only slightly higher than in 2010 (54%), but dramatically lower than the 62.4% rate of just four years earlier.

The United States is Experiencing the Longest Stretch of High Unemployment Since the Great Depression - CBO Director's Blog - The rate of unemployment in the United States has exceeded 8 percent since February 2009, making the past three years the longest stretch of high unemployment in this country since the Great Depression. CBO projects that the unemployment rate will remain above 8 percent until 2014. The share of unemployed people who have been looking for work for more than six months—referred to as the long-term unemployed—topped 40 percent in December 2009 and has remained above that level ever since. In a study requested by the Ranking Member of the House Committee on Ways and Means, CBO examines the following questions:

  • What are the consequences of unemployment?
  • What factors have caused high unemployment?
  • What policies would increase demand for workers?
  • What other policies could reduce unemployment?

Our prolonged employment gap – Everyone knows that the Great Recession has inflicted tremendous damage to the lives and fortunes of millions of Americans. But what you may not know is that most of the suffering is still to come.  We’re not even halfway done with this mess.  The economy has been growing for 31 months now, and employment has risen by 3.2 million over the past two years, but there’s still a long way to go before the economy is back to full employment of around 5.5%. Public and private forecasters agree that we’ll probably have five, six or seven more years of elevated unemployment, wasted lives and squandered potential.  The economy is underachieving, now and for several more years to come. To measure the extent of the underachievement, economists speak of the “output gap,” which is simply the difference between what the economy is now producing and what it could produce if it could marshal all of its productive resources, such as capital, labor, natural resources and organizational ingenuity.  The Congressional Budget Office figures that the output gap will total about $6 trillion before all is said and done. That is an incredible amount of lost production. Federal Reserve officials talk about narrowing and eventually eliminating this output gap as a major goal, but they’ve focused on the wrong measure. It’s not full output that the Fed is supposed to achieve, but full employment.

What explains high unemployment? The aggregate demand channel - A drop in aggregate demand driven by shocks to household balance sheets is responsible for a large fraction of the decline in U.S. employment from 2007 to 2009. The aggregate demand channel for unemployment predicts that employment losses in the non-tradable sector are higher in high leverage U.S. counties that were most severely impacted by the balance sheet shock, while losses in the tradable sector are distributed uniformly across all counties. We find exactly this pattern from 2007 to 2009. Alternative hypotheses for job losses based on uncertainty shocks or structural unemployment related to construction do not explain our results. Using the relation between non-tradable sector job losses and demand shocks and assuming Cobb-Douglas preferences over tradable and non-tradable goods, we quantify the effect of aggregate demand channel on total employment. Our estimates suggest that the decline in aggregate demand driven by household balance sheet shocks accounts for almost 4 million of the lost jobs from 2007 to 2009, or 65% of the lost jobs in our data

Perfect Storm Threatens Long-Term Unemployed - In December, there were more than 13 million unemployed workers and about four people looking for work for every available job. According to the Economic Policy Institute (EPI), 5.5 million people have been unemployed for more than half a year, up from 1.2 million in 2007, and the average duration for an unemployed person is over nine months.; “It is not, of course, that these millions of workers have become lazy, unskilled, or unproductive, it is that there are not enough jobs available,” writes EPI economist Heidi Shierholz. She notes that even new research from the Federal Reserve Bank of San Francisco attributes increased duration in unemployment to “the severe and persistent weakness in aggregate demand for labor.” So it’s particularly alarming to see Congress playing games with an extension of unemployment benefits that are set to expire at the end of the month. Without an extension, more than one million Americans will be cut off in March, and more than 3.3 million by June 1. “Instead of offering a hand up and rallying to help those who are most struggling, Republicans and perhaps some Democrats would like to drastically cut down on the maximum number of eligible weeks, and throw up roadblocks to stop many jobless people from getting any benefits at all,”

How We Work Now, In America - The chart above divides total Full Time jobs by Total Part Time jobs, in the United States. Coming into the financial crisis of 2008, the US maintained nearly 5 Full Time jobs for every Part Time job. The failure of the economy to add back those Full Time jobs, along with flat to falling wage growth in real terms, accounts for much of the country’s dissatisfaction with the “recovery.” Replacing higher paying full time jobs with lower paying part time jobs simply won’t do. As food prices continue to climb, and as oil stubbornly holds to $100 a barrel (kicking 12% of US oil consumption offline), Americans are discovering what its like to live without progress

Labor's Declining Share of Total Income  - Jacobson and Occhino of the Cleveland Fed offer a short overview of what is "Behind the Decline in Labor's Share of Income" in the February 2012 issue of Economic Trends.  Back in the day, when I was first getting familiar with these numbers, the standard summary of the data was that labor income was about two-thirds of total output in the U.S. economy, although the share fluctuated over the business cycle. As Jacobson and Occhino write: "Over the cycle, the labor income share tends to increase during the early part of recessions, because businesses lower labor compensation less than output, and compensation per hour continues to increase even as productivity slows down. Then, after reaching a peak sometime during the recession, the labor income share tends to decrease during the rest of the recession and the early part of the recovery, as output picks up at a faster pace than labor compensation, and compensation per hour grows at a slower pace than productivity. Only later in the recovery, as the labor market tightens, does labor compensation catch up with output and productivity, and the labor income share recovers."  But this basic fact--labor as two-thirds of economic output--no longer seems to be holding true. It's not just that the ratio is at historic lows in the post-World War II period, as shown in the figure; the data seems to show an overall pattern of a dropping labor share of income even before the Great Recession started, and reaching back to the 1980s or the late 1970s.

The fraying thread between pay and productivity - Do workers reap the benefits of productivity growth? Few questions are more central to the conundrum of faltering living standards.  Of all the findings from our recent work at the Resolution Foundation, then, few are more worrying than those that suggest a weakening of this fundamental relationship between economic growth and gains for ordinary workers. In the last twenty years of the 20th century, each pound of UK GDP growth was accompanied by around 90 pence of median wage growth. From 2000 to 2007 that figure fell to just 43 pence. This development bears worrying similarities to the experience of the United States where median wages have now been flat for a generation. It is not an exaggeration to say that the pay of Americans in the bottom-half has decoupled from productivity growth. So is a similar form of decoupling now happening here? And, if so, what’s driving it? The truth is that these are very tough questions to answer, not least because they raise a whole host of definitional issues. How should we measure productivity if we want to compare it to pay? Whose pay are we talking about anyway? What do we even mean by pay (for example, should we include things like employer pension contributions)? And what does economic theory say about the relationship between pay and productivity—should we really expect a perfect link between the two?

10 Questions for Economists Who Oppose Manufacturing Subsidies - Why are mainstream economists, right and left, so determined to push back any attempt to subsidize manufacturing in America? The question will arise anew tonight when President Obama presents his budget, complete with tax provisions to support manufacturing. After the president addressed the issue as his first topic in the State of the Union a couple of weeks ago, many esteemed economists seemed to rush to the offense. Obama proposed using tax carrots and sticks to encourage manufacturers to stay here, return here, or get out of those low-wage emerging markets. Some mainstreamers, seeming to represent the conventional wisdom among them, openly scorned the idea. At least one, Laura Tyson, has stood her ground in favor of a policy focus on manufacturing. I understand the mainstream economic reflex. After working so hard to get world nations to reduce trade barriers for the last 40 to 50 years, they and their successors view subsidizing manufacturing in the U.S. as a retreat. It could provoke retaliation as well. And moving the world toward free trade makes eminently good theoretical sense — to a degree. The anti-manufacturing subsidy bias is really a subset of the firm, almost unshakable allegiance to free trade theory among the American mainstream. Since there is plenty of uncertainty — including my own — about this issue, let me just pose some rhetorical questions to a phantom mainstream economist in hopes he or she will clarify the issues.

Seven ways to improve U.S. infrastructure spending - Here is a column full of good sense from Edward Glaeser, excerpt: SPLIT UP THE PORT AUTHORITY: Last week gave us another painful audit of the work by the Port Authority of New York and New Jersey to manage the World Trade Center site. I’m not going to pile on, but this super-entity is too big to succeed. How can the Port Authority possibly focus on tasks such as making New York’s airports more functional when it has so much else on its plate? The problems at John F. Kennedy International Airport aren’t evidence of the need for a new federal infrastructure agenda, they indicate only that the Port Authority has too much to do. Splitting off the airports, probably into two separate entities (for New York and New Jersey), could generate managerial focus and more competition. The airports can fund themselves if they are free to charge higher landing fees. Millions of fliers into New York should be perfectly willing to pay a bit more to ensure a more pleasant experience. More nimble and less restricted airports would help that happen.

Postal Service Seeks 50-Cent Stamps to Prevent 'Taxpayer Burden' -- The U.S. Postal Service wants Congress to help it raise the price of a first-class stamp to 50 cents, an 11 percent increase, as part of its strategy to avoid annual losses as high as $18.2 billion by 2015. The Washington-based agency included the increase in a five-year business plan released yesterday. In a separate letter to Congress, the service said U.S. taxpayers will have to cover losses if lawmakers don't help it cut costs. The letter and business plan reiterated proposals to cut billions of dollars a year in costs by ending Saturday mail delivery, closing facilities and pulling out of a health-care program for federal workers to manage its own benefits. Congress would have to approve some of those changes. "In the context of the tremendous operating challenges facing the USPS, we believe the plan is comprehensive and balanced," Lloyd Sprung, senior managing director of Evercore Partners Inc., told reporters on a conference call. The service hired Evercore, a New York-based investment-banking firm, last year to provide restructuring advice, "We believe the plan allows the USPS to preserve its mission while also becoming economically self-sustaining," he said.

Regulations Create Jobs, Too - When the Obama Administration announced tough new pollution regulations for power plants last year, the industry loudly protested. The rules, which among other things will require coal-fired plants to make deep reductions in mercury and sulphur dioxide emissions by 2015, will cost utilities at least $12 billion, the Environmental Protection Agency estimates. Coal producers put the price tag at $21 billion. They say electricity prices will spike 12 percent, dozens of plants will close, and thousands of workers will lose their jobs. “This rule is the most extensive intervention into the power market and job market that EPA has ever attempted to implement,” says Scott Segal, a lobbyist at Bracewell & Giuliani, which represents the utility Southern Co. (SO) He argues the regulation will “undermine job creation in the United States.” Tell that to Cal Lockert, the vice-president of Breen Energy Solutions, a Pittsburgh manufacturer of equipment that absorbs acid gases to keep them from spilling out of smokestacks. Lockert spends his days persuading power companies that he can help them bring some of their oldest, dirtiest plants in line with the federal requirements. There’s been “a frenzy of engineering firms and utilities” calling him for demonstrations of his products, he says. He’s hired a dozen people in the past month and says he’s just getting started.

Orwellian Doublespeak Dominates Economic Policy - While taking in my morning helping of news and commentary, I was struck by a certain similarity in every article touching on economic policy. It wasn't just the trampling of the Constitution, the abandonment of rational accounting principles, or the futility of the search for logic behind the proposals coming out of Washington that was so disturbing. There is nothing new about such sad developments. We long ago began to adapt to life without these bygone bulwarks against chaos.  It was the progressive destruction of the English language that prompted coffee to come out of my nose. Without a common understanding of precisely what words mean, rational discourse becomes futile. We might as well babble gibberish at each other as we fall back to settling our differences swinging clubs. For example, what does "unemployment" mean? How can the official unemployment rate go down when millions of discouraged job seekers stop looking for work and the nation's labor participation rate takes the biggest plunge in history? Easy; simply stop counting people who drop out of the labor market. Numerous articles have pointed this out, but even sophisticated investors don't seem to be paying attention. When newspaper headlines proclaim, "Unemployment Down!" the stock market goes up. How's that for baking institutionalized ignorance into the market?

Obama to unions: See you later - On Tuesday President Obama signed a bill that will make it harder for workers to form a union.  This bill, the FAA Reauthorization Act, passed Congress last week despite an outcry from major unions.  Dozens of House Democrats voted for it, as did most Democratic senators. The signing of the FAA bill ends a long-running legislative fight.  It began with something President Obama did right: He appointed members to the National Mediation Board who, in 2010, adopted a new rule governing elections for railroad and airline workers seeking to unionize.   Now, votes are counted in RLA elections the way they are in other union elections, or in presidential elections: Whichever side gets the most votes wins.  Predictably, Republicans were furious.  In a series of showdowns over the past year, the GOP insisted that the Federal Aviation Administration Reauthorization, which funds FAA functions like air traffic control, be amended to include language overriding the National Mediation Board’s new rule. 

Weighing Benefits and Costs of Unemployment Insurance - As politicians have debated expansions and contractions in the unemployment insurance program, many commentators, as well as reports by the Congressional Budget Office and other government agencies, have asserted that the unemployment program increases aggregate spending, and by that channel even helps people who are not unemployed. However, that proposition has so far been the subject of few direct, empirical investigations. Studies find that, with labor income held constant, the recipients of unemployment insurance and other transfer payments from the government tend to use those resources to consume, rather than invest or purchase liquid assets. As news articles often say, government transfers such as unemployment compensation “put money in the hands of consumers.”That unemployed people tend to spend their benefits when they receive them is important, because it tells us that the benefits are important for maintaining their living standards. Even if unemployment benefits reduced employment as a consequence of paying people not to work, the fact that the beneficiaries’ living standards depend so much on them helps make the case that the program’s benefits outweigh their cost.

Casey Mulligan Has Another Head Scratcher On UI - In his Economix post today Casey Mulligan asks the question of whether unemployment benefits on net create jobs. He tells readers that: "Even if unemployment insurance did not discourage a single person from working, the net effect of the program on hiring can be positive or negative, depending on the labor intensity of the goods and services that the unemployed buy, compared with the labor intensity of the goods and services that those who pay for unemployment do not buy." There is a problem in this story and it has to do with timing. The people who pay for unemployment insurance (UI) are in fact the same as the people who receive it. It is paid for as deduction from wages. At the point in a business cycle where large numbers of people are receiving benefits (like now) the UI system will be running a deficit. This allows unemployed workers to receive benefits, which they will overwhelmingly spend, without an offsetting current payment from other workers.  However, there is not a plausble story whereby workers would reduce consumption today by an amount equal to the additional spending allowed by the payment of unemployment benefits. Therefore we don't have to investigate the relative labor intensity of the items purchased by UI beneficiaries and non-beneficiaries as Mulligan suggests

What to do About Apple and Fraud Friendly Manufacturing in China? - Former banking regulator and white collar criminologist Bill Black gives an unvarnished view of the behavior of Apple and other technology companies in dealing with suppliers in China. He does not buy the idea that the US is powerless to do anything about work condition in China and provides some concrete suggestions.

America’s failed promise of equal opportunity - Americans are increasingly aware that the ideal of equal opportunity is a false promise, but neither party really seems to get it. Republicans barely admit the problem exists, or if they do, they think tax cuts are the answer. All facts point in the opposite direction. Despite various tax cuts over the past 30 years, not only have income and wealth inequality dramatically increased, but the ability of individuals to rise out of their own class has declined. Social stagnation is increasingly the norm, with poverty rates the highest in 15 years, real wage gains worse even than during the decade of the Great Depression, average earnings barely above what they were 50 years ago, and more than 80 percent of the income growth of the past 25 years going to the top 1 percent. In fact, since 1983, the bottom 40 percent of households have seen real declines in their income and the same goes for the bottom 60 percent when it comes to wealth. We know what the economic status quo does: It redistributes upwards. Despite the ambiguity of their goals, the Occupy protests have made one point abundantly clear: The mainstream Democratic alternative is paltry stuff. For the most part, Democrats disagree that tax cuts and deregulation are the solution, and instead argue that the state should be used to guarantee equal opportunity. For instance, cheap, publicly available education, job training and affirmative action are all justified on the grounds that each American should have the skills to compete and the labor market should treat everyone equally.

Is intergenerational economic mobility lower now than in the past?, Chicago Fed Letter: In the wake of the Great Recession and the growth in income inequality over recent decades in the United States, the degree of economic mobility over generations has become an increasingly salient issue. A recent New York Times article highlighted the growing evidence showing that intergenerational economic mobility appears to be lower in the United States than in other advanced countries. This Chicago Fed Letter discusses some of the research on trends in intergenerational mobility. I begin by describing how intergenerational economic mobility is commonly measured and show that, conceptually, it is a “backwards-looking” measure that describes the mobility experience of individuals born decades earlier. I then discuss two distinct approaches I have used in previous studies to study long-term trends in intergenerational mobility. After staying relatively stable for several decades, intergenerational mobility appears to have declined sharply at some point between 1980 and 1990, a period in which both income inequality and the economic returns to education rose sharply. This finding is also consistent with theoretical models of intergenerational mobility that emphasize the role of human capital formation. There is fairly consistent evidence that intergenerational mobility has stayed roughly constant since 1990 but remains below the rates of mobility experienced from 1950 to 1980.

Working spouses cause inequality? Can this emerging zombie lie be killed? - A major new zombie lie is being launched: The claim that high inequality is due to more working spouses in high-income households and well-off people increasingly marrying other well-off people. This was part of James Q. Wilson’s recent op-ed in the Washington Post, which I addressed in an earlier blog post (though not on this point). My zombie lie detector went wild, however, after reading a very good New York Times article detailing new research showing “the [education] achievement gap between rich and poor children is widening, a development that threatens to dilute education’s leveling effects.” At the end of the article are two statements by conservative public intellectuals, one from Douglas Besharov and one from Charles Murray, attributing income inequality to working spouses. To recall, here’s what Wilson wrote: “Affluent people, compared with poor ones, tend to have greater education and spouses who work full time.” Wilson then suggests that if these are the drivers of inequality, then it is best not to do anything about the problem, since, in his words, “We could reduce income inequality by trying to curtail the financial returns of education and the number of women in the workforce—but who would want to do that?” Here’s what the Times‘ Sabrina Tavernise attributed to Murray in her piece: The growing gap between the better educated and the less educated, he [Murray] argued, has formed a kind of cultural divide that has its roots in natural social forces, like the tendency of educated people to marry other educated people, as well as in the social policies of the 1960s, like welfare and other government programs, which he [Murray] contended provided incentives for staying single.”

Is the Distribution of Income Fair? - In the mid to late 1800s there was an important debate in economics about how the price of goods and services is determined. On one side were the proponents of a labor theory of value, a view often attributed to Marx but the roots of this theory go back to at least Adam Smith and continue through David Ricardo and others. According to this theory all value is created by labor – capital itself is nothing but stored up or “embodied” labor – so that the price of a good can be determined through clever calculations that determine the quantity of the direct and indirect labor used to produce it. This leads to a view of the world where class struggles between owners and workers are a prominent feature of the economic landscape. If one group of people does almost all of the work in society and thus creates almost all value, and other groups get a share of that output through the power that comes with ownership, e.g. through rental or interest income, without contributing much work themselves, then one class must be living off – exploiting – the other. The other side of the debate, which provides a much better explanation for prices, presents a more harmonious view of economic relationships. Under the alternative theory, the value of a good or service is determined by its usefulness. It is the utility of a good rather than how much labor it takes to produce it that determines its price. Thus value becomes subjective – it is no longer an objective, measurable quantity such as the caloric exertion involved in the creation of the good or service – and this has important social implications.

The Great Recession in Black Wealth  - The Great Recession produced the largest setback in racial wealth equality in the United States over the last quarter century. In 2009 the average white household’s wealth was twenty times that of the average black household, nearly double that in previous years, according to a 2011 report by the Pew Research Center.  Driving this surge in inequality is a devastating drop in black wealth. The typical black household in 2009 was left with less wealth than at any time since 1984, after correcting for inflation.  It’s important to remember wealth’s special role in supporting a household’s economic well-being. Even though income forms the stream of money that collects into a household’s pool of wealth, wealth and income are crucially different. Income pays for everyday living expenses—the groceries, clothes, and gas. A family’s wealth, or net worth, includes all the assets they’ve built up over time (e.g., savings account, retirement fund, home, car) minus any money they owe (e.g., school loans, credit-card debt, mortgage). Access to such wealth determines whether a layoff or medical crisis creates a bump in the road, or pushes a household off a financial cliff. Wealth can also provide families with financial stepping-stones to advance up the economic ladder—such as money for college tuition, or a down payment on a house.

Even Critics of Safety Net Increasingly Depend on It — Ki Gulbranson makes about $39,000 a year and wants you to know that he does not need any help from the federal government.  He says that too many Americans lean on taxpayers rather than living within their means. He supports politicians who promise to cut government spending. In 2010, he printed T-shirts for the Tea Party campaign of a neighbor, Chip Cravaack, who ousted this region’s long-serving Democratic congressman.  Yet this year, as in each of the past three years, Mr. Gulbranson, 57, is counting on a payment of several thousand dollars from the federal government, a subsidy for working families called the earned-income tax credit. He has signed up his three school-age children to eat free breakfast and lunch at federal expense. And Medicare paid for his mother, 88, to have hip surgery twice.  There is little poverty here in Chisago County, northeast of Minneapolis, where cheap housing for commuters is gradually replacing farmland. But Mr. Gulbranson and many other residents who describe themselves as self-sufficient members of the American middle class and as opponents of government largess are drawing more deeply on that government with each passing year.

More Americans Relying On Government Benefits - Government benefits, like Social Security and Medicare, make up nearly a fifth of Americans’ income, and almost half of the country lives in households that receive benefits. The cost of these programs is rapidly rising and consumed nearly 66 cents of every dollar of federal and state revenues in 2010. In a recent poll, Americans’ perceptions about the cost of these programs sometimes conflicted with reality. (infographics & poll)

The 2012 Question - Interesting piece in the NYT today about how many people benefit from some form of government spending on “entitlement” programs, and how they feel about it. I’ll have more to say about this next week, but for now, just a few points, since I posted on this same issue just a few days ago, reaching what might seem like an opposite conclusion. EG, in that post–based on an important new CBPP analysis—I stressed the finding that only 9% of entitlement spending goes to folks who are non-elderly, non-disabled, or not working very much (see figure below).  How does this square with an article that points this out: Almost half of all Americans lived in households that received government benefits in 2010, according to the Census Bureau. The share climbed from 37.7 percent in 1998 to 44.5 percent in 2006, before the recession, to 48.5 percent in 2010.The answer is that almost every example of a beneficiary of a government program in the Times article fits into to one of those benefit-receiving slices in the pie chart–they are either elderly, disabled, or working. Also, some of the statistics need adjusting—to truly understand how much entitlement spending has really gone up, you’ve got to take into account:

  • The Great Recession: Both the tax system and the safety net are still countercyclical. This means we spend more on things like food stamps and unemployment benefits in recessions and we collect less in tax revenue as well.
  • Adjusting for Age: With more seniors, we’re going to spend more on retirement and health benefits, even holding policy constant. 
  • Inefficient Health Care Spending:

Moochers for Self-Reliance - Krugman - The big Times report on dependence on government benefits was a fine piece of reporting. One thing that caught my eye, of course, was the statement that some of the areas most dependent on government benefits are also the most Republican and anti-government. I noted this point long ago, and was by no means the first person to do so. Still, I would have liked a bit more documentation; so I’ve done some myself. Below the fold, from the IRS and from the BEA, is the ratio of taxes paid to Washington to personal transfers received, with states ranked by the ratio (there may be an issue with intra-state transfers, but I doubt it makes much difference): So are states that get a lot but don’t pay much also states that vote for candidates demanding self-reliance and an end to Big Government? Basically, yes. By my reckoning, 7 of the most dependent states in the sense that they pay relatively little while receiving a lot went for McCain in 2008; only 2 of the least dependent states did.

Welfare, I'm not hurting from it and neither are you.- A good friend and I got into an email debate. He sent me the latest message regarding how wonderful it is that Florida is going to be drug testing welfare recipients. I responded that I'll consider the policy when we start testing all the CEO's who get welfare for their sector of the economy, the lawyers, judges and all country club members.  I also noted welfare is not the problem He noted it's not “the” problem, but it is “a” problem and he knows this from talking to people. I know of welfare too. I have served on two nonprofit boards, one for substance abuse and the other The Providence Center. My family adopted a family when I was in junior high. We had foster children.  Welfare is not the problem. But, my friend is a very smart person and an engineer, so I needed some numbers. Using this site I checked out what the ratio of spending on Family and Children and Housing is to our GDP. I used GDP and not the overall budget because hey, we all worked to earn that money and it might as well be used for something that is heart warming.  The following numbers are total national spending (Fed, State, Local). I started with 1970 and went forward using the endings of the presidential terms starting with 1980. (table)First of all, these are miniscule percentages of our GDP. Second, it sure looks to me like the best way to solve the “welfare problem” is to solve the economic problem.

Memo to Mitt—The Safety Net Needs Fixing - The issue is whether to extend, for another 10 months, the two percentage point payroll tax holiday and emergency unemployment benefits for the long-term unemployed. Lest you've forgotten, last December Congress only managed to agree on a two-month stop-gap extension of each, not the full year the president had requested. Those extensions expire at the end of this month. Continuing both policies through the end of this year should be a no-brainer. In fact, when the two-month deal was hurriedly passed in December, virtually everyone on the planet breathed a sigh of relief and assumed the other 10 months would follow. Sadly, however, Republicans and Democrats are now squabbling, in their usual partisan way, over whether to do it, how to pay for it, and a few other extraneous matters that shouldn't even be on the table. It's embarrassing.  Democrats want to cover the cost of the extensions by imposing a surtax on incomes over $1 million and eliminating some corporate tax subsidies. Republicans want to cover the costs by extending the pay freeze on federal workers, trimming some pension benefits, and raising Medicare premiums paid by wealthier seniors.Here's a suggested compromise: Don't pay for it at all, at least not now. Raising other taxes or cutting other benefits would negate much of the stimulative impact of the payroll tax cut and the unemployment benefits.

Who Benefits From the Safety Net - A new analysis from the Center on Budget and Policy Priorities underscores that the poor are no longer the primary beneficiaries of the government safety net. Terms like entitlements, government benefits and safety net often conjure images of tax dollars sliding from the hands of the wealthy into the pockets of the poor. But as we reported Sunday, that image is badly outdated. Benefits now flow primarily to the middle class. The center’s study found that the poorest American households, the bottom fifth, received just 32 cents of every dollar of government benefits distributed in 2010. Share of population and entitlements by income group, 2010. Source: Center on Budget and Policy Priorities analysis of data from Office of Management and Budget, United States Departments of Agriculture, Health and Human Services, and Labor, and Census Bureau. Spreadsheet (.xls) The finding is broadly consistent with the data we reported Sunday that the poorest households received 36 percent of benefits in 2007, down from 54 percent in 1979, numbers that came from a study published last year by the Congressional Budget Office.
While the findings are not directly comparable because of differences in methodology, the new study suggests that the recent recession did not cause any significant increase in the share of benefits flowing to the poor, as might once have been expected.

The Morals Of The Lower Classes - Basically Village Elders expect the masses to live the moral lives they themselves don't in order to demonstrate what remarkable moral leadership they have shown. No this does not make any sense.

What Expanded Safety Net? - In general, I think Binyamin Appelbaum and Robert Gebeloff’s article on how the same people oppose government handouts and take government handouts is very good. But I think their framing buys into a piece of conventional wisdom that just isn’t true. Here it is, without any shortening:“The problem by now is familiar to most. Politicians have expanded the safety net without a commensurate increase in revenues, a primary reason for the government’s annual deficits and mushrooming debt. In 2000, federal and state governments spent about 37 cents on the safety net from every dollar they collected in revenue, according to a New York Times analysis. Over the next 25 years, as the population ages and medical costs climb, the budget office projects that benefits programs will grow faster than any other part of government, driving the federal debt to dangerous heights.” The idea that politicians have expanded the safety net is just not true, with the exception of the Medicare prescription drug benefit and an expansion in Medicaid that hasn’t taken effect yet. Spending on social programs has increased for a few obvious reasons: the baby boomers have started taking Social Security benefits, increasing that program’s expenditures; the recession boosted unemployment benefits, disability claims, and eligibility for poverty programs; and most importantly, health care has gotten much more expensive.

No, NYT, there’s been no expansion of government benefits, no ‘entitlement society’ - There was a very interesting story on the front page of the Sunday New York Times, “Even Critics of Safety Net Increasingly Depend on It,” detailing a range of views of people who have an anti-government political orientation yet depend heavily on government supports. I want to strongly object to one part of the story that seems to support the notion that we’re becoming an “entitlement society.” The story claims that there’s been a major “expansion of government benefits,” which it says “has become an issue in the presidential campaign.” The Center for Economic and Policy Research’s Dean Baker sees some of the same problems. Many of the facts presented in the story do not support that conclusion and the ones that do seem to support it are misleading. Here’s the key portion: In 2000, federal and state governments spent about 37 cents on the safety net from every dollar they collected in revenue, according to a New York Times analysis. A decade later, after one Medicare expansion, two recessions and three rounds of tax cuts, spending on the safety net consumed nearly 66 cents of every dollar of revenue. There are two things problematic with the comparison between 2000 and 2010. One is that the denominator is revenue when it should be expenditures since revenue has eroded because of tax cuts (acknowledged in the article) and because revenues fall in a recession (2000 had 4.0 percent unemployment, 2010 had 9.6 percent) since the fall in economic activity and income reduces revenue. Revenue as a share of GDP hit a 60-year low in 2010. Here’s what you find when you look at federal budget data: Entitlements (i.e., mandatory spending) as a share of federal expenditures were the same 53 percent of total outlays in 2007 as they were in 2000, so there was no trend towards expansion, at least before the recession hit. The mandatory share rose to 55 percent in fiscal year 2010 and 56 percent in 2011, a small increase.

Same Net, More People Falling - Krugman - James Kwak and Larry Mishel, in slightly different ways, make a point I was planning to get to: the rise in safety net spending over the past decade does not reflect an expansion of that safety net. Instead, it reflects two things: rising health care costs, and a terrible economic slump that has put many more people in need. You really don’t want to fall into the Sharron Angle type thing of looking at soaring numbers of people on unemployment insurance and food stamps and claiming that this is the welfare state run amok. It’s the financial sector run amok, and pushing more and more people over the edge.

Denial or Principle? - I wanted to make a belated return to Binyamin Appelbaum and Robert Gebeloff’s article on reluctant safety net beneficiariesEarlier this week I argued that their framing of an expanding safety net that has spread from the poor to the middle class is wrong, but otherwise the themes they discuss are very important.Many liberals like to point out the apparent hypocrisy of the people featured in the article, who rail against big government, demand lower spending, and simultaneously rake in benefits from the federal government that they hate. The central figure in the article, Ki Gulbranson, works hard yet has barely enough money to support his family, even with the earned income tax credit* and reduced-price school lunches for his kids. His conclusion: the country is going bankrupt, but people don’t make enough money to pay more taxes, so we should have smaller government. He would rather go without his current benefits—but he can’t imagine retiring without Medicare and Social Security. I don’t think Gulbranson is a hypocrite at all. I don’t think taking a benefit you don’t think should exist makes you a hypocrite, just like I don’t think Warren Buffett should voluntarily pay higher taxes. I think his position is one part magical thinking and one part principle.

Panorama: Poor America - Via: BBC: With one and a half million American children now homeless, reporter Hilary Andersson meets the school pupils who go hungry in the richest country on Earth. From those living in the storm drains under Las Vegas to the tent cities now springing up around the United States, Panorama finds out how the poor are surviving in America and asks whatever happened to Barack Obama’s vision for the country.  Here’s a link to the whole show.

Chris Hedges: Occupy Draws Strength From the Powerless - There is a recipe for breaking popular movements. I watched it play out over five years in the war in El Salvador. I now see these familiar patterns in the assault against the Occupy movement. It goes like this. Physically eradicate the insurgents’ logistical base of operations to disrupt communication and organization. Dry up financial and material support. Create rival organizations—the group Stand for Oakland seems to be one of these attempts—to discredit and purge the rebel leadership. Infiltrate the movement to foster internal divisions and rivalries, a tactic carried out consciously, or perhaps unconsciously, by an anonymous West Coast group known as OLAASM—Occupy Los Angeles Anti Social Media. Provoke the movement—or front groups acting in the name of the movement—to carry out actions such as vandalism and physical confrontations with the police that alienate the wider populace from the insurgency. Invent atrocities and repugnant acts supposedly carried out by the movement and plant these stories in the media. Finally, offer up a political alternative. In the war in El Salvador it was Jose Napoleon Duarte. For the Occupy movement it is someone like Van Jones. And use this “reformist” to co-opt the language of the movement and promise to promote the movement’s core aims through the electoral process.   Counterinsurgency campaigns, although they involve arms and weapons, are primarily about, in the old cliché, hearts and minds. And the tactics employed by our intelligence operatives abroad are not dissimilar to those employed by our intelligence operatives at home. These operatives are, in fact, often the same people. The state has expended external resources to break the movement. It is reasonable to assume it has expended internal resources to break the movement.

"The American Social Fabric" - I was struck by this statement by David Brooks:"The American social fabric is now so depleted that even if manufacturing jobs miraculously came back we still would not be producing enough stable, skilled workers to fill them." I'll leave the response to Dean Baker: Five years ago we had two million more people employed in manufacturing than we do today. Has the social fabric become so depleted in this period that these people or others could now not fill these jobs if they came back? If Brooks really thinks that the ill effects of unemployment are that extreme he should be screaming for more stimulus in every column. I think Brooks is wrong about the cause. It's not moral decay of the middle class, it's the desperation that comes with lack of opportunity, and the lock-in that comes with some of the solutions to that problem. But I will note that I have been emphasizing the social value of keeping people connected to the labor force through temporary jobs programs since the onset of the recession.

Red Moochers - Paul Krugman - Aaron Carroll of The Incidental Economist and I have been emailing back and forth about the extent to which conservative states tend to be much more dependent on government support than liberal states, and Aaron has produced a nice chart. He takes the top ten most conservative and liberal states as ranked by Gallup, plots the conservative minus liberal score on the X-axis, and the ratio of transfers to personal income on the Y-axis: Those very conservative states with low reliance on transfers, by the way, are Nebraska, Wyoming, and Utah; they really are pretty self-reliant, but they also have very few people, so the overall conservative performance is dominated by bigger states that are simultaneously very conservative and very much dependent on the government safety net. And yes, I’m aware of Andrew Gelman’s work (pdf) showing that the big difference between red and blue states is how the relatively affluent vote. More on all that when I have time, which is to say, not today.

How Blue America Subsidizes Red America - A very neat Aaron Carroll chart shows that, on average, conservative states feature more "dependency" on federal programs than do liberal ones. You can slice this kind of data in a variety of ways, but you always end up with the same aggregate pattern. It happens to be the case that the richest parts of the United States (think the San Francisco Bay area or Connecticut) favor Democrats and also that conservative areas of the country are overrepresented in the Senate. Transfers, on average, flow away from high-income and underrepresented areas and toward low-income and overrepresented areas. I think the overall pattern is best described as a coincidence and not a pattern of large-scale hypocrisy but there are two important points to make about it. One is that high-income people living in low-income states are generally very conservative in their political ideology but probably benefit more from federal income support programs more than they realize. If you own fast food franchises in the Nashville area, for example, you're going to form a self-perception as a self-reliant businessman but the existence of Medicaid and the Earned Income Tax Credit are helping to ensure that your customers have adequate income to sometimes eat at your Taco Bell. These chains of dependency snake even longer. If you sell luxury cars in Florida, many of your customers are probably medical professionals who are earning high incomes because other people have Medicare benefits. The existence of transfer payments props up the entire local economies of low-income, low-productivity parts of the country.

Moochers Against Welfare, by Paul Krugman - Modern Republicans are very, very conservative; you might even (if you were Mitt Romney) say, severely conservative. ... And what these severe conservatives hate, above all, is reliance on government programs. Rick Santorum declares that President Obama is getting America hooked on “the narcotic of dependency.” Mr. Romney warns that government programs “foster passivity and sloth.” Representative Paul Ryan requires that staffers read Ayn Rand’s “Atlas Shrugged,” in which heroic capitalists struggle against the “moochers” trying to steal their totally deserved wealth, a struggle the heroes win by withdrawing their productive effort and giving interminable speeches. Many readers of The Times were, therefore, surprised to learn, from an excellent article published last weekend, that the regions of America most hooked on Mr. Santorum’s narcotic — the regions in which government programs account for the largest share of personal income — are precisely the regions electing those severe conservatives. Wasn’t Red America supposed to be the land of traditional values, where people don’t eat Thai food and don’t rely on handouts? . Now, there’s no mystery about red-state reliance on government programs. These states are relatively poor. But why do regions that rely on the safety net elect politicians who want to tear it down?

Confederacy-lite: The Oklahoma’s AG’s Civil War against the United States of America -  Bill Black - The fact that only 49 State Attorneys General ("AG") entered into the mortgage fraud foreclosure fraud settlement focused attention briefly on Oklahoma’s AG, E. Scott Pruitt. The Oklahoma Republican Party bills Oklahoma as the reddest state, and Pruitt is beet red. He refused to enter into the settlement not because it was too weak, but because it provided any reduction in the principal amount of the debt of distressed Oklahoma homeowners.  The distinguishing characteristic about Pruitt is that he was elected on the promise to launch a litigation war against the federal government, particularly federal regulation. Pruitt and his counterparts in Virginia (Ken Cuccinelli) and Florida (Pam Bondi) claim that their principal function is protecting their citizens from the depredations of – the United States of America. Pruitt, ala South Carolina in 1860, expressly politicized the cause as opposition to the elected President of the United States. He asserts that regulation is inherently illegitimate because it is done by “unelected bureaucrats.”

Spending by states and cities declines - States, cities and school districts trimmed spending at the end of 2011 by more than any time in a decade, a USA TODAY analysis finds. The belt-tightening coincided with a cut in federal stimulus aid and reflected lower spending on health care for the poor, employee compensation and big ticket items, such as roads and college buildings. The lower spending, plus an increase in tax revenue in the past two years, has most states reporting the smallest shortfalls in years — or even small surpluses. State and local spending fell $26 billion in the last three months of 2011 from the same period a year earlier, or 1.2%, reports the federal Bureau of Economic Analysis. This reversed a longer trend of spending growth during the recession and recovery, despite cuts by some states and cities. "The majority of states have a stable to positive outlook," says budget expert Arturo Perez of the National Conference of State Legislatures. Making a difference: States budgeted for just a 1.9% bump in general fund revenue this year, much lower than forecasts — and spending commitments — made in earlier years.

Reversing Local Austerity - Krugman - One question that arises when we talk about the possibility of reversing the disastrous push for austerity runs something like this: “OK, you say you want more government spending, but what should it spend money on?” The truth is that I think the perceived lack of shovel-ready projects was overstated even in 2009, but it was a real concern. The point I want to make is that matters now are actually a lot easier: we could get a fairly big fiscal bang just by resuming aid to state and local governments, allowing them to reverse the big cuts they have recently made. So here’s my chart. It shows employment by state and local governments, which has fallen around half a million, with the majority of the cuts coming from education. Moreover, the baseline should not be zero; it should be normal growth, say along with population growth. So I’ve indicated what would have happened to state and local employment if it had grown at its usual rate of 1% a year:

Avoiding Muni Defaults Set The Stage For An Infrastructure Crisis - When you stick your neck out and make prognostications about the future, sometimes you're going to be wrong. I’m certainly no exception. But when it comes to really big misses, I think Meredith Whitney’s call for a monster blow-out of the Municipal Bond market is on top of the list. Meredith Whitney Loses Credibility As Muni Defaults Fall 60% Meredith is a smart lady. That being the case, it’s worth looking into why she was so wrong. A report this weekend from the Bond Buyer provides a partial answer: Long-Term Muni Bond Volume Slipped 32% To $295B From $433B A 32% ($138B) YoY decline is a very big relative change. The drop in long-term financing was not offset by increases in short-term debt; that category fell by 7.4% ($5B). The drop in total borrowings is almost exclusively a result of the 46% ($129B) in the “New Money” category. The drop in New Money debt issuance is a consequence of hundreds of cities and states collectively saying: We’re in a pinch on revenues. Let’s not spend any money we don’t have to for the time being. We’re going to have put off the construction of the new (Sewer plant, overpass, water treatment facility, school, whatever). The last thing we want to do is go to the Muni market and borrow any more. As a result of many individual decisions to defer infrastructure projects, the Munis have kicked the can down road. They have eliminated the current and future expenses related to these projects.

Should States Use Tax Breaks to Woo Seniors? - We’ve all seen the articles in Forbes, Kiplingers, or U.S. News trumpeting the best states to live in retirement. A key measure for them all: Low taxes. What you may not know is that states actively compete with one another to provide tax breaks to older residents—especially to wealthy seniors. This competiton is similar to the way states use tax subsidies to woo businesses. It make not make much sense, but it sure is trendy.   For instance, in 2010 the Georgia legislature voted to exempt nearly all retirement income from tax starting in 2016. Last year, the governor of Maine proposed making all pension income tax-free. Not all states are headed in this direction. Michigan, which is in deep financial distress, recently rolled back some generous tax exemptions for pension income. But nearly every state offers some tax breaks for seniors. Why? Many seniors have plenty of money to spend including Medicare dollars, and Social Security and pension benefits. Just as important, they use relatively few state and local services:  The elderly don’t need K-12 education and spend relatively little time in jail. And their health care is largely funded by the federal Medicare program.

Alabama's Immigration Law Could Cost Billions Annually - Alabama’s harsh immigration law has stirred controversy since it went into effect in September. The statute, which among other things requires police to question people they suspect of being in the U.S. illegally, has prompted thousands of immigrants to flee the state. The law’s backers believed out-of-work Alabamians would snap up the jobs those immigrants once held.It hasn’t turned out that way. A new study details the economic impact of harsh immigration laws such as those passed by Alabama and five other states. Published by the Center for Business & Economic Research at the University of Alabama, it’s the first economic cost-benefit analysis (PDF) of the state’s immigration statute. Dr. Samuel Addy, an economist and director of the Center, found that the law, known as HB 56, will annually shrink Alabama’s economy by at least $2.3 billion and will cost the state not less than 70,000 jobs . Most of the damage will come from reduced demand for goods and services provided by Alabama businesses patronized by immigrants. Those positions support other jobs, leading to a net employment loss of 70,000 to 140,000. As a result, Addy estimates, the state’s gross domestic product will decline by $2.3 billion to $10.8 billion for every year the law is in effect and will cost $56.7 million to $264.5 million in tax revenue.

The Ugly Truth Behind Michigan's Budget Surplus - Michigan is a model of fiscal recuperation. At least that’s what the headlines said as I stepped off a plane in Detroit recently: its spending was slashed so ruthlessly in the past few years that the New York Times quoted a former state budget director as moaning, “We were so far down that the floor looked like up to us.” But now there is a budget surplus projected for 2013, of anywhere from half a billion to a billion dollars, with yet sunnier fiscal predictions ahead. This apotheosis is generally credited to the enactment of Republican Governor Rick Snyder’s stern austerity policies, which include replacing “a business tax with a corporate income tax that is expected to save businesses $1.5 billion a year,” according to the same Times article. “To make up lost dollars, lawmakers agreed to tax public workers’ pensions, reduce the state’s Earned-Income Tax Credit for the working poor, and remove or reduce other tax exemptions and deductions.” On the ride from the airport, my friend Dee gave me an earful about what he described as “Snyder’s for-profit governance, while for us ordinary non-corporate humans, things just get bleaker.” The schools are decimated, he told me. Infrastructure is crumbling, zoos and parks are being eliminated, libraries closed and daycare all but nonexistent. Snyder has slashed funding for the state’s colleges and universities by 15 percent in the past year alone.

Occupy Kindergarten: The Rich-Poor Divide Starts With Education  - Economic class is increasingly becoming the great dividing line of American education.  The New York Times has published a roundup of recent research showing the growing academic achievement gap between rich and poor students. It prominently features a paper by Stanford professor Sean F. Reardon, which found that, since the 1960s, the difference in test scores between affluent and underprivileged students has grown 40%, and is now twice the gap between black and white students. (Graph courtesy of the Times.)T  he children of the wealthy are pulling away from their lower-class peers -- the same way their parents are pulling away from their peers' parents. When it comes to college completion rates, the rich-poor gulf has grown by 50% since the 1980s. Upper income families are also spending vastly more on their children compared to the poor than they did 40 years ago, and spending more time as parents cultivating their intellectual development. Today, there's a much stronger connection between income and a child's academic success than in the past. Having money is simply more important than it used to be when it comes to getting a good education.

Preschooler's Homemade Lunch Replaced with Cafeteria "Nuggets" - A preschooler at West Hoke Elementary School ate three chicken nuggets for lunch Jan. 30 because the school told her the lunch her mother packed was not nutritious. The girl’s turkey and cheese sandwich, banana, potato chips, and apple juice did not meet U.S. Department of Agriculture guidelines, according to the interpretation of the person who was inspecting all lunch boxes in the More at Four classroom that day. The Division of Child Development and Early Education at the Department of Health and Human Services requires all lunches served in pre-kindergarten programs - including in-home day care centers - to meet USDA guidelines. That means lunches must consist of one serving of meat, one serving of milk, one serving of grain, and two servings of fruit or vegetables, even if the lunches are brought from home. When home-packed lunches do not include all of the required items, child care providers must supplement them with the missing ones. The girl's mother - who said she wishes to remain anonymous to protect her daughter from retaliation - said she received a note from the school stating that students who did not bring a "healthy lunch" would be offered the missing portions, which could result in a fee from the cafeteria, in her case $1.25."

Parents protest after Charter school fines students $5 for detention (Video) -Hundreds of people protested at Chicago Public School headquarters Monday against the Noble Street Charter Network's use of fines to discipline students that they say is not stopping the bad behavior and digs deep into the parents' pockets. Noble was recently touted by Mayor Rahm Emanuel as having what he called "secret sauce" in creating quality education in Chicago. Now other charter schools are looking to make similar changes, changes that some former students and parents say are too strict and too costly. "The way to make schools safe is not to force fine that makes our parents choose between sending us to school and putting food on our plates," said Timothy Anderson of Youth in Chicago Education. They feel disciplinary codes in the noble network of charter schools in Chicago are too tough and expensive. Parents and educational organizations agree. "We wonder how they run a 19-school network if they have to balance the budget on the backs of low income families like that,"

Financial Literacy: 'Pretty Dismal' -“Let’s say you have $200 in a savings account. The account earns 10 percent interest per year. How much would you have in the account at the end of two years?” I assume that most Economix readers can handle that calculation of compound interest, but when a group of 51-to-56-year-olds (a k a Early Baby Boomers) were asked that question, less than one in five could arrive at the correct answer. This is one of the findings of financial illiteracy in a working paper by Annamaria Lusardi, an economist at Dartmouth College. The paper examines just how well Americans and citizens of other countries understand the basic financial concepts that underpin decisions about mortgages, saving for retirement, credit card borrowing and other economic needs. Reviewing several surveys, Ms. Lusardi finds that while those 23 to 28 years old are generally more financially literate than other age groups, the general level of numeracy is “pretty dismal …considering the complexities of the calculations involved in many financial decisions.” Numeracy appears to decline with age, although Ms. Lusardi writes that it is not clear whether that happens because of a general decline in cognitive ability or because older people have a lower level of financial knowledge.

Senate budget includes nearly 60 percent cut for USF - Days after the Florida Senate surprised the University of South Florida with a proposal to immediately spin off its Lakeland branch campus into the state's 12th university, Senate budget writers proposed slashing USF's state funding nearly 60 percent. The common denominator: influential budget chairman and supporter of the standalone Lakeland school, Sen. JD Alexander. "It's political," USF chief operating officer John Long told school trustees at an emergency meeting Monday evening in Tampa. The Senate proposal would cut $79 million in state funding from USF — out of a total of $400 million in reductions to the university system statewide. Another $25 million would be held in "contingency," pending USF's cooperation in making USF's Lakeland campus into "Florida Polytechnic University" — Alexander's pet project. Factoring in the extra faculty, staff and students USF would have to absorb because of the split, and the money for USF's pharmacy school that would go away with the change, USF leaders say they are looking at a cut of almost $104 million.

The relation between high college tuition and low state funding of higher ed: the right's austerity agenda - Linda Beale -As certainly everyone should be aware by now (after almost 20 Republican candidate debates and months of negative campaign ads), the GOP candidates all think that we need to prescribe an austerity budget for state and federal governments.  "Too much spending" they yell.  "Too high taxes", they scream.  "It makes our big corporations uncompetitive", they whine.  "We need to break the backs of unions so public workers are as poor as workers in private industry, but still give tax cuts to the wealthy", they assert, "so jobs can trickle down to the poor".   See, e.g., Arthur B. Laffer (yes, he of the laughingstock napkin-drawn Laffer "curve" projecting his view that cutting revenues from taxes increases revenues), "The States are leading a pro-growth rebellion," Wall St. Journal, (lauding the move to free-rider states, where stingy workers can get the benefits from the results of collective bargaining agreements without paying for the costs of supporting the union that got those benefits from them, thus starving and "busting" the union; gloating over the fact that California didn't adequately fund its state workers' retirement plans and that the anti-tax movement will keep it from doing so now). That's a prescription for disaster.  

Harvard’s Liberal-Arts Failure Is Wall Street’s Gain - In recent years, many top universities have tried to guide their students into careers other than finance.  In 2008, Drew Gilpin Faust, the president of Harvard University, went so far as to give a speech to graduating seniors asking them to stand fast against Wall Street’s “all but irresistible recruiting juggernaut.” Tufts University is paying the student loans of graduates who go into public service.  The efforts seem to be failing. In December, the New York Times’ Catherine Rampell asked Harvard, Yale and Princeton for data on the professions their graduates were entering. As of 2011, finance remained the most popular career for Harvard graduates, sucking up 17 percent of those who went from college to a full-time job. At Yale, 14 percent of the 2010 graduating class, and at Princeton, 35.9 percent, were headed into finance.

How Harvard is failing its students - In a recent Bloomberg article, Ezra Klein argues that Harvard and the other Ivy Leagues are failing their students because the students end up confused about what they can do with themselves after college and end up going to Wall Street firms as a way of making themselves marketable. From the article: For many kids, college represents an end goal. Once you get into a good college, you’ve made it, and everyone stops worrying about you. You’re encouraged to take classes in subjects like English literature and history and political science, all of which are fine and interesting, but none of which leave you with marketable skills. After a few years of study, you suddenly find it’s late in your junior year, or early in your senior year, and you have no skills pointing to the obvious next step. What Wall Street figured out is that colleges are producing a large number of very smart, completely confused graduates. Kids who have ample mental horsepower, incredible work ethics and no idea what to do next. So the finance industry takes advantage of that confusion, attracting students who never intended to work in finance but don’t have any better ideas about where to go.

How Colleges and Universities Can Help Their Local Economies - NY Fed - Policymakers are increasingly viewing colleges and universities as important engines of growth for their local areas. In addition to having direct economic impacts, these institutions help to raise the skills of an area’s workforce (its local “human capital”), and they do this in two ways. First, by educating potential workers, they increase the supply of human capital in a region. Perhaps less obviously, these schools can also raise a region’s demand for human capital by helping local businesses create jobs for skilled workers. In this post, we draw on our recent academic research and Current Issues article to outline these pathways and how they might inform local economic development policy. (We also discuss our findings in a new video.)

S&P says student loan debt could be next financial bubble - Student-loan debt may become the next U.S. asset bubble as rising tuition costs climb while household income stagnates, Standard & Poor's said. Colleges and universities have been struggling with declining endowments and lower state funding at the same time students are facing an inability to repay loans in a tough economy, the ratings company said today in a statement. "Student-loan debt has ballooned and may turn into a bubble," S&P said. "There are more defaults and downgrades for some student loan asset-backed securities." 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. Under U.S. law, student-loan debt -- unlike credit-card borrowings -- can rarely be discharged in bankruptcy court. President Barack Obama last month proposed linking federal aid to a college's ability to control tuition costs. The plan calls for increasing campus-based aid only for schools that limit tuition-cost increases and penalizing those that don't.

Student Loans Could Be America's Next "Debt Bomb" - Growing numbers of Americans are finding themselves bankrupt, with their college diplomas partially to blame. Slightly more than 80 percent of bankruptcy attorneys say the number of their potential clients with student loan debt have increased "significantly" or "somewhat" in the past three to four years, according to a survey by the National Association of Consumer Bankruptcy Attorneys. And there's little hope those debtors will get out of their obligations; 95 percent of bankruptcy attorneys surveyed said that very few student loan debtors will be discharged from their loan as a result of undue hardship. "Take it from those of us on the frontline of economic distress in America: This could very well be the next debt bomb for the U.S. economy," With so many college graduates burdened with so much debt, the potential for bankruptcies is huge. Nearly 25 percent of bankruptcy attorneys said they've seen potential student loan client cases surge by 50 to more than 100 percent, according to the NACBA survey. That despite the number of Americans that filed for bankruptcy overall falling last year, according to The New York Times. Americans that graduated college with loans in 2010 owe an average of about $25,000 -- a five percent boost from the year before.

Retirees tighten the belt, but still struggle - As the rebound in the U.S. economy helps boost income and spending among working-aged households, older Americans relying on retirement income are having a hard time paying the bills. Despite steady belt-tightening as they age, retirees' incomes just aren't keeping up, according to a review of the latest data by the Employee Benefits Research Institute. On average, retired households spend about 80 percent of what working households spend, but their earnings are only 57 percent of what working households take home. Not surprisingly, retired Americans spend a rising portion of their income on medical expenses as they get older. Health care cost consume roughly 13 percent of spending by those 65 and older -- more than double the 5.3 percent of spending for those 45 to 54 and just 4.0 percent for those under 25, according to the Bureau of Labor Statistics. That rises to about 20 percent of total spending for those ages 85 and over, according to the EBRI. advertisementWith government health care spending soaring, Congress is wrestling with various proposals to contain costs. That doesn't bode well for retirees who already face higher health care bills than younger households.

Social Security Reserves Forecast To Run Dry In 2022 - Social Security's bank account will go bust in 2022 — the first time the program's combined trust funds will run a deficit, according to President Obama's budget released Monday. One of Medicare's trust funds also will be in the red for much of the next decade, according to the numbers in the briefing book that the White House provided to Congress along with the budget, which lays out Mr. Obama's tax and spending plans for fiscal year 2013 and beyond. Social Security has taken in less in taxes than it has paid out in benefits since 2010, but the shortfall has beenmade up as the government has dipped into IOUs left in the trust funds from previous years. Monday's numbers, though, show the combined trust fund itself will run a deficit of $2.6 billion in 2022.

Alabama Plans to Close Most Hospitals for Mentally Ill - Alabama will shut down most of its mental health hospitals by the spring of 2013 in a sweeping plan to cut costs and change how the state’s psychiatric patients receive treatment, state officials announced on Wednesday. The decision to close four hospitals and lay off 948 employees is a bleak reminder of Alabama’s shrinking budget. But it is also the latest example in a longstanding national effort among states to relocate mentally ill patients from government hospitals to small group homes and private hospitals. Mental health advocates believe patients often get better care in smaller, less isolating facilities. Since the 1990s, Alabama has closed 10 other mental health treatment centers. “What’s unusual is how many hospitals in Alabama are being closed so fast,” . “The trend has been to downsize much more gradually.”

Quinn eyes cuts to Medicaid - Illinois doctors who agree to treat Medicaid patients will get paid less for doing it under one scenario Illinois Gov. Pat Quinn is considering. It deals with something called "the reimbursement rate." For example, a dentist might get about $75 for filling a cavity for someone with private insurance. But for a Medicaid patient, the dentist only receives about $30 from the state. That money comes from taxpayers. Quinn is looking for places to cut the state budget. He presents his ideas to the General Assembly on Feb. 22. The state already faces a backlog of Medicaid bills totaling more than $2 billion. But if Quinn reduces rates to doctors any further, fewer doctors will agree to take Medicaid patients, according to Wayne Polek, president of the state Medical Society.

Fewer Americans Have Employer-Based Health Insurance -- Fewer Americans got their health insurance from an employer in 2011 (44.6%) than in 2010 (45.8%), continuing the downward trend Gallup and Healthways have documented since 2008. As employer-based health insurance has declined, the percentage of Americans who are uninsured has increased, rising to 17.1% this year, the highest seen since 2008. The 25.2% of Americans who had government health insurance -- Medicare, Medicaid, or military/veterans' benefits -- is unchanged from 2010, but remains slightly elevated compared with 2008 and 2009 levels. The percentage of Americans who report they receive healthcare through some other means, which would include buying their own coverage, has been stable over the past four years. Two factors appear to be driving up the percentage of uninsured Americans. First, more Americans were unemployed or underemployed in 2011 than in 2008. Second, fewer employees had health insurance from their employer, which may be because employers no longer offered it or the cost was too high for employees to afford. Gallup finds a decrease in employer-based insurance since 2010 regardless of whether Americans were employed full time by an employer, employed full time for themselves, or working part time.

Tax Foundation Brief: Health Care Individual Mandate Beyond Congress's Taxing Power  - Today we filed a brief with the U.S. Supreme Court explaining that the health care "individual mandate" is beyond Congress's taxing power.  On March 26-28, 2012, the Court will be hearing a record 5-1/2 hours of oral argument on the constitutionality of the Patient Protection and Affordable Care Act (PPACA), sometimes known as Obamacare or the health care reform law. The Court will be considering whether the law can be challenged despite the Anti-Injunction Act, whether the "individual mandate" requiring all Americans to purchase health insurance is severable from the rest of the bill, and whether the law is permitted under Congress's power to regulate interstate commerce or its power to tax. Our brief focuses on this last question: whether the individual mandate is permissible under Congress's power to tax. We argue that it is not, because it is properly considered a penalty and not a tax:

Providing insurance to the poor reduces healthcare costs - Enrollment of uninsured patients in a program with benefits comparable to those offered under the Affordable Care Act of 2010 resulted in significant healthcare cost savings, a new study finds. Published in the February issue of Health Affairs, the research sheds light on the potential outcomes of newly enacted healthcare reforms. “In a case study involving low-income people enrolled in a community-based health insurance program, we found that use of primary care increased but use of emergency services fell, and – over time – total healthcare costs declined,” said study co-author David Neumark, UC Irvine Chancellor’s Professor of economics and director of UCI’s Center for Economics & Public Policy study. Working with researchers from the Virginia Commonwealth University Health System, Neumark tracked the emergency room, inpatient, outpatient and primary-care service utilization of about 26,000 previously uninsured Richmond residents between 2000 and 2007 whose household incomes fell 200 percent below the federal poverty level. Qualified enrollees were granted health insurance and assigned a primary-care provider for one year. They were required to proactively re-enroll for subsequent annual coverage. The demographics of these participants paralleled those of the population that will be affected by changes under the Affordable Care Act of 2010, Neumark said. The legislation is set to extend Medicaid benefits to about 16 million uninsured, low-income adults and children by the end of 2014.

Health-Care Costs and Climate Change - That’s the average global temperature from 1998 through 2008, according to NASA.  You all know this, so why am I bringing it up? Well, look at this, from J. D. Kleinke of AEI in The Wall Street Journal: That’s health care spending as a share of the economy, so we don’t have to worry about correcting for inflation (as we do with Kleinke’s graph). Do you think the trend is up or down? There is some difference between rising temperatures and rising health care spending. Temperatures are rising because there is too much greenhouse gas in the atmosphere, and that is something we are not going to be able to change in the short run. Health care costs are somewhat more responsive to changes in behavior by companies and households, so it is possible that health care inflation could be slowing down. In that environment, even if there are short-term changes that keep costs from growing quickly for a few years, as occurred with managed care in the 1990s, the long-term trend is still up—and we should be cautious about declaring victory as long as the structural problems have not gone away. So people from AEI cherry-pick statistics to make their political points. So what?

The Options for Payment Reform in Health Care - Over the years, both experience and empirical research have taught policy makers around the globe that how money enters the health system – and how much enters – has a powerful influence over the shape and modus operandi of health care delivery. Perspectives from expert contributors.It is therefore not surprising that “payment reform” has become the new battle cry in the United States, as the nation seeks better control over the annual increases in health spending per capita.So, what choices do policy makers have in payment reform?It is useful to go back to basics. Any payment system for health care has several dimensions:

1. The “base” upon which prices are defined and paid.
2. The level of the payment per unit of the chosen base.
3. The administrative and economic process by which that price level is determined.

The chart below focuses on the first and third of these dimensions. The columns describe the main bases in the menu; the rows describe the methods by which price levels are determined. The second dimension — that is, the “right” level of payment — is highly debated.

How Big Pharma Cooks Data –The Case of Vioxx and Heart Disease  - Yesterday I caught a lecture at Columbia given by statistics professor David Madigan, who explained to us the story of Vioxx and Merck. It’s fascinating and I was lucky to get permission to retell it here. Merck was well aware of the fatalities resulting from Vioxx, a blockbuster drug that earned them $2.4b in 2003, the year before it “voluntarily” pulled it from the market in September 2004. What you will read below shows that the company set up standard data protection and analysis plans which they later either revoked or didn’t follow through with, they gave the FDA misleading statistics to trick them into thinking the drug was safe, and set up a biased filter on an Alzheimer’s patient study to make the results look better. They hoodwinked the FDA and the New England Journal of Medicine and took advantage of the public trust which ultimately caused the deaths of thousands of people.

Supply of a Cancer Drug May Run Out Within Weeks - A crucial medicine to treat childhood leukemia is in such short supply that hospitals across the country may exhaust their stores within the next two weeks, leaving hundreds and perhaps thousands of children at risk of dying from a largely curable disease, federal officials and cancer doctors say.  The drug is methotrexate, and the cancer it treats is known as acute lymphoblastic leukemia, or A.L.L., which most often strikes children ages 2 to 5. It is an unusually virulent cancer of white blood cells that are overproduced in bone marrow and invade other parts of the body.  The cancer commonly spreads to the lining of the spine and brain, and oncologists prevent this by injecting large quantities of preservative-free methotrexate directly into the spinal fluid. The preservative can cause paralysis when injected into the spinal column, so cannot be used for this disease. Methotrexate is also used to treat rheumatoid arthritis. Ben Venue Laboratories was one of the nation’s largest suppliers of injectable preservative-free methotrexate, but the company voluntarily suspended operations at its plant in Bedford, Ohio, in November because of “significant manufacturing and quality concerns,”

U.S. Discovers Fake Cancer Drug - The maker of the widely used Avastin cancer drug said Tuesday that it is warning doctors, hospitals and patient groups that a counterfeit version of the medicine has been found in the U.S. .Tests of counterfeit vials of Avastin showed that they didn't contain the active ingredient in Roche Holding AG's intravenous drug, according to the Swiss company's Genentech unit. It isn't clear how much of the counterfeit product was distributed in the U.S. or whether it has caused any harm. A Genentech spokeswoman said the company doesn't know if any patients were given the fake drug. The Food and Drug Administration is investigating, and has sent letters to 19 medical practices in the U.S. that the agency says buy unapproved cancer medicines and might have bought the counterfeit Avastin. An FDA spokeswoman said it hasn't received any reports of patient side effects that appear to be linked to the counterfeit product.

Health Care: Supply Chain Meltdowns - First:  Counterfeit vials of the cancer drug Avastin have been found in three states. The vials, sold directly to physician offices, lack the active ingredients to make the drug effective. Somewhat luckily, the packaging was so sloppy the vials were spotted, although some of the medication was likely used. We might not be so lucky next time. Then: The drug common Methotrexate, used to treat several kinds of cancers, is in short supply. Methotrexate is considered essential in battling acute lymphoblastic leukemia in adults and in children.  As drugs become generic the cost goes down, but generic drug makers are not especially adept at making injectable medications, being better at mass production of pills. The closure of just a few plants can cause a shortage, as we have now. More than 250 meds have been on the shortage list in the last year or two, as the lower costs of production are offset by lower reimbursements leading to less capital investment and production.  And Finally: The Johnson and Johnson Depuy subsidiary is in hot water with the FDA for joint replacements failing too early too often (15 years is the hoped for life of joint replacement surgeons, results vary by patient). Depuy recently received some bad publicity for selling the same joint replacements in Europe.

Drug Quickly Reverses Alzheimer’s Symptoms in Mice - Neuroscientists at Case Western Reserve University School of Medicine have made a dramatic breakthrough in their efforts to find a cure for Alzheimer's disease. The researchers' findings, published in the journal Science, show that use of a drug in mice appears to quickly reverse the pathological, cognitive and memory deficits caused by the onset of Alzheimer's. The results point to the significant potential that the medication, bexarotene, has to help the roughly 5.4 million Americans suffering from the progressive brain disease.Bexarotene has been approved for the treatment of cancer by the U.S. Food and Drug Administration for more than a decade. These experiments explored whether the medication might also be used to help patients with Alzheimer's disease, and the results were more than promising. Alzheimer's disease arises in large part from the body's inability to clear naturally-occurring amyloid beta from the brain. In 2008 Case Western Reserve researcher Gary Landreth, PhD, professor of neurosciences, discovered that the main cholesterol carrier in the brain, Apolipoprotein E (ApoE), facilitated the clearance of the amyloid beta proteins.

Childhood Abuse Disrupts Brain Formation: Study - Childhood abuse leads to permanent changes in a seahorse-shaped area of the brain that can cause adult depression and drug abuse, Harvard researchers said in a study that raises the possibility of new treatment.  Brain scans of adults who averaged 22 years old showed differences in a part of the brain where new neurons are generated, according to the study today in the Proceedings of the National Academy of Sciences. People exposed to childhood abuse were found in the study to have a less-dense hippocampus.  About 3.7 million U.S. children are assessed yearly for abuse, and the number may be higher because some cases don’t come to light, studies show. Today’s findings may provide hope for treatment because the brain is still growing throughout early adulthood, said Martin Teicher, a psychiatrist at Harvard Medical School in Boston. Mental illnesses caused by childhood mistreatment may take years to develop.

Processed Food and Coronary Capitalism - A systematic and broad failure of regulation is the elephant in the room when it comes to reforming today's Western capitalism. Yes, much has been said about the unhealthy political-regulatory-financial dynamic that led to the global economy's heart attack in 2008 (initiating what Carmen Reinhart and I call "The Second Great Contraction"). But is the problem unique to the financial industry, or does it exemplify a deeper flaw in Western capitalism? Consider the food industry, particularly its sometimes malign influence on nutrition and health. Obesity rates are soaring around the entire world, though, among large countries, the problem is perhaps most severe in the United States. According to the US Centres for Disease Control and Prevention, roughly one-third of US adults are obese (indicated by a body mass index above 30). Even more shockingly, more than one in six children and adolescents are obese, a rate that has tripled since 1980.

Public Utility, Private Profit: Privatization of Water Is as Benign as Lucifer - Where I live the reservoirs are still mostly full from the last winter’s rain and we will not experience any delays or service interruptions. I take water for granted, did even during drought years when we recycled water for the garden and to flush toilets. Every year about 2 million people, most of them children, die from lack of water, either directly or indirectly through lack of sanitation; that’s twice as many people as the United States killed in Iraq. Estimates of international agencies put the number at 1.1 billion who do not have access to enough water to drink, cook with, or properly bathe.  For most of my life I was not even aware that water might be a problem for some people, blissfully wrapped in the Bay Area cocoon. What I’d heard seemed to be passing news bulletins. Droughts somewhere, I wasn’t sure. Relief efforts. I’ve also been ignorant about nearly everything else in the world. I don’t think I really got how deeply evil some corporations were. I didn’t understand how money worked, nor what the World Bank was about, nor the International Monetary Fund. They sounded benign.  I certainly didn’t understand how the World Bank and some huge corporations were, in concert, working to kill millions of people by depriving them of access to water. I do now.

Where the Colorado River Runs Dry - Until 1998 the Colorado regularly flowed south along the Arizona-California border into a Mexican delta, irrigating farmlands and enriching a wealth of wildlife and flora before emptying into the Gulf of California.  But decades of population growth, climate change and damming in the American Southwest have now desiccated the river in its lowest reaches, turning a once-lush Mexican delta into a desert. The river’s demise began with the 1922 Colorado River Compact, a deal by seven western states to divide up its water. Eventually, Mexico was allotted just 10 percent of the flow.  Officials from Mexico and the United States are now talking about ways to increase the flow into the delta. With luck, someday it may reach the sea again.  It is paradoxical that the Colorado stopped running consistently through the delta at the end of the 20th century, which — according to tree-ring records — was one of the basin’s wettest centuries in 1,200 years. Now dozens of animal species are endangered; the culture of the native Cocopah (the People of the River) has been devastated; the fishing industry, once sustained by shrimp and other creatures that depend on a mixture of seawater and freshwater, has withered.

Breaking: Monsanto Found Guilty of Chemical Poisoning in France - In a major victory for public health and what will hopefully lead to other nations taking action, a French court decided today that GMO crops monster Monsanto is guilty of chemically poisoning a French farmer. The grain grower, Paul Francois, says he developed neurological problems such as memory loss and headaches after being exposed to Monsanto’s Lasso weedkiller back in 2004. The monumental case paves the way for legal action against Monsanto’s Roundup and other harmful herbicides and pesticides made by other manufacturers. In a ruling given by a court in Lyon (southeast France), Francois says that Monsanto failed to provide proper warnings on the product label. The court ordered an expert opinion to determine the sum of the damages, and to verify the link between Lasso and the reported illnesses. The case is extremely important, as previous legal action taken against Monsanto by farmers has failed due to the challenge of properly linking pesticide exposure with the experienced side effects.

Regenerative Agriculture: Feeding the Future - It is an illusion to think we can continue to use as much energy as we do now. No one can entirely rule-out that some extravagant technology will be forthcoming, e.g. solar power or nuclear fusion on the full-scale of 500 EJ/year as we get through now, but the particular issue of matching liquid fuels derived currently almost entirely from petroleum appears insurmountable. The "solution" is probably the collective of individual solutions, and that means adopting a completely different paradigm of human philosophy and intention. The most pressing demand is how to feed the population of the world, and how to adapt industrialised conurbations, with cities provided for entirely from external regions for their food and electricity. If oil is the most vulnerable element in the energy-mix as the life-blood of transportation, then we must aim to live with less transportation, and this includes the means and distribution implicit to modern food production. I have spoken about regenerative agriculture and permaculture, in which most of the energy involved in running them is provided quite naturally by native soil fauna fed ultimately by photosynthesis, since the fuel for good soil derives from plants as the factories that supply carbon-rich nutrients and in a wonderful symbiosis, the living soil microbes, especially fungi can draw other nutrients and water from the soil to nourish the plants. The individual elements of life feed one another in a mutually dependent and beneficial manner.

Global suicide 2020: We can’t feed 10 billion - Our team is tasked to solve this problem: “How to feed the 7 billion people already on Earth today plus another 3 billion by 2050?” Feed 10 billion. And we can’t wait till 2050 to start. The clock’s ticking. We’re already at the tipping point. We must start planning now. In fact, the Pentagon has already warned our team that by 2020, the planet’s “carrying capacity” will be so drastically compromised that they are already preparing military defense systems for the coming “all-out wars over food, water, and energy supplies.” World’s biggest survival task is food: Earth cannot feed 10 billion First, a crucial research paper from a leading consultant, Jeremy Grantham, whose firm manages $100 billion. He predicted the 2008 meltdown a couple years in advance. Now looking ahead to 2050, he reinforces the Pentagon’s worst fears, warning of an “inevitable mismatch between finite resources and exponential population growth” with a “bubble-like explosion of prices for raw materials” and commodity shortages that will become a huge “threat to the long-term viability of our species when we reach a population level of 10 billion,” making “it impossible to feed the 10 billion people.” Yes, the planet’s “carrying capacity” cannot feed 10 billion people. So that’s a constraint on known research solutions. Grantham concludes, “as the population continues to grow, we will be stressed by recurrent shortages of hydrocarbons, metals, water, and, especially, fertilizer. Our global agriculture, though, will clearly bear the greatest stresses.”

Child Malnutrition Affects 1 In 4 Children Globally, Report Says - Nearly half a billion children are at risk of "devastating and irreversible" damage from malnutrition, including stunted growth and undeveloped brains, according to a new report released by Save the Children. This "hidden crisis" kills more than 300 children every hour of every day and affects one in four children worldwide, according to the report. Chronic childhood malnutrition has been called a "silent killer," as it is often not listed as a cause of death and does not benefit from as much attention as high-profile campaigns targeting malaria or HIV/AIDS. Soaring food prices have left children particularly vulnerable. According to the Press Association, one-third of parents reported that their children did not have enough to eat, and one-sixth said that their children skipped school in favor of work. Chief executive of Save the Children Justin Forsyth outlined the gravity of the situation: "Every hour of every day, 300 children die because of malnutrition, often simply because they don't have access to the basic, nutritious foods that we take for granted in rich countries," he said.

Recent extreme weather affected 80% of Americans - Violent and deadly weather events have affected more than 240 million Americans — about 80% of the nation’s population — over the past six years, says a report out today from an environmental advocacy group. Last year was particularly awful for weather in the USA, with at least 14 weather and climate disasters across the nation that each inflicted more than $1 billion in damage. They included a series of devastating tornado outbreaks in the central and southern USA, the ongoing drought in the southern Plains, massive river flooding along the Mississippi and Missouri Rivers, and batterings from Hurricane Irene and Tropical Storm Lee. Environment America’s report looks broadly at county-level weather-related disaster declarations from FEMA for 2006 through 2011 to find out how many Americans live in counties hit by recent weather disasters. The report focused on weather and climate events, and did not include geological events such as earthquakes or volcanic eruptions.

Study: Sierra snowfall consistent over 130 years - Snowfall in the Sierra Nevada has remained consistent for 130 years, with no evidence that anything has changed as a result of climate change, according to a study released Tuesday. The analysis of snowfall data in the Sierra going back to 1878 found no more or less snow overall - a result that, on the surface, appears to contradict aspects of recent climate change models. John Christy, the Alabama state climatologist who authored the study, said the amount of snow in the mountains has not decreased in the past 50 years, a period when greenhouse gases were supposed to have increased the effects of global warming. The heaping piles of snow that fell in the Sierra last winter and the paltry amounts this year fall within the realm of normal weather variability, he concluded. "The dramatic claims about snow disappearing in the Sierra just are not verified," said Christy, a climate change skeptic and director of the Earth System Science Center at the University of Alabama in Huntsville. "It looks like you're going to have snow for the foreseeable future."

With climate change, today’s ’100-year floods’ may happen every three to 20 years: research - Last August, Hurricane Irene spun through the Caribbean and parts of the eastern United States, leaving widespread wreckage in its wake. The Category 3 storm whipped up water levels, generating storm surges that swept over seawalls and flooded seaside and inland communities. Many hurricane analysts suggested, based on the wide extent of flooding, that Irene was a “100-year event”: a storm that only comes around once in a century. However, researchers from MIT and Princeton University have found that with climate change, such storms could make landfall far more frequently, causing powerful, devastating storm surges every three to 20 years. The group simulated tens of thousands of storms under different climate conditions, finding that today’s “500-year floods” could, with climate change, occur once every 25 to 240 years. The researchers published their results in the current issue of Nature Climate Change.

More water shortages for China? - -- China faces worsening water shortages, a government official warned. The country's water shortages, along with serious river pollution and a deteriorating aquatic ecosystem, pose a growing threat to economic and social development, Hu Siyi, China's vice minister of water resources said Thursday, state-run news agency Xinhua reports. China's population of 1.3 billion people consumes more than 600 billion cubic meters of water a year, equal to about three-quarters of its exploitable water resources, Hu said. "The constraints of our available water resources become more apparent day by day."  New guidelines released Thursday by the State Council -- China's Cabinet -- cap the maximum volume of water use at 700 billion cubic meters by 2030. Other measures include stricter government supervision of underground water supplies, greater protection of drinking water sources and the introduction of water-use licenses and other steps aimed at restoring the aquatic ecosystem.

Melting Arctic Ice: What Satellite Images Don't See -- For scientists studying the health of Arctic sea ice, satellite observations are absolutely essential for providing the big picture. But those high-altitude observations need occasional reality checks from scientists down on the surface. It was during one such on-the-ground research expedition last fall that David Barber, an Arctic climatologist at the University of Manitoba, got an unwelcome surprise. Barber was aboard the Canadian research icebreaker Amundsen, checking on ice in the Beaufort Sea north of Alaska and Western Canada. The ship was well inside a region the satellites said should be choked with thick, multiyear-old ice. . But the ship kept going, at a brisk 13 knots — its top speed in open water is 13.7 knots — and even when it finally reached thick ice, he says, "we could still penetrate it easily." . Some of what satellites identified as thick, melt-resistant multiyear ice turned out to be, in Barber's words, "full of holes, like Swiss cheese.." The findings add another wrinkle to a problem climate scientists have been warning about since the record melt of 2007: after each summer meltback, the Arctic Ocean refreezes completely in winter. The problem is that much of that refreezing creates a relatively thin layer of so-called first-year ice. "It's weaker than thick, multiyear ice," says University of Colorado scientist James Maslanik, "and less resistant to melting."

Arctic Sea Ice Update: Spectacular and Ominous - We are entering the final stage of the freezing season in the Arctic. Winter time is usually a boring time for watching the sea ice. This winter was looking more or less like previous years, until about a month ago. A flip in atmospheric patterns that brought very late winter conditions to Europe, also had an effect on the fringes of the ice pack on the Atlantic side of the Arctic. Large swathes of sea water in the Barents and Kara Seas that ought to have been completely frozen over, opened up and total Arctic ice growth came to a practical standstill on various graphs, such as the Cryosphere Today sea ice area graph.The regional effect can clearly be seen on this comparison of sea ice concentration maps for February 11th in the 2004-2012 period: Novaya Zemlya, the large Russian island that divides the Barents and Kara seas, is completely ice-free. The same almost goes for Svalbard, the archipelago in the top left. I think it’s safe to safe that this is unprecedented ever since satellites started monitoring Arctic sea ice in 1979. It’s almost as if the melting season has already started in the Barents and Kara Seas, more than two months earlier than normal.

2°C warming goal now ‘optimistic’, say French scientists — French scientists unveiling new estimates for global warming said on Thursday the 2°C goal enshrined by the United Nations was “the most optimistic” scenario left for greenhouse-gas emissions. The estimates, compiled by five scientific institutes, will be handed to the UN’s Intergovernmental Panel on Climate Change (IPCC) for consideration in its next big overview on global warming and its impacts. The report — the fifth in the series — will be published in three volumes, in September 2013, March 2014 and April 2014. The French team said that by 2100, warming over pre-industrial times would range from two degrees Celsius to 5.0°C. The most pessimistic scenarios foresee warming of 3.5-5.0°C, the scientists said in a press release. Achieving 2°C, “the most optimistic scenario,” is possible but “only by applying climate policies to reduce greenhouse gases,” they said.

We Can't Keep Growing Like This: A couple of questions for you to ponder over your morning coffee: What's the sustainable long-term growth rate for the world population? And, relatedly... What's the sustainable long-term growth rate of the world economy? Go ahead--take some guesses. 2% annual population growth? 4%-5% economic growth? That sounds reasonable, right? Not asking too much? We've all gotten used to growth rates like those, and they're baked into just about every projection countries and economists make. It seems perfectly sane to imagine that we can sustain 2% population growth and 4%-5% global economic growth pretty much forever. Because even though we're currently sustaining ourselves in part by consuming the finite resources of our planet, our big brains and innovation and productivity improvements will always save us in the end. Well, if you're planning for us to grow our population and economy at 2% and 4%-5% respectively forever, you'd better pray that we soon figure out how to travel at warp speed, live forever in space, and find hundreds of other habitable planets to live on, because otherwise we'll soon cover every inch of the Earth and then some. A few years ago, investment manager Jeremy Grantham gave a presentation to some highly sophisticated traders and mathematicians in which he gave examples of why and how our current conceptions of sustainable growth are completely misguided. So much of a part of conventional thinking are these conceptions, however, that even the mathematicians had trouble grasping this. To see why a 4%-5% economic growth rate isn't sustainable, read on.

Don’t let the age of austerity be the age of inaction - There is not much good news when it comes to managing the global system. The euro is (still) in crisis; trade talks are stuck; the Group of 20 has run into the sand; and then there is climate change – the greatest global challenge met by the greatest global short-sightedness. Or are we missing something? Certainly, the 2009 Copenhagen conference ended in stalemate, and the “climategate” affair has given sceptics a field day. Also, the financial crisis has turned attention away from the climate challenge. But, at a bad time in the news cycle just before Christmas, the parties to the UN climate convention, meeting in Durban, agreed that a global legally binding approach to controlling emissions would be undertaken, to be signed in 2015 and implemented from 2020.  Europe played a vital role in Durban. But the key shift was from China. Under pressure from vulnerable and poor states in Africa and elsewhere, it has shifted from naysayer to supporter of a global deal. The US found itself outflanked – with Saudi Arabia and Venezuela for company. The challenge now is to avoid a repetition of Copenhagen. The world cannot afford three years of talks that founder at the last minute. Success in 2015 depends on several factors. First, we need to change the debate from being narrowly about climate to being broadly about resources. This means food, water and energy – on land and in the oceans. All three are obviously affected by climate change. All three interact in dangerous ways. Increasing our resource efficiency not only helps the climate, but will help our economy.

Battle Over EU Airline Tax Risks "Carbon Trade War"; US Congressman Equates Tax to " Barbary Pirates for Safe Passage"; Insanity of Cap-and-Trade Revisited - Led by the US and China, 26 nations are now protesting the EU's airline carbon tax, and a outright Carbon Trade War Edges Nearer. An alliance of countries opposed to a carbon tax on airlines is threatening to tear up trade deals with the European Union and impose new taxes on EU carriers, in a sign the world’s first carbon trade war is edging closer. A meeting has been called for next week by the 26 countries that have been fighting to stop Brussels’ charging airlines flying in or out of the EU for their carbon emissions. China has already told its carriers to ignore the EU legislation which took effect from January 1 and US legislators are attempting to push a similar measure through Congress.

Energy, Carbon And Craziness - I fear I did not explain myself completely when I posted about Bill McKibben's war on carbon in Do The Facts Matter Anymore? Or Not? I intend to rectify that today. Look at this very simple diagram:  Just as there are two products in this simplified diagram, there are two rigid viewpoints about burning fossil fuels. The first group, which could be represented by Exxon Mobil, focuses exclusively on the Energy component and ignores the Carbon. That Energy is very important. Without it we would not enjoy the comforts of industrial civilization and our precious internet. The Earth would not be able to support nearly as many people. All hell would break loose if we didn't have that Energy. And so forth. These people steadfastly ignore our best science, which tells us that we're warming the Earth's surface by emitting all that Carbon. Their denial concerning the unimportance of Carbon is complete. In short, they are crazy.The second group, which could be represented by Bill McKibben and, focuses exclusively on the Carbon component and ignores the Energy. The Carbon is very important. If we keep emitting it at current rates, which is called Business As Usual, we risk raising the Earth's surface temperature by 3° centrigrade or more. We risk making the Earth uninhabitable for our species. And so forth. These people steadfastly ignore the benefits of the Energy, choosing instead to view it as one big, undifferentiated pile of Carbon. They want humanity to stop burning fossil fuels right now. They ignore the disastrous consequences if we suddenly had to do without all that Energy. Their denial concerning the unimportance of Energy is complete. In short, they are crazy.

More Southern forests at risk from biomass plants, report indicates - A new report says Southern forests are at risk from biomass plants that burn wood to make energy.  The report, released Tuesday by two environmental groups, says the expanding biomass industry will look at cutting trees to fuel the power plants, a departure from the current practice of using waste wood from sawmills and other sources. The report raises questions about whether the South will have an adequate supply of waste wood, thereby increasing the need to cut trees specifically for biomass plants.  In addition to concerns about deforestation, the report says biomass plants could cause a spike in atmospheric carbon over the next 35-50 years. Carbon is a pollutant that contributes to climate change. Long-term carbon levels should drop, but researchers question whether that will be soon enough to help stop global warming.

Biomass: Just Because it's Green Doesn't Mean it's Clean - Florida residents last year filed a legal challenge against a company that was planning to build a biomass incinerator in the Florida Panhandle. They complained the incinerator project was a "toxic nightmare" for the coastal area. Now, a new study conducted on behalf of the National Wildlife Federation finds that it might be awhile before burning wood instead of fossil fuels pays off for the environment. This suggests that maybe things aren't always as green as they seem. A study examining more than half of the 22 proposed biomass facilities in seven southern U.S. states found that burning wood in favor of fossil fuels for electricity would reduce the amount of carbon dioxide in the atmosphere eventually. However, the same study found this wouldn't happen fast enough to offset other factors that most scientists claim contribute to global climate change. The authors of the study anticipated a major expansion for the part of the power sector in the south that can use woody biomass to make electricity. Groups like Gulf Citizens for Clean Renewable Energy say wood-fed incinerators would spew toxic fumes into the environment and use up valuable drinking water supplies. On the other side of the debate, advocates of woody biomass say that not only does the alternative fuel source cut down on energy costs, it's also good for an economy that might otherwise depend on foreign sources for energy.

Will Hurricanes Topple U.S. Wind Turbines? - As plans for wind farms rising out of the ocean along the Atlantic and Gulf coasts inch closer to fruition, a new study from Carnegie Mellon University suggests that hurricanes could destroy a significant number of turbines in some of these areas, even coming close to wiping them out. Although turbines are designed to both harness and withstand the forces of wind, they can be severely damaged by too much of it. In the United States, Europe and Asia, turbines have caught fire, blades have shredded and towers have crumpled when hit by stormy gales. The authors of the study, published on Monday in the National Academy of Sciences magazine PNAS, set out to quantify the likelihood that a hurricane could topple towers in American waters where projects are under consideration or development.

Tunisia - A Possible Electrical Savior of Southern Europe? - Europe, battered by a perfect storm of recession and rising energy requirements, is looking for additional electrical power reserves anywhere it can. Surcease may come from North Africa, and the leading potential state to supply that need might be… Tunisia. Tunisia is endowed with a reliable source of solar power in its southern Saharan region, where the sunshine generates 20 percent stronger solar radiation than even the best locations in Europe. Given its proximity to Italy, Tunisia is in an ideal position to transfer such renewable energy directly to European markets, with much less energy loss along the way compared to its Maghreb neighbors. Last year’s Arab Spring has significantly improved investor interest in Tunisia.

Which Trends Are Changing the World of Energy - Technology and global competition are profoundly impacting our energy future.  The evidence is all around us in wind and solar energy advances, horizontal drilling and hydraulic fracturing creating a new North American oil and gas boom market, and the technologies driving smart grid, microgrids, and constant energy management. What are the forces of change taking place in energy today?

1. Global competition for energy resources from emerging economies like China
2. Struggle over energy policy and greenhouse gas emissions around the world
3. Growth in unconventional oil and gas from shales and oil sands
4. Uncertainty of environmental regulations forcing power plant retirements
5. Game changing technology  is turning the energy industry on its head

Bill Gates pressures Obama over new mining and energy anti-corruption laws -- Bill Gates is putting pressure on the Obama administration to prevent major US energy companies from neutering legislation aimed at stamping out corruption in developing countries. The billionaire philanthropist has published a letter to the Securities and Exchange Commission, the US financial watchdog, expressing concern at attempts to water down a new law designed to increase transparency in deals involving extractive industries. The former Microsoft chief said it was important that the US was the standard bearer in the fight against corruption, adding: "I feel it is critical to ensure the final rules for this provision are strong and robust and in keeping with the intentions of Congress." Sources close to Gates said it was unusual for him to make direct appeals, but there was concern about a lobbying campaign in Washington that would provide the big energy companies with loopholes that would allow them to continue operating in their current fashion. Gates said Africa's natural resources were worth $246bn in exports in 2009, six times greater than the money it received in aid. "Little of this value remained in Africa. Transparency of financial flows is critical to ensuring these valuable resources are transformed into public benefits."

Canada opens doors to uranium trade with China - Uranium producers in Canada got a heavy dose of good news as the country's Prime Minister, Stephen Harper, abolished trade rules that banned the export of uranium to China. Prime Minister Harper, who has been on a trade mission in China with Canadian business leaders, made the announcement as part of a slew of other agreements between China and Canada.  The Canadian government will amend a 1994 nuclear agreement between the two countries to allow uranium exports to China, though the exact details of what the amendment would say is unclear. Chinese and Canadian officials are to work them out over the coming months, a federal government statement said. Government officials in Canada touted the uranium deal on two fronts, economic and environmental.

Nuke dangers nowhere near resolved: Kan's crisis adviser - In December, Prime Minister Yoshihiko Noda announced the "conclusion" of the meltdown crisis at the Fukushima No. 1 nuclear plant, saying Tokyo Electric Power Co. was managing to keep the three crippled reactors cool, as well as the facility's spent fuel pools. Hiroshi Tasaka But a former special adviser to Naoto Kan, who was prime minister when the crisis started, warned that the situation is far from resolved and said Fukushima has exposed a raft of serious nuclear problems that Japan will have to confront for years. "I would say (the crisis) just opened Pandora's box," Hiroshi Tasaka, who has a doctorate in nuclear engineering and is now a professor at Tama University, said in a recent interview with The Japan Times. He was one of a select group who glimpsed the secret worst-case scenario document written up by the Japan Atomic Energy Commission on March 25 that was later reportedly quashed by the government.

Fukushima at Increased Earthquake Risk, Scientists Report - Seismic risk at the Fukushima nuclear plant increased after the magnitude 9 earthquake that hit Japan last March, scientists report. The new study, which uses data from over 6,000 earthquakes, shows the 11 March tremor caused a seismic fault close to the nuclear plant to reactivate.The results are now published in Solid Earth, an open-access journal of the European Geosciences Union (EGU). The research suggests authorities should strengthen the security of the Fukushima Daiichi nuclear power plant to withstand large earthquakes that are likely to directly disturb the region. The power plant witnessed one of the worst nuclear disasters in history after it was damaged by the 11 March 2011 magnitude 9 earthquake and tsunami. But this tremor occurred about 160 km from the site, and a much closer one could occur in the future at Fukushima. "There are a few active faults in the nuclear power plant area, and our results show the existence of similar structural anomalies under both the Iwaki and the Fukushima Daiichi areas. Given that a large earthquake occurred in Iwaki not long ago, we think it is possible for a similarly strong earthquake to happen in Fukushima,"  The 11 April 2011 magnitude 7 Iwaki earthquake was the strongest aftershock of the 11 March earthquake with an inland epicentre. It occurred 60 km southwest of the Fukushima nuclear power plant, or 200 km from the 11 March epicentre.

While the Rest of the World Is Abandoning Unsafe Nuclear Designs, America Will Build New Unsafe Reactors.  The geniuses at the Nuclear Regulatory Commission have given the green light for new nuclear power plants in the U.S. … which don’t include safety upgrades which were demonstrated vital by the Fukushima meltdown. The Atlanta Journal Constitution notes: The Nuclear Regulatory Commission on Thursday approved Southern Co.’s plan to build two reactors at Plant Vogtle, south of Augusta — though the decision was not without dissent. Gregory Jaczko, chairman of the five-member NRC, cast a lone vote against issuing a license for the project. He said he wanted but had not gotten a binding commitment from Southern that it would incorporate changes stemming from last year’s nuclear disaster in Japan. “Significant safety enhancements have already been recommended as a result of learning the lessons from Fukushima,” Jaczko said, referring to the plant on Japan’s coast that was devastated by an earthquake and tidal wave, “and there is still more work ahead of us. Knowing this, I cannot support issuing these licenses as if Fukushima never happened.” The U.S. remains without a long-term plan to store nuclear waste.

Why Not Thorium? -- The Fukushima disaster reminded us all of the dangers inherent in uranium-fueled nuclear reactors. Fresh news yesterday about Tepco’s continued struggle to contain and cool the fuel rods highlights just how energetic uranium fission reactions are and how challenging to control. Of course, that level of energy is exactly why we use nuclear energy – it is incredibly efficient as a source of power, and it creates very few emissions and carries a laudable safety record to boot. This conversation – “nuclear good but uranium dangerous” – regularly leads to a very good question: what about thorium? Thorium sits two spots left of uranium on the periodic table, in the same row or series. Elements in the same series share characteristics. With uranium and thorium, the key similarity is that both can absorb neutrons and transmute into fissile elements. That means thorium could be used to fuel nuclear reactors, just like uranium. And as proponents of the underdog fuel will happily tell you, thorium is more abundant in nature than uranium, is not fissile on its own (which means reactions can be stopped when necessary), produces waste products that are less radioactive, and generates more energy per ton.

Bakken formation oil and gas drilling activity mirrors development in the Barnett - animation

Energy independence? U.S. is almost there - The U.S. is the closest it has been in almost 20 years to achieving energy self-sufficiency, a goal the nation has been pursuing since the 1973 Arab oil embargo triggered a recession and led to lines at gasoline stations. Domestic oil output is the highest in eight years. The U.S. is producing so much natural gas that, where the government warned four years ago of a critical need to boost imports, it now may approve an export terminal. Methanex Corp., the world’s biggest methanol maker, said it will dismantle a factory in Chile and reassemble it in Louisiana to take advantage of low natural gas prices. And higher mileage standards and federally mandated ethanol use, along with slow economic growth, have curbed demand. The result: The U.S. has reversed a two-decade-long decline in energy independence, increasing the proportion of demand met from domestic sources over the last six years to an estimated 81 percent through the first 10 months of 2011, according to data compiled by Bloomberg from the U.S. Department of Energy. That would be the highest level since 1992.

Everything you know about shale gas is wrong - Everything you know about America’s shale gas “miracle” is wrong.I have already shown that we do not have a 100-year supply of natural gas, and that gas production is not profitable at today’s prices. I also noted that the U.S. Energy Information Administration recently slashed its resource estimate by 42 percent. But now there’s even more bad news: U.S. gas production appears to have hit a production ceiling, and is actually declining in major areas. The startling revelation comes from a new paper published today by Houston-based petroleum geologist and energy sector consultant Arthur Berman. Berman reached this conclusion by compiling his own production history of U.S. shale gas from a massive data set licensed from data provider HPDI. His well-by-well analysis found that total U.S. gas production has been on an “undulating plateau” since the beginning of 2009, and showed declines in some areas in 2011.

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.

Magical thinking: Kunstler and Berman on natural gas euphoria - In Episode #192 of the Kunstlercast which aired February 2nd, James Howard Kunstler and Duncan Crary have done us all a great favor by interviewing noted petroleum geologist, Arthur Berman. Berman’s popular in the peak oil world. In addition to his day job as a petroleum geologist and consultant, he’s on the board of the Association for the Study of Peak Oil and an editorial board member of the Oil Drum. He occasionally makes appearances on CNN and maintains his own blog at Petroleum Truth Report. Recently, Berman gave a series of presentations called US Shale Gas: Magical Thinking and the Denial of Uncertainty, and that’s what Kunstler wanted to talk to him about.

The growing water market in the Oil patch - “In 2008 there were 25 billion barrels of water handled (by the oil and gas industry) in the US—even at 60 cents a barrel it’s a multibillion dollar business,” says Jonathan Hoopes, President of GreenHunter Energy Inc. (GRH-AMEX). “With the big growth in unconventional since then, it’s likely another 5-6 billion barrels.” GreenHunter is a pure play on the fast growing water market in the oil patch, along with companies like Heckmann Corp (HEK-NYSE), and Ridgeline Energy Services (RLE-TSXv; RGDEF-OTCQX). There are also many private technology companies with new water treatment processes. Ridgeline is developing a water purification and recycling technology for the oil and gas sector. CEO Tony Ker says the industry is just beginning to put a formal cost structure on their water, and it’s not always easy to see through the mist to a simple business model. “Customers in the oil and gas industry are finding their way into the water industry,” he told me in a recent interview. “Two years ago customers didn’t know what the water business meant. At some point they knew they would have to clean and re-use it, but didn’t

Why Joe Nocera Is Wrong About Keystone XL - I am usually a big fan of Joe Nocera, but he is all wrong about the Keystone XL pipeline. He claims that Obama, in his “centrist heart of hearts,” also favors KXL. If so, the President is wrong, too. The first problem is that Nocera, like other pipeline proponents, frames the decision on KXL in isolation. Doing so leads to the following seductive line of reasoning: The United States needs a lot of oil now and for the foreseeable future. If we don’t get the oil from Canada, we will get it from other sources, like Venezuelan oil sands or Nigeria’s polluted delta, that are just as dirty. Therefore, we might as well buy our oil from our friends to the North. But who says we have to use so much oil? Other countries do not. The United States has the highest oil consumption of any one of the advanced economies that make up the OECD. Why? Primarily because we have the lowest energy taxes and the cheapest oil prices. Low oil prices feed into an endless list of decisions we make. How far from work will we live? Is it worth buying an electric car, even with subsidies, when gas is so cheap? If we build a high-speed rail line, will enough people ride it when it costs so little to drive?

Joe Nocera Still Doesn’t Get It On Keystone XL -  Joe Nocera replies to his Keystone XL critics in “The Politics of Keystone, Take 2” in Saturday’s New York Times. He still doesn’t get it. Like many people, Nocera doesn’t seem to understand the relationship between energy use and energy prices. He writes: The seemingly inexorable rise in greenhouse gas emissions is the result of deeply ingrained human habits, which will not change if the pipeline is ultimately blocked. The truth of the matter is that human habits are not really all that deeply ingrained. In countries where energy prices are higher, people systematically use less of it. How much less is shown dramatically in the chart attached to my response to Nocera’s first defense of KXL. Wealthy countries like Japan and Germany that have much higher fuel prices than the United States use only a half to a third as much per capita:  Nocera plunges even more deeply into economic confusion when he writes, “The benefits of the oil we stand to get from Canada, via Keystone, far outweigh the environmental risks,” and then goes on to list, as one of the benefits, the fact that Canadian oil is currently selling at a discount from Saudi crude. An especially low price on oil from a relatively dirty source is not a “benefit” — it is bad energy policy and bad environmental policy.

Keystone XL Pipeline: Texas Farmer Wins Temporary Restraining Order Against TransCanada - A coalition of environmentalists, conservative property rights activists and landowners are mounting a full court press against TransCanada in an attempt to derail the oil company’s attempts to build the controversial Keystone XL pipeline in Texas. On Monday, they won a small victory when a Lamar County judge issued a temporary restraining order against the company’s plans to do construction work on a farm near Paris, Texas. The coalition’s efforts are reminiscent of another battle during the last decade over eminent domain in Texas, concerning a massive “superhighway,” known as the Trans-Texas Corridor, that Republican Gov. Rick Perry had sought to build with the help of a Spanish company. Perry lost that fight to a coalition of conservative ranchers and environmentalists, dealing him a serious political blow. “We are involved because it’s starting to look a whole lot like the Trans-Texas Corridor battle,” said Terri Hall, founder of Texans Uniting for Reform and Freedom. “When push comes to shove, it’s clear to me that my party is more interested in oil and gas interests than property rights,”

Bill forces decision on pipeline, expands drilling to pay for transportation projects - The Republican-controlled House endorsed a plan Thursday to vastly expand oil and gas drilling off the nation’s coasts to help pay for a $260 billion transportation bill. The legislation has no chance of passing the Senate and faces a White House veto. But for Republicans, the 237-187 vote showed they’re willing to go further to boost U.S. energy production than President Barack Obama. Obama lately has embraced increased oil and gas production on the campaign trail, and has touted how the U.S. in recent years has produced record amounts of oil and natural gas. “The bill we are considering … is an action plan that clearly contrasts President Obama’s anti-energy policies with the pro-energy, pro-American jobs policies of Republicans,” said Rep. Doc Hastings, R-Wash., chairman of the House Natural Resources Committee.

TransCanada: Keystone XL Pipeline Could Not Begin Until 2015 at the Earliest - The Republican theory on the Keystone XL pipeline is that the President is holding back the immediate creation of eleventy billion jobs by refusing to give approval to a permit for construction. Under their various pieces of legislation, TransCanada, the pipeline operator, would be able to immediately begin construction and create jobs hauling tar sands oil from Canada to the Gulf of Mexico. But Brad Johnson finds a story on an earnings release from TransCanada, stating firmly that there would not be a start date for construction until 2015. The Calgary, Alberta-based company said that its executives continue to work with Nebraska to determine the best route that avoids Nebraska’s environmentally sensitive Sandhills region. The company said last month it expected the new application would be processed in an expedited manner so that it could be in service in late 2014. TransCanada has now moved that back to early 2015. While the report makes it sound like the denial of the permit is responsible for this pushback of the start date, as Johnson explains it’s really the mandate from the state of Nebraska for a new route around the underground aquifer in the Sand Hills region. That requires the deployment of a new route, which has to be mapped out and planned.

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

Shell moves one step closer to drilling in the Chukchi Sea - The Interior Department said Friday it had approved Shell Oil’s plan to respond to potential oil spills in the Chukchi Sea, bringing the company closer to drilling off the northern coast of Alaska. Shell hasn’t yet received approval of its Beaufort Sea spill response plan and must still get Interior’s approval on each of its individual well permits before it can begin to drill. The Bureau of Safety and Environmental Enforcement also must inspect and approve various drilling equipment beforehand. The company nonetheless hailed the spill plan’s approval as a critical step toward starting to drill sometime in July. Last year it received approval of its exploration plans for the Beaufort and Chukchi seas. The Houston-based arm of the Dutch company hopes to drill six exploratory wells over the next two years in the Chukchi Sea in the Burger Prospect, in 140-foot waters 70 miles from the coast.

Shell Clears Major Hurdle in Its Bid for New Arctic Drilling - In a crucial step toward the ultimate approval of new oil drilling off the North Slope of Alaska, the Interior Department on Friday tentatively approved Shell’s plans for responding to a potential spill in the frigid Arctic waters. Shell still needs to cross several more regulatory barriers before it will be permitted to begin drilling as many as six exploratory wells in the Chukchi Sea in July. But the green light from the Interior Department on the company’s oil spill response plan is a clear sign that the Obama administration is disposed toward allowing the drilling despite the dogged opposition of many environmentalists. “Alaska’s energy resources — onshore and offshore, conventional and renewable — hold great promise and economic opportunity for the people of Alaska and across the nation,” Interior Secretary Ken Salazar said in a statement. “In the Arctic frontier, cautious exploration — under the strongest oversight, safety requirements and emergency response plans ever established — can help us expand our understanding of the area and its resources, and support our goal of continuing to increase safe and responsible domestic oil and gas production.”

Oil well in Alaska's North Slope suffers a blowout - An exploratory well being drilled on the North Slope by the Spanish oil company Repsol suffered an apparent blowout Wednesday morning when drillers were unable to control pressure from a pocket of natural gas, state and company officials said. Drilling mud and methane gas shot from the well through a diverter pipe, but none of the 76 workers on the rig were injured, no oil was spilled and the gas didn't ignite, the officials said. The well spewed gas for hours Wednesday, but by about 5:45 p.m. the gas had stopped flowing on its own, indicating it was probably from a small pocket, said Dan Seamount, chairman of the Alaska Oil and Gas Conservation Commission. The well was still producing water and remained out of control, he said. . A spokesman for the Alaska Department of Environmental Conservation, Ty Keltner, said drilling mud landed on the rig and neighboring snow. The DEC initially said the spill contained about 1,200 gallons of drilling mud, but by 7:30 p.m. had increased the estimate to about 42,000 gallons, based on information from Repsol.

Time for an oil change: Americans strongly oppose fossil fuel subsidies  - As part of the fiscal year 2013 budget [PDF] released on Feb. 13, President Obama proposed to eliminate $40 billion in tax breaks for oil and gas producers over the next 10 years. Yesterday, the Yale Project on Climate Change reiterated its recent finding that Americans of all political stripes oppose subsidies for “coal, oil, and natural gas companies.” They oppose these subsidies by 70 percent to 30 percent — better than two to one. Republicans oppose these subsidies by 67 percent to 34 percent (reflects rounding of percentages).  Intensity matters in public opinion. A determined, energetic minority can be quite powerful. The Yale poll shows that there is much more intensity against oil subsidies than in favor of them. Americans strongly opposed to the subsidies outnumber those who strongly support them by 31 percent to 3 percent — a 10-to-1 ratio. Independents — the voters who will likely determine the outcome of the 2012 election — strongly oppose these fossil fuel subsidies by 45 percent to 2 percent.

Repsol's YPF touts massive Argentine oil find - YPF, the Argentine arm of Spanish oil major Repsol, said its Vaca Muerta shale prospect holds 22.8 billion barrels of oil and gas resources, a staggering amount that may double Argentina's oil and gas output within a decade. The announcement sent YPF shares up 8 percent to 165.25 pesos ($38) on the Buenos Aires exchange. Following recent test-drilling, YPF said on Wednesday that oil and gas resources in its 12,000 square kilometer concession in southern Argentina's Patagonia region were much larger than previously thought. But it cautioned that developing the entire shale play could cost $25 billion per year. "If the exploration in the whole Vaca Muerta area is successful, and intense development work starts immediately, in 10 years Argentina's current oil and gas production capacity could be doubled," YPF said in a statement. Argentina pumped around 760,000 barrels per day (bpd) of oil and 4 billion cubic feet of gas per day in 2010, according to U.S. Department of Energy, which called it South America's top natural gas producer.

INSTITUTE INDEX: Time of trials for BP? -

  • Date on which the Gulf oil spill trial is scheduled to begin in New Orleans unless a settlement is reached: 2/27/2012
  • Percent chance that BP will settle with the federal government before then, according to the former head of the U.S. Justice Department's Environmental Crimes Section: 70 to 80
  • Anticipated settlement: $20 billion to $25 billion
  • Rank of the BP case among the biggest private litigations in U.S. history: 1

Oil prices will rise as supplies tighten? Hardly. - Most commodity prices are collapsing. Copper is down 18 percent from its February 2011 peak. Corn prices are off by a quarter since last summer. Natural-gas prices are half the level of six months ago. Yet crude oil, down from its April peak of $114 per barrel, has risen by a third from its October low of $76 to again flirt with the $100 mark. On Monday, they dropped below $97 on concerns about the lack of a deal on Greek debt.  Some of the recent increase may stem from tensions with Iran. But much of it seems to be a general view that crude oil is a different kind of commodity that is in perpetual danger of being in short supply, given its essential nature in modern economies; the chronic instability of oil-producing countries in the Middle East, Africa, and South America; and the peak-oil thesis, first predicted by M. King Hubbert in 1956, that global oil production inevitably will dwindle. I don't buy it. In fact, I think that human ingenuity, constantly improving recovery technology, and higher prices (if needed) probably make any current estimate of recoverable oil far too low – and too static. Actually, global production capacity will rise from 92 million barrels a day in 2010 to 110 million in 2030, forecasts Daniel Yergin of IHS CERA, a forecasting firm in Cambridge, Mass.

January Oil Supply - Total liquid fuels where at all time highs in January, according to OPEC and the IEA. A graph of changes just since 2008 is above, and a longer picture (with prices on the RHS) is here: The combination of higher production and (slightly) lower prices is causing the price production curve to push the envelope of recent behavior: The above data are all for "Total Oil Supply" aka "Total Liquid Fuels". To break it down into components we need to rely on EIA data that only go through October (so we can't see where the surge in Nov-Jan came from yet): Note the above is not zero-scaled. It allows us to see that "crude plus condensate" (C&C) has been pretty flat since 2005, with increases in the total mainly coming from other components of the liquid fuel stream. This next picture makes a line graph of that data and moves the "crude plus condensate" line onto the right hand scale to make the changes in the different streams more easily comparable: You can see that during the C&C plateau period since 2005, about 1mpd in additional total supply has come from a long standing trend in the increase in natural gas liquids (NGPL), while another 1mpd has come from "Other Liquids" and appears to be specifically a response to the plateauing of conventional oil.  This is mainly biofuels. 

Citigroup Says Peak Oil Is Dead - Citigroup announced to the world Thursday that peak oil is dead. The controversial idea that world crude oil production is almost at its peak and will soon begin an irrevocable long-term decline has been laid to rest in the highly productive shale oil formations of North Dakota, with potentially big consequences for oil prices, the bank said. However, despite this reading of last rites, the data suggest it would be premature to pronounce this patient dead. Changes in oil markets in the past decade have given significant traction to the argument that world oil production is close to peaking. Despite the huge incentive of a near-threefold increase in the price of benchmark Brent crude from 2000 to 2010, the world barely managed to eke out a 10% increase in crude oil production, according to BP data. Many have argued that this proves the physical limit on global crude oil production is near, or may already have been passed. “The belief that global oil production has peaked, or is on the cusp of doing so, has helped to fuel oil’s more than decade-long rally,” Citigroup said in a note to clients. “This is now all changing because of what is happening in North Dakota,” where new technology has led to a large and unexpected surge in oil production from shale rock.

The Petro Business Cycle - Oil is the lifeblood of modern society, powering over 90% of our transportation fleet on land, sea, and air. Oil is also responsible for 95% of the production of all goods we buy and ultimately drives the natural rhythms of recession and recovery. We define this as the “Petro Business Cycle” The post-crash world we have inhabited since the credit crisis of 2008 has been defined as “The New Normal.” A term used to describe an economic and market environment much different than the three decades that preceded it. In contrast to the past, the “New Normal” will mean a lower living standard for most Americans. It will be a world of lower economic growth, higher unemployment, stagnant corporate profits, and the heavy hand of government intervention in all aspects in the economy. For investors it will be an environment marked by volatility, zero interest rates, and disappointing equity returns. The age of leverage is coming to an end as consumers, businesses, and governments are forced to reign in their balance sheets. For consumers it will mean less discretionary spending as higher taxes and inflation erode the purchasing power of wages. Businesses will have fewer profit opportunities and find it more difficult to replicate the growth rates of the booming 80’s and 90’s. Governments will struggle with the illusion that their fiscal and monetary stimulus will produce long lasting effects on the economy. Eventually profligate government spending will give way to an age of austerity now beginning to spread across Europe.

With Friends Like Moscow, Who Needs Venezuela's Oil? - Venezuela said it was ready to welcome a Russian energy company into the giant Orinoco oil belt, solidifying a relationship propped up by a multi-million investment from Moscow last year. Both sides announced recently they'd starting working through a Caracas-controlled joint venture in a 21,000-square-mile section of the vast oil reserve. When the Iranian president paid a visit to the region, House Republicans cried foul over the "tour of tyrants" though Russia's relationship with Caracas barely makes headlines. While Moscow is certainly no Tehran, it's certainly no beacon of democracy either. With Caracas sitting atop OPEC in terms of reserves, lawmakers should put aside their grievances in favor of a grand assessment of U.S. energy security. Caracas in 2007 said international oil companies working in the Orinoco belt need to be minority partners to work there. The region holds more than 500 billion barrels of technically recoverable reserves, making it host to one of the largest known oil deposits in the world. Caracas approved of a joint venture between state-run oil company Petroleos de Venezuela, or PDVSA, and a regional subsidiary of Russia's Gazprom, which would hold a minority stake with 40 percent. Last year, Moscow paid around half of the $1 billion needed to help develop oil in Venezuela.

Saudis to Re-open Idled Oil Field - Saudi Aramco, the national oil company of Saudi Arabia, is proceeding with a plan announced last May to re-open oil production at its Dammam oil field. Dammam is the country’s oldest field discovered in 1938 and has been shut-in for about 30 years. Saudi Aramco estimates that 500 million barrels of heavy oil remain in the field and believe production could reach 100,000 barrels/day. A total of 32 million barrels were produced at Dammam before it was closed. Saudi Arabia’s — and the world’s — largest field, Ghawar, has produced 65 billion barrels and is still active today. This report is both positive and negative. On the positive side, even 100,000 new barrels/day is a good thing. On the negative side, if Saudi Aramco needs to re-open a long idled field to maintain its current production and spare capacity quantities, the oil situation in Saudi Arabia could be more tenuous than the country would like to have the rest of us believe.

Saudi Aramco to Re-Open Oldest Field to Tap Heavy Oil, EIU - Bloomberg: Saudi Arabian Oil Co. plans to re- open the Gulf kingdom’s oldest oil field and produce there for the first time in 30 years as the company boosts output of heavy crude, the Economist Intelligence Unit said. The state-owned producer, known as Saudi Aramco, may revive a plan from 2008 to restore production at the mothballed Dammam field, the EIU said in a report. Dammam contains some 500 million barrels of oil and may yield as much as 100,000 barrels a day of Arabian Heavy crude, according to the report. “Dammam field including Dammam Well 7 can operate easily with current technology and Saudi Aramco conducted a 3-D seismic survey over the entire area almost 10 years ago,” Sadad al- Husseini said today by e-mail. Al-Husseini was executive vice president for exploration and development at Saudi Aramco. Aramco, the world’s largest oil exporter, is considering redeveloping the onshore field in response to “tight market conditions,” the London-based researcher said in the report issued yesterday. It shut Dammam, and several small fields, in the early 1980s due to low demand.

Iran presses ahead with dollar attack - Last week, the Tehran Times noted that the Iranian oil bourse will start trading oil in currencies other than the dollar from March 20. This long-planned move is part of President Mahmoud Ahmadinejad’s vision of economic war with the west. “The dispute over Iran’s nuclear programme is nothing more than a convenient excuse for the US to use threats to protect the 'reserve currency’ status of the dollar,” the newspaper, which calls itself the voice of the Islamic Revolution, said. “Recall that Saddam [Hussein] announced Iraq would no longer accept dollars for oil purchases in November 2000 and the US-Anglo invasion occurred in March 2003,” the Times continued. “Similarly, Iran opened its oil bourse in 2008, so it is a credit to Iranian negotiating ability that the 'crisis’ has not come to a head long before now.” Iran has the third-largest oil reserves in the world and pricing oil in currencies other than dollars is a provocative move aimed at Washington. If Iran switches to the non-dollar terms for its oil payments, there could be a new oil price that would be denominated in euro, yen or even the yuan or rupee. India is already in talks with Iran over how it can pay for its oil in rupees.

Oil Rises to One-Month High as Iran Cuts Exports - Oil rose to its highest in a month as Iran said it had cut oil exports to six European countries and after China pledged to help resolve Europe’s debt crisis. Crude futures in New York increased as much as 1.8 percent. Iran summoned the ambassadors of Italy, Spain, France, Greece, Portugal and the Netherlands to protest against the EU sanctions on the country’s nuclear program, state-run Fars news agency reported. China will invest in Europe’s bailout funds, the nation’s Central Bank Governor Zhou Xiaochuan said in Beijing. EU finance ministers will today prod Greece to deliver budget cuts in exchange for a second aid package. “The market is all about fears of supply disruption, as we have these tensions in the Middle East and especially the conflict with Iran,” said Sintje Boie, an analyst at HSH Nordbank in Hamburg, who predicts Brent crude will surpass $120 a barrel in coming weeks. “We have seen some signs of stability in the debt crisis.”

India Defends Oil Purchases From Iran — Ranjan Mathai, the Indian foreign secretary, made the rounds in Washington last week, describing India’s relationship with the United States as one of growing comfort, depth and candor, if not perfect harmony. On that last point he could have been talking about the recent frictions between the two countries over Iran. India’s determination to continue buying Iranian oil, despite sanctions and growing political pressure from the United States and Europe, has frustrated officials in Washington at a time when the forward momentum in the United States-India relationship has slowed, with differences over issues including civil nuclear cooperation, trade protectionism and military sales. The situation was exacerbated last week by news reports that India had become Iran’s top oil customer, while an Indian official announced plans to send a trade delegation to Tehran. In New Delhi, diplomats and analysts say India’s purchasing of Iranian oil is a matter of economic necessity, given its dependence on imported oil.  Indian officials, even those supportive of a stronger partnership with the United States, caution against turning issues like Iran into diplomatic litmus tests, considering the complexities of a neighborhood in which India represents a bulwark of stability, democracy and economic opportunity compared with Pakistan, Afghanistan and other countries. “This can’t be a test of our friendship,” said Lalit Mansingh, a former Indian ambassador to the United States. “Washington must realize that we are in a neighborhood where Iran is a factor.”

Saudi Arabia offers increased oil exports to India - Saudi Arabia is reported to have offered to increase its crude oil exports to India. Saudi Arabia is one of the largest suppliers of oil to India. “King Abdullah offered all assistance, including additional supply of crude oil, should India require the same. He expressed eagerness to strengthen relations with India”, Economic Times quotes an Indian spokesperson. Earlier, Saudi Arabia had offered a similar assurance to South Korea, who have been facing increasing pressure from the US to cut back on its oil imports from Iran. As such, the Saudi assurance helped ease some nerves in S Korea. India, on the other hand, is not expected to buckle under US pressure and cut back on its oil imports from Iran. However, the Saudi offer will help to ease any supply tightness should such an

Copper trends have divorced from China may fall to $7800 tonne - Copper prices were influenced by Chinese demand and many investors used to look at Chinese import figures and domestic demand to predict future trends in copper. But recent data suggest that copper trends may have finally divorced from Chinese demand, a Citigroup report states. Copper prices have rallied since the beginning of 2012 and the trend seems to be largely unrelated to Chinese demand. Copper inventories in China is rising, premiums for the physical metal is softening and traders have been absent from the market since December. In spite of such negative Chinese indications, prices have risen since January this year. “For any price rally to be sustainable, there needs to be some form of fundamental support, whether in the form of tightening supply or surging demand. Given that neither is apparent, the rally seems likely to falter, with the key question being the timing of any fall back”, The Citigroup report states

China tells banks to roll over loans -  China has instructed its banks to embark on a mammoth roll-over of loans to local governments, delaying the country’s reckoning with debts that have clouded its economic prospects. China’s stimulus response to the global financial crisis saddled its provinces and cities with Rmb10.7tn ($1.7tn) in debts – about a quarter of the country’s GDP – and more than half those loans are scheduled to come due over the next three years.  Since the principal on many of the loans is not repayable, banks have started extending maturities for local governments to avoid a wave of defaults, bankers and analysts familiar with the matter told the Financial Times. One person briefed on the plan said in some cases the maturities would be extended by as much as four years.

China extends loans to avoid mass default - A mountain of debt is coming due and the principal is unpayable, so governments have agreed to extend maturities. This could be a description of a bail-out package for Greece. Instead, it is what China is doing to prevent scores of provinces and cities from defaulting on bank loans. The flaws in China’s fiscal system were savagely exposed during the global financial crisis when Beijing introduced a stimulus package that was largely implemented by local governments. Lacking sufficient funding and prohibited from even borrowing money because of past excesses, provinces and cities created thousands of financing vehicles to get around the rules and raise capital in the quickest way possible. They tapped state-owned banks which, encouraged by Beijing, were happy to oblige with enormous loans. From relatively little debt at the start of 2008, local governments finished 2010 owing Rmb10.7tn ($1.7tn). The national auditor has reported that more than a third of that debt will have matured by the end of this year. Critics have pointed to dangers in the loan rollover plan. Repayment delays will hinder banks’ lending abilities. Some bad loans will simply be prolonged instead of recognized. Problems will remain concealed.

China Enters Into Recession - China entered into recession in December 2011.  We base that observation upon our analysis of international trade data collected by the U.S. Census Bureau, where we have calculated the year-over-year growth rate in the value of goods and services that the United States has both exported to China and which the U.S. has imported from China.  Here, we observe that the year-over-year growth rate of U.S. exports to China has fallen into negative territory. Since a growing economy is one that draws an increasing level of exports from other nations, while a contracting economy is one that draws a falling level of exports, the year-over-year decline of U.S. exports to China in December 2011 indicates that China has indeed fallen into recession.  To help put that observation in context, the chart below reveals the annual growth rates of both U.S. exports to China (shown in blue) and U.S. imports from China (shown in red) since January 1985:

Chinese Credit Growth Slows Significantly -  Yves here. This is a short post, but don’t underestimate the significance. The big picture is that Chinese government has been tightening credit to try to lower inflation, with some success, and various commentators have been calling a soft landing outcome. But residential real estate sales took a tumble in November, and electricity use fell in January (although that may be in part due to the Chinese New Year). This is another sign that just as American economists were unduly confident in their ability to fine tune the economy in the 1960s, so too may analysts be overly optimistic about the ability of Chinese leadership to control its economy.

China’s economic rebalancing is already underway - The international community, and particularly policymakers in the US, put great expectations on the contribution that China can make to a global economic recovery by rebalancing its economy through promoting consumption growth (see, for example, O’Neill 2010 on this site). The Chinese authorities broadly accept this priority and have put in place a number of policy measures that aim to achieve it. Piecing together a complete picture of Chinese consumption by drawing on both official and unofficial data reveals some interesting insights about how far China is along the way to boosting domestic consumption. China’s consumption share of GDP was probably underestimated by an average of 3.1 percentage points during the past decade, as it declined steadily from 64% in 2000 to 50% in 2008, in line with official statistics, but recovered afterwards to 54% in 2010.

Appreciation in China’s Currency Goes Largely Unnoted -— With little fanfare, China’s currency has appreciated significantly in the last year and a half, leading many economists to question whether the exchange rate is still the most important economic issue for the United States to press with China’s leaders. The rise of the renminbi — up 12 percent since June 2010 on an inflation-adjusted basis and 40 percent since 2005 — has helped American companies by effectively reducing the cost of their products in China. In the last two years, American exports to China have risen sharply. The renminbi remains undervalued, relative to all other currencies, by 5 to 20 percent, according to various estimates. But many business executives and economists say that other issues, like intellectual-property theft and barriers to entering Chinese markets, are now a bigger drag on the American economy. In his Oval Office meeting on Tuesday with Xi Jinping, China’s vice president and likely next leader, President Obama discussed the currency as one of the trade practices that concerned the United States. That meeting — and tough public comments by Vice President Joseph R. Biden Jr. — continued a three-year campaign by the administration to convince Chinese leaders that a stronger currency is in their interest.

The renminbi will become a reserve currency within the next decade - Is China’s currency destined to become the dominant global reserve currency? This column argues that despite not yet having a flexible exchange rate or open capital account, China’s government is pursuing ‘liberalisation with Chinese characteristics’. It argues that the renminbi will become a reserve currency within the next decade, eroding but not displacing the dollar’s dominance.

Behind a White House Pivot on China - One of the striking aspects of Vice President Joseph R. Biden Jr.’s critical public comments this week to Xi Jinping, the likely next leader of China, was how they contrasted with the Obama administration’s typical approach to China.  As James Fallows, who knows a thing or two about China, wrote in his recent Atlantic cover article assessing President Obama’s first term, the administration has generally combined “a low-key demeanor” in public with clear, frequent messages in private about American priorities. Mr. Fallows concludes: The strategy was Sun Tzu-like in its patient pursuit of an objective: re-establishing American hard and soft power while presenting a smiling “We welcome your rise!” face to the Chinese. “So why would the administration now change tactics if the old one seemed to be working? Two possibilities seem most plausible. One, it’s an election year. With Mr. Obama being attacked by Republicans for being too soft on China — and with many Americans blaming China for some of the economy’s problems — a low-key approach to China creates political problems. Two, the administration may be worried that the earlier strategy is running its course.

China-Canada boost ties: Canadian Prime Minister Stephen Harper in Beijing this week signed with Chinese Premier Wen Jiabao a declaration of intent for a Foreign Investment Promotion and Protection Agreement (FIPA), after 18 years of negotiations between the two countries. Separately, a US$1 billion fund will facilitate Chinese investment in Canadian resource companies. Under FIPA's terms, Canadian mining companies would acquire legally binding rights and obligations in China, while Chinese investment in Canadian industries such as coal, iron ore, and potash would be likewise facilitated. The agreement, one of several reached this week, will enter into force following legal review and ratification by the respective governments. Chinese state-owned enterprises invested US$5 billion in Canada's resource sector in 2011 alone, nearly one-third of the nearly $18 billion they are reported to have spent buying oil and gas companies worldwide last year. The Canadian side is hopeful that the FIPA with China will promote a better equilibrium in the balance of trade, as China has become Canada's second-most important trading partner after the US. In 2010, Canada's trade deficit with China was US$29.7 billion out of a total trade turnover (imports plus exports) of $54.7 billion.

B.C. lumber sales to China falling rapidly  - Sales of British Columbia lumber to China have begun to plunge, a startling reversal from the boom forest products companies enjoyed through much of 2011. The lumber industry predicts additional growth in 2012 but the current situation is difficult. Inventories of wood are still piled up in China amid a weakening construction market there, sapping demand for B.C. lumber. In December – traditionally the biggest sales month of the year – B.C. sold just $67-million in lumber to mainland China, according to Statistics Canada figures compiled by BC Stats. Sales were down 36 per cent from a year earlier, and December was the second-slowest month of 2011. Sales have fallen month by month since September, a disappointing end to what was a record year in 2011. B.C. sold $1.07-billion of lumber to China, up 60 per cent from $668-million in 2010 and more than triple sales two years ago.

Ironic EU Begging Expedition to China - Europe returned from its begging expedition to Beijing empty-handed. Well, they called it a summit, but it was an unmitigated begging expedition, one more in a series. Jose Manuel Barroso, President of the EU Commission, and Herman Van Rompuy, President of EU Council, were talking to Premier Wen Jiabao, trying to lure China into plowing part of its hard-earned foreign exchange trillions into the European bailout fund, the EFSF. And they made that dreadfully convoluted and opaque creature smell like a rose, expounding with habitual European finesse and nuance on its guarantees and loss mitigation provisions backed by countries like Italy and Spain that can barely keep their nose above water. Even a small amount would have been something. Anything really. Just so that they wouldn’t have to fly home empty-handed. And once they got their foot in the door, surely, there’d be ways and means to get the other foot in as well. But rather than kick out the conniving beggars, Wen smiled and declared soothingly, as always, that Europe was an important partner, and that China and the EU would work together to solve the debt crisis.

China's dependence on foreign trade drops to 50.1 pct -- China's reliance on foreign trade dropped to 50.1 percent in 2011, indicating that the economy is transferring to a more inner-led growth mode, the General Administration of Customs (GAC) said Wednesday. The reliance on foreign trade, which measures an economy's dependance on international markets, is the ratio of the total trade value in the country's GDP, according to the GAC. China's reliance on foreign trade stood at 38.5 percent in 2001, and reached 51.9 percent in 2003 before peaked at 67 percent in 2006, GAC data showed. The country's reliance on foreign trade has been above 50 percent for years, indicating that the country has widely participated in global markets, and foreign trades have played an important role in the economy, the GAC said. But the country's figure is higher than around 30 percent in other nations such as the United States and India, showing that the economy still have great room to cut the reliance by boosting domestic demand, the GAC said.

In Defense of the Baltic Dry Index - News that the Baltic Dry Index is sunk as an economic indicator is much exaggerated. The index — which measures the cost to haul dry freight over the world’s oceans — has merely run aground after getting hit with a shipping-market tsunami. Don’t worry. It will right itself soon enough — and should once again become a useful forecasting tool, as early as the end of the year. The cost of shipping dry commodities, such as coal, iron ore and grains, forms the basis for the BDI. When more raw materials are shipped, it is because they are needed to be made into finished products. Also, when more of them are shipped, the price of chartering a vessel increases. That makes the index a gauge of industrial expansion.It worked beautifully until the financial crisis. Then things went wrong. Since November 2009, the BDI has plunged 85%, from a high of 4661 to 715 Friday. Normally, such a move would augur a global slump. But this time, the slide coincided with the recovery, albeit a slow one, from the 2008-2009 global recession. That mismatch has some people willing to forever scuttle the idea of the BDI as an economic indicator. The truth is those problems are only temporary.

Japan 4Q GDP Contracts More Than Expected - Japan's economy shrank an annualized 2.3% in the October-December period, contracting for the fourth quarter in five as exports and manufacturing faltered amid weak overseas demand, the strong yen and flooding in Thailand. Economists surveyed by Dow Jones Newswires had forecast that the nation's real, or price-adjusted, gross domestic product would decline an annualized 1.6% from the previous quarter. The GDP figure released Monday by the Cabinet Office highlights that Japan's economy remains vulnerable to external factors as a sustainable recovery from the stresses of last year's earthquake, tsunami and nuclear disasters remains elusive. "In December exports and production increased after (the initial damage from) flooding in Thailand, and if we take those factors into account and look at the overall economic situation I think we can say that upward movement is continuing,"

Japan’s GDP shrinks in fourth quarter - Japan’s economy shrank for the third time in four quarters between October and December, after floods in Thailand damaged production, and a strong yen and subdued overseas demand hurt exports.  Preliminary government figures showed that real gross domestic product fell 0.6 per cent between the third and the fourth quarters, dragged down by a 3.1 per cent fall in exports and a 0.3 per cent decline in private inventories. That is equivalent to a 2.3 per cent fall in GDP on an annualised basis, significantly worse than consensus forecast of a 1.3 per cent decline. The data also showed sluggish public investment, which fell 9.5 per cent on an annualised basis.

Japan’s 2-Decade Experiment with Fiscal Austerity and 0.7% NGDP Growth - Peter Tasker has an excellent op-ed (“Europe can learn from Japan’s austerity endgame”) in Monday’s Financial Times, pointing out that Japan for the last two decades has been pursuing the kind of fiscal austerity program now being urged on Europe to combat their debt crisis. When Japan’s bubble economy imploded in the early 1990s, public finances were in surplus and government debt was a mere 20 percent of gross domestic product. Twenty years on, the government is running a yawning deficit and gross public debt as swollen to a sumo-sized 200 percent of GDP. Fiscal austerity did not begin immediately, but “Japan’s experiment with Keynesian-style public works programmes ended in 1997. The public works programmes did not promote a significant recovery, but in the six years from 1992 to 1997, real GDP at least managed to grow at a feeble 1.3% annual rate. But in the two years after austerity began — public works spending being cut back and the consumption tax raised, real GDP fell by 2.1% (1998) and 0.1% (1999). Despite fiscal austerity, the budgetary situation steadily deteriorated, government outlays rising as percentage of GDP while tax revenues are 5% lower as a percentage of GDP than in 1988 when the consumption tax was introduced.

Bank of Japan Boosts Easing With 1% Goal for Inflation: Economy - Japan's central bank unexpectedly added 10 trillion yen ($128 billion) to an asset-purchase program and set an inflation target after an economic slide fueled criticism it has been slower to act than counterparts. An asset fund was increased to 30 trillion yen, with a credit lending program at 35 trillion yen, the Bank of Japan said in Tokyo today. The BOJ also said that it will target 1 percent inflation "for the time being." Stocks rose and the yen weakened against the dollar as the central bank expanded stimulus for the first time since October to revive an economy that shrank an annualized 2.3 percent last quarter. Lawmakers had urged extra efforts to counter deflation after the Federal Reserve adopted a 2 percent inflation target and the European Central Bank expanded its balance sheet. Today's decision "shows the BOJ bowed to political pressure," "There will probably be limited impact on the yen's gains."

Japan Announces $130 Billion QE Program, One Percent Inflation Target - In a move that surprised markets, the central bank added 10 trillion yen ($130 billion) to its asset buying and lending scheme, under which it buys government and private debt and lends cheap funds against various types of collateral. The entire increase amount will be for purchases of long-term government bonds, the BOJ said. The BOJ also said it will set consumer inflation of 1 percent as its price goal for the time being, making a clearer commitment to end deflation than before when it defined the level as its "understanding" on long-term price stability. BOJ Governor Masaaki Shirakawa was grilled in parliament last week by lawmakers threatening to revise the BOJ law to give the government more scope to intervene in monetary policy, while the economics minister urged the bank to explore ways to make its price commitment easier to understand. The central bank has pledged to keep ultra-low interest rates until an end to deflation is in sight, and defined desirable long-term price growth as consumer inflation of 2 percent or lower with the median for the nine-member board at 1 percent.

Surprise Stimulus Means BOJ Buying 25% of '12 Debt: Japan Credit -- The Bank of Japan's surprise decision to boost stimulus and set an inflation goal may lead the central bank to buy a record 25 percent of bonds sold this year by the world's most indebted nation. Bonds rose and the yen weakened after the BOJ said yesterday it will increase note purchases by 10 trillion yen ($127 billion) through 2012. Five-year yields slid to 0.31 percent today, the least since November and trailing only Switzerland's as the world's lowest. The 10-year rate fell to 0.955 percent, compared with 1.95 percent in the U.S. and 1.90 percent in Germany, according to data compiled by Bloomberg. The BOJ is trying to keep the economy from deflating after it contracted in three of the past four quarters amid last year's record earthquake and the yen at postwar highs. The bond purchases may keep borrowing costs low for Prime Minister Yoshihiko Noda's administration, while persuading domestic investors to chase higher yields overseas, weakening the yen. "It's a plus in terms of supply and demand, and it will give firm support to short- and mid-term notes,"

Insight: Japan slowly wakes up to doomsday debt risk - Capital flight, soaring borrowing costs, tanking currency and stocks and a central bank forced to pump vast amounts of cash into local banks -- that is what Japan may have to contend with if it fails to tackle its snowballing debt. Not long ago such doomsday scenarios would be dismissed in Tokyo as fantasies of ill-informed foreigners sitting on loss-making bets "shorting Japan." Today this is what is on bureaucrats' minds in Japan's centre of political and economic power. "It's scary when you think what could happen if there's triple-selling of bonds, stocks and the yen. The chance of this happening is bigger than markets think," says a senior official.

India to Increase Borrowing Next Year - India is likely to borrow about 5.5 trillion rupees ($110 billion) next financial year, nearly 8% more than this year, to help bridge a widening fiscal deficit as it struggles to limit subsidies, a senior finance ministry official said Thursday. The target is based on a likely 5.1% fiscal deficit projection that the government is expected to announce on March 16 in its budget for next fiscal year, which starts in April.

How Neoliberalism Changed Economic Development: The Examples of India and China - This is an intriguing little video summarizing the hypothesis of a new study by Vamsi Vakulabharanam. It looks at the puzzle of why China and India are exceptions to the Kuznets curve, that economic development at first increases income inequality but then starts to produce less disparity. But that did not occur in India and China. Vakulabharanam argues that the difference lies in changes in institutional arrangements, and the inflection point was roughly 1980.

International Reserves and Equity Capital Inflows - During the current tough economic situation in the industrial world, including the US and the Euro Zone, the global economic outlook increasingly depends on the performance of emerging economies: Their economic growth might propel the global economy out of a possible double-dipping recession. This hope is supported by the recent decoupling-recoupling debate, which argues that emerging economies’ business cycles might have become more independent of the economic situation in the industrial world.  Historically, one of the key factors that negatively affect emerging economies are financial crises caused by a sudden stop of short-term cross-border capital inflows. Prominent examples include the Mexican debt crisis in 1994 and the East Asian financial crisis in 1997. A financial crisis with self-fulfilling mechanism can lead to a large-scale capital reversal even in the absence of a shock to economic fundamentals (Caballero and Krishnamurthy, 2001). Thus, policies aiming at securing the stability of short-term capital inflows and maintaining a good investment environment in emerging markets seem to be among the key elements for both emerging economies themselves and the global economy as a whole. The hoarding of large stocks of international reserves might be instrumental to reach these goals.

Norway Faces Severe Credit Shock - Norway faces “severe” imbalances in its credit and property markets as households continue to amass debt at unsustainable levels, according to the head of the country’s financial regulator. “Growth rates on household debt and house prices are not following a sustainable path,” Morten Baltzersen, Director General of the Financial Supervisory Authority in Oslo, said in an interview. “The longer these developments go on, the greater the risk is of a severe imbalance evolving.” Norway’s credit and property markets continue to show signs of overheating five months after the regulator asked banks to tighten lending standards. Robert Shiller, the co-creator of the S&P/Case-Shiller (SPCS20) home-price index, said in January Norway is in the grip of a house price bubble, while the International Monetary Fund on Feb. 2 warned of real estate and credit market risks in Norway.

Europe’s black cygnets - Although the Greece default is the very obvious European black swan at the moment I thought it would be prudent to point out two other things happenning in Europe over the next 12 months that certainly have the potential for evolving from a cygnet into something bigger. There a number of elections occurring across Europe over the next 12 months that have the potential to de-rail the current European status quo. Greece itself is supposed to be having a national election in April which is adding to the current debacle. Greek party leaders have more than one eye on their electorates at the moment which means the bailout negotiations have politicking on top of all the other issues.  . Greece elections, however, are not the greatest concern in my mind. Greece will be defaulting in some form or another this year, the elections influence is simply a question of how ‘messy’ that default becomes. Germany also has two state elections this year which are a chance for Merkel’s Christian Democrats to regain the national majority they lost last year. It is believed that the worry about these election result was the source of the recent hamstringing of Angela Merkel by Volker Kauder, the floor leader of her party.Latest polls have Merkel’s popularity at a two year high, however the results of the next state election in Saarland , to be held on March 25, are anything but predictable given recent history.

 Greek Leaders Urge Lawmakers to Approve Debt Deal - Prime Minister Lucas Papademos urged Greeks on Saturday night to accept a tough new austerity package sought by its lenders. The alternative, he said, was certain bankruptcy. “We are a breath away from ground zero,” Mr. Papademos said in a televised address to the nation ahead of a crucial parliamentary vote on a new debt deal scheduled for Sunday night. The austerity program — which foresees cuts to private sector wages and private sector layoffs — is tough but will “restore the fiscal stability and global competitiveness of the economy, which will return to growth, probably in the second half of 2013,” Mr. Papademos said, adding that the deal would safeguard the country’s future in the euro zone and encourage skeptical investors to return to Greece. Greece’s so-called troika of foreign lenders — the European Commission, the European Central Bank and the International Monetary Fund — has demanded the austerity measures in exchange for about $170 billion in bailout money that Greece needs to avert default. The troika has also made passage of the measures a condition for sealing a deal in which private creditors will take voluntary losses of up to 70 percent of Greek debt. Mr. Papademos said that those who argued that bankruptcy would be preferable to more austerity were “woefully mistaken.”

PM warns of collapse if bailout deal rejected - Prime minister Lucas Papademos told Greeks they face a collapse in living standards and shortages of fuel and medicine if lawmakers on Sunday reject a multi-billion euro bailout deal and the country defaults on its debt. Papademos spoke on Saturday in a televised address to the nation before parliament votes on a deeply unpopular austerity bill to clinch a 130-billion-euro bailout from the European Union and International Monetary Fund. "This agreement will decide the country's future," he said. "We are just a breath away from ground zero." "A disorderly default would set the country on a disastrous adventure," Papademos said. "Living standards would collapse and it would lead sooner or later to an exit from the euro." Failing to adopt the bill, he said, "would disrupt imports of fuel, medicine and machinery".   

Greek Party Leaders Urge Yes Vote on Austerity - Greece's prime minister and the leaders of Greece's two major parties Saturday moved to rally lawmakers behind painful austerity measures the country must take to gain a fresh bailout, ahead of a key parliamentary vote Sunday.  In a dramatic televised address to the nation Saturday evening, prime minister Lucas Papademos warned that Greece will face dire consequences because of a disorderly default that will eventually lead to an exit from the euro-area if an austerity package, a necessary precondition for the aid, doesn't win approval in parliament.  The bills that will be voted on midnight Sunday include a set of austerity cuts, structural reforms and the terms of a debt restructuring. They need to get a majority in parliament if Greece is to receive a second, EUR130-billion ($171 billion) bailout from its official-sector creditors, the European Union, the European Central Banks and the International Monetary Fund.

Greek Protesters Clash With Police Before Vote - As hooded youths torched shops and battled police in the streets of Athens, lawmakers early Monday approved a tough austerity package that was expected to help the country avoid default. Out of the 300 members of Parliament, 199 voted yes, 74 voted no, 5 voted present while 22 were absent. Lawmakers accepted the plan after Greece’s so-called troika of foreign lenders — the European Commission, the European Central Bank and the International Monetary Fund — had demanded the measures in exchange for about $170 billion in bailout money. The troika had also made passage a condition for sealing a deal in which private creditors will take voluntary losses of up to 70 percent of Greek debt. The outcome was widely expected, though many lawmakers grudgingly voted yes. Addressing Parliament, Prime Minister Lucas Papademos stressed that rejection would plunge the country into bankruptcy. He appealed to lawmakers to do their “patriotic duty” and make the “most significant strategic choice a Greek government has faced in decades.”

Athens passes demanded austerity bill - Greek lawmakers on Thursday approved a tough austerity package aimed at averting a default, but the vote was overshadowed by violent street protests in central Athens and dozens of arson attacks against shops and banks. The legislation passed by 199 votes in favour to 74 against, a convincing majority for Lucas Papademos, the caretaker prime minister who has been given the job of pushing through painful reforms demanded by the European Union and the International Monetary Fund in return for a second €130bn bail-out.

Greece passes crucial bailout vote as country burns - The Greek parliament approved a deeply unpopular austerity bill to secure a second $130bn (£110bn) bailout and avoid a messy default after a day of street battles between police and protesters left Athens in flames. The 199-74 vote was passed amid some of the most serious violence seen on the streets Athens and spread to other Greek towns and cities, including the holiday islands of Corfu and Crete.  More than 45,000 protesters, many facing steep cuts in pensions, wages and a bigger fall in living standards besieged the Greek Parliament in two demonstrations. A minority were met with tear gas by the 4,000 policemen after throwing fire bombs.  The controversial loan and austerity package sets out €3.3bn in wage, pension and job cuts for this year alone, adding to the pain of years of recession, high employment, lower wages and high unemployment.

Greek lawmakers approve austerity bill as Athens burns (Reuters) - The Greek parliament approved a deeply unpopular austerity bill to secure a second EU/IMF bailout and avoid national bankruptcy, as buildings burned across central Athens and violence spread around the country. Cinemas, cafes, shops and banks were set ablaze in central Athens as black-masked protesters fought riot police outside parliament. State television reported the violence spread to the tourist islands of Corfu and Crete, the northern city of Thessaloniki and towns in central Greece. Shops were looted in the capital where police said 34 buildings were ablaze. Prime Minister Lucas Papademos denounced the worst breakdown of order since 2008 when violence gripped Greece for weeks after police shot a 15-year-old schoolboy."Vandalism, violence and destruction have no place in a democratic country and won't be tolerated," he told parliament as it prepared to vote on the new 130 billion euro bailout to save Greece from a chaotic bankruptcy.

Greek protesters fight with police as parliament agrees cuts deal - As more than 40 buildings went up in flames, including two historic cinemas and several banks, Athens city centre was left resembling a war zone with cafes and shops smashed and looted as MPs backed the austerity measures by 199 votes to 74 in the single most important ballot in modern Greek history. The chaos dominated one of the stormiest debates seen in the Greek parliament as MPs argued over a raft of strict measures demanded in return for international aid. Clashes were also reported in Thessaloniki, Patras, Corfu and Crete. The violence erupted as tens of thousands of demonstrators – many clearly from the austerity-hit middle class in designer spectacles and trendy attire – converged on Syntagma square in front of the parliament to denounce the wage, pension and job cuts envisaged in the €130bn loan agreement. Banners proclaiming "Popular uprising!", "It's us or them!" and "Don't gamble away all we have achieved" were prevalent.

Greek Parliament Passes Austerity Plan as Riots Rage - After violent protests left dozens of buildings aflame in Athens, the Greek Parliament voted early on Monday to approve a package of harsh austerity measures demanded by the country’s foreign lenders in exchange for new loans to keep Greece from defaulting on its debt. The Parliament also gave the government the authority to sign a new loan agreement with the foreign lenders and approve a broader arrangement to reduce the amount Greece must repay to its bondholders. The new austerity measures include, among others, a 22 percent cut in the benchmark minimum wage and 150,000 government layoffs by 2015 — a bitter prospect in a country ravaged by five years of recession and with unemployment at 21 percent and rising. But the chaos on the streets of Athens, where more than 80,000 people turned out to protest on Sunday, and in other cities across Greece reflected a growing dread — certainly among Greeks, but also among economists and perhaps even European officials — that the sharp belt-tightening and the bailout money it brings will still not be enough to keep the country from going over a precipice. Angry protesters in the capital threw rocks at the police, who fired back with tear gas. After nightfall, demonstrators threw Molotov cocktails, setting fire to more than 40 buildings, including a historic theater in downtown Athens, the worst damage in the city since May 2010, when three people were killed when protesters firebombed a bank. There were clashes in Salonika in the north, Patra in the west, Volos in central Greece, and on the islands of Crete and Corfu.

Europe’s Debt Crisis: Back from the Brink? - So it looks like Greece will dodge a default, at least for now. The Greek parliament passed a new $4.4 billion austerity package on Sunday, which includes a painful 22% cut in the minimum wage and 150,000 public sector job losses. Greece’s euro zone partners were demanding the country approve these painful measures in return for a second, $170 billion bailout. The vote clears the way to finalizing that bailout – first approved way back in July – along with an arrangement between Athens and its private-sector bondholders to restructure some $265 billion of the nation’s sovereign debt.  There was very little chance that the Greek parliament would reject the euro zone’s dictates. The alternative was default and a probable exit from the monetary union, something the Greeks are still not willing to do, as my colleague Joanna Kakissis reported the other day. Caretaker Prime Minister Lucas Papademos said that more austerity was “the only alternative to a catastrophic default … that would force Greece, sooner or later, to leave the euro.” Progress on the Greece front isn’t the only bit of good news coming out of Europe these days. Bond yields for giant Italy, the biggest threat to the future of the euro, are down significantly thanks to the aggressive reform program being pushed through by new Prime Minister Mario Monti. Compared to where we were just a few weeks ago – with Italy sliding towards the abyss, the euro tanking and Greece spiraling towards something ugly – Europe has clearly pulled itself back from the brink.

One Greek hurdle down, but more ahead -  - A tense Sunday in Athens as the Greek parliament approved an austerity budget amid violence in the streets that included riot police firing tear gas and stun grenades at protesters while buildings throughout the city were firebombed: Now the package has been approved, the leaders of Greece’s two main parties, the PanHellenic Socialist Movement and conservative New Democracy party, have to make a written commitment to implement the programme fully, regardless of who wins a snap general election expected in April. That’s the latest update from the FT, emphasis ours. And according to the Wall Street Journal, 43 deputies from the socialist party Pasok and conservative party New Democracy, whose leader Antonis Samaras is expected to be the next prime minister, were expelled for not voting in favour. Also from the WSJ — here’s something we suspect that this won’t be viewed favourably by the EU and IMF: But in a sign of the intense public pressure facing Greek politicians, Antonis Samaras, leader of New Democracy and likely the next prime minister, said the measures should be renegotiated after national elections expected in April. …Euro-zone finance ministers will meet on Wednesday in Brussels to sign off on the deal. Their expected approval will trigger an offer to private-sector holders of Greek government bonds, who will be asked to exchange their existing bonds for new bonds with half the face value.

Athens In Flames - Over the weekend, more than 45 buildings across Athens were set ablaze by violent protesters. The fires began as the Greek Parliament passed a strict package of austerity measures, in an effort to meet demands by the European Union and the International Monetary Fund. The measures, which were prerequisites for a $170 billion bailout, included steep public-sector job cuts and a 20 percent reduction in the minimum wage. More than 80,000 Greeks reportedly demonstrated in the streets of Athens -- among them, a small, violent group that hurled firebombs at riot police and set dozens of fires. More than 120 police and protesters were injured. The next step for the new austerity measures is implementation, and that may face strong opposition as well. Collected here are scenes from a weekend of unrest in Athens. [36 photos]

Social unrest harms hopes of Greek reform - Sunday’s explosion of street violence in Athens underlines the danger that political disorder may undercut Greece’s attempt to implement the economic reforms required to avert a debt default, according to Greek politicians and economists. Although parliament passed the measures, the rebellion and the urban violence raise the prospect that the next Greek government, which will take office after elections set for April, will lack the authority and determination to hold firm to the austerity course. According to opinion polls, the election’s most likely outcome is a victory for the centre-right New Democracy, but without an overall majority. Antonis Samaras, leader of New Democracy and the likely next prime minister, and Evangelos Venizelos, finance minister and one of Pasok’s senior figures, are both pledged to the austerity plan dictated by Greece’s European and International Monetary Fund creditors. But Mr Samaras appeared to put his personal commitment in doubt when, before the vote, he suggested to his party faithful that he might seek to renegotiate the plan’s terms if he became prime minister.

A Must-Read On The Societal Disaster That's Happening In Greece: PSI, bond yields, ECB involvement, IMF-demanded reforms... there's enough jargon and government speak floating around the Greek crisis that it's easy to forget the real, humanitarian cost of an economic collapse. A new story by Russell Shorto in the NYT Magazine should help bring out the human side of the situation. This paragraph is a punch in the gut: By many indicators, Greece is devolving into something unprecedented in modern Western experience. A quarter of all Greek companies have gone out of business since 2009, and half of all small businesses in the country say they are unable to meet payroll. The suicide rate increased by 40 percent in the first half of 2011. A barter economy has sprung up, as people try to work around a broken financial system. Nearly half the population under 25 is unemployed. Last September, organizers of a government-sponsored seminar on emigrating to Australia, an event that drew 42 people a year earlier, were overwhelmed when 12,000 people signed up. Greek bankers told me that people had taken about one-third of their money out of their accounts; many, it seems, were keeping what savings they had under their beds or buried in their backyards. One banker, part of whose job these days is persuading people to keep their money in the bank, said to me, “Who would trust a Greek bank?”

The killing of Greece - As you have probably heard, the Greek parliament, if you can still call it that, has passed the austerity bill. Overnight Athens has erupted in protest with a reported 80,000 people on the streets and up to 30 buildings on fire.All of KKE, Syriza and Democratic Left members voted no, as well as 21 New Democracy members and 13 Pasok members. Laos members also voted No with their leader absent. All but one Democratic Alliance members voted Yes. The political fallout is in full swing as I type, with Antonis Samaras expelling 21 members from his party and George Papandreou doing the same. 43 members in total have been removed. What a complete mess. What makes the situation completely surreal are the numbers. Greek debt in 2008 was approximately 260bn Euro. The first bailout was 110bn, the current one, that appears to be tearing the country apart, is 130bn. Add in the PSI+ haircut of approximately 100bn ( after sweetener deduction ) and you realized that Europe could have simply paid the entire bill in 2008 and saved itself 80bn Euro. Ok, that is an oversimplification of the problem but you can see my point.  However now, after 340bn Euros, Greece is still has an unmanageable debt, is in a far worse position than it was 3 years ago and it appears the country itself is coming apart at the seams.

Greece – A Default is Better Than the Deal on Offer - Pick your poison. In the words of Greek Finance Minister Evangelos Venizelos, the choice facing Greece today in the wake of its deal with the so-called “Troika” (the ECB, IMF, and EU) is “to choose between difficult decisions and decisions even more difficult. We unfortunately have to choose between sacrifice and even greater sacrifices in incomparably more dearly.” Of course, Venizelos implied that failure to accept the latest offer by the Troika is the lesser of two sacrifices. And the markets appeared to agree, selling off on news that the deal struck between the two parties was coming unstuck after weeks of building up expectations of an imminent conclusion.  In our view, the market’s judgment is wrong: an outright default might ultimately prove the better tonic for both Greece and the euro zone.  The only questions that remain to be resolved are these: have all of the parties begun preparations to mitigate the ultimate impact of an outright default by Athens? And will the ECB be sufficiently aggressive in combating the inevitable speculative attacks on the other members of the euro zone periphery, which are almost certain to ensue, once Greece is “resolved” one way or the other.

European Leaders 'Confident' Greece Meeting Bailout Demands-- Germany and the European Commission welcomed Greek approval of the austerity steps demanded for a financial lifeline, suggesting euro finance chiefs will pull Greece back from the brink when they meet in two days. The Greek parliament’s backing “is a crucial step forward toward the adoption of the second program,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels today. “I’m confident that the other conditions, including for instance the identification of the concrete measures of 325 million euros ($430 million), will be completed by the next meeting” of finance ministers. Euro-area finance chiefs will convene in Brussels on Feb. 15 for their second extraordinary meeting on Greece in a week. Frustrated after two years of missed budget targets, ministers declined to ratify the 130 billion-euro package in a special session on Feb. 9, demanding that Greek officials put their verbal commitments into law. “It’s important for now to complete this program -- and the passage in the Greek parliament yesterday was very important,” German Chancellor Angela Merkel said in Berlin. “The finance ministers will meet again on Wednesday to undertake the work on this, but there can’t and the won’t be any changes to the program.”

Schaeuble warns Greek promises no longer suffice - Greek promises on austerity measures are no longer good enough because so many vows have been broken and the country that has been a "bottomless pit" has to dramatically change its ways, German Finance Minister Wolfgang Schaeuble said. In a hard-hitting interview with the Welt am Sonntag newspaper, Schaeuble also said it is up to Greece whether the country can stay in the euro zone as part of its efforts to restore its competitiveness. "The promises from Greece aren't enough for us anymore," Schaeuble said. "With a new austerity programme they are going to first have to implement parts of the old programme and save." Schaeuble said there was quite a difference between Greece and other euro zone strugglers. "The Greeks are a special case...The Portuguese government is doing a decent job," he said, adding that Portugal's problem is that the country needs more economic growth.

Greece still to convince Europe after rescue deal - - The Greek government came under pressure on Monday to convince skeptical European capitals that it would stick to the terms of a multi-billion-euro rescue package endorsed by lawmakers during violent protests on the streets of Athens. Parliament backed drastic cuts in wages, pensions and jobs on Sunday as the price of a 130-billion-euro ($172 billion) bailout by the European Union and International Monetary Fund, as running battles between police and rioters outside parliament drove home a sense of deepening crisis. The EU welcomed the vote, but told Greece it had more to do to secure the funds and avoid a disorderly default next month that would have "devastating consequences." Euro zone finance ministers meet on Wednesday, and the fragile ruling coalition of Prime Minister Lucas Papademos has until then to say how 325 million euros of the 3.3 billion euros in budget savings will be achieved. A government spokesman said political leaders also had until Wednesday to give a written commitment that they will implement the terms of the deal, reflecting fatigue in Brussels over what EU leaders say have been a string of broken promises.

EU tries to finalise €130bn Greek bail-out E- uropean officials rushed to finalise details of a €130bn Greek bail-out on Monday amid signs Germany and its eurozone allies may not be prepared to approve the deal at a finance minsters’ meeting on Wednesday, despite Athens backing new austerity measures. Senior European Union officials said they believed Greece had met the demands of the troika of international creditors – the European Commission, International Monetary Fund, and European Central Bank – after a parliamentary vote on Sunday, including an extra €325m in budget cuts. “The Greeks will have done the necessary prior actions by Wednesday, including the €325m, so all the elements should be on the table,” a senior official said. But other officials said scepticism remained intense in Germany and the Netherlands and a Tuesday meeting of the “euro working group” – finance ministry officials from all 17 eurozone members – would be key to decide whether lenders would approve the deal. One eurozone official said the group had come up with a list of at least a half-dozen items that Greece must accept before the deal will be moved to finance ministers for final approval on Wednesday. The items on the list include, according to several officials, proof of the €325m in cuts, clarification on how Greece intends to reduce labour costs 15 per cent, and reassurance that all Greek leaders will back the deal – especially after Antonis Samaras, head of the centre-right New Democracy party and Greece’s presumptive next prime minister, indicated that he may try to renegotiate the pact after April elections.

For Greece, Bailout Two Is Just The Beginning - If one is wondering why Greece Finance Minister Venizelos is scrambling to pass the proposed bill which enacts Greek Bailout #2, without any debate or details, very much like the US Attorneys General passed the robosigning settlement without a robosigning settlement even having been inked, the following excerpt from Section E of the MoU between Greece and the Troika should explain it. Because heaven forbid someone actually ask for details as to just what '€[xxx]' of future funding needs over and above the €320 billion in committed funding means in practical terms, i.e., just how lower the minimum wage is going, how many million more jobs will be lost (in a population of just 11 million), and how soon until pension and retirement benefits go negative. Also, our German friends may be interested to know that funding 136% of Greek GDP in the form of endless "bailouts" (of which 81% goes to shore up bank balance sheets), is just the beginning. We are confident our German PM friend is more than aware of this exit clause which gives her the loophole to opt out of everything all over again.

The 1% are the only beneficiaries of Greek austerity, not ordinary Greeks - An interesting post over on Naked Capitalism on the Greek austerity measures being demanded by the EU leaders (Germany, mostly) and the IMF: Marshal Auerback: Greece and the Rape by the Rentiers (Feb. 10, 2012). The austerity demands, in order for a sovereign nation to pay back its debt to mostly big banks that lent money recklessly in the leadup to the financial crisis, make no sense at all. If you impose austerity, you clamp down on the economy. If you clamp down on the economy, the poor and near-poor who are already struggling will struggle even more. Unemployment will increase. Desperation will set in and crime or revolution will follow. The 1% at the top do okay at least for a while--after all, they've been hogging all the good stuff for a decade at least, and many of them (if the scofflaw wealthy in this country are any guide) will have sequestered funds away in hidden offshore bank accounts to bide them through the rough times or even support them if they expatriate to avoid the mayhem. When austerity measures include privatization of public assets, that same top 1% is able to acquire very valuable assets for a song and then charge "rentier" rewards for the public to use their own assets.

Greeks Facing Austerity: A Return from Euro to Drachma? - The agreement came after days of drama and delay. In the end, Greek political leaders finally acceded to tough new austerity measures in exchange for more bailout loans. But no one was celebrating. Several ministers resigned. The leader of one of the three parties in the coalition government withdrew his support and blamed Germany for Greece's problems. Workers went on strike and resumed antiausterity demonstrations, which devolved into clashes with riot police. And euro-zone leaders said they wouldn't hand over the new loans, which total about $171 billion, until the Greek Parliament approves the deal. The new austerity cuts include a controversial 22% cut in the minimum wage, which currently stands at close to $1,000 per month before taxes, as well as a promise to cut 150,000 jobs from the government payroll of 800,000 by the end of 2015. Prime Minister Lucas Papademos dealt with the defecting politicians by telling his cabinet that those who couldn't handle the "historic responsibility" of rescuing Greece from this crisis should leave the government. "We cannot let Greece go bankrupt," he told cabinet ministers on Friday. "A disorderly default would plunge our country into disaster. It would create conditions of uncontrolled economic chaos and social explosion."

Greece far from safe even after debt swap - FT - On Sunday night, as Athens burned, the Greek parliament voted to approve an omnibus bill. It contained the main elements of an agreement with the Troika on fiscal austerity, privatisation and structural reform, and the recapitalisation of Greek banks. Was this a ‘make or break’ moment for Greece?  A rejection of the deal by the Greek parliament, a disorderly Greek sovereign default and euro area exit would certainly have been disastrous for Greece. Not only would the Greek financial system have probably collapsed in weeks or even days but the transition period to a new drachma would in all likelihood have been chaotic and the resulting very large currency depreciation more painful than stimulating.  But even the Greek parliamentary “yes” is little more than a minor milestone on a long road. Many steps are needed just to avoid disorderly default on the impending bond repayment of €14.4bn in late March.  The Greek government needs to find an additional €325m in spending cuts and the leadership of the main Greek parties needs to commit in writing to stick to the agreement even after the next Greek election before the eurogroup signs off on the agreements (likely this week).  That would still leave parliamentary approvals in Austria, Germany, Finland, the Netherlands and Slovenia and the timely completion of the debt swap with the private creditors (the German vote will probably take place on February 27).  Even if disorderly Greek default is avoided on March 20 (our base case), Greece is far from home safe. The agreement includes additional austerity measures and a debt swap that – under very optimistic assumptions about economic growth and fiscal deficits – would reduce Greek general government (gross) debt to 120 per cent of gross domestic product by 2020.

Samaras Pledges To "Renegotiate" Bailout Pact After April Elections - If there was one thing the Troika needed not to hear less than 24 hours after the latest bailout demand vote passed, it is that the leader of Greek ill-named "New Democracy" party who is likely to replace Papademos as the next leader of Greece following the April elections, is that at best the new "deal" will last for two months, or until after the next local election. Needless to say, this it the only "pledge" out of Greece in the past week that is 100% certain to be kept. From The Guardian: "Samaras, the current front-runner to replace Lucas Papademos, told parliament last night: "I ask you to vote in favour of the new loan agreement today and to have the ability to negotiate and change the current policy which has been forced on us"." While hardly surprising, Guardian goes on to point out "that would rather thwart the Troika's demands that Greece's leaders all pledge to implement the current plan, as Megan Greene of Roubini Economics pointed out on Twitter: 'Samaras demands bailout be renegotiated after elections and troika insists he sign that he'll uphold 2nd bailout. We still have a problem.'" Indeed - it is called Merkel seeks guarantees that what the next Greek leader said is a joke before it agrees to send even more billions in taxpayer cash down what Schauble earlier called a "bottomless pit."

Why no EU plan for default or euro exit?  - The real problem, though, is that the euro area leadership seems to have learned little from the disastrous progress of the Greek insolvency proceedings. The latest “rescue” deal for the country has been greeted with disbelief by even the usual courtiers and publicists, yet there is continued insistence that this puts an end to the problem. Everyone can now get on with growth and structural reforms. Greece’s problems are unique and never to be repeated. Political leaders and their vast staff organisations have set up yet more entities, such as the European Financial Stability Facility and the European Stability Mechanism, which provide yet more opportunities for careerists, and yet more confusion about who makes decisions. It would have been much more productive to come up with two sets of clear policies; one to deal with sovereign defaults within the eurozone, the other to provide for procedures for a member country to give up the euro as a national currency. The principal objection raised to admitting even the possibility of either contingency is that it would, inevitably, lead to market landslides and the onset of the dreaded events. This is nonsense. For example, there is a contingency plan for how the US government would fund itself after a nuclear war: a 20 per cent national sales tax.  Did this decades old plan, or the construction of blast and fallout shelters lead to nuclear war? No.

Employment in Greece - From a peak of 4.5 million workers in 2008, Greece has already lost 500,000 jobs. Our first chart shows that the country is already in its worst condition since the beginning of the century in terms of the share of the working age population who have a job (our projections are based on the last monthly data for 2011), It is hard to see how laying off another 150,000 workers from the public sector, as requested for a new international loan, will help Greece to recover. In the next chart we compare government tax revenues to employment, where tax data are from the sectoral accounts of Greece. Although the recent data revision to sectoral accounts are less pessimistic than the former release, we should expect the fall in employment to produce a corresponding fall in government revenues, with adverse effects on government deficits and debt.What Greece needs are policies to create jobs.

Athens, Helsinki to sign collateral deal - Finland may sign a deal on securing collateral in exchange for its commitment to Greece’s second bailout in the “next few days,” Finance Minister Jutta Urpilainen said on Monday. A vote in parliament on Finland’s participation in the bailout could follow next week, she told reporters in Helsinki. Euro-area finance ministers share a “very strong” common stance in their view on what Greece must do, namely act on its pledges of austerity before more aid can be released, she said. Finland, one of four AAA-rated euro members, last year became the only nation in the currency bloc to secure extra assurances that its commitments to a second Greek rescue be repaid by insisting on collateral.

Germany: Greek bailout approval not until March - A spokeswoman for Germany's finance ministry says the final approval of a new, euro130 billion ($171 billion) bailout for Greece won't be given until early March. That means the eurozone will have to split the final bailout approval from a related debt relief deal that will take several weeks to implement and which has to be finalized ahead of a bond repayment on March 20. Marianne Kothe said Monday that the other euro countries will first want to see how many of Greece's private creditors participate in a bond swap designed to cut Greece's debt by euro100 billion. She said that before Germany can approve new aid payments, without which Greece would default by late March, its parliament will have to vote on the new rescue package on Feb. 27.

Draghi's $158 Billion Free Lunch to Boost EU Bank Profits -- Banks are benefiting from a European Central Bank subsidy that could reach 120 billion euros ($158 billion), enough to pay every bonus at financial firms in London for the next 24 years at today's levels. Royal Bank of Scotland Group Plc, BNP Paribas SA and Societe Generale SA are among more than 500 banks that took 489 billion euros of three-year loans from the Frankfurt-based ECB at a December auction. The loans currently carry a 1 percent annual interest rate, less than a quarter of the 4.3 percent average yield on euro-denominated senior unsecured bank debt of all maturities in the past year, according to Commerzbank AG. With borrowing estimated to hit a record 1.2 trillion euros after a second auction later this month, banks may save 120 billion euros over three years. That could boost 2012 profit by about 10 percent for lenders in Italy and Spain, according to estimates by Morgan Stanley. “This is very much a free lunch,”

Economists Warn of Long-Term Perils in Rescue of Europe’s Banks - Few would begrudge Mario Draghi his boast last week that he and the European Central Bank had prevented a disastrous credit crisis by showering banks with cheap loans in December. But beneath the gratitude toward Mr. Draghi, the president of the central bank, lurks a fear that the easy money could simply be creating the conditions for another banking crisis several years from now. Because of the central bank’s cheap financing, some economists warn, sick banks now face less pressure to confront their problems — to clean out bad loans and other impaired assets, or even wind down operations if there is no hope of a turnaround. The European Central Bank, they say, could inadvertently spawn a cohort of “zombie banks,” burdened by nonperforming loans and assets that remain on the books, like the ones that helped make the 1990s a lost decade for Japan. “It’s a huge bet,” said Charles Wyplosz, a professor of economics at the Graduate Institute in Geneva. “If the crisis ends up well, the E.C.B. will have pulled off a miracle. If things go wrong, then commercial banks will be in a much worse situation than they were before.”

A Few Charts That Explain Why Portugal Is Sunk: Portugal is widely regarded as Europe's second-most troubling nation, with rising debt-to-GDP ratio and unsustainable government spending policies. In fact, more and more investors are becoming convinced that a debt restructuring in Portugal is simply inevitable. "When [yields in] the two year bond market are over 20 percent [as they were two weeks ago], it's not a bond yield investors expect to get repaid on," Tommy Molloy of FX Solutions told Business Insider. Anyone who purchases such bonds, he says, "are expecting at least a partial restructuring." These charts from Reuters chartist Scott Barber (via @aussietorres) give a deeper insight into why investors don't think the government will be able to actually repay their debts, at least not in the long term:

French Elections Potentially More Momentous Then Greek Vote - French President Sarkozy has not formally declared his candidacy. There is no doubt that this is a tactical issue and that perhaps as soon as next week he could make the formal declaration. In the mean time, with the European debt crisis and heads of state summits, he is looking very presidential and using his office as what Americans call the "bully pulpit". Polls suggest that in the first round of balloting in late April, Sarkozy is trailing his Socialist challenger Hollande 31%-24.5%. Marina Le Pen’s candidacy appears sufficiently strong to deny either candidate a majority in the first round. The austerity Sarkozy has delivered, much more than he had previously supported, the weak economy, which is believed to be contracting now, and rising unemployment, his support in the polls has flagged. This has led some observers to fear that Le Pen’s votes won’t necessary go to Sarkozy in the second round, but might simply stay at home. There are two things that appear to be scaring investors about the prospects of a Hollande victory: what he is saying and the implications for the Paris-Bonn axis. Essentially, Hollande has declared his intention to renegotiate the fiscal compact that was just agreed upon. His opposition to more austerity in France is predicated on much more optimistic growth projections.

France to push on with trading tax - - France is determined to press ahead with a financial transaction tax inspired by the UK’s stamp duty and supported by at least eight other eurozone countries, the country’s finance minister has said. François Baroin, French finance minister, said the the tax will be levied at 0.1 per cent, raising €1bn a year on share trades. By contrast, the British stamp duty on shares stands at 0.5 per cent, and raised £2.7bn in the 2010/11 tax year.  In an interview with the Financial Times on Monday, hours before parliament was due to kick off a debate on a so-called Tobin tax announced by President Nicolas Sarkozy last month, Mr Baroin said he hoped the initiative would put pressure on the European Commission to accelerate the implementation of a controversial Europe-wide levy which is staunchly opposed by the UK. Asked whether the tax would end up bolstering the position of London’s financial services sector, Mr Baroin said: “We don’t think about it like that. But it is difficult for the UK to criticise this tax as madness, since stamp duty served as its inspiration.” The French Banking Federation has so far vociferously opposed a unilateral FTT – derided by many as part of Mr Sarkozy’s re-election bid – as being both “ineffective and counter-productive to the French economy”. However, Mr Baroin said France was prepared to implement the tax alone in August and was confident that other countries would follow suit either at the same time or shortly after.

Hollande insists on fiscal treaty move - The main opposition candidate for the French presidency has spelt out his intention to reopen discussions on the new European treaty with all signatory countries if he wins the election, a move that would throw into doubt the results of months of negotiations by his opponent Nicolas Sarkozy and the German chancellor Angela Merkel. François Hollande, the Socialist candidate currently leading the polls in France’s presidential election campaign, brushed aside stern warnings from Mr Sarkozy and Ms Merkel that the treaty – due to be signed by 25 European Union countries in early March – would have to be respected by any new president.  The opposed positions of Mr Hollande and Ms Merkel – who has pledged to campaign for Mr Sarkozy – suggest a difficult relationship if he is elected. So far she has declined to meet him ahead of the vote. He said he would travel to Berlin for such a meeting, but added: “I won’t knock at the door if she doesn’t want to open it. That’s unpleasant for me.

Seehofer calls for people's vote on euro - Horst Seehofer, the head of the Christian Social Union party, wants Germans to vote on whether the euro should be saved or not and is calling for a change to Germany’s Basic Law, or Constitution, to allow that to happen. “The CSU is for a people’s vote in Germany over the basic questions about Europe. That’s a good path to bring the European idea closer to citizens,” Seehofer told the paper. The instrument of a people’s referendum should be anchored in the German constitution, he told the paper. A week ago the Ferdinand Kirchof, the vice president of the Federal Constitutional Court, told the paper that Germany “finally needs a direct democracy in the EU,” saying Brussels had distanced itself from European Union citizens and from the home regions comprising the EU.

Germany Speaks: Not So Fast On The Greek "Deal" - Europe's now painfully transparent policy of demanding that Greece decide to default on its own is becoming so glaringly obvious, we truly fear for the intellectual capacity of everyone who ramps the EURUSD on any incremental "europe is saved" rumor. As a reminder, yesterday we said, in parallel with the Greek irrelevant MoU vote: "The only real questions are i) what the Greek population may do in response to this latest selling out of a population "led" by an unelected banker, which if history is any precedent, the answer is not much, and ii) how Germany will subvert this latest event, and put the bail [sic] back in Greece's court once again." We documented on i) earlier today - a couple of burned down buildings, a few vandalized store fronts, lots of tear gas and that's about it, as people still either don't believe or can't grasp the seriousness of the situation. As for ii) we now get the first indication that not all may be well on Wednesday. From the FT: "European officials rushed to finalise details of a €130bn Greek bail-out on Monday amid signs Germany and its eurozone allies may not be prepared to approve the deal at a finance minsters’ meeting on Wednesday, despite Athens backing new austerity measures."

Die Wahrheit Macht Frei - In response to the latest suicidal austerity demands of the Troika hit squad, protestors in Greece burned a German flag while the Greek daily paper Dimokratia adorned its front page with the headline, “Memorandum Macht Frei” [memorandum makes you free]. These elements of the populace are unsurprisingly reacting to the fact that bureaucrats in Washington, Berlin and Brussels are signing away the living standards of the Greek people while telling them that it’s all being done for their own good and is absolutely necessary for peace and prosperity in Europe. Ambrose Evans-Prichard pointed out in a recent blog post that the Troika’s plans for Greece are far worse than what was demanded of [or offered to] Germany after the second World War, and much more similar to what was demanded of it after the first one (we all know how well that worked out). In 1953, the Western powers granted Germany 50% relief on its external debts with very few conditions attached, and now Greece is struggling to get that same amount with absolutely impossible conditions attached. The main reasons for this difference in treatment are a) Greece is not nearly as strategically important to these Western capitalist powers as Germany was back then and b) the financial elites simply cannot afford to create a precedent of debt forgiveness in the current environment of unprecedented public and private debts. What is perfectly clear, though, is that the continuously shape-shifting complex of bailout, haircut and austerity measures advocated for Greece have been destined to fail since they were first conceived.

Portuguese Economy Contracts for a Fifth Straight Quarter - Portugal’s economy shrank for a fifth quarter in the three months through December as the government cut spending and raised taxes to trim its budget gap. Gross domestic product declined 1.3 percent from the third quarter, when it fell 0.6 percent, the Lisbon-based National Statistics Institute said in a preliminary report today. It was the biggest quarterly drop since the first quarter of 2009. Economists predicted a fall of 1.5 percent, the median of eight estimates in a Bloomberg News survey showed. GDP declined 2.7 percent in the fourth quarter from a year earlier. The economy shrank 1.5 percent in 2011 after expanding 1.4 percent in 2010, according to today’s report. “The sharper reduction in GDP in the fourth quarter reflected a significant worsening of the negative contribution of internal demand, associated particularly to the declines in investment and household consumer spending,” the statistics institute said today.

Fitch, S&P downgrade Spanish banks - Fitch Ratings and Standard & Poor’s on Monday lowered their credit rating of Spanish banks, including the country’s four largest lenders, following their downgrade of Spain last month. Fitch cut its rating for Santander, the biggest eurozone bank by market capitalisation, by two notches to “A” and cut its ratings for BBVA, Bankia and CaixaBank by one notch. Standard & Poor’s cut its rating for the banks ― Spain’s four biggest ― as well as for 11 other Spanish lenders. The agency lowered its credit ratings on 10 banks by one notch and it cut its rating on another five by two notches. “The downgrade of Spain indicates a weakening of its ability to support its largest banks,” Fitch said in a statement.

Moody's cuts eurozone debt ratings - Ratings agency Moody's has downgraded its sovereign debt ratings of several eurozone nations due to their exposure to the region's debt crisis. It has cut its ratings for Italy, Malta, Portugal, Slovakia, Slovenia and Spain, and has put Austria, France and the United Kingdom on a negative outlook. The agency cited the nations' "susceptibility to the growing financial and macroeconomic risks emanating from the euro area crisis". It said Europe's weakening economic prospects "threaten the implementation of domestic austerity programs and the structural reforms that are needed to promote competitiveness". The agency questioned the implementation of reforms in the region and whether there were adequate resources to resolve the crisis. Moody's said those factors would keep market confidence fragile "with a high potential for further shocks to funding conditions for stressed sovereigns and banks".

6 European Nations Get Downgrades - Moody’s Investors Service cut the debt ratings on Monday of six European countries, including Italy, Spain and Portugal, and became the first big ratings agency to switch Britain’s outlook to negative. The move came a month after similar downgrades by Standard & Poor’s and Fitch Ratings. All three agencies cited the debt crisis and its ramifications for the region’s economy.  In a statement, Moody’s said the main reasons underpinning its decision were “the uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic framework and the resources that will be made available to deal with the crisis.” It also cited Europe’s increasingly weak macroeconomic prospects, which it said threaten the adoption of austerity programs and the structural reforms needed to promote competitiveness.  Moody’s downgraded Spain to A3 from A1 with a negative outlook; Italy to A3 from A2 with a negative outlook; and Portugal to Ba3 from Ba2 with a negative outlook. The agency also lowered the ratings for Malta, Slovakia and Slovenia.  Moody’s revised to negative its outlook on Britain, France and Austria, which have the agency’s top Aaa rating.

Moody's Downgrades Italy, Spain, Portugal And Others; Puts UK, France On Outlook Negative - Full Statement - You know there is a reason why Europe just came crawling with an advance handout looking for US assistance: Moody's just went apeshit on Europe. In other news, we wouldn't want to be the company that insured Moody's Milan offices. Full release: Moody's adjusts ratings of 9 European sovereigns to capture downside risks As anticipated in November 2011, Moody's Investors Service has today adjusted the sovereign debt ratings of selected EU countries in order to reflect their susceptibility to the growing financial and macroeconomic risks emanating from the euro area crisis and how these risks exacerbate the affected countries' own specific challenges. Moody's actions can be summarised as follows:

- Austria: outlook on Aaa rating changed to negative
- France: outlook on Aaa rating changed to negative
- Italy: downgraded to A3 from A2, negative outlook
- Malta: downgraded to A3 from A2, negative outlook
- Portugal: downgraded to Ba3 from Ba2, negative outlook
- Slovakia: downgraded to A2 from A1, negative outlook
- Slovenia: downgraded to A2 from A1, negative outlook
- Spain: downgraded to A3 from A1, negative outlook
- United Kingdom: outlook on Aaa rating changed to negative

Spain risks choking market with bond supply glut - Madrid is running far ahead of the euro zone pack in terms of 2012 sovereign debt issuance, smashing its funding targets by cashing in on strong demand from domestic banks flush with money borrowed from the European Central Bank. To date, Spain has raised 29 percent of the 86 billion euros it needs in 2012 compared with 18 percent of planned bonds sales by this time last year. In contrast, Italy has raised 10 percent and Germany 11.5 percent. "They see an open window and are trying to secure as much liquidity as they can... Everyone was expecting some front-loading but this is unprecedented," said  "The glut of liquidity put in by the ECB is trumping fundamentals...which is why we believe that Spain and Italy are getting away these auctions at the levels they are. We believe it isn't sustainable and the effects of the LTROs (ECB long-term refinancing operations) will begin to wane," . The decision by rating agency Moody's to cut Spain's credit rating underscores the country's fundamental problems, which cannot be overcome by the provision of cheap cash to banks.

Spanish farmers protest over EU-Morocco trade deal - Spanish farmers pelted the European Parliament and Commission office in Madrid with tomatoes on Tuesday in protest against a trade agreement with Morocco that they say could put fruit and vegetable growers out of work and add to high unemployment. The reciprocal agreement lowers trade barriers on the entry of primary goods - mainly fruit and vegetables - into the European Union from Morocco in return for allowing processed goods into the North African country. Farmers from the COAG union plan to turn up with 500 tonnes of oranges to another protest on Wednesday and further action is set for Thursday, when the European Parliament is due to vote on prolonging the agreement.

EU may punish Spain for austerity delays: report - The European Union may punish Spain's government, led by Prime Minister Mariano Rajoy, by May for holding off on austerity measures ahead of a regional election in March, Reuters reported Tuesday, citing a source familar with the situation. The report also cited three senior European Union officials, who said the European Commission thinks Spain overstated 2011 deficit figures to make this year's deficit look better, and that it's also moving too slow in addressing a deterioration in public finances that is expected this year. Amadeu Altafaj Tardio, spokesman for Economic and Monetary Affairs Commissioner Olli Rehn dismissed the report as "absolutely speculative and misleading." He said Spanish authorities themselves found slippage at the end of 2011 and have taken action to correct that, and added that "we cannot speculate on what will be the assessment for 2012 because the budget doesn't even exist yet. We can't come to a conclusion when it hasn't even been presented."

EU to punish Spain for deficits, inaction - The European Union is likely to take action against Spain's newly installed government by May for delaying austerity measures ahead of a regional election next month, sources familiar with the situation have told Reuters. An official from the Spanish government, which declined to comment on the story ahead of its publication, said in response that the administration was doing its job on deficit reduction and that the EU was supporting the effort. A final decision still has to be made, but the European Commission believes the new government overstated the deficit figures for 2011 so the current year's data would look better. Spain is also not addressing quickly enough the deterioration in public finances expected in 2012, risking the country's longer-term growth, three senior EU officials said. Asked if the European commissioner for economic and monetary affairs, Olli Rehn, would take action and recommend that the bloc's 27 finance ministers adopt sanctions against Madrid, one of the officials said: "It is very likely."

Empty buildings haunt Spain amid real estate crash - Towering apartment blocks, complete with swimming pools and playgrounds, loom over empty streets, weed-filled lots and gaping excavation pits. The lone bank in this mega-development nicknamed "Manhattan" closed two years ago and most storefronts are bricked up. Apartments galore are for sale here and prices are plunging. More than 13,000 apartments were supposed to go up to create a mini-city for 30,000 people just 45 minutes outside of Madrid. But only 5,100 were built, many are uninhabited and regular Spaniards who bought them as investments are now competing to offload them for huge losses. Spain's real estate crash and economic implosion have turned what was supposed to become a vibrant suburban paradise for young Spanish couples and their children into one of the most visible monuments of the country's boom gone bust. Such modern-day ghost towns have become a familiar part of the Spanish landscape, abandoned shells left to slowly decay

Portugal's Jobless Rate Jumps - Portugal's unemployment rate jumped to 14% in the final three months of last year, surprising economists and suggesting that austerity measures being implemented under the country's international bailout are creating a bigger-than-expected dent in the economy. A total of 771,000 people were without jobs in the fourth quarter, a rise of 12% from the previous quarter when the jobless rate stood at 12.4%, the country's national statistics bureau said Thursday.

Greece's economy shrinks by 7% - Greece’s recession worsened at the end of last year, new figures showed on Tuesday, adding to the pressure on a government caught between riots at home and pressure from eurozone leaders to force through deep spending cuts in exchange for a fresh €130bn bail-out.  The economy contracted by 7 per cent in three months to December compared with the same period in the previous year, a steeper decline than the 5 per cent recorded in the third quarter, according to preliminary data published by Elstat, the national statistics body. Greece’s economy has now shrunk in every quarter but one since mid-2008.  The figures came ahead of a cabinet meeting at which Lucas Papademos, the technocrat prime minister, is expected to seek agreement on further details of austerity measures designed to persuade eurozone finance ministers to sign off on a fresh bail-out when they meet on Wednesday. The so-called euro working group, comprising finance ministry officials from all 17 eurozone member states, is also due to discuss the crisis on Tuesday, as Greece struggles to seal a €200bn restructuring of privately held debt before a €14.5bn redemption due on March 20.

Greece and the return of the economic ‘death spiral’ - During the latter part of 2008, central bankers around the world worried secretly that the death spiral was approaching. The concern was that it was too late to stop economies crashing. In the event, concerted international action on both monetary and fiscal policy prevented collapse – although they did get pretty darn close to the precipice. Interest rates were cut to zero. Banks and even car companies were rescued. Massive amounts of liquidity were made available. There were tax cuts, cash for clunkers and even fridges, along with schemes to help the young unemployed. Plus the collapse came very quickly. The fear was that cash machines around the world would close, banks would fold and stock markets would tank within hours. This was a once-in-100-year shock: in my view, without such unprecedented intervention, unemployment rates in the US and Europe could well have risen to over 24% – which is where they are already in Greece and Spain.  That brings us to Greece, whose government is trying to negotiate the umpteenth and final package to solve the problem. Output is down, as I noted above, and still falling. The Greek government faces a €14.5bn bond payment on 20 March that it looks extremely unlikely to be able to make. Ten-year bond yields have reached 29.8% in Greece – and they are now 11.6% in Portugal, which is also going to have to be rescued. Germany has taken away any hope Greece had of recovery.

Graphic: the Greek economy's "downward spiral" - cording to the IMF, the Greek economy is in a "downward spiral" with debt to GDP at an all-time high, money supply at a historic low and 20 per cent unemployment.  The IMF considers Greece to be in "a downward spiral of fiscal austerity, falling disposable incomes, and depressed sentiment", and when looking at the key measures it's hard to disagree.  Greece's public debt is 160 per cent the size of its annual GDP, far above the average of Euro area countries. Help from the EU and IMF is predicated on that ratio reaching 120 per cent, which requires highly ambitious austerity measures.  Nearly half of those under 25 in Greece are unemployed and with 150,000 public sector jobs cuts by 2015, dramatic scenes like those recorded yesterday are likely to become even more common.

Eurozone ministers cancel Greece debt meeting - European finance ministers have cancelled a meeting scheduled for Wednesday that was to discuss Greece's second bailout. Eurozone members say Greece has failed to meet all the conditions needed in order to receive its next rescue loan. The group had demanded Greece detail how it will cover its budget gap of $428m. Al Jazeera’s John Psaropoulos, reporting from Athens, said the cancellation was the latest in a line of procedural hiccups. He said "the Greeks have gone to Brussels unprepared with respect to precisely where the 325m euro [$428m] that was still outstanding" from the $3.9bn in cuts that were meant to be made this year. “What I am hearing from the Greek government is that about [$132m] of that sum remains to be clarified." Our correspondent said $262m will be culled from military expenditure and local government spending, with several hundred jobs in local government to be eliminated by June of 2012.

Eurozone ministers cancel meeting on Greece bailout - Eurozone finance ministers cancelled Wednesday's special meeting in Brussels on Greece's €130bn bailout as Athens scrambled to provide proof that it was capable of making a further €325m (£270m) in budget cuts. Ministers in the Eurogroup had been expected to gather for talks which, if all had gone to plan, would have approved the rescue funds to save Greece from a messy bankruptcy next month. Data released by the Greek statistics agency showed the country's economy had shrunk by 7.0% in the last quarter of 2011. With the EU's patience with Greece close to breaking point, the eurogroup chairman, Jean-Claude Juncker, said the ministers would hold only a telephone conference call before a regular meeting already scheduled for 20 February. Juncker said he was still awaiting written undertakings from Greek party leaders on pushing through the austerity package of pay, pension and job cuts which parliament passed on Sunday as rioters torched dozens of buildings in central Athens.

Eurozone meeting on Greece called off - Two steps forward, one step back. So goes the frenzied effort across Europe to bail out Greece and save it from a potentially devastating default on its debts. A meeting of the finance chiefs of the 17 euro countries to discuss Greece's second multibillion bailout planned for Wednesday was called off after Athens failed to deliver on several demands made by its partners in the currency union. The last-minute cancellation of the meeting — which was expected to give the green light for a key debt-relief deal with private creditors linked to the bailout — shows the eurozone wants much tougher guarantees now from Athens before giving it an extra €130 billion ($171 billion) in rescue loans, on top of €110 billion ($145 billion) granted in 2010. Tensions between Athens and other European capitals have hit new highs this week. While the European Union is officially still warning of the far-reaching dangers of a disorderly default by Greece, some politicians have in recent weeks downplayed the effects of such an event.

Greece Forced to Cut Private Sector Salaries? - C. J. Polychroniou refers here to the fact that private sector salary cuts are part of the “rescue package” recently approved by the Greek Parliament.  Asked to comment at the Foreign Policy blog, Dimitri Papadimitriou explains why this attempt at internal devaluation won’t work. In an interview for Bloomberg Radio Papadimitriou also stresses that these measures are politically untenable (although approved by the Parliament, whether they will actually be implemented is another question).  In the interview Papadimitriou goes on to say that European policymakers are merely trying to shield the rest of the eurozone from Greece so that the beleaguered country can eventually be shown the door.  While policymakers’ rhetoric suggests they are unequivocally committed to ensuring that Greece remains in the Union, Papadimitriou argues that their actions suggest otherwise.  Without any serious investment in kickstarting Greek growth—Papadimitriou references what was done with East Germany following reunification—what we’re looking at here are not serious attempts to keep the eurozone intact. Listen to or download the Bloomberg interview here.

Time For Some Honesty: No One Gives a Rat's Ass About Greece - It's high time for some honesty. No one cares about Greece, except Greeks. Greece is a mere 2% of Eurozone GDP..  All this fantasyland talk of Armageggon if Greece exits the euro is total nonsense. The world will not end when Greece defaults. Indeed, the world might breathe a sigh of relief. So Why the Fear-Mongering? That answer is easy. Bureaucrats have said for too long and in too many ways that "no one can leave the euro". This is not about what is best for Greece. Is is about "face saving" of bureaucrats whose collective faces deserve to be dipped something far more smelly than mud.Rather than let Greece default gracefully, all the nanny-zone fools cling to false hopes, while Merkel blatantly lies about wanting to keep Greece in the nanny-zone.It was in the best interest of Greece to not let them in the Eurozone in the first place. Then it was in the best interest of them to default 2 years ago, 1 year ago, and 6 months ago.

Slovak Growth Slowdown to Cut Tax Revenue by 140 Million Euros -- Slovakia will probably collect 140 million euros ($184.8 million) less in taxes than planned this year as economic growth in the eastern euro-area member is set to fall short of projections, Finance Minister Ivan Miklos said. The Finance Ministry will propose spending cuts to the government to ensure the budget deficit this year remains on track to meet the target of 4.9 percent of gross domestic product, Miklos said today at a press conference in Bratislava, adding that the new government, which will form after March 10 elections, will need to take additional measures to improve public finances. Slovakia’s export-driven economy is being hurt by the slowdown in the euro area caused by the region’s lingering debt crisis. The shortfall in tax revenue is related to a revision earlier this month of the 2012 economic-growth forecast to 1.1 percent from 1.7 percent, on which the budget was based.

Credit Plunge Signals 'All Is Not Well' - European (like US) stocks remain in a narrow range just above the cliff of the unbelievably good NFP print of 2/3. US and European credit markets have lost significant ground since then and it seems equity investors just want to ignore this 'uglier' reality for now. The BE500 (Bloomberg's broad European equity index) is unchanged from immediately after the NFP 'jump', investment grade credit is +10bps from its post-NFP tights, crossover (or high yield) credit is around 50bps wider, Subordinated financial credit is +50bps off its post-NFP wides at 382bps, and senior financial credit is an incredible 36bps wider at 225bps (by far the largest on a beta adjusted basis). The divergence is very large, increasing, and a week old now and perhaps most importantly as we look forward to LTRO Part Deux, LTRO-ridden banks have underperformed dramatically (40bps wider since 2/7 as opposed to non-LTRO banks which are only 10bps wider) - how's that for a Stigma? Some 'banks' have suggested the underperformance of credit is due to 'technicals' from profit-taking in the CDS market - perhaps they should reflect on why there is profit-taking as opposed to relying on recency bias to maintain their bullish and self-interest positioning as the clear message across all of the credit asset class is - all is not well.

European Industrial Production - European industrial production was down again in December - by 1.1% compared to November.  The graph from Eurostat is above. It continues to look like the early stages of a a recession in Europe.  The obvious question now is how deep and how long that will last.  My current best guess is that we will not see an abrupt rupture (as the ECB appears committed to avoiding catastrophic financial institution failure), but in the absence of that, the underlying imbalances of current account deficits in the periphery that cannot be resolved by exchange rate shifts will take a long time (years) to work out.  I hold this opinion pretty lightly though.

Europe car sales slump amid debt crisis - Figures from the European Automobile Manufacturers' Association (ACEA) show sales of passenger cars fell 7.1pc to 968,769 in January compared to the previous year. Sales in Portugal collapsed, falling 47.4pc, while France saw sales drop 20.7pc, Italy was off 16.9pc and Greece retreated 13.3pc. The contraction in the new car market highlights the challenges facing European automotive manufacturers, which are already regard as having too much capacity. Sales in Germany, the largest market, fell 0.4pc to 210,195 cars, while sales in the UK, the fourth largest-market, were flat at 128,853. Among the car companies, Mazda slumped 36.1pc, Renault 25pc, and Fiat 16.2pc. The best performing manufacturer was Jaguar Land Rover, whose sales soared 39.2pc in January. The success of the company is helping to boost car manufacturing in the UK, where all JLR's plants are based.

European Car Sales Plunge: Portugal -47.4%, France -20.7%, Italy -16.9% - Please consider auto sales numbers from a Google Translation of  the article Portugal leads drop in car sales in Europe.

  • Portugal -47.4%
  • France -20.7%
  • Italy -16.9%
  • Belgium -16%
  • Cyprus -17%
  • Greece -13.3%
  • Germany -.4%
  • UK unchanged
  • Spain +2.5%
  • Ireland +1.5%

Bloomberg reports Renault Leads European Car-Sales Drop With Fiat, Peugeot as Growth Stalls Renault SA (RNO), Fiat SpA (F) and PSA Peugeot Citroen (UG) led the biggest decline in European car sales since June as consumers balked at making big purchases after the region’s economy shrunk. Registrations in January fell 6.6 percent to 1 million vehicles, marking the fourth consecutive monthly decline, Brussels-based European Automobile Manufacturers’ Association, or ACEA, said today in a statement.

Department of Yikeshis German counterpart [finance minister] suggested postponing Greek elections and installing [sic] a new government without political parties. I do understand the financial motive here, but this is not a good idea!  It is even less of a good idea to say so in public.  Is the goal simply to irritate the Greeks so much that they leave the Eurozone on their own?  Twitter rumors are suggesting that Finland and the Netherlands are raising similar ideas, namely postponing elections and, it seems, simply ruling the country through its budget?  I am not sure how this is supposed to work, or to be received in Greece, or why it should be a good precedent for the European Union.  The FT story is here.

Eurozone divisions threaten Greece aid - Eurozone officials have called off an emergency meeting of finance ministers to approve a vital €130bn bail-out for Athens amid a growing fight among the country’s European creditors about the merits of allowing Greece to go bankrupt. Jean-Claude Juncker, the Luxembourg prime minister who chairs the eurogroup, said the delay in Wednesday’s scheduled meeting had been prompted by the continued failure of Greece’s political leaders to commit to the bail-out’s tough terms after April elections. But senior European officials said Tuesday’s meeting of the “euro working group” – senior officials from eurozone finance ministries – was also coloured by a widening split over whether Athens should be trusted with a second bail-out.  The delay heightens the risk Greece will be forced into a full-scale default next month when a €14.5bn bond is due for repayment. It also highlighted deepening divisions among eurozone governments about the consequences of such an outcome.Olli Rehn, the European Commission’s top economics official, warned there would be “devastating consequences” if Greece defaulted, and pleaded for eurozone governments to approve the bail-out quickly. Officials said Mr Rehn has support from the European Central Bank and the French government.

Eurozone Leaders Still Wary of Second Greek Bailout - Greek lawmakers held up their end of the bargain by agreeing, despite mass riots in Athens, to crushing austerity measures required by the “troika” (the European Union, the IMF and the European Central Bank) in order to receive a new bailout. But the European finance ministers remain hesitant to deliver the bailout funds, claiming to be wary of what they consider past broken promises by Greece. Senior European Union officials said they believed Greece had met the demands of the troika of international creditors – the European Commission, International Monetary Fund, and European Central Bank – after a parliamentary vote on Sunday, including an extra €325m in budget cuts. “The Greeks will have done the necessary prior actions by Wednesday, including the €325m, so all the elements should be on the table,” a senior official said. But other officials said scepticism remained intense in Germany and the Netherlands and a Tuesday meeting of the “euro working group” – finance ministry officials from all 17 eurozone members – would be key to decide whether lenders would approve the deal. One eurozone official said the group had come up with a list of at least a half-dozen items that Greece must accept before the deal will be moved to finance ministers for final approval on Wednesday.

What Happens If Greece Doesn’t Get a Bailout? - After the Greek parliament on Sunday passed yet another package of austerity measures demanded by its euro-zone neighbors – this one worth $4.4 billion – the path seemed clear to finalizing a long-delayed, second bailout of the country totaling $170 billion. Well, it turns out the Greek vote wasn’t enough to satisfy skeptical euro-zone leaders. Instead of pinning down the bailout details, European finance ministries have reopened the entire plan to bail out Greece. A debate is now raging among euro-zone countries over whether or not a second bailout makes any sense at all. The basic problem apparently is that there is a growing belief in some northern euro members – such as Germany and Finland – that Greece’s politicians will never be capable of implementing reforms, whatever promises are made now, so a new bailout would end up being a waste of money. German Finance Minister Wolfgang Schäuble publicly questioned the commitment of Greece’s politicians to reform after an upcoming election.

Greece's GDP Is In Total Freefall - More awful economic statistics out of Greece.  In the fourth quarter, GDP shrank 7% from a year earlier. That compares to a decline of 5% in Q3, according to Reuters. The idea that the economy can survive more austerity -- especially given the attendant social collapse -- is laughable.

Greek family and welfare provision - I have argued previously (here) that the EU/IMF/ECB insistence on “flexibilizing” labor law in Greece overlooked the basic structure of the Greek private market, which consists overwhelmingly of small, family owned and operated businesses, with ultra –flexible wage arrangements (a wife’s labor, especially, is often unremunerated). Add de facto non-enforcement of labor law even in the tiny segment it applied to and the massive informal sector and you end up with one of the most flexible markets, labor cost-wise, in Europe. Moreover, despite the infamous Greek welfare “drones” in the media, Greece does not have a welfare regime comparable to the rest of Europe. In fact, much like in the US, the Greek family internalizes most of the cost of basic services such as education, healthcare, housing. State employment and pensions have for a long time played the role of a substitute for the lack of such a welfare regime, for those of course who could access these jobs, usually on the basis of clientelist relations. The basic structure of state employment included jobs distributed widely among the client base of the governing party, with wages too low as remuneration and too high as welfare, along with privileged wages and perks for a narrow elite group within the public sector. Average wage and pension levels remained well below European levels before the crisis, while consumer prices had skyrocketed and remain among the highest in Europe even today.

Austerity Policy Destroying Greek Society - Although we’ve featured quite a few news reports on the impact of austerity in Greece, this report from Dimitri Lascaris, a lawyer with family in Greece, via Real News Network, gives a flavor of how conditions have deteriorated, even in small towns where social ties are presumably tighter than in Athens.

Greek rhetoric turns into battle of wills-- The battle of wills between Athens and its eurozone lenders has intensified, with Greece's finance minister accusing "forces in Europe" of pushing his country out of the euro while his German counterpart suggested postponing Greek elections and installing a new government without political parties. The tongue-lashing by Evangelos Venizelos, who is expected to stand in April elections as leader of the centre-left Pasok party, came as his government scrambled to meet escalating demands from international lenders that must be met if Athens is to avoid a full-scale default. Greece took a step closer to meeting those demands when Antonis Samaras, head of the centre-right New Democracy party and the presumptive next prime minister, sent a two-page letter to European Union leaders on Wednesday vowing to implement the austerity measures included in the €130bn bail-out programme. 'Slash wages to promote European growth' The letter, which came along with a similar missive from George Papandreou, the former prime minister who remains head of Pasok, was demanded by EU leaders as a condition of the deal. But the letter was received coolly in Brussels, particularly as Mr Samaras reiterated his stance that "modifications might be required" to the programme.

More on Greece and Nationalism - The deal in Greece won’t work. Greece cannot pay. I agree with John Carney; eventually they will leave the eurozone. But not before considerable damage is done and nationalism makes its presence known throughout Europe. My thesis:

  • Deficit spending on [a large] scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year)…
  • Meanwhile, all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with.  However, when the prop of government spending is taken away, the global economy will relapse into recession.
  • As a result there will be a Scylla and Charybdis of inflationary and deflationary forces, which will force the hands of central bankers in adding and withdrawing liquidity. Add in the likely volatility in government spending and taxation and you have the makings of a depression shaped like a series of W’s consisting of short and uneven business cycles. The secular force is the D-process and the deleveraging, so I expect deflation to be the resulting secular trend more than inflation.
  • Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.

Greece is broken, and can’t be fixed - As Mohamed El-Erian says, the broken dynamics surrounding Greece right now are extremely reminiscent of what was happening in Argentina in 2001. New money is necessary, but it’s also insufficient; it all feels like some kind of Samuel Beckett-style existential paradox. You must go on, I can’t go on, I’ll go on. To provide a bit of context here, look at the amount that the Greek economy has already shrunk: 16%. That compares to 20%, peak-to-trough, in Argentina, and 29% in the US in the Great Depression. But the big problem in Greece is that the worst economic effects of austerity haven’t even happened yet.“On the current path – which is not sustainable in my view – we may very well see Greek GDP go down 25-30 percent, which would be historically unprecedented. It’s a disastrous crisis for them,” Dadush “If you could say with a reasonable probability that the worst was over, then that would be different. But you can’t say that. They’re in for a long nightmare.”The point here is that both Europe and Greece need a light at the end of the tunnel. Without that, social unrest in Greece will only get worse, the credibility of its promises will continue to deteriorate, and the Europeans will be understandably reluctant to throw good money after bad. And right now that light does not exist. Greece probably can’t implement the austerity package it’s promising, and even if it does, GDP won’t start growing to the point at which its debt-to-GDP ratio will come down to a remotely sustainable level.

Greece’s depression could prove worst in modern history - How badly is Greece hurting from its debt woes and onslaught of austerity? One World Bank official tells the paper Ekathimerini that the country is on pace to suffer the worst economic contraction in the postwar era. “On the current path — which is not sustainable in my view — we may very well see Greek GDP go down 25 to 30 percent, which would be historically unprecedented,” said Uri Dadush, a former World Bank official. The previous records were set by Argentina — which contracted 20 percent after it defaulted on its debts in 2001 — and Latvia, whose economy shrunk 24 percent after the 2008 financial crisis. (For various reasons, economists seem to consider the break-up of the Soviet Union, which shrunk Russia’s economy 44 percent, a special case). And Greece could well beat them all, even with the bailout it’s getting from the rest of Europe. After four years of recession, the country has contracted 16 percent, and it’s hard to see how Greece will start growing anytime soon with further sharp budget and wage cuts on the horizon, as the country struggles to rein in its debt load (which, in turn, has been exacerbated by endless recession). Typically when countries are caught in this trap, they drastically devalue their currency to shrink their debts. But as long as its tethered to the euro, Greece doesn’t have that option.

Michael Hudson on Greece - Greece and what is happening to it is not getting enough attention.  What is happening there, in my opinion is an example of the human race at it's worse.  I do not see the implementation of austerity as an experiment.  I see it as just one more step by those in the world controlling banking to mold the world into its self image. This is a link to an 11 minute interview of Michael Hudson:  Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas CityIn this interview, Prof. Hudson suggests that Greece is the test to see how far the world's money people can push in preparations for further advancement within the EU.  Interestingly he notes, that in the US, because we privatized our utilities years ago, we are not seeing the same drive of austerity as we are seeing in Europe, including England.  Though we should not be complaisant.

Athens faces tough bail-out terms - A €130bn bail-out of Greece will contain unprecedented controls on Athens’ ability to spend funds, officials said, as European leaders scrambled on Thursday to paper over their divisions on the rescue package. The agreement, which officials hope to finalise on Monday, is likely to include an escrow account that must always contain enough cash to pay Greece’s debt for nine to 12 months. If the account falls below that level, money will be taken from funds earmarked to run the Greek government, according to people briefed on the talks. In addition, the bail-out will include a permanent and beefed-up presence of international monitors who will attempt to keep real-time tabs on the Greek government’s spending decisions, officials said.  If the deal is finalised by Monday, it will still include a list of 24 “prior actions” that Greece must complete by the end of the month, before aid is released.  The deal will be quickly followed by a €200bn Greek debt restructuring, with offers to private debt holders to participate to be issued on Wednesday. The offer would be open for 10 days, officials said, and the swap formally completed a week before a €14.5bn bond becomes due on March 20, narrowly avoiding a default. But senior officials warned that a deal was not assured. According to one official, under the plan Greece’s debt would be more than 128 per cent of economic output by 2020. That is well above the 120 per cent the International Monetary Fund and several northern European Union countries have demanded.

Austerity drives Greeks to despair - Greece's austerity measures are being met with anger and grief by the people of the debt-ridden country. Days of violent protests couldn't stop Greece's parliament from passing a European bailout deal -- but now the country faces massive cutbacks. Whole government departments will be shut down and as many as 15,000 public servants will be thrown out of work. The crisis is even prompting a spike in suicide attemts. But there may be an opportunity to reform a broken system, as CBS correspondent Elizabeth Palmer reports. In Central Athens, on Wednesday, a young woman who had just lost her job threatened to take her life. Lambrousia Harikleia climbed onto the balcony of her workplace and threatened to jump. The mother of a handicapped child, she perched on the ledge of her office building, one slated for closure. Her rescuers promised her problems could be solved. She accused them of lying. One of the things that has forced the Greek people to the precipice is the corrupt and inefficient government that everyone agrees must shrink. For decades, politicians have been handing out jobs - with generous benefits - in return for votes, and now the country is broke.

Greece heads toward a revolutionary explosion - Eighteen months of austerity have produced a social decline that is unprecedented in peacetime. Wages and salaries in the private sector have decreased by 20 percent and in the public sector by up to 50 percent. Over one million Greeks, one in five adults and one in two young people, are unemployed. Only a third of these receive unemployment benefits, which are now due to be reduced from €460 ($600) to €360 ($470) per month. The new austerity package passed Sunday evening will reduce the working class and broad layers of the middle class to a naked struggle for survival. By 2015, an additional 150,000 state employees are to be laid off and an additional €11.4 billion slashed from the budget, with even more cuts in public-sector wages. With prices for basic commodities at Western European levels, survival will be impossible for many, especially if they have to support destitute family members. One does not have to be a mathematical genius to see that these measures will not solve, but only worsen the debt crisis. All economic indicators are pointing downwards. The economy shrank by 7 percent last year, industrial output by 16 percent. Despite an increase in the VAT rate, revenues from the tax declined by 19 percent because 60,000 small and family businesses went bankrupt. A further 50,000 bankruptcies are expected this year.

It's not just the economy stupid! - You are the average Greek. You make about 800euro a month in a city where the cost of living compares to Paris. You pay your taxes, which are as high as in some of the northern European welfare states, yet you get none of the services they do. Your family is your safety net. You are guilty of the everyday acts of corruption that you need to survive in the system, such as bribing public hospital doctors to do their job. And you are barely making ends meet. All around you you see evidence of the affluence of a political class in cahoots with the business circles that monopolize Greek markets and keep consumer prices high. In 2009, the prime minister you voted for on a platform of “tax the rich” and fight corruption, tells you that because of your high wages and the public sector inefficiency the country needs a bailout. The corrupt politicians who have borrowed money to turn it into lucrative public procurement projects for themselves and for the companies that bribed them are still in place. Not one of them is persecuted because they have voted into law an amnesty for themselves, while the foreign press-which you can read online- is buzzing with multibillion dollar scandals involving the government and foreign companies, or the government and land swaps with monasteries, or the government and the corrupt procuring of military equipment from France and Germany. To add insult to the injury, your government largely contributes to the European press depiction of you as southern welfare drone, overpaid, underworked, definitely not of the Protestant ethic. The vice-President of the government informs you that you and he have eaten the money together. Your government explains and the troika agrees that you need to be reformed, while the political class remains in place. You get poorer. You get angrier

Portugal’s Debt Efforts May Be Warning for Greece - As debt-plagued Greece struggles to meet Europe’s strict terms for receiving its next round of bailout money, the lesson of Portugal might bear watching. Unlike Greece, Portugal is a debtor nation that has done everything that the European Union and the International Monetary Fund have asked it to, in exchange for the 78 billion euro (about $103 billion) bailout Lisbon received last May. And yet, by the broadest measure of a country’s ability to repay its debts, Portugal is going deeper into the hole. The ratio of Portugal’s debt to its overall economy, or gross domestic product, was 107 percent when it received the bailout. But the ratio has grown since then, and by next year is expected to reach 118 percent. That’s not necessarily because Portugal’s overall debt is growing, but because its economy is shrinking. And economists say the same vicious circle could be taking hold elsewhere in Europe. Two other closely watched countries on the debt list, Spain and Italy, also have rising debt-to-G.D.P. ratios — even though they, like Portugal, have adopted the budget-slashing and tax-raising measures that the European officials and the I.M.F. continue to prescribe.

Hungary to give up flat tax as part of new deal with IMF - Hungary will have to give up on its flat tax to sign a new deal with the International Monetary Fund (IMF), according to local newspaper Nepszabadsag, quoting government sources. Hungary, like Romania, currently has a 16 percent flat tax on income, but must change taxation policy to qualify for a planned EUR 20 billion deal with the EU and the IMF. The deal should help the country avoid payment incapacity, as Hungary will have to roll over several billions of euros in debt this year. The country could also increase health contributions, cut the number of public servants, restructure companies and give up on the controversial taxation on banks. The Hungarian authorities passed the bank tax in 2010, despite criticism and warnings from international creditors. The legislation brought about a 0.5 percent tax on assets from the end of 2009, which would have raised around USD 800 million for the Hungarian budget.

Spain Says $31 Billion Power-System Debt Burden Must Be Shared -- Spanish utilities, energy consumers and the government will need to share the 24 billion-euro ($31 billion) debt burden run up by the nation’s power system, according to Industry Minister Jose Manuel Soria. “There has to be a distribution of the burden,” Soria said in a speech in Madrid. The debt can be covered by “power bills, utilities’ balance sheets or the public accounts.” The minister is wrestling with the power system’s mounting liabilities, which are excluded from public borrowing figures even as they are guaranteed by the state. Soria must divide an annual deficit from the system of about 4 billion euros between power companies and consumers to prevent debt growing further. As a first step, he froze new subsidies for renewable power plants last month, saying it would save about 160 million euros a year. Current subsidies cost consumers about 7 billion euros.

Watchdog: Another Draghi Conflict of Interest Uncovered - This is breaking news presented with interspersed editorial comment. From the report on the Council recommendation for appointment of Mario Draghi (pictured) to be the President of the European Central Bank (rapporteur: Sharon Bowles): 4. Do you have any business or financial holdings or any other commitments which might conflict you with your prospective duties, and are there any other relevant personal or other factors that need to be taken account of by the Parliament when considering your nomination? [M. Graghi:] No. Follow up: Yet, Draghi's son has been an interest trader at Morgan Stanley since 2003. From the ECB Code of conduct (2002/C 123/06):

Record ECB funding for French banks - French banks tapped the European Central Bank in December for a record €218.2 billion in loans, in a sign the sector piled in to the ECB's first offer of ultra-cheap three-year funds. The Bank of France loaned the banking sector €218.2 billion in December, up from €166.6 billion in November, according to the French central bank's balance sheet. The sum topped the previous record of €215.3 billion registered in December 2008 at the height of the 2008-2009 financial crisis, figures from Thomson Reuters Datastream showed. The European Central Bank injected €489 billion of three-year liquidity into the banking system in December in order to fend off a credit crunch and keep loans flowing to the euro zone economy.

Eurozone central bankers and the taboo subject of losses - In narrow economic terms, there is no reason why central bank bureaucrats should ever be terrified of balance sheet losses. Central banks exist to support the financial system; they are not driven by profit motives. Since an institution such as the European Central Bank, BoJ or Federal Reserve can always create more money, “losses” are primarily an accounting issue. That point was hammered home by Thomas Jordan, acting head of the Swiss National Bank. He recently gave an interview to the FT in which he insisted that there was no need to panic if the Swiss bank temporarily suffered “negative equity” as a result of losses incurred by its bold interventions to weaken the franc. If that occurred, he explained, the central bank could simply rebuild its capital buffers through its normal operations; the central bank could not go “bust”, even amid red ink.  But Jordan’s comments are notable precisely because they are so rare in their honesty; other western central banks have bent over backwards in the last couple of years to avoid discussing the issue in front of voters, even as they engage in novel forms of quantitative easing. And in the case of the ECB, its leadership has made strenuous efforts to avoid writedowns on its own sovereign bonds; witness its latest deal with the Greek government designed to provide protection against forced losses on its portfolio of Greek bonds – estimated to have a face value of about €55bn (but which it is thought to have paid about €40bn).

Euro Area Portfolio Flows - Rebecca Wilder - Today the ECB released the Euro area balance of payments for December. This is a statistical release that is worthy of only the biggest data geeks – but it is quite interesting, especially in forming relationships between FX and capital flows. I’ll demonstrate what’s been going on in EA bond, equity, and money markets in one just chart. The data come from the ECB, and can be seen in the Monthly Bulletin, Table 7.3. The chart illustrates portfolio flows as the 3-month sum total flows in and out of Euro area bond, equity, and money markets, or portfolio investment. The red line plots the dynamics of investment flows by foreign residents in (positive) and out of (negative) the Euro area. The blue line plots the dynamics of investment flows by Euro area residents in (positive) and out of (negative) the Euro area. When the blue line is positive, Euro area residents are bringing assets home, or repatriating capital. This is rare. When the red line is negative, foreign residents are moving capital out of the Euro area by selling euro assets. This is also rare. Both occurred in 2011.Foreign investors reduced exposure to euro-denominated assets, -€78.9 billion in Q4, while Euro area investors brought assets back home, +€55.8 in Q4. Spanning 2011, foreign inflows into equity, bond, and money markets turned 180 degrees from +€183 net accumulation in the 3 months ending in June to -€78.9 in Q4.

Euro Area Q4 'Flash' GDP at -0.3% q/q, First Negative Reading Since Q2 2009 - Via email from Barclays Capital : Euro Area Q4 'Flash' GDP at -0.3% Quarter Over Quarter: Eurostat has estimated that euro area GDP contracted by 0.3% q/q in Q4 in its "flash" form (BC & consensus: -0.4% q/q). This is the first negative reading since Q2 09 (-0.2% q/q), and the most negative since Q1 09 (-2.7% q/q).  As we have already pointed out in our earlier comment (Euro area Q4 GDP wrap-up: Divergent news but still looking for -0.4% q/q for the euro area), today's outturn is the result of a diverging trend vs expectations. On the negative side, we estimate (because we have applied our own seasonal adjustment to the published non-seasonally adjusted data) that the Greek GDP fell by 5.1% q/q, much more strongly than our -1.0% q/q forecast, and the Netherlands also dropped by a severe -0.7% q/q (BC & consensus: -0.3% q/q). Italy also came in below expectations (-0.1pp) at -0.7% q/q. On the bright side, Germany (-0.2% q/q, vs -0.4% q/q expected) and particularly France (+0.2% q/q, vs -0.2% q/q projected) came in stronger than expected.  After pencilling in the actual GDP levels for France and the Netherlands, and the quarterly changes from the eurostat release for the other countries (using FSO for Germany), our tracking estimate is at -0.358% q/q, thus close to the rounding point. Beyond the fact that we don't have any precise information about the exact quarterly change for other large economies (Germany, Italy, Spain) - where decimal places can play a significant role - we would like also to highlight that Ireland should also be considered a significant source of uncertainty.

Italy falls back into recession as GDP shrinks - The Italian economy contracted for a second consecutive quarter in the final three months of 2011, meeting a widely-used definition of recession, official data showed Wednesday. The country's national statistics office, Istat, said preliminary gross domestic product shrank 0.7% in the fourth quarter compared to the previous three months. Third-quarter GDP shrank by 0.2%. Compared to the final quarter of 2010, Europe's third-largest economy contracted by 0.5%. Economists surveyed by Dow Jones Newswires had forecast a 0.4% quarterly contraction. Earlier, national data showed German GDP shrank less than expected in the fourth quarter, while French GDP unexpectedly grew.

Euro-Area Economy Contracts for the First Time Since 2009 - Europe’s economy shrank less than economists forecast in the fourth quarter as a better-than- predicted performance in Germany and France helped mitigate the region’s first contraction since 2009. Gross domestic product in the 17-nation euro area fell 0.3 percent from the prior three months, the first drop since the second quarter of 2009, the European Union’s statistics office in Luxembourg said today. Economists had forecast a drop of 0.4 percent, the median of 42 estimates in a Bloomberg News survey shows. In Germany, Europe’s largest economy, GDP dropped less than economists projected in the fourth quarter, while France’s economy unexpectedly expanded in that period. German companies have boosted output and spending over the past year to meet export demand, helping soften the impact of tougher budget cuts from Spain to Ireland. While Moody’s Investors Service cut the ratings of six of the region’s member states on Feb. 13, saying policy makers haven’t done enough to restore investor confidence, the economy is showing some signs of stabilization. Euro-region economic sentiment improved in January and services output expanded.

Euro-zone GDP contracts 0.3% in fourth quarter - Gross domestic product across the 17-nation euro zone contracted by 0.3% in the final three months of 2011 compared to the previous quarter, the European Union statistics agency Eurostat said in a preliminary estimate released Wednesday. Economists had forecast a 0.4% contraction. GDP in the euro zone grew by 0.1% in the third quarter. Compared to the final quarter of 2010, the economy grew 0.7%. Earlier, national data showed that Germany, Europe's largest economy, shrank by a smaller-than-expected 0.2% in the fourth quarter, while France unexpectedly grew. Italy saw its GDP contract for a second consecutive quarter, meeting a widely-used definition of recession.

Italy Debt Rises to 1.897 Trillion Euros on Bailout Costs -- Italian government debt rose 4 percent in 2011 to 1.897 trillion euros ($2.5 trillion) on funding for European bailouts and a weaker euro that increased the cost of servicing foreign-denominated debt, the Bank of Italy said in a report today. The government contributed 9.2 billion euros to euro-region bailouts in 2011, about three times the amount of the previous year, the central bank said, after Greece, Ireland and Portugal needed rescues to avoid default. The decline in the euro added 200 million euros in debt financing costs, the report said. The increase in the debt was contained by a decline in the government’s budget deficit to 62.6 billion euros from 67 billion euros in 2010. Excluding the aid to euro-region countries, the deficit fell to 53.4 billion euros, from 63.3 billion euros in 2010. In the past two years, Italy contributed 10 billion euros to a rescue of Greece and 1.6 billion euros to both Ireland and Portugal, the central bank said.

Everything Must Go! The Great European Fire Sale - What do Rome's 2020 Olympic bid, Portugal's Shrove Tuesday carnival, Greece's sunlight, Ireland's National Stud, Spain's national lottery and Britain's national air traffic control service have in common? Answer: they are all being either sold or cancelled by European governments desperate to whip their public finances back into shape after a decade of living beyond their means. Such measures would once have suggested incomprehensible panic. Now everyone's at it. It would have been more surprising if Mario Monti hadn't called off an Olympic bid that could have swallowed up €9.5bn (£8bn) that his near-bankrupt nation didn't have. But it's not just radical belt-tightening that we're seeing. A remarkable number of nations are also doing the equivalent of selling the family silver, in a Europe-wide fire sale of state assets with no obvious precedent. Greece is probably the Continent's biggest auctioneer, with an estimated €50bn of assets up for sale (see far right). But others have had the same idea. Ireland, for example, is considering the sale of billions of euros of assets, from Dublin's historic port to the Irish National Stud horsebreeding operation.

François Hollande Versus the German Dictate - The Eurozone debt crisis has frayed a lot of nerves, particularly among Greek politicians, whose country is on the verge of bankruptcy, and German politicians, who no longer trust Greek politicians—they’d misrepresented deficits and debt in order to accede to the Eurozone, and had continued to do so up to insolvency. For that hair-raising debacle of Northern Europe vs. Greece, read…. Firewalls In Place, Markets Ready: Greece Can Go To Heck.But now another confrontation, far bigger and at the very core of the Eurozone, is shaping up: France vs. Germany, or rather François Hollande vs. the German dictate. President Nicolas Sarkozy, who’d held his nose and supported the debt-crisis remedies prescribed by German Chancellor Angela Merkel, is under siege. But his dominant opponent, socialist Hollande, has come out forcefully against every paragraph of the German dictate. He wants to push the ECB to buy sovereign bonds more aggressively. He wants to institute Eurobonds to spread risks. He rejects austerity policies and insists on stimulus. And he wants to renegotiate Merkel’s most recent oeuvre, the fiscal-union pact. But Germany is unlikely to compromise. Instead, a few northern Eurozone countries might form a bloc with Germany—a rift that might tear the Eurozone apart.

German President Resigns; Major Embarrassment to Chancellor Merkel - The German presidency is little more than a symbolic position, nonetheless, the announcement by German President Christian Wulff that he will resign is a major embarrassment to German Chancellor Angela Merkel who hand-picked Wulff as president. Spiegel Online reports Wulff Announces He Will Step Down German President Christian Wulff resigned from office after prosecutors stated a day earlier they would seek to have parliament lift his immunity. Prosecutors wanted his immunity revoked so they could formally investigate allegations he accepted favors during his tenure as governor of the state of Lower Saxony. At the center of the probe are allegations that a film producer had paid for a vacation in a luxury hotel for Wulff during his time in office in the state.  Speaking nearly a half hour after Wulff's resignation, German Chancellor Angela Merkel appeared before reporters to say she had received Wulff's resignation with "great respect and deep regret." The chancellor also noted that the development underscored the strength of the German legal system because it showed that all people are treated equally, regardless of their position.

Just as Greece complies at last, Europe pulls the plug - Officials from the EU and the International Monetary Fund made two grave errors when they swooped into Greece in mid-2010 and dictated the now hated "Memorandum". The regime of drastic cuts has tipped the economy into a violent downward spiral. They thought that private industry would muddle through as the state went through the austerity mincer. What the EU-IMF "Troika" did not fully understand is how many firms were really part of the state in disguise.  "The Greek government outsources everything," said one official with close knowledge of the events.  Faced with the guillotine, the state first slashed procurement contracts and then stopped paying its bills altogether. The government is now €7bn (£5.8bn) in arrears to private companies, including €3bn in unpaid VAT refunds for exporters. It is why business has borne the brunt of the fiscal squeeze, suffering 450,000 job losses, and why Greece's unemployment has soared to 21pc.  At the same time the banking system seized up. More than €60bn of deposits were withdrawn. By November, no Greek bank could issue a letter of credit accepted anywhere in the world, with calamitous implications for trade. "Greece became a leper, and is now stuck in Catch-22,"

Next Steps For Greece - And so we are back to the same fiscal feudalism that Germany demanded, and the Greece refused weeks ago. We have been pondering the ECB bond swap 'news-story' and the market's reaction to this with incredulity. Our earlier discussion of the deal (here and here) pointed to the problems and now Peter Tchir explains how this debt swap is actually a step towards a Greek default (thanks to the removal of the CAC-encumberance within the ECB). It is also a large step towards colonization as the FT notes that the bailout terms will contain "unprecedented controls" on Athens. It is our earlier comments on the unintended consequence of this ECB action - that of explicitly subordinating all other sovereign bondholders in Europe, and that this would likely raise the very large specter of legal action by other Greek bondholders arguing the ECB has received unfair treatment - that the FT also brings to investors' attention (which is seemingly being ignored on the eve of OPEX). Whichever way you look at this - it is not good for Greece and could have significantly negative implications for the rest of the European sovereign bond market just as investors are starting to dip a toe in the cool risk water once again.

Exclusive: Euro zone ponders delay of 2nd Greek bailout program Reuters: (Reuters) - Euro zone finance officials are examining ways of delaying parts or even all of a second bailout program for Greece while still ensuring it avoids a disorderly default, several EU sources said on Wednesday. The delays could possibly last until after Greece holds elections expected in April, they said, although it depends to what extent Greek political leaders make firm commitments on further spending cuts and labor reforms unpopular with voters. While most elements of the package, which will total 130 billion euros, are in place, some euro zone finance ministers are not satisfied that all Greece's political party leaders are fully behind the reforms and so want legal guarantees. It is also not clear that Greece's debt-to-GDP ratio, which currently stands at around 160 percent, will be cut to 120 percent by 2020 via the agreement, as demanded by the 'troika' of the European Commission, IMF and European Central Bank. "There are proposals to delay the Greek package or to split it, so that an immediate default is avoided, but not everything is committed to," one official briefed on preparations for a euro zone finance ministers call later in the day told Reuters.

Forget about preventing default in Greece, control it, says Europe - : Greece’s European partners are increasingly skeptical that Athens can avoid default. The highly indebted country is working feverishly to secure a debt write-off to avoid default, but international investors see even that as a default of sorts.With only weeks to go before a crucial bond repayment date, statements from European leaders reveal a growing mistrust in the Greek political class's ability and willingness to implement deficit cutting measures. Without those measures, Greece will not receive a necessary second bailout from international lenders, and without the bailout, it will likely default when its debt comes due in March. According to some analysts, Europe is readying for a Greek bankruptcy. “Some of the core economies in the eurozone are taking a much tougher stance on Greece now and seem to be prepared to allow it to default,” says Ben May, European economist at the London-based research consultancy Capital Economics. “Add to that the number of stumbling blocks remaining and there is a real chance Greece could default in March.”

Greece is Out of Time, Again -There is definitely something odd happening in Europe. I can’t quite put my finger on it, so I thought I would list out my musings on the topic and see what I can come up with. Firstly, overnight there was talk that the ECB appears to have entered into a bond swap deal with Greece: The national central banks in the euro zone are set to exchange their holdings of Greek bonds into new bonds in the run up to a private sector debt deal to avoid taking any forced losses, euro zone sources said on Thursday. The euro zone is putting the finishing touches to a second bailout deal for Greece for finance ministers’ approval on Monday, paving the way for a debt swap with its private creditors needed to avoid a ruinous default in March. The deal, which aims to halve in nominal terms what Greece owes to investors, slashing its debts by 100 billion euros, is set to include a legal requirement for bondholders to accept losses. This would have put the ECB in a tricky position, leaving it open to claims it was financing governments. So what does this mean? Well, if it is true, IMHO it means that the PSI+ deal is nowhere near where it is claimed to be and Greece is just a few steps away from introducing collective action on its bonds.

The Greece game turns chaotic - Back in 2010 the ECB started buying Greek bonds to try to prop up Greece’s debt markets. It did so in the open market, which meant that it was the highest bidder at the time; reportedly it paid somewhere in the region of 75 cents on the euro for each bond. They’re currently trading at about half that level, so when the bonds get their 50% haircut, it’s going to lose billions of euros, right? Wrong. For one thing, as John Carney pointed out in January, it didn’t really spend money on those bonds, it just printed money. If Greece doesn’t pay the ECB back, the worst thing that happens is that the euro money supply gets expanded a little. But for another thing, it turns out that the ECB had a little trick up its sleeve all along: The national central banks in the euro zone are set to exchange their holdings of Greek bonds into new bonds in the run up to a private sector debt deal to avoid taking any forced losses, euro zone sources said on Thursday…  What’s happening here is many things, but it’s most definitely not a technicality. The ECB is taking its stock of old Greek bonds, which are worth very little and which are going to suffer a whopping great haircut next month, and swapping them out for shiny new bonds which Greece is going to pay in full. This is no normal bond exchange: No one else gets this deal, and there are no tag-along rights for private-sector investors who might fancy the opportunity to do something similar. The ECB’s stock of Greek bonds have suddenly become senior to everybody else’s stock of the exact same securities

In Europe, the reasons to fear a Lehman-like event still seem compelling - It appeared that the brinkmanship tactics had pushed Greece over the edge on Feb 12 as Athens was set ablaze in protest. Now it appears that the European finance ministers are slipping over the edge. Strong doubts remain, and are being expressed, about whether a second aid package is throwing good money after bad. Papademos has failed to deliver. As former ECB vice president, he was expected to deliver two things: new austerity and implementation. He has, after much fanfare, agreed to the new austerity demands. The rub, according to the creditor nations, is the commitment. Domestic considerations are blunting the international priorities. When this seemed to be the case in Italy late last year, Germany’s Merkel reportedly helped push Berlusconi out. However, it seems more difficult to repeat. It seems European officials would prefer to extend Papademos’s term. Samaras has no incentive to agree to postpone elections that he would likely win. Nor can European officials bar Samaras, yet his apparent reservations and desire to modify/renegotiate the agreements cannot but undermine confidence in a government he would lead.

Is The Greek Day Of Judgment Upon Us?: Calls from analysts, investors and even journalists for Greece to hard default and leave the eurozone have increased dramatically over the last month, as it becomes apparent the debt restructuring EU leaders worked out last July is not deep enough to be sustainable. But is this really the deciding moment for Greece? Some would say Greece is so close to defaulting once €14.4 billion ($18.7 billion) in bonds mature on March 20 that this really is the end. They would cite politicians who have laid down an ultimatum for Greece; just this morning Luxembourg's Finance Minister said Greece must choose between gripping reforms or euro exit, according to AFP. They will harp on the likelihood that the current plan on private sector involvement that doesn't trigger a credit event either won't happen or will completely destroy the credit default swap markets. On the other hand, there are many signs indicating that EU leaders are once again willing to "kick the can down the road." Headlines yesterday indicating they could delay dispersion of some or all of the bailout funds promised to Greece until April or later suggest they are willing to do just enough to keep the country from a disorderly default but not enough to truly fix the country's sustainability problems.

Athens rehearses nightmare of default  -On Friday afternoon, Constantine Michalos, president of the Athens chamber of commerce, sat in his office – around the corner from where protesters were hurling chunks of marble at riot police – and contemplated what was once unthinkable: that Greece would default on its debt and then be forced into a messy exit from the euro. “All hell would break loose,” Mr Michalos said, sketching a society that would quickly run short of fuel, food, medicine and necessities. “You would have social upheaval.” On Monday, eurozone finance ministers gather in Brussels to consider a €130bn bail-out that Greece counts on to avoid such a scenario as early as next month. Since the crisis began nearly two years ago, it has been widely held that a default would prove disastrous not only for Greece but also for the entire European Union, and that it was to be avoided at all costs. This week, that assumption was questioned as never before. Some officials in the Netherlands, Germany and Finland – three of the eurozone’s four remaining triple A governments – now argue that the blowback from a Greek default might not be so debilitating, after all.“I am not advocating a Greek default, hard or soft – but I’m not excluding the possibility of it if the Greeks don’t get their acts together,” Alexander Stubb, Finland’s Europe minister, told the Financial Times.

Greece “Officially Defaults” March 23, Banks Close - Wonder why European leaders appear more like a rotating cast of bumbling 3 Stooges than a team of coordinated fraternal bureaucrats throughout the debt crisis in Greece? British investigative reporter John Ward of The Slog may have shed some light on to the matter of Greece and the strategically planned hard default of the beleaguered nation’s financial obligations at the close of business March 23. According to Ward, that following Monday, the 25th, Greek banks will close, then presumably usher in the drachma in addition to the shock, confusion and panic expected in markets to the surprise outcome of the two-year long display of alleged unity between France (NYSEArca:EWQ), Germany (NYSEArca:EWG) and other monied parties to solving Greece is revealed to be just a ruse, a delay tactic for a preparation of the event. “A written document giving firm dates and detailed actions for a planned Greek default has been in the possession of two top Wall Street bank currency trading bosses since the second week in January,” Ward begins his blog post of the morning of Feb. 16. “The Slog has separate but corroborative sources affirming the existence of the document, and a conviction among senior bank staff that – at least at the time – the plan represented ‘a timetable, not a contingency’. The plan gives a firm date of March 23rd for default to be announced after the close of business.”

Iceland upgrade sure makes default look palatable - A friend commented to me when he saw the story that Iceland had been upgraded by Fitch, the ratings agency, that this "sure makes default look palatable". Obviously, Iceland is not out of the woods yet but their relative success says there are other ways to get it done. The BBC reports: Iceland is safe to invest in again, according to Fitch, which has upgraded its credit rating three years after its economy spectacularly collapsed. Fitch raised Iceland’s sovereign rating by one notch, to BBB- from BB+, meaning that the country’s debt is now "investment grade". Iceland’s economy imploded under a mountain of debt in 2008, forcing an International Monetary Fund bailout. Since then, the debts of its neighbours have sparked a crisis in the eurozone. Fitch said the decision "reflects the progress that has been made in restoring macroeconomic stability, pushing ahead with structural reform and rebuilding sovereign creditworthiness".

U.K. Jobless Claims Rise More Than Forecast as Cuts Bite - U.K. jobless claims rose more than economists forecast in January and unemployment held at the highest rate for 16 years in the fourth quarter as the economy contracted. The number of people claiming jobless benefits rose by 6,900 to 1.6 million, the highest since January 2010, the Office for National Statistics said today in London. The median of 24 forecasts in a Bloomberg News Survey was for a gain of 3,000. Unemployment measured by International Labour Organization methods rose by 48,000 to 2.67 million in the fourth quarter, leaving the rate at 8.4 percent, the most since the end of 1995. The data fueled opposition claims that Prime Minister David Cameron is trying to cut the budget deficit too quickly after the economy shrank 0.2 percent in the fourth quarter. Government forecasters predict unemployment will reach 8.7 percent by the end of 2012 as the private sector fails to make up for the loss of tens of thousands of public-sector jobs.

UK Unemployment Rises To The Highest Level In 17 Years: British unemployment rose by 48,000 to 2.67 million in the three months to December. The unemployment rate rose from 8.3 percent to 8.4 percent, the highest level in 17 years, according to the Guardian. British unemployment is now worse than American (8.3 percent). The UK saw 6,900 new jobless claims, worse than market estimates of 3,000. This may be another sign that British austerity has backfired.

'True' UK unemployment is 6.3m, says TUC - The true state of British unemployment is more than double its current level at 6.3 million people, if alternative measures including adults stuck in part-time work are used, according to research published on Tuesday. The TUC, the umbrella body for UK trade unions, said the total is swelled beyond the official figure of 2.68 million if new categories such as underemployed adults are included. Britain bases its jobless data on a widely used formula that defines an adult as unemployed if they are out of work and have actively sought a new post over the past month. However, the TUC said incorporating six measures of joblessness that are common in the US would paint the UK job market in a much bleaker light. Those include unemployed people who want work but have not actively sought it for six weeks, who number more than 2.2 million in the UK, and "underemployed" adults who are in part-time work because they cannot find full-time work, who add a further 1.3 million to the unemployment total.

Frozen to death as fuel bills soar: Hypothermia cases among the elderly double in five years   - The number of pensioners dying from hypothermia has nearly doubled in five years, a period when a succession of cold winters has been coupled with drastic rises in energy bills. The official figures emerged after several days of Arctic conditions which drove temperatures across the whole country as low as minus 10C (14F). They showed that 1,876 patients were treated in hospital for hypothermia in 2010/11, up from 950 in 2006/07. The number of sufferers who died within 30 days of admission shot up from 135 to 260. Three-quarters of victims were pensioners, with cases soaring among the over-60s more than any other age group.

Pension Provider to British Government – “QE Actually Does Kill Demand!” - More pension funds are getting their act together and calling the British government on their dodgy pseudo-stimulative policies. The British pension provider Saga has released an excellent counterargument to the recent round of QE announced by Bank of England governor, Mervyn King (an argument that we have been pushing for some time). Saga are seething and you would guess that pension recipients are no less enraged because the effects that QE is having on pension funds appears to be quite devastating. Dr. Ros Altmann, Director-General of Saga, made the following statement which will resonate with many:  The Bank of England has consistently ignored the dreadful damage that its QE policy has inflicted on anyone coming up to retirement. During 2012, record numbers of people will reach age 65 and many will need to buy an annuity. Around half a million annuities are sold each year and, since 2008, annuity rates have fallen by about 25%, most of which is due to the effect of QE. That means over a million pensioners will be permanently poorer for the rest of their lives, as they have bought an annuity at rates that have been artificially depressed by the Bank of England. Annuity rates have plunged, meaning the people’s hard-earned pension savings are not giving them the pension income they could have achieved even just a few months ago. That means less spending power in the pockets of pensioners; and that, in turn, means less demand in the economy.

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