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

Saturday, February 4, 2012

week ending Feb 4

Fed's Balance Sheet Grows A Little In Latest Week - The U.S. Federal Reserve's balance sheet increased slightly over the last week as the central bank continued with a plan to adjust its portfolio and spur an economy it expects to grow only modestly this year. The Fed's asset holdings in the week ended Feb. 1 were $2.927 trillion, up from $2.922 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities held steady at $1.662 trillion in the previous week. The central bank's holdings of mortgage-backed securities rose to $836.01 billion from $835.62 billion. The Fed's portfolio has more than doubled since the financial crisis of 2008 and 2009, as the central bank bought mortgage-backed securities and government bonds The report Thursday showed holdings of Treasury securities with a remaining maturity exceeding 10 years rose over the past week. The Fed last week updated projections of the economy over the coming years. It forecast growth this year ranging 2.2% to 2.7%. Thursday's report showed total borrowing from the Fed's discount lending window was $8.14 billion on Wednesday, down from $8.18 billion a week earlier. Commercial banks borrowed $10 million from the discount window, up from $7 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts was $3.414 trillion, up from $3.407 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts rose to $2.684 trillion from $2.679 trillion in the previous week. Holdings of federal agency securities rose to $729.64 billion from the prior week's $728.20 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--February 2, 2012

The Federal Reserve promises free money forever  -- The U.S. Federal Reserve Bank announced last week that it would make money available for free forever. This was in response to a persistently weak economy and a desire by fed board members to be asked back to the annual JP Merganser Chaste Bank costume ball. "Free is a good word," said Federal Reserve Bank president, Ben Bankster, commenting of the Fed's action. "Everybody likes free stuff." JP Merganser Chaste president J. Me Diamondback agreed. "We get all kinds of free stuff from the Fed, and we really like it," he said. "And, the board of governors of the Fed should definitely be checking their mailboxes for invitations to our annual costume ball." Some critics pointed out that JP Merganser Chaste and other banks are not using the free money for lending which would help spur economic activity. "Not true," replied Diamondback. "We're showing our appreciation for all this free money by lending it back to the Fed to earn interest and lending it to the federal government which has been so nice to us. How patriotic is that?"

Gross Says Witnessing Death of Abundance, Birth of Austerity --- Bill Gross said the zero-bound interest rate policies embraced by central banks including the Federal Reserve may end up killing as opposed to creating credit and developed economies may suffer accordingly. While recent actions by policy makers provide assurances that short and intermediate U.S. bond yields may not change for years, any potential for price appreciation is limited, Gross, who runs the world’s biggest bond fund, wrote today in a monthly investment outlook released on Newport Beach, California-based Pacific Investment Management Co.’s website. “Monetary and fiscal excesses carry with them explicit costs,” Gross wrote. “My intent really is to alert you, the reader, to the significant costs that may be ahead for a global economy and financial marketplace still functioning under the assumption that cheap and abundant central bank credit is always a positive dynamic.”Zero-bound interest rates don’t always force investors to take more risk by purchasing stocks or real estate, Gross said. When investors are more concerned about the return of, rather than returns on, their money, the liquidity being provided by central bankers can instead be “trapped” in a mattress, bank account or Treasury bills, he wrote. “We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time,” Gross said.

The Central Bank Versus The American People - The Federal Reserve has now committed to keeping short-term interest rates near zero for almost three more years. They have also committed to a 2% inflation target. Some say QE3 is just around the corner, but that's not my subject today. Tim Iacono took note of Ben Bernanke's disingenuous answer to a question during his latest news conference (video below). Blue shading highlights Bernanke's answer. In the case of savers, we think about all these issues and we certainly recognize that the low interest rates we’re using to try to stimulate investment and expansion of the economy also pose a cost on savers who have a lower return. And we do hear about that obviously and we do think about that.I guess the response I would make is that the savers in our economy are dependent on a healthy economy in order to get adequate returns, in particular, people who own stocks, corporate bonds, as well as Treasury securities. And if our economy is in really bad shape, then they’re not going to get good returns on those investments. So, I think what we need to do is, when the economy goes into a very weak situation, then low interest rates are needed to help restore the economy to something closer to full employment and increase growth and that, in turn, will lead ultimately to higher returns across all assets for savers and investors.

Counterfeit Money, Counterfeit Policy - Counterfeiting is illegal because it is the false creation of value. The counterfeiter takes low-value paper and turns it into high-value money, which is fundamentally a claim on the real productive value of the economy that issues the currency and recognizes it as a proxy means of exchanging that productive value. Counterfeiting is illegal because the counterfeiter creates no additional value--he creates only the proxy for value. Creating real value--adding meaningful goods or services to the economy--is tedious, hard work. How much easier to simply transform near-worthless paper into a claim on actual goods and services. If this is illegal, then would somebody please arrest the Board of the Federal Reserve for counterfeiting? The Fed has blatantly printed money without creating any real value to back up their added claims on productive value. Hence they are counterfeiting, pure and simple. A government based on rule of law would arrest these fraudsters and cons at the earliest possible convenience. And while you're drawing up the indictment, can you also charge them with counterfeiting competence and policy, as they have demonstrated the Peter Principle par excellence: the Board has risen to its highest level of incompetence. Their counterfeit policies have wreaked incomparable damage on the real productive economy.

Plosser Says He Didn't Back Fed's Late 2014 Rate Pledge - -- Philadelphia Federal Reserve Bank President Charles Plosser said he didn’t support the central bank’s decision last month to extend the time frame for low rates at least through late 2014. “Economic conditions have modestly improved since our December meeting, especially on the employment front,” Plosser said. “I saw little justification to further ease monetary policy.” The Federal Open Market Committee on Jan. 25 extended its commitment to keep rates low by at least 18 months as moderate rates of economic growth have failed to reduce unemployment below 8.5 percent since the 18-month recession ended in June 2009. The Fed said in December that economic conditions were likely to warrant low rates “at least through mid-2013.” The central bank has held the benchmark lending rate in a range of zero to 0.25 percent since December 2008.

Fed’s Evans Would Back ‘Very Aggressive’ Debt Purchases - A high-profile defender of Federal Reserve policies to stimulate the U.S. economy would back “very aggressive” debt purchases by the Fed, and said he believes the central bank should more explicitly state the conditions necessary for a federal-funds rate increase. “We still have a ways to go” before the Fed would begin to raise interest rates, said Charles Evans, president of the Federal Reserve Bank of Chicago. The yield has remained near zero since December 2008 and late last month the policy-making Federal Open Market Committee indicated that the rate would stay “exceptionally” low at least through late 2014.

Fed still divided as Fisher sees no need for QE3 (Reuters) - A third round of large-scale asset purchases by the Federal Reserve is not needed and would compound the difficulties of tightening monetary policy when the time finally comes, a top Fed official said on Thursday. "Personally I don't see how you can justify it given the state of the current economy," Dallas Federal Reserve President Richard Fisher said in remarks that underscored the sharp divide within the U.S. central bank over what to do in the face of an uneasy economic recovery. Earlier Thursday, the head of the Chicago Fed, Charles Evans, advocated a much more forceful approach in tackling unemployment, even if it means jumping into a potentially controversial new round of so-called quantitative easing, or QE3. "I would be very aggressive," Evans told a small group of reporters. Fisher and Evans stand on opposite ends of a wide philosophical spectrum of the 17 Fed policymakers, a divide that was clear last week when the central bank anonymously published their individual forecasts: some expect rates to rise this year while others don't see that until 2016.

Criticism From Republicans on Fed Strategy - Congressional Republicans criticized the Federal Reserve on Thursday for working to reduce unemployment and revive the housing market rather than maintaining a single-minded focus on inflation. The Fed’s chairman, Ben S. Bernanke, was sharply questioned by members of a House committee about the Fed’s announcement last week that it planned to hold short-term interest rates near zero until late 2014, a measure that the Fed described as necessary to support a faster pace of economic recovery. “I think this policy runs the great risk of fueling asset bubbles, destabilizing prices and eventually eroding the value of the dollar,” said Representative Paul Ryan, the Wisconsin Republican who is chairman of the House Budget Committee. “The prospect of all three,” Mr. Ryan said, “is adding to uncertainty and holding our economy back.” Mr. Bernanke was calm and careful in his responses, but he did not back down. He told the committee that the economy, and the housing market in particular, would need help for years to come from the Fed and Congress.

Paul Ryan Bashes Bernanke For Killing Savings, Distorting Markets - In a fascinating exchange between Federal Reserve Chairman Ben Bernanke1 and Congressman Paul Ryan, the Republican from Wisconsin accused the Fed of eroding peoples’ savings, creating a false sense of security by manipulating the yield curve, and bailing people out by indirectly engaging in fiscal policy. Bernanke hasn’t been comfortable the last couple of times he was forced to testify in Congress. On Thursday, the Fed Chairman was questioned by the House Budget Committee on the state of the economy. After giving his usual description of the economic outlook (inflation has remained moderate, unemployment is high, Fed will do whatever it can to keep the modest recovery on track), Bernanke faced the sharp tongue of Paul Ryan, Chairman of the House Budget Committee. More than questioning him, Ryan expressed his concern that Fed policy would cause more harm than good. Ryan told Bernanke the Fed was “too loose for too long,” effectively causing a dislocation of capital that led to the real estate bubble and subsequent financial crisis. Ryan said he felt fear that because Bernanke denied the Fed was responsible for the crisis, via ultra low interest rates for too long, his current policy mix could cause economic disruptions to a possibly catastrophic magnitude.

Low rates: the drug we can all do without  - Low interest rates and novel forms of monetary accommodation, such as quantitative easing, have become seen as a panacea for economic ills. The US Federal Reserve has committed to holding rates around zero for the foreseeable future. Faced with deep-seated economic problems, other central banks are likely to follow. Financial markets have generally reacted positively to low rates, pushing up asset prices. However, low rates point to a worrying lack of economic growth and the increasing risk of deflation. Indeed, the relationship between rates and economic activity is tenuous. The cost of funds is only one factor among several complex drivers of demand. In the housing market, demand depends on many things – the level of deposit required, existing home equity (the price of a house less outstanding debt), the ability to sell a current property, income levels and employment security.  And businesses, in the absence of growing demand for their products, are unlikely to borrow to invest in new capacity based purely on the low cost of debt. In reality, low interest rates create economic distortions, especially where real interest rates (nominal rates adjusted for inflation) are low or negative. Low cost of debt encourages substitution of labour with capital in the production process. Given that 60-70 per cent of activity in developed economies is driven by consumption, this shift reduces aggregate demand as employment and income levels decrease. Low rates favour borrowing, encouraging substitution of debt for equity in financing structures and increasing financial risk. Where companies and nations are overextended, incentives to reduce debt decrease. In fact, low rates, which lower coupon payments, are economically identical to a disguised reduction of the principal amount of the loan.

Credit where it's due - IT SEEMS that a few people were surprised, and perhaps disappointed, to see me offer some praise to Ben Bernanke for changes announced in the most recent Federal Open Market Committee statement. Don't get me wrong. I would like the Fed to do more, and I would have preferred it to have done more some time ago. I think we can chalk quite a lot of the weakness of the American recovery up to insufficiently stimulative monetary policy—a hugely costly policy error. Every once in a while, however, it's worth taking a break from haranguing policy officials when they show that they're learning. And every once in a while, it's important to remember the context in which Fed officials are making policy. Mr Bernanke has a difficult job. He's tasked with managing the world's primary reserve currency and its largest economy through one of the modern world's most treacherous economic periods. It's a position within which one can't afford to behave too incautiously. It is to Mr Bernanke's great credit that, recognising the huge importance of the Fed in the world economy, he took the chairmanship with an eye toward shepherding its institutions toward greater transparency and accountability. His predecessor ran the Fed in near-dictatorial fashion, and sought to be as obscure in his messaging as possible.

The Fed's communications problem - LET'S take a break from patting the Fed on the back to talk about some of the potential difficulties inherent in the Fed's current communications strategy. At the Financial Times old ECB hand Lorenzo Bini Smaghi writes: The first relates to the time horizon over which the Fed is supposed to achieve price stability, namely the long-run. This differs from most other central banks in advanced economies, where price stability is targeted over a horizon of two to three years... Monetary policy produces its effects with lags of one to three years. This is the period over which the central bank should be held accountable. Focusing over this time horizon also helps market participants. For instance, it’s not too difficult to anticipate a monetary policy tightening if a central bank publishes forecasts that show inflation rising above the stated objective for the next two to three years. But if the objective of price stability is defined over the longer term, communication becomes more complex. In particular, the link between the inflation forecasts and the policy decision is unclear... Here are the Fed's latest economic projections: If you read the fine print at the bottom of the forecast, you see that each participant's projections build in what they assume to be an appropriate monetary policy. In other words, this is what the Fed thinks is appropriate given its ability to manipulate the economy.

Yes, the Fed Still Has a Communication Problem - Ryan Avent's initial enthusiasm for the Fed's new communication strategy is beginning to wane.  Avent began to lose his new-found Fed religion after reading Lorenzo Bini Smaghi's critique of the Fed's new policies.  Here is Smaghi: [I]f the objective of price stability is defined over the longer term, communication becomes more complex. In particular, the link between the inflation forecasts and the policy decision is unclear. What should market participants derive from a published inflation forecast above the two per cent target in the long run (but not necessarily over the next two years)? Should they expect a tightening to take place? And when? The long run is not a “policy-relevant” time horizon and thus has little value for those attempting to understand the central bank’s next moves. Welcome to the club.  As I have been arguing the past few weeks, the Fed's new communication strategy is at  at best white noise to the market and at worst worst a quagmire of confusion. For example, how should one interpret the fact that FOMC's forecast did not just push out the horizon for increasing the federal funds rate but also lowered the expected growth rate for real GDP in 2012 and 2013? Is the  FOMC signalling additional monetary stimulus or  a weaker economy to come over the next two years?   There is a better way to this. 

Entering The Debt Dimension - We ended last week’s newsletter explaining why we were not betting on an announcement for more quantitative easing by the Fed, although “consensus” economists claimed to be. We argued that additional QE was unlikely, citing our friends (Bruce Krasting, Lee Adler of the Wall Street Examiner, and Jon Hilsenrath - with his direct line to Bernanke). This week, those expecting easing were disappointed; there was no mention of launching any new program for large-scale asset purchases.  But the Fed did extend the period it anticipates keeping interest rates at or near zero percent (ZIRP). (See Wednesday’s press release here) The Fed also plans to continue its program to extend the average maturity of its holdings of securities, Operation Twist, and to maintain its policy of reinvesting principal payments from its existing holdings, including mortgage-backed and Treasury securities. It is currently holding nearly $3Tn in total assets. The returns from those assets are significant, and the Fed’s balance sheet is continuing to grow even after the end of its asset purchase programs.

Easier does it - WRITING on the surprisingly strong January jobs report, my colleague says: Will the better tone to the jobs market deter the Federal Reserve from further monetary easing? Not yet. Ben Bernanke, the Federal Reserve chairman, acknowledged the moderately better tone to economic data yesterday, but the last official Fed statement and press conference strongly suggested the Fed is inclined to do more quantitative easing; we’d have to get more, and better, reports like this one to take that option off the table. I agree that this report probably isn't enough to change the Fed's outlook. The jobs numbers beat expectations, but labour market improvement isn't a surprise to anyone; the private sector has been adding nearly 200,000 jobs a month for the past six months. When the Fed met in late January it knew things were better than they'd been in a while, if not quite this good. The report certaintly shouldn't deter the Fed from taking additional action. Even if the natural rate of unemployment has risen as high as 6.5%, the present unemployment rate of 8.3% implies quite a lot of labour market slack. Inflation has been falling in recent months, and the latest employment report shows that earnings growth has been muted, even as the pace of hiring has increased.

If Only Bloggers Ran the Fed... - From the latest Kauffman Economic Outlook, a quarterly survey of economic bloggers, we find this figure: Too bad bloggers cannot run the Fed.  At least we have changed the conversation so that the Fed is talking about NGDP targeting. P.S. A note to those bloggers who want the central bank to target repo rates.  If a central bank successfully adopts a NGDP level target, then many of the problems surrounding repos and interbank lending would disappear.

ZIRP and Interest Income, by Tim Duy: Edward Harrison at Credit Writedowns describes the Fed's zero interest rate policy as "toxic," noting that it is a transfer from savers and fixed-income investors to borrowers. On net, this is simulative if the spending propensities of the latter exceeds that of the former, but the willingness of the borrowers to spend is constrained by weak household balance sheets. The Fed is thus pushing on a string, and possibly even making matters worse by reducing the income flow to households. Harrison points to the following chart to illustrate the severity of the problem: If the Obama Administration takes advantage of low interest rates and is able to push forward with refinancing efforts for underwater borrowers, then we can expect an at least temporary economic boost of potentially substantial magnitude. See Joe Gagnon for estimates. I would expect more modest outcomes, as the Administration has proved itself capable of half-hearted efforts in the past. Anything, however, would be helpful at this point. My question is how much of the zero interest rate environment is attributable to Fed policy directly? Or, in other words, is the Fed really just following the economy down? It seems that the banking system is awash with cash - note the trend of total checkable deposits:

Monetary Policy: The Federal Reserve Is Doing It Wrong... - Brad DeLong - That has to be the conclusion of anybody coming at the problem of monetary policy from any applied-math optimal-control perspective. James Hamilton sends us to the Fed's forecasts of inflation: If the Fed's view is that the PCE-deflator unemployment rate should be 2.0%/year on average (and why the PCE deflator? Why not the GDP deflator? Investment-goods prices are prices too), then if the Fed had a single mandate its policies should be such as to get us to 2.0%/year inflation if not next year than the year after. But it is not until the "longer run" three and more years into the future that the Fed's expectation of inflation converges to 2.0%/year. But the Fed does not have a single mandate: it has a dual mandate. And that dual mandate commands it to tolerate short-run inflation higher than it thinks is ideal when by doing so it can reduce excessively high unemployment.

Inflation expectations and the Fed - Noteworthy among the information released by the U.S. Federal Reserve last week was a statement of the FOMC's longer run goals and policy strategy. A key section reads: 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.  This represents an important step in the direction of an explicit inflation target, which some academic research suggests might help lead to greater financial stability. It's very useful to connect this statement of longer run goals with other details released last week on what the Fed is expecting over the next several years. A key takeaway from the latter is the Fed's expected behavior for the PCE deflator:So the FOMC is saying that it would like inflation to be about 2% annually, but is expecting it only to be 1.4 to 2.0% over the next 3 years. Putting 2 and (less than) 2 together, the FOMC is telling us that, based on its price stability objective alone, the Fed is expecting inflation to be lower than it would like. In other words, even if the economy were at full employment, a little more stimulus would be called for.

Bernanke Defends Fed Inflation Stance - Federal Reserve Chairman Ben Bernanke in testimony to the House Budget Committee said that the central bank won’t tolerate higher inflation. In an exchange with Budget Committee Chairman Paul Ryan, who isn’t a big fan of Fed policy, Bernanke said those who believe the central bank has changed its tune on inflation control are wrong. Ryan argued the latest Fed statement and the Fed’s interest in having a “balanced” strategy to achieve its policy mandates creates the perception the Fed is willing to tolerate above-target inflation. Bernanke said that is a misunderstanding, and that the “balance” issue affects the speed with which the Fed addresses its jobs and prices mandate. And in any case, Bernanke sees no threat on the inflation front. “We are not seeking higher inflation, we do not want higher inflation and we will not tolerate higher inflation,” Bernanke said.

Two Measures of Inflation: New Update I've updated the accompanying charts with the latest Personal Consumption Expenditures price index from the Bureau of Economic Analysis. The annualized rate of change is calculated to two decimal places for more precision in the side-by-side comparison. The BEA's PCE price index for December, released yesterday, showed core inflation to be approaching the Federal Reserve's 2% target at 1.85%. Core CPI, released two weeks earlier, is now above the target zone at 2.23%. The Fed, of course, is on record as using Core PCE as its inflation gauge:  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. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances. [Source] The October 2010 core CPI of 0.61% was the lowest ever recorded, and two months later the core PCE of 0.93% was an all-time low. However, we have seen a significant divergence between the headline and core numbers for both indicators, especially the CPI, at least until a few months ago, when energy prices began moderating. The latest headline CPI and PCE are both off their respective interim highs set in September.

It Is Pretty Obvious That Inflation Is Part Of The Government Plan - Forget about lost decades. Forecasts that we’ll be turning Japanese couldn’t be further from the truth. Here’s why.  It’s simple, really. Deflation is not in the interest of anybody in power, so it’s very unlikely to happen. The U.S. Federal Reserve‘s policy move to target inflation last week just re-emphasizes this point. That’s not to say deflation is a bad thing for everybody.For savers and those living on fixed incomes, deflation would be a very good thing indeed. Their income would gradually increase in real terms, and their savings would become steadily more valuable. Holders of Treasury bonds would also gain mightily from deflation. However, the very people who would gain from deflation are not in power.The People’s Bank of China can’t vote in the U.S. (yet!), Ron Paul is not president, and there is not an organized and powerful  savers’ political movement. After all, this is not Germany

How to Prepare for a Deflationary World - With interest rates at zero and forecasts for very low economic growth, fears that the United States could experience falling prices, or deflation, have reappeared. Experts generally do not expect prices to actually fall, but it's not something they totally disregard. And for retirees, deflation sharply increases the need to find reliable, if modest, investment returns. Falling prices may seem to be a consumer bargain. But when prices fall, consumers tend to put off discretionary purchases in anticipation that prices will be even lower in the future. The decline in purchasing eventually hurts corporate profits, wages, and personal incomes. Paying debts with shrinking incomes becomes increasingly difficult, which leads to further spending cuts. And on it goes, in a reinforcing cycle of shrinking economic activity. Japan suffered an extended period of deflation in the 1990s. Today, the country's economy continues to be bottled up in a low inflation-low growth stagnation that continues to sap its economy.

How the Fed Presidents' Assets Stack Up - The Federal Reserve, in its latest show of transparency, on Tuesday made available to the public the annual financial disclosures filed by the 12 presidents of its regional banks for 2010. Unfortunately, only the Atlanta Fed put its president’s disclosure online. So we’re posting the entire set in a document viewer. What did we learn? Some Fed presidents are very wealthy; a few have strikingly little wealth. Some hold shares in individual companies; some prefer index funds. And as a group, they have much more reason to fear inflation, which weighs on the wealthy, than to fear high unemployment, which so far has not cost them their jobs. The disclosures do not include the value of personal residences or retirement benefits accrued through the Fed. James B. Bullard, president of the Federal Reserve Bank of St. Louis, submitted a blank disclosure with a note saying that all of his assets were in those exempt categories. The disclosures also do not include annual salaries, information that the Fed discloses separately. The 12 presidents received an annual average salary of $345,000 in 2010.

Fed’s Fisher: All FOMC Forecasts ‘Are Guesses’ - The Federal Reserve‘s newly expanded forecasts of the economic and monetary policy outlook are at best shots in the dark that should be viewed cautiously by financial markets, a top central bank official said Thursday. “I would caution, again, that at best, the economic forecasts and interest-rate projections of the [Federal Open Market Committee] are ultimately pure guesses,” Federal Reserve Bank of Dallas President Richard Fisher said. He suggests “you simply take all this forward guidance and forecasting a year or more out with a big grain of salt, bearing in mind that the policy statements and forecasts issued by the FOMC are tactical judgments of the moment, made within a broader strategic context.

US economy stumbles - In mid November I wrote a piece called Can the US consumer carry us all. It was following the release of good October retail sales growth and argued the following: This demand appears to have caught producers off guard, or, they have been managing inventories rather well. The September wholesale inventory number last week was low and the inventory sales ratio is also subdued: This suggests that the unexpectedly strong (relatively) demand, will have to be met with an upswing in production rather than existing stocks.  I can see this mini-cycle continuing to make a small dent in unemployment (as well as support Chinese exports through year end). It is, not, however, a resilient bounce. Check out these personal finance charts from the US Department of Commerce. As we look back, this proved a remarkably accurate assessment. Q4 GDP was driven largely by a big inventory rebuild which boosted the regional Fed manufacturing indexes from their Q3 slump and we’ve also seen a nice burst in employment. Note that I described this as a mini-cycle because in the new normal such bursts of consumer spending cannot sustain a high growth virtuous cycle. Without asset price inflation to drive consumers’ sense that their wealth is growing faster than their debt, savings rundowns always reverse. And now it appears we are there again. Last night’s release of Personal Income Expdenditures (PCE) showed that that give back began in December. From the BEA:

The missing GDP - If you’re keen for yet another post comparing the US recovery against prior editions, we think this table sent by Credit Suisse on Friday is worth a quick look:It shows the average contribution to real growth of each GDP subcomponent in the first ten quarters of the last five recoveries, and then compares them against the corresponding contributions in this one. Some commentary from Credit Suisse (emphasis ours): Overall real GDP growth is averaging 2.4% in the current recovery, about half the historical average (4.7%). The largest missing block of the economy is consumer spending on services, with the shortfall spread out among a number of sub-components – housing and utilities, health care, financial services, and transportation. …Residential investment (deviation from average: -0.7 ppt) and state and local government (-0.5 ppt) are the next largest laggards. Gross exports have been the most significant growth outperformer in the recovery so far, though a more moderate run rate for global growth this year (our expectation) suggests that status is vulnerable.

Net Exports, Exports, Real Exchange Rates and Manufacturing - Several observers have noted that exports have increased substantially since the President made his commitment to doubling exports. [1] The most recent GDP release confirms improvement in the net exports to GDP ratio (ex. oil imports) and real exports, and a BEA release from a month and a half ago confirms a rebound in manufacturing value added. Figure 1 confirms that the real exchange rate lagged two years has a measurable correlation with the ex-oil trade balance. I’ve documented the evidence for a causal effect in several previous posts. One new observation I’ll make is that the unit labor cost deflated real exchange rate is more highly correlated with trade balance movements than the conventional CPI deflated. Theory suggests that the ULC deflated measure would better measure international competitiveness. [paper] The practical matter is that unit labor costs are available for a subset of countries (typically developed), so the unit labor cost index does not incorporate Chinese costs. Eyeballing Figure 1 suggests that the trade balance should continue to improve, given depreciation of the dollar to date. Of course, rest-of-world growth matters as well, so that conjecture is conditional.

CBO Projects 1/3 Less Growth Than The Fed: The Congregational Budget Office (CBO) is out with its annual report. It’s a blockbuster. This 165 page monster is filled with dozens of charts, graphs and detailed projections. It will be talked about for weeks. The report provides a dismal outlook for the economy. There is one data point I'd like to focus on. Here is the CBO forecast for real GDP for 2012 and 2013: The 1.1% Real GDP number for 2013 surprised me. The CBO’s expectations are way under those of both the “Blue Chip” economists and the Federal Reserve: What does it mean if the economy is going to slow, as CBO now thinks? Some consequences: The CBO now forecasts Social Security to run into trouble in just a few years. This is a very substantial change in the outlook for SS. Changed fortunes make it a certain that America’s favorite entitlement program will be on the table for a significant re-vamp.

The U.S. Economy is Uncertain, Fragile, and … Growing - Over at the Kauffman Foundation, Tim Kane has released his latest quarterly survey of economic bloggers. Here’s the usual word cloud reflecting the adjectives (up to five per respondent) that we econobloggers offered up to describe the U.S. economy: That’s much better than last quarter, when you needed a magnifying glass to find any optimistic sentiments:

The Biggest Risk to the Economy in 2012, and What’s the Economy For Anyway? - Robert Reich - Treasury Secretary Tim Geithner, speaking at the World Economic Forum in Davos a few days ago, said the “critical risks” facing the American economy this year were a worsening of Europe’s chronic sovereign debt crisis and a rise in tensions with Iran that could stoke global oil prices. What about jobs and wages here at home? As the Commerce Department reported Friday, the U.S. economy grew 2.8 percent between October and December – the fastest pace in 18 months and the first time growth exceeded 2 percent all year. Many bigger American companies have been reporting strong profits in recent months. GE and Lockheed Martin closed the year with record order backlogs.Yet the percent of working-age Americans in jobs isn’t much different than what it was three years ago. Yes, America now produces more than it did when the recession began. But it does so with 6 million fewer workers. Average after-tax incomes adjusted for inflation are moving up a bit. (They increased at an annual rate of .8 percent in the last three months of 2011 after falling 1.9 percent in prior three-month period. For all of 2011, incomes fell .1 percent.)

It Is Safe to Resume Ignoring the Prophets of Doom ... Right? - Once the crisis hit, it became popular to scour the past for apocalyptic predictions that had come true. While many gloomy forecasts came from the left — notably Paul Krugman and Dean Baker — there was one particularly prescient voice from the right. As early as 2004, Peter Schiff, a libertarian investor, was arguing that the housing-fueled economic boom was a bubble waiting to burst. But these successful prognosticators, among others, didn’t just take a bow in 2008. Many predicted that the U.S. economy would worsen or, at best, stall. Perhaps grasping for hope, many smart people, including, apparently, President Obama, spent 2009 thinking those doomsday callers had just been lucky. Maybe they were right about the crisis, but they were surely far too pessimistic about the recovery. Oops again! For nearly a decade, it turns out, the most accurate forecasts have come from the fringe. So it’s upsetting to learn that many of those same Cassandras now believe, for different reasons, that we are on the brink of another catastrophe that may be far worse.

Government checks don’t bounce- Check out the chart below. It’s of the breakup of the US GDP with the last bar being the results for the 4th quarter of 2011 released Friday night. I got it out of The Atlantic on Saturday Morning and tweeted it. The reason I was so excited, well not excited really but rather whatever the word for heightened senses is, was the size of the Government drag on growth – the grey bar. Now regular readers know what’s coming next – GDP = C+I+G+(X-M). These 5 Sectors, consumption, investment, government and net exports make up the 2.8% annualized growth rate for the last quarter. Leaving aside that this recovery is so bad each quarter of it so far has been below the post WWII average it’s the G that I’m interested in here today and particularly the negative contribution (don’t you love economics – negative contribution!) for the 4th quarter of 1%. Austerity is the new black these days. Whether its Australian households, European governments or the United States Treasury everyone I’d saving and cleansing. But what is true of households is not true of sovereign nations per se. Sure the behavioral similarity in tightening your belt to pay you bills is understandably similar but the reality is the situation is very, very different. While myself and my family have to earn income in order to pay our bills or the cheques I write will bounce the same is not true of the government.

What a Drag - Here’s one reason we’re stuck in slow growth mode: the budget crunch among state and local governments.  The figure shows the yearly percentage point contribution to or subtraction from real GDP growth from the state and local sectors since the late 1980s.  The trend bounces around but the recent cliff dive is evident.  It’s also why we keep losing jobs in these sectors month after month.  Unlike the feds, states have to balance their budgets every year, which means they either raise taxes or cut services.  They haven’t done much on the tax side, so they’ve been laying off teachers, cops, maintenance workers; practically every month over the past few years we’ve been adding private sector jobs and shedding public sector jobs. In a very real sense, what you have here is a microcosm of austerity measures at work in cities and towns across the country.  Moreover, this drag on growth is avoidable.  One of the most successful parts of the Recovery Act was state fiscal relief, as those dollars went directly to preserving state and local jobs.

What a Drag, Part 2 - Yesterday I wrote about the economic drag caused by squeezed state and local budgets, posting a figure that showed the loss to overall GDP caused by state/local contractions.  Today, I’ve added state and local job losses to that picture.The figure below just plots the same data as in the last figure—the annual percentage point contribution or subtraction to real GDP growth from the state and local sectors.  But it adds annual gains or losses in jobs. As you can see, it’s a very tight fit.  Last year, state and local squeeze shaved about 0.3% off of GDP and cost 266,000 jobs.  A simple regression of state/local job losses on the GDP contribution finds that for every point of growth that the states and locals take off of GDP, employment in the sectors falls around 700,000. We generally recognize that GDP losses map onto job losses but the fit is not usually this tight—there are lags in the generalized relationship between growth and jobs and lots of other moving parts.  But that’s less the case in state and local governments.  Here, the chain of events is pretty obvious and pretty clear.  You squeeze their budgets, it shows up quickly and directly in growth and jobs.

Destructive Austerity, USA - Krugman - Jared Bernstein has been emphasizing, rightly, the extent to which our weak recovery is being undermined by cutbacks at the state and local level: But it’s even worse than he says. Why? Because if you look at what’s being cut, it’s heavily focused on investment:  That is, we’re sacrificing the future as well as the present. Oh, and the cuts that aren’t falling on investment in physical capital are largely falling on human capital, that is, education. It’s hard to overstate just how wrong all this is. We have a situation in which resources are sitting idle looking for uses — massive unemployment of workers, especially construction workers, capital so bereft of good investment opportunities that it’s available to the federal government at negative real interest rates. Never mind multipliers and all that (although they exist too); this is a time when government investment should be pushed very hard. Instead, it’s being slashed. What an utter disaster.

Expensive Subsidies Help State and Local Governments Drag Down Recovery - The release of gross domestic product data on Friday highlighted how the contraction of state and local governments has been a drag on economic recovery since the end of the official recession. As Nicholas Johnson of the Center on Budget and Policy Priorities explains, 2011 was the third straight year that state and local government output has fallen, reaching -2.3% in 2011, the worst since 1944, as shown in the chart below. Paul Krugman amplifies this point, noting that investment in physical capital by state and local governments has fallen from over $290 billion (constant 2005 dollars) in 2008 to a little over $250 billion today, well over 13%. He further emphasizes that a lot of the cuts on current spending by governments has fallen on education. State and local governments, constrained by balanced budget requirements, are not doing their part to "win the future." This is precisely what Krugman predicted in December 2008 when he said that "50 state governors who are slashing spending in a time of recession" would counteract the stimulus that would be enacted at the federal level in 2009. As readers of this blog know, a big chunk of state and local deficits could be offset by cutting corporate subsidies rather than cutting programs. My estimate of these subsidies comes to as much as $70 billion per year, more than enough to pay for the 656,000 state and local jobs Johnson reports have been lost since their peak employment in 2008.

US Budget Deficit To Dip To $1.1T - A new budget report released Tuesday predicts the U.S. government will run a $1.1 trillion deficit in the fiscal year that ends in September, a slight dip from last year but still very high by any measure. The Congressional Budget Office report also says that annual deficits will remain in the $1 trillion range for the next several years if Bush-era tax cuts slated to expire in December are extended, as commonly assumed. The report is yet another reminder of the perilous fiscal situation the government is in, but it is commonly assumed that President Barack Obama and lawmakers in Congress that little will be accomplished on the deficit issue during an election year. The first wave of statements from lawmakers had a familiar ring as each party cast blame on the other. "Four straight years of trillion-dollar deficits, no credible plan to lift the crushing burden of debt," said House Budget Committee Chairman Paul Ryan, a Republican. "The president and his party's leaders have fallen short in their duty to tackle our generation's most pressing fiscal and economic challenges."

Deficit Tops $1 Trillion, but Is Falling - The United States economy will remain sluggish for the next few years, with unemployment high, but budget deficits are starting to come down, the Congressional Budget Office said on Tuesday in its latest formal outlook. The deficit in the current fiscal year is expected to be $1.1 trillion, the budget office said, the fourth year in which it would exceed $1 trillion. But it just might be the last such year, at least for a while. Unless Congress passes new legislation changing the course on spending or taxation — changes that are a distinct possibility, but no basis for a forecast — projected deficits would “drop markedly” starting next year and for a decade to come. That is because current laws would allow the Bush-era tax cuts to expire, the alternative minimum tax to reach ever more taxpayers and federal spending to decline modestly under newly imposed spending caps, at least until the aging of the population and rising costs for health care tilt the balance of spending upward again. If Congress leaves current law unchanged, the report said, the deficit will fall to $585 billion in 2013 and $345 billion in 2014. In other words, doing nothing might be the most straightforward way for Congress to slash the deficit, a goal espoused by lawmakers in both parties. 

US set for fourth year of $1 trillion-plus deficit: CBO (Reuters) - The United States is on track for a fourth straight year with a $1 trillion-plus budget deficit as a sluggish economy holds down corporate tax revenues, congressional forecasters said on Tuesday, but they warned that extension of payroll tax cuts would swell the gap even more. The non-partisan Congressional Budget Office said the fiscal 2012 deficit would rise to $1.079 trillion from its previous estimate of $973 billion made last August. The U.S. posted $1.3 trillion deficits in each of the past two years after a record $1.4 trillion deficit in fiscal 2009, President Barack Obama's first year in office. 

How Accounting "Constrains" Economics - There’s been a running discussion of this on various blogs (sorry if I missed linking some!), inflated simultaneously by Krugman and by magisterial and mysterious commenter JKH’s “paradigm riff,” here. That discussion has brought me to the following conclusions. Assuming you have a coherent and accurately representative System of National Accounts*:

  • • Accounting, and accounting identities, do (or should) impose a constraint on our economic reasoning and predictions.
  • • If some piece of economic reasoning predicts something that simply can’t happen according to the accounting (things don’t add up, balance), that reasoning/prediction is wrong.
  • • Accounting can’t tell us whether a piece of economic reasoning is right. It can only tell us if it’s wrong.
  • • Accounting won’t necessarily tell us that a piece of economic reasoning is wrong
  • • Accounting tells us exactly nothing about how people will behave, nor can it cause or constrain that behavior. It can only tell us that that it’s logically impossible for them (all) to behave in a given way.

Takeaway: Conformance to the rules and balances of accounting is a necessary but not sufficient condition for economic reasoning and predictions to be correct. Or to put it another way: Accounting is a constraint on economics, not economies.

Why Economists Don't Understand Accounting, or Business - I just searched Harvard, U Chicago, and a few other top econ departments’ course offerings and major requirements. The string “account” barely appears. Chicago says quite explicitly: Courses such as accounting, investments, and entrepreneurship will not be considered for economics elective credit. Much less requirements! No wonder so many economists:

  • • Have such profound misunderstandings of the National Income and Product Accounts and the Fed Flow of Funds reports (and how they relate to each other). Nobody ever taught them how to read or understand the darn things.
  • • Have such crazy notions about how producers think when they’re setting prices.

The Cyclical Dimension of the Safe Asset Problem - An important problem facing the global economy is the shortage of safe assets, assets that facilitate transactions at both the retail and institutional level.  There is both a long-term, structural dimension to this problem as well as a short-term, cyclical one.  The structural dimension is that global economic growth over the past few decades has outpaced the capacity of the world economy to produce truly safe assets, a point first noted by Ricardo Cabellero.  The cyclical dimension is that the shortage of safe assets was intensified by the Great Recession, a point stressed by Gary Gorton.  I previously made the case that both the Fed and the ECB were an important part of the cyclical story by failing to restore nominal incomes to their expected, pre-crisis paths.  In other words, since 2008 the Fed and the ECB passively tightened monetary policy which caused some of the safe assets to disappear while at the same time increasing the demand for them.  I still hold this view, but after reading some papers on safe assets and talking with Josh Hendrickson I have come up with a more general view to the cyclical dimension of the safe asset problem. Gorton, Lewellen, and Metrick (2012) show that safe assets have constituted a relative stable share of all assets since the 1950s. They also show, as does Bansal, Coleman, and Lundblad (2011), that public and private safe assets tend to act as substitutes in providing liquidity services.  Given these findings, it stands to reason that when the central bank is doing its job and nominal GDP (NGDP) is growing at its appropriate trend, then there will be enough safe assets being privately provided.  If, however, the central bank slips and NGDP falls below its expected path, then some of the privately produced safe assets disappear, creating a shortage of safe assets. The government steps in and creates safe assets that, if produced sufficiently, would restore NGDP back to its expected path. In other words, if monetary policy does not do its job then fiscal policy could substitute for it, but in a way not normally imagined. It would do so not by increasing aggregate demand via higher government spending, but by making up for the shortage of safe assets that facilitate transactions.  All this requires is running a budget deficit which may or may not imply higher government spending (i.e. it could also come from tax cuts).  Debates about Ricardian equivalence, crowding out, and other fiscal policy concerns become moot.  What matters is if there are enough safe assets, and if not, whether fiscal policy can provide them in the absence of a NGDP-stabilizing monetary policy. 

A Surfeit of Dearth Revisited: The Global Shortage of Safe Assets -- David Beckworth: global economic growth over the past few decades has outpaced the capacity of the world economy to produce truly safe assets. Really? The U.S. could have just deficit-spent more, crediting people’s/businesses’ checking accounts and thereby increasing the global stock of the world’s safest asset: U.S. dollars. It could (by U.S. law is required to) simultaneously issue bonds in/borrow an equivalent amount, but it comes to the same thing as regards the inflationary impact. (Issuing bonds is actually a bit more inflationary because of the future money-creation needed to pay the interest.) That fear of inflation — and the resultant unwillingness to provide the safe assets that Beckworth thinks the world needs — is the only constraint on Beckworth’s “capacity.” If he is correct that the supply of dollars is, has been, insufficient to meet global demand, then inflation is not currently a concern — arguably quite the contrary.

S&P Warns of Cuts; Another US Downgrade Coming? - Concerns over the size of United States debt reared their head once again as ratings agency Standard & Poor’s warned that health care costs for a number of highly-rated Group of 20 countries, including the U.S., could hurt growth prospects and harm their sovereign creditworthiness from the middle of this decade. S&P downgraded the United States credit rating for the first time ever in August of last year. "Governments' fiscal burdens will increase significantly over the coming decade, with the highest deterioration in public finances likely to occur in Europe and other advanced G-20 economies, such as Japan and the U.S.," S&P said in a statement on Tuesday. Health care costs for a typical advanced economy will stand at 11.1 percent of gross domestic product by 2050, up from 6.3 percent of GDP in 2010, S&P said. "Population aging will lead to profound changes in economic growth prospects for countries around the world as governments work to build budgets to face ever greater age-related spending needs,"

John Mauldin: It's Time to Make the Hard Decisions (chris martenson interview - podcast) Back in the 1930's, Irving Fisher introduced a concept called the 'debt supercycle.' Simply put, it posits that when there is a buildup of too much debt within an economy, there reaches a point where there simply is no other available solution but to let it rewind. We are at that point in our economy, as are most other major economies around the world, claims John Maudlin, author of the popular Thoughts from the Frontline newsletter and the recent bestselling book Endgame: The End of the Debt Supercycle and How It Changes Everything. For the past several decades, excessive and increasing amounts of credit in the system have allowed us to live above our means as both individuals and nations. We've been able to have our cake and eat it, too. Now that the supercycle has ended and the inevitable de-leveraging cycle is staring us in the face, we will be forced to set priorities in a way that has been foreign to our society for over a generation.

Treasury Ponders Negative Interest Rates - A curious tidbit from a Treasury release this morning: The question was asked if it made sense for Treasury to permit bids and awards at negative interest rates in marketable Treasury bill auctions. [A Treasury employee] noted that there were operational issues associated with such a rule change, but that the hurdles were not insurmountable. It was the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible. Put simply, the Treasury Borrowing Advisory Committee, composed mostly of Wall Street types, is urging that investors be allowed to pay the government for the privilege of lending it money. For example, an investor would be able to bid and then pay the government $101 for a $100 Treasury bill. It sounds a bit crazy. After all, a dollar bill is a perfect substitute for a zero-interest Treasury security. But Treasury bills have occasionally traded in the secondary market at negative yields, most recently in December. Those who buy a normal Treasury bill at a negative rate would be assured of getting back less than they paid for it — unless they sell it to someone else for more, of course.

Treasury May Let Investors Pay to Lend to US - The U.S. government may ask investors to pay for the privilege and safety of holding short-term debt issued by the Treasury Department. In response to clamor from investors, the Treasury said on Wednesday it was looking closely at allowing negative-yield auctions. This would mean bidders who want the security of U.S. government debt in the face of global insecurity might have to pay a premium for it. Doing so would allow the U.S. government to benefit from something that is already occurring on the secondary market, where investors have accepted negative yields in recent months to protect their cash from financial strains. Remarkably, Wall Street is asking to be able to pay a premium for U.S. debt even after the United States lost its prized triple-A rating last year and as the government heads for a fourth straight year with $1 trillion-plus budget deficit. "It is the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible," according to minutes of the Treasury Borrowing Advisory Committee, which includes 21 financial institutions that make markets for U.S. government securities.

Perverse Fiscal Policy - Assuming a picture is worth a thousand words, our graph is offered as an illustration of some wise words from Mark Thoma: We need a temporary increase in government spending to increase demand and employment through, for example, building infrastructure. That would help to get us out of the deep hole we are in. Instead, the government seems to be trying to make it harder to escape. We do need to address our long-run budget problems once the economy is healthy enough to withstand the tax increases and program cuts that will be required. But the idea of "expansionary" austerity has failed. Real government purchases fell by almost $30 billion (annualized) last year with $20 billion of this decline shockingly coming from Federal purchases. While it is true that state & local purchases have been declining since late 2007 with the cumulative decline exceeding $90 billion per year, we have also seen a significant decline in Federal purchases over the past year. We should add that Keynesian macroeconomists have always worried about the implications those state & local balanced budget requirements, which force this kind of perverse fiscal reaction to recessions.

Bernanke Urges Caution in Sharp Deficit Cutting - — Ben Bernanke is urging lawmakers to balance their desire to cut deficits with policies that could help boost the weak economy in the short run. Bernanke told the House Budget Committee that he recognizes that huge budget deficits represent a serious threat to the economy. “Even as fiscal policymakers address the urgent issue of fiscal sustainability, they should take care not to unnecessarily impede the current economic recovery,” Bernanke said. “Fortunately, the two goals … are fully compatible.” The Federal Reserve chairman is testifying a week after the Fed signaled that a full recovery could take at least three more years. As a result, the Fed said it doesn’t plan to raise its benchmark interest rate from a record low before late 2014 at the earliest.

Bernanke on Fiscal Policy: ‘Do No Harm’ - Federal Reserve Chairman Ben Bernanke said Thursday that a balance must be struck between encouraging economic growth and tackling the fiscal challenges facing the country. Testifying before the House Budget Committee, Bernanke said that monetary policy was “not a panacea” and urged Congress and the Obama administration to take action to address the twin challenges facing the country. “This Congress has a very difficult and important job to address the long-term fiscal sustainability of our budget,” Bernanke told the panel of lawmakers.

The Economic Outlook and the Federal Budget Situation - Ben Bernanke -  Testimony Before the Committee on the Budget, U.S. House of Representatives - Feb 2

Why Growth Matters More than Debt - The proper question is not how will America pay foreigner creditors back but rather what will maintain China and Japan’s desire to buy low-interest Treasury securities from us? The U.S. federal debt recently eclipsed $15 trillion, and is still climbing. That has generated headlines and raised a lot of questions. How should we behave towards China, supposedly our biggest creditor? Has the debt burden become unsustainable? How will our kids and grandkids ever pay off the debt we’ve been accumulating? The answers contain some surprises. A total federal debt of $15 trillion means debt owners currently hold assets totaling $15 trillion in Treasury bonds, bills, and notes. Let’s examine who owns those assets. A pie chart is a convenient way of showing how those assets break down by owner. At the time of this writing, the latest official numbers are for December 2011. (The official numbers are updated monthly: The Treasury summarizes our debt position; the Fed estimates the magnitude of foreign holdings by country and reports its own holdings of Treasury securities.)

The Jobs Guarantee and MMT Core. This is an introduction to a series of 16 posts I began in reply to a number of posts by John Carney at the CNBC blog and Cullen Roche at Pragmatic Capitalism, and discussions replying to them. The posts by Carney and Roche criticized the MMT Job Guarantee (JG) proposal. They did so by calling into question whether the JG would be effective in achieving Full Employment (FE) and Price Stability (PS), and also by calling into question the MMT goals of “Public Purpose”, and “FE with a living wage” as appropriate. The critics proposed that “Full Productivity” (FP) and PS be goals of MMT, and that “prosperity” be the higher level goal. They also proposed that MMT concentrate on description and avoid policy prescriptions, and that it deal only with “facts” and not with “theory.” The first 13 posts in this series refute these proposals, and also discuss the question of the appropriate hourly rate for the JG program. They also discuss various fallacies of composition inherent in many of the objections made to the MMT JG program, the issue of whether an FE or an unemployed “buffer stock” is more in line with public purpose, and also the issue of whether it’s possible to deal only with “facts” and not with “theories.” In the 14th post I introduce the idea of the MMT Knowledge Claim Network (KCN) consisting of Social/Value Gaps, Knowledge Gaps (problems), Descriptive Knowledge Claims, Prescriptions, and Narratives. I also argue that the MMT KCN is a fused fact-value network with important value commitments, that it was developed holistically by its originators. that it is not focused on descriptive aspects of economics alone, that it offers explicit value claims, and that it’s normative aspect is clear.

Annoying Anti-Stimulus Arguments: Numbers 1 and 2 - Unfortunately this may be the beginning of a series. I will try and keep it short and to the point. I will also avoid mentioning anyone in particular who has made these arguments – you know who you are! These arguments are annoying because they keep being made, despite the fact that they have shown to be inadequate over and over again. No. 1   Arguments that ignore the zero lower bound for interest rates.  There are good arguments for saying that if monetary policy is free to do its job, then countercyclical fiscal policy is both unnecessary and welfare reducing. I have written on the subject. But having written those papers, I could see immediately the importance of that proviso about monetary policy. At the zero lower bound for interest rates (in a liquidity trap), monetary policy is clearly not free to do its job, and so different conclusions apply.  No.2    Arguments that say stimulus is just Econ 101, and the profession has moved on.  I have in the past been very critical of the gap between undergraduate teaching in macro and teaching at masters/PhD level. I think it is quite wrong to teach things to undergraduates that we then tell graduate students are incorrect. But the analysis of fiscal stimulus is not one of these. I know this because my work on fiscal policy uses microfounded New Keynesian models of the type Woodford and others analyse. It is not the same as old fashioned Keynesian analysis, but it can give similar answers for similar reasons. I gave an example here.

The stimulus questions - OVER at Democracy in America, my colleague summarises a number of recent debates about "fiscal stimulus" in a way that usefully illustrates the...confused nature of the discussion. Fiscal policy has been an intensely political subject over the last few years, and that, I think, has made it very difficult to figure out what, at any given time, people are arguing about. I think Tyler Cowen often overstates the utility of generosity toward one's opponents in a debate, but in this case he has a point—participants often seem more interested in winning an exchange than in working to clarify exactly what the disagreement is about in the first place. Other things equal, a government will suffer a deterioration in its budget balance when the economy weakens. Tax revenues decline, and social spending will often increase. Allowing the government to balance its budget over the business cycle—and therefore to run deficits during recessions—provides automatic stabilisation to the economy, the more so when governments have put in place generous, specific automatic stabilisers like unemployment insurance. By contrast, forcing the government to balance its budget in every year introduces a great deal of pro-cyclicality; as the private sector contracts the government is also forced to contract, amplifying the demand shock.

Treasury estimates borrowing need of $444 billion —The Treasury Department is seeking to borrow $444 billion in the current quarter through March. The latest estimate of borrowing plans for the January-March period would make this quarter the fifth highest in terms of government borrowing. Borrowing needs have surged as the government has had to fund record budget deficits. The borrowing this quarter is $97 billion lower than the government initially indicated it would need. Treasury said Monday that improved tax receipts and lower expected spending were among the reasons for the reduced figure. Senate Democrats were able to block a Republican move last week to halt the latest increase in the debt ceiling. The borrowing limit rose by $1.2 trillion to $16.4 trillion.

Ezra Klein: Doing the math on Obama's deficits - Romney brings a large clock.  It’s there so Romney can point to it and tell the crowd that if he’s elected, he’ll “do a better job slowing down that clock.” But if you’re a deficit-obsessed voter, the clock doesn’t answer the key question: How much has Obama added to the debt, anyway?  There are two answers: more than $4 trillion, or about $983 billion. The first answer is simple and wrong. The second answer is more complicated but a lot closer to being right. When Obama took office, the national debt was about $10.5 trillion. Today, it’s about $15.2 trillion. Simple subtraction gets you the answer preferred by most of Obama’s opponents: $4.7 trillion. Which of Obama’s policies added $4.7 trillion to the debt? The stimulus? That was just a bit more than $800 billion. TARP? That passed under George W. Bush, and most of it has been repaid. There is a way to tally the effects Obama has had on the deficit. Look at every piece of legislation he has signed into law. Every time Congress passes a bill, either the Congressional Budget Office or the Joint Committee on Taxation estimates the effect it will have on the budget over the next 10 years. And then they continue to estimate changes to those bills. If you know how to read their numbers, you can come up with an estimate that zeros in on the laws Obama has had a hand in.

Adding to the deficit: Bush vs. Obama - Since President Obama became chief executive, the national debt has risen almost $5 trillion. But how much of that was because of policies passed by Obama, and how much was caused by the financial crisis, the continuation of past policies and other effects? For this analysis, we worked with the Center on Budget and Policy Priorities to attach a price tag to the legislation passed by Obama and his predecessor. George W. Bush’s major policies increased the debt by more than $5 trillion during his presidency. Obama has increased the debt by less than $1 trillion. Read related article.

CBO Releases the Budget and Economic Outlook: Fiscal Years 2012 to 2022 - CBO Director's Blog - This morning CBO released the Budget and Economic Outlook: Fiscal Years 2012 to 2022Each January, CBO prepares “baseline” budget projections spanning the next 10 years. Those projections are not a forecast of future events; rather, they are intended to provide a benchmark against which potential policy changes can be measured. Therefore, as specified in law, those projections generally incorporate the assumption that current laws are implemented. But substantial changes to tax and spending policies are slated to take effect within the next year under current law. So CBO has also prepared projections under an “alternative fiscal scenario,” in which some current or recent policies are assumed to continue in effect, even though, by law, they are scheduled to change. The decisions made by lawmakers as they confront those policy choices will have a significant impact on budget outcomes in the coming years. In the remainder of this blog post, I’ll summarize key aspects of our projections; they are also illustrated in the figures below. (slide show)

(CBO) The Budget and Economic Outlook: Fiscal Years 2012 to 2022 - 166pp pdf

CBO Forecast: Trillion Dollar Deficits, Slow Growth, And High Unemployment - Yesterday, the Congressional Budget Office released a rather grim forecast for the nation’s budget deficit and economic future: The Congressional Budget Office on Tuesday predicted the deficit will rise to $1.08 trillion in 2012. The office also projected the jobless rate would rise to 8.9 percent by the end of 2012, and to 9.2 percent in 2013. These are much dimmer forecasts than in CBO’s last report in August, when the office projected a $973 billion deficit. The report reflects weaker corporate tax revenue and the extension for two months of the payroll tax holiday.A rising deficit and unemployment rate would hamper President Obama’s reelection effort, which in recent weeks has seemed to be on stronger footing. If the CBO estimate is correct, it would mean that the United States recorded a deficit of more than $1 trillion for every year of Obama’s first term. CBO Director Doug Elmendorf told reporters that Congress will have to make important choices this year regarding the supercommittee trigger and tax policy that will have huge effects on the deficit.While unable to recommend choices, Elmendorf said that addressing the deficit sooner rather than later is easier.

Key Points in CBO’s Economic Forecast - The nonpartisan Congressional Budget Office released its latest budget and economic forecasts this morning. Both Democrats and Republicans will find campaign trail fodder in the report, as well as reason for concern. Here are the key points in the report:

  • 1) Growth will slow to just 1.1% in 2013 because of tax increases, spending cuts, and other factors. CBO projects 2012 GDP to increase just 2%.
  • 2) Unemployment rate will stay above 7% until 2015. It will increase to 8.9% at end of this year and hit 9.2% at the end of 2013.
  • 3) Deficit will be $1.1 trillion in 2012, the fourth consecutive year above $1 trillion.
  • 4) The deficit is projected to shrink next year, but how much it shrinks depends on tax and spending choices.
  • 5) Revenues are projected to pick up markedly in future years. Total revenues to jump from $2.3 trillion in 2011 to $3.7 trillion in 2015. That’s the equivalent of going from 15.4% of GDP to 20.2% of GDP.
  • 6) The Social Security Disability Insurance trust fund will be exhausted in 2016. The Medicare hospital insurance trust fund will be exhausted in 2022.
  • 7) If spending cuts and tax increases are allowed to go into effect as required under current law, the deficit will contract sharply to $585 billion in 2013 and $345 billion in 2014.
  • 8) Under current law, the debt will grow $3.1 trillion over next 10 years. If spending cuts and tax increases are reversed, however, the debt would grow $11 trillion. That includes an additional $1.2 trillion in interest on the debt.

The New CBO Report: Still a Best-Case Scenario After All These Years - The Congressional Budget Office’s new budget and economic outlook is out, and as usual, it really doesn’t seem all that bad when you look at their “baseline” numbers.  (Deficits as a share of GDP over the next ten years are still at economically sustainable–less than the growth rate of the economy–levels.)  Oh, except that the CBO baseline is (by law) a projection of current-law policies, which assume a lot of very optimistic things about Congress’s proclivity toward fiscally responsible behavior. You see, in current law there are lots of costly policies that expire after a year or two…or nine, or two–as in the 2001 Bush tax cuts which were first scheduled to expire at the end of 2010 and now again are scheduled to expire at the end of 2012.  Expiring tax cuts have been the most fashionable way to deficit spend in this town ever since. In their budget outlook, CBO assumes any tax cuts scheduled to expire actually expire.  That could mean CBO’s assuming they will actually expire, or it could mean (more realistically but still very optimistically) that if Congress and the president extend the tax cuts in the future, that they will fully offset their cost, by cutting spending or raising other taxes–a novel concept known as “pay as you go.”  Once upon a time, Congress followed strict pay as you go rules–on both tax cuts and mandatory spending–and they complied with discretionary spending caps, too.  By the way, that was the last time we were actually running budget surpluses, at the end of the Clinton Administration.

CBO: TARP Spending Will Be $61 Billion More in Fiscal 2012 - The federal government will spend roughly $61 billion more in fiscal 2012 than it did in fiscal 2011 on its continuing emergency rescue fund instituted at the height of the 2008 financial crisis, the nonpartisan Congressional Budget Office said.The CBO said the government would record outgoings of $23 billion in fiscal 2012 on the Troubled Asset Relief Program, as compared to $37 billion in savings it booked in fiscal 2011.This is largely due to declines in share prices of two companies in which the government still holds substantial shares: American International Group Inc. and General Motors Co.The two were among dozens of firms that received hefty bailouts from the federal government at the end of 2008 or early 2009. Between them, the Treasury and New York branch of the Federal Reserve still control a 77% stake in AIG. The firm received a total of $184 billion in loans and guarantees from the Treasury and Fed as it stood on the brink of collapse in 2008.

CBO's Budget and Economic Outlook: Tax Expenditures - The CBO has just released the Budget and Economic Outlook. The document is full of extremely useful information, and provides a useful anodyne for some of the reality-free analyses floating around (examples here). For now, I'll just highlight two interesting graphs regarding tax expenditures:  From the document: The major tax expenditures considered here fall into four categories—exclusions from taxable income, itemized deductions, preferential tax rates, and tax credits. Of those tax expenditures, four are exclusions of certain types of income from individual income taxes: employers’ contributions for health care, health insurance premiums, and long-term care insurance premiums for their employees; contributions to and earnings of pension funds (minus pension benefits that are included in taxable income); unrealized capital gains from assets that are transferred at the owner’s death; and untaxed Social Security and Railroad Retirement benefits. Employers’ contributions for health insurance and contributions to pension funds are also excluded from payroll taxes.

CBO’s View on the Wall Street Journal Story about CBO - CBO Director's Blog - The Wall Street Journal has just published an article entitled “Congress’s Number Cruncher Comes Under Fire.” Here’s our view: CBO is responsible for providing nonpartisan and thoughtful analysis to the Congress, and we are proud that our success in carrying out that mission, for more than 35 years, is widely acknowledged both on and off Capitol Hill. We have the utmost confidence in the objectivity of our work and devote considerable time and energy to explaining the basis of our findings as clearly as we can to help Members of Congress understand the work that we do. In fulfilling its responsibility to the Congress, CBO works hard to ensure that its cost estimates and other analyses are impartial and well-researched. To that end, the agency:

  • Draws on the knowledge and insights of the talented analysts on its staff as well as input from outside experts (including professors, analysts at think tanks, private-sector experts, and employees at other government agencies) representing a variety of perspectives;
  • Applies a rigorous internal review process that involves multiple people at different levels in the organization;
  • Enforces strict rules to prevent conflicts of interest; and
  • Makes no policy recommendations.

New Strategy, Old Pentagon Budget — The $259 billion in budget cuts over the next five years announced by the Pentagon may sound like a lot. But they are mainly a scaling back of previously projected spending — the delights of the Washington budget games. This year, Pentagon spending will total $531 billion. In 2017, it will rise to $567 billion. Factoring in inflation, that amounts to only a minuscule 1.6 percent real cut. (Both numbers exclude war spending — $115 billion this year.) After a decade of unrestrained Pentagon spending increases, President Obama deserves credit for putting on the brakes. The cuts are a credible down payment on his pledge to reduce projected defense spending by $487 billion in the next decade. They are not going to be enough. In the likely absence of a bipartisan budget pact, a further automatic across-the-board 10-year cut of nearly $500 billion is to take effect starting next January. Even if a last-minute deal heads that off, the country needs to find more savings. And there is still plenty of room to cut deeper without jeopardizing national security.

The Real Story About The Obama Pentagon Changes - Here are two easy-and-quick-to-read pieces on the magnitude of the military spending changes Secretary of Defense Leon Panetta actually announced last week. The simple answer according to two people who know is that the reductions are less than the headlines indicated. First, over at the Will and the Wallet, CG&G alum Gordon Adams did this very nice post about how what Panetta announced is "promising" in the sense that it shows there is finally the start of a meaningful shift in DOD strategy that could lead to significant savings. But Gordon says the proposal is also "dangerous" because the plans leaves "the long term budget trajectory...unrealistically high" and will leave Pentagon planners with the notion that they'll have more to spend in the future than will be the case. Over at his own blog GoozNews, Merrill Goozner did this excellent post that talks about the numbers and the politics of the military budget changes Panetta announced. His conclusion: there's much less in what was announced than the White House wants you to believe.

Republican Senators: Slash jobs instead of defense spending - A group of Republican Senators will propose on Thursday a bill to stop mandatory defense spending cuts triggered by the failure of the congressional super committee, putting in its place a plan to reduce the number of federal workers and freeze the pay of others.  The proposal would save about $127 billion in 2013 by forcing government agencies into an attrition scheme, blocking them from hiring unless three workers retire for every two new hires. It would also block any and all pay raises until June of 2014, according to CNN, which cited unnamed congressional staffers. The plan would preserve high dollar defense contracts for weapons-makers while forcing the government’s workforce to shrink by about 5 percent. It’s being called the “Down Payment to Protect National Security Act of 2012,” and Republicans said they plan to introduce it in a press conference later Thursday.

The GOP’s plan to spare defense, target federal workers - Even before the supercommittee’s demise, John McCain vowed to nullify the cuts to defense spending that would automatically go into effect if the group couldn’t come to a deal. Thursday, McCain took the next step toward making good on that promise. Together with five other Republican senators — including minority whip Jon Kyl, a member of the dissolved supercommittee — McCain unveiled a bill to eliminate the triggered defense cuts for a year. The legislation would replace the $109 billion in cuts that are scheduled to happen in 2013 with cuts to the federal workforce instead: It extends the federal employee pay freeze through June 2014 and “restricts federal hiring to only two employees for every three leaving, until the size of the federal government workforce is reduced by five percent,” which is expected to save $127 billion within 10 years. That said, even if the bill passed, it would still leave about $491 billion in triggered defense cuts that would begin in 2014. Why undo the cuts for only one year, instead of the full decade? It’s probably that finding an additional $491 billion in offsets would be politically difficult, and proceeding without them would mean increasing the deficit by nearly half a trillion dollars. So eliminating one year of cuts would at least buy them more time.

Boehner Says He’s Confident Congress Will Extend Payroll Tax-Cut -- House Speaker John Boehner said he’s confident that Republicans and Democrats in Congress will agree to a payroll tax-cut extension supported by President Barack Obama. “We are in a formal conference with the Senate, and I’m confident that we’ll be able to resolve this fairly quickly,” Boehner, an Ohio Republican, said on ABC’s “This Week” program yesterday. A short-term extension of the payroll tax cut expires Feb. 29, and the president is seeking to have it extended until the end of 2012. Unless Congress acts, the 2 percentage point payroll tax-break for employees will lapse, as will emergency unemployment benefits. The two parties disagree on how to pay for the plan and whether all the costs must be offset. Congressional Republicans have blocked efforts over the past year to impose a surtax on income exceeding $1 million to pay for the extension. A House-Senate conference committee aimed at breaking the deadlock on the extension is scheduled to meet again Feb. 1. President Obama, in his Jan. 24 State of the Union address, called on Congress to approve the tax cut, urging “no side issues. No drama.”

Obama’s SOTU, authoritarian followership, and civil society: Part I - I make no apology for a late post on the SOTU; the SOTU, as Charles Pierce points out, was a campaign speech, so those of us who still listen to the teebee or the radio are going to be hearing the talking points and tropes deployed by Obama last Tuesday drone out over and over and over the airwaves at least until November 6.Let me be clear: I did listen to the speech, and all the way through, too. One can hardly blame Obama for leading with his strongest card: He transmogrified killing the unarmed Osama Bin Laden, then dumping his corpse into the sea, into a surefire applause line. No, it wasn’t Obama glorifying a not-especially-clean hit as a campaign talking point that bugged me; what bugged me is what follows. Obama segued into a paean to teamwork as exemplified in the military: These achievements are a testament to the courage, selflessness and teamwork of America’s Armed Forces. At a time when too many of our institutions have let us down [note lack of agency], they exceed all expectations. They’re not consumed with personal ambition. They don’t obsess over their differences. They focus on the mission at hand. They work together.Imagine what we could accomplish if we followed their example.

8 House GOP Freshman Want Credit For Getting A Cash Advance On Their Master Card To Make A Payment On Their Visa - This should eliminate all doubts about how little some members of Congress understand about federal finances. As Dana Milbank explains in his column from today's The Washington Post, eight House Republican freshman made a grandstanding play this week to get public attention and credit for something that makes no financial sense whatsoever. First, the eight representatives didn't spend all of the amount they got in 2011 from the House of Representatives to pay for staff and other expenses in their Washington and district offices. They correctly claimed that they saved taxpayers money by doing so. But second, the representatives then said that they wanted to return the unspent money to the Treasury and designate that the funds be used to reduce the national deb. They clearly felt that they should get big props for doing this. This is wrong on so many levels that it's hard to know where to start.

244 Members of Congress Flunked Arithmetic - TPMLivewire reports: Every House Republican voted Thursday to reject the proposition that the Bush tax cuts added to the deficit. Joined by just a handful of Democrats, the full Republican conference rejected a measure that would have affirmed what nearly all budget experts and economists recognized: President George W. Bush's debt-financed tax cuts blew up the budget in the last decade, leaving the country in a hole that sank into a chasm after the 2008 financial crisis. The final tally was 174-244. I guess their next vote will declare that the Earth is flat.

Why the GOP should stop invoking Reaganomics - Bruce Bartlett - Judging from the candidates’ tax proposals, they seem to believe that the most Reagan-like candidate is the one with the biggest tax cut. But as the person who drafted the 1981 Reagan tax cut, I think Republicans misunderstand the premises upon which Reagan’s economic policies were based and why those policies can’t — and shouldn’t — be replicated today. I was the staff economist for Rep. Jack Kemp (R-N.Y.) in 1977, and it was my job to draft what came to be the Kemp-Roth tax bill, which Reagan endorsed in 1980 and enacted the following year. Kemp and Sen. Bill Roth (R-Del.) proposed cutting tax rates across the board by about a third, lowering the top rate from 70 percent to 50 percent and reducing the bottom rate from 20 percent to 8 percent.While our aim was to increase growth and employment, we were intent on doing so in a way that did not exacerbate inflation, which was the nation’s top problem.  We believed that inflation contributed to unemployment because when workers got cost-of-living pay increases, they were pushed into higher tax brackets. In turn, this required them to ask for bigger pay increases to try to maintain their after-tax income. This cycle increased the cost of employment for businesses and discouraged them from hiring more workers.

Tax Expenditures Have a Major Impact on the Federal Budget - Tax expenditures have a significant impact on the budget because, in aggregate, they reduce revenues by a sizable amount. But because they are not readily identifiable in the budget and are generally not subject to annual reauthorization, tax expenditures are much less transparent than spending on entitlement programs. CBO discusses major tax expenditures in its report on the budget and economic outlook issued earlier this week (see pages 93-96). On the basis of estimates prepared by the Joint Committee on Taxation and extrapolated by CBO through the 10-year budget window, CBO estimates that:

  • Certain major tax expenditures total more than $800 billion in 2012—or 5.3 percent of GDP, equal to about one-third of the federal revenues projected for 2012 and greater than projected spending on Social Security, on defense, or on Medicare.
  • That set of tax expenditures will total nearly $12 trillion over the 2013–2022 period—or 5.8 percent of GDP—including the effects on both payroll and income taxes.

Will Tax Increases to Close the Deficit Harm Economic Growth?, by Mark ThomaPoliticians want you to believe tax increases will kill the economy. They won't. The CBO's latest Budget and Economic Outlook showing the magnitude of the long-run budget problem we face is another reminder that the considerable long-run deficit problem we face cannot be solved by program cuts alone -- the cuts required would be too deep to be acceptable -- an increase in revenues is needed. If that's true, why are politicians, particularly those on the right, taking such a strong stance against tax increases of any kind? Taking a hard line on tax increases and insisting on program cuts is an attempt to make as much of the adjustment as possible accord with their ideological preference for smaller government. But politicians understand that enhanced revenue will be part of the final package even if their political posturing suggests otherwise. But there is another reason for this posturing against tax increases beyond the hope for a smaller government. The resistance to tax increases is also over who will end up paying the increased revenue. Will it be tax increases for the wealthy, closing deductions such as mortgage interest, tax increases for the middle class, etc.? Who, exactly, will foot the bill?

Average Americans don’t think like economists - Northwestern University and University of Chicago’s business schools surveyed a group of top economists, as well as the public at large, and found some big differences when it came to economic policy. Some of the questions tested basic economic literary: A full 100 percent of economists agreed that permanently raising the federal tax rate by 1 percent for those in the top income tax bracket would increase federal tax revenue over the next 10 years. By contrast, only 66 percent of the general public agreed that this was the case, with just 50 percent of Republicans concurring and 80 percent of Democrats. The misconception could partly explain why there’s such aversion to tax increases. But the biggest differences between the two groups was over a highly politicized issue, rather than one that was primarily factual. The survey asked whether the “Buy American” provision of the stimulus — which required the bridges and roads built under the law to use U.S.-made steel and supplies — would have “a significant positive impact on US manufacturing employment.” Just 10 percent of economists surveyed agreed with the statement, as compared to 75 percent of the general public. Such overwhelming public support helps explain why both Republicans and Democrats have pushed for special breaks for manufacturing even when they don’t seem like the best economic policy.

New Podcast: National Taxpayer Advocate Nina Olson - This week on the Tax Policy Podcast we're lucky to have Nina Olson, the National Taxpayer Advocate, as our guest. As head of the federal Taxpayer Advocate Service, she keeps an eye on what the Internal Revenue Service is up to and looks out for the interests of taxpayers year in and year out. In her most recent report to Congress, Ms. Olson highlights a number of problems affecting U.S. taxpayers, including insufficient funding for customer service at the IRS, the lack of a federal Taxpayer Bill of Rights, and identity theft. Listen to the episode here.

Kooky Tax Protestors! – Linda Beale - Anybody who has read much of my blog probably has realized that I don't think much of "tax protestor" movements like the one Wesley Snipe got involved with. . They claim that there is no law that imposes an income tax liability or a duty to file a tax return. (They continue to make these absurd claims even after having the various provisions of the Code, regs and other authorities pointed out to them.)  But today I received a letter. It is printed on expensive rag content paper, with an attorney's name prominently displayed at the top (from Shreveport, Louisiana) and it is addressed to me regarding my availability to be engaged as an expert witness on behalf of tax protestors who want to use the "Cheek" defense to criminal tax evasion charges.  Here, the claim that the defendants' attorneys are hoping to make is that tax protestors can have a genuinely held belief that failure to file returns/pay taxes does not violate any known legal duty. The attorney claims in the letter that these defendants "have formed their beliefs after a thorough and careful reading of the Internal Revenue Code, regulations, Supreme Court holdings and historical authorities, including all of the past regulations and all tax acts enacted since 1916."  Wow.

What Debt Did for Romney - The most interesting line in the G.O.P.’s official response to the State of the Union address was Mitch Daniels’s assertion that the United States is in big trouble because “no entity, large or small, public or private, can thrive, or survive intact, with debts as huge as ours.” Unsurprising as the attack was, its phrasing inadvertently underscored the curious reality of this year’s election; namely, that the same party that loves to inveigh against the dangers of excessive borrowing is now likely to nominate for President a man whose entire career, and entire fortune, was built on debt. Leveraged-buyout firms like Bain Capital, which Mitt Romney ran between 1984 and 1999, routinely borrow massive sums in order to make their acquisitions, leaving companies with debt loads equal to twice their annual sales or more.

Double Taxation, by Rajiv Sethi: The release of Mitt Romney's tax returns has drawn attention yet again to the disparity between the rates paid on ordinary income and those paid on capital gains. It is being argued in some quarters that the 15% rate on capital gains vastly underestimates the effective tax rate paid by those whose income comes largely from financial investments, on the grounds that corporations pay a rate of 35% on profits. Were it not for this tax, it is argued, dividends and capital gains would be higher, and so would the after-tax receipts of those (such as Romney and Warren Buffett) who derive the bulk of their income from such sources.. The absurdity of this claim is clearly revealed if one considers capital gains that accrue to short sellers, who pay rather than receive dividends while their positions are open. Following the logic of the argument, one would be forced to conclude that short sellers are taxed at an effective rate of negative 20%, thereby receiving a significant subsidy due to the existence of the corporate tax. The flaw in this reasoning is apparent when one recognizes that asset prices are lower (relative to the zero corporate tax benchmark) not only when a short position is covered, but also when it is entered.

Wealth and Income Taxes on the Rich-Becker - The Occupy Wall Street movement has not expressed clear goals, but it does want higher taxes on the “rich”. President Obama agreed in his State of the Union address, and proposed that the rich-in his case, anyone with an annual income of at least $1 million- pay no less than 30% of their income in federal taxes. Others have proposed to add annual taxes on household wealth, in addition to taxes on income. The fact is that Obama’s tax goal is already being met by the complicated American tax code, while even a small wealth tax would discourage savings and create other problems. According to a 2010 study by the Congressional Budget Office, the effective federal tax rate on the top 1 percent of households has already been about 30%. This might seem to be a misprint since very wealthy persons like Warren Buffet and Mitt Romney report that they pay only about 15% of their income in taxes. However, much of their incomes come from investments that are first taxed at the corporate tax rate of 35%, and then the after-corporate tax income is taxed again when paid out as corporate dividends, or when capital gains are realized.

Taxing Wealthy People More Heavily—Posner - Inequality in income and wealth has grown very substantially in the United States in recent decades, and appears to be at a historical high. That would hardly be noticed, in a society such as ours that is strikingly free of envy, were it not for the last almost three and a half years of economic distress. The distress is not felt by the wealthy; this is noticed, and angers the nonwealthy, who are naturally inclined to think that the distress should be shared, and that increasing the progressivity of the tax system would be a step in that direction, and should be taken. Many people are worried by the nation’s huge public debt, and it is natural to think that raising taxes on the wealthy would reduce that debt by reducing the gap between government revenue and government spending. Furthermore, Federal Reserve and other regulatory officials, who I believe were (with a helping hand from many academic economists) primarily responsible for the economic distress because of unsound interest-rate and regulatory policies, and regulatory laxness, and general cluelessness, have managed to shift the blame, in the mind of the public, for the economic distress to the financial industry. Markets are Darwinian, and the industry’s reliance on short-term capital, both financial and human, compels risk taking to the farthest degree that the government will allow, and the Greenspan-Bernanke Fed and its staff and the entire financial regulatory establishment allowed too much risk taking. But this is not widely understood; the reappointment of Bernanke as Chairman of the Federal Reserve helped to conceal recognition of the point.

Higher Taxes Help the Richest, Too - TAXES and regulation will occupy center stage in the presidential contest.  One debate, for example, will focus on whether tax cuts for the wealthiest families should expire as scheduled at year-end — an issue that could gain traction now that Mitt Romney, the possible Republican nominee, has disclosed that he and his wife paid an effective federal rate of just 13.9 percent on their huge 2010 income. And on the regulation side, there will be attempts to repeal rules like the recently adopted Environmental Protection Agency standards that limit highly toxic mercury emissions.  Surveys indicate that most voters now favor higher taxes on the rich. But many wealthy people are determined to hang on to their tax cuts, and because recent changes in campaign finance law have greatly increased their political leverage, they may prevail. If so, however, it could prove a hollow victory.  Beyond some point, there seems to be little gain in satisfaction from bolstering your private spending. ...By contrast, higher spending on many forms of public consumption would produce clear gains in satisfaction for the wealthy. It’s reasonable to assume, for example, that driving on well-maintained roads is safer and less stressful than driving on pothole-ridden ones.

The Truth About The So-Called “Buffett Rule” - As I noted yesterday, it’s been difficult over the past several months to determine exactly what President Obama means when he talks about the so-called “Buffett Rule,” or how he proposes that it be implemented. His State Of The Union Address certainly didn’t provide much detail, and neither did the five state barnstorming trip he completed yesterday. Senator Whitehouse of Rhode Island has one idea, but it’s unclear if that would have the support of the majority of the Democratic Caucus in the Senate, not to mention the President himself.  More importantly, though, there seems to be very little discussion from the White House about what the actual impact of the so-called “Buffett Rule” would be: Obama tied his proposal — which would tax those earning $1 million at a minimum of 30 percent — to cutting a deficit estimated to top $1.1 trillion for the fourth straight year. But for the moment, the White House wants to keep the attention focused on Obama’s argument that it’s unfair to tax Buffett’s secretary at a higher rate than her boss.“I’m not going to give you a schedule of how broad individual tax reform would break down and what impact it would have,” White House press secretary Jay Carney said at the Wednesday briefing. “The president simply believes that as a matter of principle that unfairness ought to be changed.”

The economic royalty can easily afford it - Citizens for Tax Justice has calculated that President Obama’s “Buffett Rule” would, if in effect this year, raise $50 billion in a single year and affect only the richest 0.08 percent of taxpayers — that’s just eight percent of the richest one percent of taxpayers. [...] 99.92% of us will not be affected by "The Buffett Rule". Of the .08% of the wealthiest Americans who the Buffett tax rule will affect, the creme de la creme of the steaming shit bowl that our Oligarchy hath wraught over the last 40 years of trickle down Reaganomic sophistry, well, this graph should easily detail exactly how rich the super-rich are. Despite the all-too predictable shrieking Grover Norquist and his tribe will engage in, when it comes to slightly higher taxes, trust me, the economic royalty can easily afford it.

Will Buffett Avoid the Buffett Rule? - Billionaire Berkshire Hathaway CEO Warren Buffett is once again thrilling the political class by volunteering other people to pay higher taxes.  Since Berkshire pays no dividends, Mr. Buffett had little at stake but enjoyed the opportunity to pose as if he were a rich guy eager to cough up more dough to Washington. In the current debate, President Obama is pushing the “Buffett Rule” to ensure that high-income earners pay higher tax rates. But even if it’s enacted, don’t expect the Buffett Rule to have much impact on Mr. Buffett. By an amazing coincidence, the sage of Omaha is already positioned to shield most of his rising wealth from such a tax. This brings us to the Buffett Rule, which at its heart is a way to raise taxes on dividends and capital gains. Berkshire still doesn’t pay a dividend, and as for capital gains taxes, well, Mr. Buffett has already made clear that he’ll largely avoid them by transferring his fortune to the Gates Foundation and to charitable trusts controlled by his family. In fact, at the 2010 Berkshire annual shareholders meeting, according to Dow Jones Newswires, Mr. Buffett urged attendees to “follow my tax dodging example” and give away their wealth.

Broke bureaucrat of the day, St Louis Fed edition - Binyamin Appelbaum has helpfully aggregated all the Fed presidents’ financial disclosure statements in one place. The richest Fed president is Dallas’s Richard Fisher, who used to run an investment fund called Value Partners. And the legacy of Value Partners is still visible in Fisher’s statement: he owns more than $500,000 of stock in an obscure clothing company called Cherokee Inc, for instance, which was one of Value Partners’s biggest investments. But the most striking disclosure comes at the other end of the scale, from St Louis Fed president James Bullard. Bullard’s a career central banker who has never had a lucrative private-sector career, but he’s still doing OK for himself: his annual salary is $281,300, which should be more than enough to bring up a family of four in St Louis. Here’s the thing, though: Bullard’s disclosure form is completely blank. Which means that, except for his house and his Federal Reserve retirement benefits, he has no investments at all worth more than $1,000 — not even a savings account. Or, to put it another way, the president of the St Louis Fed, earning well over a quarter of a million dollars a year, is living paycheck-to-paycheck. Every two weeks, he gets paid $10,819, less taxes and deductions, and yet by the end of the year he still doesn’t have even $1,000 in a checking account.

Romney’s gift from Congress - When the Romney campaign disclosed in December that the couple’s five sons had a $100 million trust fund, I suspected that, in setting up the fund, the Romneys used a tax strategy that allows some very rich people to avoid paying gift taxes. But it was impossible to know if this was the case without seeing their tax returns going back years.So when Mitt Romney released the family’s 2010 tax return last week, I went looking. I found a hint on pages 132 and 134 of the return. It showed that the value of property placed that year into another family trust, the Ann D. Romney Blind Trust, was, for tax purposes, zero. The Ann Romney trust is not the same trust as the one that holds the Romney sons’ $100 million, but I wondered if the Romneys used the same approach in prior years when it came to valuing property placed into the sons’ trust. Reuters emailed the Romney campaign spokeswoman to ask how much the Romneys paid in gift taxes on assets put into the sons’ trust over the last 17 years. The spokeswoman, citing Brad Malt, the Romney family tax lawyer, answered: none. The idea that someone could pay zero gift taxes on contributions to a $100 million trust fund may surprise people who have heard arguments that the wealthy are overburdened by gift and estate taxes. But the Romneys’ gift-tax avoidance strategy is perfectly legal.

Romney’s Wife Had $3 Million in Secret Swiss Bank Account Through 2010; Not Reported in Federal Disclosure Forms - Yves Smith - Remember how peculiar it was that presidential candidate Mitt Romney refused to release his tax returns? That was predictably a non-starter. Most voters probably assume the reason he resisted was to avoid the controversy over his strikingly low tax rate. Another factor appears to have played into this decision. The release of the tax returns shows Romney neglected to disclose some required financial information in his personal disclosure form filed with the Office of Government Ethics last year. His team apparently timed the release of his tax records with the hope that State of the Union hooplah would dominate news coverage and result in his finances getting less attention than they might otherwise. And that appears to been correct. His failure to divulge information about 23 investments, and more important his use of secret Swiss bank accounts, has been given a free pass. As Citizens for Responsibility and Ethics in Washington director Melanie Sloan observed, “Mr. Romney says the errors are minor, but then again he also claims earning $374,000 in speaking fees isn’t much money.” This anodyne coverage in a Los Angeles Times article from last week is typical: Some investments listed in Mitt and Ann Romney’s 2010 tax returns — including a now-closed Swiss bank account and other funds located overseas — were not explicitly disclosed in the personal financial statement the Republican presidential hopeful filed in August as part of his White House bid.The Romney campaign described the discrepancies as “trivial” but acknowledged Thursday that it was reviewing how the investments were reported and would make “some minor technical amendments” to Romney’s financial disclosure that would not alter the overall picture….

Why Carried Interest Is A Worse Scam Than You Think - The much-anticipated release of Mitt Romney’s tax returns confirmed what was widely assumed: He pays less of his income in taxes—13.9 percent to be exact—than do many middle-class households. Romney manages this sweetheart rate thanks to the so-called carried interest loophole that rather absurdly lets him classify the vast majority of his income as capital gains—which are taxed far lower than ordinary income. It’s an outrage. And one that is demonstrably without any justification. First, a quick primer on how carried interest works. Capital gains generally only apply to profits investors earn from risking their own capital. This is not so with carried interest. Indeed, the magic of carried interest is that some financiers book capital gains far in excess of any capital they ante up—or, put differently, they get to count performance fees as capital gains. This is an enormous boon due to the low taxation of capital gains. After equaling the top marginal rate of 28 percent at the end of the Reagan years, the capital gains rate has fallen to 15 percent over the past two decades (versus a top marginal rate now of 35 percent). This is why the über-wealthy—the top 0.1% earn half of all capital gains—have had their effective tax rate plummet over this period. This lower rate is usually justified due to the double taxation of capital from corporate income taxes, but this isn’t necessarily true. It’s well-known that many corporations pay little or no income tax, and there are certain corporate structures called “pass-throughs” that avoid all tax as well. Private equity funds like Romney’s Bain Capital are, of course, organized as pass-throughs.

Cheat away on taxes, more Americans say - Here’s the good news for Uncle Sam: The vast majority of Americans still believe that you should never cheat on your taxes — or, at least, that's what they tell the pollsters representing the Internal Revenue Service Oversight Board. The bad news: The percentage of people who say you should cheat on your income taxes “as much as possible” hit 8 percent in 2011, double what it was in 2010. That’s also higher than any other recent year in which the question was asked. Another 6 percent of those surveyed said a little cheating here and there is OK. The oversight board this week released its annual survey of taxpayer’s attitudes about the IRS.  The survey was conducted by an outside research firm in August. For the most part, despite our grumbling, Americans seem to at least accept that taxes are a necessary part of life. Almost everyone surveyed agreed that it is every American's civic duty to pay taxes, and most people said they thought tax cheats should be held accountable. 

What a Value-Added Tax Would Mean for the Tax Code—and the Economy - A well-designed Value-Added Tax could simplify the tax code for most households and finance significant reductions in corporate and individual income tax rates without adding to the budget deficit. And it could be a key piece of a revenue system that is both progressive and less intrusive in economic decisions than today’s law. That’s the conclusion of a new study by my Tax Policy Center colleagues Eric Toder, Jim Nunns, and Joe Rosenberg. The VAT, a national consumption levy that would tax household purchases of all goods and services, is hardly perfect—no tax is. But properly structured, it could be a vast improvement over what we have. In a project funded by the Pew Charitable Trusts, TPC modeled a sweeping reform of the federal tax system that includes a VAT. The plan was authored by Columbia Law School professor Michael Graetz . While there are many forms of consumption taxes (Herman Cain’s 9-9-9 tax included several), Graetz’s is similar in structure to the one used by most other countries. In effect, every business pays tax on its sales and gets a credit for any tax that is included in the price of what it buys from other firms.

How to Avoid Reinventing the Wheel on Tax Reform, Part 2 - Last week, I explained that much of the heavy lifting on tax reform has already been done in various studies that are still relevant to the problems of the tax code today. I concentrated on one in particular, the 1977 Treasury “Blueprints” study. Today and in future posts I want to discuss some others that are easily available on the Internet. In his 1984 State of the Union address, President Ronald Reagan asked the Treasury Department to study tax reform and send him a report on options.  The Treasury approached the project with an open mind. That is, it was not premised on a particular philosophy of taxation. This was frustrating to some of the political appointees at Treasury, who favored tax reform based on “supply side economics.” They wanted a flat rate tax on a consumption base that would largely, if not entirely, exempt capital from taxation. The final report, published in November 1984, was a balanced discussion of tax issues generally free of politics or ideology — a pragmatic review of practical problems with the tax system and options for improvement that reflected a consensus view among tax specialists.

When Does a Corporate Income Tax Become a VAT? Or Why Do Conservatives Oppose a Flat Tax for Business? - The Administration is planning to release a reform proposal for the corporate tax system. The plan is supposed to be released in early February, perhaps on the same day as his budget proposal for fiscal year 2013. This is not the first time that expectations have started to spike ahead of a potential catalyst for reform. Wall Street Journal editor Steven Moore noted towards the end of last year that Congressional negotiators were in advanced tax reform talks in the context of the Super Committee. Specifically, the reports indicated that negotiators may trade fewer deductions for capital spending and interest for lower corporate tax rates of “between 25% and 28%, down from 35% now.” The Ways and Means Committee then released a table demonstrating that the “revenue neutral” corporate tax rate would be 28%, which means that the revenue generated from the elimination of all tax expenditures could reduce the statutory rate by 7 percentage points. Further reducing the rate to 25% would require changes to the definition of “corporate income” to disallow deductions for what are currently considered legitimate business expenses.

What Happened to Corporate Tax Reform? - President Obama’s 2011 State of the Union Address contained ringing language on corporate tax reform: Get rid of the loopholes.  Level the playing field.  That was then. This year, instead, the White House is advocating a handful of minor fiddles that would raise corporate taxes on some while creating new loopholes for others. We won’t get the full details until the February budget message, but here is an outline of what to expect, courtesy of Reuters:

  • Eliminating a tax break for moving expenses when a U.S. company ships operations overseas.
  • Doubling the domestic production tax incentive for advanced manufacturers to 18 percent, while eliminating it for oil production, to urge manufacturers to create U.S. jobs.
  • Closing a tax loophole that allows U.S. companies to shelter profits overseas from intangible property, like royalties from a drug patent.
  • Proposing a new credit of $6 billion over three years for investments that help fund projects to improve economic activity in communities hit by major job losses or military base closures.
  • Proposing an additional $5 billion in an advanced energy manufacturing tax credit the White House says would leverage nearly $20 billion in U.S. clean energy manufacturing.
  • Proposes extending for all of 2012 a provision to allow companies to deduct the full cost of investment in equipment, which the White House says yields $50 billion in tax relief over two years.

Not quite the same, is it? Let’s go back to first principles to see just what is wrong with the corporate tax and why it should be a priority area for tax reform.

Private Equity and “Job Creation” - The phrase “job creation” always makes me a little queasy.  I doubt that there’s any proof that productivity-increasing innovation always increases employment. But this line of thinking quickly leads to questions like whether the invention of the automatic toll booth is a good thing (because it eliminates what must be a pretty unpleasant job) or a bad thing (because it results in the layoff of people who may not have good alternatives), and those questions are above my pay grade.Anyway, job creation these days usually refers to growing companies, making stuff people want, which tend to hire new workers—leaving aside the question of whether the products they make are causing other people to lose their jobs. This is the kind of job creation that Mitt Romney (and the private equity industry, at least publicly) wants to be associated with.But private equity, as I wrote about last week, is just a way of taking over existing companies. While it’s possible for a private equity fund to invest in growing companies, they are more likely to invest in mature companies, for various reasons: it’s easier to borrow money against a company that has hard assets; mature companies are more likely to have the kinds of inefficiencies that build up over decades of poor management; you need steady cash flow to service debt, and high-growth companies are often spending most of their cash flow on new investments; and you’re more likely to find undervalued companies in sleepy industries.

Wall Street execs are major Obama fundraisers - The latest interesting data point emerged this week in the form of an analysis of the bundlers to Obama’s campaign and the Democratic National Committee performed by the Center for Responsive Politics (CRP). The campaign, to its credit, voluntarily released the names of people who have bundled – in other words raised money from their social and professional circles and sent it to the campaign in one large chunk — more than $50,000. There were just 357 of these elite bundlers in the second and third quarters of 2011. And the second most represented industry after law was the securities and investment industry, according to the CRP analysis. The 62 bundlers who work in that industry have raised at least $9.4 million for Obama and the DNC. That “at least” is significant because the Obama campaign specifies only a dollar range in its disclosures, with the top category being “$500,000+.” So the real aggregate figure may be considerably higher. Among these bundlers are employees of big-name firms including Goldman Sachs, Morgan Stanley, Barclays and Citigroup.

Bill to Prohibit Insider Trading by Members of Congress Advances in Senate - In an effort to regain public trust, the Senate voted Monday to take up a bill that would prohibit members of Congress from trading stocks and other securities on the basis of confidential information they receive as lawmakers. The vote was 93 to 2. Senators of both parties said the bill was desperately needed at a time when the public approval rating of Congress had sunk below 15 percent. “The American public has no confidence in Congress,”At the same time, Democratic senators moved to tap into concerns about comparatively low tax rates paid by some of the nation’s top earners, introducing a bill that would require households with more than $1 million of adjusted gross income to pay at least 30 percent of it in taxes.

Senators’ Amendments Ensnarl Insider Trading Bill - In the Senate these days, even a popular bill has trouble passing. Most senators profess support for a bill to ban insider trading by members of Congress. But somehow the bill has quickly become snarled in a tangle of friendly and unfriendly amendments. Prospects for the legislation looked bright on Monday when the Senate voted 93 to 2 to take up the measure, which would prohibit lawmakers from trading stocks on the basis of confidential information they gain by virtue of their public office. Just 48 hours later the sponsors of the bill were trying to keep it on track. Some senators wanted to make it tougher. Some wanted to make it weaker. And some wanted to address tangential issues. “At some point, this becomes ridiculous,” said the Senate majority leader, Harry Reid, Democrat of Nevada. “Senators come over here and say they are not going to allow a vote on an amendment unless they are guaranteed votes on non-germane, non-relevant amendments. It becomes a circus.” More generally, sponsors of the bill said they had heard grumbling from colleagues in both parties about the bill’s requirement for lawmakers to disclose stock sales and purchases within 30 days of the transactions. Republicans say the disclosure requirement should apply to federal employees in the executive branch, as well as members of Congress.

Senate Approves Ban on Insider Trading by Congress - The Senate passed a sweeping new ethics bill on Thursday that would ban insider trading by members of Congress and require prompt disclosure of stock transactions by lawmakers and by thousands of officials in the executive branch of government. The 96-to-3 vote followed three days of impassioned debate in which senators tried to outdo one another in proclaiming their support for ethics in government. President Obama1 called for passage of such legislation in his State of the Union address last week2. More than half of House members, including at least 100 Republicans, have signaled support for it, and House Republican leaders said Thursday that they would schedule consideration of the Senate-passed bill on the House floor next week. A handful of lawmakers have tried for years to enact restrictions on stock dealing by members of Congress. Their efforts drew little support until new attention to the practice last year — coupled with election anxiety — prompted a flood of backing for the idea and support from Mr. Obama. Senators of both parties said the bill was desperately needed to restore trust in Congress at a time when its public approval rating had sunk below 15 percent.

That Uncertainty Word—I Don’t Think It Means What You Think It Means - In numerous posts, I’ve argued that the evidence doesn’t come close to supporting the conservative talking point that what’s holding back hiring is Obama-driven regulatory uncertainty. Well, here’s another data nugget: the share of layoffs, job losses, and UI claims that employers report are due to government regulations or interventions.  They are tiny—expect in one case in the table, never more than half of one percent.  And in the most recent quarter, they were all about zero (technically, the number reported was too small to meet BLS sampling criteria).Source: BLS, Table 2 My point is not simply to dispense with an erroneous talking point, but to try to stop the key-dangling-look-over-here-not-over-there routine re the major economic problem we still face: inadequate demand.Moreover, the policy implications of getting the diagnosis wrong are steep.  The regulatory diagnosis points toward dismantling stuff like financial and health care reform—particularly nuts, btw, since neither has really been implemented yet.  The insufficient demand diagnosis points toward stimulus. And if we can’t read the right signs, we’re going to stay lost.

Full-Reserve Banking and Loanable Funds - Richard Williamson asks a sensible and straightforward question: If, as Modern Monetary Theorists propose, banks’ reserve levels put no significant constraints on their lending, why don’t we have 100%-reserve banking — and presumably no runs on banks as a result? First an explanation — I hope simple, clear, and generally accurate (if simplified): Say you start your own bank. You take in $100 in checking-account deposits and lend it all out, holding no reserves. That’s not safe or even workable. You need some buffer so your depositor’s checks will clear. So there’s a rule: you can only lend $90, and you leave $10 sitting in your “reserve account” at the Fed — essentially your bank’s checking account. When everybody’s checks clear each night through the Fed’s system, reserves get transferred between banks, and you’ve got enough on deposit so nothing bounces. So back to Richard’s question: if the Fed required 100% reserves, the banks couldn’t lend out all those checking-account deposits. The quantity of “loanable funds” would decline. But banks could still lend, 10-to-1 (or so), against their capital. What do those numbers look like in practice?

Full-Reserve Banking, the "Right" to Earn Interest, and "Financial Repression" -Nick Rowe replies to Richard Williamson re: full-reserve banking (emphasis mine): The key reading here (even though it appears to be about a different subject) is Milton Friedman’s “The optimum quantity of money”. Foregone nominal interest payments is a tax on holding currency…. 100% required reserves mean you impose the same tax on chequing accounts … My reply, edited and links added: Nick, just because people (“the market”) want risk-free long-term holdings that pay interest does not in any way imply what seems to be the unstated assumption here: that the government is obligated to provide them, or that failing to provide them is a “tax” — a “taking” of something that they own or deserve by some natural right. The government could issue dollar bills instead of t-bills without violating anyone’s rights. This is no different from saying that foregone transfer payments to the poor constitute a “tax” on the poor. You could call either (as in Carmen Reinhart’s “pity the poh’ bondholders” perorarations) “financial repression” — though the charge seems sadly misplaced in one of the two contexts. (This locution is the most egregious example I’ve seen of economists shilling for creditors. Witness its widespread repetition by said creditors, their congressional toadies, and their money-media water carriers.)

Complexity and transparency in finance - The blog interfluidity, written by Steve Randy Waldman, posted a while back on opacity and complexity in the financial system, arguing that it is opacity and the resulting lack of understanding of risk that makes the financial system work. Although I like a lot of what this guy writes, I don’t agree with his logic. First, he uses the idea of equilibrium from economics, which I simply don’t trust, and second, his basic assumption is that people need to not have complete information to be optimistic. But that’s simply not true: people are known to be optimistic about things that have complete clarity, like the lottery. In other words, it’s not opacity that makes finance work, it’s human nature, and we don’t need any fancy math to explain that. Partly in response to this idea, I wrote this post on how people in the financial system make money from information they know but you don’t. But then Steve wrote a follow-up post which I really enjoy and has a lot of interesting ideas, and I want to address some of them today. Again he assumes that we don’t want a transparent financial system because it would prevent people from buying in to it. I’d just like to argue a bit more against this before going on.

Geithner: Goal of Dodd-Frank Isn’t to Eliminate Failure - The goal of the 2010 Dodd-Frank financial law isn’t to wipe failure from the face of the U.S. financial system, Treasury Secretary Timothy Geithner said Thursday at a rare press conference.  His observation was in response to a question about what more U.S. regulators could have done to prevent the collapse of MF Global Holdings Ltd., which was the subject of yet another investigative hearing on Capitol Hill Thursday. It is important to note, Mr. Geithner said, “we are not attempting to design a financial system that takes out the risk of failure of individual firms who make mistakes… take too much risk. That is not possible and it’s not desirable.” Unless, of course, you want a system “run by the government, and we’re not prepared to do that,” he added. Rather, the aim of Dodd-Frank is to make the system more resilient when such failures occur. “We are trying to make sure that the largest institutions whose failures can cause so much damage to the innocent are forced to run much more conservatively,”

Geithner Defends Dodd-Frank, Pledges Housing Moves - Treasury Secretary Timothy Geithner defended the Dodd-Frank financial-overhaul law against mounting attacks on Thursday, the latest in a series of moves by the Obama administration to push ahead with its signature Wall Street overhaul. “Those who are still working to delay and weaken reforms will only increase uncertainty and damage our efforts to get the rest of the world to adopt a level playing field,” Mr. Geithner said in a briefing with reporters. He added that there was no evidence that repealing the law would help the economy, as Republican candidates for the GOP presidential nomination have argued. Mr. Geithner pledged to lay out more detail on the administration’s approaches to reforming the U.S. housing finance system over the spring. He said the Treasury would be exploring potential legislation on with top House and Senate leaders on financial issues. “Realistically, we don’t expect to legislate this year,” he said. “We think that is going to take a little bit more time. We could be surprised, but I think that is unlikely.”

Dodd-Frank in One Graph - Big portions of the financial reform law are set to go into effect this year. Intended to make corporate practices transparent, the law itself is anything but. The government has yet to spell out the details of most of the 400 new regulations it imposes. A non-headache-inducing guide.

Geithner: Key Parts of Financial Reform Coming in 2012 - The Obama administration is warning other countries not to poach business from U.S. markets while the United States continues toughening rules for the financial industry, U.S. Treasury Secretary Timothy Geithner said on Thursday. In an address at the Treasury in which he set out an agenda for reforms, Geithner said globalized financial markets mean that dangers to the U.S. economy can arise from anywhere and thus make a more level playing field vital. "This is particularly important in the reforms that toughen rules on capital, margin, liquidity and leverage, as well as in the global derivatives market," he said. "In these areas we are working to discourage other nations from applying softer rules to their institutions in order to try to attract financial activity away from the U.S. market and U.S. institutions," Geithner added. He did not name any specific countries, but in virtually any region of the globe, there are financial centers that aspire to challenge New York's prowess. Some Wall Streeters complain that stiffened regulation since the 2007-2009 financial crisis has created an opening for others to gain an edge on U.S. firms.

Bank or no bank? - In a market economy, when you need something, you go out and buy it. Liquidity is no different, in that respect at least. If it is market liquidity that you need, you go to a dealer, who stands ready to buy what you are selling. You pay for the convenience, though—the dealer is getting more for the same asset than you are. If it is funding liquidity that you need, you go to your bank, who stands ready to lend. You pay for the convenience, though—the bank is paying less for its funds than you are. Stick with funding liquidity for a moment. A bank is well suited to provide such liquidity, since a bank's liabilities are money, and it can create them at will. If the need for funding liquidity is systemic, the bank that can provide it must be the one whose liabilities are interbank money—the central bank. And if the need for liquidity is international? The country that issues the world's reserve money can create more of it, and that might be enough to stave off the crisis. Might some other asset do the job?

A list: Experts who want to break up the big banks - A growing chorus of economists, analysts and other observers are calling for the mega-banks to be broken into smaller pieces. Whatever the cause of the finanical crisis of 2007-2008, the first step toward a solution is to get rid of the international giants that defy regulation, these observers believe. RepoWatch is soliciting the names of people who say Too Big To Fail is Too Big To Exist. They will be added to this list as they are submitted and confirmed. Although the list will be alphabetical, it must begin with MIT professor Simon Johnson and Yale student James Kwak, who blog together at Baseline Scenario and co-authored “13 Bankers: The Wall Street takeover and the next financial meltdown.” They have been the leading voices on this issue since the crisis. Others are:

Volcker Rule Stirs Up Opposition Overseas -- Usually, it is the banks that are fighting efforts to impose new regulations on the industry. Now, it is foreign governments fighting against bank regulations in the United States. In the halls of last week’s annual meeting of the World Economic Forum here, Wall Street’s top bankers found a curious ally in their battle to end — or perhaps water down — the Volcker Rule, that part of last year’s Dodd-Frank financial regulation law that says that banks are not allowed to participate in “proprietary trading.” Translation: Banks can’t make risky bets with their own money. The idea, rooted in ending the too-big-to-fail phenomenon, is to separate the risky casino element of Wall Street from the utility role of helping finance the economy. Yet finance ministers from around the world lined up to whisper in the ear of Timothy Geithner, the Treasury secretary, who made the rounds in Davos on Thursday and Friday, about a specific element of the Volcker Rule that has them apoplectic: The rule says that United States banks — and possibly certain foreign banks that do business in America — would be restricted in trading foreign government bonds. Yet the rule, conveniently, provides an exemption for United States government securities. Every other country is out of luck.

Progress on Letting Big Banks Fail - Simon Johnson - The drafters of the Dodd-Frank financial reform law got an important thing right. Despite fierce pushback from the banks — and lackluster support from the White House at critical moments — the legislators communicated a key new intent: megabanks must be able to fail, and the Federal Deposit Insurance Corporation should be in charge of that liquidation process.. The F.D.I.C. was an inspired choice for this role, because it is less captivated by the “magic” of Wall Street and less captured by its money and influence than any other group of officials. The F.D.I.C. has also long been in the business of shutting down banks while limiting the damage to taxpayers, although it did not previously have complete jurisdiction over the largest banks when they got into trouble. It could only deal with those parts that had federally insured “retail” deposits, and this turns out not to be where the biggest problems have occurred in recent times. Charged with this mandate, the F.D.I.C. took the remarkable step of opening up its decision-making process. By creating a Systemic Resolution Advisory Committee of informed outsiders and by Webcasting the deliberations of that group, the agency has brought perhaps an unprecedented degree of transparency to public policy for banks — a point made forcefully by Dennis Kelleher; his blog at Better Markets is a must-read for anyone who cares about financial regulatory reforms. (Disclosure: I’m a member of the committee, an unpaid position.)

Guest post from OWS: Too Big to Fail is Too Big to Ignore - FT Alphaville - (below is a note prepared for the December 4th meeting of the Occupy Wall Street General Assembly by its alternative banking working group) As a presidential candidate, Jon Huntsman proposed a six-point plan to address the critical and important problem of banks that are too big to fail. Now that he has left the race, there is no presidential candidate with a plan or even with an obvious interest in addressing this vital question. The Alternative Banking Working Group of Occupy Wall Street believes it is extremely problematic that this issue is being ignored, and urges every presidential candidate, including Barack Obama, to propose their too big-to-fail plans for review and for debate. In the weeks and months to come, presidential candidates on both sides of the aisle should make explicit plans to set up appropriate firebreaks in the financial system to protect taxpayers. We’d like to take a moment to comment on Huntsman’s original plan, which is a good start. It sets a cap on bank size based on assets as a percentage of GDP. While such a cap could constitute a step in the right direction, it remains an inadequate solution unless other significant issues are addressed. Since Huntsman’s plan does not consider the impact of derivatives, implementation of his plan could lead to banks with limited hard assets and bloated derivatives books.

Reflections on the current disorder « LBO News from Doug Henwood  (this is an excerpt from a longer piece available here) There are several dimensions to Wall Street’s rise to pre-eminence over the last few decades. One can simply be measured in money. For example, in almost every year since the U.S. national income accounts begin in 1929, securities and commodities brokers have been the highest-paid of almost the almost 90 industries reported by the Bureau of Economic Analysis. And the securities industry’s premium has grown enormously over time. From 1929 through 1939, it was 237% of average pay. It fell during World War II and the immediate postwar decades, at just under 180% of average pay. But with the takeoff of the bull market in 1982, the premium began to swell, crossing 300% in 1992 and 400% in 2006. It fell back some in 2008, to a mere 409%. It fell back some more in 2009 to 366%, which, though below the massive heights of a few years ago, is still higher than anything before 2004.

A veteran Wall-Streeter confronts the Occupy movement - (Stephen Roach, Financial Times) For me, it was a disturbing yet fitting end to the 2012 World Economic Forum. I was a panellist at Friday’s Open Forum, a session held since 2003 in an effort to take the debate from the glitterati to real people. In attendance were members of the local community, students and several representatives of the so-called Occupy community. The topic, “remodelling capitalism”, was a chance to open up this debate to the seething masses. And that’s exactly what happened.  Chaos erupted immediately. Occupy agitators, strategically placed around the packed, standing-room-only auditorium, led the audience in a series of chants: “No speeches! No stage! Join us!” The cacophony was unruly and unsettling. I started thinking more about an escape route than opening comments. Yet after some 20 minutes, a majority shouted down the minority and we began.  Maria, a 24-year-old representative of Occupy, was the first panellist to speak. She read a manifesto that spoke of anger at “the system” and the need to construct a new one based on equality, dignity and respect. She urged repudiation of materialistic iPhone-centric values.  The rest of us on the panel spoke a different language. A politician (Ed Miliband, the UK’s Labour party leader) gave an abbreviated stump speech. A UN commissioner (Navi Pillnay) urged us to confront human rights abuses head on. A Czech academic (Tomas Sedlacek) vented against the evils of interest rates and growth. A Jordanian minister spoke of the Arab spring’s lessons on youth alienation and education. As for me – a Wall Streeter for more than three decades – I confess it was unsettling to engage a hostile crowd whose main complaint is rooted in Occupy Wall Street. Speaking over hisses, I tried to stick to my expertise as an economist.

Counterfeit Value Derivatives: Follow the Bouncing Ball -- Here is how the counterfeit value derivative con works. It’s a game of “I pretend, you pretend, we all pretend, and the taxpayer will pay in the end”.

  • 1) I’ll create an instrument, say a credit default swap (CDS), an unregulated insurance with no capital requirements, with a certain “notional” value. Notional value is just something I assign. It does not have to be attached to or backed by any real asset or actual money/principal, but I can pretend as if it is. (Notional amount.)
  • 2) As a seller, I will just declare that this swap covers the full value X of this company, contract, etc. if credit event Y happens. I receive lucrative insurance premiums and fees for my unbacked promise. The CDS’s value is based in nothing more than my promise to pay. I don’t have to have adequate capital reserves on hand, but I can pretend as if I do. (credit default swap.)
  • 3) As a buyer, you can then buy as many of these CDS’s as you want, even for a single default. If you are really sure something is going to tank you can insure it 30 times over (or a 100 or 1,000) and get 30 (or 100 or 1,000) times the return when it goes bust!  As a buyer of this phony “insurance” you don’t have a stake in the affected properties, but you can essentially pretend you do.
  • 4) As buyer and seller of CDS’s either one of us can assign our risks to a third party through another contract, and pretend as if we are covered in case our own game playing blows up in our faces.
  • 5) We can purchase and sell of these derivative contracts to each other at unlimited rates to generate massive volume and huge fees and profits. We can simply hyper-cycle risk and take our chunk each time.

According to the Bank of International Settlements, as of June 2011 total over-the-counter derivatives contracts have an outstanding notional value of 707.57 trillion dollars, ( 32.4 trillion dollars in CDS’s alone). Where does this kind of money come from, and what does it refer to? We don’t really know, because over-the-counter derivatives are not transparent or regulated.

Goldman Sachs Among Banks Fighting to Exempt Half of Swaps Books -  More than half of the derivatives- trading business of Goldman Sachs Group Inc. (GS), Morgan Stanley and three other large banks could fall largely outside the Dodd- Frank Act if they succeed in lobbying regulators to exempt their overseas operations, government records show. The debate over the reach of Dodd-Frank has been among the most contentious aspects of the regulatory overhaul enacted by President Barack Obama after the 2008 credit crisis. The banks have met with regulators, testified to Congress and filed dozens of letters contending that they will suffer a competitive disadvantage if the regulations apply to their foreign arms. Banking lobbyists have been gaining traction with their argument that a combination of U.S. supervision of their holding companies and foreign supervision of their operations abroad is sufficient to oversee risk to the financial system. While the banks haven’t publicized how much of their swaps business is overseas, they file quarterly statements to the Federal Reserve. A Bloomberg News analysis of the filings shows that Goldman Sachs had 62 percent of its $134 billion in fair- value derivatives assets and liabilities in non-U.S. branches or subsidiaries for international banking as of Sept. 30, while 77 percent of Morgan Stanley (MS)’s $101 billion was in non-U.S. operations. If overseas operations aren’t subject to U.S. rules or equivalent regulation by other nations, it could impede the goal of preventing another credit crisis,

Unintended profits and the custodians -- The Streetwise Professor pretty much nails one of the big winners in the (regulatory mandated) move to OTC derivatives central clearing: big custodial banks will be even more tightly connected with all major participants in the derivatives trade because of their comparative advantage in providing collateral transformation, and the strong economies of scope between providing this service and providing other custodial services. In other words, the folks who already know where the collateral is, like BNY Mellon and JP Morgan (the dominant two players in tri-party repo) will be big winners in the move to clearing because there will be a massive increase in the demand for collateral, and they can take a turn in connecting the people who have it with the people who need it. So clearing might increase rather than decrease interconnectedness. Just saying.

Interview of Mr. John Reed regarding banking fixing the game - In case you are not aware, Bill Moyers is back and he doing his best work to date concentrating on our the changing of the rules regarding the economy. This episode where he interviews John Reed, former Citi Bank CEO and current MIT chair is most telling as it relates to the issue of why we as a nation need to do what is required by law: investigate and prosecute as the investigations dictate. First, let me just say, you need to watch the interview. What is most telling for me is the denial that still exists in Mr. Reed. Sure, he acknowledges that it all went wrong, but it is done in the temperance of “mistake”:

1. an error in action, calculation, opinion, or judgment caused by poor reasoning, carelessness, insufficient knowledge, etc.
2. a misunderstanding or misconception.

Crony Capitalism and the History of Bailouts Disinformation: In this revealing interview, David Stockman, former budget director and original Supply-Side proponent, tells of the 30-year history of how crony capitalism and the American finance industry has affected American politics.

The Problem with the Profit Motive in Finance - The Financial Services Roundtable, the lobbying group for the biggest financial companies in the U.S., has a new "white paper" out with the rah rah title, "Financial Services: Safer & Stronger in 2012." A few of the bullet points:

    • Banks insured by the Federal Deposit Insurance Corporation have $1.5 trillion in capital — the highest capital levels in the history of American banking.
    • The largest U.S. banks have increased Tier 1 capital — the core measure of a bank's financial strength from a regulator's point of view — by nearly 50 percent over the last four years.
      Executive compensation has been reformed significantly to align with long-term performance.
      Banks have developed fortress balance sheets, improving credit quality by 54 percent, increasing net income and, restoring aggregate lending to pre-crisis levels of nearly $7 trillion.

Why you're very welcome, Financial Services Roundtable! You see, almost all of the positive indicators above were enabled by or forced on banks by people working for us the taxpayers (by which I mean Congress, the Federal Reserve, and financial regulators). Most of them — increased capital, executive compensation changes, higher credit quality, fortress balance sheets — would have been fought tooth and nail by the Financial Services Roundtable before the financial crisis.

Banks must reclaim their proper role - Amid all the debates about reforming the global financial system, the two most important challenges are clear. The first is to return banking to its rightful place in a market economy. Banking should not depend on a safety net from taxpayers. Those who most espouse the disciplines of capitalism – bankers and financiers – should live by them. The second challenge is to take a much broader view of global finance than in the past. Looking back, regulators have to recognise that the rules of the game failed to keep up with the progressive fusion of banking, capital markets and insurance; and were not modified in response to accumulating macroeconomic imbalances. So far, much public discussion has focused on changes in the Basel regime for bank capital requirements, and that is certainly vital. But the G20’s reform programme must also go beyond traditional policy options. First, it absolutely must solve the “too big to fail” problem – in other words, the G20 must put in place a credible regime for managing the orderly failure of financial institutions, however large, complex or international. Where losses exceed equity but outside capital cannot be raised, any kind of business must either go into liquidation or be reconstructed. In the case of banking, liquidation entails huge costs and disorder as financial contracts are closed out and essential services – payments, credit, risk transfer – are shut down.

3 Months After The MF Global Bankruptcy, We Find That $1.2 Billion (Or More) In Client Money Has "Vaporized" - On the three month bankruptcy anniversary of the company whose rehypothecation gimmicks will one day be seen as a harbinger of everything that is  broken with the multi-trillion ponzi system, but not just yet despite loud warnings otherwise, we are getting close to a final verdict of where the $1.2 billion (and possibly more as originally predicted by Zero Hedge - see below) in commingled client money may have gone. Note the use of the passive voice because using the active, as in money that MF Global executives stole from clients, is prohibited in a legal system in which nobody goes to jail for something as modest as $1.2 billion in theft. That verdict? "Vaporized." No really (and yes, in the passive voice of course). From the WSJ: "As the sprawling probe that includes regulators, criminal and congressional investigators, and court-appointed trustees grinds on, the findings so far suggest that a "significant amount" of the money could have "vaporized" as a result of chaotic trading at MF Global during the week before the company's Oct. 31 bankruptcy filing, said a person close to the investigation." Uh huh...

MF Global - A Despicable State Of Affairs - Much of the financial press picked up this story from the Wall Street Journal, Money From MF Global Feared Gone. Much of the mainstream media in the US and the UK these days is just a conduit for sound bites from the monied interests. "Nearly three months after MF Global Holdings Ltd. collapsed, officials hunting for an estimated $1.2 billion in missing customer money increasingly believe that much of it might never be recovered, according to people familiar with the investigation.  As the sprawling probe that includes regulators, criminal and congressional investigators, and court-appointed trustees grinds on, the findings so far suggest that a "significant amount" of the money could have "vaporized" as a result of chaotic trading at MF Global during the week before the company's Oct. 31 bankruptcy filing, said a person close to the investigation."And as we have heard, quite a bit of that money was also diverted in the last few days into the pockets of MF Global's bank, JP Morgan, which still reportedly holds much of it. Now whether they are legally entitled to keep that money is another matter. But this entire charade has been cloaked with a public relations campaign using terms like 'missing,' 'vaporized,' and 'mystery' to describe the customer assets as if no one really knows where the funds had gone, which the CFTC has explicity stated months ago is not the case. And that the handling of the bankruptcy and the method of ordering customers with creditors is in violation of the CFTC's rule 190, as is evident from the precedents and intentions which established it.

MF Global: Oops, They DID Find the Money After All As We Had Said, But... You have to read this latest news item with a discerning eye, and in the context of what has gone on so far including the piece the other day from the Wall Street mouthpiece that the money simply 'vaporized.' It is a variation of the spin. No the money is not vaporized, but its complicated. There are lots of possibilities just too complicated to explain to the public, and you have to be patient, little customers, while a pile of creditors' lawyers sit on your money until you hopefully go away. Real journalism and critical news analysis is apparently dead. The mainstream media outlets merely repeat sound bites supplied to them. But one has to ask themselves, could this situation become more ludicrous? Does anyone actually buy this clumsy handling of serious wrongdoing and gross seizure of customer assets? The professionals and those in the know do not, and it is putting a chill on the markets, and people are afraid to talk about it above a whisper. It's an old story, of droit du seigneur, of the lord of the manor drunk with power doing something unspeakable. 

So Why Hasn’t SEC Enforcement Chief Robert Khuzami Resigned? SEC Only Now Investigating CDOs Created on His Watch at Deutsche Bank -- Yves Smith - I’d heard from German speaking readers about the Der Spiegel report of an SEC investigation in its German edition over the weekend and they’ve now released it in their English language version. Der Spiegel is careful about its sourcing, so readers should take this account seriously. The story is about the overall litigation risks facing the German powerhouse, the SEC investigation is a mention in passingMeanwhile, the US Securities and Exchange Commission is also investigating Deutsche Bank, SPIEGEL reports. According to financial regulatory sources, the bank launched one CDO transaction called “START” in which it allegedly allowed the hedge fund of US speculator John Paulson to choose junk mortgage securities against which he could speculate — without the other investors knowing about it. Goldman Sachs settled a suit with the SEC in a similar case for $550 million,  Why is there probably less here than meets the eye? For this investigation to be taken seriously, SEC enforcement chief Robert Khuzami would have to resign. He was the general counsel for the fixed income area at the time when the deals in question were undertaken (contra Der Spiegel, START was a program of synthetic CDOs, not just a single deal, just the Goldman Abacus trade that was the focus of an SEC lawsuit was actually just one of 25 Abacus trades). It would not be sufficient for Khuzami to recuse himself from this investigation. Staff would still be concerned about how the probe might affect their ultimate boss.

S.E.C. Is Avoiding Tough Sanctions for Large Banks - Even as the Securities and Exchange Commission1 has stepped up its investigations of Wall Street in the last decade, the agency has repeatedly allowed the biggest firms to avoid punishments specifically meant to apply to fraud cases.  By granting exemptions to laws and regulations that act as a deterrent to securities fraud, the S.E.C. has let financial giants like JPMorganChase, Goldman Sachs and Bank of America continue to have advantages reserved for the most dependable companies, making it easier for them to raise money from investors, for example, and to avoid liability from lawsuits if their financial forecasts turn out to be wrong.  An analysis by The New York Times of S.E.C. investigations over the last decade found nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions. Those instances also include waivers permitting firms to underwrite certain stock and bond sales and manage mutual fund2 portfolios.

Quelle Surprise! SEC Fails to Sanction Big Banks for Fraud -- Yves Smith - Ed Wyatt of the New York Times has released an important story tonight on how the SEC goes easy on big banks by giving them exemptions to laws meant to stop securities fraud. This report stands in stark contrast to a Reuters story which repeats the favorite Administration mantra: it’s really hard to prosecute financial-related cases. It sure is when you don’t chose to use the powers you have. The gist of the Times piece is that the SEC gives the biggest banks like JP Morgan and Goldman waivers so that they can continue to have ready access to the financial markets without a lot of hassle. The overview: An analysis by The New York Times of S.E.C. investigations over the last decade found nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions. Those instances also include waivers permitting firms to underwrite certain stock and bond sales and manage mutual fund portfolios. JPMorganChase, for example, has settled six fraud cases in the last 13 years, including one with a $228 million settlement last summer, but it has obtained at least 22 waivers, in part by arguing that it has “a strong record of compliance with securities laws.” Bank of America and Merrill Lynch, which merged in 2009, have settled 15 fraud cases and received at least 39 waivers.

The craven SEC, part 196Edward Wyatt makes a very good point today — why is the SEC doing big favors for big banks, every time it slaps a fine on them? If a bank settles a fraud case, it automatically loses certain privileges, like the ability to issue debt securities opportunistically, without going through laborious SEC filings, and the ability to shelter forward-looking statements against lawsuits from investors. It’s worth noting here that no company has any kind of right to these privileges. If a company tells lies to investors, those investors should be able to sue it. And if a company wants to issue securities to the public, it’s the SEC’s job to examine the proposed offering first. But somehow, along the way, a handful of very big companies — especially banks — managed to persuade the SEC that they were trustworthy corporate citizens, and that they didn’t need to be bound by those rules. That’s a little bit suspicious just for starters. But it gets much worse.

Pandit Does Davos, 0.1% Gloat, Madness Reigns: Sometimes a single fact stands out amid all the clutter, offering a flash of insight and clarity. Here is one of them: Citigroup Inc. (C) Chief Executive Officer Vikram Pandit is a co-chairman of the World Economic Forum’s annual meeting this week in Davos, Switzerland.  At first blush, the notion might seem almost ho-hum, a non- event. Upon further consideration, this looks like it can’t possibly be right. Then it turns out, much to our amazement, that the story is accurate, confirming once again that our world is stark mad. You really have to wonder why anyone outside of Citigroup would pick Pandit to lead anything.  It’s one thing for Citigroup to blow itself up so spectacularly that it needs multiple taxpayer bailouts to stay afloat. What seems strange is that an organization like the World Economic Forum would honor the fellow who was Citigroup’s CEO throughout most of the financial crisis, by selecting him as one of its six co-chairmen. If Sheila Bair had gotten her way when she was head of the Federal Deposit Insurance Corp., Pandit would have been fired years ago.  It’s stunning when you think about it: How does Pandit, who owes much of his fortune to the American public’s largess, wind up being showcased as a paragon of leadership and free enterprise, little more than a year after the U.S. Treasury finally sold the last of its Citigroup common stock?

Wall Street’s gilded frat party - A week or so ago, we read in The New York Times about what in the Gilded Age of the Roman Empire was known as a bacchanal – a big blowout at which the imperial swells got together and whooped it up. This one occurred here in Manhattan at the annual black-tie dinner and induction ceremony for Kappa Beta Phi.  That’s the very exclusive Wall Street fraternity of billionaire bankers, and private equity and hedge fund predators. They got together at the St. Regis Hotel off Fifth Avenue to eat rack of lamb, drink and haze their newest members, who are made to dress in drag, sing and perform skits while braving the insults, wine-soaked napkins and petit fours – those fancy little frosted cakes — hurled at them by the old guard. In other words, a gilt-edged Animal House, food fight and all. This year, the butt of many a joke were the protesters of Occupy Wall Street. In one of the sketches, the bond specialist James Lebenthal scolded a demonstrator with a face tattoo, “Go home, wash that off your face and get back to work.” And in another, a member — dressed like a protester – was told, “You’re pathetic, you liberal. You need a bath!” Pretty hilarious stuff. The whole affair’s reminiscent of the wingdings the robber barons used to throw during America’s own Gilded Age a century and a half ago, when great wealth amassed at the top, far from the squalor and misery of working stiffs.

A modern Pecora Commission to right Wall Street’s wrongs - So, here we are, four years after the great financial collapse, three years after the recovery began and in the last year of Obama’s term — and the president has finally decided to investigate the role of fraud in the great global financial crisis. Hence, this new task force — the unit of Mortgage Origination and Securitization Abuses — begins behind the curve. The statute of limitations is, in many cases, close to elapsing. Even so, do not dismiss the investigation out of hand because of the timing: History informs us that a serious investigation can begin four years after the fact. Recall that Ferdinand Pecora was the fourth chief counsel for the Senate committee that investigated the Wall Street crash of 1929 and subsequent Depression. He was appointed in 1932 and received broad investigatory powers in 1933. His report ran thousands of pages. Thanks in large part to Pecora’s findings, Congress passed the Glass-Steagall Banking Act, which separated commercial and investment banking; the Securities Act of 1933, which established penalties for filing false information about stock offerings; and the Securities Exchange Act, which created the Securities and Exchange Commission to regulate the stock exchanges. Nearly 50 years of financial stability followed. 

A Case of Firms With Just Too Much Money - The Nasdaq 100 index, made up of the 100 biggest nonfinancial stocks traded on that exchange and the basis for the popular PowerShares QQQ exchange-traded fund has a combined stock-market value of $2.7 trillion. The cash and investments on Apple's (AAPL) books alone amount to nearly 4% of that value -- never mind the stupendous earning power of the company itself, evident in last week's gaudy profit report (see Tech Trader column for more on this).‪ The net cash held by the top eight companies in the index, which together make up half of this so-called NDX index, comes to nearly 10% of the benchmark's total market capitalization. In essence, the market is saying that these outfits -- essentially the greatest technology innovators of the past two generations -- are worth at least one-tenth as much dead as alive. And the modest P/Es most of these companies sport indicates that investors certainly aren't placing an inflated value on their businesses.

Hordes of hoarders - FT - Call it the $1,700bn problem. Companies in the US are flush with cash and are paying out a smaller proportion of their earnings as dividends than ever before. Much the same can be said for western Europe. Governments and households on both sides of the Atlantic are meanwhile strapped for cash. This cannot persist much longer. The implications for politicians, the financial services industry and the economy as a whole are profound. Money paid to investors does not go to acquisitions or new investments; businesses run “for cash”, rather than spending in an attempt to boost revenues, do not promote growth. “Politicians and policymakers are going to have to ask the question – how much longer are we going to allow companies to run themselves for cash?” says David Bowers of Absolute Strategy Research in London. At present, cash accounts for more than 6 per cent of the assets on the balance sheets of US non-financial companies. That is the highest in at least six decades, and represents the fruit of record high profit margins. Companies cut costs through redundancies during the post-Lehman economic swoon, while negligible interest rates reduced their borrowing costs. As a result, US corporate profits are higher, as a share of gross domestic product, than at any time since 1950. But as uncertainty persists, groups are reluctant to repay that cash to shareholders by buying back stock or – particularly – paying dividends. The pay-out ratio (the proportion of earnings that go in dividends) for the S&P 500 index is at its lowest since 1900.

On Corporate Cash - The first article I wrote on the internet (in 2003) argued for the value of excess cash in the hands of intelligent management teams. But there is a limit to that, and more so when many companies build up large slack cash balances.  Think of the converse: only one really intelligent company has a lot of slack cash.  That company starts buying up other companies like a clever private equity buyer, but taking account of synergies with existing companies in the process. Such a buyer would understand the value of each company purchased, and how much fat could be cut out, synergies realized, etc.  But even as that one company acted, valuations would rise with each purchase, until the “intelligent company” stopped buying, because it was no longer reasonable to buy at the higher valuations. If this is true with one clever buyer, it is true with many not-so-clever-buyers, but it takes longer, and there will be errors, failures even, and more.

Blaming Capitalism for Corporatism - The term “capitalism” used to mean an economic system in which capital was privately owned and traded; owners of capital got to judge how best to use it, and could draw on the foresight and creative ideas of entrepreneurs and innovative thinkers. This system of individual freedom and individual responsibility gave little scope for government to influence economic decision-making: success meant profits; failure meant losses. Corporations could exist only as long as free individuals willingly purchased their goods – and would go out of business quickly otherwise. Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.

Free-market evangelists face a lonely fate - Much has been made of the fact that last week in Davos, business leaders were forced by recent events to consider issues such as inequality and the future of capitalism. While such public acts of introspection by elites deservedly generate the kind of cynicism that is also produced by other Davos traditions, including high-powered dinners to discuss world hunger and invitation-only discussions to consider the plight of the disenfranchised, the focus on the future of capitalism offered up a side order of irony to go with a generous helping of summit scepticism.The irony is that the future of free markets will not be determined by the alpha capitalists of Davos, nor will it take the form that has been assumed at recent high-powered summits. The outcomes are likely to surprise many and be different from what we had been led to believe was likely a few years ago.Now, in addition to the economic Darwinism of the Anglo-American model, and capitalism “with Chinese characteristics”, there is “Eurocapitalism”; the “democratic development capitalism” of India and Brazil, with their strong social agendas to go with their growth aspirations; and the small-state entrepreneurial capitalism of Singapore, the Gulf states and Israel.

It's the economy – and CEO pay, stupid -- The individuals who gathered in Davos, Switzerland last week are doing comparatively well in this economy. But many of the U.S. CEOs are concerned about the uncertain business climate. And many of their peers sit on cash while millions continue to search for work. Why are we in this current mess? "Incentives may be driving CEOs to invest less," says a New York Fed staff report exploring the connections between pay, business decisions, and the economy's health. When CEOs are paid highly in options or restricted stock (as most U.S. large company CEOs are today), "the economy becomes more volatile," he told me. This kind of economic volatility isn't driven by business fundamentals and makes the economy "unpredictable," Acting out of self-interest based on how they are paid, CEOs will fail to take actions in the best interests of their corporations, the paper's authors argue. Current symptoms of this sort of behavior include widespread cost cutting and a failure to invest in a company's long-term future. CEOs can easily find themselves in a mode of cost cutting to boost their company's stock price, which then becomes a self-fulfilling prophecy, Donaldson says. CEOs cut costs, the stock price rises, and so they keep cutting costs because it boosts the stock price over the short term.

Executive pay - IGM Forum - poll of economists

  • Question A: The typical chief executive officer of a publicly traded corporation in the U.S. is paid more than his or her marginal contribution to the firm's value.
  • Question B: Mandating that U.S. publicly listed corporations must allow shareholders to cast a non-binding vote on executive compensation was a good idea.

Where Has All The Money Gone - Pt. III, Not to You and Me -- Part I showed the money going to corporate profits, not to the salaries of working people.  Part II showed that the finance sector has captured an increasing slice of the profit pie.  Here is a different look at where the money hasn't gone. The first graph shows Real GDP/capita and Real Disposable Income/Cap since 1950 on a log scale.   I've left the 50's out of the argument (but not the graph,) as a courtesy to Ike, since his relative performance suffers due to the post war baby boom.  The population grew at an above normal rate for over a decade, and that skews the GDP/Cap data. If you've been paying any attention to time series economic data, you know there are break points in almost any econ measure, somewhere in the vicinity of 1980.  I've added trend lines, breaking the data sets arbitrarily at 1980.  These trend lines here tell the same story - it's deja vu all over again.  Pre-1980 trend lines start with 1960 data.  I stopped the post '80 trend line data sets at 2007, to avoid the influence of The Great Recession, which would have have further deceased their slopes.

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

Fed Senior Loan Officer Survey: Lending standards "little changed", "somewhat stronger loan demand" - The Federal Reserve released the quarterly January 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices today. The survey had "three sets of special questions: the first set asked banks about lending to firms with European exposures; the second set asked banks about changes in their lending policies on commercial real estate (CRE) loans over the past year; and the third set asked banks about their outlook for credit quality in 2012."  Overall, in the January survey, domestic banks reported that their lending standards had changed little and that they had experienced somewhat stronger loan demand, on net, over the past three months. On Europe:  Large fractions of domestic and foreign respondents again reported having tightened standards on loans to European banks or their affiliates and subsidiaries. There was more widespread tightening of standards than in the previous survey on loans to nonfinancial firms that have operations in the United States and significant exposures to European economies. On CRE:  The January survey also included a question regarding changes in terms on CRE loans over the past year (repeated annually since 2001). During the past 12 months, on net, some domestic banks reportedly eased maximum CRE loan sizes and many domestic banks trimmed loan rate spreads. A few large domestic banks, on balance, reported that they had lengthened maximum loan maturities. Other terms for CRE loans were reportedly little changed. The January results were the first in five years to find a net easing in some of the CRE loan terms covered in the survey. There are several charts here.

U.S. Banks Tally Their Exposure to Europe’s Debt Maelstrom - Five large American banks, including JPMorgan Chase and Goldman Sachs, have more than $80 billion of exposure to Italy, Spain, Portugal, Ireland and Greece, the most economically stressed nations in the euro3 currency zone, according to a New York Times analysis of the banks’ financial disclosures. But these banks have made extensive use of a type of financial insurance, called credit-default swaps4, to help them offset any losses that might occur if defaults swamped the five troubled nations. Using these swaps, along with other measures, the five banks have cut their theoretical exposure to the troubled countries by $30 billion, to $50 billion. The analysis also shows that Citigroup has the greatest percentage of its exposure potentially protected at 47 percent, while Bank of America has bought the least protection at 12 percent.  Big banks have reduced their sovereign debt exposure, but they still have tens of billions of dollars of it.

Citi to Cut Bonuses in Investment Bank About 30% - Citigroup Inc. (C), the third-biggest U.S. lender by assets, cut 2011 bonuses in its investment banking division by about 30 percent on average amid slumping revenue, according to a person briefed on the matter. Some businesses within the securities and banking unit had bonuses reduced by as much as 70 percent compared with the previous year, said the person, who asked to remain anonymous because the decisions aren’t public. The unit, led by James “Jamie” Forese, includes bond and stock trading as well as debt and equity underwriting. Chief Executive Officer Vikram Pandit, 55, is firing workers and shrinking costs in the unit as he grapples with declining revenue. The bank said this month that it will cut about 1,200 workers from the division to save $600 million this year and more reductions may follow. The unit’s revenue slipped 21 percent since 2009, while compensation and other operating costs climbed 15 percent.

U.S. Gets Tougher on Debt Collecting -  The Federal Trade Commission intensified its crackdown on the booming debt-collection industry, announcing a $2.5 million settlement with a company for allegedly coercing borrowers into paying debts they no longer legally owed. The settlement with Asset Acceptance Capital Corp., one of the nation's largest buyers of soured consumer debts, is the second-biggest penalty ever levied by the FTC against a debt collector. Officials said they are investigating other companies for alleged violations of federal law and expect to announce more enforcement actions soon. "More cases are on the way," said Tony West, an assistant attorney general in the Justice Department's civil division.

The Banker Tax - Because our political system is corrupted by corporate lobbyists, it leaves the people with few choices. Those who do not wish for a violent revolution are left with the one alternative of taking control of their own money. Money can be anything two parties in a transaction choose it to be. Precious metals is one good choice. Converting ones savings from Federal Reserve Notes into precious metals is not some kooky survivalist ploy. It is empowering a person to vote against the immoral monetary system. Hoarding food is not a kooky survivalist ploy, it is hedging against an immoral banker tax. We all have the moral obligation not to pay the banker tax. Refuse to deposit your funds into a money center bank. Support efforts to end the Federal Reserve System.

The Numbers Are In: Find Out Just How Many Americans Have Ditched Their Banks - Finally, we've got some cold, hard stats on how badly banks are hurting from November's Bank Transfer Day movement. A new report by Javelin Strategy & Research estimates a staggering 5.6 million big bank customers have switched banks in the last 90 days. Of those, the research firm says a cool 610,000 cited Bank Transfer Day as their reason. It seems we've come full circle. If you remember, there was a lot of hoopla surrounding early figures released by the Credit Union National Association just after BTD, which inititially reported more than 650,000 customers made the switch to credit unions. A month later they backpedaled, putting the figure at a little more than 214,000. It was a bit of a setback for CUNA, especially at a time when credit unions were being heralded as the white knights of consumer banking. Javelin's study will give them a bit more clout and at the very least shows that the growing chasm between consumers and financial institutions is nothing for big banks to sniff at.

Quelle Surprise! Feds Dust off Old Rogue Traders CDO Case to Burnish “Tough on Mortgage Crime” Credentials -  Yves Smith - The powers that be are in the process of seeing how they can burnish their “tough on bank crime” credentials while not ruffling anyone really important. And the case featured in the Wall Street Journal, “U.S. Plans Charges on Bond Fraud,” illustrates the sort of enforcement theater we are likely to see over the coming months.  Wow! Charges! Better yet, criminal charges! Finally the Administration is getting tough on crime. Right. It’s tough on crime against banks. This is shades of the Taylor Bean, the only case of a criminal prosecution of financial firm executives…who were ripping off even bigger financial firms, Deutsche Bank and Paribas. The story: some traders in 2008 were reported by Credit Suisse to have been mis-marking CDO positions. Frankly, mismarking of CDOs was so widespread that one wonders what these traders did for their activity to be out of line with awfully lax industry norms.So here we have an almost four year lapse in filing charges against (per the Financial Times) two low level employee-miscreants that allegedly produced $2.8 billion in losses. And the clever bit here is that even though no one now expects the employees to be able to shift blame to management, as in prove that their conduct was sanctioned, or at least not hidden, it will be a foreign bank and not an American one that would be embarrassed by the revelations.

Ex-Credit Suisse traders admit cooking subprime books (Reuters) - In a rare criminal prosecution to emerge from the financial crisis, two former Credit Suisse traders admitted on Wednesday to conspiring to manipulate the value of about $3 billion in subprime mortgage-backed securities in order to hide losses as the U.S. real estate market began to collapse in 2007. The men, London-based David Higgs, 42, and Salmaan Siddiqui, 36, of McLean, Virginia, pleaded guilty in U.S. district court in New York to a criminal charge of conspiracy to falsify books and records and commit wire fraud. Their one-time boss, Kareem Serageldin, 38, a U.S. citizen who lives in Britain, faces the same conspiracy charge and additional charges of falsifying books and records and wire fraud. Federal prosecutors said they do not consider Serageldin a fugitive even though he has yet to appear in the United States to answer to the charges. There have been few prosecutions of individuals at high-profile banks for conduct that contributed to the financial crisis, but the Obama administration says it is stepping up investigations over the collapse of the subprime housing market.

Analysis: Obstacles high for more mortgage prosecutions (Reuters) - Despite the determination of President Obama to take Wall Street to court for the financial crisis, prosecutors face an uphill struggle to win more convictions like the two they scored on Wednesday against former Credit Suisse mortgage traders. David Higgs, 42, and Salmaan Siddiqui, 36, pled guilty in U.S. District Court in New York to a criminal charge of conspiracy to falsify books and records and commit wire fraud in a way that bolstered their bonuses. The convictions marked the first successful criminal prosecutions against individuals at investment banks involved in the meltdown, and took four years to win, even without a trial. In building the case, prosecutors enjoyed advantages that are rarely available -- and likely make this kind of success hard to replicate. Prosecutors drew on a trove of emails and taped telephone recordings from the traders that helped establish criminal intent. They also had price history on their side. The Credit Suisse traders placed unusually high values, or "marks," on their portfolio of bonds months after Citigroup (C.N) and Merrill Lynch each reported multi-billion-dollar losses on their portfolios of similar mortgage securities. Prosecutors "got two people to plead guilty, so that suggests this is the lower-hanging fruit" of potential cases.

Goldman to face mortgage debt class-action lawsuit - Goldman Sachs Group Inc was ordered by a federal judge to face a securities class-action lawsuit accusing it of defrauding investors about a 2006 offering of securities backed by risky mortgage loans from a now-defunct lender.U.S. District Judge Harold Baer in Manhattan certified a class-action lawsuit by investors led by the Public Employees' Retirement System of Mississippi. These investors claimed they lost money in the GSAMP Trust 2006-S2, a $698 million offering of certificates backed by second-lien home loans made by New Century Financial Corp, a California subprime mortgage specialist that went bankrupt in 2007. Thursday's decision is a setback for Goldman, which had sought to force investors to bring their cases individually.

Fannie and Freddie not to blame for bubble - There is plenty of blame to go around for the U.S. housing bubble, but not much of it belongs to Fannie Mae and Freddie Mac. The two giant housing-finance institutions made many mistakes over the decades, some of them real whoppers, but causing house prices to soar and then crater during the past decade weren’t among them. The biggest culprits in the housing fiasco came from the private sector, and more specifically from a mortgage industry that was out of control. These included lenders who originated home loans, investment bankers who packaged them into securities, rating agencies that misjudged these securities, and global investors who bought them without much, if any, study. In other words, America’s mortgage securitization machine was fundamentally broken. It created millions of mortgage loans that, even under reasonable economic assumptions, stood little chance of being repaid — and were not. As a result, hundreds of billions of dollars were lost as defaults and write-downs brought the financial system, and the wider economy, to the brink, requiring a massive government bailout.

Anxiety Mounts Over Maturing Real Estate Loans - Borrowers and lenders are starting to grapple with the billions of dollars in commercial real estate loans made during the boom year of 2007 that are coming due this year, in a greatly contracted economy. Experts have warned of a rash of recapitalizations, refinancings and building sales. In New York City alone, nearly $70 billion worth of commercial mortgages that were bundled together and issued as collateral for bonds are maturing this year. Of those, $26 billion, or 37.4 percent, are five-year loans that were originated during the height of the real estate bubble, when underwriting standards were loosest, according to data from the research firm Trepp.. These include loans on prominent properties, including the Manhattan Mall, with $232 million maturing, and the Jumeirah Essex House, with a $180 million loan, according to Trepp. “These loans are going to have the hardest time being refinanced since they were underwritten when property values and revenues were far higher,” “We are going to see a wave of loans maturing this year, then again in 2014 and 2017, when the 7- and 10-year deals underwritten during the bubble mature.”

Unofficial Problem Bank list declines to 958 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Jan 27, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  Busy week with many changes to the Unofficial Problem Bank List as the FDIC released its enforcement action activity for December 2011 and they closed several banks. In total, there were 11 removals and six additions, which leave the list with 958 institutions with assets of $389.0 billion. A year ago, there were 949 institutions with assets of $410.9 billion on the list. For the month of January 2012, changes to the list were nine cures, six failures, four unassisted mergers, one voluntary liquidation, and eight additions. The list fell by 12 institutions during the current month and it is the seventh consecutive monthly decline after the list peaked on a month-end basis at 1,001 institutions in June 2011.

Unofficial Problem Bank list unchanged at 958 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Feb 3, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  Quiet week for the Unofficial Bank List with no closings, one voluntary liquidation, and one addition. The list is unchanged at 958 institutions but assets increased by nearly $600 million to $389.6 billion.

Freddie Mac Bets Against American Homeowners - Freddie Mac, the taxpayer-owned mortgage giant, has placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates. Freddie began increasing these bets dramatically in late 2010, the same time that the company was making it harder for homeowners to get out of such high-interest mortgages. No evidence has emerged that these decisions were coordinated. The company is a key gatekeeper for home loans but says its traders are “walled off” from the officials who have restricted homeowners from taking advantage of historically low interest rates by imposing higher fees and new rules. Freddie’s charter calls for the company to make home loans more accessible. But the trades, uncovered for the first time in an investigation by ProPublica and NPR, give Freddie a powerful incentive to do the opposite, highlighting a conflict of interest at the heart of the company. In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance.

Freddie Mac Attack - Freddster (noun): Fraudster who profits from conflict of interest at Freddie Mac (the knife). Jesse Eisinger, pf ProPublica and Chris Arnold, of the public sector NPR News have the most interesting article about ruthless greedy uh socialism I guess at public sector Freddie Mac. The idea is that Freddie Went long the interest payments on mortgages and not the principal repayments. This means the harder it is to refinance, the better for Freddie Mac. Freddie Mac also has significant regulatory power to decide how hard it is to refinance Freddie Mac insured loans. The conflict of interest is clear. via Kevin Drum where commenter  Andrew Sprung wrote "Could Einsinger and Arnold''s story have been prompted by an administration leak as a prelude to a recess appointment to replace DeMarco at FHFA?" I hope so, or rather I wish I had any hope that it is so. But at least it is a hint that someone in the White House has decided to put pressure on DeMarco.

ProPublica’s Off Base Charges About Freddie Mac’s Mortgage “Bets” - Yves Smith - A new ProPublica story, “Freddie Mac Betting Against Struggling Homeowners,” treats the fact that Freddie Mac retains the riskiest tranche of its mortgage bond offering, known as inverse floaters, as heinous and evidence of scheming against suffering borrowers.  The storyline in this piece is neat, plausible, and utterly wrong. And my e-mail traffic indicates that people who are reasonably finance savvy but don’t know the mortgage bond space have bought the uninformed and conspiratorial ProPublica thesis hook, line, and sinker. We need to get into a bit of detail to explain what is wrong with the ProPublica account. The structuring of Freddie and Fannie bonds is to deal with interest rate risk (remember, there is no credit risk since the bonds are guaranteed by the GSEs).  The undesirable feature of mortgages is their prepayment risk. Every country ex the US has features in mortgages that restrict or prohibit prepayment risk (the most common is having mortgages be floating rather than fixed rate). Prepayments are very unattractive to bond investors, since the time you are happiest as a fixed income investor is when interest rates fall, since your bonds go up in value. So the structuring of a CMO (collaterlialized mortgage obligation) creates a series of normal looking bonds from the cash flows from mortgage securities: some fixed interest rate bonds of various maturities (created at a lower interest rate than the yield on the mortgages) and one medium-term maturity fixed rate bond which is then decomposed into a floating rate bond and an “inverse floater” which consists only of the inverse of the interest rate payments on the floating rate note (for instance, if the coupon on the bond from which it was decomposed was 6% and the rate on the floater is Libor + 8 basis points, or .08%, the inverse floater would pay at 6% – (Libor = .08%).

Freddie Mac and Inverse Floaters - A new scandal from reporters for ProPublica and NPR. In 2010 and '11, Freddie purchased $3.4 billion worth of inverse floater portions -- their value based mostly on interest payments on $19.5 billion in mortgage-backed securities, according to prospectuses for the deals. They covered tens of thousands of homeowners. Most of the mortgages backing these transactions have high rates of about 6.5 percent to 7 percent, according to the deal documents.The authors describe this as only being bad. It is bad for homeowners because it reduces Freddie's incentive to refinance loans. It is bad for Freddie Mac because it means taking on more risk from these instruments.  There is another possibility. In its normal course of business, Freddie Mac buys mortgages and issues debt, giving it a duration mismatch. These inverse floaters seem to have negative duration, which helps to offset that mismatch. The article does not discuss the duration issue at all. Instead, it acts as if inverse floaters were a pure speculative play by Freddie Mac, which I think is unlikely to be the motivation. I do not know enough about Freddie's overall hedging strategy to know whether or not it is doing a good job. But neither do the authors of the article. The real scandal here is the lousy journalism.

Freddie Mac gets paid to obstruct refinancings - Jesse Eisinger and Chris Arnold have a really good story about Freddie Mac today, a company which is preventing mortgage refis at the same time as it’s making enormous prop bets that homeowners are going to continue to find it hard to refinance.Back in September I noted that mortgage bonds are trading well above par just because investors are well aware that refis are hard to come by for many homeowners, and said that those investors were “taking unfair advantage of the fact that homeowners are locked into above-market mortgage rates”. What I never dreamed of was that the investors and the rule-setters were the same people — in this case, Freddie Mac. But here’s what Freddie is doing. In the past two years, it’s bought $3.4 billion of hugely-risky “inverse-floater” notes — essentially bets that homeowners with above-market mortgage rates won’t be able to refinance to market rates. And then it turns around and implements rules which prevent homeowners from refinancing. The Silversteins have made all their mortgage payments on their current home in full and on time, despite the fact that they’re paying an interest rate of 6.875%. They’d love to refinance to get that rate lowered, but Freddie Mac won’t let them — because of the way they sold their previous home.

Freddie Mac and the inverse floaters, cont. - Jesse Eisinger is back with a follow-up to his original piece about Freddie Mac and the inverse floaters; he’s also left a long comment on this blog, responding to various criticisms of his story which appeared in the blogosphere. There are two main pieces of new information in the update. The first is that the size of Freddie’s inverse-floater position is even greater than we previously thought — $5 billion, rather than $3.4 billion. And the second is that the FHFA forced Freddie to stop making these trades last month, before the original ProPublica piece appeared. Now the FHFA, under Ed DeMarco, is a highly obstructionist agency which will always protect Frannie’s short-term interests over the broader health of the housing market and American homeowners. If even the FHFA was expressing serious concerns about these deals, that’s very strong evidence that something fishy was going on. To get a feel for the tenor of the debate, check out the official FHFA response to Eisinger’s story: The inverse floater leaves Freddie Mac with a portion of the risk exposure it would have had if it simply held the entire set of mortgages on its balance sheet. The CMO structuring activity results in some portion of the mortgage cash flows being sold off and a smaller amount needing to be financed by Freddie Mac with debt securities. It also results in a more complex financing structure that requires specialized risk management processes.

Is Freddie Mac Betting Against the American Homeowner? - The non-profit investigative journalism organization ProPublica, in cooperation with National Public Radio, published a story yesterday revealing that Freddie Mac, the government-owned mortgage financier, has recently been purchasing derivatives that would make the company money “if homeowners stay trapped in expensive mortgages with interest rates well above current rates.” The story, titled “Freddie Mac Bets Against American Homeowners” argues that these derivative purchases are unethical because they give Freddie Mac “a powerful incentive” not to help homeowners refinance at today’s historically low rates. The article states that “no evidence has emerged that these two decisions were coordinated,” but it does imply that there is something wrong with Freddie tightening its lending standards and then attempting to profit off the knowledge that these standards would be tighter. So have these well-respected news organizations uncovered more corruption in government and Wall Street chicanery aimed at fleecing unsuspecting homeowners? The short answer is no. Conflict of interest is inherent and largely unavoidable in the government’s conservatorship of Fannie and Freddie, and the seemingly contradictory actions described in the article were very likely a natural outgrowth of that conflict and probably each taken in good faith — not a conspiracy to manipulate the housing market for short term gain.

Treasury Investigates Freddie Mac Investment - The Treasury Department is investigating a report that Freddie Mac, the mortgage giant, bet against homeowners’ ability to refinance their loans even as it was making it more difficult for them to do so, Jay Carney, a White House spokesman, said on Monday.  The report came just as the Obama administration had been escalating its efforts to push Fannie Mae and Freddie Mac to ease conditions for homeowners, including those who owe more on their mortgages than their homes are worth.  Last Friday, the Treasury announced that it would offer increased incentives to lenders to forgive portions of homeowner debt, saying pointedly that for the first time the incentives would be offered on loans held by Fannie and Freddie.  But Fannie and Freddie, which said they would review the increased incentives, have long declined to allow debt reduction on the loans it holds or guarantees, saying that it would create unnecessary losses for taxpayers. The companies, which are financed by taxpayers, have also maintained barriers to refinancing, like risk-based fees for homeowners, even as mortgage interest rates have dropped below 4 percent.

Michael Olenick: More on ProPublica’s Off Base Charges About Freddie Mac’s Mortgage “Bets” - Fallout continues from the ProPublica/NPR story “Freddie Mac Bets Against American Homeowners,” though probably not the sort ProPublica expected. Many in the blogsphere who work on finance and housing finance issues, including myself and Yves Smith, didn’t find the piece to be convincing. In a rebuttal Yves, who like me is anything but a cheerleader for the GSEs, explained Freddie’s practice is, in reality, only slightly more nefarious than clearing snow from the parking lot. That is, of all the awful decisions Freddie Mac makes, this isn’t one of them. ProPublica co-author Jesse Eisinger replied to Yves’ critique in the comment section. I e-mailed Yves about Jesse’s remarks and she suggested I flesh my observations out into a post.  To recap: Freddie Mac purchases and bundles mortgages, bundles those mortgages into pools of mortgages, then sells the expected mortgage payments to investors in the form of bond-like securities. Securitization is a vital component of the modern mortgage market, or most other credit markets for that matter, since the process frees up capital that can then be used to make more mortgages. In late 2010 Freddie Mac, according to the ProPublica story, started to retain a greater number of “inverse floaters,” an instrument created when mortgage pools are turned into collateralized mortgage obligations. As Yves pointed out, even though this portion is typically hard to sell and is thus often retained by the originator, it often makes more sense to use a CMO to create more conventional-looking bonds that can be sold to investors at better prices and retain inverse floater because it results in lower interest rates than if they sold a simple mortgage pass through. The GSEs have a mandate to provide more affordable loans to homeowners and better results to taxpayers, so lowering the cost of mortgage funding is consistent with those objectives. It is true that inverse floaters benefit when borrowers don’t refi, but as Yves pointed out, the GSEs engage in very complex interest rate hedging strategies.

Mortgage Settlement and New Investigation - Last week President Obama announced a new task force to investigate abuses related to the origination and securitization of mortgages during the housing bubble: "I am asking my Attorney General to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis." Some people have argued that his will derail the proposed mortgage settlement. Even though Eric Schneiderman, the New York attorney general will be a co-chair, it sounds like this will be a federal investigation and will be focused on origination and securtization abuses. Loren Berlin at the  I've seen several commentaries that lump servicing and origination abuses together. Obviously the banks wanted broad immunity in any mortgage settlement, and the state attorneys general wanted narrower releases. According to reports about the mortgage settlement, the banks would be released from claims brought by the states and the federal government for servicing and foreclosure abuses, but injured homeowners could still bring legal action. And the states (but not the federal government) would release the banks from origination claims. I could have the details wrong, but that is what has been reported.

It Has a Fancy Name, but Will It Get Tough? - PRESIDENT OBAMA  told the nation last week that he was convening a task force to investigate the abusive practices in the mortgage industry that led to our economic woes. Both lending and the practice of bundling loans into securities will come under scrutiny, he said, adding: “This new unit will hold accountable those who broke the law, speed assistance to homeowners and help turn the page on an era of recklessness that hurt so many Americans.”  Some greeted this new task force — its unwieldy name is the Residential Mortgage-Backed Securities Working Group — with skepticism. It is an election year, after all, and many might wonder if this is just a public-relations response to the outrage against the institutions and executives that almost wrecked the economy.  If this task force4 nailed some big names, and soon, it would help to allay deep suspicions that the authorities have given powerful people and institutions a pass during this awful episode.  Among those heading the working group are officials from the Securities and Exchange Commission5 and the Justice Department — the same institutions already charged with rooting out and punishing wrongdoing. Their record in these pursuits6 has been disappointing so far. This is especially so, considering the evidence of wrongdoing unearthed in private lawsuits against mortgage originators and securities firms in recent years.

Eric Schneiderman: The Right Man, the Right Moment - In his State of the Union address last week, President Obama announced what Robert Kuttner, co-editor of The American Prospect, describes as maybe “the most fateful political and economic development of the election year”—the formation of an interagency task force to finally investigate the mortgage and lending practices that led to the collapse of the economy and trillions of dollars in lost wealth, with New York Attorney General Eric Schneiderman named as co-chair. It remains to be seen whether Schneiderman will be given the extensive resources and manpower he needs to conduct a thorough and aggressive investigation, or if the Wall Street faction within the Administration will stonewall the process. But I’m confident in this: Schneiderman is the right man for the job, and he’s not about to let himself be co-opted for the president’s re-election bid. Throughout his career he’s been a steadfast champion of causes because they are right, not because they are popular or politically expedient. He’s been successful because he works to move voters closer to his positions, and sets a course toward a better future and better possibilities. If he’s being obstructed, he’ll let people know.

Treating the shattered economy as a crime scenemsnbc video:  Eric Schneiderman with Rachel Maddow

Eric Schneiderman: Hero or Goat? - The activation of the administration's long dormant task force on criminal misconduct in the financial collapse, with New York's progressive attorney general Eric Schneiderman as co-chair, could be the most fateful political and economic development of the election year. There are still immense pitfalls ahead, as Wall Street allies inside the administration and on Wall Street itself try to reduce Schneiderman's role to that of symbolic fig leaf.  Some skeptics in the progressive community have raised questions both about the upside for Schneiderman and his motives. Given the administration's feeble record on prosecutions to date, the critics are right to flag the likelihood that people like Attorney General Eric Holder and SEC enforcement chief Robert Khazumi will try to sandbag Schneiderman. But my reporting suggests that they underestimate both the man and the dynamics that have been set loose. The surprising move raises several questions.  First Big Question: Why did Obama, after letting the Treasury, Justice Department, and SEC sit on potential criminal prosecutions for three years, do this now?

Holder & Obama’s Propaganda is “Belied by a Troublesome Little Thing Called Facts” - Bill Black -The Obama administration’s record of prosecuting elite financial frauds is worse than the Bush administration’s record, which is a very large statement. Syracuse University’s TRAC issued a report on November 11, 2011 entitled “Criminal Prosecutions for Financial Institution Fraud Continue to Fall.” Neither administration has prosecuted any elite CEO for the epidemic of mortgage fraud that drove the ongoing crisis. This contrasts with over 1,000 elite felony convictions arising from the S&L debacle. The ongoing crisis caused losses more than 70 times greater than the S&L debacle and the amount of elite fraud driving this crisis is also vastly greater than during the S&L debacle. Bank CEOs leading “accounting control frauds” now do so with impunity from the criminal laws. They become wealthy through fraud and even if they are sued civilly they almost invariably walk away wealthy with the proceeds of their frauds.  Elite financial institutions officers engaged in fraud face a dramatically reduced risk of prosecution compared to 20 years ago when financial fraud was far less common. TRAC reports that the number of financial institution fraud prosecutions under Obama is less than one-half the number 20 years ago. Bush (II) was slightly better than Obama in prosecuting non-elite financial institution frauds, but both were pathetically bad.

A few policies I expect soon - Housing, payroll tax extension, a Greek deal and more ...
Mortgage Servicer Settlement. Loren Berlin at the HuffPo writes: As Mortgage Settlement Deal Nears Feb. 3 Deadline, Nevada AG Raises Concerns In a letter sent Friday, emailed to federal officials and obtained by The Huffington Post, Nevada's attorney general, Catherine Cortez Masto, asked 38 questions relating to a variety of concerns, including fears that states would play second fiddle to the federal government in making decisions. She also questioned if states would lose their ability to pursue certain types of lawsuits against banks and whether states would get their fair share of the housing assistance for their borrowers. It sounds like these issues will be clarified, and I expect most states (if not all) to join the settlement.

• A surge in refinance activity in March. Not a new policy - this was announced last October when the FHFA made changes to Home Affordable Refinance Program (HARP) to allow more homeowners with GSE loans and with negative or near negative equity - and who are current on their mortgages - to refinance into lower interest rate loans.
• REO to Rental Program: This rental program for Fannie and Freddie REO is being pushed by several agencies, and was discussed earlier this month in the Fed white paper "The U.S. Housing Market: Current Conditions and Policy Considerations" and by NY Fed President William Dudley: Housing and the Economic Recovery. This program could include bulk REO sales to investors, but might also include Fannie and Freddie renting out more REOs. There will be a similar effort for non-GSE properties as regulators relax the rules on banks renting out properties.

What a Strong Servicer Settlement Looks Like - Many–including me–have attacked the idea of a multistate and federal settlement with the biggest bailed out banks (wearing their mortgage servicing hats) on the grounds that it’s wrong to settle something that hasn’t been thoroughly investigated. We’ve also objected by pointing out the numbers on the table are too small by at least a zero to make much of a difference to homeowners or the housing market as a whole. We’ve raised more specific objections too, like the scope of the liability release and concerns about enforcement since the banks have exactly zero credibility on deals they’ve previously inked on these issues.But community groups and others have countered hey: homeowners need help now, and desperately, don’t make the perfect the enemy of the good. So here’s a guide to what “the good” would look like, at least from where I sit. (And here’s a hint; it looks nothing like what we’ve been told is on the table.)

Mortgage Settlement: States face "end-of-the-week deadline" - From Reuters: States to decide this week on mortgage deal State and federal officials are close to a settlement with the largest U.S. banks over mortgage abuses, with states facing an end-of-the-week deadline to decide whether they will sign on, people close to the talks said. ... negotiators have overcome a sticking point and agreed on Joseph Smith, North Carolina's banking commissioner, as a monitor to ensure the banks comply with the terms of the settlement ... In exchange for up to $25 billion, much in the form of cutting mortgage debt for distressed homeowners, the banks will resolve civil state and federal lawsuits about servicing misconduct and faulty foreclosures, and state lawsuits about how they made some of the loans. If this settlement goes forward (and I expect it will), then there will be more modification and foreclosure activity in coming months.  This is just one of several policy changes in the works including the automated HARP refinance program (starts in March) and a possible GSE REO to rental program. Plus the Federal Reserve is "contemplating issuing guidance to banking organizations and examiners" to allow banks to also rent more residential REO. Currently, according to LPS, there are 1.79 million loans 90+ days delinquent and an additional 2.07 million loans in the foreclosure process.

Liability Release Not the Only Stumbling Block in Foreclosure Fraud Settlement - Matt Taibbi starts off positively exultant when talking about developments in the foreclosure fraud settlement, particularly on the narrow release of liability, but I’m interested in what happens after he gets his head out of the clouds: Let me clarify something, for readers who might mistake my meaning here. Robosigning is not a small offense. It’s not a “clerical” issue. It’s a mass-perjury issue, a tax evasion issue, a contractual fraud issue, and it’s a criminal conspiracy issue (the banks’ highest executives were engaged in planning it) and it resulted in millions of errors that resulted in untold numbers of premature foreclosures. Robosigning had a profound and immediate impact on large numbers of actual human beings, and I don’t want people to think I’m dismissing it as unimportant. I When I first heard about the foreclosure settlement, I thought it might contain a broad waiver for everything, including the tax evasion issues, the fair lending issues, securitization, and all the other things on that list above. If they did that, that would be TARPx10. My only point about this deal is that it’s not the unreal, criminal giveaway it was originally meant to be. Taibbi has kind of bought the argument that the robo-signing was a smaller part of a bigger fraud in the securitization markets, which is true. That doesn’t mean that a settlement that allows you to go after that poisoned tree by only giving up the fruit is in any way equitable.

Exclusive: Mortgage deal would give states enforcement clout (Reuters) - A proposed settlement to resolve mortgage abuses by top U.S. banks will give states broad authority to punish firms that mistreat borrowers in the future, according to documents seen by Reuters on Wednesday. Under the settlement, which states are currently reviewing to decide whether they will join, the states and a separate "monitoring committee" will have the authority to go to court to enforce the terms and seek penalties of up to $5 million per violation. A strong enforcement mechanism could help the states and the Obama administration sell the deal to the public, after left-leaning activist groups have questioned whether the negotiations were too lenient on the banks.Negotiations between state and federal officials to resolve allegations of misconduct in servicing home loans have stretched into their second year. The delay is partly due to some states trying to extract a bigger settlement from the banks and to reserve their ability to file more mortgage-related suits in the future.

As Mortgage Settlement Deal Nears Feb. 3 Deadline, Nevada AG Raises Concerns - As the Obama administration, state attorneys general and the nation's biggest banks close in on a settlement over allegations of widespread mortgage fraud, Nevada's attorney general is pushing back with concerns and questions. Meanwhile a Feb. 3 deadline looms for states to declare whether they are joining the settlement. In a letter sent Friday, emailed to federal officials and obtained by The Huffington Post, Nevada's attorney general, Catherine Cortez Masto, asked 38 questions relating to a variety of concerns, including fears that states would play second fiddle to the federal government in making decisions. She also questioned if states would lose their ability to pursue certain types of lawsuits against banks and whether states would get their fair share of the housing assistance for their borrowers.  "What would happen if all of the state attorney general representatives had one view and the federal agencies disagreed?" Masto asked in her letter. Masto's letter comes at a time when the Obama administration is looking to show it can be tough with Wall Street. Consumer advocates and housing experts alike have consistently criticized the administration's handling of the foreclosure crisis, calling the president soft on the banks.

Masto Raises Score of Questions Over Foreclosure Fraud Settlement - Lots of developments late today on the foreclosure fraud and servicing settlement. We know that a term sheet of some kind has been sent to the states for approval. Apparently there was a deadline attached to that, of February 3rd. We’ve seen deadlines before in the settlement, but this one has a little more weight attached, because the AGs have the document in their hands for the settlement. The final value of any settlement will depend on which states it includes, and could drop sharply if states like California, one of the hardest hit by the foreclosure crisis, do not join. In another sign the deal is close, negotiators have overcome a sticking point and agreed on Joseph Smith, North Carolina’s banking commissioner, as a monitor to ensure the banks comply with the terms of the settlement, these people said. Smith was President Obama’s pick for FHFA commissioner, but he didn’t make it through the confirmation process. He comes pretty well-recommended. But the existence of an independent monitor doesn’t answer the host of questions that go well beyond the release of liability in the settlement. In fact, Nevada AG Catherine Cortez Masto saw fit to write up a list of 38 questions and send them off to the settlement negotiators. This suggests that the AGs got a very vague document, with a lot of trust given to the executive committee on the details. Masto, at least, isn’t comfortable with that. And she has plenty of reason to be skeptical

California’s Harris Seeks Edge in U.S. Foreclosure Standoff - California Attorney General Kamala Harris’s holdout position in a proposed agreement with banks over foreclosure practices may reap financial and political rewards at the cost of prolonging some constituents’ suffering.  Her strategy has created an obstacle in the negotiations between state attorneys general and the five largest U.S. mortgage servicers over a nationwide probe. By Harris’s own reckoning, her reluctance to sign onto a deal and any investigation she might pursue risk deepening the “blight and despair” for many of the 2.2 million California homeowners whom she has said are “holding on by their fingernails.”  Still, she is pushing a broader probe of banks’ mortgage practices, including securitization of the loans. The gambit may lead to more favorable terms in a proposed multistate agreement said to be worth as much as $25 billion, and might carry Harris, a rising star in the Democratic Party, to higher office, both a state political observer and law professor said.  If she just goes along with other attorneys general, it’s not her achievement” . “It’s hard to claim credit for something that was a group effort.”

Why is the Normally Astute Taibbi Sounding Like a Hopey Dopey Liberal on the Mortgage Settlement? -- Yves Smith - I hate taking issue with Matt Taibbi.  But even someone as skilled as Taibbi occasionally has the writing equivalent of a bad hair day. And his post, “A Victory for the Public on Foreclosures?” is an example. And his misreading matters precisely because he has so much cred with the public that is unhappy with Big Finance. Taibbi has taken up cheerleading the Schneiderman involvement in a Federal investigation committee as major progress and also amplified the messaging that the current version of the release in the mortgage settlement deal (which by the way is still more of a mystery than it ought to be) is a good deal. As we will discuss in due course, even a narrow deal around robosigning is in fact NOT a good deal. I need to get a bit granular since quite a few folks on what passes for the left have gone into hopey dopey liberal mode. This is EXACTLY what the Administration wanted. A mere gesture, appointing Schneiderman to a part time job co-chairing an under-staffed investigation, when the committee members who are likely not to be on the same page as him have the advantage of being in DC where the troops will be located and knowing their way around the relevant bureaucracies. The ONLY hope Schneiderman has of pulling this off is lots of very noisy, sustained pressure, NOT going all gooey-eyed at a blast of Administration PR.

Yet More Mortgage Settlement Lies: Release Looks Broad, Not Narrow; Other States Screwed to Bribe California to Join - Yves Smith - A number of writers, such as Mike Lux, Bob Kuttner, Matt Taibbi, and Justin Krebs, have been willing to convey the Administration message that the current version of the mortgage settlement is a “much tougher deal” and even a pretty good deal, thanks to Schneiderman’s intervention. It is important to note that any recent improvement in terms has come at the cost of Schneiderman moving from being decidedly against the settlement to being in the “maybe/maybe not” camp as an apparent part of his decision to join an Administration investigation on mortgage abuses. But as we have stressed, the fact that the Obama team is pushing to wrap up the settlement agreement before the probe underway is a very bad sign. How can you settle when you don’t know the full extent of the bad conduct? In addition, the change in Schneiderman’s posture has undermined the solidarity of the dissenting attorneys general, which is no doubt what Obama hoped to achieve. While there is every reason to believe there has been some improvement in terms due to the resistance of Schneiderman and other state attorneys general (Beau Biden of Delaware, Martha Coakley of Massachusetts, Catherine Cortez Masto of Nevada, and Kamala Harris of California), the notion that, per Mike Lux, “the settlement release is tight” appears to be patently false.  Since there has yet to be any disclosure of the draft terms, we can’t be certain, but a reading of a letter sent by Nevada’s Masto gives plenty of cause for pause. Reaching inferences from her 38 questions is a Plato’s cave exercise, but some of the items seem pretty clear.

Securitization Fail, What It Means If the Servicer Settlement “Cures” It & Why NY Can’t Sign - The criminal securities fraud at the heart of the financial crisis has one very under-reported aspect: “securitization fail.” Once you understand the securitization fail concept, you can instantly, with tremendous clarity, see the scale of the fraud the Bailed Out Banks and Wall Street firms committed and commit every day. Get securitization fail, and the bankers’ crimes stand out like a vast herd of bison on the South Dakota prairie, a herd much bigger than this one. Perhaps the most critical insight that flows from understanding securitization fail, however, is that the crimes will continue so long as we are processing foreclosures. When you understand securitization fail, you understand the scale of liability the Bailed Out Bankers created for themselves, and why foreclosure fraud is their preferred escape route. In fact, you’ll understand why the banks will continue to commit foreclosure fraud regardless of signing the settlement with law enforcers. Get securitization fail and you understand that a thorough investigation could straightforwardly document it, and create so much leverage for law enforcement that it could essentially dictate terms of settlement.

Foreclosure Wrongdoing Settlement Between States And Banks Moved to Feb. 6 - The deadline for states to decide whether to join a proposed nationwide foreclosure settlement with banks was delayed to Feb. 6 from Feb. 3, the Iowa Attorney General’s Office said. States were given more time to evaluate the proposal, which may total $25 billion, after at least one asked for a delay, Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, said yesterday in a phone interview. Miller is helping to lead negotiations. State and federal officials have been negotiating an agreement with mortgage servicers that would provide mortgage relief to homeowners and set requirements for how banks conduct foreclosures. State officials are reviewing the agreement with Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. (C), Wells Fargo & Co. (WFC) and Ally Financial Inc (ALLY)., and are being asked to sign on. Greenwood declined to name the state that asked for more time or comment on state support for the deal. Nevada Attorney General Catherine Cortez Masto said in a Jan. 27 letter to Miller, the Justice Department and U.S. Housing and Urban Development Secretary Shaun Donovan that she needed answers to 38 questions to evaluate the deal. The deadline was changed as Oregon Attorney General John Kroger said today in a statement that he would sign on to the settlement, joining Connecticut Attorney General George Jepsen, who also supports it. Delaware Attorney General Beau Biden has said he won’t sign on to the settlement.

Foreclosure Accord Said to Ensure Same Terms for All 50 States -- Lenders including Bank of America Corp. and JPMorgan Chase & Co. and state attorneys general agreed to ensure that states signing a nationwide accord on foreclosures will be entitled to improved terms won later by states that opt out, two people familiar with the matter said. California Attorney General Kamala Harris is one of the highest profile attorneys general to publicly balk at the settlement, saying she won’t sign a deal that blocks investigations into mortgage loans. New York Attorney General Eric Schneiderman, who last week declined to say whether he would sign the deal, yesterday sued Bank of America, based in Charlotte, North Carolina, New York- based JPMorgan and Wells Fargo & Co. in state court in Brooklyn over the use of a national mortgage database that the state claims led to improper foreclosures. The agreement to grant so-called most-favored nation status comes in the endgame of a probe that began in 2010 following claims of widespread foreclosure wrongdoing by mortgage servicers. States have until Feb. 6 to accept the agreement with the five largest servicers, which also include San Francisco- based Wells Fargo, New York-based Citigroup Inc. and Detroit- based Ally Financial Inc. The deal, said to be worth as much as $25 billion, will settle allegations the banks used faulty or forged documents to seize homes from borrowers.

Investors (and Others) Realizing Their Ox is About to be Gored in Mortgage Settlement – Yves Smith - Investors have been remarkably passive as banks and servicers have taken advantage of them. We’ve heard numerous reports of servicer fee abuses that amount to stealing from investors (remember, if you overcharge a stressed borrower and that borrower loses his home, the money in the end comes out of pension funds and 401 (k)s when the excessive fees are deducted from the proceeds of the sale of the home). Investors can even see suspicious patterns in investor reports. We’ve also pointed out that they are guaranteed even more pain, since $175 billion of losses that have already recorded on loans in MBS pools have not yet been allocated to the related bonds.  But the fees to manage bond funds are pretty thin, and fixed income investors are generally a risk averse lot, and are not well set up to litigate. So it shouldn’t be surprising that investors have sat on the sidelines during the mortgage settlement and “fix the housing market” debates, even as becomes clearer and clearer that the solution envisaged is to take from investors to make the banks whole. Remember, the major banks have very large second lien portfolios that should be written down. So the plan, which was messaged in an interview with William Dudley in the Financial Times in early January and is embodied in the mortgage settlement plan, is to write down first liens and leave seconds largely intact (there have been some indications that seconds might get a modest ding in the case of a principal mod on the first, but that is backwards. The second should be WIPED OUT before anything modification is made to the first mortgage). Any principal mods on the first lien that leaves the second in place amounts to a transfer from retirement plans to banks. Pensions are being raided to avoid exposing the insolvency of the big banks.

Schneiderman Files Civil Fraud Lawsuit Against Three Major Banks for Use of MERS (Updated) -- Yves Smith - New York filed a lawsuit against various units of JP Morgan, Bank of America, Wells, MERSCORP and MERS over their use of MERS in foreclosures. This civil suit alleges that the use of MERS has “resulted in a wide range of deceptive and illegal practices,” most importantly, over 13,000 foreclosures in MERS name where MERS “often” lacked standing to foreclose. The suit claims that an undetermined number of foreclosures that were not made in the name of MERS were also deceptive by virtue of MERS “certifying officers” making improper assignments prior to the foreclosure. The suit includes the use of robosigners who failed to review the review the underlying records as required, and served to disguise gaps in the chain of title. The section of the filing with background on MERS will be familiar to most NC readers, but it does include the juicy factoid that MERS members have saved over $2 billion in recording fees. NYS MERS Final Summons and Complaint 2/3/12. The causes of action are:

    • Repeated and persistent fraud and illegal acts
    • Deceptive acts or practices

LPS Uses Bogus Florida IG Report on Firing of Foreclosure Fraud Investigators in Motion to Dismiss Nevada Lawsuit - I don’t know how states like Massachusetts and Nevada, with active legislation against banks and document processors over the same conduct that would be released here, could possibly sign on to this deal. There’s some news on that front. Lender Processing Services, which has been sued by Nevada for deceptive practices in generating false documents, sought to dismiss the complaint today in a filing with a state court. The complaint by Nevada Attorney General Catherine Cortez Masto fails to allege any document executed by subsidiaries was incorrect or caused any borrower financial harm, Lender Processing Services said in a statement today. The state’s claims “are a collection of suppositions, legal conclusions and inflammatory labels,” the company said in the court filing. The [...] Nevada sued the company in December, claiming that it engaged in a pattern of “falsifying, forging and/or fraudulently executing” foreclosure documents, requiring employees to execute or notarize as many as 4,000 foreclosure- related documents a day, according to a statement from the attorney general. Lender Processing Services also demanded kickbacks from foreclosure firms, the office said. Two interesting things here. First, LPS leans hard on the idea that borrowers weren’t harmed by the use of false documents. The implication here is that the borrower was delinquent anyway, so there’s no abuse going on. But the more important part of the motion to dismiss (copy at the link) comes when LPS makes the claim that robo-signing isn’t really a crime. It’s merely “signing of documents by an authorized agent,” says LPS, and that is permitted under Nevada law.

Nationwide Title Clearing Sued by Illinois Over Foreclosure Documents -- Illinois Attorney General Lisa Madigan sued Nationwide Title Clearing Inc., a Florida company she claims caused the filing of faulty documents with county clerks.  “The practices that NTC used were a key contributor to the mortgage crisis by undermining the integrity and accuracy of the mortgage servicing and foreclosure process,” Madigan said today in a statement.  Nationwide Title Clearing prepares documents for mortgage servicers to use against borrowers in default, foreclosure and bankruptcy, Madigan said. Among the documents are mortgage assignments used by lenders in foreclosures.  NTC employees signed forms used in Illinois foreclosures as officers of the foreclosing financial institutions and not Nationwide, often without reading or verifying the documents they signed, Madigan said.  “NTC creates documents through an assembly-line process,” Madigan said. “NTC signers typically have little or no role in the actual creation of documents that they sign.” Their sole role is to affix their signatures, she said.

US regulator launches foreclosure sales plan (Reuters) - The regulator for mortgage finance companies Fannie Mae and Freddie Mac said on Wednesday investors could now sign up to pre-qualify to bid on foreclosed properties held by the government-controlled firms. Those investors meeting the qualifications set by the Federal Housing Finance Agency could purchase homes and then convert them into rental units under the new program. They would be required to use the properties as rentals for a specific number of years. Government-run Fannie Mae, Freddie Mac and the Federal Housing Administration own a large portion of the country's foreclosed properties. As that inventory is expected to swell, the federal program is aimed to clear the backlog of distressed properties that has flooded the market and depressed prices, while at the same time meeting the increased demands of renters. The regulator said it will announce the first transaction during a pilot phase of the so-called REO initiative in the "near term." Fannie Mae will offer for sale pools of various types of assets in the first pilot program, including rental properties, vacant properties and non-performing loans with a focus on the hardest-hit areas. "This is an important step toward increasing private investment in foreclosed properties to maximize value and stabilize communities," said FHFA acting director Edward DeMarco.

FHFA Makes Announcement That Interested Investors May Pre-Qualify For REO Initiative – The Federal Housing Finance Agency (FHFA) today announced the first step of a Real-Estate Owned (REO) Initiative targeted to hardest-hit metropolitan areas announced in August 2011. Investors interested in participating may “pre-qualify” to establish eligibility to bid on transactions in the initial pilot phase as well as subsequent phases.The REO Initiative will allow qualified investors to purchase pools of foreclosed properties with the requirement to rent the purchased properties for a specified number of years. This rental period could provide relief for local housing markets that continue to be depressed by the volume of foreclosed properties, and provide additional rental options to certain markets. Prequalification ensures investors will have the financial capacity and operational expertise to manage properties in a way that is conducive to the stabilization of communities hard hit by the housing downturn. The REO Initiative was developed in conjunction with the Treasury Department, Department of Housing and Urban Development, Federal Deposit Insurance Corporation, Federal Reserve, Fannie Mae and Freddie Mac. The Initiative was informed by meetings with stakeholders and review of more than 4,000 responses to a Request for Information (RFI) seeking input on options for selling single-family REO properties held by Fannie Mae, Freddie Mac, and the Federal Housing Administration.

Obama proposes home loan refinancing plan -- President Barack Obama proposed a plan aimed at helping millions of homeowners refinance their mortgages to today's historically-low rates. To pay for it though, he'll need $5 billion to $10 billion.  The plan would allow borrowers who are current on their mortgage to save thousands of dollars by refinancing into loans backed by the Federal Housing Administration, according to the U.S. Department of Housing and Urban Development.  The cost is estimated to range between $5 billion and $10 billion. To pay for it, Obama is proposing to impose a fee on large banks -- a move that may have a hard time making it past Congress, which must approve the measure.  The refinancing plan is the latest in a string of programs1 designed to help solve the nation's housing market crisis. President Obama unveiled the Home Affordable Modification Program (HAMP) foreclosure-prevention effort three years ago as part of the massive stimulus bill but it hasn't helped nearly as many homeowners as intended. What's different about the new proposal is that it would help borrowers with private bank loans who could not obtain new, refinanced loans in the past because they owed more on their mortgages than their homes were worth.

Obama Announces Refinancing Plan - President Barack Obama announced a fresh bid Wednesday to revive the housing market by letting millions of homeowners refinance their mortgages, presenting a plan that is likely to encounter congressional opposition.  The program aims to help borrowers who are current on their mortgages refinance into lower-interest federally insured loans. Borrowers would qualify even if they owe more than their homes are worth or if they have trouble securing a new mortgage from a private lender. The centerpiece of the announcement was the refinancing push, which complements an existing program that makes it easier for homeowners with mortgages backed by Fannie Mae and Freddie Mac to refinance. The new initiative would extend that opportunity to roughly one-third of all mortgages that aren't backed by federal entities and instead are owned by banks or were bundled by private firms that sold them off to investors as mortgage-backed securities. The Federal Housing Administration would instead guarantee the new loan. To qualify, homeowners would have to be current on their last six mortgage payments and have no more than one delinquency in the previous six months.

Obama's Plan To Help Homeowners and Boost the Economy - President Obama detailed his administration’s new housing plan in Virginia today, a little over a week after announcing it in his State of the Union address. The crux of the plan is providing help to underwater homeowners—which, in turn, could also boost the economy. The plan works like this: everyone who has a mortgage with a non-government sponsored enterprise (GSE), like Fannie Mae and Freddie Mac, is eligible to refinance under this plan if they meet the government’s criteria. (There are also features to further incentivize help for those with GSE loans—more on that later). Non-GSE homeowners must be current on their payments, meet a minimum credit score and be a single-family, owner-occupied home within FHA loan limits to get help under the new plan. (The idea is to target aid to families that aren’t already quite wealthy and are trying to stay in their current homes). Crucially, however, it doesn’t matter if the homeowner is underwater on their mortgage (meaning they owe more than their home is worth). This is important because underwater homeowners typically can’t refinance, which creates a vicious economic cycle for the country: with high mortgage payments, people have less money to spend and so the economy suffers. But a suffering economy pushes home prices downward, meaning underwater homeowners are sunk even deeper.

Obama details broader housing plan - President Barack Obama called on Congress Wednesday to make it easier for millions of additional homeowners to refinance their mortgages at lower interest rates even if they owe more than their homes are worth. He conceded that his administration’s housing plans so far have not lived up to their promise. Calling the housing problem “massive in size and in scope,” Obama detailed a proposal he outlined in his State of the Union speech last week, tackling an issue of vital concern in states key to his re-election. “This housing crisis struck right at the heart of what it means to be middle class in America: our homes,” Obama said, Obama’s proposal would give homeowners with privately held mortgages a shot at record low rates though a new government program, for an annual savings of about $3,000 for the average borrower.

Two strong positives for the new Obama refinance plan -(1) It finally allows underwater borrowers to exercise an option that investors knew existed when they purchased mortgage backed securities--the prepayment option. Right now, the fact that borrowers are underwater allows investors to earn a windfall by collecting a premium on what is effectively a callable bond.
(2) It imposes a Pigou tax on large banks. When a small bank fails, the negative externality is small to non-existent. When a TBTF bank fails, the negative externality can be catastrophic.  Taxes on large banks help internalize the externality.

A Look Inside President Obama’s New Housing Proposals - President Obama held a rally yesterday in Falls Church, Virginia, where he provided more details concerning his plan, mentioned briefly in his state of the union speech, to stabilize the housing market.  The centerpiece of the plan is a new program that would expand HARP to many homeowners whose loans are not backed by government-owned Fannie Mae and Freddie Mac, enabling them to refinance even if they don’t qualify under traditional lending standards. The new program would be run out of the Federal Housing Administration and would be open to all non-Fannie- and Freddie-backed borrowers who meet the following criteria:

  • Are current on their loan for the past six months and missed no more than one payment in the six months prior to that;
  • Have a FICO score of 580 or better;
  • Have a loan that is no larger than the FHA conforming loan limits in their area;
  • Have a loan for a single family, owner-occupied, principal residence; and
  • Have a loan-to-value ratio of 140 or less

After Three Years, Homeowners Still Being Treated as Political Pawns - The overriding theme of President Obama's last few months has been "We Can't Wait."  But as Ezra Klein points out today, that theme suddenly disappeared when the subject turned to relief for homeowners. Instead of proposing a limited program that he could enact on his own, Obama has deliberately chosen an approach that requires congressional approval: In choosing to expand the program beyond Fannie and Freddie, the administration has also expanded the program beyond what it has the executive authority to do on its own. If they just wanted to further streamline the HARP program, they could recess appoint a new director for Fannie and Freddie and get to work. Creating the new program through the FHFA -- and paying for it through a new tax on banks -- requires congressional approval, and few think House Republicans are likely to sign onto a new tax. The administration argues that there has been bipartisan support for refinancing initiatives in Congress.. But the question remains: If Congress ignores this bill, as they have ignored so many of the Obama administration’s other initiatives, is the White House sufficiently committed to leave Congress behind and use Fannie and Freddie to go their own way?

The permanent foreclosure crisis and Obama's refinancing obsession - For the umpteenth time, President Obama has announced that his solution to the foreclosure crisis is to encourage "responsible" homeowners to refinance at lower interest rates.  Adopting the Tea Party rhetoric and blaming home buyers who got houses in 2006 for their inability to foresee what few economists foresaw, Obama has steadfastly refused to push for principal reductions and payment suspensions for homeowners behind in payments, lest their luckier neighbors who bought at lower prices become resentful.  As a result, he continues to offer help to homeowners who need it least.  Behind the rhetoric is an important policy choice: who will bear the billions of mortgage losses that have yet to be flushed out of the system.  Principal reduction modifications for defaulted borrowers would distribute the losses among taxpayers (via Fannie and Freddie), private investors and banks (who hold non-GSE loans), and give underwater homeowners some relief.  More importantly, principal modifications mitigate the aggregate losses to the system while accelerating the necessary deleveraging. Refinancing current borrowers does nothing to prevent the huge deadweight losses from continuing foreclosures, at 50% loss severities, on homes whose owners are delinquent.  Choosing to do no more for the 7 million or so delinquent mortgage debtors means maximizing losses to those homeowners, but also to taxpayers and investors.  It would certainly help to continue driving down home prices, which does benefit new first-time buyers, but at a huge aggregate cost.

Obama Bluffs on ReFi? - In his State of the Union speech, the President said: Millions of innocent Americans have seen their home values decline. And while government can’t fix the problem on its own, responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief. And that’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates. No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust. I found this interesting, and can’t wait to see the legislation that the Prez is going to offer up. I have written four articles on the topic of a Mega ReFi (here, here, here and here). The first one was back in August. At first I thought there might be something behind all this talk. Now, five months later, I think it's all gas. We’re not going to see any big ReFi plan until after the next election. These are the issues as I see it: 

Fannie Mae Serious Delinquency rate declines, Freddie Mac rate increases - Fannie Mae reported that the Single-Family Serious Delinquency rate declined in December to 3.91%, down from 4.0% in November. This is down from 4.48% in December 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate increased to 3.58% in December, up from 3.57% in November. This is the fourth month in a row with a small increase in the delinquency rate. Freddie's rate is down from 3.84% in December 2010. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. These are loans that are "three monthly payments or more past due or in foreclosure".The serious delinquency rate has been declining, but declining very slowly (Freddie's decline seems to have stalled). The reason for the slow decline is most likely the backlog of homes in the foreclosure process due to processing issues (aka robo-signing).  I expect a mortgage servicer settlement agreement to be reached very soon, and that will probably lead to more modifications and foreclosures - so the delinquency rate should start to decline faster.  The "normal" serious delinquency rate is under 1%, so there is a long way to go.

Foreclosures Draw Private Equity as U.S. Rents Homes -  Private equity firms are jumping into distressed housing as the U.S. government plans to market 200,000 foreclosed homes as rentals to speed up the economic recovery. GTIS Partners will spend $1 billion by 2016 acquiring single-family homes to manage as rentals, Thomas Shapiro, the fund’s founder said. That followed announcements this month that GI Partners, a Menlo Park private equity fund, expects to invest $1 billion, and Los Angeles-based Oaktree Capital Management LP will spend $450 million on similar housing. “It’s a massive market,” Shapiro said in a telephone interview from New York. “We’re starting to see this as a billion dollar opportunity to buy rental housing.” Creating more single-family rental properties is one of a series of programs introduced by President Barack Obama’s administration aimed at reviving the housing market. An S&P/Case-Shiller index (SPX) of property values in 20 cities has dropped 33 percent from its peak in July 2006 and 12 percent of homeowners with a mortgage are either delinquent or in foreclosure. Last week, the administration revised its Home Affordable Modification Program, offering government incentives for mortgage investors Fannie Mae and Freddie Mac (FMCC) when they forgive debt on homes that lost value as a way of preventing delinquent borrowers from losing their houses.

Mortgage Rates fall to record low - Probably worth a mention - especially since refinance activity will probably pick up soon (I expect HARP to increase in March) ... From Freddie Mac: Average Mortgage Rates Ease Setting New Record Lows Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average mortgage rates dropping to new all-time record lows as data on economic growth fell short of market projections. All products in the PMMS survey, except the 1-Year ARM, averaged new lows....30-year fixed-rate mortgage (FRM) averaged 3.87 percent with an average 0.8 point for the week ending February 2, 2012, down from last week when it averaged 3.98 percent. Last year at this time, the 30-year FRM averaged 4.81 percent. ...5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.80 percent this week, with an average 0.7 point, down from last week when it averaged 2.85 percent. A year ago, the 5-year ARM averaged 3.69 percent.  This is the lowest 30 year fixed rate since Freddie Mac started tracking rates in 1971.

Case Shiller: House Prices fall to new post-bubble lows in November (seasonally adjusted) - S&P/Case-Shiller released the monthly Home Price Indices for November (a 3 month average of September, October, and November). This release includes prices for 20 individual cities and and two composite indices (for 10 cities and 20 cities).Note: Case-Shiller reports NSA, I use the SA data.  From S&P: Home Prices Continued to Decline in November 2011 According to the S&P/Case-Shiller Home Price Indices Data through November 2011, released today by S&P Indices for its S&P/Case-Shiller1 Home Price Indices ... showed declines of 1.3% for both the 10- and 20-City Composites in November over October. For a second consecutive month, 19 of the 20 cities covered by the indices also saw home prices decrease. The 10- and 20-City composites posted annual returns of -3.6% and -3.7% versus November 2010, respectively. These are worse than the -3.2% and -3.4% respective rates reported for October.The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 33.5% from the peak, and down 0.7% in November (SA). The Composite 10 is at a new post bubble low (Seasonally adjusted), but still above the low NSA. The Composite 20 index is off 33.5% from the peak, and down 0.7% in November (SA). The Composite 20 is also at a new post-bubble low.

Case Shiller Home-Price Index Falls 3.7% - Residential real estate prices fell more than forecast in November, showing distressed properties are hampering improvement in the U.S. housing market. The S&P/Case-Shiller index of property values in 20 cities declined 3.7 percent from November 2010 after decreasing 3.4 percent in the year ended in October, the group said today in New York. Economists projected a 3.3 percent drop, according to the median estimate in a Bloomberg News survey. Another wave of foreclosures threatens to keep the pressure on prices and delay recovery in the industry that precipitated the last recession, underscoring the Federal Reserve’s view that housing “remains depressed.” More stability in real-estate values may be needed to persuade Americans to take advantage of record-low mortgage rates. “We’ve seen home prices take a turn for the worse after showing some signs of a bottom, and we do think that there is more downside from here,” said Ellen Zentner, a senior economist at Nomura Securities International Inc. in New York, who correctly forecast the price decline. “If you get stronger jobs and wage growth, it’ll go far in alleviating some of the pipeline foreclosures that have yet to happen.”

No Bottoming Out for Real Estate Market as Home Values Keep Falling - If you’re watching the real estate markets, the good news is that the Federal Reserve has pledged to keep interest rates low through 2014. The bad news is that the market is going to need it. The November Case-Shiller housing numbers, released this morning, indicate that prices tumbled 3.7% from the year before. That’s below expectations of a 3.2% drop. Even worse, it contradicts a trend in which the rate of price drops had been slowing. For several months, prices had been falling, but by a slightly smaller percentage each month — indicating a bottoming out. This latest data may be an outlier, or it may (horrors!) presage another leg down. (Housing prices are currently 32.9% off their peak). Current speculation among housing observers is that after a lull in the processing of foreclosures due to the robo-signing scandal, we may be seeing a new flow of distressed homes coming onto the market. If that’s the case, then the newly marketed foreclosures could hold prices down for the next few months. However, there’s a lot of optimism building in the real estate community, too, so when prices turn, they may turn suddenly. Sentiment among homebuilders, meanwhile, hit its highest level in four years, while the National Association of Home Builders Remodeling Index rose last week to a five-year high.

A Look at Case-Shiller by Metro Area - S&P/Case-Shiller home-price data moved lower in November on both a monthly and annual basis. The composite 20-city home price index, a key gauge of U.S. home prices, dropped 1.3% from October and fell 3.7% from a year earlier. Nineteen cities posted monthly declines, with just Phoenix showing an increase. Atlanta, Las Vegas, Seattle and Tampa posted new index level lows. Eighteen of the 20 cities posted annual declines in November, with just Detroit and Washington D.C. notching gains. On a seasonally adjusted basis, which aims to take into account the slower selling season in the winter, three cities — Denver, Minneapolis and Phoenix — posted monthly increases. The overall 20-city index was down 0.7% from the previous month on a seasonally adjusted basis. Although the housing market has been showing some signs of stabilization, prices continue to be under pressure. “The enormous supply overhang of existing homes (particularly factoring in all those in foreclosure or soon to be) promises to keep pressure on prices for some time,” See a sortable table of home prices in the 20 cities in the Case-Shiller index. Read the full story. Read the full S&P/Case-Shiller release.

In Atlanta, Housing Woes Reflect Nation’s Pain - Housing prices continue to fall nationwide, despite a few modest signs of improvement. But not all markets are equal. Places like Miami and Phoenix — symbols of boom-time excesses and later the sites of fierce crashes — were not the weakest performers last year. That distinction goes to Atlanta. A sprawling Southern metropolis, Atlanta has become one of the biggest laggards in the economic recovery. In November, prices of single-family homes were down close to 12 percent compared with a year earlier, the largest decline among major metropolitan areas, according to data released on Tuesday in the Standard & Poor’s/Case-Shiller Home Price Index. Home prices regionally are now below their levels of 2000, making Atlanta one of only four metro areas to have experienced such a slide. The price of entry-level housing in the area — the lowest tier of the market, valued at just under $96,600 — fell by close to a third last year. Even though the national economy shows signs of strengthening, the beleaguered housing market remains a significant drag on the recovery. Across a group of 20 metropolitan areas measured by S.& P./Case-Shiller, prices of single-family homes were 3.7 percent lower in November compared with a year earlier, with average prices at their 2003 levels. Economists say prices are unlikely to hit a nadir until at least late spring.

Housing’s Rise and Fall in 20 Cities - NYT Interactive - The Standard & Poor’s Case-Shiller Home Price Index for 20 major metropolitan areas is one of the most closely watched gauges of the housing market. The figures for November were released Jan. 31. Figures shown here are not seasonally adjusted or adjusted for inflation.

Where Housing Prices Are on the Rise - The Case-Shiller/Standard & Poor’s home price indexes out Tuesday show that prices in Detroit were up 3.8 percent in November from the end of 2010.Only two other markets were up in that period — Washington, up 1 percent, and Denver, up 0.6 percent. The other 17 lost ground in the first 11 months of 2011, a fact that helps to explain why action on housing is again being talked about in Washington. Among the more notable reverses were those in the three California markets. Los Angeles, San Francisco and San Diego were all lower in November than they were at the end of 2009. Each was down more than 4 percent for the year through November. The worst performer in the first 11 months of 2011 was Atlanta, off 11.1 percent. Las Vegas was second, with a fall of 8.1 percent. Atlanta and Las Vegas are two of the four areas that fell to new lows for this cycle. The others are Tampa and Seattle. Miami, the other Florida market included in the survey, was up a scant 0.4 percent from the low it reached last spring. It is hardly a surprise that house prices were an issue in the Florida Republican primary on Tuesday, with Newt Gingrich’s service as a consultant to Freddie Mac being used against him by Mitt Romney.

The Trouble With Case Shiller - The Case-Shiller Home Price Indices were released this morning and, as usual, they're getting lots of media attention. I have no problem with that, except for one minor detail. These indices are a worthless and misleading indicator of current housing market conditions. Back in 2010, I wrote a public article pointing this out. Here are the key excerpts from that piece that tell you why Case-Shiller should be ignored.

  • If Dow Jones used the methodology to report the Dow Industrials that Standard and Poor's uses to construct the Case-Shiller Indices (or CSI) the Dow would be reported as being at 10,650 when, in reality, it's at roughly 10,800. 10,650 is where the Dow's three-month moving average was at the end of May.
  • The CSI doesn't remotely represent the current state of the housing market, which is, in fact, much lower than where the CSI shows it to be, and it has been trending drastically lower when the CSI shows it being relatively flat recently.
  • The data is collected from a month ended two months ago -- in today's case, July. That data is from public sources for closed sales, not then-current contracts. So the currently reported data represents sales that happened mostly two months before that, which would be May. Then that data is aggregated with the data collected in the two previous months, for sales contracts from the two months before that (March and April), and reported as an average price for the three months. The theoretical midpoint of the data reported now is from three-and-a-half months ago, representing the average contract price from roughly five-and-a-half months ago.

CoreLogic December Home Price Index Gives First Look at Full-year 2011 Price Changes: The CoreLogic HPI shows that, including distressed sales, home prices in the U.S. decreased 4.7 percent in 2011 compared with December 2010. This year-end report shows that home prices continued the trend of year-end decreases—this is the fifth consecutive year with a decrease in the HPI. The HPI excluding distressed sales shows that home prices decreased by 0.9 percent in 2011, giving an indication of the impact of distressed sales on home prices in 2011. The report also shows that national home prices including distressed sales decreased 1.4 percent on a month-over-month basis, the fifth consecutive monthly decline. However, the HPI excluding distressed sales posted its first month-over-month gain since July 2011, rising 0.2 percent. The December drop in home prices follows a decline of 4.3 percent* in November 2011 compared to November 2010. Excluding distressed sales, year-over-year prices declined by 2.0* percent in November 2011 compared to November 2010. Distressed sales include short sales and real estate owned (REO) transactions. “While overall prices declined by almost 5 percent in 2011, non-distressed prices showed only a small decrease. Until distressed sales in the market recede, we will see continued downward pressure on prices,”

CoreLogic: House Price Index declined 1.4% in December to new post-bubble low - This CoreLogic House Price Index report is for December. The Case-Shiller index released last week was for November. Case-Shiller is currently the most followed house price index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average of September, October and November (November weighted the most) and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® Prices fell by 4.7 percent nationally in 2011 The CoreLogic HPI shows that, including distressed sales, home prices in the U.S. decreased 4.7 percent in 2011 compared with December 2010. This year-end report shows that home prices continued the trend of year-end decreases—this is the fifth consecutive year with a decrease in the HPI. The HPI excluding distressed sales shows that home prices decreased by 0.9 percent in 2011, giving an indication of the impact of distressed sales on home prices in 2011. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was down 1.4% in December, and is down 4.7% over the last year. The index is off 33.7% from the peak - and is now at a new post-bubble low.

Real House Prices and House Price-to-Rent - Case-Shiller, CoreLogic and others report nominal house prices. It is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices are back to 1999/2000 levels, and the price-to-rent ratio is also back to 2000 levels. The first graph shows the quarterly Case-Shiller National Index SA (through Q3 2011), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through November) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to Q4 2002 levels, the Case-Shiller Composite 20 Index (SA) is back to February 2003 levels, and the CoreLogic index is back to April 2003. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to Q1 1999 levels, the Composite 20 index is back to April 2000, and the CoreLogic index back to February 2000. This graph shows the price to rent ratio (January 1998 = 1.0). On a price-to-rent basis, the Composite 20 index is back to April 2000 levels, and the CoreLogic index is back to February 2000.

ROBERT SHILLER: A Housing Bottom? What Are They Thinking?: I spoke with Yale professor Robert Shiller in Davos earlier this week. Shiller has correctly identified (in advance) two major price bubbles in recent decades—the stock market bubble of the late 1990s and the housing bubble of the late 2000s. One of the key attributes of most bubbles is that, when they finally burst, prices tend to "overshoot" on the downside, crashing well below fair value until all the exuberance is wrung out of the system. So is that what's going to happen to house prices this time? Or, as many people think, are house prices finally "bottoming" and getting ready to blast higher again?

Existing Home Inventory declines 17% year-over-year in January - According to the for monthly inventory (54 metro areas), listed inventory is probably back to early 2005 levels. Unfortunately the deptofnumbers only started tracking inventory in April 2006. This graph shows the NAR estimate of existing home inventory through December (left axis) and the HousingTracker data for the 54 metro areas through January.  Since the NAR released their revisions for sales and inventory, the NAR and HousingTracker inventory numbers are tracking pretty well.  Seasonally, housing inventory usually bottoms in December and January and then starts to increase again in February. So inventory should increase over the next 6+ months. The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the January listings - for the 54 metro areas - declined 17% from the same month last year.  This is just inventory listed for sale, sometimes referred to as "visible inventory". There is also a large "shadow inventory" that is currently not on the market, but is expected to be listed in the next few years.  Some of this "shadow inventory" will be forced on the market, such as completed foreclosures, but most of these sellers will probably wait for a "better market".

HVS: Q4 Homeownership and Vacancy Rates - The Census Bureau released the Housing Vacancies and Homeownership report for Q4 this morning.  As Tom Lawler has been discussing, this is from a fairly small sample, and the homeownership and vacancy rates are higher than estimated in other reports (like Census 2010). This report is commonly used by analysts to estimate the excess vacant supply for housing, but it doesn't appear to be useful for that purpose. It might show the trend, but I wouldn't rely on the absolute numbers.  The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate declined to 66.0%, down from to 66.3% in Q3 2011. I'd put more weight on the decennial Census numbers and that suggests the actual homeownership rate is probably in the 64% to 65% range.  The HVS homeowner vacancy rate declined to 2.3% from 2.4% in Q3. This is the lowest level since early 2006 for this report. The homeowner vacancy rate has probably peaked and is now declining. However - once again - this probably shows that the trend is down, but I wouldn't rely on the absolute numbers. The rental vacancy rate declined to 9.4% from 9.8% in Q3. I think the Reis quarterly survey (large apartment owners only in selected cities) is a much better measure of the overall trend in the rental vacancy rate - and Reis reported that the rental vacancy rate has fallen to the lowest level since 2001.

Homeownership rates fall to 66% as downturn nears a bottom - Fewer Americans own homes and many of them are continuing to see values decline. The U.S. Census Bureau reported Tuesday that the nation's homeownership rate fell to 66% in the fourth quarter, continuing a seven-year drop from a fourth-quarter peak of 69.2% in 2004. At the same time, U.S. home prices fell 1.3% in November from October and were 3.7% below 2010 levels, the Standard & Poor's/Case-Shiller home price index indicates. Falling homeownership - and prices - reflect the worst housing downturn since the Great Depression. And while there are signs that the housing industry's downturn may at least be nearing a bottom, the impact of the collapse will be evident for years to come, economists say. As of November, average U.S. home prices were back to mid-2003 levels, S&P says. "Americans are less keen on homeownership knowing now that prices can fall,"

Construction Spending increased 1.5% in December - This morning the Census Bureau reported that overall construction spending increased in December:  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during December 2011 was estimated at a seasonally adjusted annual rate of $816.4 billion, 1.5 percent (±1.4%) above the revised November estimate of $804.0 billion. The December figure is 4.3 percent (±1.9%) above the December 2010 estimate of $782.9 billion. The value of construction in 2011 was $787.4 billion, 2.0 percent (±1.1%) below the $803.6 billion spent in 2010. Private construction spending increased in December: Spending on private construction was at a seasonally adjusted annual rate of $529.7 billion, 2.1 percent (±1.1%) above the revised November estimate of $518.8 billion. This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Private residential spending is 64% below the peak in early 2006, and non-residential spending is 30% below the peak in January 2008. Public construction spending is now 11% below the peak in March 2009. The second graph shows the year-over-year change in construction spending. On a year-over-year basis, both private residential and non-residential construction spending have turned positive, but public spending is down on a year-over-year basis as the stimulus spending ends.

Lawler: Home Builder Results for Last Quarter - Of the nine large publicly traded home builders whose fiscal quarters end on the same day as calendar quarters, eight have published earnings and operating stats. I don’t comment on earnings, put below are some selected stats on orders, settlements, and order backlogs. Pulte, of course, noted that in the quarter ended December 31, 2010 there was a “one-time pickup” of about 200 net orders “associated with a change in the Company’s order recognition process,” and that as of result a “like-to-like” comparison of the latest quarter vs. the comparable year-ago quarter would show a YOY gain of “about” 8%. Adjusting the totals for all eight builders for the “Pulte shift,” the YOY gain in net orders for the above group would be 13.3% (and the YOY decline for the previous year would be 16.7%). For these eight companies combined, the backlog of orders at the end of last year was up 18.1% from the end of 2010, though it was little changed from the end of 2009. Census new SF home sales data showed a YOY increase in sales for the fourth quarter of 2011 (NSA, of course), of just 3.0%, while the YOY % decline for Q4/10 was 20.5%. Unfortunately, the Census new SF sales data are not directly comparable to reports from home builders, partly because of the treatment of sales cancellations, and partly because the timing of a “sale” can differ slightly.

Q4 2011 GDP Details: Investment in Office, Mall, and Lodging, Residential Components - The BEA released the underlying details this week for the Q4 Advance GDP report. As expected, the recent pickup in non-residential structure investment has been for power and communication.  The first graph shows investment in offices, malls and lodging as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q1 2008 and then declined sharply. Investment has increased a little recently (probably mostly tenant improvements as opposed to new office buildings). Investment in multimerchandise shopping structures (malls) peaked in 2007 and is down about 62% from the peak. Lodging investment peaked at 0.32% of GDP in Q2 2008 and has fallen by about 80%. Notice that investment for all three categories typically falls for a year or two after the end of a recession, and then usually recovers very slowly (flat as a percent of GDP for 2 or 3 years). The second graph is for Residential investment (RI) components as a percent of GDP. According to the Bureau of Economic Analysis, RI includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories (dormitories, manufactured homes). Usually the most important components are investment in single family structures followed by home improvement. Investment in single family structures has been moving sideways for almost three years, although it might be moving up a little. Investment in home improvement was at a $158 billion Seasonally Adjusted Annual Rate (SAAR) in Q4 (about 1.0% of GDP), significantly above the level of investment in single family structures of $109 billion (SAAR) (or 0.7% of GDP). And investment in multifamily structures is still moving sideways as a percent of GDP (increasing slowly in dollars).

NMHC Apartment Survey: Market Conditions Tighten in Recent Survey - From the National Multi Housing Council (NMHC): Apartment Industry Continues Recovery, Survey Says Market conditions continued to improve for the multifamily industry across all areas, according to the latest National Multi Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions. For the seventh time in the last eight quarters, all four indexes reflecting Market Tightness, Sales Volume, Equity Financing and Debt Financing were at or above 50 – indicating growth from the previous quarter. The Market Tightness Index rose to 60 from 52, marking the eighth straight quarter with the index at or above 50. This graph shows the quarterly Apartment Tightness Index. Any reading above 50 indicates tightening from the previous quarter. The index has indicated tighter market conditions for the last eight quarters and suggests falling vacancy rates and or rising rents.  This fits with the recent Reis data showing apartment vacancy rates fell in Q4 2011 to 5.2%, down from 5.6% in Q3 2011, and 9.0% at the end of 2009.

Household Formation: Divorces, Births Correlated with Unemployment Across States  - If you haven’t seen it already, there’s several arguments that a wave of household formations will start, taking pressure off the housing market and boosting overall aggregate demand.  See Yglesias here, Krugman here and Karl Smith here. As you can see here at Sober Look, “Family households have completely decoupled from the US population growth since 2008.” You’ve also seen this in relation to divorce rates, child-birth rates, households doubling up, etc. – a big drop-off starting in 2008.  But, usually due to data limitations, this analysis is almost always at the national level.  I wanted to find rates at the state level, to use the range of unemployment rate growth across states to see if household-related changes tracked them, boosting the argument that the weak economy is causing these changes. Weirdly, I can’t currently find household growth at the state level for beyond 2008. But I did find other things.  From the U.S. Census’ Births, Deaths, Marriages, & Divorces data page, here’s changes in divorce rate (2009 subtracting 2005 averages) against the change in the unemployment rate by state (2009 subtracting 2005):

Help America: Get Divorced! - Money troubles are a huge strain on marriage, so you’d expect that divorce would surge after a massive recession and years-long period of weak growth. Yes, as far as we can tell, the national divorce rate has been falling throughout the Great Recession. There are lags in the federal government’s data, but the feds say the United States fell from 3.6 divorces per 1,000 Americans in 2007 to 3.5 divorces per 1,000 in 2008 to 3.4 divorces per 1,000 Americans in 2009. What’s more, there’s reason to believe that this is no coincidence. The bad economy is actually keeping people’s marriages together—divorce is expensive. Mike Konczal, a fellow at the Roosevelt Institute, ran the numbers on a state-by-state basis and found that if you compare 2005 to 2009, states with a higher increase in unemployment saw larger drops in divorce rates. There’s at least some evidence that the mild economic recovery of 2011 has led to a divorce rebound, and if the unemployment rate continues to fall we can expect that trend to continue. Indeed, we should probably be expecting a temporary spike in divorce as several years of pent-up marital angst is unleashed in a single burst.

Solo nation: American consumers stay single - Americans are now within mere percentage points of being a majority single nation: Only 51% of adults today are married, according to census data. And 28% of all households now consist of just one person — the highest level in U.S. history. That second statistic may appear less dramatic than the first, but it’s actually changing much faster: The percentage of Americans living by themselves has doubled since 1960. The extraordinary rise of living alone is among the greatest social changes since the baby boom. Until recently, no culture in human history had sustained large numbers of people in places of their own. Today more than 40% of households have just one occupant in cities such as Atlanta, Washington, D.C., Denver, St. Louis, and Seattle. In Manhattan, nearly 50% of households consist of a single occupant, a number that seems impossibly high until you discover that the rate is similar in London and Paris, and even higher — a staggering 60% — in Stockholm.

Personal Income increased 0.5% in December, Spending decreased slightly - The BEA released the Personal Income and Outlays report for December:  Personal income increased $61.3 billion, or 0.5 percent ... in December, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $2.0 billion, or less than 0.1 percent.... Real PCE -- PCE adjusted to remove price changes -- decreased 0.1 percent in December ... PCE price index -- The price index for PCE increased 0.1 percent in December, in contrast to a decrease of less than 0.1 percent in November. The PCE price index, excluding food and energy, increased 0.2 percent, compared with an increase of 0.1 percent. The following graph shows real Personal Consumption Expenditures (PCE) through December (2005 dollars). PCE decreased less than 0.1% in December, and real PCE decreased 0.1%.  The PCE price index, excluding food and energy, increased 0.2 percent. The personal saving rate was at 4.0% in December.

Spending Was Stagnant in December, Though Incomes Rose - The income of Americans rose in December by the most in nine months, a hopeful sign for the economy. But the increase did not result in more spending; instead, Americans saved their extra cash. Income rose 0.5 percent from November to December, the Commerce Department said Monday, in its sharpest advance since March. Spending in December was unchanged, following scant gains of 0.1 percent in both October and November. Economists noted that income rose last month largely because of strong hiring. In December, the economy added 200,000 jobs, meaning more income available to spend. On Friday, the government is expected to report another solid month of hiring in January. Despite the added income last month, Americans increased their savings. The savings rate rose to 4 percent of after-tax incomes in December, up from 3.5 percent in November. If consumers continue to save additional income rather than spend it, the economy could slow. That could in turn force employers to pull back on hiring. Consumer spending accounts for about 70 percent of economic activity.

Jittery Consumers Equal Bigger Savers - December was one of the driest on record in the U.S., but consumers were focused on rainy days. Personal income rose a healthy 0.5% in December, and just about all of it was stashed in rainy-day funds. The saving rate — personal savings as a% of aftertax income — jumped to 4.0% from 3.5%. According to economists at Credit Suisse, the half-point increase was the biggest gain since April 2010. An increase in savings had been expected, and in the long run is seen as good for the economy. From September until November, consumers financed their purchases at the expense of savings. Economists had warned newly frugal consumers would return to increasing their precautionary savings, even if the result was a slowdown in current spending. Indeed, consumer spending was virtually flat in December, capping off a lackluster fourth quarter. As a result, spending is starting the first quarter at a low level compared to its fourth-quarter average. The need to save reflects the jitters still evident in the household sector. Consumer fundamentals have improved — but the improvement is relative: Economic sentiment and finances of families are still worse than they were before the global financial collapse and recession.

Consumer spending fizzles as savings rise - U.S. consumer spending was flat in December as households took advantage of the largest rise in income in nine months to boost their savings, setting the tone for a slowdown in demand early in 2012. The Commerce Department said on Monday spending was the weakest since June and followed a 0.1 percent gain in November. Economists polled by Reuters had expected spending, which accounts for more than two-thirds of U.S. economic activity, to nudge up 0.1 percent last month. For all of 2011, spending rose 4.7 percent, the largest increase since 2007.  When adjusted for inflation, spending dipped 0.1 percent, breaking three straight months of gains. It increased 0.1 percent in November.The government reported on Friday that consumer spending grew at a 2.0 percent annual pace in the fourth quarter, helping to lift gross domestic product 2.8 percent - an acceleration from the third-quarter's 1.8 percent rate. Part of the spending, which has been concentrated in motor vehicles, has been funded from savings and credit cards as high unemployment constrains wage growth.

A Troubling Trend For Income & Spending Rolls On -American consumers are spending less and saving more. That's the message in yesterday's personal income and consumption report for December from the Bureau of Economic Analysis. That's a healthy development for household balance sheets and, in the long run, it's a plus for the economy. But if you're looking for a fresh sign that the economy will avoid a recession, it's not clear that these numbers will suffice. Let's start with the good news. Disposable personal income (DPI) rebounded nicely last month, rising 0.4% in December. That's the biggest monthly gain since March and a clear reversal of the sluggish numbers in recent months. But as the chart below shows, consumption growth has evaporated, with personal consumption expenditures (PCE) posting a slight retreat in December. For an economy that relies heavily on consumer spending, that's a warning sign.The trend, of course, is the true measure to watch for evaluating the business cycle, and on this front the news continues to look troubling. As you can see in the second chart below, the year-over-year percentage change in both DPI and PCE continues to fall. Even December's relatively strong rise in DPI wasn't enough to slow the decline. PCE's year-over-year change also continues to drop.

Real Personal Consumption Expenditures and Recessions - The latest release of Personal Consumption Expenditures, following Friday's release of the Advance Estimate of Q4 GDP, gives us an opportunity to analyze consumption at a monthly granularity, in contrast to the quarterly data in GDP. The US economy is mostly about consumption, which accounts for about 70% of Gross Domestic Product. In fact, if we study the quarterly reporting of GDP from its inception in 1947, Personal Consumption Expenditures (PCE) have ranged from a low of 60.5% in Q3 1951 to a high of 71.2% in Q3 2009. As of the most recent quarter, PCE is an even 71% of GDP. It's also interesting to note the shift over time in the three components of PCE: Durable Goods, Non-Durable Goods and Services. Here are two pie charts showing the shift since 1959, the first year that the Bureau of Economic Analysis provides the component breakdown on a monthly basis. The growth in services has been dramatic, as the nation has increasingly shifted to a services economy. The consumption of Durable Goods (items with a 3+ year lifespan) is somewhat smaller five decades later, but the most conspicuous change is the growth of services in relation to Non-Durable Goods. If we look at the overall growth of consumption over this timeframe, the year-over-year change in monthly real PCE has been quite volatile. The chart below shows the YoY change along with recessions. I've also highlighted the YoY rate of change at the month each recession began.

Vital Signs: Americans Boost Savings - Americans ramped up their efforts to save money — even during the holiday shopping season. The saving rate, which is the portion of disposable income put away into savings, rose to 4% in December from 3.5% in November. The rate spiked during the past recession amid broad economic anxiety, but has since come down as Americans cope with stagnant wages and higher living costs.

Restaurant Performance Index highest in almost six years in December - From the National Restaurant Association: Restaurant Performance Index Rose to Highest Level in Nearly Six Years in December The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 102.2 in December, up 1.6 percent from November and its highest level in nearly six years. In addition, December represented the third time in the last four months that the RPI stood above 100, which signifies expansion in the index of key industry indicators. “Aided by favorable weather conditions in many parts of the country, a solid majority of restaurant operators reported higher same-store sales and customer traffic levels in December,”  “In addition, restaurant operators are solidly optimistic about sales growth in the months ahead, and their outlook for the economy is at its strongest point in nearly a year.”  (see graph) The index increased to 102.2 in December (above 100 indicates expansion).  The data for this index only goes back to 2002..

Weekly Gasoline Update: Regular and Premium Up a Nickel - Here is my weekly gasoline chart update from Department of Energy data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump -- both regular and premium both increased 5 cents over the past week, resuming, after a one-week pause, their steady increase since mid-December. Regular remains about 13.3% off its 2011 interim high set in early May 2011. Premium is down 11.6%. WTIC closed today at 98.78. It is 13.3% off its 2011 interim high, which also dates from early May 2011. As the first chart below shows, the price of oil has risen significantly since the interim low in early October while gasoline prices had trended downward until the last six weeks. The increase in the price of oil has begun finding its way to the gasoline pump, although WTIC is off its 2011 daily close high of 103.25. As I write this, shows two states, Hawaii and Alaska, with the average price of regular above $4. But three states, CA, NY and CT are hovering around 3.73.

Consumer Confidence Unexpectedly Declines -- U.S. consumer confidence in January gave back some of the huge gains posted in the previous two months, according to a report released Tuesday. Views on labor markets darkened. The Conference Board, a private research group, said its index of consumer confidence retreated to 61.1 this month from a revised 64.8 in December, first reported as 64.5. The January index was far less than the 68.0 expected by economists surveyed by Dow Jones Newswires. The fallback was concentrated in consumers’ view of the current economy. The present situation index, a gauge of consumers’ assessment of current economic conditions, dropped to 38.4 in January from a revised 46.5, originally reported as 46.7. Consumer expectations for economic activity over the next six months slipped only slightly, to 76.2 in January from a revised 77.0, first reported as 76.4.

Consumer Confidence Decline in U.S. Points to Cooling of Growth: Economy - Consumer confidence unexpectedly dropped in January and a gauge of business activity fell, underscoring forecasts that the U.S. economy will cool after expanding at the fastest pace since the second quarter 2010. The New York-based Conference Board’s confidence index decreased to 61.1, lower than the most pessimistic forecast in a Bloomberg News survey of economists, from a revised 64.8 reading the prior month. The Institute for Supply Management-Chicago Inc. said its business barometer declined to 60.2 from 62.2 in December. Readings above 50 signal growth. Employers aren’t hiring fast enough to drive bigger gains in wages and consumer spending, while higher gasoline prices are cutting into household budgets. Another report today showed home prices fell more than forecast in November, eroding the wealth of families as they seek to rebuild savings.

Consumer Confidence Takes an Unexpected Dive - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through January 19th. The 61.1 reading is substantially below the consensus estimate of 67.0 reported by, which is the same as's own estimate.  The table here shows the average consumer confidence levels for each of the five recessions during the history of this monthly data series, which dates from June 1977. The latest number is well above the bottom of the unprecedented trough in 2008, but it is well below the 69.4 average confidence level of recessionary months a full 32 months after the end of the Great Recession (based on the official call of the National Bureau of Economic Research).  The chart below is another attempt to evaluate the historical context for this index as a coincident indicator of the economy. Toward this end I have highlighted recessions and included GDP. The linear regression through the index data shows the long-term trend and highlights the extreme volatility of this indicator. Statisticians may assign little significance to a regression through this sort of data. But the slope clearly resembles the regression trend for real GDP shown below, and it is probably a more revealing gauge of relative confidence than the 1985 level of 100 that the Conference Board cites as a point of reference. Today's reading of 61.1 is dramatically below the 81.3 of the current regression level (24.9% below, to be precise).

Vital Signs: Consumer Confidence Inches Down - Americans’ confidence in the economy inched downward in January, after climbing late last year. The Conference Board’s index of consumer confidence fell more than three points to 61.1 in January, following two months of increases. Despite recent gains in the employment market, most Americans have a guarded economic outlook due to slow income growth, gasoline prices that are higher than a year ago and the weak housing situation, analysts said.

Vital Signs: Truck Shipments Growing - The supply of goods being shipped by truck has been growing. The American Trucking Associations’ index of commercial truck shipments, by weight, rose a seasonally adjusted 6.8% in December from November. The 5.9% increase notched for the full year in 2011 was the largest since 1998. The trucking group attributed the gain to increased manufacturing production and restocking of inventories.

US auto sales rise in January, led by Chrysler, VW - U.S. auto sales are off to a strong start this year, continuing their brisk pace from late 2011. Sales of cars and trucks rose 11 percent to 913,287 in January, kicking off what is expected to be the strongest year for the industry since before the recession in 2007. New products, low interest rates and better loan availability helped overcome lingering worries about the economy and pushed the sales pace to its highest level since the Cash for Clunkers program in August 2009. Chrysler had its best January in four years. Toyota and Honda were back in the game, getting boosts from important new vehicles. Volkswagen, which wants to aggressively expand in the U.S., reported big increases. The only loser among the major automakers was General Motors Co., whose sales fell 6 percent from a strong January last year. January's sales pace was even faster than December's, a relief for the industry after a bumpy 2011. Sales started at a healthy pace last year but plummeted after the Japanese earthquake in March caused car shortages and didn't really recover until the last four months of the year.

U.S. Light Vehicle Sales at 14.18 million annual rate in January - Based on an estimate from Autodata Corp, light vehicle sales were at a 14.18 million SAAR in January. That is up 12.1% from January 2011, and up 5.1% from the sales rate last month (13.5 million SAAR in Dec 2011). This was well above the consensus forecast of 13.6 million SAAR. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for December (red, light vehicle sales of 14.18 million SAAR from Autodata Corp). The annualized sales rate was up sharply from December, and this was about the same level as August 2009 with the spike in sales from "cash-for-clunkers". Excluding cash-for-clunkers this was the strongest sales month since April 2008. The second graph shows light vehicle sales since the BEA started keeping data in 1967. This shows the huge collapse in sales in the 2007 recession. This also shows the impact of the tsunami and supply chain issues on sales, especially in May and June.Growth in auto sales will probably make another strong positive contribution GDP in Q1 2012 GDP, although not as strong as in Q4 2011.

Dallas Fed Manufacturing Survey shows expansion in January - This is the last of the regional Fed surveys for January. The regional surveys provide a hint about the ISM manufacturing index - and all of the regional surveys were stronger in January.  From the Dallas Fed: Texas Manufacturing Activity Picks Up: The production index, a key measure of state manufacturing conditions, rose from 0.2 to 5.8, suggesting growth resumed this month.  Other measures of current manufacturing conditions also indicated growth in January. The new orders index jumped to 9.5, its highest reading in six months, after two months in negative territory. ...The general business activity index shot up to 15.3 after dipping into negative territory in December.Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:  The New York and Philly Fed surveys are averaged together (dashed green, through January), and five Fed surveys are averaged (blue, through January) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through December (right axis).

ISM Seasonality - Earlier this month there was some discussion about how the ISM manufacturing survey might be overstating the strength of manufacturing in December due to some seasonal adjustment issues. Here was a story from FT Alphaville: ‘Tis (still) the seasonality, ISM edition Today the ISM addressed this issue and released some revisions: ISM Report On Business® Seasonal Adjustments 2012 Seasonal adjustment factors are used to allow for the effects of repetitive intra-year variations resulting primarily from normal differences in weather conditions, various institutional arrangements, and differences attributable to non-movable holidays. It is standard practice to project the seasonal adjustment factors used to calculate the indexes one year ahead (2012). This year's seasonal factor revisions include greater attention to two areas: series with marginal seasonality and with improved outlier detection. Due to this focus, the Department of Commerce recommended that ISM no longer seasonally adjust the ISM Manufacturing Inventories Index. Additionally, they recommended making revisions to all seasonally adjusted data for a longer time period than what ISM has typically done in the past. For December, the ISM PMI was revised down to 53.1 from 53.9.

ISM Manufacturing index indicates faster expansion in January - PMI was at 54.1% in January, up from a revised 53.1% in December. The employment index was at 54.3%, down from a revised 54.8%, and new orders index was at 57.6%, up from a revised 54.8%.  From the Institute for Supply Management: January 2012 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector expanded in January for the 30th consecutive month, and the overall economy grew for the 32nd consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®  Here is a long term graph of the ISM manufacturing index. This was below expectations of 54.5%, but the consensus was before the revisions. This suggests manufacturing expanded at a faster rate in January than in December. It appears manufacturing employment expanded in January with the employment index at 54.3%.

Continued Improvement For Manufacturing Activity In January - January looked a bit better through the prism of the ISM manufacturing index, which rose again last month to 54.1 from December's 53.1. That's the third monthly increase in a row. Readings above 50 are generally interpreted as a sign that the economy is growing. It's hardly a knock-out blow against analysts warning of high recession risk these days, but it's clearly a step in the right direction. At this critical juncture for the global economy, anything that doesn't bite us is a big help. Components of the ISM survey reflected growth as well. "Manufacturing is starting out the year on a positive note, with new orders, production and employment all growing in January," . For some context, here's how the ISM manufacturing index compares with the latest data on rolling 12-month percentage changes for the stock market, new orders for durable goods, and industrial production: Based on the recent upturn in durable goods orders, it's not terribly surprising to see manufacturing activity rising. But with the stock market's annual return doing all it can to stay above zero, and with industrial production's pace slipping, the big picture is still mixed. All the more so after learning that ADP's estimate of job growth in January slowed by more than a trivial degree.

Vital Signs: Strength in U.S. Manufacturing - U.S. factories expanded their production in January as companies restocked shelves. The Institute for Supply Management’s manufacturing index rose one point to a seasonally adjusted 54.1 from December, marking the 30th consecutive month of increased factory activity. Readings over 50 indicate expansion. Manufacturers’ backlogs and new orders also jumped, signaling that production will keep rising in coming months.

Manufacturing as Midwest Destiny - Chicago Fed - In the Midwest, the terms “industrial” and “cities” are almost synonymous. Though agriculture has been important to growth and development, the region’s economy was built on manufacturing, and the sector continues to be prominent—for both small towns and large metropolis alike.  However, labor and income generated from the region’s factories began to wane 40 to 50 years ago. In response, the region’s cities have undertaken deliberate development strategies to maintain their economic vibrancy. Some strategies have focused on the historic mainstay—manufacturing—while some have focused on diversification into service sectors ranging from tourism to business services and finance. These efforts have met with mixed success, and the industry mix of most Midwest cities continues to be steeped in manufacturing. Accordingly, “Industrial cities” of the Midwest continue to address the same fundamental challenge—that is, how to sustain their communities as manufacturing’s ability to generate jobs and income continues to decline. The chart below looks at manufacturing’s share of jobs going back to the year 1969. In both the Great Lakes region and in the U.S., the share of jobs to be found in manufacturing has declined by one half or more. A much greater share of workers now find employment outside of the manufacturing sector than are employed by the sector.[1] Importantly, though, the Great Lakes Region continues to be more highly specialized in manufacturing as compared to the U.S.

ISM Non-Manufacturing Index indicates faster expansion in January - The January ISM Non-manufacturing index was at 56.8%, up sharply from 53.0% in December. The employment index increased in January to 57.4%, up from 49.8% in December. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: December 2011 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in January for the 25th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®. "The NMI registered 56.8 percent in January, 3.8 percentage points higher than the seasonally adjusted 53 percent registered in December, and indicating continued growth at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 59.5 percent, which is 3.6 percentage points higher than the seasonally adjusted 55.9 percent reported in December, reflecting growth for the 30th consecutive month. The New Orders Index increased by 4.8 percentage points to 59.4 percent, and the Employment Index increased by 7.6 percentage points to 57.4 percent. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. This was well above the consensus forecast of 53.3% and indicates faster expansion in January than in December.

Non-Manufacturing ISM Ignores Banker Layoffs, Surges Past Expectations On Biggest Jump In Employment Index Ever  - And another major economic indicator beat, this time coming from the January Non-manufacturing ISM data, which unlike yesterday's miss in the manufacturing ISM, surged past estimates of 53.2, up from a revised 53.0 in December, to a whopping 56.8 in January. The primary reason for this was the reported jump in Employment which rose from 49.8 to 57.4, which was the biggest jump pretty much ever (see chart below), and the highest employment number since 2006. And this happened in a month in which the banking sectors laid of thousands of bankers. Brilliant. We leave it up to readers to estimate the credibility of this report. In other news, inflation is back, as the report states that "Corrugated Cartons is the only commodity reported down in price." What was up? "Airfares; Beef; Chemical Products; Chicken; Crab; Coffee (2); #1 Diesel Fuel (2); #2 Diesel Fuel (3); Fuel; Gasoline; Medical Supplies (2); Paper; Petroleum Based Products; Resin Based Products; Vehicles; and Wire." In other news, factory order missed expectations of a 1.5% increase, coming in at 1.1%. But who cares: it is an election year and the propaganda machine is on in full force.

Where Did All the Workers Go? 60 Years of Economic Change in 1 Graph - President Obama's State of the Union speech was surprisingly bullish on reviving manufacturing, prompting one very clever person on Twitter to say something along the lines of: "Democrats want the economy of the 1950s, while Republicans just want to live there." It got me thinking: What did the economy look like in the 1950s? If you could organize all the jobs into buckets and compare the paper-shuffling professional services bucket to the manufacturing bucket, what would they look like around 1950, and how has the picture changed in the last 60 years? National Journal addressed just this topic in its special report on the rise and fall and rise of manufacturing. The spectacular graphic compares employment by sector in 1947 and 2007 and its most important lesson is a whopper. Manufacturing and agriculture employed one in three workers just after World War II. Today, those sectors employ only one in eight. 

Obama’s SOTU: GM is a Terrible Model for US Manufacturing - video - Perspective from a long-time UAW member, and member of Obama’s 98% (snort): Obama’s talking points on manufacturing really shouldn’t be given a free pass.

Why Jobs in Manufacturing are Better - I support high employment in manufactuging. The reason is that I believe that people are paid more if they work in manufacturing than if they work in other sectors. These labor market rents are not considered by employers when deciding how many people to hire. The aim isn't just a sustainable trade balance but also "good jobs for good wages." The evidence supporting the hypothesis that high wage sectors provide better jobs (not just compensating differentials) to the same workers is overwhelming.  Yes economists argued for decades that this can't be true and that our models show that people are paid (counting non pecuniary amenities) based on their ability. But believing in those models is like believing in Phlogiston. They don't fit the facts. If there are labor market rents, then the logic of propmoting manufacturing employment is clear. People get something for nothing if they switch from employment in services to employment in manufacturing -- well the data show they lose big if they move the other way. This happens when the shift can't possibly be a sign that the manufacturing employer learned that they weren't as able as they seemed, because it happens when whole plants are closed.

Apple and Exchange Rates - Over at The Economic Policy Institute Blog, Josh Bivens thinks something is missing in the big New York Times story on why Apple makes stuff in China instead of America:Yes, I’m gettingboring on this topic, but, exchange rates are by far the single most important determinant of U.S. trade performance, so if the question is “why isn’t X made in the US anymore,” it’s very likely that the answer remains “the dollar is overvalued.” The main point of the New York Times story was that differences in hourly wages are not the primary driver of Apple’s production in China, but rather the available scale, flexibility, supply chain, and the quantity of appropriate labor available. Given that they are specifically countering the notion that wage differences are the issue, it seems quite besides the point to reply that the determinants of wage differences are being ignored. Something we learn from the article is that you should think of Apple’s decision in terms of the labor supply curve for the type of labor they want. It is highly concentrated, medium skilled workers that can scale up extremely quickly. One advantage in China seems to be that it is much cheaper to move quickly along the supply curve. Huge supplies of flexible labor like that don’t exist in the U.S. without offering enough pay to lure them from all over the country. In fact laws here prevent the sort of flexibility you can get in China. This means that when you scale up labor quickly in the U.S., increasing the number of workers must take up relatively more of the slack than increasing worker hours hours. Their labor supply curve is much flatter where they need it to be, and exchange rates aren’t going to flatten the labor supply curve in America.

Apple’s Ethical Blindness Selects for Criminal Suppliers in Fraud-Friendly Nations - William Black - The New York Times is presenting a series of important articles by Charles Duhigg and Keith Bradsher on Apple's overwhelming reliance on foreign suppliers. The first article ("How the U.S. Lost Out on iPhone Work": January 21, 2012) was driven by this anecdote: People will carry this phone in their pocket, [Steve Jobs told his top officers working on the iPhone]. People also carry their keys in their pocket. "I won't sell a product that gets scratched," he said tensely. The only solution was using unscratchable glass instead. "I want a glass screen, and I want it perfect in six weeks.  It is a revealing anecdote, but what it reveals most was not discussed directly by the authors in their articles. What if Jobs cared as much about his suppliers' workers' lives and health as he did about scratches on an iPhone screen? What if he demanded that Apple's suppliers comply with the law "perfect[ly] in six weeks?" The authors provided facts establishing Jobs' selective approach to problems. Scratches had to end within six weeks -- endemic fraud endangering workers' lives and health has persisted for over five years. The endemic fraud will continue as long as Apple selects suppliers through a process that gives fraudulent firms operating in fraud-friendly nations a decisive advantage over honest firms operating in the U.S. The second New York Times article sets forth specific examples of the endemic, persistent anti-employee fraud that Apple's suppliers commit.

Apple’s supply chain problem -  Logistics and supply chain professionals suspect that Apple Inc.’s operating procedure will undergo significant change in order to recover from its recent public-relations disaster.  As reported in the New York Times recently, supplier labor practices were less than transparent. Read New York Times story. The story described employees working excessive hours in unsafe working conditions in plants making products for Apple.  The best way for Apple to reestablish its “sustainability” credentials would be to reconfigure its network of second- and third-tier suppliers of peripherals like screens, flash memory, and microprocessors. These factories are primarily based in more labor-friendly nations like South Korea and Japan.  Indeed, supply chain analysts have been warning U.S. manufacturers sourcing goods from China that they should expect “quality fade” to occur in the weeks preceding the Lunar New Year. This occurs primarily because low-wage workers leave the coastal industrial centers for celebration at their towns and villages in the hinterlands.  The Year of the Dragon came early for several multinationals, however, as evidenced by the revealing news Apple provided its shareholders about labor abuses related to its most popular products.

Facebook Is Responsible for Creating 450,000 Jobs? Really?! - As Facebook prepares to file its IPO documents with the U.S. Securities and Exchange Commission — as soon as Wednesday, according to recent reports — the company is trying to make the argument that it adds more to the economy than a convenient way to waste time at work. By touting the economic activity it has generated and the jobs it’s created, Facebook is also trying to pre-empt criticism that the primary winners from the IPO are insiders who stand to reap billions from the offering. Speaking at the World Economic Forum in Davos, Switzerland, on Sunday, Facebook chief operating officer Sheryl Sandberg touted the company’s job-creating power. “Facebook is barely seven years old and has 3,000 employees — and it has created more than 450,000 jobs in Europe and the U.S.,” she told a CNBC debate audience at the World Economic Forum.  Sandberg was referring to two recent studies purporting to show the economic impact of the social-networking giant, which now boasts more than 800 million users worldwide. Both attempt to describe the impact of the so-called app economy that has sprung up around the social-networking giant.

High-Tech US Corporations Deny Skilled American Workers Jobs Through Abuse of Visa Loophole - In a two-part Times expose, an Apple executive claimed: "We [Apple] don't have an obligation to solve America's problems." That was in response to Apple shipping so many potential US jobs overseas to these slave-wage sweatshops; e.g., "90 percent of the parts of an iPhone are made outside the U.S."But there's another insidious way that the high-tech industry denies jobs to US citizens. It's called the H-1B visa, which allows America's technological firms - and other specialized employers - to bring in foreign employees, frequently at a lower wage package than might be paid to an individual with the same qualifications who is an American citizen. There are many arguments against the program, primarily the allegation that there is generally no actual shortage of US citizens with high-tech skills for the work done by H-1B visa holders.  Of course, the high-tech companies are telling the White House and Congress that they can't find US citizens for the H-1B jobs, but many critics argue that many high-tech companies hire H-1B workers without even offering the positions to Americans. On top of that, after the H-1B workers are sent back to their native nations, there are reports that they are rehired by US companies abroad to start offshore high-tech offices that move more US jobs overseas. In short, the H-1B visa could be seen as an outsourcing training program at the expense of highly skilled US professionals.

The end of lone-wolf capitalism - The new paradigm might have begun at the dawn of the nuclear age with the Manhattan Project.  Dozens of physicists worked collectively, collaboratively and pretty much anonymously. No eu­reka moment, no lone hero, no one person challenging fate, science and bureaucracy.  More recently, the Human Genome Project showed this sort of collective innovation at work. This effort to map the entire human DNA chain was launched by the government — an origin too impersonal to satisfy the entrepreneurial myth we cherish, and a process too slow for some of the researchers. At the time, the news media focused on former National Institutes of Health scientist Craig Venter, who formed a company named Celera to compete to map the genome. Here was the perfect hero — a lone individualist. But the project proved too costly, too intensive, too complex and — when President Bill Clinton declared that genes could not be patented — too unprofitable for a lone wolf to do it all by himself. Venter did soldier on, but like the Manhattan Project, the ultimate success in mapping the human genone was the product of thousands of scientists in hundreds of institutions, in this case scattered around the world.

America's Disastrous Public Sector Construction Plunge - Here's a nice look from Mark Doms at the Department of Commerce at what's been happening with private sector construction spending: Note that these are year-on-year changes, not levels. We built less in 2007 than we built in 2008, then we built even less in 2009, then we built even less in 2010. By 2011 it inched up a tiny bit. So what happened with public sector construction during this time? Well: Instead of surging in 2008 and 2009 like it should have, spending on public sector projects decelerated. But it's hard to orchestrate a huge surge on short notice so perhaps that's forgiveable. But by 2010 and 2011 when there should have been plenty of time to begin executing projects mapped out in 2009, spending was tumbling. What we basically should have done was create a giant slush funds for construction projects. The global investment community lost faith in U.S. mortgage-backed securities and wanted to plow money into super low-yield U.S. treasury bonds. We should have let them do so, and then used the capital raised to create construction slush funds for mayors and governors to tap.

U.S. Highway Trust Fund Faces Insolvency Next Year, CBO Says - The Highway Trust Fund, which pays for U.S. road, bridge and mass-transit projects, faces insolvency “sometime” during the 2013 fiscal year that will begin Oct. 1, according to the Congressional Budget Office. The Highway Trust Fund will probably run a deficit of $10 billion this year, compared with $8 billion in 2011, the Washington-based CBO, which provides Congress with analysis on programs funded by the U.S. budget, said in a report today. The fund, which is financed through fuel taxes, won’t be able to meet its obligations next fiscal year, according to the report. “Today America is one big pothole and we have lots of bridges that are crumbling,” Transportation Secretary Ray LaHood said in a speech in New York yesterday. “The Highway Trust Fund was a great source to build our interstate highway system, but it has been diminished.” Revenue into the trust fund, primarily from U.S. fuel taxes, has declined as cars have become more fuel-efficient and Americans are driving less because of higher gasoline prices, according to the U.S. Department of Transportation. President Barack Obama and Congressional Republicans have ruled out increasing the 18.4-cents-a-gallon gasoline tax, last raised in 1993. The U.S. Chamber of Commerce and Obama’s deficit-reduction commission have recommended increasing the tax by 15 cents a gallon.

No Country Left Behind (NCLB) and The Race to the Slop = The 2009 Report Card for America’s Infrastructure grades 15 categories of infrastructure, including levees (  So how is America doing?  The report notes, “….. for the second time,America’s infrastructure rates a cumulative grade of D.  While not all categories fare as badly or are plagued by the same problems, delayed maintenance and chronic under-funding are contributors to the low grades in nearly every category.” (ibid).   The report goes on: “Grades ranged from a high of C+ for solid waste to a low of D- for drinking water, inland waterways, levees, roads, and wastewater. U.S.surface transportation and aviation systems declined over the past four years, with aviation and transit dropping from a D+ to D, and roads dropping from a D to a nearly failing D-. Showing no significant improvement since the last report, the nation’s bridges, public parks and recreation, and rail remained at a grade of C, while dams, hazardous waste, and schools remained at a grade of D, and drinking water and wastewater remained at a grade of D-. Levees, the newest category, debuted on the 2009 Report Card at a barely passing grade of D-. Just one category—energy—improved since 2005, raised its grade from D to D+.” (

The Price of Growth - Growth. It's what every economist and politician wants. If we get 'back to growth,' servicing debts both private and sovereign becomes much easier. And life will return to normal (for a few more years). There is growing evidence that a major US policy shift is underway to boost growth. Growth that will create millions of new jobs and raise real GDP. While that's welcome news to just about everyone, the story is much less appealing when one understands the cost that come with such growth. Are we better off if a near-term recovery comes at the expense of our future security? The prudent among us would disagree.  Since 2009, though not well advertised, Washington has been pursuing a quiet policy to boost exports in nearly every sector, throwing investment capital at port and rail infrastructure, and getting the message out to regulators and state government. Now, after some very notable gains in which exports have advanced to nearly 14% of GDP, the President in his State of the Union Speech made it clear: The US would no longer cede a labor and manufacturing advantage to the rest of the world.

Economic growth not enough to sharply reduce unemployment -  The economy grew late last year at a pace that in normal times would suggest it’s healthy. But the 2.8 percent annualized growth rate in the October-December quarter — the fastest pace since the spring of 2010 — isn’t being cheered by most economists or investors. That’s because growth would need to be much stronger to sharply reduce unemployment. And signs in the data point to slower growth ahead. For all of last year, the economy grew just 1.7 percent. That was barely more than half the growth in 2010. The outlook for all 2012 is slightly better. The Federal Reserve estimates growth of roughly 2.5 percent for the year. Though the economy has picked up and is far stronger than during the Great Recession, unemployment is still a high 8.5 percent. Many people remain reluctant to spend more or buy homes. Many employers are still hesitant to hire. For the final three months of 2011, Americans spent more on vehicles, and companies restocked their shelves at a robust pace. But overall growth last quarter — and for all of last year — was held back by the sharpest cuts in annual government spending in four decades, the Commerce Department said Friday.

The Path to a More Secure Economic Future - President Obama’s State of the Union address was largely devoted to explaining the administration’s plans to provide a more secure economic future. As president Obama made clear is his speech and in his follow-up along the campaign trail, a key part of the administration’s strategy is to revive manufacturing in the US. At first I was skeptical that this could work. But it does appear that an outsourcing reversal is underway, and that production costs in China and other countries will increase as their development progresses. This will reduce the advantages from offshore production, so perhaps there’s hope after all. It’s certainly worth a try. Looking forward, if things remain as they are it’s difficult to see anything but struggles for the working class. We have rising inequality, stagnant or even falling incomes for most households, and declining “good job” opportunities due to offshoring and technological advances, particularly for those with just a high school education. The result is a “dangerous” decline of the middle class. I am often asked how to restore jobs that provide hope and opportunity, and like most economists, I mutter something about better education and hope for the best. But the truth is that economists do not have good answers to this problem.

The 30 Fastest Growing Jobs In America - It's jobs week in America.  Yesterday, ADP told us that US companies added 170k jobs in January.  Today, Challenger Gray tells us about job cuts and the Bureau of Labor Statistics (BLS) tells us about initial unemployment claims.  Tomorrow we get the official BLS nonfarm payroll and unemployment rate figures through January 2012. But all of this week's jobs data is short term in scope. The Bureau of Labor Statistics just published it's employment projections for 2010 to 2020, which includes a list of the 30 jobs that will grow fastest through 2020. Eleven of the 30 jobs require a bachelor's degree or higher. Also, four of the top five fastest growing jobs require less than a high school degree. We ranked the jobs based on percentage growth from 2010 to 2020.  We also include the number of jobs to be added during that period as well as the typical education needed to get the job.

United States of Health Care - Job growth in the health care industry has been going gangbusters during the recession and its aftermath, and the gains are likely to keep coming. That’s according to new employment projections from the Bureau of Labor Statistics. The bureau estimates that the country will add 5.6 million health care and social assistance jobs in the current decade, an increase of about 34 percent. Here’s a breakdown of estimated job changes from 2010 to 2020: The industry with the biggest projected job losses between 2010 and 2010 is the federal government, which is expected to eliminate a net 372,000 jobs. At the occupational level, the positions with the fastest projected growth are registered nurses (expected to add 712,000 jobs), retail sales workers (707,000), home health aides (706,000) and personal care aides (607,000). Most of the occupations with the highest growth, like these, are service jobs — and service jobs that need to be performed in person, as opposed to over the phone or Internet. Think of dental hygienists, veterinary technicians and family therapists. After all, jobs that can be automated (for example, file clerks) or relocated somewhere cheaper (for instance, sewing machine operators) probably will be. Another interesting section of the report looks at the skill sets that will be in the  highest demand in 2020. In raw numbers, workers with no education beyond a high school diploma will have the highest job growth.

American Airlines Wants to Terminate Its Pension Plan, Lay Off 13,000 - Details of the American Airlines bankruptcy are emerging.  And the details are that AMR wants all of its creditors to take a deep haircut, especially the workers:  The company aims to cut labor costs 20% under bankruptcy protection, and will soon begin negotiations with its three major unions. Some management jobs would also be cut. AMR also proposes to end its traditional pension plans. The move has been strongly opposed by the airline's unions and the U.S. pension-insurance agency. CEO Thomas Horton said cost-cutting will include restructuring debt and aircraft leases, grounding older planes, and changing labor contracts. This is just the opening salvo in what promises to be a bruising negotiation with the unions.  It's not clear that the company actually expects to be allowed to terminate the pension plan.  But the threat certainly gives them leverage with the unions, especially the pilots, because if the plan is terminated and taken over by the Pension Benefit Guaranty Corp, the payouts will be capped at around $50,000 a year--far less than pilots get from the current plan.

Jobless Claims Continue To Trend Lower - Reading this morning's latest weekly update on jobless claims inspires the question: When will we see evidence that a new recession is here, or lurking in the near future? The answer: Not today. If there's a clear sign that the economy's set to tumble, it's not obvious in last week's new applications for unemployment benefits. In fact, this leading indicator continues to tell us that the labor market is slowly improving. New claims dropped by 12,000 to a seasonally adjusted 367,000 last week. One number doesn't tell us much, of course, but it's hard to dismiss the trend. As the chart below shows, new jobless claims have been zig-zagging lower for months. As of last week, claims are near a four-year low. You can't rely on any one indicator for business cycle analysis, but jobless claims have a fairly good record over the last four decades of providing an early warning sign of recessions. The fact that the trend in new claims are showing no signs of rising can't be accepted as the last word on what comes next, but this indicator surely increases the pressure on economists who argue that there's a recession in our midst.

Fewer Seek Unemployment Aid as Job Market Improves - The number of people seeking unemployment aid fell last week, a sign that companies are cutting fewer jobs and likely stepping up hiring. The Labor Department says weekly unemployment applications fell 12,000 to a seasonally adjusted 367,000. The four-week average, a less volatile measure, dropped for the third straight week to 375,750. That’s the second-lowest level for the four-week average since June 2008. When applications stay consistently below 375,000, it usually signals that hiring is strong enough to lower the unemployment rate. The report comes a day before the government will issue its jobs report for January. Economists forecast that the report will show that employers added 155,000 jobs last month, while the unemployment rate remained at 8.5 percent.

Vital Signs: Falling Jobless Claims Decline - Fewer Americans are being laid off than in previous months as the labor market strengthens. The number of workers filing new claims for unemployment benefits—an indicator of the pace of layoffs—fell by 12,000 last week to a seasonally adjusted 367,000. That’s well below the 400,000-plus new claims filed weekly in the summer and early fall. As the economy has shown signs of firming, employers have become more confident and stepped up hiring.

What's at Stake in Friday's Jobs Report - The economic pie is growing, but the share going to American workers is at a record low. Friday’s jobs report is expected to show that Americans are not on their way to getting a bigger cut. Much is at stake in the Labor Department report, which economists predict will reflect unemployment stagnating at 8.5 percent in January.  The economy has been growing now for 10 straight quarters. It has even made up the ground lost from the recession, and the United States now churns out more goods and services than it did before the downturn began in 2007. But that output is being produced with six million fewer workers, despite population growth. As a result, the share of income produced in the country that is flowing to workers’ bank accounts has been steadily shrinking.Of every dollar of income earned in the United States in the third quarter of 2011 — the latest period for which data is available — just 44 cents went to workers’ wages and salaries. That is the smallest share since the government began keeping track in 1947, according to the Commerce Department, and it continues a trend that predates the Great Recession. The average share of national income going to wages and salaries over the last 50 years has been about 57.6 cents on the dollar.

ADP: Private Employment increased 170,000 in January - ADP reportsEmployment in the U.S. nonfarm private business sector increased by 170,000 from December to January on a seasonally adjusted basis. The estimated advance in employment from November to December was revised down to 292,000 from the initially reported 325,000.  Employment in the private, service-providing sector rose 152,000 in January, and employment in the private, goods-producing sector increased 18,000 in January, while manufacturing employment increased 10,000. This was at the consensus forecast of an increase of 172,000 private sector jobs in January. The BLS reports on Friday, and the consensus is for an increase of 135,000 payroll jobs in January, on a seasonally adjusted (SA) basis.

ADP: Job Growth Slows In January - Job growth slowed in January, according to ADP. It wasn't a cataclysmic slowdown, but it's enough to keep the debate about recession risk bubbling. U.S. nonfarm private sector employment increased by a seasonally adjusted 170,000 last month, according to the ADP Employment Report. That's down from the 292,000 gain in December. It's clear that the labor market is still expanding, and that's one more favorable trend for the optimists. But the magnitude of the downshift is hardly a clear signal of hope about the future. At the very least, the outlook for the business cycle is a bit more hazy in the wake of this report. As the chart below shows, today's ADP update implies that the Labor Department's official estimate of nonfarm payrolls for January will also deliver mildly disappointing news. The consensus forecast for Friday's update from the government for private payrolls anticipates a mild 168,000 rise vs. 212,000 reported for December, according to

Challenger: Job cuts increased in January -- The U.S. job market stumbled out of the gates in 2012 -- at least according to one report. Planned job cuts for the month of January totaled 53,486, according to a report from outplacement consulting firm Challenger, Gray & Christmas. That's a 28% increase from December and the highest total since the 116,000 cuts announced in September.  Leading the way were financial firms and retailers, which announced lay-offs totaling 7,611 and 12,426, respectively. Cuts of seasonal retail workers typically don't show up in the report, Challenger said. The Challenger report follows data Wednesday from payroll processor ADP saying that the private sector added 170,000 jobs in January, down sharply from 292,000 in December.  The reports from Challenger and ADP come ahead of the government's highly anticipated monthly jobs report, due Friday, though their figures aren't always reliable predictors of the government's numbers. Economists surveyed by CNNMoney expect the Labor Department's data to show that 130,000 jobs were added last month, with 150,000 from the private sector and a loss of government jobs. That would mark a sharp slowdown in hiring versus December, when 200,000 jobs were created.

U.S. Unemployment Up, to 8.6% in January - U.S. unemployment, as measured by Gallup without seasonal adjustment, increased slightly to 8.6% in January from 8.5% in December, but was down from 9.9% in January a year ago. The percentage of U.S. employees who are working part time but want full-time work increased sharply to 10.1% in January, from 9.8% in December. The January reading is also substantially higher than the 9.1% of January 2011 and is the highest percentage for this segment of the workforce since Gallup began monitoring it in January 2010. Underemployment, a measure that combines the percentage of workers who are unemployed with the percentage working part time but wanting full-time work, surged to 18.7% in January. This is a worsening from the 18.3% of December but is still below the 19.0% of a year ago.   The U.S. government's January unemployment rate that it will report Friday morning will be based largely on mid-month conditions. At mid-month, Gallup reported that its unemployment rate had declined to 8.3%, based on data collected through the 15th of the month.

January Employment Report Revisions and Issues - Tomorrow (Friday) the BLS will release the January Employment Situation Summary at 8:30 AM ET. Bloomberg is showing the consensus is for an increase of 135,000 payroll jobs in January, and for the unemployment rate to remain unchanged at 8.5%. Here are a few revisions and issues to look for tomorrow: • Establishment Data: "With the release of January 2012 data on February 3, 2012, the Current Employment Statistics (CES) survey will introduce revisions to nonfarm payroll employment, hours, and earnings data to reflect the annual benchmark adjustment for March 2011 and updated seasonal adjustment factors. Not seasonally adjusted data beginning with April 2010 and seasonally adjusted data beginning with January 2007 are subject to revision." The preliminary benchmark was for an increase of 192,000 total nonfarm payroll jobs, and 140,000 private sector jobs as of March 2011. The annual revision is benchmarked to state tax records, and usually the preliminary estimate is pretty close to the final benchmark estimate. This will be the first upward revision since 2006. Household Survey: "Effective with the release of The Employment Situation for January 2012 scheduled for February 3, 2012, population controls that reflect the results of Census 2010 will be used in the monthly household survey estimation process.

Trim Tabs Fearless Forecast: US Payrolls +45,000 Jobs; Analysis of Jobs, Wages, GDP, Weekly Claims, Housing; Forced Lifestyle Changes; Boomer Drag on GDP Trends - Last month Trim Tabs estimated December payroll growth was 38,000. ADP estimated payroll growth at 325,000. I estimated +78,000. The BLS reported +200,000. Was this a miss by Trim Tabs? ADP? Me? Here is the correct answer, whether or not you believe the BLS: I don't know and no one else does either. The BLS numbers are subject to massive revisions. Literally millions of jobs are revised away (or added) months, even years later. December and January are typically the hardest months to estimate, subject to huge seasonal adjustments and later revisions. Economic Turning Points Economic turning points compound the problem greatly. The BLS readily admits its birth-death adjustments are hugely wrong at turning points. Are we at an economic turning point now? I think so, and a turn in supporting data is all I need to convince me. If so, the BLS can be off on its numbers by a great deal.

January Employment Report: 243,000 Jobs, 8.3% - From the BLSTotal nonfarm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Job growth was widespread in the private sector, with large employment gains in professional and business services, leisure and hospitality, and manufacturing. Government employment changed little over the month. ... Private-sector employment grew by 257,000 ...The change in total nonfarm payroll employment for November was revised from +100,000 to +157,000, and the change for December was revised from +200,000 to +203,000. [and on benchmark revision] The total nonfarm employment level for March 2011 was revised upward by 165,000. This was the first positive benchmark revision since 2006. There were several revisions, and I'll have graphs soon, but this was solidly above expectations.

Employment Rate Down 0.2% to 8.3% on 243K New Jobs - Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics: Total nonfarm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Job growth was widespread in the private sector, with large employment gains in professional and business services, leisure and hospitality, and manufacturing. Government employment changed little over the month.  Today's numbers are better than the consensus, which was for 155K new nonfarm jobs and an unemployment rate of 8.5%.'s own estimate was closer at 225K nonfarm jobs and an 8.4% rate. The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948.  The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. The January number is 3.6% — unchanged from last month. This measure gives an alternative perspective on the relative severity of economic conditions. As we readily see, this metric remains significantly higher than the peak in 1983, which came six months after the broader measure topped out at 10.8%.

Employment Situation  (w/ 7 graphs) The employment report was the strongest this cycle with payroll employment rising 243,000. The household survey shows a gain of 843,000 but almost 250,000 of that is due to the new population adjustments so the net result is an increase of 631,000. This is what is in the chart, but the January observation is not comparable to the 2011 observations. Moreover, hours worked rose 0.6% as compared to the 0.2% norm over most of this cycle.In January government employment was little changed as compared to the 276,000 drop in government employment last year. Despite all the talk about uncertainty employment gains this cycle continue to be better than last cycle. The civilian employment/population ratio was little changed last month as it has been for months so the drop in the unemployment rate continued to stem more from the labor force falling rather than employment rising. But hours worked for nonsupervisory workers rose 0.6% in January, the strongest gain this cycle. Average hourly earnings only rose 0.2% and the year over year change in average hourly earnings is now 1.9%, the smallest increase on record. The combination of very strong gains in hours worked and very weak average hourly earnings average weekly earnings appear to be bottoming.

Good News All Around In January Jobs Report - Since August, the unemployment rate has dropped from 9.1% to, as of the last report in January, 8.5%. Good news, without question, although incomplete given the fact that several of those monthly drops occurred because the labor force participation rate fell as people dropped out of looking for work. Additionally, the monthly jobs reports weren’t really great news since the net jobs numbers was far below where it needs to be in order for the jobs market to really recover. You can’t say that this month, though, because the January jobs report is good news all around, and the best jobs report we’ve seen in more than three years: The pace of job creation surged in January, with the US economy generating 243,000 new positions while the unemployment rate dropped to 8.3 percent, according to government data released Friday. Both numbers were far better than consensus, which expected a growth of 150,000 jobs and a steady unemployment rate of 8.5 percent.The overall work week remained unchanged at 34.5 hours while wages rose an average of four cents an hour to $23.29. Job gains have been concentrated primarily in the service sector, particularly in retail and the food and beverage industries. Warehousing, manufacturing, mining and health care also have participated.

Private Payrolls Post A Surprisingly Strong Gain In January - Today's employment report from the U.S. Labor Department delivered a hefty blow against the idea that recession risk is high for the immediate future. Private nonfarm payrolls rose by a net 257,000 in January (total nonfarm payrolls rose by a slightly lower 243,000 because of a 14,000 decrease in the government's workforce). That's the strongest monthly increase for the private sector since last April and a tidy increase over December's revised gain of 220,000. Economists overall had been expecting a considerably lower increase of well under 200,000 for private payrolls for January. As I've been discussing for months, the falling trend in new weekly jobless claims has been signaling for some time that the labor market would continue to heal and perhaps grow at a moderately faster pace. Today's jobs report certainly lends persuasive support for that view.  Thanks to January's rise in jobs, the unemployment rate last month fell to 8.3% from 8.5% in December. That's the lowest jobless rate in nearly three years. It's still high, but at least it's moving in the right direction, and perhaps with some momentum. Indeed, as recently as last September the jobless rate was 9.0%. Even better, the growth in private-sector employment last month was broadly based. The cyclically sensitive goods-producing sector, for instance, posted a net 81,000 rise in January, up from December's encouraging 71,000 increase. Meanwhile, the all-important service sector, which represents the lion's share of the nation's labor force, enjoyed a robust net gain of 176,000 positions last month, building on December's 149,000 pop.

Happy new year - Is the jobs recovery finally for real? It certainly feels that way. Before getting into the caveats, let's look at January's solid employment report. Non-farm employment jumped 243,000, or 0.2%, from December, the best in nine months. The unemployment rate fell to 8.3%, a three-year low, from 8.5%. There were no obvious asterisks marring the positive tone of the report. Payroll gains were broad based. Construction rose 21,000, not surrendering any of its mild-weather gains of December. Manufacturing jumped 50,000, corroborating other signs of strength in the industrial sector. Government employment is becoming less of a drag: it fell only 14,000. Prior declines in the unemployment rate were often the result of people dropping out of the labour force and thus no longer being counted as unemployed. Not this time. In January the number of employed people jumped 631,000, after adjusting for new population estimates. That’s according to the household survey which is used to calculate the unemployment rate, and often produces different results from the bigger and better-known payroll survey.

Video: Labor Market Seeing Sustained Growth - WSJ Staff - The News Hub panel provides comprehensive coverage of the improving U.S. employment picture. The Labor Department reported 243,000 non-farm payroll jobs were added in January.

Fantastic news on jobs - What mean reversion? This is two fantastic jobs reports back-to-back, with the second even better than the first. You thought the December jobs report was great? I certainly did — but it’s been revised, now, and it’s even better than was first reported. And the January report is positively glowing. Unemployment was just 8.3% in January, marking three successive months where it fell by 0.2 percentage points. This time last year, there were 13.9 million unemployed; that figure has now dropped by 1.2 million people, or 8.3%. That’s really impressive for an economy which is hardly booming. And it’s a real decline, too: the employment-to-population ratio is just as high as it was a year ago, even as the total population has risen by 3.6 million people.  One glance at these charts is enough to show that there’s still a very long way to go. Unemployment is far above where it should be; payrolls need to stay strong for a long time to make up for all the jobs lost during the recession; much more of the population needs to be working; and, most importantly, we need to do something about the stubbornly large ranks of the long-term unemployed. But none of these things can be addressed in a single month: creating jobs takes time. And what we’ve been seeing over the past couple of months is an economy moving smartly in exactly the right direction.

Good News: Unemployment Falls to 8.3% as U.S. Adds 243,000 Jobs - The U.S. labor market continued to add new jobs in January, pushing the unemployment rate to the lowest level in nearly three years, in a sign that the economy is recovering from the worst recession in decades. The Bureau of Labor Statistics said January’s unemployment rate fell to 8.3% from 8.5% in December as the economy added 243,000 jobs, a much better result than the 125,000 to 150,000 jobs that many analysts had been expecting. The overall trend trend in the report pointed to strengthening momentum in the U.S. economy. The number of unemployed persons fell to 12.8 million, the lowest number since February 2009, which was President Obama’s first full month in office. Professional and business services added 70,000 job, while the manufacturing sector increased by 50,000. The construction sector, meanwhile, added 21,000 new jobs. “This is the strongest jobs report seen through the entire recovery,” Justin Wolfers, an economist at the University of Pennsylvania, wrote in a Twitter message. “It’s rare that all indicators point so strongly in the same direction.”

Nonfarm Payroll +243,000 ; Unemployment Rate 8.3%; Those Not in Labor Force Rose an Amazing 1,177,000 - Quick Notes About the "Falling" Unemployment Rate -

  • In the last year, the civilian population rose by 3,565,000. Yet the labor force only rose by 1,145,000. Those not in the labor force rose by 2,420,000.  
  • In January, the Civilian Labor Force rose by 508,000.  
  • In January, those "Not in Labor Force" rose by an amazing 1,177,000. If you are not in the labor force, you are not counted as unemployed.  
  • Participation Rate fell .3 to 63.7%, taking out a 1984 low  
  • Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Some of those labor force numbers are due to annual revisions. However, the point remains: People are dropping out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low. Here is an overview of today's release.

  • US Payrolls +243,000 - Establishment Survey
  • US Unemployment Rate Declined .2  - Household Survey
  • Average workweek for all employees on private nonfarm payrolls was +.1 to 34.4 hours
  • The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged higher 0.1 hour to 33.7 hours in November.
  • Average hourly earnings for all employees in the private sector rose by 4 cents to $23.24

Messages from the January Employment Release: Accelerating Improvement for Now - Employment growth accelerates along several dimensions: nonfarm payroll, an alternative measure of nonfarm payroll, private employment, hours, and civilian employment (report here). However, JEC vice chairman Brady (JEC-Republicans) states in a press release: "Job Numbers Mask Underlying Job Weakness."  Not only did NFP employment increase by 243,000, benchmark revisions going back four years (although important revisions were for the last year) raised the December 2011 estimated employment by 266,000. Trend employment continued to rise. This upward shift was also reflected in the research series that is calculated by using household data to generate a series conforming to the NFP concept; the changes are largely due to the application of new population controls (see BLS, Appendix). More on the distinction between the official and research series at here. With the government shedding jobs, it is perhaps more useful to refer to private employment for underlying labor market trends.

Good News on Employment - With only a minimal drag from the government sector, the February employment report shined on the back of a solid gain in private sector hiring: The last couple of months look more like the optimistic numbers seen early in 2011 before the mid-year slowdown raised the specter of another recession. As has been widely noted, there is little to complain about in this report. To be sure, in many respects we are still deep in the hole. Long-term unemployment remains a challenge: Wage growth is meager: And the employment to population ratio remains sits a levels not seen since the early 1980s: Still, as noted earlier, these issues should be alleviated if job growth is sustained. And as a precursor to such improvements, the unemployment rate is falling, and at a reasonably quick pace: What will this mean for the Fed? As I discussed earlier, the unemployment rate looked to be the weak link in the Fed's most recent forecast of 8.2-8.5% by year end. We are at 8.3% in January, and unless either waves of workers re-enter the job market or the economy shifts gears dramatically soon, we will be easily below 8% in just a couple of months. Under such a trajectory, I have to imagine that another round of QE, as well as the Fed's interest rate projection, are not sure bets at all.

Better - Krugman - No, not me — nothing like a 13-hour flight from Moscow to Houston to treat a cold. But the jobs report was definitely the best news we’ve had in a while. The usual caveats apply: it could be a blip, it might be an artifact of seasonal adjustment, etc.. Also, the gap remains huge. Suppose that we need 100,000 jobs a month to keep up with population growth, and that we’re 10 million jobs in the hole — both conservative estimates. Then we need about 7 years of growth at this rate to restore full employment. Alternatively, note that this month’s job gain roughly equals the average job gain during the Clinton years — all 8 of them. And unemployment at the start of that run was higher than it is now.

Employment: Some good news, some bad news - Atlanta Fed's macroblog - Comparisons can be useful in determining where the economy is at any given point in time, and today's Employment Situation report from the U.S. Bureau of Labor Statistics provides another opportunity to do just that. According to that report, the U.S. economy added 243,000 nonfarm payroll jobs in January 2012. But total nonfarm employment is still 5.6 million lower than at the start of the last recession (December 2007). For additional comparisons, more than 1 million fewer people filed initial unemployment insurance claims during the last week of January 2012 than during the last week of January 2009 (at the height of the recession). However, 55,000 more people filed initial claims during the last week of January 2012 than during the last week of January 2007 (before the recession started). When examining layoffs, more than 400,000 fewer workers were laid off or discharged during November 2011 (according to the most recent data) than during the height of the recession in November 2008. Nonetheless, there were roughly a million fewer job openings and hires during November 2007 (before the recession started). Nominal average hourly earnings of wage and salary workers were about two dollars (9.6 percent) higher in January 2012 than around the start of the recession (January 2008). Nonetheless, real average hourly earnings (controlling for inflation) were only eight cents (0.8 percent) higher over the same time period.

Did Economy Really Create 500,000 Jobs? - According to one little-followed measure, the economy created nearly 500,000 jobs last month — about twice as many as the government’s official figure of 243,000. To gauge employment, the Labor Department uses two separate surveys. The jobs figures come from establishment payrolls, while the unemployment rate comes from a survey of U.S. households. But the Labor Department also releases jobs figures from the household survey that it has adjusted (by subtracting farm workers and so on) to reflect the same sort of jobs the establishment survey covers. By this count, the economy added 491,000 jobs last month. In fact, the household gauge shows that the economy didn’t erase quite as many jobs in the recession as the establishment survey did, and that there’s been a significantly stronger rebound in employment. But why? Both of the Labor Department surveys have downsides. The sample size for the household data is much smaller than the establishment figures, for example. But the establishment figures can’t always keep up with shifts in the makeup of U.S. businesses. So economists generally think the establishment figures are better, but sometimes argue that the household ones are better at picking up turning points in the labor market.

Wow. But Is the Number Real? - How many jobs did the American economy add in January? The Labor Department estimated on Friday that the economy gained 243,000 jobs. The department also estimated that the economy lost 2,689,000 jobs in the month. The difference in the two numbers is in seasonal adjustment. Employment always falls in January, as temporary Christmas jobs end. So the government applies seasonal adjustment factors in an effort to discern the real trend of the economy apart from seasonal fluctuations. The actual survey showed the big loss in jobs. The seasonal adjustments produced the reported gain of 243,000 jobs. A reason to doubt the number is that there has been a tendency in this cycle for the seasonal factors to overstate moves, in both directions. Labor mobility is down, as fewer workers quit to seek better jobs and employers both hire and fire fewer people than they used to do. If the seasonal adjustment was too large, then the gain should be smaller. But there are plenty of signs that gains are real. Consider the annual change in nonfarm payrolls. Seasonal factors should have no effect there. Over the last 12 months, the economy added nearly two million jobs, more than in any similar period since early 2007. For the 12 months, here are some of the changes. Total +1.5% Private Sector +2.1%
Construction +2.1%
Manufacturing +2.0%
Information Services -1.7%
Financial Activities +0.3%
Professional and Business Services +3.5%
Education and Health Services +2.1%
Leisure and Hospitality +2.7%

Government -1.2%
Federal government -1.5%
State governments -1.4%
Local governments -1.1%

January Jobs Report: Good News for the Economy, Bad News for the Pessimists - Some Obama opponents are struggling to find a cloud in the silver lining of January’s jobs numbers, which estimated that there was a 243,000-job boost and a big drop in the unemployment rate, from 8.5% to 8.3%, last month. Their biggest gripe focuses on the size of the labor force: As the unemployment rate has trended down over the last few months, anti-Obama commentators have argued that the official percentage for those without jobs is deceptive because the Bureau of Labor Statistics doesn’t count those who have stopped looking for work. In Friday’s report, they found a sharp increase in that group: More than 1.2 million people joined the non-job seeking pool of working-age Americans last month. I was ready to join the pessimists Friday morning when I saw the sharp drop in the unemployment rate, but for a different reason. The January unemployment report, I had been forewarned by BLS, was the first to be based on models using 2010 census figures. (All these numbers are guestimations based on surveys of smaller samples taken around the country). A big shift up or down in the unemployment rate, I thought, could be explained by the change in the overall population of the country, reflected in the census numbers.

Strong Job Growth Leads to Drop in Black/Hispanic Unemployment, by Dean Baker: The Labor Department reported that the unemployment rate fell to 8.3 percent in January, bringing its drop over the last year to 0.8 percentage points. African Americans in particular saw an especially sharp decline in unemployment, with their overall rate falling by 2.2 percentage points to 13.6 percent, the lowest level since March of 2009. The unemployment rate for African American men over age 20 fell by 3.0 percentage points to 12.7 percent, the lowest level since November of 2008. The drop for women over age 20 was 1.3 percentage points to 12.6 percent. The unemployment rate for Hispanics dropped by 0.5 percentage points to 10.5 percent, the lowest since January of 2009. These numbers are erratic and may be partially reversed in future months. The gains for whites were more modest, with the overall unemployment rate edging down by 0.1 percentage points to 7.4 percent. The unemployment rate for white men over age 20 fell by 0.2 percentage points to 6.9 percent, while it was unchanged for women over age 20 at 6.8 percent. The unemployment rate for all men and women over age 20 is now the same at 7.7 percent, the first time they have been equal since the recession began in December, 2007.

Here's The TRUTH About The Massive, Million Plus Spike In People Not In The Labor Force - There's a ton of hype today about the 1 million+ spike in people not in the labor force, and whether it undermines the good jobs data. The chart is actually alarming at first blush. Yow! Is someone cooking the books? Was there a gigantic exodus of people out of the workforce? Hate to burst your conspiracy theories, but no. As SilverOz at The Bonddad Blog points out, the BLS' own announcement points out that starting this year, brand new population data from the 2010 census is being used: "Effective with data for January 2012, updated population estimates which reflect the results of Census2010 have been used in the household survey. Population estimates for the household survey are developed by the U.S. Census Bureau. Each year, the Census Bureau updates the estimates to reflect new information and assumptions about the growth of the population during the decade. The change in population reflected in the new estimates results from the introduction of the Census 2010 count as the new population base, adjustments for net international migration, updated vital statistics and other information, and some methodological changes in the estimation process. The vast majority of the population change, however, is due to the change in base population from Census 2000 to Census 2010. So there you go. New population data is in. Thus this number went up.

Employment: The "Not in Labor Force" actually declined in January - Some readers sent me a link to some terrible analysis that argued over 1 million people left the labor force in January. I pointed out the error. Apparently Rick Santelli at CNBC made the same mistake and reads the wrong blogs! The Bonddad blog points out the error: No Rick Santelli and Zero Hedge, One Million People Did Not Drop Out of the Labor Force Last Month (CR note: I never read zero).  This does bring up an important point: The BLS updated the population estimates today based on the 2010 Census. I mentioned this in the preview yesterday and in the posts this morning. For whatever reason, the Census Bureau doesn't go back and revise the earlier population estimates, but they do provide analysis of the changes in several key numbers if the population estimate hadn't been changed. Below is the table from the BLS: With the 2010 population controls, the "not in labor force" appeared to have increased by 1.2 million in January, and the working age population jumped 1.7 million. That didn't happen last month; the numbers changed because of the new population estimate. This does suggests there are 1.2 million more people out of the labor force than we originally thought, but that is because the working age population is larger than previously estimated. As the BLS points out, without the population change the "not in labor force" actually declined.

Implied Unemployment Rate Rises To 11.5%, Spread To Propaganda Number Surges To 30 Year High - Sick of the BLS propaganda? Then do the following calculation with us: using BLS data, the US civilian non-institutional population was 242,269 in January, an increase of 1.7 million month over month: apply the long-term average labor force participation rate of 65.8% to this number (because as chart 2 below shows, people are not retiring as the popular propaganda goes: in fact labor participation in those aged 55 and over has been soaring as more and more old people have to work overtime, forget retiring), and you get 159.4 million: that is what the real labor force should be. The BLS reported one? 154.4 million: a tiny 5 million difference. Then add these people who the BLS is purposefully ignoring yet who most certainly are in dire need of labor and/or a job to the 12.758 million reported unemployed by the BLS and you get 17.776 million in real unemployed workers. What does this mean? That using just the BLS denominator in calculating the unemployed rate of 154.4 million, the real unemployment rate actually rose in January to 11.5%. Compare that with the BLS reported decline from 8.5% to 8.3%. It also means that the spread between the reported and implied unemployment rate just soared to a fresh 30 year high of 3.2%. And that is how with a calculator and just one minute of math, one strips away countless hours of BLS propaganda.

Graphs: Unemployment Rate, Participation Rate, Jobs added - There were some revisions this morning to previous employment reports. This included the annual benchmark revision to state unemployment insurance (UI) records, and benchmarking the population controls to the 2010 Census data and an update to seasonal factors. The benchmark revision increased total employment in March 2011 by 165,000 jobs - the first positive benchmark revision since 2006. This graph shows the jobs added or lost per month (excluding temporary Census jobs) since the beginning of 2008.Job growth started picking up early last year, but then the economy was hit by a series of shocks (oil price increase, tsunami in Japan, debt ceiling debate) - and now it appears job growth is picking up again. The second graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate declined to 8.3% (red line). The Labor Force Participation Rate declined to 63.7% in January (blue line). This is the percentage of the working age population in the labor force and is at the lowest since the early '80s. The decline in the participation rate is not good news even though it is pushing down the unemployment rate. The Employment-Population ratio was unchanged at 58.5% in January (black line).The third graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

Employment Summary, Part Time Workers, and Unemployed over 26 Weeks - This was a solid report and well above expectations. However there is still a long ways to go for a healthy labor market with solid wage gains.  There were 243,000 payroll jobs added in January, with 257,000 private sector jobs added, and 14,000 government jobs lost. The unemployment rate fell to 8.3% from 8.5% in December. U-6, an alternate measure of labor underutilization that includes part time workers and marginally attached workers, declined to 15.1%. This remains very high - U-6 was in the 8% range in 2007. The annual benchmark revision indicated 165,000 more payroll jobs in March 2011; the first positive benchmark revision since 2006. The BLS also adjusted the population control by the Census 2010 data. This resulted in a large increase in the labor force and an even larger increase in the "not in the labor force" category.  However - in the not good news category - the participation rate declined to 63.7% and the employment population ratio was unchanged in January at 58.5%. The average workweek was unchanged at 34.4 hours, and average hourly earnings increased 0.2%. "The average workweek for all employees on private nonfarm payrolls was unchanged in January. ... In January, average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents, or 0.2 percent, to $23.29. Over the past 12 months, average hourly earnings have increased by 1.9 percent." This graph shows the number of workers unemployed for 27 weeks or more.  According to the BLS, there are 5.518 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 5.588 million in November.

Still losing the unemployment war - Mohamed A. El-Erian  - While the numbers have markedly improved over the past year, too much of the commentary has been overly partial and, sometimes, dangerously misleading — a situation that is likely to grow worse in the run-up to the November elections. My problem is not with what the data reveal about the economy’s performance. The consensus on this has been correct: After massive destruction, the United States has been generating jobs at a healthier rate, albeit one that is still too anemic given the huge employment shortfalls caused by the 2008-09 global financial crisis. The pace of job creation is certainly picking up but, as yet, is insufficient to overcome our unemployment crisis.  The focus on the headline jobs number — be it the estimate of new jobs created (a strong 243,000 in December, according to Friday’s report) or the measure of the unemployment rate (down to 8.3 percent, a three-year low) — is understandable. And the importance paid to those summary statistics will naturally increase as analysts seek to draw implications for the outcome of the November presidential election. Meanwhile, attention is diverted from something critical to the future of the economy — namely, what is happening to the composition of U.S. joblessness. The composition indicators have been flashing yellow, if not red, for a while. With 43.9 percent of the unemployed (5.5 million people) out of work for 27 weeks or more, today’s America faces the unusual challenge of “long-term unemployment”: The longer people are unemployed, the harder it is for them to return to the labor force at the same level of productivity and earnings, and the poorer the prospects for national competitiveness and prosperity.

America's Jobs Deficit - Robert Reich - The most significant aspect of January’s jobs report is political. . But as a practical matter the improvement is less significant for the American work force. President Obama’s only chance for rebutting Republican claims that he’s responsible for a bad economy is to point to a positive trend. Voters respond to economic trends as much as they respond to absolute levels of economic activity. Under ordinary circumstances January’s unemployment rate of 8.3 percent would be terrible. But compared to September’s 9.1 percent, it looks quite good. And the trend line – 9 percent in October, 8.6 percent in November, 8.5 percent in December, and now 8.3 percent – is enough to make Democrats gleeful.  But the U.S. labor market is far from healthy. America’s job deficit is still mammoth. Our working-age population has grown by nearly 10 million since the recession officially began in December 2007 but many of these people never entered the workforce. Millions of others are still too discouraged to look for work. The most direct way of measuring the jobs deficit is to look at the share of the working-age population in jobs. Before the recession, 63.3 percent of working-age Americans had jobs. That employment-to-population ratio reached a low last summer of 58.2 percent. Now it’s 58.5 percent. That’s better than it was, but not by much. The trend line here isn’t quite as encouraging.

The Non-Farm Payrolls Report: Air Brushing History - – Nominal Work Force for Nominal GDP - Back in Stalinist Russia, they had whole departments of people that were responsible for rewriting history and documents in order to support the latest Party lines. Today the US reported a remarkably high Non-Farm Payrolls number, well in excess of even the most optimistic estimates. 243,000 jobs added, and unemployment has dropped to only 8.3 percent. Isn't that good news indeed. If one tracks the data closely, and keeps their own copies of the records, what we see instead are revisions, sometimes going back as far as ten years, that most greatly affect the 'seasonally adjusted' numbers, but also affect the raw numbers as well. The Obama Administration, as well as the previous Administration, have been going back and tinkering with history, rewriting the numbers here and there, in most cases 'rolling jobs forward' to the current months to make the current headlines look better. But what was surprising in this latest round is that for the first time in my memory they went back and adjusted the Birth-Deal Model, which are imaginary jobs in the first place! And on the web site that I usually check they have stopped providing all the historical data, limiting it to what looks like a year or two of data. What can one do when the statistics are questionable like this?

Great jobs report, but what about the long-term unemployed? – There are more than a few college-educated, unemployed people over 50 years old living in the Pacific U.S. who aren't cheering today's jobs report. While the report showed that the economy generated 243,000 jobs in January, it's important to remember the segment of unemployed being left behind. The unemployment rate for January fell to 8.3%, a three-year low that has given the biggest skeptics hope that better days are on the horizon. Stocks and bond yields surged as the U.S. Labor Department report signaled the economy may be weathering Europe's debt crisis. The U.S. economy has been growing now for 10 consecutive quarters, with the latest U.S. manufacturing report showing that the nation is now producing more goods and services than it did before the 2007 downturn. But all this is happening with six million fewer workers even as the population expands. If we delve into January's labor report a little deeper, prospects for the long-term unemployed (those jobless for six months or longer) didn't improve. The long-term unemployment rate was little changed at 5.5 million workers who account for 42.9% of the unemployed.  While the number of workers jobless for a year or longer has fallen after reaching historic highs in the aftermath of the Great Recession, there are still more workers in this group than those who had just been laid off. Specifically, 2.8% versus 1.7% of the total labor force.

Getting It Wrong on the BLS Employment Report The December to January unemployment statistics are often reported wrong in the press. We're sorry, god love ya, but these articles are plain incorrect. People like to compare the month to month change in population, the number of people no longer considered part of the labor force and other data. The grave mistake made by so many in the press and elsewhere is not realizing annual population adjustments are placed in the January data, not distributed evenly across the entire year, or backwards applied and that's why one cannot compare these two months. Below is a graph of non-institutional population monthly change. This is the number from where all other unemployment statistics are derived. It represents people 16 and older, not locked up somewhere, in a medical facility or in the military. See those huge three spikes in the above graph? That's when the latest Census, taken every 10 years, has been incorporated into the data series. What happens is almost a do over, starting with the next year and you see a huge discontinuity in the data when the Census has been incorporated into the non-institutional population statistic. Believe me, we did not get a streaming horde of illegal aliens in one month, nor did everyone decide to give spontaneous birth. Those spikes simply represent the tacking on of population controls to reflect the latest Census.

Contrary to Government Claims of 243,000 Jobs Created, Almost 1 Million Jobs Were Actually LOST In January: Lee Alder notes: The seasonal adjustment fudge that the Gummit adds to the mix grossly overstated what the actual survey data showed. Here’s a picture. The red line is the actual survey numbers. The blue line is the fake seasonally adjusted number. Remember: Red… actual. Blue… fake. Just so you know your eyes aren’t playing tricks on you, let’s zoom in to just the past 13 months. There you have it. The headline, fake, number was up by 243,000, purportedly the biggest increase since 2006. But what’s this? The actual survey number showed a decrease of 1.1 million jobs. In the world of seasonally adjusted government data, down can be up.

Deconstructing The “Massive Beat” in Employment Data- The headlines are blaring of a massive surge in January employment that blew away analysts expectations. Frankly, I find it hard to believe that any analysts would not have expected this “news.” The real time Federal Withholding Tax daily data for January, which I dutifully cover each week in the Treasury updates, showed a massive surge beginning in late December. Since everybody didn’t get a 10% raise, the analysts might have inferred that more people were working. Whether that’s a sustainable trend or not is another question, but for January at least, there should have been no mystery. I like to look behind the headlines at the real unadjusted, unmassaged, unmanipulated numbers to get some idea of what’s really going on. Here’s where things get strange. Total reported employment and full time employment plunged in January, as is normal for that month. So the Gummit survey data doesn’t square with the tax collections. Had we based our forecast for the headlines (which is the only thing that matters to the market in the short run) on the withholding data, we would have gotten it right, but for the wrong reasons. It’s a head scratcher that suggests that the Gummit’s employment numbers shouldn’t be trusted, which isn’t news. What we do know for sure is that there was a gigantic surge in withholding taxes from late December to mid January, and that surge disappeared completely in the last week

"Final Nail In Today's NFP Tragicomedy: Record Surge In Part-Time Workers  - It appears the record surge in people not in the labor force is not the only outlier in today's data. For the other one we go to the Household Data Survey (Table 9), and specifically the breakdown between Full Time and Part Time Workers (defined as those "who usually work less than 35 hours per week"). We won't spend too much time on it, as it is self-explanatory. In January, the number of Part Time workers rose by 699K, the most ever, from 27,040K to 27,739K, the third highest number in the history of this series. How about Full time jobs? They went from 113,765 to 113,845. An 80K increase. So the epic January number of 141.6 million employed, which rose by 847K at the headline level: only about 10 % of that was full time jobs: surely an indicator of the resurgent US economy... in which employers can't even afford to give their workers full time employee benefits. We can't wait for Mr. Liesman to explain how this number, too, is unadulterated hogwash, and how it too is explained away to confirm economic strength.

Local Governments Still a Drag on the Economy - Today’s encouraging jobs report would have been even more encouraging if local governments weren’t still slowing the economic recovery. Local governments — mostly school districts — cut another 11,000 jobs last month.  Total job losses at the state and local government levels have reached 668,000 since employment in this category peaked in August of 2008. To put these figures in historical context, it’s useful to separate education workers (teachers, librarians, administrators, and so on in public schools, colleges, and universities) from other state and local workers (police, firefighters, garbage collectors, bus drivers, and so on).  The education side of state and local employment has employed more people than the non-education side since the early 1990s, in part because of state education reforms that increased teacher hiring. However, the public education workforce has shrunk over the last three years to its lowest level, relative to the U.S. population, since the late 1990s (see chart).  The non-education state and local public workforce has shrunk to its lowest level since the mid-1980s.

Comparing Recessions and Recoveries: Job Changes - The Labor Department delivered a pleasant surprise today, reporting that the nation’s employers added 243,000 jobs in January, compared with 203,000 in December. That’s the fastest job growth in nearly a year. Perhaps even more impressive, the unemployment rate, at 8.3 percent, fell to its lowest level in three years. Job gains were widespread across the private sector. Manufacturing, business services, health care and leisure and hospitality had the biggest growth. Downsizing at federal and local governments continued. This is an exceptionally good report, but remember that employment still has a long way to go before returning to its pre-recession level. The chart above shows economywide job changes in this last recession and recovery compared with other recent ones, with the black line representing the current downturn. Since the downturn began in December 2007, the economy has had a net decline of about 4 percent in its nonfarm payroll jobs. There are now 12.8 million workers who are looking for work and cannot find it; the figure nearly doubles if you include workers who are part-time but want to be employed full-time, and workers who want to work but have stopped looking.

Construction Employment, Duration of Unemployment, Unemployment by Education and Diffusion Indexes - The first graph below shows the number of total construction payroll jobs in the U.S. including both residential and non-residential since 1969. Construction employment increased by 21 thousand jobs in January, after increasing by 74 thousand jobs in all of 2011. Last year was the first year with an increase in construction employment since 2006, and the first with an increase in residential construction employment since 2005.Construction employment is now increasing and construction will add to both GDP and employment growth in 2012.   This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. All categories are moving down (the less than 5 week category is back to normal levels). The other categories are still high.This graph shows the unemployment rate by four levels of education (all groups are 25 years and older).This says nothing about the quality of jobs - as an example, a college graduate working at minimum wage would be considered "employed". This is a little more technical. The BLS diffusion index for total private employment was at 64.1 in January, up from 62.4 in December. For manufacturing, the diffusion index increased to 69.1, up from 64.2 in December. Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS.

The Hiring Hare Will Soon Morph Into a Tortoise - Hiring looks like a rabbit, but expect job growth to shift into a slower pace soon. U.S. non-farm payrolls posted gains of more than 200,000 in December and January. That pace of hiring helped to bring down the jobless rate, which slipped to a nearly three-year low of 8.3%. Can the labor markets maintain such hippity-hoppity vigor? It seems unlikely. The drags from the euro zone, housing and deleveraging are still weighing on growth prospects. Businesses will not need to add workers at a 200,000-plus monthly pace throughout all of 2012. In fact, the strength in December and January payrolls partly reflect two temporary events. First, unseasonably warm weather allowed more outside economic activity. Construction payrolls, which have been dropping since 2006, increased in December and January. Plus, the number of people who could not get to work because of bad weather last month was the lowest January total since 2006. Second, businesses may have been catching up on their labor needs after they paused mid-year in response to production disruptions from the Japanese disasters and the uncertainty surrounding the debt-ceiling debate in Washington.

FRBSF: Why Is Unemployment Duration So Long? - What's responsible for the slow recovery of employment in recent recessions? : The analyses discussed here suggest that weak labor demand is the primary explanation for prolonged unemployment duration observed in the recent recession and recovery. The weak recovery of employment is similar to the jobless recoveries that followed the 1990–91 and 2001 recessions. This suggests that the labor market has changed in ways that prevent the cyclical bounceback in the labor market that followed past recessions. The shift towards jobless recoveries probably reflects a reduction in temporary layoffs during cyclical downturns. Stricter market incentives to control costs in the face of stiff domestic and international competition may also be factors. In addition, anecdotal evidence suggests that recent employer reluctance to hire reflects an unusual degree of uncertainty about future growth in product demand and labor costs. These special factors are not readily addressed through conventional monetary or fiscal policies. But such policies may be able to offset the central obstacle of weak aggregate demand. More here.

Never Ending Unemployment - The San Francisco Fed's Rob Valletta and Katherine Kuang recently published a short study called Why Is Unemployment Duration So Long?  Based on previous research by others, the authors dismiss the notions that the long duration of unemployment for millions of Americans is due to 1) changing demographic characteristics of the labor force or 2) the extension of unemployment insurance (UI) benefits from the normal 26 weeks to a maximum of 99 weeks for most eligible workers. One hears this second bogus "explanation" from time to time. Mean and stupid people like to say that UI gives potential workers no incentive to seek jobs. This is a form of blame the victim. Valletta and Kuang then zero in on the breathtakingly obvious explanation for the long duration of unemployment after the meltdown in 2008—weak labor demand. These [previous] results strongly suggest that weak labor demand plays a key role in prolonged unemployment duration. But they do not directly disprove explanations related to the supply of labor, such as mismatches between worker skills and employer skill needs. Mismatches may cause available jobs to go unfilled and thereby hold down employment growth. In this case, our variable measuring cumulative employment losses reflects labor supply frictions as well as weak demand.

Determining Why People Stop Working Is Key -  When Friday’s jobs report comes out, the January unemployment rate is expected to stay at 8.5%. That doesn’t mean, however, that 91.5% of the U.S. population is working. Millions of adult Americans don’t work because of retirement, child-care duties or schooling. The employment-population ratio — or emp-pop ratio — calculates the proportion of working age [16 and older] population that actually have jobs. The emp-pop ratio reached almost 65% in 2000; but in December, it was just 58.5%. Even though the jobless rate has fallen by almost 1.5 percentage points since 2010, the emp-pop ratio remains at its lowest reading since 1983. The ratio falls for two reasons. First, the usual reasons — such as retirement and education — are structural in nature. Second, people don’t have jobs because spending in the economy doesn’t generate enough demand for labor. This is cyclical. Determining the structural and cyclical causes are important because the former are mostly chosen by the participants, while the latter are usually involuntary and impose costs on the economy.

Chicago Fed Blames Baby Boomers for Labor Force Drop - WSJ - The long-running decline in the proportion of Americans still tied to the labor force relative to the nation’s total population has been vexing economists and government officials for some time. They worry the sharp decline in what is called the labor-force-participation rate is a sign overall economic conditions have become so unfavorable many people are simply dropping out of looking for formal work altogether. Against that uncertainty, new research from the Federal Reserve Bank of Chicago argues half of the decline in the labor-force-participation rate over roughly the last decade is a demographic story rather than an economic one.In a paper published Wednesday, staff economists Daniel Aaronson, Jonathan Davis and Luojia Hu state the retirement of the baby boomer generation is a major driver of the decline in this measure of economic health. Given the source of this downward pressure, it is unlikely labor-force-participation rates will regain past heights.

The real unemployment rate? - Similar variations of this adjusted unemployment rate make headlines now and again. Our colleague Ed Luce, for instance, noted in December that “if the same number of people were seeking work today as in 2007, the jobless rate would be 11 per cent”. But what is striking about the broken line above isn’t where it now ends — at 10.3 per cent — but rather the lack of any meaningful, sustained improvement for more than two years. This alternative measure has remained above 10 per cent since September 2009, and aside from a bit of skittishness (some of which is down to uncaptured seasonality) has mostly just moved sideways. That is from Cardiff Garcia, here is more.

Broader Unemployment Rates, by State - In the nation’s worst-off states, more than one in five residents wanted a job and were unable to find one last year. Unemployment nationwide averaged 8.9% in 2011, but the rate still hovered in the double-digits in states such as Nevada and California. Expanding the rate to include those who wanted to work but gave up their hunt provides an even darker picture: In each of those states the broader measure of unemployment topped 20%, according to a Labor Department report. The rate, known as the U-6, is designed to measure underutilization in the labor market and includes jobless workers, those who want a job but have given up searching and those who are working only part-time because they can’t find full-time positions. States that have high unemployment rates unsurprisingly also have bigger U-6 rates, but looking at the differences between them can give us some insight in the way that individual states are struggling. Click for an interactive map of broader unemployment rates

Compensation for Workers Increases a Bit - Compensation for U.S. workers increased modestly in the final three months of 2011, an indication that a slowly improving labor market isn’t yet putting pressure on wages. The employment cost index rose 0.4% in October through December, the Labor Department said Tuesday, up from a 0.3% advance during the third quarter. Economists surveyed by Dow Jones Newswires had expected an increase of 0.5% in the fourth quarter. Wages and salaries grew 0.4%, compared to 0.3% in the prior period. Benefit costs rose 0.6%, after holding nearly flat in the prior three months. Benefits include overtime premiums, bonuses not tied to output, as well as paid leave, insurance and retirement. Compared to a year earlier, employment costs posted a 2.0% increase, equal to the 12-month gain reported for the fourth quarter of 2010. Benefit costs on an annual basis rose 3.2%, driven by an increase in the cost of health care.

How Does the Compensation of Federal Employees Compare with That of Workers in the Private Sector? - CBO Director's Blog - The federal government employs 2.3 million civilian workers, or 1.7 percent of the U.S. workforce, in over 700 occupations and spent about $200 billion in fiscal year 2011 to compensate them. Recently, concern about the federal budget and about equity between the public and private sectors has focused greater attention on the costs that the federal government incurs to compensate its employees. Today CBO released a study—prepared at the request of the Ranking Member of the Senate Budget Committee—that addresses the question:  How does the compensation of federal employees compare with that of workers in the private sector? CBO’s Key Findings: Differences between the average compensation of employees of the federal government and that of private-sector employees varied significantly by level of education. As shown in the table below:

  • Among people with a high school diploma or less education, or whose education culminated in a bachelor’s degree, the total cost of compensation, on average, was higher for federal workers than for similar workers in the private sector, after accounting for differences in demographic factors and in certain characteristics of their jobs. 
  • By contrast, among people with a professional degree or Ph.D., total compensation costs were lower for federal employees than for similar private-sector employees, on average.
  • Differences between the government and the private sector in the average costs of benefits were much greater than the differences in the average wages.

Do Federal Workers Get Paid More Than Private Ones? - Yes, according to a new report by the Congressional Budget Office. As always in such comparisons, however, there are some caveats.CBO summarizes its main results in this handy chart: Report author Justin Faulk summarizes the findings as follows: Differences in total compensation—the sum of wages and benefits—between federal and private-sector employees also varied according to workers’ education level. Federal civilian employees with no more than a high school education averaged 36 percent higher total compensation than similar private-sector employees. Federal workers whose education culminated in a bachelor’s degree averaged 15 percent higher total compensation than their private-sector counterparts.Federal employees with a professional degree or doctorate received 18 percent lower total compensation than their private-sector counterparts, on average.Overall, the federal government paid 16 percent more in total compensation than it would have if average compensation had been comparable with that in the private sector, after accounting for certain observable characteristics of workers.

The Million Dollar Mailman - Likely prompted by a new CBO study that argues federal workers are overpaid relative to private sector workers, Karl presents two questions I believe meant to imply that the government cannot overpay for workers. I would answer Karl’s questions with a question of my own: if the government offered a salary of a million dollars a year for a 30 hour a week mail carrier job, what would it get it return?  Yes, at some margins if you offer more than you will get higher quality applicants. But the position must allow the possibility the marginal product large enough to compensate you, the employer, for the wages. There are a couple of things that need to happen to get your extra wages worth, and that fact that this is low-skilled government work suggests this isn’t the case. First, you need the extra dollars offered to lead to more skilled workers in fact being hired, rather than just more skilled workers queuing up for the position and first-come-first serve or some patronage determining who gets hired. In addition, you need the extra skills to lead to extra value. If the majority of the overpaying was happening at the high end of the distribution where skills are more heterogeneous and extra skill has the potential to create a lot of extra value, I could buy Karl’s story that extra wages was buying valuable extra skills.

As the Plutonomy Powers Ahead, the “Realonomy” Remains in Recession - American economic output is now at an all-time high. So why doesn't it feel that way? Back in October 2005, three Citigroup stock analysts heralded the arrival of a new kind of economic system in the United States. They called it the "Plutonomy," the economy of the rich. They explained that in a Plutonomy "the rich absorb a disproportionate chunk of the economy and have a massive impact on reported aggregate numbers." In other words, official economic statistics no longer represent the experience of the economy as a whole. More and more, they represent only the experiences of the very rich. Official economic statistics show that US national income per capita grew a cumulative 10 percent between 1999 and 2011 (adjusted for inflation). In aggregate, we generate 10 percent more per person than we did 12 years ago. Where did that 10 percent growth go? Up in the stratosphere of the American Plutonomy, the IRS reports that incomes among the top 400 American taxpayers increased 107 percent between 1999 and 2007 (adjusted for inflation). Top 400 incomes declined in 2008, but by most accounts they have now bounced back to pre-recession levels.

Earning Less - Why The Poor Get Poorer - Working harder - earning less. That is what today's release of productivity and labor costs showed us. With that report also comes the suspicion that a lot more people would be reciting the classic prose of Johnny Paycheck's "Take This Job And Shove It" if they thought they had an option to find work elsewhere.  This report, of course, shines the light on one of the primary reasons why the poor keep getting poorer, even as the economy struggles to recover at the weakest rate of any post-WWII period on record. In the most recent release of the data, productivity slowed in the fourth quarter even as hours worked rose. Nonfarm business productivity eased to an annualized 0.7 percent in the fourth quarter as hours worked increased an annualized 2.9 percent after a 0.9 percent gain the third quarter. This in turn is also a bad sign for corporate profit margins as unit labor costs rose sharply at an annualized 1.2 percent, following a 2.1 percent decrease in the third quarter. Can you say "margin compression?"  Compensation did rise slightly in the 4th quarter but is still running at a negative rate of 1.2% from last year. Working longer hours but earning less — the plight of the average American continues.

The Coming Demographic and Financial Disaster - Median income of Americans 65+ is $19,167. What happens when less affluent youth move back home and clash with older generations?   What happens when a society that prides itself on a middle class and self-sufficiency suddenly starts losing both?  For over a decade the middle class in the US has been shrinking.  This isn’t some speculation but is reflected in the stagnant household income data.  You also have a giant demographic train in that many baby boomers are now retiring in mass.  Over 10,000 baby boomers enter into retirement each day and many have an inadequate amount of savings (if any) to get them through the leaner years.  Couple this with a less affluent younger generation and you have a recipe for financial and social turmoil.  Many of these younger Americans, many saddled with large student debt, are moving back home with parents that have seen their entire home equity evaporate.  Do you think these are happy households especially when the median income of those 65+ is $19,167? There seems to be this misconception that older Americans are simply well off.  The data shows us otherwise:

Port of Longview signs off on ILWU and EGT settlement: Port of Longview commissioners Friday signed off on a settlement with EGT Development and union dock workers. The pact provides a framework for longshoremen to work inside the $200 million grain terminal and end one of the area's longest, angriest labor disputes in decades. EGT and the International Longshore and Warehouse Union still have not signed a labor contract, but both sides agreed on the settlement before submitting it to port commissioners, according to port attorney Frank Randolph. Rank-and-file ILWU members approved the agreement Tuesday, according to the union. The agreement, announced by Gov. Chris Gregoire Monday, effectively settles a federal lawsuit between EGT and the port over labor requirements at the terminal and halts past claims from the dispute.

Inequality, the Middle Class, and Growth - The trickle-down, deregulatory agenda—what I have called YOYO, or “you’re on your own” economics—presumes that the growth chain starts at the top of the wealth scale and “trickles down” to those at the middle and the bottom of that scale. Problem is, that’s not worked. Here’s a better model. In the midst of the 1990s boom, which lifted the earnings and incomes of middle and low-wage workers much more so than the 1980s or 2000s cycles, Larry Mishel and I started talking about “wage-led demand growth.” We meant that a much better way to generate robust, lasting, and broadly shared growth is through an economically strengthened middle class. At the most basic level, this growth model is a function of customers interacting with employers, business owners, and producers. A recent article by successful venture capitalist Nick Hanauer very compellingly describes this interaction: I’ve never been a “job creator.” I can start a business based on a great idea, and initially hire dozens or hundreds of people. But if no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate. That’s why I can say with confidence that rich people don’t create jobs, nor do businesses, large or small. What does lead to more employment is the feedback loop between customers and businesses. And only consumers can set in motion a virtuous cycle that allows companies to survive and thrive and business owners to hire. An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be.

Social democracy and equal opportunity -My critique of Tyler Cowen’s post arguing the unimportance of social mobility has started off, or maybe merged into, of those old-fashioned blog firestorms we used to have back in the day, now also reticulated through Twitter – a few links here, here and here. But rather than criticise Cowen further, I thought I would try to work through the bigger issues involved from a social democratic perspective[1].  In particular, as discussed in comments here, should social democrats favor policies to enhance social mobility, or does mobility between generations make inequality even worse, for example by justifying what appears as meritocracy? It’s helpful to start with some facts, and the big one is that inequality of opportunity and inequality of incomes (or, more generally) outcomes are strongly positively correlated. The US and UK are notable as being highly unequal societies in both respects. More precisely, as would be expected on the basis of even momentary thinking about the ways in which parents try to help their children, highly unequal outcomes in one generation are negatively correlated with intergenerational mobility in the next.

The Post Gives Another Defense of the 1%, Mobility - Dean Baker - There is a big market in defending the One Percent these days and the Post is rising to the challenge. It presented a front page Outlook piece by James Q. Wilson that tells readers that inequality is not a really big deal because of the all the mobility in U.S. society. Furthermore, it tries to tell us we would be worse off with less inequality because inequality fell in Greece over the last three decades. Wilson's main source for his claims about mobility is a study from the St. Louis Fed which in turn relies on data from a study from President Bush's Treasury Department. Wilson tells us that less than half of the people in the top one percent were still there 10 years later. This reflects the findings of the study. However 75 percent of the top one percent were still in the top 5 percent 10 years later and almost 83 percent were in the top ten percent. Much of the mobility found in this study was likely simply the result of life-cycle effects. Earnings peak between ages 45 and 65. If we assume that people in these age groups are twice as likely to be in the top one percent as people who are younger or older, then we would expect 25 percent of the people in the top one percent to fall to a lower income category over a 10 year period simply because they have aged out of their peak earnings years.

Inequality, Mobility, Opportunity - Lane Kenworthy: ... Is it possible, then, for a country to have high income inequality but also low inequality of opportunity? John Quiggin is skeptical. He suggests the UK experience has debunked this “third way” notion. I’m not so sure. Imagine a rich nation with America’s income inequality and Nordic public services: affordable high-quality early education, K-12 schooling with late tracking and equal funding, and widespread access to good-quality universities. And perhaps also comprehensive prenatal care. Would its opportunity (mobility) structure look more like America’s or more like Sweden’s? But, some will respond, you can’t get those services if income inequality is high. The rich will block the heavy taxation needed to fund them. Maybe. But income inequality has been rising in Sweden. In fact, in the late 1990s and mid 2000s the top 1%’s share of income (including capital gains) in Sweden was about the same as in the 1970s United States (see figure 7 in this paper by Atkinson, Piketty, and Saez). So far this hasn’t undermined Swedish taxation, though it’s probably too soon to draw any firm conclusions. More here.

We’re More Unequal Than You Think - NYRB - Imagine a giant vacuum cleaner looming over America’s economy, drawing dollars from its bottom to its upper tiers. Using US Census reports, I estimate that since 1985, the lower 60 percent of households have lost $4 trillion, most of which has ascended to the top 5 percent, including a growing tier now taking in $1 million or more each year.1 Some of our founders foresaw this happening. “Society naturally divides itself,” Alexander Hamilton wrote in The Federalist, “into the very few and the many.” His coauthor, James Madison, identified the cause. “Unequal faculties of acquiring property,” he said, inhere in every human grouping. If affluence results from inner aptitudes, it might seem futile to try reining in the rich. All four of the books under review reject Hamilton and Madison’s premises. All are informative, original, and offer unusual insights. None accepts that social divisions are inevitable or natural, and all make coherent arguments in favor of less inequality, supported by persuasive statistics.

With Focus on Income Inequality, Albany Bill Will Seek $8.50 Minimum Wage - The Occupy Wall Street encampment at Zuccotti Park is no more, but the focus it brought to income inequality is having an impact in Albany and beyond. The Assembly speaker, Sheldon Silver, a Manhattan Democrat, plans to introduce a bill on Monday to raise the state’s minimum wage to $8.50 an hour, a 17 percent increase. The bill also calls for the minimum wage to be adjusted each year for inflation. Mr. Silver’s action follows similar steps by lawmakers across the country: Delaware recently passed a minimum wage increase, and raises are being considered in California, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Missouri and New Jersey. The New York proposal, which Mr. Silver said would be his top legislative priority this year, will be subject to close scrutiny from Senate Republicans and business leaders, who say the measure could hurt job growth. But Mayor Michael R. Bloomberg, a political independent with strong ties to the business community, has supported Mr. Silver’s call for an increase in the minimum wage. “It is impossible to live in this city on $15,000 a year,”

Labor Dept. changes child labor plan - Under pressure from farm groups, the Labor Department has agreed to modify a plan that's intended to keep children away from some of the most dangerous farm jobs. The proposal now will include broader exemptions for children whose parents are part owners or operators of farms, or have a substantial interest in a farm partnership or corporation, officials said Wednesday. The rules would ban children younger than 16 from using most power-driven equipment and prevent those younger than 18 from working in feed lots, grain bins and stockyards. Farm groups had complained that the initial rules - proposed last year - would upset traditions where children often work alongside their parents and relatives to learn how a farm operates. The rule's original language exempted youths only on farms wholly owned or operated by their parents, but did not include thousands of farms owned by closely held corporations or partnerships of family members and other relatives. Labor Secretary Hilda Solis said her agency would work with the Agriculture Department to ensure that the rules reflect the concerns of rural communities.

A Harder Squeeze on the Poor - House Republicans have hit upon a noxious scheme to help pay for an extension of the payroll tax cut: a tax increase on millions of poor working families. A bill passed by the House and now in conference seeks to deny cash refunds under the child tax credit to those who file tax returns using “individual taxpayer identification numbers” issued by the Internal Revenue Service. Only those using Social Security numbers would be eligible. The refundable portion of the child tax credit is a life-saver for the working poor. Families that would be cut off by this policy change make an average of $21,000 per year, according to the Treasury Department. They would lose an average of $1,800. About 80 percent of those families are Hispanic. The taxpayer identification numbers are used frequently, though not exclusively, by unauthorized immigrants to pay the taxes because they are not eligible for Social Security numbers. The I.R.S. accepts their tax payments and allows families to claim the child tax credit regardless of immigration status. This policy is an effective antipoverty tool that protects children, most of whom are American-born citizens.

House GOP seeks to bar the use of welfare funds at strip clubs - House Republicans don’t want Uncle Sam paying for any more lap dances. A bill that GOP leaders are bringing to the House floor Wednesday would require states to prevent welfare recipients from accessing or spending their benefits at strip clubs, casinos and liquor stores. Republicans included the proposal in the payroll tax bill the House passed in December, and are bringing it back up for a vote separately as part of a package of bills they want included in a final agreement extending the payroll tax cut and other measures through 2012.

How Would Romney Pay for the Repairs in the Safety Net? - This morning on CNN, Mitt Romney said: “I’m not concerned about the very poor, we have a safety net there,” Romney said. “If it needs repair, I’ll fix it. I’m not concerned about the very rich, they’re doing just fine. I’m concerned about the very heart of America, the 90, 95 percent of Americans who, right now, are struggling, and I’ll continue to take that message across the nation.” I guess some Democratic hacks could take the very first part of this statement out of context (Romney is not concerned about the very poor) but let’s do as he lectured Soledad O’Brien and finish the sentence. The safety net does need repair and that would involve an increase in government spending. Now if Mr. Romney has decided to agree with President Obama about the very rich doing fine, then have him say we will pay for this increase in government spending by raising taxes on the very rich. But wait – his tax proposal would dramatically reduce Federal revenues by giving the very rich even more tax breaks. So the arithmetic just does not add up unless Mr. Romney is proposing even bigger deficits.

Who cares how "deserving" the poor are? - Bryan Caplan is apparently about to debate Karl Smith on the question of "How deserving are the poor?" I want to get my two cents in ahead of this debate, by asking the counter-question: "Who cares?" The question of "How deserving are the poor" is a matter of opinion. There is no right answer, because to say someone "deserves" something is a prescriptive statement, and you can't prove those with facts. Also, it is a somewhat pointless question, because no matter what answer you decide you like, it doesn't really imply any particular policy prescription. In practice, people who say "The poor deserve to be poor" are usually just trying to push the idea that we shouldn't try to do anything about poverty other than scolding the poor for their own mistakes (I'll come back to this idea in a bit). But this doesn't really follow. As I see it, there are two important questions about poverty from a policy perspective: 

    • 1. Do we want to make poor people less poor?
    • 2. If we do want to do that, how do we accomplish it?

Bryan Caplan's answer ... to the question of "How deserving are the poor" is that if people are poor mainly as a result of their own actions, then they deserve to be poor. But as I see it, whether people are poor because of their own actions doesn't really help us answer either of the two questions I posed above.

Morals? Can't afford them - Noahpinion, Tyler Cowen and others have recently posted about the deserving poor. Bernard Shaw played with the idea of the deserving and undeserving poor in Pygmalion, written over 100 years ago.Pygmalion, more familiar as My Fair Lady, tells the story of a young flower seller, Eliza Doolittle, who is transformed by the linguist, Henry Higgins, into a "lady."Her no-good wastrel father, Mr. Doolittle, objects to Henry Higgins' adoption of his daughter, and demands appropriate compensation. Higgins, and his friend Pickering, are shocked, "Do you mean to say, you callous rascal, that you would sell your daughter for 50 pounds?...Have you no morals, man?"  "Can't afford them, Governor," Doolittle replies, "Neither could you if you was as poor as me."

Romney Isn’t Concerned - Krugman -  If you’re an American down on your luck, Mitt Romney has a message for you: He doesn’t feel your pain. Earlier this week, Mr. Romney told a startled CNN interviewer, “I’m not concerned about the very poor. We have a safety net there.”  Faced with criticism, the candidate has claimed that he didn’t mean what he seemed to mean, and that his words were taken out of context. But he quite clearly did mean what he said. And the more context you give to his statement, the worse it gets. First of all, just a few days ago, Mr. Romney was denying that the very programs he now says take care of the poor actually provide any significant help. On Jan. 22, he asserted that safety-net programs — yes, he specifically used that term — have “massive overhead,” and that because of the cost of a huge bureaucracy “very little of the money that’s actually needed by those that really need help, those that can’t care for themselves, actually reaches them.”  This claim, like much of what Mr. Romney says, was completely false: As the Center on Budget and Policy Priorities has documented, between 90 percent and 99 percent of the dollars allocated to safety-net programs do, in fact, reach the beneficiaries. But the dishonesty of his initial claim aside, how could a candidate declare that safety-net programs do no good and declare only 10 days later that those programs take such good care of the poor that he feels no concern for their welfare?

Rolf Pendall: Racial Segregation is Still a Reality - Rolf responds to Glaeser and Vigdor: The Manhattan Institute for Policy Research’s website made a triumphal proclamation this week that we have reached “the end of the segregated century.” The New York Times dutifully spread the news, leading with the headline “Segregation Curtailed in U.S. Cities, Study Finds.” The story beneath the spin, however, shows that segregation isn’t just a phenomenon to look back on regretfully during African American History Month (which begins today). Segregation lives on in far too many American cities.  Chicago, over 70 percent of African Americans would have to move to a predominantly non-black neighborhood (or the same proportion of whites would have to move to mostly non-white areas) to achieve an even racial distribution? Chicago isn’t the only metropolitan area in this position: Detroit, Cleveland, and St. Louis also surpass 70 on this segregation index. New York, Baltimore, and Philadelphia—that is, a continuous band of urbanization stretching from just north of Washington, DC, to the middle of Connecticut with well over 25 million inhabitants—stand between 60 and 65. The heart of the northeast corridor still lives in a segregated century, as does the fringe of the Great Lakes. Even “less segregated” metropolitan areas still have levels of racial segregation far higher than the Fair Housing Act promised.

How to Listen for Racism on the Campaign Trail: Here are some things you could learn about black Americans from the recent statements and insinuations of Republican presidential candidates, Republican congressmen and Republican-friendly radio personalities: Black people have lost the desire to perform a day’s work. Black people rely on food stamps provided to them by white taxpayers. Black people, including Barack and Michelle Obama, believe that the U.S. owes them something because they are black. Black children should work as janitors in their high schools as a way to keep them from becoming pimps. And the pathologies afflicting black Americans are caused partly by the Democratic Party, which has created in them a dependency on government not dissimilar to the forced dependency of slaves on their owners. Judging by these claims, all of which have actually been put forward recently, here is a modest prediction: This presidential election will be one of the most race- soaked in recent history. It is already more race-soaked than the 2008 election, which, of course, marked the first time that a black man became a major-party candidate.

Low IQ & Conservative Beliefs Linked to Prejudice - There's no gentle way to put it: People who give in to racism and prejudice may simply be dumb, according to a new study that is bound to stir public controversy. The research finds that children with low intelligence are more likely to hold prejudiced attitudes as adults. These findings point to a vicious cycle, according to lead researcher Gordon Hodson, a psychologist at Brock University in Ontario. Low-intelligence adults tend to gravitate toward socially conservative ideologies, the study found. Those ideologies, in turn, stress hierarchy and resistance to change, attitudes that can contribute to prejudice, Hodson wrote in an email to LiveScience."Prejudice is extremely complex and multifaceted, making it critical that any factors contributing to bias are uncovered and understood," he said.

State Taxes Are Wildly Regressive - Some indigestible food for thought:  there is not a single state in the Union—not one—in which the top 1% of income earners pay a higher rate of state taxes than the bottom 20%.  For the majority of states, it’s not even close:  the poorest 20% pay somewhere between double and six times the tax rate of the richest 1%.  In Florida, those who make the least pay 13.5% of their income in state taxes, while those who make the most pay 2.1%. This comes to us from Mother Jones’ Kevin Drum, who dug into the comprehensive “Assets and Opportunity Scorecard” recently produced by the The Corporation for Enterprise Development.

Second Year In, Republican Governors Back Off - A year after a coterie of new Republican governors swept into the statehouses and put in place aggressive agendas to cut spending and curb union powers, sparking strong backlashes in many places, many of them are adopting decidedly more moderate tones as they begin their sophomore year in office. The efforts to weaken unions have not ended — witness the recent events in Indianapolis, where the longtime Republican governor, Mitch Daniels1, supports making Indiana the first state in the industrial Midwest with so-called right-to-work legislation. But many of the new Republican governors who swept into office last year, taking aim at collective bargaining rights, are striking less confrontational notes as they begin the new year, at least judging by what they have been saying in their State of the State addresses. A gradually improving economy has eased some of the pressure for steep spending cuts. Many state lawmakers face re-election this year, and in many states they are showing little appetite to face the kind of uproar that greeted efforts to curb collective bargaining rights in states like Ohio and Wisconsin last year. And with a presidential campaign unfolding, some Republicans worry that overreaching at the local level, particularly in swing states, would make it harder for them to win in November.

Indiana Senate Sends Right-to-Work Bill for Governor Daniels’s Signature - Indiana will become the nation’s 23rd right-to-work state after its Senate exempted nonunion employees from paying dues when working alongside their unionized colleagues. The vote was 28-22, sending the measure to Republican Governor Mitch Daniels for his promised signature. The Republican-controlled House of Representatives passed the bill Jan. 26, ending three weeks of Democratic boycotts that prevented the chamber from operating. Republican Senator Carlin Yoder, the bill’s sponsor, said unions “will still be allowed to exist.” During floor debate, Yoder said right to work gives “freedom to those who don’t want to be part of something they don’t believe in.”  Twenty-two states, mostly in the Deep South and the Rocky Mountain West, have enacted right-to-work laws. Republican gains in the 2010 elections prompted legislation in states including Wisconsin and Ohio aimed at restricting bargaining rights for government workers’ unions.

With NFL Players Behind Them, Groups Plan ‘Occupy Super Bowl’ Protests Of Indiana’s Assault On Workers - Four days before his state hosts Super Bowl XLVI, Indiana Gov. Mitch Daniels (R) signed anti-union “right-to-work” legislation into law Wednesday afternoon, making Indiana the 23rd right-to-work state in the country. Daniels signed the law despite the fact that thousands of workers gathered outside the statehouse in the days leading up to the law’s passage, and despite his own apparent opposition to such a law back in 2006.  In the days since more than 10,000 protesters marched through downtown Indianapolis, union officials and other organizers have grappled with how, and if, they should make their voices heard during Super Bowl festivities. Daniels has warned opponents of the new law that disrupting the Super Bowl would give the state a “black eye.” Nevertheless, with the National Football League’s Players Association officially opposing the law, labor leaders and organizers affiliated with local Occupy groups have vowed to press on.

Tougher Than Wisconsin: Arizona Republicans Launch ‘All Out Assault’ On Public Unions  - With a sweeping series of bills introduced Monday night in the state Senate, Republicans in Arizona hoped to make Wisconsin’s battle against public unions last year look like a lightweight sparring match. The bills include a total ban on collective bargaining for Arizona’s public employees, including at the city and county levels. The move would outpace even the tough bargaining restrictions enacted in Wisconsin in 2011 that led to massive union protests and a Democratic effort to recall Republican Gov. Scott Walker. “At first glance, it looks like an all out assault on the right of workers to organize,” Senate Minority Leader David Schapira (D) told TPM on Tuesday. “And to me, that’s a serious problem.” The bills were crafted with the help of the Goldwater Institute, a powerful conservative think tank in Phoenix that flew Walker to the state for an event in November. Nick Dranias, director of the institute’s Center for Constitutional Government, told TPM he sees Walker as a “hero” but that Wisconsin’s laws were “modest” compared to Arizona’s measures. “In Arizona, we believe that the political will exists to do even more comprehensive reform,” Dranias said. “The environment, the climate that we face in Arizona is much more receptive to these kinds of reforms than Wisconsin is.”

How Scott Walker and ALEC Plotted the Attack on Arizona Unions… Two days after Ohio voters overwhelmingly rejected Governor John Kasich’s anti-labor agenda by a sixty-one to thirty-nine margin in a statewide referendum, Wisconsin Governor Scott Walker jetted to Arizona to launch the next front in the national campaign to attack union rights. After meeting with former Vice President Dan Quayle, Walker was whisked over to the Phoenician Resort in Scottsdale, where he briefed a thousand Arizona conservatives on how they could attack “the big-government union bosses.” “We need to make big, fundamental, permanent structural changes. It’s why we did what we did in Wisconsin,” declared Walker, who at the annual dinner of the right-wing Goldwater Institute said that compromising with unions was “bogus.” Comparing governors who have been attacking the collective-bargaining rights of public employees with the founders of the American experiment—“just like that group that gathered in Philadelphia”—Walker told his listeners: “We need to have leaders not just in Wisconsin but here in Arizona…”

If unions won't budge, Detroit may have to take drastic budget measures - From closing all the city's recreation centers and privatizing ambulance services to increasing bus and garbage fees to merging the health department with Wayne County's, the Detroit City Council is mulling drastic reductions to help ward off the state's appointment of an emergency manager. The reductions, proposed at a sobering council meeting Monday, also included an additional 1,300 layoffs -- Mayor Dave Bing already has proposed cutting 1,000 jobs -- if the city can't squeeze major concessions from its 48 unions. Achieving savings from those concessions, which the council and the mayor said would reach $105 million a year, are the only way to avoid an emergency manager, Gov. Rick Snyder has said. He imposed an early February deadline to come up with concessions to avoid the appointment of an emergency manager.

Report: Poorest families hit 1,000 times harder than rich by Michigan tax changes - As tax season starts in full swing, a new report says low income families will be hardest hit by a state tax reform package passed last year.  While the changes don't take effect until the 2012 tax year, the Michigan League for Human Services hopes some credits helpful to the poor can be restored by then, particularly the $600 per-child tax deduction.  The League released a report that says the tax plan will hit poor families 1,000 times harder than wealthy households. Families making less than $17,000 a year would pay one percent more in taxes in 2012, while families making more than $334,000 would see their taxes go up by only .001 percent, the report states. Gilda Jacobs, president and CEO of the League, wants to see a fair tax structure that doesn’t hit the poor harder than the wealthy.

California needs to find $3 billion by March -- State lawmakers moved to avoid a cash crunch Tuesday as the controller warned that California could be in the red by early March. A lag in revenue and higher-than-expected spending mean the state needs to scrape together more than $3 billion to stay in the black and keep a comfortable cash reserve, the controller said. A legislative committee advanced a bill that would expand the state's ability to borrow from dedicated funds to cover daily expenses, while Gov. Jerry Brown's administration planned to tap universities and take other measures to help plug the gap. The hunt for cash came on a busy day in the Capitol that included a step to ask voters to ease the state's controversial three-strikes law. The Assembly approved a bill to authorize a ballot measure on the issue for November 2014, but the legislation faces an uncertain future in the Senate. The proposal would ask voters whether to impose harsh prison sentences only on offenders whose third conviction is for a violent or serious crime rather than any felony, as the law now requires. Of all the states with three-strikes laws, only California applies the rules to nonviolent offenders. He said the measure could save $15 million annually for the first 10 years.

Many Californians have no emergency savings - More than three in 10 people in California don’t have enough savings to get by for three months if they were to lose their job, according to a study released Tuesday. More than two years after the official end of the recession, 30.9% of Californians have little to no financial cushion, according to the report by the nonprofit Corp. for Enterprise Development. If illiquid assets -- things that can’t quickly or easily be converted into cash, such as a home -- are excluded from the equation, the number rises to an even more troubling 43.1%. The complete study is available here. “Growing numbers of Americans have almost no savings or other assets to fall back on if they lose their jobs or face a medical crisis,” said Andrea Levere, president of CFED. “Without those savings, few will be able to invest in a more economically secure future, including buying a home, saving for their children’s college educations or building a retirement nest egg.” The study analyzed the 50 states and the District of Columbia. Overall, California ranks a dismal 39th nationwide in financial security and was at or near the bottom in key yardsticks, such as unemployment and education.

New Yorkers Face “Downward Mobility” - About one third of New York City residents nearing retirement age won’t be able to quit or will have to rely entirely on Social Security because they have less than $10,000 in savings, according to a study released today. About 40 percent of New York workers had access to an employer-sponsored retirement plan in 2009, compared with the national average of 53 percent, according to the report. “It’s going to mean a generation of retirees will do worse than their parents and grandparents,” Teresa Ghilarducci, the center’s director, said in a telephone interview. “This means a lot more downward mobility.” About 36 percent of households near retirement had less than $10,000 in liquid assets and about 19 percent had $10,000 to $99,999, according to the report. The median net worth of New York households where the head is nearing retirement, defined as age 55 to 64, was $442,450 including home equity, for married couples. It was $46,000 for single people. “We have a large proportion of people who are nearing retirement, but without enough money to live comfortably,” 

Sacramento City Schools Approve $28M In Cuts - On Thursday, Superintendent Jonathan Raymond said the Sacramento City Unified School Board voted to approve a "gut-wrenching" budget to balance a $28 million deficit. More than 200 teachers, custodians, counselors and librarians will receive pink slips. The cuts also will increase class sizes to about 35 students per teacher. Sports, music programs and bus service will be eliminated. Raymond said some crucial programs may be saved if the governor's tax initiative is placed on the June ballot and approved by voters. If not, $28 million in cuts will go into effect next year.

'The vice president of the U.S. is... Bill Clinton!' Shocking video shows high school students are woefully uninformed -Students in U.S. high schools spend their days studying history, geography, and mathematics. But one intrepid student reporter who wanted to know how much basic knowledge his classmates had experienced a comically tragic response. Most of his classmates didn’t even know who the vice president of the country was. One student guessed Osama bin Laden, while another proudly stated that it was former president Bill Clinton. He asks them basic general knowledge questions, like asking them to name what war won the U.S. its independence. The majority of students responded with dead air. When prompted, one chirruped in, ‘The Korean War!’ and another thought the Civil War was when America declared its freedom. One girl answered the correct answer (the Revolutionary War) when heavily prompted. The video also tests geography and other common knowledge among high school students, like naming a country that begins with a ‘U.’

Let them game the model - One of the most common reasons I hear for not letting a model be more transparent is that, if they did that, then people would game the model. I’d like to argue that that’s exactly what they should do, and it’s not a valid argument against transparency. Take as an example the Value-added model for teachers. I don’t think there’s any excuse for this model to be opaque: it is widely used (all of New York City public middle and high schools for example), the scores are important to teachers, especially when they are up for tenure, and the community responds to the corresponding scores for the schools by taking their kids out or putting their kids into those schools.  In other words, given that it’s high stakes it’s only fair to let people know how they are being measured and, thus, how to “improve” with respect to that measurement. Instead of calling it “gaming the model”, we should see it as improving our scores, which, if it’s a good model, should mean being better teachers (or whatever you’re testing). If you tell me that when someone games the model, they aren’t actually becoming a better teacher, then I’d say that means your model needs to improve, not the teacher.

Ga. college students: Without food stamps we wouldn't be able to eat (Video) Georgia's college students are facing the prospect of the HOPE Scholarship paying less and less toward their tuition in the next few years. So how are they dealing with rising tuition and fees? Many are working whatever part-time jobs they can rustle up, mornings, nights and weekends. But they're also tapping into an unconventional form of student financial aid: food stamps. The "Supplemental Nutrition Assistance Program" is providing college students who qualify with $200 a month toward their groceries, making them part of the 20 percent of Georgia's population currently receiving the benefit. Not all college students qualify for food stamps under Georgia's rules. And late Monday afternoon, a spokeswoman with the Georgia Department of Human Services was looking up, at the request of 11Alive News, the latest numbers that show exactly how many college students statewide are on food stamps, now. But it is an open secret on the campuses that increasing numbers of students are going straight to the state and applying, which is perfectly legal. And the colleges and universities are not involved at all.

The Education Revolution -- Charlotte Allen summarizes a lot of recent developments that I think are going to change higher education.  It's happening, almost overnight: what could be the collapse of the near-monopoly that traditional brick-and-mortar colleges and universities currently enjoy as respected credentialing institutions whose degrees and grades mean something to employers. Read the whole thing. Here is what I see as four technologies coming together:

  • 1. The use of YouTube for bite-sized lectures, as famously demonstrated by Khan Academy but widely used by others.
  • 2. Video conferencing. Using this technology, it is easier to attend two seminars in different cities than it is to walk to two seminars on the same campus.
  • 3. Artificial intelligence for assessment. It's about more than just grading multiple choice tests. Something like can grade numerical answers. A software course can grade you on whether your program works.
  • 4. Real-time natural-language interaction (like the i-phone's Siri). Now that I have "flipped the classroom" in statistics and I walk around giving students helpful hints, I think that my hint-giving could easily be automated.

I see the potential for a dramatic reduction in the labor intensity of teaching. I think we are at a point in education that reminds of what the Web felt like in 1994. A lot of excitement is coming, and change will sweep through faster than most people expect. Traditional colleges seem poised to be the Borders Books of the next round of technological change.

Rogers: getting an MBA is a terrible mistake -- Jim Rogers tells CNBC that finance is a terrible place to be for the next 10-15 years. He echos a point I made in this piece.

Parents Snared in $100 Billion U.S. College Debt Trap Risking Retirement - Terry Williams borrowed about $7,000 to earn a degree from Spelman College 38 years ago. For her youngest child, a sophomore at Belmont University in Nashville, she will take on almost $40,000 in parental loans. “I’ll probably work until I fall dead at my keyboard,” the Decatur, Georgia, resident said in an interview. It’s not just graduates who are staggering under the weight of educational loans. Parents, too, are borrowing record amounts to put their kids through college, jeopardizing their retirements. With the housing crisis, many families can no longer avail themselves of one popular option for financing university studies: taking out a second mortgage. “A plunge in home prices has erased the equity that many homeowners had just a few years ago,”Federally backed educational loans to parents, at an estimated $100 billion, make up 10 percent of the $1 trillion in educational loans. The problem is more acute at some private schools, such as Colgate University, Trinity College and Sarah Lawrence College, which have smaller endowments and can’t offer the same financial aid as Harvard and Princeton universities.

Calstrs Should Cut Assumed Return to 7.5%, Actuary Recommends - The California State Teachers’ Retirement System, the second-largest U.S. public pension, should lower its assumed annual rate of return to 7.5 percent from the current target of 7.75 percent, its actuary said. The board of the $144.8 billion fund is scheduled to vote Feb. 2 on the recommendation, which would add $5.9 billion to its $56 billion funding shortfall, according to a report by Milliman Inc., the fund’s consulting actuary. Calstrs posted a 2.3 percent investment gain in 2011, reducing its ability to meet long-term obligations to 856,000 members and their families. The fund had only 71 percent of the money it needs to pay benefits as of June 30, 2010, down from 78 percent a year earlier, according to a statement. “There is a less than 50 percent probability that the current assumption” of 7.75 percent will be met “over the long term,” Milliman actuaries wrote in their report. Over 10 years, the fund gained 5.4 percent, according to a statement Jan. 24.

California Teachers’ Pension Trims Investment Forecast to 7.5% -- The California State Teachers’ Retirement System, the second-largest U.S. public pension, cut its assumed annual rate of return to 7.5 percent from 7.75 percent, the second reduction since 2010. The board of the $144.8 billion fund voted yesterday to adopt an actuary’s recommendation to lower its investment forecast because of what a staff report called “dramatic market declines” beginning in 2008. The change means the plan will need larger contributions from taxpayers, teachers, school districts, or a combination of all three, to cover pension costs. The fund had 71 percent of what it needs to pay future benefits as of June 30, 2010. Lowering the rate adds $5.9 billion to its $56 billion shortfall, according to Milliman Inc., the fund’s consulting actuary. “It’s better to err on the side of being conservative,” said Sharon Hendricks, a Los Angeles community-college instructor and board member. “I certainly do that with my personal finances.”

Bloomberg's $68.7 Billion NYC Plan Spreads Pension Payments - New York Mayor Michael Bloomberg said his $68.7 billion preliminary budget for the next fiscal year would avoid new taxes or cuts to vital services by stretching billions of dollars of increased pension costs over 22 years. The mayor, 69, who presented his 11th budget today at City Hall, said New York has reduced its anticipated spending for pensions by $850 million through June 2013. That's because the city had set aside more money than would be needed if the state Legislature, City Council and unions agree to his plan to amortize the payments over more than two decades. Those savings -- combined with $180 million in reduced debt service, spending cuts, more state aid and $500 million in freed-up reserves -- helped close a $2 billion deficit in the fiscal year that begins July 1, he said. Bloomberg projected a $3 billion gap in the following year. "It is a responsible budget that continues to make responsible spending cuts while protecting the core services and investments that have helped make our city the place to be, helped us to weather the national recession better than most other places," the mayor said.

Mayor Bloomberg calls pension system ‘ticking time bomb’ that costs 6 times more than 10 years ago - Mayor Bloomberg called the city’s pension system a “ticking time bomb” that costs six times more than it did 10 years ago. The city will have to shell out $8 billion to cover pension costs this year - with $1 out of every $6 from taxpayers going toward it, he said on Thursday. “Imagine what would happen to your family budget if the rent went up six times over the course of a decade, or your grocery bill or the cost of a Metro card,” he said as he unveiled the city’s 2013 preliminary budget. The mayor compared the skyrocketing expense to a $2 slice of pizza in 2002 costing $12 today. “We just cannot afford to pay such costs for future city workers,” he said, calling for a new hiring tier for union workers that would lower the city’s contribution to their retirement funds. “We have an obligation to pay for those who are with us now. ... We just cannot afford to grant new people those size benefits.”

State action urged to stop pension debt from ballooning — Illinois’ multibillion-dollar pile of unpaid bills will quadruple within five years unless steps are taken to curtail state pension and Medicaid spending, a government watchdog concluded Monday in a new analysis of the state’s budget. The Chicago-based Civic Federation is warning that state government’s $9.2 billion backlog of unpaid bills that will exist by early summer will reach an unprecedented $34.8 billion by 2017 without immediate action by Gov. Pat Quinn and state lawmakers. “The governor and General Assembly must act now. Failure to address unsustainable trends in the state’s pension and Medicaid systems will only result in financial disaster for the State of Illinois,” Laurence Msall, president of the Civic Federation, said in a prepared statement. Specifically, the group urged “aggressive implementation” of a Medicaid reform package that passed in January 2011 designed, in part, to boost the use of managed care and lessen reliance on institutional care for the elderly and disabled.

Illinois Faces ‘Potentially Paralyzing’ $35 Billion Unpaid Bill Backlog - Illinois’s unpaid bills may more than triple to $34.8 billion by 2017 unless lawmakers and Democratic Governor Pat Quinn immediately bring Medicaid and pension spending under control, said a research group. The “potentially paralyzing” backlog, projected to reach $9.2 billion when this fiscal year ends June 30, would be fueled by an “unsustainable” increase in Medicaid spending, according to the Civic Federation, which calls itself a nonpartisan government research organization. “Failure to address unsustainable trends in the state’s pension and Medicaid systems will only result in financial disaster for the state of Illinois,” Laurence Msall, president of the Civic Federation in Chicago, said in a press release today. Illinois had its general-obligation bond rating reduced Jan. 6 by Moody’s Investors Service to A2 from A1, making it the company’s lowest-graded U.S. state. Moody’s revised its outlook because the state “took no steps to implement lasting solutions to its severe pension underfunding or to its chronic bill payment delays.”

Pension Puffery- Here are 12 half-truths that deserve to be debunked in 2012: One of my pet peeves in the ongoing debates over public pension reform is the way partisans on each side try to pitch half-truths and myths to support their arguments. The other side seldom believes any of these, but they help rally the allies on the speaker's side. Sometimes the press naively re-circulates these fallacies, which leaves the general public even more confused about what to believe. There's an old saying in politics that if you tell the same lie long enough, the public will eventually believe it — and that apparently is the mentality of lobbyists on both sides. In an effort to start the new year with a clean slate for public debate, I'd like to set the record straight on a dozen of the most glaring fallacies and silly slogans. This is a lengthy column, so readers can click on to any one of these topics to jump to that subject:

American Airlines proposes to end all four pension plans - AMR Corp. wants to terminate all four of its pension plans as part of a broad bankruptcy restructuring that aims to cut costs by $2 billion a year, the company said today.  "American's pension plans are very expensive – we spend more on them than our competitors spend on their retirement plans. We simply do not see a way we can secure the company’s future without terminating our defined benefit plans," the company said in materials posted on a company website.  The Fort Worth-based carrier is also proposing to replace its existing retirement benefit plans with defined contribution plans such as 401(k)s. American said all active employees would be offered a 401(k) plan with non-pilot employees receiving a company match dollar-for-dollar of up to 5.5 percent while pilots would participate in a new plan that will replace its defined benefit plan and B plan.  Details on job cuts and other operational changes were not released. Executives are meeting with union leaders today to detail their plans for each work group, and more details are expected to be released later today. AMR has more than 80,000 employees, including about 25,000 in North Texas.

Will Taxpayers Be On The Hook For American Airlines' Pensions? - American Airlines needs $18.5 billion to cover its pension promises to current and former employees, but it has only set aside $8.3 billion. American Airlines is asking the bankruptcy court for permission to drop its pension plans. If the court allows that, the plans will be taken over by the Pension Benefit Guaranty Corp, a government agency that takes over pension plans for failed companies. The PBGC works like an insurance company. Firms that are backed by the PBGC pay premiums to the agency. Those premiums are supposed to pay for the agency's costs, so taxpayers don't have to pay. But in recent years the premiums haven't been enough — the agency's funding shortfall is currently $26 billion. The PBGC, for its part, is pushing back against American's request. Here's a statement from PBGC Director Josh Gotbaum: "Before American takes such a drastic action as killing the pension plans of 130,000 employees and retirees, it needs to show there is no better alternative. Thus far, they have failed to provide even the most basic information to decide that." If the PBGC does wind up on the hook for American Airlines pensions, it would be the largest single claim on the agency since it took over United Airlines pensions plans in 2005.

Chart of the Day: Permanent Zero and Personal Interest Income - If you are an American retiree or near-retiree, you’re not happy these days. Five years ago, you were getting a decent return on your fixed income investments. But since then, the Fed has trashed the fixed income market by reducing interest rates to zero percent for "an extended period". The thinking is that this will get people to take on more credit. But the reality is that a lot of people are stuffed to the gills with existing credit and are not creditworthy. The Fed is pushing on a string. Meanwhile, it is sucking money out of the economy. Ross Perot would tell you that giant sucking sound is the fed reaching into your pocket and giving your interest income to the Treasury by buying up government debt and keeping interest rates at zero. Prediction: The next recession will see significant deleveraging and financial distress. The Fed will then move to purchasing municipal bonds, stocks and real assets for fear of a deflationary spiral.

Strengthening Economic Security in Retirement - Treasury blog - In his State of the Union message last week, President Obama laid out a blueprint for an America that’s built to last—where hard work pays off and responsibility is rewarded. Today, the Departments of Treasury and Labor are taking steps to strengthen economic security for our nation’s seniors by giving Americans greater investment information and access to more choices to plan for a secure retirement. These steps will be of particular importance to women, who tend to live longer and have fewer retirement assets and lower retirement income than men. The Department of Labor is taking action to require 401(k) plan providers to better disclose the cost and nature of the services they provide, while Treasury and the IRS are announcing steps that will ease regulatory barriers in the market for annuities and other forms of lifetime income. The Council of Economic Advisers (CEA) has prepared a detailed report describing the significance of today’s actions, which can be accessed here.

Social Security: The Elevator Pitch - Since Social Security started it has always brought in more money than was spent. It contributes a surplus to the total federal budget. That’s true today and will continue for quite some time. The extra revenue needed to make SS solid far beyond the foreseeable future (75 years) is tiny: 0.6% of GDP.  A 0.6% revenue increase would not be a big burden. The U.S. has been taxing about 28% of GDP for decades, compared to 30-50% in other rich countries (average: 40%).  Coincidentally, Scrapping the Cap on SS contributions — so high earners paid payroll tax above $110K — would deliver … 0.6% of GDP. Worried about our fiscal future? It’s the health care costs, stupid. What providers charge. U.S. providers charge two to five times what they charge in other countries, and it’s rising faster — and faster than wages, GDP, inflation. If you’re not talking about that, you have nothing useful to say about our fiscal future:

SOCIAL SECURITY More How They Lie To Us - David Brooks says in a column headlined  Where Are the Liberals? Americans don't hate government, but "believe the government has been captured by rent-seekers."  This is the disease that corrodes government at all times and in all places. As George F. Will wrote in a column in Sunday’s Washington Post, as government grows, interest groups accumulate, seeking to capture its power and money. Some of these rent-seeking groups are corporate types. . . . Others exercise their power transparently and democratically. As Will notes, in 2009, the net worth of households headed by senior citizens was 47 times the net worth of households led by people under 35. Yet seniors use their voting power to protect programs that redistribute even more money from the young to the old and affluent.  The lie is that this is a dishonest segue from corporate rent seekers to the implication that "seniors" (as if they were all the same) are rent seekers, and that the normal wealth that "a generation" acquires after a lifetime of work is somehow unnatural and unfair, and worst of all, that somehow SS is redistributing money to the affluent.  SS doesn't redistribute money except from your young self to your old self, exactly as if you had saved it (and bought insurance against inflation and financial setbacks of various kinds), it does not add to the wealth of the wealthy, it helps the elderly poor live in modest comfort... very modest comfort.

Social Security Trust Fund Outlook Takes $1 Tril Dive - The outlook for Social Security's trust fund has deteriorated to an astonishing degree over the past year, new Congressional Budget Office projections show. The nonpartisan budget scorekeeper now expects the trust fund to peak in 2018 and decline to $2.7 trillion in 2022 — a full $1 trillion less than Social Security's own actuaries were expecting last year. The new trajectory suggests that the trust fund's current depletion date of 2036 may jump ahead several years when Social Security's trustees release their annual report this spring, making the retirement program more central to the 2012 election. The trust fund doesn't mean much for the government’s ability to afford benefits — Social Security's assets are canceled out by Treasury's equal debt. But it does give Social Security the legal authority to pay all promised benefits until its special-issue Treasuries are spent. Under current law, once the trust fund is exhausted, Social Security could only afford to pay 78% of benefits. Since the disabled and older retirees would be protected, new retirees would face much deeper cuts to a benefit that is not especially generous to begin with.

Koch Bros. Mouthpiece Tells Occupy: “Forget the 1%, Go After Granny” - Firedoglake - The uproariously named “” has a video out entitled “Why Geezers Are the True Enemy of the Occupy Movement” featuring Veronique de Rugy. In the video, Ms. de Rugy explains to young occupiers that the elderly have done deplorably well in the preceding few decades. This makes Nonna and Nonno the natural enemies of the young and should therefore be stripped of Social Security and Medicare. In her defense, she does stop short of suggesting they be taken to the nearest frozen mountaintop and set adrift. Lest she be mistaken for some class warrior, Ms. de Rugy hastens to point out that even though many of the aged are rolling in enough gelt to keep them in poligrip and corrective shoes for the rest of their lives, they differ from the one-percent. The heroic one-percenters, you see, amassed their riches by making contributions to the economy, unlike grandma who fritters away her days watching Matlock reruns and has yet to outsource a single job Veronique de Rugy is a senior research analyst with the Mercatus Center of George Mason University. If I were her, given her own analysis, I’d worry about that senior part. The Mercatus Center was founded as the Center for Market Processes by former economist Rich Fink, executive vice president of Koch Industries and former president of the Koch Foundations.

Government Health Care Spending To Reach $1.8T by 2022, CBO Predicts - On Tuesday, the Congressional Budget Office released an economic outlook predicting that the cost of government health care programs -- including Medicare and Medicaid -- will more than double across the next 10 years. According to CBO's outlook, federal spending on health care programs will increase to $1.8 trillion by 2022 and account for about 7% of the nation's economy. CBO said the biggest driver of the projected health care spending increase is the aging U.S. population. CBO estimates that Medicare spending will rise by 90% by 2022, assuming Congress allows a 27% physician pay cut to take effect in March. However, if lawmakers delay the cuts for the next decade and freeze physician pay rates at 2011 levels, CBO says Medicare spending would increase by an additional $316 billion across 10 years (Baker, "Healthwatch," The Hill, 1/31). Overall, CBO predicted that the federal deficit likely will surpass $1 trillion in fiscal year 2012 for the fourth consecutive year and that unemployment would remain above 7% until 2015 (Peterson/Paletta, Wall Street Journal, 1/31).

Fundamental Fiscal Challenge: Rising Health Care Costs – CBO Blog - This morning I testified before the House Budget Committee on our annual Budget and Economic Outlook that was released yesterday. My testimony highlighted many of the points that were included in yesterday’s blog post. One point I want to emphasize is the following: The combination of tax and spending policies that the nation has been accustomed to cannot be sustained over the long term. That is because the aging of the population and rising costs for health care will, in the absence of other changes, steadily push spending up.The number of people age 65 or older will increase by one-third in the coming decade, substantially raising the cost of Social Security, Medicare, and Medicaid. In addition, the Affordable Care Act will significantly increase the number of nonelderly people receiving assistance through federal health care programs. Furthermore, CBO projects that the costs per enrollee for Social Security and the major health care programs will continue to rise.  (Yesterday’s blog post described the difference in the assumptions underlying CBO’s baseline projections—which are conditioned on current law—and the alternative fiscal scenario.)

Health Care Payers Push Back Against Costs -In a paper, “Divide et Impera: Protecting the Growth of Health Care Incomes (Costs),” published this month in the British journal Health Economics, I summarize themes touched on here and there in several earlier posts on this blog. My argument in the paper is that what is often called overuse of health care by what are often described as excessively insured Americans — especially their use of high-cost, high-tech procedures — is at best a partial explanation for the high cost of American health care. Yet cost-containment initiatives like high deductibles and co-insurance have taken use of health care as their chief target. These efforts will be only partly successful in controlling national health spending. Equally important contributors to our high health spending, and probably more so, have been two other factors. The first is the much higher administrative overhead costs loaded onto the American health system. A second major factor accounting for high health spending per capita in the United States is the significantly higher prices Americans pay for virtually all health care services and products.

Portable DNA Sequencer Demonstrated at World Economic Forum - It was the talk of Davos, grabbing the imagination of a forum otherwise shrouded in gloom: a miracle machine that cracks the code of life within hours and could revolutionise healthcare. Patients will no longer have to wait weeks to know if they have cancer and their doctors will know immediately what kind of disease they have, allowing them to target therapies precisely and to avoid harmful delays or mistakes. Health officials confronted by superbug outbreaks will be able to identify the bug’s strain and begin planning treatment within hours rather than days or weeks, potentially saving thousands of lives. Soon, researchers in the developing world will take portable DNA sequencers into the field to identify new viruses and verify water quality. And police investigators will be able to develop a suspect’s DNA profile as quickly as their fictional counterparts do in glossy television dramas, while commandos on the battlefield will identify the bodies of friend and foe.

Coronary Capitalism, by Kenneth Rogoff 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. 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 the US Centers 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. Of course, the problems of the food industry have been vigorously highlighted by experts on nutrition and health, including Michael Pollan and David Katz, and certainly by many economists as well. And there are numerous other examples, across a wide variety of goods and services, where one could find similar issues. Here, though, I want to focus on the food industry’s link to broader problems with contemporary capitalism and on why the US political system has devoted remarkably little attention to the issue

Ritalin Gone Wrong - THREE million children in this country take drugs for problems in focusing. Toward the end of last year, many of their parents were deeply alarmed because there was a shortage of drugs like Ritalin and Adderall that they considered absolutely essential to their children’s functioning.  But are these drugs really helping children? Should we really keep expanding the number of prescriptions2 filled?  In 30 years there has been a twentyfold increase in the consumption of drugs for attention-deficit disorder.  As a psychologist who has been studying the development of troubled children for more than 40 years, I believe we should be asking why we rely so heavily on these drugs. Attention-deficit drugs increase concentration in the short term, which is why they work so well for college students cramming for exams. But when given to children over long periods of time, they neither improve school achievement nor reduce behavior problems. The drugs can also have serious side effects, including stunting growth.

Drug addiction ‘may be hereditary’ - Drug users hooked on crack cocaine may have inherited their vulnerability to addictive behaviour, scientists claimed yesterday. Researchers found that drug addicts and their non-addicted siblings share certain features of the brain, meaning it may be hard-wired for addictive behaviour. Scientists who scanned the brains of 50 pairs of brothers and sisters of whom one was a cocaine addict found that both siblings had brain abnormalities that made self-control more difficult. The findings increase understanding of why some people with a family history of drug abuse have a higher risk of addiction than others. The study could also help vulnerable people lean how to take control before addictions set in.

Malaria toll ‘is twice as high’ - BBC - Worldwide malaria deaths may be almost twice as high as previously estimated, a study reports. The research,  published in the British medical journal the Lancet, suggests 1.24 million people died from the mosquito-borne disease in 2010. This compaGlobal malaria mortality between 1980 and 2010 a systematic analysires to a World Health Organisation (WHO) estimate for 2010 of 655,000 deaths. But both the new study and the WHO indicate global death rates are now falling. The research was funded by the Bill and Melinda Gates Foundation. It used new data and new computer modelling to build a historical database for malaria between 1980 and 2010. The conclusion was that worldwide deaths had risen from 995,000 in 1980 to a peak of 1.82 million in 2004, before falling to 1.24 million in 2010. The rise in malaria deaths up to 2004 is attributed to a growth in populations at risk of malaria, while the decline since 2004 is attributed to "a rapid scaling up of malaria control in Africa", supported by international donors.

McDonald's scraps "pink slime" from burgers - McDonald's is axing "pink slime" from its burgers, after receiving heat from celebrity chef and food activist Jamie Oliver, CBS This Morning reported. What is pink slime? It's the name Oliver has given to fatty beef trimmings soaked in ammonium hydroxide, which removes bacteria and makes the beef taste better. "We're taking a product that would be sold in its cheaper form for dogs," Oliver said on his TV show, Food Revolution, where he demonstrated the practice. "After this process, we can give it to humans." The technique is approved by the United States Department of Agriculture and the Food and Drug Administration.

FDA USING ‘INTERSTATE COMMERCE’ TO REGULATE YOUR STEM CELLS AS A ‘DRUG’ -  According to the U.S. Food and Drug Administration, adult stem cells — undifferentiated cells found in every human body that can transform into specialized cells with the medial potential to repair certain areas of the body damaged by disease or injury — fall under its jurisdiction for regulation as a drug. The FDA states on its websiteStem cells, like other medical products that are intended to treat, cure or prevent disease, generally require FDA approval before they can be marketed. At this time, there are no licensed stem cell treatments.

Whistleblowers Expose FDA’s Illegal Surveillance of Employees - As reported in today's Washington Post, six current and former employees of the Food and Drug Administration (FDA) have filed a complaint against the FDA in U.S. District Court. The employees are seeking an injunction to stop the agency from illegally spying on employees' private communications to Congress and other oversight agencies.  Linked here are key documents related to this lawsuit and the FDA's spying program. The complaint details how the FDA targeted its employees with a covert spying campaign that lasted for two years. The FDA began the program after learning that the employees wrote a letter to President-Elect Obama and his transition team in early 2009 detailing government misconduct in approving unsafe medical devices.  The Agency installed (or activated) spyware on their workplace computers and used other technology that to monitor their password-protected Gmail-to-Gmail communications. In addition to reading the whistleblowers' emails, the FDA took contemporaneous screen shots of the employees’ computer screens. Managers used the collected information to learn the identities of confidential whistleblowers and to obtain the details of the public health and safety concerns the whistleblowers intended to disclose to the Office of Special Counsel, Congress and the Agency's own Inspector General.

Occupy Monsanto with Farmers: Jan. 31, Foley Square (NYC) On January 31st, family farmers from across the county will take part in the first phase of the OSGATA et al. v. Monsanto court case filed to protect farmers from genetic trespass by Monsanto’s genetically modified (GMO) seed, which can contaminate organic and non-GMO farmers’ crops and open them up to abusive lawsuits. Meet at Foley Square in Manhattan at 9 am on Tuesday, Jan. 31, 2012. As a result of aggressive lawsuits against farmers with contaminated crops, Monsanto has created an atmosphere of fear in rural America and driven dozens of farmers into bankruptcy. But farmers are fighting back! The Federal District Court judge has agreed to hear oral arguments in this landmark case to decide whether or not this case will move forward. Occupy Wall Street Food Justice, Occupy Big Food and Food Democracy Now! will assemble at Foley Square in Manhattan in solidarity with farmers on the front lines of the struggle against corporate domination of our food system.

US Dept. of Agriculture New Hardiness Zones Show Impact of Global Warming - Gardeners who have noticed some unusual goings-on in their yards had their suspicions confirmed this week when the US Dept. of Agriculture released its new map of plant hardiness zones. The map confirms what many gardeners have already figured out about global warming and the impact it is having on plants. Hardiness zones, based on minimum winter temperatures, are marching northward. This means that plants that wouldn’t have survived through winter in some regions just 20 years ago are now making it. Comparing the new 2012 map to the last map published in 1990 shows some significant shifts, especially across the Great Plains. Though the USDA cautions that not all the changes to the map can be attributed to climate change, it is clear that the major shifts are related to warmer temperatures. For example, Iowa and Nebraska used to straddle Zones 4 and 5, but now fall almost entirely within the warmer Zone 5. Most areas in the continental US have warmed by 1-2 degrees F during the last 50 years. This warming has brought shorter and less severe winters. In fact the country has seen many fewer record lows each winter.

When my backyard invades your backyard - First the Emerald Ash Borer, now the Asian Longhornded Beetle: Ohio's trees are under attack.  The debate over eradication of an invasive pest that kills a particular tree specie comes down to a question of 'preemptive overkill' versus 'wait and hope.' State and federal agencies have spent more than $370million to research and fight longhorn infestations in Illinois, New York, New Jersey and Massachusetts. The first U.S. infestation was found in Brooklyn in 1996. The beetles hitch rides to the U.S. inside wooden pallets and crates shipped from Asia. In Ohio, they threaten millions of trees as well as the state’s syrup industry, which produced 125,000 gallons of maple syrup in 2011. The extermination strategy officials proposed in November was to cut down and mulch every healthy tree within one-quarter mile of lightly infested trees and within a half-mile of a tree with at least 10 holes from which the beetles had emerged as adults. For Bonnie and Paul Barbick, that means hundreds of trees in a 20-acre wooded lot near their renovated brick farmhouse.

Texas vs US Soybean Yields - I was curious how the 2011 drought in Texas translated into crop yield statistics.  I happened to pick on soybeans to start with, and generated the graph above, which shows whole-US and Texas soybean yields.  Sure enough the drought has caused a 30% or so drop in Texas yield in 2011 versus  the 2000-2010 average.  However, for the US as a whole, 2011 is well within the normal range of variation. However, the graph raises a larger question: over the last sixty years, US yields have been generally increasing (consistent with the usual technologically driven yield improvements in most crops in most places).  However, Texas yields have been basically flat the entire time.  What's up with that? Theories are solicited in comments. FWIW, here's the USDA's county level yield map for soybeans in 2010 - clearly Texas is well outside the sweet spot for growing soybeans, but there is production along the Gulf coast. And here's the acreage planted:

More 2011 Texas Crop Stats - Pursuant to yesterday's question of how the 2011 drought affected Texas crop production, I found this helpful summary from the Texas Field Office of the USDA National Agricultural Statistics Service.  The graph above is for cotton, and shows both production and yield.  Production was hurt more than yield because a lot of planted acreage had to be abandoned outright.  That will be a common pattern. Here is corn: and here is sorghum: There are a few more graphs in the report, but you get the idea.  Crop production in Texas was roughly halved compared to an average year in the last decade.  This being the result of what was, by harvest time in September, the worst drought in Texas in the historical record: Though it only narrowly beat out 1956 and given the lack of overall trend here I think you'd be hard pressed to say that the PDSI is clearly outside the range of historical variability in a statistical sense.

Climate science experts predict intensified drought in Texas - The extreme drought gripping Texas and the rest of the Southwest is likely to intensify, according to a panel of climate experts from Columbia University. Richard Seager, an expert on droughts in North America, told a Washington audience that the Texas drought of the past decade has been the continent’s most serious. The luckiest three percent of the state’s land is rated as having a “severe drought,” said Lisa Goddard, an expert on climate prediction. Another 88% of the state is considered “exceptional.” The drought can be attributed to the La Nina phenomenon, a cooling pattern in the Pacific Ocean, in combination with a warming pattern in the Atlantic Ocean, panelists marking the second annual Climate Science Day explained. However, the drought is also part of a “host of problems out there that we’re creating for ourselves,” Seager said, referring to global warming. He added that we can expect weather extremes, especially the drought, to intensify, and for the Southwestern states to become more arid with time.

Food Crisis as Drought and Cold Hit Mexico - A drought that a government official called the most severe Mexico had ever faced has left two million people without access to water and, coupled with a cold snap, has devastated cropland in nearly half of the country.  The government in the past week has authorized $2.63 billion in aid, including potable water, food and temporary jobs for the most affected areas, rural communities in 19 of Mexico’s 31 states. But officials warned that no serious relief was expected for at least another five months, when the rainy season typically begins in earnest.  Among the more seriously affected communities are tribal areas of the Tarahumara indigenous community in the Sierra Madre, in the north. Known for endurance running and self-reliance, the Tarahumara are among Mexico’s poorest citizens. When false reports of a mass suicide brought on by hunger surfaced recently, journalists and aid organizations poured in to shed light on the situation

Drought Strikes Mexico - Photo Essays - TIME

Current Drought in Mexico -  I feel a little parochial for not noticing this before, but the recent drought in Texas and the US Southwest extends over much of northern Mexico and is having an even bigger impact in that country: it's causing a food crisis in the less developed nation. The map above is from the North American Drought Monitor page at NOAA and shows the severity of the drought as of December 31st.  It uses some scale that isn't clear to me and isn't the PDSI.  Still the general idea seems clear enough. This came to my attention because of a New York Times article: A drought that a government official called the most severe Mexico had ever faced has left two million people without access to water and, coupled with a cold snap, has devastated cropland in nearly half of the country. The government in the past week has authorized $2.63 billion in aid, including potable water, food and temporary jobs for the most affected areas, rural communities in 19 of Mexico’s 31 states. But officials warned that no serious relief was expected for at least another five months, when the rainy season typically begins in earnest.

China’s largest freshwater lake dries up - For visitors expecting to see China's largest freshwater lake, Poyang is a desolate spectacle. Under normal circumstances it covers 3,500 sq km, but last month only 200 sq km were underwater. A dried-out plain stretches as far as the eye can see, leaving a pagoda perched on top of a hillock that is usually a little island. Wrapped in the mist characteristic of the lower reaches of the Yangtze river, the barges are moored close to the quayside beside a pitiful trickle of water. There is no work for the fisheries. According to the state news agency Xinhua, the drought – the worst for 60 years – is due to the lack of rainfall in the area round Poyang and its tributaries. Poor weather conditions this year are partly responsible. But putting the blame on them overlooks the role played by the colossal Three Gorges reservoir, 500km upstream. The cause and effect is still not officially recognised, even if the government did admit last May that the planet's biggest dam had given rise to "problems that need to be solved very urgently".

Australia Selling the Farm as 20% Price Slump Lures Influx of Global Funds - Winston Heywood ended a 200-year family history when he sold his parched wheat fields to a fund managed by U.S. investor Westchester Group Investment Management Inc. for more than A$6 million ($6.4 million). “They offered me the money I could live off for the rest of my life,” said the 62-year-old, who in August left for the New South Wales coastal town of Coffs Harbour after enduring his driest season since 2000. “My kids didn’t want to go through the ups and downs I went through.” At least four other funds are seeking A$1.6 billion to buy similar assets in Australia, lured by fresh rain, the prospect of bumper crops, and land prices that have dropped 20 percent nationwide, and in some areas have fallen by half, since the end of 2007. Now, three years after billionaire James Packer sold off cattle ranches larger than the Netherlands, rural land prices may have bottomed, according to Colliers International. The influx has pushed lawmakers to consider legislation that would increase scrutiny of overseas purchases after foreign ownership of land almost doubled since 1984. The funds also need to defy a history of farming ventures that have struggled to reward investors.

World lacks enough food, fuel as population soars: U.N. (Reuters) - The world is running out of time to make sure there is enough food, water and energy to meet the needs of a rapidly growing population and to avoid sending up to 3 billion people into poverty, a U.N. report warned on Monday. As the world's population looks set to grow to nearly 9 billion by 2040 from 7 billion now, and the number of middle-class consumers increases by 3 billion over the next 20 years, the demand for resources will rise exponentially. Even by 2030, the world will need at least 50 percent more food, 45 percent more energy and 30 percent more water, according to U.N. estimates, at a time when a changing environment is creating new limits to supply. And if the world fails to tackle these problems, it risks condemning up to 3 billion people into poverty, the report said. Efforts towards sustainable development are neither fast enough nor deep enough, as well as suffering from a lack of political will, the United Nations' high-level panel on global sustainability said. "The current global development model is unsustainable. To achieve sustainability, a transformation of the global economy is required," the report said.

Food Aid to to Developing Nations May Increase Armed Conflict - For decades, aid workers, journalists and others have documented cases where food aid has been misappropriated by armed groups who use it to feed their soldiers and buy weapons. Convoy trucks and other equipment are often captured. Such reports are, in the end, merely anecdotal, and may only represent extreme, outlying cases. But Harvard’s Nathan Nunn and Yale’s Nancy Qian devised a way sidestep such issues and more directly measure what is happening. Their results are sobering. The flow of American food aid, the economists found, has a lot to do with the wheat crop. In bumper years, the U.S. government accumulates wheat as part of its price support program. In the following year, the surplus is shipped to developing countries as food aid. They found that an increase in food aid raises the incidence, onset and duration of armed civil conflict in a recipient country. The problem is particularly acute in countries where there are few roads — giving aid convoys fewer opportunities to circumvent problems — and ones where there are stark ethnic divisions.

Ethanol's food-fuel dilemma - After 30 years of government largesse that would have made even Nancy Pelosi blush, Congress in December let expire the roughly $6 billion annual subsidy for corn ethanol. That's bad news for the big refiners that were paid 45¢ for each gallon of corn ethanol they blended into gasoline supplies. But it's good news for those worried about the "food-fuel dilemma" when the demand for corn to make ethanol has been raising the price of some foods. Not so fast. It turns out that while the subsidies are gone, U.S. law still requires oil refiners to blend corn ethanol into fuel -- some 12.5 billion gallons this year and at least 15 billion gallons by 2015. That's still a small portion compared with the 133 billion gallons of gasoline that the U.S. Energy Information Administration estimates Americans will burn this year, but nonetheless enough to keep upward pressure on corn prices. That law needs to change, argues Jeremy Grantham. "It [U.S. ethanol policy] is truly diabolical," he says. "The subsidy was decoration. The mandate is the villain here."

What do Burmese pythons, Asian beetles and Asian carp all have in common? - Answer: They are all univited (and unwanted?) guests in U.S. ecosystems.  That, and they're all Asian.  But I'm sticking with the invasive species angle. Ohio officials have long considered the Asian carp a dire threat to Lake Erie’s $10 b illion-a-year tourism and fishing industries. Concerns have grown since 2009, when DNA tests indicated the fish had slipped past a Chicago-area electric barrier meant to keep them out of Lake Michigan.  The carp eat most of the food that native fish rely on. Some specimens can weigh as much as 50 pounds. “The key is to stop them before they get in, and that’s why these physical barriers are so important,” said David Ullrich, the Great Lakes and St. Lawrence Cities Initiative director. “We need a higher degree of certainty.”...  Ohio government leaders, including Gov. John Kasich, express support for the barriers but are concerned about funding the project. Kristy Meyer, clean-water director for the Ohio Environmental Council, said the risk justifies the expense.

Filmmaker sounds alarm over ocean of plastic - On Midway atoll in the North Pacific, dozens of young albatross lie dead on the sand, their stomachs filled with cigarette lighters, toy soldiers and other small plastic objects their parents have mistaken for food. That sad and surreal sight, says Hong Kong-based Australian film director Craig Leeson, is one of the many symptoms of a plague afflicting the world’s oceans, food chains and human communities: the onslaught of discarded plastic. “Every piece of plastic ever made since the fifties exists in some shape or form on the planet,” Leeson told AFP. “We throw plastic into a bin, it’s taken away from us and we never see it again — but it still comes back at us.”

Environmental Watch: Micro-plastic fibers from washing clothes showing up in marine environment - Microscopic plastic debris from washing clothes is accumulating in the marine environment and could be entering the food chain, a study has warned. Researchers traced the “micro-plastic” back to synthetic clothes, which released up to 1,900 tiny fibers per garment every time they were washed. Earlier research showed plastic smaller than 1mm were being eaten by animals and getting into the food chain. The findings appeared in the journal Environmental Science and Technology. “Research we had done before… showed that when we looked at all the bits of plastic in the environment, about 80% was made up from smaller bits of plastic,” said co-author Mark Browne, an ecologist now based at the University of California, Santa Barbara. “This really led us to the idea of what sorts of plastic are there and where did they come from.”Dr Browne, a member of the US-based research network National Center for Ecological Analysis and Synthesis, said the tiny plastic was a concern because evidence showed that it was making its way into the food chain. “Once the plastics had been eaten, it transferred from [the animals'] stomachs to their circulation system and actually accumulated in their cells,” he told BBC News. In order to identify how widespread the presence of micro-plastic was on shorelines, the team took samples from 18 beaches around the globe, including the UK, India and Singapore. “We found that there was no sample from around the world that did not contain pieces of micro-plastic.” 

Snowy owls soar south from Arctic in rare mass migration (Reuters) — Bird enthusiasts are reporting rising numbers of snowy owls from the Arctic winging into the lower 48 states this winter in a mass southern migration that a leading owl researcher called "unbelievable."Thousands of the snow-white birds, which stand 2 feet tall with 5-foot wingspans, have been spotted from coast to coast, feeding in farmlands in Idaho, roosting on rooftops in Montana, gliding over golf courses in Missouri and soaring over shorelines in Massachusetts. A certain number of the iconic owls fly south from their Arctic breeding grounds each winter but rarely do so many venture so far away even amid large-scale, periodic southern migrations known as irruptions. "What we're seeing now -- it's unbelievable," said Denver Holt, head of the Owl Research Institute in Montana. "This is the most significant wildlife event in decades," added Holt, who has studied snowy owls in their Arctic tundra ecosystem for two decades.

Jack Mackerel — Another Epic Fisheries Collapse - On several occasions I have warned you about the human-caused destruction of the world's oceans. One key aspect of this catastrophe is the collapse of various important fisheries, which has a devastating effect on ocean ecosystems. Eventually, the oceans will be all but dead, almost bereft of animal life. Honestly, marine scientists don't really know how much havoc we're wreaking by overfishing various important species, but as our knowledge grows, we'll learn in the end that the outcome of such wanton destruction is not benign. It never is. The New York Times has come out with a report detailing the decimation of the Jack Mackerel fishery (species Trachurus murphyi) off the coasts of Chile and Peru. The indiscriminate slaughter of these fish looks just like the destruction of the cod fishery off New England and eastern Canada in the northwest Atlantic in the 1990s. From In Mackerel's Plunder, Hints of Epic Fish Collapse

Cedar trees said victims of climate change - Yellow cedars, a culturally and economically valuable tree in Alaska and British Columbia, have been dying off because of shifting climate, researchers say. The die-offs have affected about 60 percent to 70 percent of trees in forests covering 600,000 acres in the region, researchers say, and it’s all down to snow — or more accurately the lack of it. “The cause of tree death, called yellow-cedar decline, is now known to be a form of root freezing that occurs during cold weather in late winter and early spring, but only when snow is not present on the ground,” U.S. Department of Agriculture scientist Paul Hennon said.

Floods create ‘inland sea’ in Australia - Major flooding hit parts of Australia’s east on Friday, stranding thousands of residents, prompting a military airlift and leaving some communities only accessible by helicopter. The deluge, which has sparked dozens of rescues and left about 7,275 people isolated in various parts of New South Wales state has also impacted Queensland to the north where homes have reportedly been inundated. “From the air it looks like an inland sea,” New South Wales Premier Barry O’Farrell said after visiting the region.

Death toll from Europe freeze tops 220 - Temperatures plunged to new lows in Europe where a week-long cold snap has now claimed more than 220 lives and forecasters warned Friday that the big freeze would tighten its grip over the weekend. A total of 223 people have died from the cold weather in the last seven days according to an AFP tally, with Ukraine suffering the heaviest toll. People have been found dead on the streets in some countries, while thousands have been trapped in mountain villages in Serbia. In Italy, Venice’s canals started freezing over and even Rome was dusted in snow. The lowest temperatures recorded in Europe overnight were in the southwest of the Czech Republic, where the mercury dropped as low as minus 38.1 degrees Celsius (minus 36.5 Fahrenheit) overnight. The EU executive said vital Russian gas deliveries had dropped in nine countries, with Russian giant Gazprom invoking flexibility clauses as it also braves a cold snap. Supplies fell 30 percent in Austria and 24 percent in Italy. Ukraine’s emergencies ministry raised its death toll to 101 since the cold snap took hold, 64 of whom died on the streets. Almost 1,600 people have sought medical attention for frostbite and hypothermia and thousands have flocked to temporary shelters.

Get Ready for Super-Extreme Weather: “We Are Just Now Experiencing the Full Effect of CO2 Emitted [by] the Late 1980s” - Meteorologist Dr. Jeff Masters said in June that, driven by global warming, “It Is Quite Possible That 2010 Was The Most Extreme Weather Year Globally Since 1816.″ In a late December PBS story on the link between 2011′s “mind-boggling” extreme weather and global warming, Masters said it’s like “being on steroids … for the atmosphere.” Now Masters examines “Where is the climate headed?” The year 2011 tied with 1997 as the 11th warmest year since records began in 1880, NOAA’s National Climatic Data Center said last week. NASA rated 2011 as the 9th warmest on record. Land temperatures were the 8th warmest on record, and ocean temperatures, the 11th warmest. For the Arctic, which has warmed about twice as much as the rest of the planet, 2011 was the warmest year on record (between 64°N and 90°N latitude.) The year 2011 was also the 2nd wettest year over land on record, as evidenced by some of the unprecedented flooding Earth witnessed. The wettest year over land was the previous year, 2010. La Niña events bring a large amount of cold water to the surface in the equatorial Eastern Pacific, which cools global temperatures by up to 0.2°C. El Niño events have the opposite effect. The year 2011 was the warmest year on record when a La Niña event was present. Global temperatures were 0.12°C (0.2°F) cooler than the record warmest year for the planet (2010), and would very likely have been the warmest on record had an El Niño event been present instead.

NASA: Global warming caused mostly by humans - A new NASA study tries to lay to rest the skepticism about climate change, especially vocal this year on the GOP presidential campaign trail. It finds, like other major scientific research, that greenhouse gases generated by human activities -- not changes in solar activity -- are the primary cause of global warming. NASA researchers updated calculations of the Earth's energy imbalance, which is the difference between the amount of solar energy absorbed by the Earth's surface and the amount returned to space as heat. They found that despite unusually low solar activity from 2005 to 2010, the planet continued to absorb more energy (half a watt more per square meter) than it returned to space during that time period. "This provides unequivocal evidence that the sun is not the dominant driver of global warming," said James Hansen, director of NASA's Goddard Institute for Space Studies, who led the research released Monday.

Poor, minority residents face most health risks with climate change - Poor, urban and minority residents are most at risk for health problems linked to climate change, according to a new California Department of Public Health analysis of Los Angeles and Fresno counties. The department examined social and environmental factors ranging from the rising sea level to public transportation access and found that African Americans and Latinos living in these counties are more likely to be exposed to health and safety risks related to poor air quality, heat waves, flooding and wildfires stemming from climate change.“Clearly, climate change risks are not equal across the state or within individual counties,” according to the report [PDF]. “Identifying communities at greatest risk is a necessary step in efficiently employing limited resources to protect public health.” In Los Angeles County, neighborhoods near Santa Monica and Long Beach were among those deemed most vulnerable, “largely from risks due to sea level rise, but also partially attributable to poor public transit, wildfire risk, and a large proportion of elderly living alone,” the report said.

Reflections on Twenty Years of Policy Innovation - In 2009, the U.S. Congress considered but ultimately failed to enact legislation aimed at limiting U.S. greenhouse-gas (GHG) emissions.  The bill under consideration at that time, the American Clean Energy and Security Act of 2009, was the last in a series considered over several years.  Sponsored by Representatives Henry Waxman (D-California) and Edward Markey (D-Massachusetts), the bill passed the U.S. House of Representatives but failed to win sufficient support in the Senate.  No legislation was enacted, and by 2010, both Congress and the White House had abandoned efforts to pass federal climate legislation. Over months of contentious debate, while the Waxman-Markey bill and subsequent Senate action were being considered, millions of Americans were introduced for the first time to the phrase “cap and trade,” a regulatory approach that first came to prominence in the 1990s as the centerpiece of a national program to address the threat of acid rain by limiting emissions of sulfur dioxide (SO2), primarily from electric power plants. The 1990 SO2 cap-and-tradeprogram was conceived by the administration of President George H. W. Bush and was widely viewed as a success.  Yet cap and trade became a lightning rod for congressional opposition to climate legislation from 2009 through 2010.

Obama Won't Touch Climate With a 10-Foot Pole -  In his State of the Union address on January 24, President Obama largely avoided the topic of climate change. He talked about it once, in passing, as a topic on which "the differences in this chamber may be too deep" to enact new legislation. Its less-controversial cousin, "energy," on the other hand, got a whopping 23 mentions as an area where Republicans and Democrats should be able to find agreement. It became clear well before that address that the president and his administration don't think that climate change is an issue that will carry them to a second term. In his public events following the speech, he's also focused on clean energy while avoiding the other "c" word.

Saudi Oil Minister Calls Global Warming “Humanity’s Most Pressing Concern”  - In a speech at the Middle East and North Africa energy conference in London yesterday, Al-Naimi — who once called renewable energy a “nightmare” — hailed energy efficiency and solar as important investments, global warming “real” and “pressing,” and explained that drilling for oil “does not create many jobs.” We know that pumping oil out of the ground does not create many jobs. It does not foster an entrepreneurial spirit, nor does it sharpen critical faculties.” In the U.S., which is definitely not the Saudi Arabia of oil (that would be Saudi Arabia), there is a major industry campaign underway to convince Americans that drilling for fossil fuels will create over a million jobs in the country. However, assuming we drill virtually everywhere possible in America, credible analysis puts the real figure at a small fraction of that claim. Even the Saudis, who pump out 12% of the world’s oil, understand that simply drilling for more oil isn’t a long-term economic strategy.

Is a Reduction in Population Numbers the only Sustainable Solution? - In a recent post, I talked about why we may be reaching Limits to Growth of the type foretold in the 1972 book Limits to Growth. I would like to explain some additional reasons now. In my earlier post, I talked about how rising oil prices are associated with rising food prices, and how these high prices can make it harder for borrowers to repay their loans, as is now happening in Europe. These same problems can lead to a contraction of credit availability. A contraction in credit availability can be doubly problematic: it can lead to a cutback in demand because buyers cannot afford goods using oil, such as new cars, and it can lead to a drop in financing for industrial uses, including expanded oil drilling. All of these issues may lead to contraction of the type expected in Limits to Growth. US governmental debt limit problems and European debt defaults are also outcomes of the type expected with rising oil prices. In this post, I would like to discuss some other basic issues that seem to be associated with Limits to Growth, and that may eventually lead to an abrupt downturn or collapse.

Sustainable Humanity - Jeffrey Sachs - Sustainable development means achieving economic growth that is widely shared and that protects the earth’s vital resources. Our current global economy, however, is not sustainable, with more than one billion people left behind by economic progress and the earth’s environment suffering terrible damage from human activity. Sustainable development requires mobilizing new technologies that are guided by shared social values. United Nations Secretary-General Ban Ki-moon has rightly declared sustainable development to be at the top of the global agenda. We have entered a dangerous period in which a huge and growing population, combined with rapid economic growth, now threatens to have a catastrophic impact on the earth’s climate, biodiversity, and fresh-water supplies. Scientists call this new period the Anthropocene – in which human beings have become the main causes of the earth’s physical and biological changes.   The Secretary-General’s Global Sustainability Panel has issued a new report that outlines a framework for sustainable development. The GSP rightly notes that sustainable development has three pillars: ending extreme poverty; ensuring that prosperity is shared by all, including women, youth, and minorities; and protecting the natural environment. These can be termed the economic, social, and environmental pillars of sustainable development, or, more simply, the “triple bottom line” of sustainable development.

Arctic climate change 'to spark domino effect, according to Western Australia University researcher - WA-based scientists have warned of "dire consequences" to the human race after detecting the first signs of dangerous climate change in the Arctic. The scientists, from the University of WA, claim the region is fast approaching a series of imminent "tipping points" which could trigger a domino effect of large-scale climate change across the entire planet. In a paper published in the Royal Swedish Academy of Sciences' journal AMBIO and Nature Climate Change, the lead author and director of UWA's Oceans Institute, Winthrop Professor Carlos Duarte, said the Arctic region contained arguably the greatest concentration of potential tipping elements for global climate change "If set in motion, they can generate profound climate change which places the Arctic not at the periphery but at the core of the Earth system," Professor Duarte said. "There is evidence that these forces are starting to be set in motion."

Future of human kind faces dire consequences due to dangerous climate change in the Arctic, say leading international scientists from the University of Western Australia  - The future of human kind faces dire consequences due to arguably the first signs of dangerous climate change in the Arctic, say leading international scientists from The University of Western Australia. They say the Arctic region is fast approaching a series of imminent "tipping points" that could trigger an abrupt domino effect of large-scale climate change across the entire planet. In a paper published in the Royal Swedish Academy of Sciences' journal AMBIO and a parallel commentary in Nature Climate Change, the lead author and Director of the University's Oceans Institute, Winthrop Professor Carlos Duarte, said the Arctic region contained arguably the greatest concentration of potential tipping elements for global climate change. "If set in motion, they can generate profound climate change which places the Arctic not at the periphery but at the core of the Earth system," Professor Duarte said. "There is evidence that these forces are starting to be set in motion." "This has major consequences for the future of human kind as climate change progresses."

Global warming drives dramatic changes in ocean currents - An ever-expanding network of sensitive measuring devices, including ocean buoys is enabling researchers to get a better handle on the magnitude and scale of global climate change, including a patterned emergence of ocean hotspots alongside currents that wash the east coast of the major continents. The warming in those areas far exceeds the average rate of ocean warming, according to research published the journal Nature Climate Change this week. “We would expect natural change in the oceans over decades or centuries but change with such elevated sea surface temperatures in a growing number of locations and in a synchronised manner was definitely not expected,”  “Detecting these changes has been hindered by limited observations but with a combination of multi-national ocean watch systems and computer simulations we have been able to reconstruct an ocean history in which warming over the past century is 2-3 times faster than the global average ocean warming rate,” he added. The changes are characterised by a combination of currents pushing nearer to the polar regions and intensifying with systematic changes of wind over both hemispheres, attributed to increasing greenhouse gases.

Increasing ocean acidity due to humans’ CO2 — A new study from the University of Hawai‘i found that carbon dioxide produced by human activity has caused an unprecedented increase in the acidity of ocean water, according to new calculations by International Pacific Research Center scientists, the university reported Tuesday. And that spells trouble for the marine organisms that create coral reefs — and the communities who depend on them. Combining computer modeling with observations, the findings were reported by an international team of climate modelers, marine conservationists, ocean chemists, biologists and ecologists — led by Tobias Friedrich and Axel Timmermann at the University of Hawai‘i at Manoa — the university stated in a news release. Their study appeared online in the Jan. 22 issue of the journal Nature Climate Change. Scientists typically measure the concentration of aragonite in ocean water to gauge the water’s acidity. Aragonite is a form of calcium carbonate. Marine organisms such as corals use it to build skeletal structures through a process called calcification. CO2 is absorbed by the ocean, where it reacts with seawater, increasing the water’s acidity. As the acidity of seawater rises, the saturation level of aragonite drops. Lower aragonite levels might significantly reduce the calcification rate of marine organisms, resulting in the potential loss of ecosystems. 

Three States to Require Insurers to Disclose Climate-Change Response Plans - Insurance commissioners in California, New York and Washington State will require that companies disclose how they intend to respond to the risks their businesses and customers face from increasingly severe storms and wildfires, rising sea levels and other consequences of climate change, California’s commissioner said Wednesday.  Up until this point, those states required about a third of larger insurers to turn over the information in a survey; for all others it was voluntary.  “Our experience and other states’ experience as regulators is you get a far better response rate if you require response to be provided than if you just allow companies to decide when and how they will respond,” said Dave Jones, the California commissioner. “Our goal is to have the most complete, best and accurate information possible for investors, the insurance industry, regulators and the broader public.”  California, which has the ninth-largest economy in the world, has led the way on this push to make a traditionally backward-looking industry anticipate and respond to the business liability presented by a changing climate. These new state regulations will focus attention on the insurance industry’s role in mediating the country’s response to climate change.

State commissioners ask EPA for stricter vehicle and fuel standards - Environmental commissioners from several Northeast and Mid-Atlantic states say that a federal plan to cut tailpipe emissions would improve public health, particularly in cities plagued by traffic congestion.   In a letter sent last week, the state commissioners asked Lisa Jackson, the U.S. Environmental Protection Agency Administrator, to quickly propose and finalize so-called “Tier 3” emissions standards, a blueprint for cleaner burning cars and light-duty trucks, along with new rules for low-sulfur gasoline. “Despite a significant and sustained joint state and federal effort spanning more than 40 years, air pollution remains a serious public health threat in our region and across the United States,” wrote commissioners from Connecticut,  Maryland, Massachusetts, New York, Rhode Island, Vermont and Washington, D.C. “Clearly, Tier 3 and low sulfur gasoline is needed to better protect public health.” The EPA began drafting the program in 2008, but the agency has yet to propose it. The slow-moving process has stirred anxiety within some environmental circles.

President Obama leaves event promoting clean energy in a motorcade of 22 fossil-fueled vehicles - YouTube: On January 26, 2012, President Obama visited a Las Vegas UPS plant. Stimulus subsidy for said UPS plant to purchase natural-gas-powered trucks: 5.6 million dollars. Stimulus subsidy for North Las Vegas green energy plant that laid off 200 workers yesterday: 5.9 million dollars. Using taxpayer dollars to leave an event promoting clean-energy vehicles in a motorcade of twenty-two fossil-fueled vehicles: Priceless. 

Basking in the Sun - Who hasn’t enjoyed heat from the sun? Doing so represents a direct energetic transfer—via radiation—from the sun’s hot surface to your skin. One square meter can catch about 1000 W, which is comparable to the output of a portable space heater. A dark surface can capture the energy at nearly 100% efficiency, beating (heating?) the pants off of solar photovoltaic (PV) capture efficiency, for instance. We have already seen that solar PV qualifies as a super-abundant resource, requiring panels covering only about 0.5% of land to meet our entire energy demand (still huge, granted). So direct thermal energy from the sun, gathered more efficiently than what PV can do, is automatically in the abundant club. Let’s evaluate some of the practical issues surrounding solar thermal: either for home heating or for the production of electricity.

Power paradox: Clean might not be green forever - If everyone in the world started living like wealthy Americans, we'd need to generate more than 10 times as much energy each year. And if, in a century or three, we all expect to be looked after by an army of robots and zoom up into space on holidays, we are going to need a vast amount more. Where are we going to get so much power from? It is clear that continuing to rely on fossil fuels will have catastrophic results, because of the dramatic warming effect of carbon dioxide. But alternative power sources will affect the climate too. For now, the climatic effects of "clean energy" sources are trivial compared with those that spew out greenhouse gases, but if we keep on using ever more power over the coming centuries, they will become ever more significant. While this kind of work is still at an early stage, some startling conclusions are already beginning to emerge. Nuclear power - including fusion - is not the long-term answer to our energy problems. Even renewable energies such as wind power will have to be used with caution, because large-scale extraction could have both local and global effects. These effects are not necessarily a bad thing, though. We might be able to exploit them to geoengineer the climate and combat global warming.

FirstEnergy closing 6 coal-fired power plants - FirstEnergy Corp. on Thursday announced it is retiring six coal-fired power plants, including four in Ohio, because of stricter federal anti-pollution rules. The six older and dirtier plants will be closed by Sept. 1. The announcement makes FirstEnergy one of the first American utilities to close aging, polluting power plants in the wake of tighter federal clean-air rules finalized last month. Closings at other utilities are expected in the coming weeks. FirstEnergy had been keeping a close eye on proposed federal rules on mercury, heavy metals and air toxics from coal-burning power plants for years, Lasky said. The new rules provided FirstEnergy with “sufficient certainty” to proceed with the closings, he said. The federal mandate that improvements be completed within three years was a factor in the decision to retire the six plants, which represent 12 percent of the utility’s generation capacity, he said.

Texas's Electrical Power Predicament - Part 1 - We have got 600 coal plants, the average age is 40 years old and we put 100 on the shelf. We are building a few gas plants, thanks to the abundant gas supply, but not enough to even keep up with the decommissioning of coal plants. We have got 104 nuclear plants, average age over 30 years old, design life 40 years, or, I should say permitted life 40. Ten years from now, ladies and gentleman, those of you who buy electricity, those of you who use for electricity—GOOD LUCK, because that will determine your future. GOOD LUCK, because the underlying system is not going to be there based on the path that we are currently on. If we stay on the path we are on...we are not going to meet peak demand in summers and winters, in most parts of the nation. We came close this August, didn't we, in Texas. And with the draught, if it doesn't let up, and with the wind not doing much in August, because it just doesn't blow on hot summer days on the high plains, when we need it, we could face rolling blackouts, rolling brownouts, even in Texas, where I think ERCOT has done a reasonably good job predicting the future. But a statistic I heard last week really frighten me. I read in a local paper in Texas, in which a person from ERCOT said that we had already reached 2014 expectations, in terms of demand, in 2011. Which says the system may or may not fall short, in the very near future, in peak periods.

U.S. CO2 emissions to stay below 2005 levels as coal use shrinks - U.S. energy-related CO2 emissions will be 7 percent lower than their 2005 level of nearly 6 billion metric tons in 2020 as coal's share of electricity production continues a steady descent over the next two decades, according to new government data. The Energy Information Administration (EIA) released an early version of its annual energy outlook on Monday, which predicted a slowdown in growth of energy use over the next two decades amid economic recovery and improved energy efficiency. The report highlights the fact that carbon-intensive coal generation will see a major decline in the power sector in the coming decades, which will ensure energy-related CO2 emissions will not exceed 2005 levels at any point before 2035. The report also showed that emissions per capita would fall an average of 1 percent per year from 2005 to 2035 as the new federal standards, state renewable energy mandates and higher energy prices would temper the growth of demand for transportation fuels.

Coal on the Ropes: In One Week, 4,099 MW of U.S. Coal Plants Are Set to Close or Hung Up in Court - In less than one week, eight U.S. coal plants representing 4,099 MW of capacity have been put on the chopping block for closure or have been delayed in court due to environmental concerns. It is yet more proof of the major changes taking place in the American coal industry. The dirtiest and oldest coal plants are being shut down in greater numbers because of

  • cheap natural gas
  • rising coal prices
  • strengthening environmental standards
  • more utilities embracing energy efficiency and demand response
  • improving cost-competitiveness of solar and wind and other renewables

At the same time, a strong movement against coal is preventing new facilities from going forward. The latest round of closures started last week when FirstEnergy said it would close six plants in its portfolio totaling 2,689 MW of capacity. The plants are getting very old, making them some of the dirtiest in the country. The average age of the six units is 55 years, with the oldest facility built in 1947. Five out of six of the plants had been relegated to reserve plants, FirstEnergy spokesman Mark Durbin told Politico:

Coal’s not dying — it’s just getting shipped abroad - The U.S. is burning less and less coal each year, thanks to cheap natural gas and new pollution rules. From a climate perspective, that’s a huge deal — less coal means less carbon. But here’s the catch: if the U.S. just exports its unused coal abroad, the end result could actually be more carbon.Coal use in the United States really does appear to be waning. In 2000, the country got 52 percent of its electricity from coal. In 2010, that dropped to 45 percent. By 2030, the government expects that to fall to 39 percent. And even that’s probably over-optimistic. Upcoming EPA rules to crack down on things like leftover coal ash waste and greenhouse-gas emissions could make life even more difficult for U.S. coal-plant operators. Indeed, one Deutsche Bank analysis predicted that coal’s share of electricity generation would plunge to a mere 22 percent by 2030, largely supplanted by cleaner natural gas, solar and wind. If that scenario actually transpired (and, admittedly, it’s a bet that natural gas prices will remain low for a long while), it would make a huge difference for America’s global-warming contributions. Deutsche Bank estimates that carbon pollution from the electricity sector would drop 44 percent below 2005 levels — that’s about a 16 percent cut in all U.S. emissions. And that’s without Congress even passing a climate bill.

’836 mn Indians burn biomass for energy’ - As many as 836 million Indians still rely on traditional biomass for energy, a report has said, even as the US claimed that India along with China would account for half of global energy consumption by 2035. “The largest populations that rely on traditional biomass for energy are in the developing regions of Asia, with 836 million in India alone,” said a new research published by the Worldwatch Institute for its Vital Signs Online publication. “Altogether, 54 per cent of the population of developing Asia relies on traditional biomass fuels,” said the report, according to which despite massive gains in global access to electricity over the last two decades, governments and development organisations must continue to invest in electrification to achieve critical health, environmental, and livelihood outcomes.

India air pollution the worst, study finds - India has the worst air quality in the world, beating even its neighbour China, according to an annual survey based at Yale and Columbia universities in the United States.  Of all the countries surveyed in the Environmental Performance Index (EPI), which measures the effects of polluted air on human health, India ranked the lowest at 132. The study used satellite data to measure air pollution concentrations.  The level of fine particulate matter in India is nearly five times the limit where it becomes unsafe for humans, said the study released at the recent World Economic Forum in Davos, Switzerland.  Health experts say particulate matter is one of the main causes of acute lower respiratory infections and even cancer. India scored a meagre 3.73 out of a possible 100 points in the air analysis, lagging way behind Bangladesh, the next-worst performer, which scored 13.66.

Faustian Bargain: Proposal Seeks to Swap National Forest Land for Strip Mining - A proposal to swap land from the Shawnee National Forest in southern Illinois to Peabody Energy has conservationists up in arms. The Harrisburg, IL Daily Register describes the deal this way: Ron Scott of the U.S. Forest Service said one parcel of land owned by the federal government has minerals that Peabody desires. Peabody's subsidiary, American Land Holdings of Illinois, spoke with the Forest Service regarding available lands the agency desired that adjoined other Forest Service properties and purchased those with the intent of trading for the piece of federal property. That federal property is 384 acres on both sides of the Saline River in Gallatin County 2 miles west of the Ohio River. The Forest Service would receive a 481-acre parcel in Pope County north of Lusk Creek, 80 acres in Pope County within the Lusk Creek Wilderness Area surrounding Little Lusk Creek and 270 acres in Jackson County between Fountain Bluff and the Mississippi River. The Forest Service would receive half the mineral rights of the 481-acre parcel where there are no desirable minerals, but no mineral rights on the other two parcels where there are also no desirable minerals, Scott said. Peabody's goal? Strip-mining for coal.

Florida's Biggest Electric Utility Switching Oil To Gas, Saving $460 Million In 2012 Fuel Costs - Gas has been mainly displacing coal in electricity generation and not much oil for the simple reason that oil provides about 1% of America's electricity and that number is declining.  There is not a lot of oil to displace in the electricity industry, but FPL, Florida's biggest electric utility, is an exception. Oil accounts for 15% of FPL's generation capacity and 4% of its electric generation, but FPL is aggressively switching its oil generation to gas, as a result of low gas prices, to the considerable benefit of the environment and consumers. FPL still has a monopoly on electricity generation so it collects from its customers every single dollar it spends on fuel to generate electricity.  Low natural gas prices will cut by an incredible $460 million the fuel costs collected from consumers just in 2012.  Instead of paying for fuel, that is $460 million of stimulus to the Florida economy that is freed for investing in clothes, food, school books, efficient lighting--all manner of things.  A typical FPL customer will save $4.53 per month as a result of the fuel cost reductions.

The Hydrogen Dream - Last week I went to Longwy's university campus, the Institut Universitaire de Technologie (part of the University of Lorraine), for a conference on renewable energies and energy efficiency. It was an event integrated in an InterReg project for innovation, called Tigre, gathering institutions from Lorraine, Saarland, Luxembourg, and Wallonie. It kicked off with a session on tri-generation, and went on with parallel sessions on waste biomass, and on hydrogen and fuel cells. I opted for the latter, feeling really curious about the present state of research on this field.  Cesare Marchetti proposed hydrogen (H2) as a large-scale energy vector almost fifty years ago. The main concern then was to find a simple way to feed transport systems with what seemed to be a fountain of energy about to come from the expanding nuclear park. The nuclear dream is largely gone, but hydrogen lives on. Is this dream about to come true as a piece in the transition puzzle to a post-fossil fuel world? That's what I was expecting to find out.

For businesses, going green brings in greenbacks - MIT News - Nearly a third of companies now say that the adoption of sustainable practices has added to their profitability, according to a new MIT study — and manufacturing firms are in the vanguard. Two-thirds of more than 2,800 companies surveyed by MIT Sloan Management Review say they have made sustainability a permanent agenda topic within their companies, up from 55 percent a year ago. And most respondents — based in 113 countries, and spanning a wide variety of sizes and industries — now see sustainability as “necessary to be competitive” in today’s economy. The study was conducted in collaboration with of the Boston Consulting Group. Manufacturing companies seem to be leading the way in this new approach: The survey found a particularly strong commitment to sustainability among “resource-intensive” producers of consumer products, commodities, chemicals and automobiles, as well as in energy-related companies. Respondents said product development was enhanced by a focus on sustainability, with 25 percent of companies citing “improved innovation in products and services” as among the top benefits they derived through sustainability.

Offshore Wind One Step Closer to Reality in the Mid-Atlantic - Today the Obama administration moved forward with plans to develop the enormous offshore wind energy resources along the Mid-Atlantic coast, using a “Smart for the Start” approach designed to expedite the siting process while incorporating strong environmental protections. Ken Salazar, Secretary of the Interior Department, (DOI), and the head of DOI’s Bureau of Ocean Energy Management, joined Governor O’Malley of Maryland in Baltimore to announce the latest developments. The administration released plans for developing waters off New Jersey, Maryland, Delaware and Virginia. Offshore wind power could create tens of thousands of jobs and generate power for millions of homes in the region. Specifically, the Department of Interior approved “wind energy areas” off the coasts of these states where projects can move through the regulatory approval process more quickly, as well as model lease language and environmental review documents for the initial site assessment process, which is the first step in developing an offshore wind project.

Shortage of Rare Metals Could Threaten High-Tech Innovation - A world in need of faster computers, smarter phones and more energy-efficient light bulbs threatens to strain the small supply of rare metals used by the global electronics industry. But limits on the production of such rare metals mean the supply can't easily expand to meet the demand for innovation in both consumer electronics and clean technologies. Scarce metals such as gallium, indium and selenium — known as "hitchhiker" metals — come only as byproducts of mining major industrial metals such as aluminum, copper and zinc. That makes it hard to simply boost production of hitchhiker metals whenever industries face a shortage, even if the metals have become critical components of everything from high-performance computers to solar panels. "With respect to metals that are hitchhikers, a higher price isn't going to lead to much more production," said Robert Ayres, a physicist and economist based at the international business school INSEAD in France. "And therefore it's much more important to think in terms of conservation, recycling and substitution."  He wants both governments and industries to come up with a standard recycling process that could reuse rare metals.

Transmission Line Under the Mediterranean to Supply Italy with Clean Power - It seems that more and more large, renewable energy projects are being announced each day. The most recent is a giant solar power plant that will be built by Top Oilfield Services, a Tunisian oil and gas engineering company, and Nur Energie, a British solar firm. The project, called TuNur, will consist of a two gigawatt concentrated solar power (CSP) park. CSP works by thousands of heliostatic mirrors focussing the sun’s rays onto a central tower filled with fluid that then heats up and drives the turbines. The plant will be situated in the Tunisian desert with the electricity being transported under the Mediterranean to Italy in a new, low-loss transmission line. The plan is to supply clean power to 700,000 European homes by 2016. Many Solar enthusiasts dislike CSP due to the high costs, especially now that the prices of photovoltaics (PVs) have plummeted.  Another criticism of CSP is the large useage of water it requires for cleaning the mirrors. Water, which in desert areas (the sort of places CSP plants are built), is a very scarce resource. However New technologies are being developed that use alternative cleaning methods.

In 2011, Global Spending on Renewable Energy Rose 40 Percent - A global revolution is slowly transforming the world’s energy market, with traditional transnational fossil fuel conglomerates facing future changes that will transform their previously cozy environment, whether they like it or not. Renewable energy, starved from the outset of funding, a foundling left at the door of the world’s rising energy needs, has reached adolescence and has begun to attract investment from beyond the traditional hydrocarbon-based market dominant companies. Sez who? PricewaterhouseCoopers., a titan of Wall Street. PwC noted in its annual analysis of merger and acquisition (M&A) transactions in the sector shows that deal values worldwide in 2011 totalled $53.5 billion, up 40 percent from 2010 rates. According to PwC, in 2011 one in every three transactions last year involved solar and the overall value for that sector rose 56 percent to $15.8 billion.

Nepal and Bangladesh to Establish Joint Venture 3,000 Megawatt Power Plant - There is a tendency when considering massive power projects in the Third World to view them as ventures in which the host countries lack expertise, capital, or both, necessitating outside investment and know-how. Such is not always the case, however. Dhaka’s The Daily Star newspaper is reporting that on 30 January Nepalese Finance Minister Barsha Man Pun proposed establishing a 3,000-megawatt power plant in its territory in a joint venture with Bangladesh, making the pitch at a meeting with Bangladeshi Finance Minister AMA Muhith at the latter's secretariat office while attending the South Asian Association for Regional Cooperation (SAARC) finance ministers' meeting. Discussing the power project with reporters after the meeting, Muhith said that Nepal was willing to export power to Bangladesh, but for that to happen, Bangladesh would need to be an equity partner in the proposed joint-venture power plant in the Himalayan country, noting that while Nepal has huge resources for hydropower, its potential has remained untapped up to the present for lack of investment.

Bird numbers plummet around stricken Fukushima plant - Researchers working around Japan's disabled Fukushima Daiichi nuclear plant say bird populations there have begun to dwindle, in what may be a chilling harbinger of the impact of radioactive fallout on local life. In the first major study of the impact of the world's worst nuclear crisis in 25 years, the researchers, from Japan, the US and Denmark, said their analysis of 14 species of bird common to Fukushima and Chernobyl, the Ukrainian city which suffered a similar nuclear meltdown, showed the effect on abundance is worse in the Japanese disaster zone. The study, published next week in the journal Environmental Pollution, suggests that its findings demonstrate "an immediate negative consequence of radiation for birds during the main breeding season [of] March [to] July". Two of the study's authors have spent years working in the irradiated 2,850 sq metre zone around the Chernobyl single-reactor plant, which exploded in 1986 and showered much of Europe with caesium, strontium, plutonium and other radioactive toxins. Research uncovered major negative effects among the bird population, including reductions in longevity and in male fertility, and birds with smaller brains. Many species show "dramatically" elevated DNA mutation rates, developmental abnormalities and extinctions, they add, while insect life has been significantly reduced.

Major new leak at Japan's nuclear plant - Kyodo - More than 8 tonnes of water have leaked from Japan's stricken nuclear power plant after a frozen pipe burst inside a reactor buiding, but none of the water is thought to have escaped the complex, Kyodo news agency said on Thursday. Kyodo, quoting the Fukushima plant's operator Tokyo Electric Power Co (Tepco), said the water had leaked from the No.4 reactor when a pipe "dropped off" but that the liquid had all been contained inside the reactor building. Kyodo quoted Tepco officials as saying the latest leak had been found late on Tuesday night and was stopped by closing a valve. The report did not make completely clear if the leaked water was radioactive but implied it, noting that water inside the No.4 reactor was being used to cool spent fuel rods. "The total amount of leakage from the reactor was initially estimated to be 6 litres, but the utility revised the figure later Wednesday, adding that the leakage appears to have started at around 5 p.m. (0800 GMT) Monday," Kyodo said.

San Onofre Nuclear Plant Radiation Leak, Worn Tubes Raise Concerns - Nuclear regulation officials said Thursday that extensive wear had been found on tubes inside a unit at the San Onofre nuclear plant. Another unit at the plant was taken off-line after a small radiation leak earlier this week. Dozens of relatively new tubes that carry radioactive water in a steam generator showed "many, many years" worth of wear, even though the tubing is 22 months old, said Victor Dricks, a spokesman for the Nuclear Regulatory Commission. Nearly 70 tubes, made from a metal alloy and formed into a U-shape, had 20% of their interior lining worn off, while hundreds more had 10% of the lining deteriorated, Dricks said. More than 9,000 tubes are in the generator. Dricks said that some of the tubes will require repair, while others will probably have to be replaced.

France faces 79-bn-euro charge for nuclear power: auditor - Dismantling France's nuclear reactors and storing their radioactive waste will eventually cost around 79 billion euros ($103.5 billion), the national audit office said on Tuesday. It put the cost of dismantling France's 58 electricity-generating reactors, run by the state firm EDF, at 18 billion euros. Storing their highly radioactive waste at a long-term site deep underground would cost an additional 28.4 billion euros. Annual maintenance costs will more than double, from 1.5 billion euros on average in 2008-10, to 3.7 billion euros by 2025, partly as a cost of incorporating post-Fukushima safety measures, it said. France derives three-quarters of its electricity from nuclear, the highest proportion of any country in the world. Debate over its nuclear programme has been spurred by the Fukushima disaster and the future of reactors built after the 1970s oil shocks, most of which are now 30 years old or more.

Germany’s green energy sector: can it grow without subsidies? - Germany’s renewable energy sector has experienced a boom in the last decade that has far superseded expectations. Supported by generous subsidies, a public that is fairly open to green investments, and a widespread skepticism of nuclear power, energy producers have covered the country with wind generators and solar panels. Twenty percent of Germany’s electricity now comes from renewable sources. But the industry risks becoming a victim of its own success. It is locked in a bitter debate with the government about the future of the subsidies that have allowed it to flourish. The government wants to severely curtail the financial support – particular for solar energy, which provides only 3 percent of Germany’s electricity but receives about half the subsidies – although there are doubts the renewable energy industry could survive without it.

European gas chess - Ever since he was elected, some 16 months ago, Ukrainian President Victor Yanukovych has been seeking to renegotiate the gas supply deal approved by his predecessor and signed by then Prime Minister and now jailed, Yuliya Tymoshenko. The contract requires Ukraine to buy more gas than it needs or pay a penalty for the gas it does not take and this has resulted in Kyiv now paying $414 per thousand cubic meters which is one of the highest gas prices in the world today. Discounting the Ukrainian gas transit fee, Russia's former ally is now paying $75 per thousand cubic metres more than Europe and some $214 per thousand cubic metres more than China. Certainly there are grounds for a serious investigation as to why the Ukrainian side ever signed such an obviously one-sided contract in the first place and clearly it is in Russia's best interests to maintain the contract for as long as possible particularly as Ukraine is Russia's third largest customer. However it would appear to be a very short term approach by the Russians in what is traditionally a very long term industry.

Russia cuts EU gas, blames cold weather - Gazprom has begun cutting gas supplies to the EU in order to meet higher demand in Russia caused by severe cold weather. Italy said on Tuesday (31 January) that volumes dropped by 10 percent but that its underground gas reserves are 65 percent full and that it can pull in extra volumes from Algeria, the Netherlands, Norway and liquid gas markets. "It is not a crisis ... there is no shortage of gas in Italy," European Commission spokeswoman Marlene Holzener told EUobserver on Wednesday morning. She noted that gas flows are so far "normal" in EU countries which depend more heavily on Russia, such as Hungary, Poland and Slovakia. She also said Gazprom expects to increase output "in just a couple of days." Temperatures fell below minus 30 degrees Celsius at night in eastern Europe at the weekend and are forecast to stay low all week. The weather has killed dozens of mostly homeless or old people in Ukraine, Poland and in Balkan countries.

As Russian gas supply dwindles, European Union braces for another potential crisis  — The European Union is bracing for another potential energy crisis in the dead of winter as Russian gas supplies to some member states have suddenly dwindled by up to 30 percent. The European Commission put its gas coordination committee on alert Friday, but insisted the situation had not yet reached an emergency level as nations have pledged to help each other if needed and storage facilities have been upgraded.  Commission spokeswoman Marlene Holzner said Russia was going through an extremely cold spell and needed more gas to keep its citizens warm. She said that Russia’s gas contracts “allow for certain flexibility in case they also need the gas. And that is the situation that Russia is facing at the moment.” The severe winter in Russia has seen temperatures drop to minus 35 C (minus 30 F). Moscow has blamed Ukraine for the shortages, saying Kiev is siphoning off more than its share. Authorities in Ukraine have denied the accusation.

U.S. Producing Natural Gas at Record Levels - The U.S. continued to produce natural gas at record levels in November, according to new data released this week by the Energy Information Administration (see chart above of the 12-month moving average). The record-setting production in November (almost 2.50 trillion cubic feet) was above its year-earlier level by 6.5% and above the level two years ago by 9%.  Over the last five years as unconventional shale gas has become increasingly more accessible due to advanced extraction techniques (fracking and horizontal drilling), gross withdrawals of natural gas have increased by about 25%. Welcome to America's new age of energy abundance with enough natural gas to last well into the 22nd century.

New Report by Agency Lowers Estimates of Natural Gas in U.S. - The difficulty and uncertainty in predicting natural gas resources was underscored last week when the Energy Information Administration released a report containing sharply lower estimates.  The agency estimated that there are 482 trillion cubic feet of shale gas in the United States, down from the 2011 estimate of 827 trillion cubic feet — a drop of more than 40 percent. The report also said the Marcellus region, a rock formation under parts of New York, Ohio, Pennsylvania and West Virginia, contained 141 trillion cubic feet of gas. That represents a 66 percent drop from the 410 trillion cubic feet estimate offered in the agency’s last report.  The Energy Information Administration said the sharp downward revisions to its estimates were informed by more data. “Drilling in the Marcellus accelerated rapidly in 2010 and 2011, so that there is far more information available today than a year ago,” its report said. Jonathan Cogan, a spokesman for the agency, added that Pennsylvania had made far more data available than in previous years.  Under the agency’s new estimates, the Marcellus shale, which was previously thought to hold enough gas to meet the entire nation’s demand for 17 years at current consumption rates, contains instead a six-year supply. The report comes just five months after the United States Geological Survey released its own estimate of 84 trillion cubic feet for the Marcellus shale.

Penn. town blames contaminated water on fracking (news video) Residents of Dimock, Penn., have lived with contaminated water wells for more than three years, and they blame the contamination on fracking for natural gas. Tony Guida reports on the tiny town's struggle to get clean water.

'Gasland' Filmmaker Arrested at Capitol Hearing -  Josh Fox, whose HBO documentary “Gasland” raised questions about the safety of the natural gas drilling technique known as horizontal hydraulic fracturing, or fracking, was handcuffed and led away on Wednesday as he tried to film a House Science Committee hearing on the topic. The Capitol Police said that Mr. Fox, whose film was nominated for an Academy Award last year, was charged with unlawful entry. Mr. Fox brought a crew to film a hearing of the energy and environment subcommittee that was looking into an Environmental Protection Agency finding that fracking was probably responsible for groundwater contamination in Pavillion, Wyo.

Ohio Tries to Escape Fate as a Dumping Ground for Fracking Fluid -- The millions of gallons of chemical- laced wastewater that fracking produces must flow somewhere, and Ohio is trying not to be that place. The oil and natural-gas drilling boom spurred more permits for disposal wells there during the past two years than during the previous decade combined. The volume injected into them was on a near-record pace last year, according to the Department of Natural Resources, and more than half was from out of state. That included 92.6 percent of the water sent to a Youngstown well closed last year after 11 nearby earthquakes. “We have become in Ohio the dumping ground for contaminated brine,”  “We didn’t prepare adequately for the potential for earthquakes and other environmental problems.” Now, Ohio is considering tightening regulations governing wells in response to the temblors and seeking to stem out-of- state fluid shipments. It’s an example of the challenges U.S. states face as they try to enjoy hydraulic fracturing’s economic boost while avoiding its side effects. Ohio’s situation highlights the tradeoff that may come with the technique of using chemical-laced water to bring forth natural gas and oil. While states benefit from investment they also may contend with roads damaged by heavy equipment and concerns about polluted drinking water, he said.

Energy secretary backs natural gas exports - The low price of natural gas is hurting domestic job growth, and exporting a small amount of the fuel will boost the economy, U.S. Energy Secretary Steven Chu told a Houston audience Thursday. Speaking at a town hall at Houston Community College, Chu said a modest increase in the price of natural gas wouldn’t significantly raise its cost to U.S. consumers who use it to heat their homes and manufacturers who need it to make products. Natural gas futures closed at $2.55, up 17 cents, in trading Thursday on the New York Mercantile Exchange. It brings much higher prices in other countries. “Exporting natural gas means wealth comes into the United States,” Chu said.

Fracking Boom Could Finally Cap Myth of Peak Oil: Peter Orszag - The U.S. oil market could be on the verge of its own fracking revolution, similar to what the natural-gas market is already experiencing. As a result, domestic production is now projected to rise significantly over the coming decades, reducing the relative share of imports in U.S. oil consumption. Advances in horizontal drilling and hydrofracking, in which highly pressurized liquids are injected into underground rock, have been used increasingly over the past few years to extract natural gas. The result has been a substantial increase in recoverable reserves -- accompanied by a lot of controversy over fracking’s environmental effects -- and an associated decline in the cost of natural gas. In late 2007, wellhead prices for natural gas were hovering in the range of $6 to $7 per thousand cubic feet; by late 2011, they had declined to $3 to $4, and they have fallen further since. “it is perhaps a permissible exaggeration to claim a natural-gas revolution.” The same controversial technologies used to recover natural gas from deep-rock formations are now increasingly being used to extract oil. Oil is already being produced from shale at several locations throughout the U.S., most notably the Bakken shale in North Dakota.

Peter Orszag Destroys The Peak Oil Myth - I just had to laugh when I saw Peter Orszag's Bloomberg column Fracking Boom Could Finally Cap Myth of Peak OilPeter R. Orszag is a Bloomberg View columnist appearing on alternate Wednesdays. Now vice chairman of global banking at Citigroup, he was President Obama's director of the Office of Management and Budget. Orszag was previously the director of the Congressional Budget Office, from 2007 to 2008. He served in two different jobs in the Clinton administration, as a senior economist at the Council of Economic Advisors from 1995 to 1996 and, in 1997, as top adviser to the director of the National Economic Council. There is a phrase I like—a little knowledge is a dangerous thing. It means "a small amount of knowledge can mislead people into thinking that they are more expert than they really are." On slow days when he is not using the revolving door between Washington and Wall Street, Peter takes the time to enlighten us on things he knows little about. Today his expertise is applied to capping the "myth" of peak oil.

With oil pipeline to US on hold, Canada eyes China - The latest chapter in Canada's quest to become a full-blown oil superpower unfolded this month in a village gym on the British Columbia coast.  Here, several hundred people gathered for hearings on whether a pipeline should be laid from the Alberta oil sands to the Pacific in order to deliver oil to Asia, chiefly energy-hungry China. The stakes are particularly high for the village of Kitamaat and its neighbors, because the pipeline would terminate here and a port would be built to handle 220 tankers a year and 525,000 barrels of oil a day. But the planned Northern Gateway Pipeline is just one aspect of an epic battle over Canada's oil ambitions — a battle that already has a supporting role in the U.S. presidential election, and which will help to shape North America's future energy relationship with China. It actually is a tale of two pipelines — the one that is supposed to end at Kitamaat Village, and another that would have gone from Alberta to the Texas coast but was blocked by the Obama administration citing environmental grounds.Those same environmental issues are certain to haunt Northern Gateway as the Joint Review Panel of energy and environmental officials canvasses opinion along the 731 mile route.

Senators push for bill to approve Keystone pipeline - A group of 44 U.S. senators, all Republican but one, have signed on to proposed legislation that would authorize the Canada-to-Texas Keystone XL oil pipeline despite the refusal of President Obama to advance the project. Sen. John Hoeven (R-N.D.) introduced a bill Monday that, if passed into law, would allow work to begin immediately on all but the sensitive Nebraska portion of TransCanada’s $7 billion project. It’s not clear how the bill will advance in the Democratic-controlled Senate. Sen. Joe Manchin (W.Va.) was the lone Democrat to co-sponsor the bill, but other Democratic senators have expressed support for the controversial project. Obama put the pipeline on the back burner earlier in January, saying the administration needed more time to review the environmental impact in Nebraska, where the state government is evaluating a new route after rejecting an initial plan that sent the line through a sensitive aquifer region.

For GOP, Pipeline is Central to Agenda - Just six months ago, Keystone for many Americans was the state nickname for Pennsylvania. But now Keystone, the Canadian pipeline, has become a centerpiece of the Republican economic and political agenda, and the party’s preferred truncheon against President Obama. On the airwaves, on the campaign trail and in both chambers of Congress, Republicans are relentlessly pushing for an expansion of the pipeline known as Keystone XL and criticizing Mr. Obama’s decision to reject the project for now, forgoing thousands of pipeline jobs. Democrats, increasingly worried that the pounding on the issue will detract from their own message against income inequality, are looking for ways to defuse it.  Republicans are framing Keystone as an urgent jobs and energy project at a time of high unemployment and creeping gasoline prices, and trying to portray Mr. Obama as giving in to hard-left environmentalists in an election year at the expense of addressing both.

ExxonMobil licenses oil sands steam injection technology to Baker Hughes  -Approximately 80 percent of Canada's oil sands can be produced using in-situ technology, which involves the injection of steam to enable bitumen to be extracted through drilling versus surface mining. 'This robust technology has proven itself in oil sands applications in Canada by increasing the efficiency of the injected steam and improving ultimate recovery, which translates into lower CO2 emissions per barrel of oil produced' The ExxonMobil-patented technology provides more effective regulation and distribution of steam in long horizontal wells for in-situ oil sands production. The technology reduces the number of wells needed, lowers operating costs by reducing steam consumption and improves overall recovery from the field. The technology can be used in cyclic steam stimulation (CSS), steam-assisted gravity drainage (SAGD) and steam flood (SF) heavy oil production projects. The technology was developed by Imperial Oil Limited, an ExxonMobil Canadian affiliate, and applied at the Imperial Cold Lake oil sands project.

North Dakota Oil Boom Strains Roads, Schools - Dave Hynek, a commissioner in Mountrail County, North Dakota, E. Ward Koeser, mayor of Williston, North Dakota, and Viola LaFontaine, superintendent of Williston School District, talk with Bloomberg's Jennifer Oldham about the impact of North Dakota's oil boom on their community. North Dakota's economy outpaced every other state in 2011, with the fastest personal income, employment and home price growth, according to Bloomberg Economic Evaluation of States, or BEES, index data. Yet the boom fueling the nation's lowest unemployment rate is also pushing rural North Dakota’s housing, electric, water, police and emergency services to the breaking point. (news video)

Gulf Reopens for Drilling as Obama Administration Accused of Low-Balling Effects of Spill - As the Obama administration announces the launch of its Blueprint for a Secure Energy Future, including a plan to lease oil and gas production in parts of the Gulf of Mexico, a scientific integrity complaint alleges that officials "manipulated" scientific data about the effects of the 2010 BP Deepwater Horizon oil leak. Nearly two years after the March 2010 spill, the administration's new policy plans to open 38 million acres offshore of Louisiana, Mississippi and Alabama to possible development in June 2012. The area will be available to deepwater drilling, said a press release from the Department of the Interior. Meanwhile, scientific information surrounding the early days of the leak has been thrown further into question. The Public Employees for Environmental Responsibility (PEER) group filed a complaint Monday based on documents obtained through a Freedom of Information Act Request that found "numbers presented to the public were less than half the true flow rate."

Spill, Baby, Spill: House Transportation Bill Is Another Giveaway to Big Oil -Today the House Natural Resources Committee will take up a trio of “drill, baby, drill” bills that would partially pay for the House surface transportation reauthorization bill, designed to fund our nation’s programs for trains and automobiles. As it stands right now, the bill would last four years and cost $260 billion. Unfortunately, the House Republicans’ version of the transportation bill would throw open protected pristine places for dirty petroleum production.  One proposal opens Alaska’s pristine Arctic National Wildlife Refuge to drilling. Another measure opens the Atlantic and Pacific coasts to be drilled and mandates more drilling in the Gulf of Mexico. The third proposal makes available millions of acres in the western U.S. to oil shale development.  Despite Boehner’s characterization of the measure as a “job creation package,” it seems to be little more than another Republican giveaway to Big Oil.Transportation advocates have sought a long-term reauthorization of highway and transit programs, which currently expire on March 31. Traditionally, improvements to roads, bridges, and public transportation are funded by the federal gasoline tax, but GOP leaders in the House are taking the unprecedented step to tie funding to an unnecessary and ineffective increase in fossil fuel production. 

Gulf Oil Spill Still Leaking After 7 Years Subject of Lawsuit - Environmental groups on Thursday sued an oil company over the pace of its cleanup of a Gulf of Mexico spill that continues seven years after it was triggered by Hurricane Ivan in 2004. “The plaintiffs filed suit to stop the spill and lift the veil of secrecy surrounding Taylor oil’s seven-year-long response and recovery operation,” Marc Yaggi, executive director of Waterkeeper Alliance, said in a statement announcing the lawsuit, which was filed in federal court in New Orleans. ”Neither the government nor Taylor will answer basic questions related to the spill response, citing privacy concerns.” Justin Bloom, a Waterkeeper Alliance director, told that the group had made Freedom of Information Act requests for documentation “and ultimately the Coast Guard has refused to provide us documents citing the Privacy Act.”

Putting a Freeze on Arctic Ocean Drilling: America’s Inability to Respond to an Oil Spill in the Arctic - Though the refrain “never again” was echoed time and again in the wake of the BP oil catastrophe, we are now facing a new oil spill threat. After spending over five years and $4 billion on the process, the Royal Dutch Shell Group is on the cusp of receiving the green light to begin exploratory drilling in Alaska’s Beaufort and Chukchi Seas next summer. Though Shell emphasizes it would drill exploratory wells in shallow water rather than establishing deep-water production wells like Macondo, the fundamental characteristics of the vastly unexplored and uninhabited Arctic coastline may increase the likelihood of a spill and will certainly hamper emergency response capability.  In addition to the lack of a scientific foundation, the Arctic has inadequate infrastructure to deal with an oil spill, and response technologies in such extreme environmental conditions remain untested.

Refinery closings could push gasoline prices back to $4 - Gasoline prices could be edging higher this spring, thanks to the bankruptcy of a European refiner, the industry's latest casualty. The U.S. east coast already sees the threat of a temporary spike in gasoline to $4 or more per gallon for the summer driving season and could pay some of the highest prices in the nation, due to the shutdown of refining capacity in that market. Refining margins have compressed as oil prices have risen. On top of that, U.S. demand has continued to drop, about 4% in the last quarter, so analysts expect any rise in prices in the spring peak season to be temporary. Over the last several years, the refining industry has shut down about 1 million barrels per day of refining capacity aimed at the east coast, the latest of which is the St. Croix Hovensa refinery, closing next month. The bankruptcy filing last week by Swiss-based Petroplus, which operated five refineries or 4% of European capacity, adds another uncertainty and illustrates the interconnections in the international refining market.

An Abundant Supply of Cheap Oil is the Most Important Resource for Our Future - Our economy runs on oil. Most of the tractors used for growing food run on oil. Nearly all of today’s cars and trucks run on oil. It is popular to talk about changing to some other fuel, but the practicalities are that any such change will be very slow. There is a huge cost associated with replacing cars and trucks with vehicles using other fuels, assuming we could figure out the technology to do this. Since 2005, world crude oil supply has bumped up against what seems to be a limit of 75 million barrels of oil a day. No matter how hard companies try to extract more crude oil, and no matter how high world oil prices rise, they seem unable to extract more than 75 million barrels a day (MBD)The US Government is aware of this issue, and now issues data for Total Oil Supply. Total oil supply includes various other liquids that are somewhat like crude oil, including biofuels, natural gas liquids, and “refinery gain”. But even including the additional categories, growth in supply has been anaemic. Oil prices started rising as early as 2004 because supply (whether defined as crude oil or more broadly) was not rising fast enough to meet increased demand around the world.

Release of Oil Reserves Not in the Cards Now: IEA -Despite reports suggesting that Iran is considering a halt to all oil exports to Europe as a response to European Union and US sanctions, the head of energy watchdog the International Energy Agency said that releasing reserves under its control is not something under consideration now. Maria van der der Hoeven, the executive director of the IEA told CNBC on Thursday that "releasing strategic reserves would only be a question if there is a real and serious disruption of supply. And that is not the case at this moment." Weighing in on the actual likelihood of Iran implementing a ban, van der Hoeven said that it was very difficult to predict what will happen. However, she explained: "As far as I can see now, Iran is very dependent on its oil exports to generate income. On the other hand, we all know what is going on, and many industries are already looking for alternatives if something like that happens." In previous supply shocks, Gulf Cooperation Council (GCC) member states have stepped in to meet energy demand. Will they do it again to preserve stability? "Yes," van der Hoeven said, "at this moment, based on what I'm hearing from producers in the Gulf, I'm confident that they will do it again."

Kingdom capable of handling any future oil shortage: Al-Naimi - Minister of Petroleum and Mineral Resources Ali Al-Naimi said on Monday that Saudi Arabia will continue to be a reliable, steady and dependable supplier of energy to the world. Giving a frank and forthright assessment of the oil industry while delivering the keynote address at Chatham House energy conference in London, Al-Naimi said: "Saudi Arabia's domestic growth will not impact on exports now or in the future." The highly experienced minister explained in detail as to why oil would continue to play a major role in the overall energy mix for many decades. "It is clear that a petroleum-free transportation system is decades away; and if you look at the vast range of products derived from crude oil, everything from lubricants to asphalt, medicines to plastics, it is clear petroleum is here to stay," he said. He said Saudi Arabia has invested massively for the Kingdom's future and for the future stability of global oil markets. "It is because of our ongoing investment that we are able to respond to shortages around the world," he said.

Industry Experts Say Iranian Oil Sanctions Will not Affect Supply - Fears that Western sanctions against Iran over its nuclear program will cause a deficit in oil supply compared to demand are apparently unnecessary as senior oil executives, traders and strategists see little chance of significant supply disruption this summer. Samuel Ciszuk, Middle East and North African (MENA) analyst at consultancy KBC Energy Economics, said that “The oil market should be very well supplied this summer – even better than now. Volumes from Iraq should be up significantly, Libya is doing very well and Saudi Arabia will increase production to compensate for some of the lost Iranian barrels.” Saudia Arabia is the world largest exporter and has already promised to cover for any shortages caused by the situation in Iran. They currently produce nearly 10 million barrels per day (bpd) and could easily increase this by as much as 500,000 bpd. Iraq has just this month put online a new oil terminal in the Gulf hoping to increase its own exports by 400,000 bpd, and Libyan production is rapidly increasing. Currently production levels are at 800,000 bpd, but they hope to increase exports by 500,000 bpd by the third quarter of the year.

Global Oil Production Update: A Strange Future Has Arrived - Since 2005, European oil consumption has fallen by 1.5 million barrels a day. And, in the same period, US oil consumption has fallen by 2 million barrels a day. If oil was priced at $60 a barrel, rather than $100 a barrel, then a fair portion of that lost demand might return. Instead, since 2005, global crude oil production has been bumping up against a ceiling around 74 million barrels a day. Thus, the tremendous growth in oil demand which emanates from the developing world, in Asia primarily, has been supplied by the reduction of demand in Europe and the United States. Why doesn’t the world simply increase the production of oil to 77, or 78 million barrels a day? After all, that is precisely the history of global oil production: a continual increase in supply to capture the advantage of rising prices. Today, in 2012, I observe that many analysts of global oil production—and the interaction between oil prices and the global economy—continue to engage in a guessing game about the future. But, frankly, the future has already arrived. And it is not a random future, but a future that was held to be improbable, if not impossible. For each extra barrel of oil produced over the past seven years from Russia, and Canada, there has been a loss of production from the North Sea, from Mexico, from Indonesia and elsewhere.

Has Petroleum Production Peaked, Ending the Era of Easy Oil? - Despite major oil finds off Brazil's coast, new fields in North Dakota and ongoing increases in the conversion of tar sands to oil in Canada, fresh supplies of petroleum are only just enough to offset the production decline from older fields. At best, the world is now living off an oil plateau—roughly 75 million barrels of oil produced each and every day—since at least 2005, according to a new comment published in Nature on January 26. (Scientific American is part of Nature Publishing Group.) That is a year earlier than estimated by the International Energy Agency—an energy cartel for oil consuming nations. To support our modern lifestyles—from cars to plastics—the world has used more than one trillion barrels of oil to date. Another trillion lie underground, waiting to be tapped. But given the locations of the remaining oil, getting the next trillion is likely to cost a lot more than the previous trillion. The "supply of cheap oil has plateaued," argues chemist David King, director of the Smith School of Enterprise and the Environment at the University of Oxford and former chief scientific adviser to the U.K. government. "The global economy is severely knocked by oil prices of $100 per barrel or more, creating economic downturn and preventing economic recovery."

Researchers Argue Peak Oil Is Here, Bringing Permanent Volatility - The global production of oil has remained relatively flat since 2005 and peaked in 2008, declining ever since even as demand has continued to increase. The result has been wild fluctuations in the price of oil as small changes in demand set off large shocks in the system.  In Wednesday’s issue of Nature, James Murray of University of Washington and David King of Oxford University argue this sort of volatility is what we can expect going forward, and we’re likely to face it with other fossil fuels as well.  The notion of peak oil is fairly simple: Oil is a finite resource and at some point we simply won’t be able to extract as much as we once did. There is no getting around that limit for any finite resource. The issue that has made peak oil contentious, however, is the debate over when we might actually hit it. Murray and King are not the first to conclude that we’ve already passed the peak. Even as prices have climbed by about 15 percent per year since 2005, production has remained largely flat. The strongest argument against this being a real peak is the increasing volume of petroleum reserves many countries are reporting. Even assuming those estimates were reliable (which Murray and King aren’t certain of), those reserves clearly have not brought increased production.

Peak oil and growth - Yesterday’s oil production chart prompted some interesting discussion on the economic outlook for a world facing physical limits to energy resource extraction, and the peak of oil production in particular  It is one more important factor to add to the impact of debt dynamics and the political response to recessionary conditions when considering the global economic outlook. I have some expertise on the interaction of energy supply and economic growth and will put forward my views on the matter in this post.  First, however, I need to be clear that my expertise is not of a engineering or geological nature, so the real scope of expanding production of oil, tar sands, coal seam gas, and even renewables in the near future is the uncertain part of my analysis (and of the industry in general).  Most graphs in this post are from the BP Statistical Review of World Energy 2011. Probably a wise place to start is from the beginning of the modern Limits to Growth movement, which gained prominence with the publication of the Club of Rome’s book of the same name in 1972. This book, by Donella Meadows and colleagues, reports on the results of a computer simulation of the economy under the assumptions of finite resources. In what was cutting edge systems model simulation at the time, the World3 computer model produced scenarios showing that under various assumptions, a decline in the rate of extraction of non-renewable resources will lead to a decline in global food and industrial production, which will in turn lead to a decline in population and greatly reduced living standards for all.

Greece - Between Iran and a Hard Place - Well, its official – on 23 January European Union foreign ministers agreed to ban the import of Iranian oil as part of sanctions designed to pressure Iran to end its alleged covert pursuit of nuclear weapons under the guise of its civilian nuclear uranium enrichment program. Measures approved by Brussels Eurocrats include an immediate ban on the signing of new supply contracts for Iranian crude oil and petroleum products for EU refineries, with existing contracts being scheduled for phasing out by 1 July. The EU currently buys around 20 percent of Iran's oil exports. The International Energy Agency estimate that the European embargo will lead to roughly 600,000 barrels of oil being removed from the European market daily. Oh, and the EU also froze assets of Iran's central bank.But the decision was hardly a done deal, as Greece’s representatives lobbied fiercely behind the scenes again the measures. The view on the sanctions looks very different from Athens, because Tehran currently supplies its "black gold" to Greece on credit terms of approximately 35 percent, a real lifeline amid Greece’s ongoing fiscal turmoil. An added benefit for Greece, according to EU officials, is that Greek refiners do not have to make payment until 60 days after receiving shipments.

India mulls using rupee to pay for Iran oil imports -  India said Monday it may use its own currency, the rupee, to pay for oil imports from Iran in the face of a US-led sanctions campaign aimed at forcing Tehran to abandon its nuclear programme. India has said it will continue to import oil from Iran, joining China in refusing to bow to intensifying US pressure not to do business with Iran. India currently routes its dollar payments for Iranian crude through a Turkish bank -- an avenue that might be closed off as Washington ratchets up pressure on the Persian Gulf state. "There are different (payment) options which are being evaluated and discussed. We are also considering the rupee as an option," Reserve Bank of India Deputy Governor H.R. Khan told reporters. Indian officials say the country could pay partly for its Iranian oil imports in rupees that Iran could then use to buy Indian goods. However, they say Iranian imports of Indian goods would not cover New Delhi's entire oil purchase bill.

Indian power firms look offshore as coal shortages worsen - It is the shape of things to come for the Indian coal market. Essar group, which is a $17 billion diversified group, is to divert some of its coal from one of its Indonesian mines to help the Indian economy cope with fluctuating power supplies brought on by acute coal shortages. Essar, the Ruias-led conglomerate had purchased Indonesia's Aries coal mine for $118 million. The coal areas are located in the Kutai region of East Kalimantan in Indonesia. The group's mines in Indonesia have an estimated reserve of 64 million tonnes. Acute coal shortages have hit power projects in India. Uncertain coal supply from mines in the country and problems in importing fuel has marooned nearly 25,000 megawatts of thermal power capacity. The shortage in domestic coal production has also led to a sharp increase in imported coal. "From a mere 43 million tonnes per annum at the end of the 10th plan, coal imports are expected to touch about 100 million tonnes per annum by the end of 2012,'' said Rajiv Kumar of the Federation of Indian Chambers of Commerce and Industry (FICCI). He noted that coal shortage could well jeopardise India's growth story.

Czech 'metal rush' sees theft of trains, bridges and statues - The authorities have finally gained the upper hand over a growing army of impoverished Czech metal thieves, lured by hefty sums they can earn from scrapyards and capitalising on lax rules on scrap purchases. Popular trophies include aluminium road signs, brass plaques and grave ornaments, storm drain covers, a vast array of spouts and pipes as well as TV cables. Statues, church bells and a copper chapel roof are other examples of lucrative booty. Thieves even stole hundreds of metal memorial plaques from the Second World War-era Nazi concentration camp in Terezin north of Prague in 2008. In that case, three men were sentenced to three-and-a-half to four-and-a-half years in prison for damage amounting to 1.7 million koruna (Dh327,250). A collector of railway artefacts was dumbfounded when his latest acquisition - a 24-tonne reconstructed antique train engine - vanished into thin air.

WTO: China Unfairly Limits Export of Raw Materials - The World Trade Organization ruled Monday that China unfairly limited exports of nine raw materials to protect domestic manufacturers. A WTO appeals body rejected China’s appeal of an earlier ruling in July that concluded the Asian economic powerhouse had violated international trade rules. The appeals body largely sided with the United States, European and Mexico, which had taken issue with Chinese restrictions on its exports of nine materials used widely in the steel, aluminum and chemical industries. They had complained that China drives up prices on overseas shipments of the materials by setting export duties, quotas and licensing requirements on them, giving the country’s manufacturers an unfair edge over competitors. But China had argued that its export limits were needed to protect the environment. The ruling affects China’s exports of certain forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorous and zinc. In it, the WTO appeals body says China must now “bring its export duty and export quota measures into conformity with its WTO obligations.”

China and UAE ditch US Dollar, will use Yuan for oil trade - The US dollar is fast losing out its reserve currency status with China aggressively replacing the dollar with the Yuan as a currency for bi-lateral trade. The latest is an agreement signed between the China and the United Arab Emirates (UAE), which will use the Yuan for oil trade. The deal is worth around $5.5 billion dollars and the Chinese central bank said that the deal aims at “strengthening bilateral financial cooperation, promoting trade and investments and jointly safeguarding regional financial stability” Earlier, Russia and Iran had decided to use Rubles as a means of currency. With both China and Russia converting their bi-lateral trades into non-US dollar deals, the greenback is now under threat of losing out its status as the world reserve currency. And the impact of such a transition will essentially tip the balance of global power.

2012: Year of the Dragon, Year of the Renminbi! - A week ago today, the Chinese and their vast diaspora celebrated Chinese New Year. As it so happens, it also ushered in the Year of the Dragon. Famously the most auspicious of characters, this too may be the year that the PRC powers-that-be become serious about internationalizing the RMB with the long-term goal of reforming the international monetary system in mind. Just as red envelopes like those above are used to give gifts in cash, 2012 may be the year the Chinese give the gift of renminbi internationalization to the world in a meaningful way. I've mentioned recent efforts to make RMB use more widespread worldwide, but I forgot to mention these two that point towards the same trend. First, Chinese authorities are improving RMB payment handling systems' integration with the international standard SWIFT (Society for Worldwide Interbank Financial Telecommunication): The People's Bank of China, the country's central bank, is in the process of upgrading what is known as China's National Advanced Payment System, or Cnaps [I pronounce it as 'Schnapps' ;-)], to better facilitate cross-border trade denominated in yuan, according to government officials and executives at Chinese banks. The processing of yuan payments isn't at the same level of efficiency as a cross-border payment in other major currencies like U.S. dollars, with a hands-on system that often leads to high transaction costs, some observers said.

Does the renminbi matter? Evidence from China’s disaggregated processed exports - China’s surging exports and its exchange rate have elicited consternation from economists, politicians, and pundits. How would a stronger renminbi affect China’s exports and its trade surplus? China’s entire surplus is in a customs regime called processing trade. Imports for processing are intermediate inputs that are imported duty-free to produce final goods for re-export. Understanding China’s economy is becoming as difficult as it is important. This is particularly the case for China’s exports and its exchange rate, which have been the source of controversy and intense debate in recent years. Shedding light on the issue, this column disaggregates China’s processing trade, with some surprising implications for policy in the region and elsewhere.

IMF Plays Down Risk of China 'Hard Landing' -- A senior International Monetary Fund official said Monday that China was taking steps to reduce property bubble risks and said it has room to add fiscal stimulus if conditions worsen."China can move away from its reliance on external demand and needs to build up domestic demand," said Anoop Singh, the IMF director for Asia and the Pacific at a news conference. He said Beijing was working on measures to stimulate demand. "We don't see (a) hard-landing risk as likely," Singh added, noting property prices were moderating and sales volumes declining. "Our sense is that these risks are being addressed and our prediction is clear: that growth will remain above 8 percent at the baseline and that if there were to be greater risks externally China has sufficient fiscal space to respond."

In Victory for the West, W.T.O. Orders China to Stop Export Taxes on Minerals - The appeals panel of the World Trade Organization1 ruled on Monday that China2 must dismantle its system of export taxes and quotas for nine widely used industrial materials. The legal setback for Beijing could set a precedent for the West to challenge China’s export restrictions on other natural resources, including rare earth3 metals that are crucial to many modern technologies, trade experts said. In the closely watched case, the trade organization’s Appellate Body, its highest tribunal, ruled that China distorted international trade4 through dozens of export policies it maintains for bauxite, zinc, yellow phosphorus and six other industrial minerals. The Appellate Body, reviewing an earlier decision by a W.T.O. dispute settlement panel, said the panel had gone too far in defining why more than three dozen Chinese policies violated free trade rules. But the appeals group said on Monday that the overall effect of China’s export restrictions was harming international trade and the policies would have to be scrapped. The case was filed in 2009 against China by the United States, the European Union and Mexico.

Western industrials feel a Chinese burn - Western industrial companies have seen a slowdown in some markets in China as efforts to cool the world’s second largest economy have hit demand for capital goods and products linked to the construction industry. China was until recently a source of rapid growth for US and European manufacturers, helping to offset weak sales in developed countries.  Last week, however, leading bellwether industrial groups including Siemens, 3M and Eaton were among those expressing caution on Chinese sales, joining others such as Volvo and ABB that warned of cooling demand at the end of last year.  Joe Kaeser, chief financial officer at Siemens, which reported a 16 per cent decline in new Chinese orders in its fiscal first quarter, said the company had witnessed a “marked slowdown in short cycle businesses” in China, particularly in industrial automation.  Weakness in Chinese orders comes at an unwelcome time for industrial companies, which are already having to deal with a European economy on the brink of recession. “Coming on the back of the weak European picture, the situation in China is not going to be a help to first-quarter earnings,”

U.S.A vs. China: A Visual Comparison of the World’s Largest Economies - Another great infographic below, this time from, comparing all the important indicators (and the cost of a Big Mac) in an easy to digest graphic.

8 industries China leads where the US used to - While some, such as coal production, may not come as a surprise, other industries the U.S. has lost the market leadership might. 24/7 Wall St. looked at a large number of manufacturing, agricultural and financial businesses to find those in which China has surpassed the U.S.  For several years, economists have said that China’s GDP growth indicates that its economy will pass that of the U.S. in the next two or three decades. China’s GDP is measured at about $6.5 trillion, now second in the world. America’s GDP is over $15.2 trillion, according to the International Monetary Fund. While China certainly has much catching up to do, the two countries’ rate of GDP growth is also very different. Last year, China’s economy expanded at more than 9 percent. America’s GDP grew at a little better than 2 percent. One reason that China continues to gain so rapidly on the U.S. is the high cost of American labor and manufacturing. In fact, U.S. manufacturing costs have risen so much that they are much higher than in any developed nation with factory capacity. This includes countries like China, Mexico and South Korea — places the U.S. and Japanese companies often contract to do their factory work. The labor price advantage has helped China become the largest steel producer in the world. China is also first place in car manufacturing.

Top Secret – The Chinese Envoy’s Briefing Paper On Australia’s Economy (Part I) - Your Excellency, I am pleased to present the requested report on the economic outlook for the Great Southern Province of China, currently referred to by the local population as “Australia”. For convenience I will refer to the country by this older name. Deep dependence on our great nation means Australia’s future is inextricably linked to China. Given that the white European colonisers historically feared the “yellow peril”, the irony of the situation will be not lost on the Politburo. Despite recent engagement with us and the rest of Asia, Australia’s focus seems confused. The country’s head of state remains an octogenarian British Queen. Australia also believes its security is guaranteed by the United States of America with whom it has extensive defence links. The locals continue to believe in both in its sovereignty and also its bright economic prospects.

The Chinese Envoy’s Briefing Paper On The Australian Economic Outlook (Part II) - Your Excellency, I am pleased to present the requested report on the economic outlook for the Great Southern Province of China, currently referred to by the local population as “Australia”. For convenience I will refer to the country by this older name. We will now turn to the outlook.  The commodity boom has created a “two track” economy – as your Excellency know economists prominent in the media love glib “sound bites”. The mining and commodity boom benefits a small part of the economy whilst simultaneously creating problems for other parts. The mining and energy sector account for less than 10% of the Australian economy. This is smaller than the Australian finance sector or manufacturing industry. Mining and mining-related sectors, such as construction, manufacturing and services industries which benefit from mining activity, make up about 20% GDP. These sectors will contribute approximately two-thirds of the projected 4% GDP in 2011/12. The remaining 80% of economy will contribute one-third of growth. Mining employs 1.5% of the workforce reflecting its capital intensive nature. Unfortunately, a portion of the equipment needed is imported adding to the current account problem, especially in the short run.

African Union's new Chinese-built headquarters opens in Addis Ababa, Ethiopia — The African Union today opened its Chinese-built headquarters in Addis Ababa, Ethiopia, a towering $200-million complex that has been called "China's gift to Africa." The new AU headquarters is Addis Ababa's tallest building, its 20-story tower dominating the cityscape of Ethiopia's tidy capital. African heads of state are meeting this weekend for their inaugural summit at the facility's massive new conference hall, which can seat 2,500 people. More from GlobalPost: South Africa sends leaders to study in China Construction began three years ago by the China State Construction Engineering Corporation, using building materials largely brought from China, and a mix of Chinese managers and Ethiopian laborers. Beijing agreed to pay for the complex in Addis Ababa around the time that the late Libyan leader Muammar Gaddafi was agitating to build the new AU headquarters in his desert hometown of Sirte.

Saudis Push Young People Into Jobs - With eyes darting over racks of sales items, 28-year-old Haya Murzouq worked the counter at her new job at one of Riyadh's busier lingerie boutiques in December. With one hand, she checked a tag for a female customer. With the other, the Saudi woman hoisted the trailing end of her black head scarf over her face, draping it for modesty as she spotted male customers. Few mall shoppers gave the shop a second glance, and a passing patrol of Saudi religious police didn't bother to stop in, but Ms. Murzouq and her co-workers, all of whom are Saudi women, are doing things long unseen in the capital and much of the rest of the kingdom: staking out sales racks and scrubbing shop floors for all to see. They stand among the vanguard in three Saudi government initiatives to nudge young Saudis, male and female, into a national labor market distorted for decades by reliance on inexpensive foreign workers.

Japan's population to drop by 1 million each year - Japan's rapid aging means the national population of 128 million will shrink by one-third by 2060 and seniors will account for 40 percent of people, placing a greater burden on the shrinking work force population to support the social security and tax systems.The population estimate released Monday by the Health and Welfare Ministry paints a grim future. In 2060, Japan will have 87 million people. The number of people 65 or older will nearly double to 40 percent, while the national work force of people between ages 15 and 65 will shrink to about half of the total population, according to the estimate, made by the National Institute of Population and Social Security Research.The total fertility rate, or the expected number of children born per woman during lifetime, in 2060 is estimated at 1.35, down from 1.39 in 2010 — well below more than 2 needed to keep the country's population from declining. But the average Japanese will continue to live longer. The average life expectancy for 2060 is projected at 90.93 for women, up from 86.39 in 2010, and 84.19 years for men, up from 79.64 years.

S&P: Japan sales tax plan relief only temporary (Reuters) - The Japanese government's plan to double the 5 percent sales tax will slow growth in public debt only temporarily as the government needs to raise taxes further and cut spending to improve its finances, Standard & Poor's said on Wednesday. Decisions on the sales tax alone are unlikely to be a trigger for a ratings or outlook change as Japan's rating also depends on its long-term economic growth, the credit ratings agency said. The appropriate level for the sales tax depends in part on the state of the economy, and the government needs to time tax hikes to ensure they lead to an overall increase in revenue, according to the ratings agency. "Even if the sales tax plan is approved, the horizon for implementation is long," Takahira Ogawa, director of sovereign ratings at S&P, told Reuters in an interview. "When we look at the sovereign rating, we have to look at economic growth conditions in the long term." S&P's rating on Japan is AA-, three notches below the highest rating. The outlook is negative, meaning there is a chance of a downgrade. Moody's Investors Service and Fitch Ratings rate Japan on the same level as S&P. Moody's has a stable outlook, but Fitch's outlook is negative.

Japanese Auto Suppliers Are Fined, and Executives Agree to Prison, in a Price-Fixing Case - A Japanese auto supplier, the Yazaki Corporation, agreed to pay one of the largest ever antitrust fines, and four of its executives will serve up to two years in prison for price-fixing and bid-rigging, the Justice Department said Monday. Yazaki, based in Tokyo, agreed to a $470 million fine for engaging in three conspiracies that began as long ago as 2000 and continued until 2010, when the government’s investigation into the matter began. The executives who pleaded guilty were Japanese nationals who worked in Ohio and Kentucky overseeing sales of parts used by Honda and Toyota. Another Japanese supplier, the Denso Corporation, based in Kariya, agreed to pay a $78 million fine to settle two price-fixing and bid-rigging charges. “This criminal activity has a significant impact on the automotive manufacturers in the United States, Canada, Japan and Europe and had been occurring at least a decade,” Andrew G. Arena, special agent in charge of the Federal Bureau of Investigation’s office in Detroit, said in a statement. “The conduct had also affected commerce on a global scale in almost every market where automobiles are manufactured and/or sold.”

World-Wide Factory Activity, by Country - The manufacturing sectors in most of the world improved last month, though many regions, especially in Europe, remained in contractionary territory. China’s factory sector continued to expand, easing fears of a hard landing there. Meanwhile Germany and Austria moved back into growth territory, even as much of the rest of the euro zone was shrinking, though at a slower pace. U.S. manufacturing continued to post steady expansion, growing even further in January. “Manufacturing is starting out the year on a positive note, with new orders, production and employment all growing in January,” said Bradley J. Holcomb, chair of the Institute for Supply Management Manufacturing Business Survey Committee, which compiles the U.S. numbers. See a sortable chart of manufacturing activity, by country.

December Global Trade - You may recall that the other month I developed a methodology for seasonally adjusting the monthly world trade figures from the WTO.  This revealed a sharp drop in global trade in October.  I then went on to apply this to November, and today give preliminary figures for December (based on a sample of 19 countries that have reported so far).  December (like November before it) shows some recovery from the October drop, but it is not yet back to the level of October.  The agreement between Imports and Exports is only partial here (probably reflecting the noisy nature of the preliminary estimate). Overall, it appears that global trade has flattened out since mid 2011, but the October drop has not led to a sustained contraction like 2008 (probably because the ECB has so far succeeded in preventing calamitous institution failure in Europe).  It looks possible that some of the October drop may have been due to businesses waiting to the last possible moment to order Christmas merchandise thus meaning that some of the normal fall surge in the non-seasonally-adjusted numbers was delayed, causing a drop then a rise in the seasonally adjusted series.

The Irrelevance of the Baltic Freight Index - There has been a great deal written of late regarding the collapsing Baltic Freight Index, with those writing about that weakness making the case that that collapse speaks volumes about the state of the global economy. This is nonsense, for the collapsing Baltic Dry Freight Index speaks only to the idiocy and greed and very poor timing of ship owners and nothing more. . Why? Because the index has fallen for the very simple reason that there were far, far, FAR too many ships brought on line when the BFI rose from its low at or near 2000 back in 2005-06 to its high near 11,500 in 2008. Ship owners became stupidly greedy believing that these good times would continue ad infinitum.  Worse, the banks that supported them became even more ignorant and financed those dreams. Ships were built and they were big ships and bigger. Ships were being scrapped, but the ships being scrapped were capable of carrying 2-5 thousand TEUs (twenty-foot export containers) and they were being replaced by ships capable of carrying 15-20 thousand TEUs! We are not math whizzes here at TGL, but even we know that one has to scrap a lot more 2-5 thousand TEU carriers to offset one carrying 17 thousand.

Argentina Sends In Federal Agents To Control Currency Trading --Argentina's government this week unleashed an army of tax agents on more than 800 businesses to ensure they are following strict rules on foreign currency sales. The agents swept across Argentina's capital and interior cities on Monday and Tuesday, three months after the government severely restricted foreign currency purchases. In late October, the government started forcing people and firms to submit to background checks before getting approval to buy U.S. dollars or other currencies. Among other things, the government required people to prove that they had legally acquired the cash they wanted to exchange for another currency.

Vicious Cycles Persist As Global Lending Standards Tighten - One of the major factors in the Central Banks of the world having stepped up the pace of flushing the world with increasing amounts of freshly digitized cash is writ large in the contraction in credit availability to the real economy (even to shipbuilders). Anecdotal examples of this constrained credit are everywhere but much more clearly and unequivocally in tightening lending standards in all of the major economies. As Bank of America's credit team points out, bank lending standards to corporates have tightened globally in Q4 2011 and the picture is ubiquitously consistent across the US, Europe, and Emerging Markets. Whether it is deleveraging, derisking, or simple defending of their balance sheets, banks' credit availability is becoming more constrained. While the Fed's QE and Twist monetization and then most recently the ECB's LTRO has led (aside from self-reinforcing short-dated reach-arounds in BTPs and circular guarantees supposedly reducing tail risk) to nothing but massive increases in bank reserves (as opposed to flowing through to the real economy), we suspect it was designed to halt the significantly tighter corporate lending environment (most significantly in European and Emerging Markets). The critical corollary is that, as BAML confirms, the single best non-market based indicator of future defaults is tightening lending standards and given the velocity of shifts in Europe and EM (and very recent swing in the US), investors reaching for high-yield may be ill-timed at best and disastrous credit cycle timing at worst.

The siren call of austerity - The World Economic Forum opened in Davos amid choruses of central bankers and economists calling for governments to cut spending. This message of austerity is like the call of the ancient Sirens, whose music lured sailors to shipwreck. We should take a lesson from Odysseus, who poured wax into the ears of his crew and had himself lashed to the mast of his ship to resist the Siren call. Austerity supporters are selling the idea that governments, like families, must cut back when income shrinks. But economically, governments are not like families. Firing teachers, cops and government clerks will, for sure, reduce public spending. But budgets, like the song of the Sirens, are only part of the story. Listen only to the alluring lyrics and, like the many voyagers before Odysseus, we will suffer disastrous consequences – in our case falling incomes and worsening economies.

One Thing Obama Could Have Done Differently - Curious about why you’ve heard so little out of Davos?  For the first time in thirty years, China sent none of its various vice-premiers to the World Economic Forum, ostensibly because the meetings this weekend fall in the middle of Chinese New Year celebrations.  Euro-fatigue also dimmed the enthusiasm for the annual corporate gabfest at the Swiss ski resort. That doesn’t mean nothing happened.  Bill Gates wrote a check for $750 million to the Global Fund to Fight Aids, Tuberculosis and Malaria, nearly making up the shortfall in its recent $13 billion fund-drive. Bloomberg News bought a page in the Financial Times to advertise its Davos coverage, and the FT, long one of the forum’s biggest boosters, brought to a boil a month-long series (“Capitalism in Crisis”), produced a special section, and maintained a witty round-the-clock blog (subscription required). But the most interesting thing about the Davos meeting this year has been the Larry Summers Redemption Tour, which was timed to coincide with it. The tour began ten days ago with a well-sourced report by Bloomberg that Summers was among those whom President Barack Obama would consider appointing president of the World Bank when Robert Zoellick’s five-year term expires later this year.

‘Davos consensus’ under siege  - FT - If nothing else, Newt Gingrich’s campaign for the US presidency has contributed an excellent new phrase to the language. His coinage – “pious baloney” – kept popping into my head in Davos last week, every time I saw the World Economic Forum’s ubiquitous slogan: “Committed to improving the state of the world”. Shocking as it may seem, the assorted bankers, businessmen, oligarchs and autocrats who descend on Davos each year are not motivated principally by altruism. And yet Davos this year did feature much agonising about inequality. In a few cases, this may have reflected moral unease. But pragmatism was even more important. Davos is effectively a festival of globalisation for men in suits and snow boots – who now fear that the argument for globalisation may be lost in the west. Yet for all the words spilled, the two most significant speeches made on these themes last week were not delivered in Davos. They were Barack Obama’s State of the Union address and a barnstorming campaign speech made by Francois Hollande, the Socialist party’s candidate for the French presidency. These speeches deserve to be read as a pair. Both men bemoaned rising inequality. Both promised higher taxes for the rich and more support for the middle classes. Both attacked high finance. Mr Hollande went as far as calling the world of finance a faceless government and “my true adversary”. 

Davos 2012: The unfinished and the unmentionable: Anyone who listened to the main sessions in Davos could tell you the top two items now on the to-do list for European leaders: fixing the eurozone's financial firewall and finally sealing the deal on Greece. But there's a second list I'd like to compile after a few days talking to senior leaders and business people here in the mountains. That's the list of fears, lurking on the sidelines, which could come back and bite us, but no-one wants publicly to confront. Call it the Davos Unmentionables. Greece was the big one in 2010: I called it the "unattended baggage at the back of the hall, which everyone was nervous about but no-one wanted to be first to open". This year, the two unmentionables were Portugal and the price of oil. 

Davos does data — Big data has gotten very big if the talking heads at the World Economic Forum in Davos, Switzerland, are talking about it. And they are talking about it. The big data phenomenon refers to the explosion of data of all types — location coordinates churned out by cell phones and GPS, machine data from manufacturing gear, consumer data from Twitter and Facebook. Just a fraction of that information resides in traditional databases. It’s not only too much to get one’s head around but also overwhelms traditional database and analytics tools, giving rise to a new generation of computing technologies: the Hadoop data framework, NoSQL databases and big data analytics. The overriding issue is finding the right data, applying the right analytics to it, and letting it deal with real-world problems. And the World Economic Forum’s elite attendees, including prime ministers, corporate titans and star academics, purport to address the biggest of big problems: climate change, the income gap, food inequality, public health crises, Iran.

Davos Post Mortem - And like that, this year's Davos World Economic Forum has come and gone, having achieved nothing except allowing a bunch of representatives of the status quo to feel even more self-righteous and important in the world's biggest annual circle jerk, in which fawning journalists ask the questions their cue cards demand, knowing too well their jobs are on the line if they ask anything even remotely provocative (and with the price of admission in the tens of thousands of dollars, one wonders just how many Excel classes these "journalists" could have taken as an alternative, in order to actually do some original math-based research, yes, shocking concept, to present to their readers instead of merely regurgitating others' talking points). Bloomberg TV has compiled the best video summary of the highly irrelevant soundbites by economists, CEOs and other people of transitory power, who provide absolutely no original insight into anything, and in which ironically it is Mexico's Felipe Calderon who summarizes it best: "we have a timebomb the bomb is in Europe and we are working together to deactivate it before it explodes over all of us." Lastly, we provide a quick glimpse into current and previous guests of Davos to show just how utterly worthless is the "braintrust" of those present.

Davos Tells EU to Fix Crisis for Good After Two Years of Failure - European leaders were told by policy makers, bankers and academics from around the world that it’s time to end the region’s debt crisis and measures aimed at simply containing it are no longer enough. Five days of debating and partying at the World Economic Forum’s annual meeting ended yesterday, with the euro area under pressure to swiftly deliver a bigger bailout fund that could help build a firewall worth more than $1 trillion. Leaders were also told they need to finish crafting tougher budget rules, and finally make Greece’s debt burden manageable. Failure to comply would threaten economic growth and financial markets, as well as deprive the region of more outside support, said delegates including billionaire investor George Soros and U.S. Treasury Secretary Timothy F. Geithner. How far Europe’s officials are willing to go in response may be revealed at a Brussels summit today. “There’s a very strong view of get on with it, get this thing done,” Bank of Canada Governor Mark Carney told Bloomberg Television in Davos, Switzerland.

As Europe Goes (Deep In Recession), So Does Half The World's Trade - Following the Fed's somewhat downbeat perspective on growth, confidence in investors' minds that the US can decouple has been temporarily jilted back to reality. It is of course no surprise and as the World Bank points out half of the world's approximately $15 trillion trade in goods and services involves Europe. So the next time some talking head uses the word decoupling (ignoring 8.5 sigma Dallas Fed prints for the statistical folly that they are), perhaps pointing them to the facts of explicit (US-Europe) and implicit (Europe-Asia-US) trade flow impact of a deepening European recession/depression will reign in their exuberance.

Europe Faces a Two-headed Monster of Debt and Oil - It looks as though we have a deal between Greece and its private-sector creditors, and not a moment too soon. The announced agreement over the weekend ended months of handwringing and protracted talks between the government of Greek Prime Minister Lucas Papademos and Charles Dallara, head of the Institute of International Finance, which represents most foreign lenders. Final details will be presented this week, according to news reports quoting those close to the talks. At present, the ECB, which holds about $70 billion in Greek debt, has declined to accept anything less than face value on its Greek portfolio. You have to wonder how private creditors will react to that position since they will trade their Greek bonds for new instruments with a 50 percent discount on the face value. With a lower interest rate (between 3 percent and 4 percent, which is very cheap money for the Greeks just now) and a long-term maturity, the total hit for private creditors, who hold slightly more than $263 billion in Greeks bonds, will exceed 70 percent. It is a “voluntary” agreement, but we cannot do without the quotation marks. Any creditor who does not participate could well find itself with worthless paper.

Spanish Unemployment Rate Rises to 22.8 Percent - Spain’s unemployment rate reached 22.8 percent at the end of last year, leaving almost 5.3 million people out of work and providing further evidence that Mariano Rajoy’s new government is struggling with an economy that is sliding back into recession.  The rise in the unemployment rate, from 21.5 percent at the end of the third quarter of 2011, also comes as Mr. Rajoy’s government is grappling with changes to labor policy that have left employers and labor unions at loggerheads.  The latest employment data, released Friday by Spain’s national statistics institute, showed that Spain also had one of the highest levels of youth unemployment in the Western world, with a third of those unemployed aged below 30. Furthermore, 1.6 million Spanish households ended last year without a single member holding an official job.

Spanish GDP falls 0.3% in final quarter of 2011 - Spanish gross domestic product fell 0.3% in the final quarter of 2011, the national statistics agency said on Monday, in a first estimate of the data. The statistics agency said growth fell owing to weak domestic demand, partially compensated by a rise in foreign demand. The figure matches a prediction from the Bank of Spain released last week. This is the first fall in GDP since the fourth quarter of 2009. On an annual basis, GDP rose 0.3% against the same period in the prior year. The Bank of Spain recently forecast Spanish GDP would contract 1.5% in 2012 and then see a "modest recouperation" of growth in 2013 of 0.2%.

Berlin seeks enforcement powers over Greece on budget policy - GERMANY HAS confirmed it wants an EU-appointed “budget commissioner” sent to Greece with powers to override its government’s budget policy. Berlin’s demand would also apply to Ireland and any other bailout recipient that consistently missed the targets set out in its rescue plans, a well-placed European source said yesterday. The source recognised that Ireland’s bailout was on track but said Berlin was anxious to avoid any repeat of the Greek situation, where the authorities have repeatedly failed to implement promised reforms. Greece is resisting the pressure from Germany. “Anyone who puts a nation before the dilemma of ‘economic assistance or national dignity’ ignores some key historical lessons,” said finance minister Evangelos Venizelos. The prospect of an Irish referendum to endorse Europe’s new fiscal treaty hangs in the balance as EU leaders make a final push today for a pact to toughen the enforcement of budget rules.

It's Official: German Economy Minister Demands Surrender Of Greek Budget Policy, Says It Is First Of Many Such Sovereign "Requests" - While over the past 2 days there may have been some confusion as to who, what, how or where is demanding that Greece abdicate fiscal sovereignty (with some of our German readers supposedly insulted by the suggestion that this idea originated in Berlin, and specifically with politicians elected by a majority of the German population), today's quotefest from German Economy Minister Philipp Roesler appearing in Germany's Bild should put any such questions to bed. And from this point on, Greece would be advised to not play dumb anymore vis-a-vis German annexation demands. So from Reuters, "Greece must surrender control of its budget policy to outside institutions if it cannot implement reforms attached to euro zone rescue measures, the German economy minister was quoted as saying on Sunday. Philipp Roesler became the first German cabinet member to openly endorse a proposal for Greece to surrender budget control after Reuters quoted a European source on Friday as saying Berlin wants Athens to give up budget control."

Call for EU to control Greek budget -- The German government wants Greece to cede sovereignty over tax and spending decisions to a eurozone "budget commissioner" to secure a second €130bn bail-out, according to a copy of the proposal obtained by the Financial Times. In what would amount to an extraordinary extension of European Union control over a member state, the new commissioner would have the power to veto budget decisions taken by the Greek government if they were not in line with targets set by international lenders. The new administrator, appointed by other eurozone finance ministers, would take responsibility for overseeing "all major blocks of expenditure" by the Greek government. "Budget consolidation has to be put under a strict steering and control system," the proposal reads. "Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time."Athens would also be forced to adopt a law permanently committing state revenues to debt service "first and foremost". 

Greeks reject German plan for EU budget commissioner - Greek officials have reacted angrily to a leaked German proposal for an EU budget commissioner with veto powers over Greek taxes and spending. The Greek government said it must remain in control of its own budget. The European Commission says it wants to reinforce its monitoring of Greek finances, but Greece should retain sovereign control.  Under the German proposal, a budget commissioner would have veto powers over Greek budgetary measures if they were not in line with targets set by international lenders. Greece would also legally commit itself to servicing its debt, before spending any money in any other way."Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time," the Financial Times quotes the German plan as saying.

Greece plans orderly exit of the Eurozone - Greece plans an orderly exit out of the Eurozone according to two sources close to Mr. Papademos, Greek Prime Minister, who spoke on condition of anonymity earlier today.The sources confirmed that plans are ready to return to a legacy currency given the current circumstances and that such exit would be dealt with, quote “in as orderly a fashion as possible” unquote.The plan does not come as a surprise but the timing may be surprising to most members and investors while negotiations about a severe haircut with the IIF are still ongoing. Last year’s announcement by Mr. Papandreou, former Prime Minister, that a referendum would be held to decide whether or not to stay in the Eurozone may have set the precedent for developing a plan that apparently will be set in motion. The stalemate in negotiations about the depth of the haircut on some of the outstanding Greek sovereign debt, said to be capped at 65-70% while Greece is looking for more concessions, may have set things in motion as the ultimate alternative.

Can Greece now leave the eurozone? - Meg Greene writes: I have long thought that the troika would cut Greece loose and let it default and exit the eurozone once eurozone banks had been sufficiently firewalled. Perhaps this aggressive proposal by Germany is one of the unintended consequences of the ECB’s three year long term refinancing operation (LTRO). If eurozone banks have as much access to cheap, three-year ECB funding as their collateral allows, perhaps Germany and the troika have decided that eurozone banks can survive a Greek default. Greece is clearly insolvent and must leave the eurozone to eventually return to growth. The German proposal may have accelerated the inevitable. I recall someone on Twitter noting that if Greek leaders turned fiscal sovereignty over to Brussels, the relevant parties would end up hanged for treason, or something like that.  I’ll predict against that outcome.  Angus adds comment.  The general point here is that apparent progress also makes it easier for parts of the Eurozone to unravel.  In this context what counts as “good news” or “bad news” can be quite tricky.

The Germans Launch a Blitzkrieg on the Greek Debt Negotiations - News stories continue to suggest that Greece once again appears on the verge of reaching a deal with its private sector creditors on how much of a loss they would be willing to accept on their bond holdings. The latest numbers suggest a 70% write-down. A pretty striking comedown for what is supposed to be a “voluntary default” and, hence, not subject to the triggers of a credit default swap on Greek debt.  Naturally, the spin surrounding the proposed agreement is that this is a “one-off” and that other troubled periphery nations shouldn’t even begin to think of securing a comparable deal. But the inherent tension between securing a write-down on Greek debt which more closely mirrors the disaster which is now the Greek economy, and the desire to minimise the potential contagion effect is rearing its ugly head already, and may help to explain some of Germany’s recent machinations. Peter Spiegel of the Financial Times published the German government’s proposal for Greece’s “improvement of compliance” with the terms of the bailout, and all of a sudden Greek PSI positively pales in comparison. According to Germany’s proposal, whatever the result of the PSI deal, Greece would need to “legally commit itself to giving absolute priority to future debt service” and “accept shifting budgetary sovereignty to the European level”. If the Greek government is not willing to do this, the troika would presumably turn off the taps of bailout money and Greece would default. With no access to market or official financing, Greece would be forced to exit the eurozone.

Core Euro Area Banks Still Very Exposed to Contagion from a Greek Exit - Rebecca Wilder - Today Megan Greene (@economistmeg) wrote a rather insightful post linking this weekend’s German proposal to Greece’s eventual exit from the EMU – the leaked proposal is to (1) make Greek debt service a top priority, and (2) for Greece to rescind national fiscal sovereignty to the European level (links included in her post). At the end of the post, she argues that the ECB’s recent liquidity measures may have produced ‘unintended consequences’ by speeding up the time frame of Greece’s exit through offering banks unlimited liquidity. Perhaps this aggressive proposal by Germany is one of the unintended consequences of the ECB’s three year long term refinancing operation (LTRO). If eurozone banks have as much access to cheap, three-year ECB funding as their collateral allows, perhaps Germany and the troika have decided that eurozone banks can survive a Greek default. Perhaps naively so, I look at the BIS statistics and see quite clearly that the Germans and the troika would be wrong as regards the Eurozone banks being able to sustain contagion effects of a Greek exit. Exposure levels remain too high as a share of equity. Better put: if I look at key core bank exposure, German, French, Dutch, and Belgian, to the Periphery economies as a share of total equity, these banks could go bankrupt if a Greek exit/default spreads to broad Periphery exposure.

The Troika vs Greece - Are you worried about Greece failing to come to some kind of agreement with its bondholders? If so, you’re far behind the curve. Because the new big worry is that Greece will fail to come to some kind of agreement with the Troika — the official-sector entities which are going to fund its deficits for the foreseeable future.To understand what’s going on here, you really need to read two different things. The first is the latest paper from Mitu Gulati and Jeromin Zettelmeyer, entitled “Engineering an Orderly Greek Debt Restructuring”. It’s clear, it’s clever, and it explains exactly what Greece’s options are. The second is the leaked document from Germany, which has effective veto control over the Troika, laying out proposed conditions under which it’s willing to continue to fund Greece. Suffice to say that in order for the restructuring to work, the Greek bonds currently held by the ECB need to be tendered into the exchange, somehow. There are various ways that this can happen: the ECB can tender its bonds directly; it can sell them to the EFSF, which would then tender them; or it could even sell them to Greece, which would tender them. But what it can’t do is sit back and continue to collect interest on those bonds while expecting all the private-sector bondholders to voluntarily take a massive haircut. Too many hedge funds own Greek debt now; if the old bonds continue to get paid out, then the hedge funds will simply refuse to tender, and the exchange offer will fail.

Greek Debt Deal, New Loan Agreement to Finish Next Week (Dow Jones)--Greece and its private sector creditors said Saturday they were on the verge of a deal to write off EUR100 billion worth of the country's debt, pending the outcome of separate talks on a new, multi-billion euro bailout for Athens. In separate statements, Greece and the creditors both noted significant progress in the talks and said a final deal would be announced next week in tandem with the new loan program. Effectively, the focus now shifts to a European summit in Brussels Monday where the continent's leaders will sanctify -- or not -- the terms of the debt restructuring and the new loan. But complicating those discussions are concerns that Greece's funding needs might be bigger than originally thought, while Europe appears divided over how to cover the gap. In October, European leaders and the International Monetary Fund agreed to provide Greece with EUR130 billion in fresh financing to cover the country's cash needs through 2015. But the new loan was contingent on a debt write-down plan that would slash Greece's debt ratio to 120% of gross domestic product in 2020 from an unsustainable 160% currently.

Greece, creditors on verge of clinching debt deal - Greece and its private creditors said on Saturday they were piecing together the final elements of a debt swap and expected to have a deal ready next week, essential for sealing a new bailout and avoiding an uncontrolled default. After muddling through round after round of inconclusive talks, the negotiations are in their final phase - though it appeared unlikely that a preliminary deal would be secured in time for a European Union summit on Monday.Greek bondholders said the two sides were finalising a deal along the lines of a proposal made by Jean-Claude Juncker, the chairman of euro zone finance ministers. The bondholders' comments suggested creditors had accepted Juncker's demand for a coupon, or interest rate, of below 4 percent on new, longer-dated bonds that Athens will swap for existing debt.

Greek Debt Talks Again Seem to Be on the Verge of a Deal - Greece once again appears on the verge of reaching a deal with its private sector creditors on how much of a loss they would be willing to accept on their bond holdings. The latest progress comes in the wake of two days of talks in Athens between Greece’s political leadership and Charles Dallara2 of the Institute of International Finance, the bankers’ lobby representing most investors. Bankers and officials involved in the discussions who were not authorized to speak publicly say that bondholders have made significant concessions with regard to the interest rate, or coupon, that the new Greek bonds would carry. Having insisted previously on an average rate above 4 percent, creditors now seem willing to accept a rate below 4 percent for the 30-year bonds — perhaps as low as 3.6 percent. The discussions were expected to continue through the weekend, and officials said some type of announcement could come within days. The talks with private creditors have broken down twice before, largely because the International Monetary Fund and European leaders have pushed for a larger debt reduction in light of Greece’s worsening economic outlook, so there is the possibility that these negotiations will founder, too.

Investors fear mounting losses in Portugal as second rescue looms - Portugal is fighting a losing battle to contain its public debt and may be forced to impose haircuts of up to 50pc on private creditors, according to a top German institute. A report for the Kiel Institute for the World Economy said Portugal would have to run a primary budget surplus of over 11pc of GDP a year to prevent debt dynamics spiralling out of control, even in a benign scenario of 2pc annual growth. "Portugal's debt is unsustainable. That is the only possible conclusion," said David Bencek, the co-author, warning that no country can achieve a primary budget surplus above 5pc for long. "We won't know what the trigger will be but once there is a decision on Greece people are going to start looking closely and realise that Portugal is the same position as Greece was a year ago." Yields on Portugal's five-year bonds surged on Thursday to a record 18.9pc, reflecting fears that the country will need a second rescue from the EU-ECB-IMF Troika. Three-year yields hit 21pc.

Portugal May Get Little Relief From Greek Deal - The Greek debt swap negotiations that may produce relief for Athens are fueling concerns in Lisbon where an agreement would make it more likely Portuguese investors would be next in line to accept a loss. European leaders have said a Greek accord where investors take a 50 percent writedown in the face value of their bonds is unique and won’t be applied to other nations struggling to tame rising debts. Holders of Portuguese securities are skeptical, with the yield on the nation’s 10-year bonds rising today to a euro-era record of 16.45 percent. “Portugal’s debt and lack of growth is very similar to Greece,” “Its bonds are falling because it’s very obvious to everyone that if there’s a haircut for Greece, there might well be a haircut for Portugal too.”

Portuguese 10-year bond yield jumps to record - The yield on 10-year Portuguese government bonds continued to explore euro-era highs Monday, topping 15% on fears the country may need to eventually seek an additional bailout or a writedown on the value of its current debt. The 10-year yield stood at 15.18% in recent action, up from around 13.6% on Friday, according to electronic trading platform Tradeweb. "Investors are worried that Greece still hasn't reached a deal with its private sector creditors on a voluntary debt exchange. That sent yields on Portugal's sovereign debt soaring because investors are worried that if Greece has a disorderly default or a forced debt restructuring, then Portugal would be next," wrote strategists at Bank of America Merrill Lynch

Flip Flop, Flip Flop; Sarkozy Hell-Bent on Proving to the UK and the World that He Hasn't a Clue - It is quite amusing to watch the self-destruction of Nicolas Sarkozy, president of France. Sarkozy got into a feud with UK prime minister David Cameron over a tax on financial transactions. Then under pressure from French banks withdrew support of the tax.  One might think that Sarkozy would have had enough of self-inflicted damage, but one would be totally wrong. Flip-Flop, Flip-Flop is back again to flip.Via Google translate from Le Monde, please consider Sarkozy will announce Sunday a VAT increase of 1.6 points Nicolas Sarkozy was expected to announce Sunday night a VAT increase of 1.6 point, we learn from several sources. VAT standard rate will be increased to 21.2%, a record in France. This increase is more limited than expected, will ease the burden on labor. This VAT is to take effect this year. The reduced rate would remain unchanged. There will be no increase in the rate of the CSG on wages, an increase of taxation on property as possible. The President will also announce the introduction of a Tobin tax to the French, a stamp duty extended. The implementing rules are not yet clear.

Merkel to join Sarkozy on campaign trail - German chancellor Angela Merkel promised to join Nicolas Sarkozy on the campaign trail as the French president took to the airwaves on Sunday to launch a set of German-style structural reforms aimed at seizing the initiative in his uphill re-election attempt. Ms Merkel’s Christian Democrat party said she would “actively support Nicolas Sarkozy with joint appearances in the election campaign in the spring”. The announcement caused surprise in Paris as Mr Sarkozy, also of the centre-right, has yet officially to declare his candidacy for the election, which will take place over two rounds on April 22 and May 6. The pledge by the German leader underscored the close ties she and Mr Sarkozy – together now habitually dubbed “Merkozy” – have built during the eurozone crisis, despite clear tensions between them at times. Ms Merkel pointedly avoided overt backing for David Cameron, the British Conservative party leader, in the 2010 UK general election. Her intervention represented a clear rebuke to Mr Hollande. He has promised to renegotiate the new “fiscal compact” for the eurozone forged by Ms Merkel and Mr Sarkozy, due to be signed at a European Union summit in Brussels on Monday. He criticised it in his manifesto for lacking any growth stimulus and called for eurobonds and a revised pro-growth role for the European Central Bank, both strongly opposed by Berlin.

E.U. Leaders Set to Admit Austerity Is Not Enough — Bowing to mounting evidence that austerity alone cannot solve the debt crisis, European leaders are expected to conclude this week that what the debt-laden, sclerotic countries of the Continent need are a dose of economic growth.  A draft of the European Union summit meeting communiqué calls for ‘‘growth-friendly consolidation and job-friendly growth,’’ an indication that European leaders have come to realize that austerity measures, like those being put in countries like Greece and Italy, risk stoking a recession and plunging fragile economies into a downward spiral.   The difficulty, however, is that reaching such a conclusion is not the same as making it happen.  Instead, leaders will discuss long-term structural reforms and better use of E.U. subsidies, while avoiding mention of the one thing that could change the climate: a fiscal stimulus from Germany, the euro currency zone’s undisputed powerhouse.  Then the summit meeting, which is to be held in Brussels and be greeted by a national strike in Belgium, will try to satisfy Berlin’s desire for fiscal discipline by wrapping up talks on a new intergovernmental treaty.

72% of Irish Want Referendum on Fiscal Treaty - The Irish government faces intense pressure to hold a referendum on the eurozone fiscal treaty after a poll that showed almost three quarters of the public want a vote on the agreement. In an opinion poll published on Sunday, 72 per cent of people surveyed said the treaty, which would tighten budget rules for the 17 countries sharing the euro, should go to a vote. Some 40 per cent of the 1,000 people questioned in the Sunday Business Post/Red C poll said they would support the treaty, 36 per cent were opposed and 24 per cent were undecided. Sinn Féin has threatened to challenge in the Irish Supreme Court any decision not to hold a referendum, a move that could plunge Europe into months of legal uncertainty. Last week several leftwing groups, including Sinn Féin, the United Left Alliance, the Workers’ party, and Eirigi launched a “Campaign Against Austerity Treaty”, demanding the government hold a referendum.

Why the Eurozone Can’t Just Muddle Through - A specter is haunting Europe – the specter of default. And all the powers of Old Europe have entered into an alliance to exorcise this specter. The result has been a kind of wishful Euro-optimism. As Time International Editor Jim Frederick reported on Friday, one of the key themes at the World Economic Forum in Davos last week was the growing belief that “the Eurozone may actually be starting to heal itself. The Eurozone crisis will continue to muddle along, but muddling may be enough.” Unfortunately, the facts argue for the opposite conclusion.It may be true that the European Union, taken as a whole, is in better financial shape than the U.S. But Europe is not a single entity. Financial burden sharing works in the U.S. largely because it is automatic. People in New York and San Francisco do not ordinarily get to vote on whether their taxes will go to pay for Social Security in Detroit or unemployment benefits in the Carolinas. We may never see the headline “Germany to Greece: Drop Dead,” but political realities limit the policy choices available to European leaders. And simply by gauging the success of the policies actually in force, one sees the slow but inevitable degeneration of the Eurozone.

Europe Needs a Real Fiscal Union, by Tim Duy: The rhetoric is heating up as we head into Monday's European Union's summit. On one hand, we see rumors circulating that a deal in the Greek debt talks is in the works. Via the Wall Street Journal: But in Athens, the mood Saturday was upbeat. "We really are one step away from a final agreement [on the debt deal]," Finance Minister Evangelos Venizelos told reporters. Note, however, that these negotiations are just one piece of the puzzle. Via the New York Times: Some hedge funds that have bought at rock-bottom prices may decide to pursue legal action, although such a process could take years with small certainty of success. Also undecided is what the European Central Bank, which owns 55 billion euros of Greek bonds, will do. Despite public pressure that it, along with investors, accept a loss on its bonds, the bank has not budged. It seems to me more accurate to state that one portion of the debt deal may be in place, but in the interest of unity on the eve of the EU summit, we will pretend that the issues of holdouts and the ECB are not relevant. In any event, given the steady deterioration of the Greek economy, I find it unlikely that this is the last word in the debt story. More interesting, however, is German demands that Greece cede its budgetary authority to the Troika. Athens of course was a bit perturbed by the escalation of demands.

Banks set to double borrowing from ECB: Report -- European banks plan to borrow at least twice as much money from the European Central Bank (ECB) next month as they did in December, the Financial Times reported on Tuesday, which would bring the sum to around one trillion euros (S$1.65 trillion). 'Several of the euro zone's biggest banks told the Financial Times that they could double or triple their request for funds' when the ECB makes its second round of exceptional three-year loans on Feb 29, the report said. 'We should have done more (the) first time,' when more than 500 banks snapped up a record 489 billion euros on Dec 21, the daily quoted the head of a euro zone bank as saying last week at the World Economic Forum. The ECB has massively boosted the amount of central bank funds it lends to euro zone banks at the ultra-low rate of 1.0 per cent to prevent a crucial interbank lending market from seizing up.

The perils of Mario Draghi's €1.5 trillion blitz - A disturbingly large number of credit experts warn that the ECB life-line is not the "game-changer" that the markets seem to think, cannot in itself can save Euroland, and may prove counter-productive – perhaps soon.This is not what I suggested in my Monday column. Since I have a special affection for the monetarist camp, I tilted to their view in that the ECB has indeed carried out a coup and may have pulled Europe of spiralling depression, just in the nick of time. (This does not mean it can ever save monetary union in its current structure, but that is another matter.) Yet we are in uncharted waters, so here is the critique of the other side. Alberto Gallo from RBS said Draghi’s €489bn loans to banks at 1pc for three years (LTRO) is having all kinds of toxic side-effects, which is disturbing given that the Financial Times splashed today that the banks may draw down another €1 trillion at the second LTRO in late February. The banks are certainly stepping up purchases of Club Med and Irish sovereign bonds, the so-called Sarkozy "carry trade". They also bought 62pc of the latest debt issue by the EFSF rescue fund in January, up from a quarter in the previous issue. The shortfall on the banks’ core Tier 1 capital ratios outweighs the extra yield from the sovereign bonds. That will aggravate the credit crunch over time.

Eurozone Problems - Krugman - I’m giving a talk in Paris tomorrow. Here are some slides; they won’t come as a shock to regular readers, but it may be useful to see them all in one place. First, I make the case that the overall economic crisis is driven by private debt, not public debt: Then I point to the huge swing of the private sector into financial surplus, which necessitated large public deficits to avoid a much deeper slump: I then turn to Europe, which has the additional problem of a capital flow bubble from north to south induced by the euro, which has to be reversed: The counterpart of these current account imbalances was a large divergence in relative price levels: Implicitly, Europe is relying on “internal devaluation” to reverse this divergence. But the reality is that this is very hard given nominal rigidity, even in Ireland, which is wrongly held up as an example of successful adjustment: Also, Europe has bought into the notion that fiscal irresponsibility is at the heart of the crisis, which is true only of Greece and not true of the troubled countries as a group: And even on the IMF’s reckoning, none of the austerity countries is plausibly on the road to a tolerable fiscal situation:

Italy’s Jobless Rate Rose to Highest Since 2004 in December -- -- Italy’s jobless rate rose to the highest in eight years in December as austerity measures meant to fight the debt crisis helped push the region’s third-largest economy toward a recession. Unemployment climbed to 8.9 percent, the highest since the data series began in January 2004, from a revised 8.8 percent in November, national statistics institute Istat said in a preliminary report today in Rome. Economists had expected a rate of 8.7 percent, according to the median of 9 estimates in a Bloomberg News survey. Prime Minister Mario Monti last month pushed through 20 billion euros ($26 billion) in tax increases and spending cuts that have further choked growth. The economy shrank 0.2 percent in the third quarter and the government has forecast another contraction in the final three months of last year, meaning Italy may already be in its fourth recession since 2001. “We are seeing all the predictable signs of Italy’s deepening recession -- rising unemployment, non-performing loans trending up, and credit standards getting tighter,” “We are barely at the initial phase of Italy’s recession, and it will get much worse.”

European Unemployment Unchanged in December - Eurostat today released the December unemployment rate estimates (graph above).  December is unchanged over November.  It's hard to read too much into any one month but I think this qualifies as good news: one might have feared that the damage to the real economy was going to accelerate, but instead it's slow and halting. Still - unemployment is now higher in Europe than it was at the height of the recession following the 2008 financial crisis.  It remains a bad situation that still seems likely to get worse before it gets better.

Euro-Area Unemployment Remains at Highest in Almost 14 Years - European unemployment remained at the highest in almost 14 years in December, suggesting the region’s worsening debt crisis and cooling economic growth prompted companies to cut jobs. The jobless rate in the 17-nation euro region held at 10.4 percent from the previous month, the European Union’s statistics office in Luxembourg said today. That’s the highest since April 1998 and in line with a Bloomberg News survey of economists. It had previously reported a November reading of 10.3 percent. Europe’s rising unemployment may undermine consumer demand further as governments toughen austerity measures to fight the fiscal crisis. With global export demand cooling, companies are under pressure to reduce costs. European Central Bank council member Ewald Nowotny said yesterday that the region may fail to grow or show a “recession in certain phases” of this year. “Crisis countries like Spain and Greece will show further increases in unemployment,” . “That’s bad news for consumer demand. We expect the economy to shrink in the current quarter after a contraction in the previous three months.”

Eurozone jobless rate at euro-era high - Unemployment in the eurozone reached a new record last month, in a further sign of the currency bloc’s faltering economic recovery. Joblessness in the 17 countries that use the euro rose to 10.4 per cent at year end - the highest level since the single currency was introduced a decade ago, according to seasonally-adjusted data from the European Union’s statistical arm. The 0.1 percentage point increase from November’s estimate compares with an unemployment rate of 9.5 per cent a year earlier. A 20,000 rise in the number of claimants marks the eighth consecutive monthly increase, though the rate is down from an average of just over 100,000 new jobless per month since May. A small fall in Germany, from 5.6 to 5.5 per cent, was offset by rises in much of the debt-laden periphery of the eurozone, including a 0.4 percentage point rise in Portugal to 13.6 per cent. France and Italy both experienced 0.1 percentage point increases, to 9.9 per cent and 8.9 per cent respectively. Youth unemployment unexpectedly fell 0.1 percentage points, although it remains more than twice the overall jobless rate, at 21.3 per cent.

Euro Area Unemployment Rate Up 0.2 Percentage Points to 10.4%; 8th Consecutive Monthly Rise; Further Deterioration Coming; Country-by-Country Comparison; Expect Germany to Turn for the Worse - Courtesy of a Barclays Capital email here are the latest unemployment numbers in Europe. Euro Area: +0.2 to 10.4% based on slight upward revisions in November, September, August. This was the 8th consecutive rise.

  • Austria 4.1% unchanged
  • Belgium: 7.2% unchanged
  • Finland 7.6% unchanged
  • France 9.9% +0.1
  • Germany: 5.5% -.1
  • Italy 8.9% +0.1
  • Ireland 14.5% +0.1
  • Netherlands 4.9% unchanged
  • Portugal 13.6% +0.4
  • Slovakia: 13.4% -.1 to
  • Spain 22.9% unchanged

From a quarterly perspective, the unemployment rate in Germany fell 0.2pp to 5.6% in Q4 (from Q3 - and -1.1pp from a year ago). Following the same trend, in Ireland, it has edged down from 14.5% to 14.4%.  France's rose by another 0.1pp in Q4 11 to 9.8% after Q3 11 and is just 0.1pp above the 9.7% Q4 10 level; Italy's rose 3 tenths in Q4 11 to 8.7%, now 0.5pp above Q4 10.  In the last quarter of the year, the situation in Portugal worsened particularly quickly as the unemployment rate rose 0.6pp to 13.3%, 1pp above Q4 10. In Spain, the situation deteriorated even quicker as the unemployment rate rose 7 tenths to 22.8% in Q4 11, 2.4pp above Q4 10 print.

I Don't See How This Can Continue, by Tim Duy: The European unemployment numbers are out. The story from the Financial Times: Unemployment in the 17 euro countries climbed to 10.4 per cent in December, with the November rate revised upwards to the same rate, setting a fresh record since the introduction of the single currency in 1999. So-called “peripheral” members such as Spain and Greece recorded the highest rates, of 22.9 per cent and 19.2 per cent respectively. By contrast, national data from Germany, the eurozone’s bulwark, showed joblessness declined in January to 6.7 per cent, the lowest level since reunification in 1991. And a picture is worth a thousand words: Perhaps France and Italy can hang on while relative wage deflation increases competitiveness with Germany, but conditions in the periphery look downright dire. And note that years of austerity have done little to help Greece and Ireland. I don't see the same medicine working in Spain or Portugal either. It is no wonder that Greece is looking for very substantial reductions in its debt, and it seems inevitable that Portugal will come to the same conclusion sooner or later. The great disparity in unemployment rates is another factor that leaves me pessimistic on the ultimate outcome of the Euro experiment. We need real fiscal transfers, and soon. More carrot with stick.

This Is Europe's Scariest Chart - Surging Greek and Portuguese bond yields? Plunging Italian bank stocks?  No: the one chart that truly captures the latent fear behind the scenes in Europe is that showing youth unemployment in the continent's troubled countries (and frankly everywhere else). Because the last thing Europe needs is a discontented, disenfranchised, and devoid of hope youth roving the streets with nothing to do, easily susceptible to extremist and xenophobic tendencies: after all, it must be "someone's" fault that there are no job opportunities for anyone. Below we present the youth (16-24) unemployment in three select European countries (and the general Eurozone as a reference point). Some may be surprised to learn that while Portugal, and Greece, are quite bad, at 30.7% and 46.6% respectively, it is Spain where the youth unemployment pain is most acute: at 51.4%, more than half of the youth eligible for work does not have a job! Because the real question is if there is no hope for tomorrow, what is the opportunity cost of doing something stupid and quite irrational today?

Financial Systems and Italian Cruise Ship Captains - There are a lot of news stories about sovereign debt problems in Europe.  The problem seems to be that there is no growth. We say “seems” to be the problem because underneath the apparent problem is the fundamental pillar that is crumbling, the real problem: Unemployment. The unemployment problem is most manifest in the young. The real problem in Europe is unemployed youth, as shockingly summarized in this graph from Zero Hedge:From The Guardian: Eurozone unemployment is at a record. According to Eurostat, the EU's statistical office, 16.3 million people are out of work in the 17 countries that joined the euro. The story of a lost generation is becoming the scandal of a continent. In Spain, 51.4% of those aged 16-24 are jobless. In Greece, the figure is 43%. Zero Hedge summarizes the scariest part of the situation: … the last thing Europe needs is a discontented, disenfranchised, and devoid of hope youth roving the streets with nothing to do, easily susceptible to extremist and xenophobic tendencies: after all, it must be "someone's" fault that there are no job opportunities for anyone.All this prompts a rhetorical question: Are the leaders of the financial systems and the central banks of the world all populated with Italian cruise ship captains who, having run their ships on the rocks, refuse to consider the fate of their passengers in their rush for self-rescue?

As jobless rate soars, Europe rethinks austerity moves - Only a few months ago, aggressive austerity programs were being touted as the saviour of the debt-strapped euro zone. Now they’re being blamed for the soaring unemployment rates that are helping to propel many of the euro-zone countries back into recession. The jobless rate in the 17-country euro zone hit 10.4 per cent in December, the European Union’s statistical agency, Eurostat, said Tuesday. That’s the highest level since 1998, just before the launch of the common currency. About 16.5 million people are out of work in the euro zone, up more than 750,000 over one year. The region’s Mediterranean frontier showed the biggest jobless increase.The grim jobless numbers are forcing some European leaders, many economists and even the International Monetary Fund – co-sponsor of three sovereign bailouts and early advocate of austerity – to rethink the strategy of using spending cuts and tax hikes to try to crunch budget deficits when economic growth is soggy.

EU President Calls for Youth Jobs Plan - Governments should draw up youth job plans that would guarantee employment, education or training to young people, European Commission President Jose Manuel Barroso told European leaders at their summit Monday. The European Union should also redirect unused funds in its budget to reduce the bloc’s high youth unemployment rate, Barroso added. The EU youth jobless rate is 22%. “This is unacceptable and a terrible indictment of our performance,” Barroso said in prepared speaking points. “In some member states, for example Spain, almost one in every two young people available for work is unemployed.”

Wolf Richter: Exodus from the Eurozone Debt Crisis - Unemployment is a staggering problem in Eurozone countries that are at the core of the debt crisis. Spain’s jobless rate jumped to 22.8%. Among 16 to 24-year-olds, it’s an unimaginable 51.4%, up from 18% in 2008 when Spain’s crisis began with the collapse of its housing bubble. In Greece, youth unemployment reached 46.6%. In Portugal, it’s 30.7%, in Italy 30.1%. And optimism, that essential source of energy for the younger generation, has been replaced by pessimism. Gallup reported that 80% of the people in the EU had a negative outlook on their local job situation. Crisis countries were at the extreme end of pessimism: in Portugal, 84% thought it was a “bad time” to find a job; in Italy, 91%; in Spain, 92%; in Ireland, 93%; and in Greece, 96%. These numbers convey a sense of utter hopelessness. For young people, the vision of a good life that their society has imparted on them has gone up in smoke. A bitter irony: it’s the best educated generation ever—and the most pessimistic.  Some retrench. Even 35-year-olds move back in with their parents. They delay plans and wait for the situation to turn around. But others, the most energetic and entrepreneurial, those that the country needs to rebuild the economy, they don’t have that kind of patience.  Spaniards are heading mostly to Argentina whose economy has been booming over the last few years, though troubles are everywhere. Portuguese prefer their former colonies. Angola, whose official language is Portuguese, has a wealth of natural resources, particularly oil and diamonds.

The Report That Will Blow Up The Eurozone - No, I’m not talking about the fact that Germany and Holland want to take over as the de facto government in Greece, Nor do I mean the report from the Kiel Institute for the World Economy that Ambrose Evans-Pritchard cites for the Telegraph, and which implies a second bailout for Portugal is looming near: Or even the true meaning behind the steep drop in the Baltic Dry Index, on which Sebastian Walsh reports for Financial News: The report I refer to in the title requires a little background info: In Holland, where I'll be for a few more days, there's a "rogue" right-wing party named PVV (Party for Freedom). It has no cabinet ministers, but the minority moderate right-wing government needs its support to stay in the saddle. The PVV, like other European right-wingers, is, among many other things, against much of what the European Union stands for. It's certainly against the Euro, and the bailouts with Dutch taxpayer money of countries like Greece and Portugal. A few months ago, the PVV announced they had commissioned a report from British financial consultancy firm Lombard Street Research on the economic consequences of staying in the Eurozone versus returning to the guilder.  That report is about to be published "within days". It will prove to be highly explosive material. And the PVV will do all it possibly can to make sure it receives a lot of media attention. It may tear down the incumbent government, which is a heavy advocate of all things Europe, and which will have to quit once the PVV support dies, but for that party that's not the no. 1 concern.

Portuguese storm gathers as EU leaders fight over Greece - Surging borrowing costs in Portugal have raised the spectre of a second full-fledged contagion crisis in the eurozone, eclipsing the latest efforts by European Union leaders in Brussels to agree on Europe's bail-out machinery and a strategy for Greece. Yields on Portuguese 10-year bonds hit a fresh record of 17.38pc on Monday even though the country is already shielded by a €78bn (£65.2bn) package from the EU, European Central Bank (ECB) and International Monetary Fund "troika" and does not have to tap the markets this year. Reports also emerged on Monday night that European banks were gearing up to ask the ECB's emergency funding scheme for up to twice as much in funds as the central bank supplied in its debut €489bn auction last month. The news reveals the extent of the liquidity squeeze on banks – with some chief executives looking to tap the ECB for up to triple the amount they originally borrowed, when the three-year money auction takes place on February 29. The funding facility was launched in December last year to stave off a second credit crisis – with €230bn of bank bonds due for repayment in the first quarter of 2012.

As Greece Nears a Big Debt Deal, Investors Now Fret That Portugal Will Ask for the Same - Despite the best efforts of European politicians to place a quarantine fence around the Greek economy, the crisis there continues to plague Portugal. The authorities in Lisbon insist otherwise, but investors are predicting that Portugal will be next in line to impose losses on bondholders as it struggles to meet the terms of a 78 billion-euro, or $103 billion, bailout agreement struck with international creditors last May.  While a short-term debt auction on Wednesday went off comfortably, Portugal’s long-term borrowing costs remain unsustainably high, and spending cuts that are cleaning up public finances are also helping to plunge Portugal into one of the deepest recessions in the Western world. Its economy is predicted to contract 3 percent this year, and the unemployment rate, at 13.6 percent, is one of the highest in the euro zone.  Whatever deal with creditors is reached in Athens in the coming days, “it’s most likely that Portugal will say that it wants one of those, too,” said Edward Hugh, an economist in Barcelona who has been tracking the euro zone’s debt crisis. Portugal “literally has nothing further to lose, except some of its debt burden,” he said.

Portugal's Debt Will Be Restructured; 3-Year Government Bond Yield Tops 25%; CDS at Record High, Implies 72% Chance of Default - Inquiring minds are watching Portuguese government bonds soar into the stratosphere, with record-high bond yields across the entire yield curve.  In all the images below, the numbers are accurate but the charts reflect yesterday. Notice the opens and the lows in the charts above. Bloomberg reports "The Frankfurt-based ECB bought Portuguese government bonds today, according to three people with knowledge of the transactions, who declined to be identified because the deals are confidential. A spokesman for the ECB declined to comment when contacted by phone." My take is the ECB foolishly attempted to manipulate Portugal's bond market at the open, then was blown out of the water in the process. The ECB recklessly bought Greek bond and learned nothing from it. Adrian Miller, a fixed-income strategist at GMP Securities LLC, talks about the outlook for the European debt crisis. He speaks on Bloomberg Television's "InBusiness with Margaret Brennan."

Banks set to double crisis loans from ECB - European banks are preparing to tap the European Central Bank’s emergency funding scheme for up to twice as much as the ECB supplied in its debut €489bn auction last month, providing further evidence of the sector’s liquidity squeeze. Several of the eurozone’s biggest banks have told the Financial Times that they could well double or triple their request for funds in the ECB’s three-year money auction on February 29. “Banks are not going to be as shy second time round,” said the head of one eurozone bank at last week’s World Economic Forum in Davos. “We should have done more first time.” Three bank chief executives, all of whom asked to remain anonymous, said they were planning to increase their participation twofold or threefold. Goldman Sachs has told clients that banks could ask for twice as much in the February auction as in December when more than 500 lenders raised €489 billion. “They could do another €1tn easily in February,” said one senior banker. “It could be way more than that if things get worse in the markets.” The ECB, under new president Mario Draghi, launched its funding facility in December to avert a looming credit crunch, with €230bn of bank bonds coming due for repayment in the first quarter of 2012 while bond markets remained largely closed to new issuance.

Euro zone banks may double emergency loans from ECB: report (Reuters) - Some of the euro zone's biggest banks have told the Financial Times that they are preparing to tap the European Central Bank's emergency funding scheme for up to twice as much as the ECB supplied in its December auction. The banks told the FT that they may double or triple their request for funds in the ECB's three-year money auction on Feb 29, a further sign of the liquidity squeeze faced by the banks, the paper said. Three bank chief executives, all of whom asked to remain anonymous, told the paper that they were planning to increase their participation two-fold or three-fold. The FT did not name any banks. In the first of two planned offerings of unlimited cheap money intended to keep credit flowing among banks hammered by the euro zone's sovereign debt crisis, financial institutions took 489 billion euros on December 22 from the ECB.

Europe is stuck on life support  - Economic decision-makers are more optimistic than two months ago. The main reason is the belief that the European Central Bank, under the shrewd leadership of Mario Draghi, has eliminated the risk of a financial implosion in the eurozone. As Mark Carney, the respected governor of the Bank of Canada and Mr Draghi’s successor at the Financial Stability Board, remarked at the World Economic Forum in Davos: “There is not going to be a Lehman-style event in Europe. That matters.” Spreads on credit default swaps on Italian and Spanish banks have fallen since the introduction of the ECB’s three-year long-term refinancing operations in December. Spreads between yields on debt of some vulnerable sovereigns and German Bunds have also eased. Does this mean the eurozone crisis is over? Absolutely not. The ECB has saved the eurozone from a heart attack. But its members face a long convalescence, made worse by the insistence that fiscal starvation is the right remedy for feeble patients.  Last week’s downgrading of its forecasts by the International Monetary Fund shows the dangers. The IMF now forecasts a recession in the eurozone this year, with a decline of 0.5 per cent in overall gross domestic product. GDP is forecast to fall sharply in Italy and Spain, and stagnate in France and Germany. This is a terrible environment for countries seeking to cut fiscal deficits. Forecasts are far from satisfactory for other high-income countries. But the eurozone is the most dangerous part of the world economy: only there do we see important governments – Italy and Spain – menaced by a loss of creditworthiness.

Euro-zone Jan. annual inflation rate holds at 2.7% -- Annual inflation in the 17-nation euro zone held steady in January at a 2.7% pace, unchanged from December, the European Union statistics agency Eurostat reported Wednesday in a preliminary estimate. The figure was in line with expectations. The inflation rate remains above the ECB's target of near but just below 2%, but has fallen back from a peak of 3% in 2011

Are the Irish People to Blame for Reckless Borrowing? - Recently the Irish Taoiseach Enda Kenny pandered to his base once again by saying that the Irish people are to blame for the current state of their economy due to reckless borrowing undertaken during the boom years. I refer not to his base in Ireland, of course — their opinion has hardly mattered since the election — I refer instead to his base among the international financial community. For it is these people that need Kenny’s confession because it is their economic model that has been proved false by the Irish crisis — and so a mea culpa is needed from the victims so that they can avoid the responsibility that they know they bear. This little stunt by Kenny made most Irish people spit and a political analyst might wonder what Irish voter would Kenny appeal to after laying the blame on the ‘Irish people’ in the abstract. It was a stupid move by a politician long known for his tactlessness. But it also says something about what the international financial community require of the countries that they have destroyed.

Brussels hit by strike as EU leaders meet - A general strike brought widespread disruption to Belgium on Monday, as European Union leaders arrived for a summit in Brussels with a focus on boosting employment across the region. Trains, shipping, air travel and public transport were all hit by the trade union action, called in response to reforms enacted hastily by the new government of Elio Di Rupo. It is the first time in nearly two decades that unions from all sectors of the economy have co-ordinated a strike. As well as schools, the postal service and other branches of the public sector, some private enterprises were affected as unions flexed their muscles. The strikes in the EU’s capital are a reflection of union discontent across the continent, worried that austerity measures will jeopardise the recovery. A Europe-wide “day of action”, bringing together unions from across the continent, is planned for February 29.

EU leaders struggle to reconcile austerity, growth - European leaders struggled to reconcile austerity with growth on Monday at a summit that approved a permanent rescue fund for the euro zone and was trying to put finishing touches to a German-driven pact for stricter budget discipline. Officially, the half-day 27-nation summit was meant to focus on ways to revive growth and create jobs at a time when governments across Europe are having to cut public spending and raise taxes to tackle mountains of debt. But disputes over the limits of austerity, and Greece's unfinished debt restructuring negotiations with private bondholders, hampered efforts to send a more optimistic message that Europe is getting on top of its debt crisis. Spain's economy contracted in the last quarter of 2011 for the first time in two years and looks set to slip into a long recession.France halved its 2012 growth forecast to a mere 0.5 percent in another potentially ominous sign for President Nicolas Sarkozy's troubled bid for re-election in May. Prime Minister Francois Fillon said the cut would not entail further budget saving measures.

EU summit: UK and Czechs refuse to join fiscal compact - Twenty-five of the EU's 27 member states have agreed to join a fiscal treaty to enforce budget discipline. The Czech Republic and the UK refused to sign up. UK Prime Minister David Cameron said his government would act if the treaty threatened UK interests. He still has "legal concerns" about the use of EU institutions in enforcing the fiscal treaty, he said. The Czechs cited "constitutional reasons" for their refusal, France's President Nicolas Sarkozy said. Czech President Vaclav Klaus, a Eurosceptic, may be reluctant to sign the treaty, analysts say. The goal is much closer co-ordination of budget policy across the EU to prevent excessive debts accumulating. Germany - the eurozone's biggest lender and most powerful economy - was particularly keen to get a binding treaty adopted to enforce budget rules. The treaty will empower the European Court of Justice to monitor compliance and impose fines on rule-breakers. The treaty also spells out the enhanced role of the European Commission in scrutinising national budgets.

EU Nears Confrontation Over Greek Rescue - European governments moved toward a confrontation over a second rescue package for Greece, just as a dimming fiscal outlook in Portugal opened a new front in the debt crisis. Bargaining with Greece over a debt writedown and its economic management came as European Union leaders signed off on key planks of the strategy to end the financial crisis. They agreed to accelerate the setup of a full-time 500 billion-euro ($659 billion) rescue fund and endorsed a German-inspired deficit-control treaty. Stocks and the euro rose. Euro leaders left a Brussels summit late yesterday with no accord over how to plug Greece’s widening budget hole and German Chancellor Angela Merkel voicing frustration with the Athens government’s failure to carry out an economic makeover. “Greece’s debt sustainability is especially bad,” Merkel told reporters. “You have to find a way through more action by the Greek government, more contributions by private creditors, for example, in order to close this gap.”

25 EU nations to sign treaty to stop overspending - All European Union countries except Britain and the Czech Republic agreed Monday to sign a new treaty designed to stop overspending in the eurozone and put an end to the bloc's crippling debt crisis, while EU leaders also pledged to stimulate growth and employment. The new treaty, known as the fiscal compact, was agreed at a summit of European leaders in Brussels on Monday. It includes strict debt brakes and makes it more difficult for deficit sinners to escape sanctions. The 17 countries in the eurozone hope the tighter rules will restore confidence in their joint currency and convince investors that all of them will get their debts under control. "We have a majority of 25 that will now sign up to the fiscal compact," Swedish Prime Minister Fredrik Reinfeldt said Monday night after the summit of European heads of government in Brussels. Although the new rules only apply to the 17 euro states, the currency union wants to get broad support from the other EU states, in hopes the accord will eventually be integrated into the main EU treaty.

European Leaders Agree to New Budget Discipline Measure - European leaders were poised Monday to agree to tougher new measures to enforce budget discipline in the euro zone, but still showed few signs of producing a comprehensive solution for the sovereign debt crisis or a credible plan to revive fragile economies across Europe’s weakened Mediterranean tier.  he meeting of European Union heads of state and government here in Brussels was aimed at finalizing the text of a so-called fiscal compact for the 17 E.U. nations relying on the euro and issuing a declaration calling for a new push to kick-start growth and combat joblessness across the Continent.  But a number of politicians and analysts said the pledge by the E.U. leaders to create new jobs was mostly empty, and others complained that the proposed rules to keep deficits under control were unbalanced because they contained little to actually help nations with high borrowing costs.  The summit declaration was also expected to skirt around the continuing problems in Greece, where a second bailout is being held up by the inability of the government in Athens to complete a deal with private holders of Greek bonds over the losses they should accept.

"Merely useless" - CHARLEMAGNE files a dispatch from the latest EU summit: Their compact—now called the “treaty on stability, co-ordination and governance in the Economic and Monetary Union”, has as its main aim the imposition of balanced-budget rules on members. This may be a useful discipline in good times. But many worry that, at a time of widespread crisis, such pro-cyclical rules risk imposing too much austerity too widely, thus darkening the spectre of recession and making it even harder to balance budgets. This may explain why leaders suddenly want to be seen talking about their plan (declaration is here in PDF) for growth and jobs, particularly in tackling the problem of youth unemployment.Nevertheless, Angela Merkel, the German chancellor who had pushed hard for the treaty, hailed it as a great success. Many others, however, dismiss the compact with so much faint praise. “It is an important distraction”, says one diplomat. “It has gone from damaging to merely useless,” says a member of the European Parliament. Even Mario Monti, these days everybody’s favourite Italian, judged the compact little more than “a decorative songbird”.

New treaty, same old flaws, by Antonio Fatás: The European Union member states (with the exception of the UK and the Czech Republic) agreed yesterday to a new Treaty on "Stability, Coordination and Governance". The text of the agreement can be found in the web site of the European Council. My first reaction after reading the document was that I must have made a mistake and clicked on the wrong (old) document. It is very difficult to see the differences with the current economic policy framework. And, unfortunately, all the flaws of the previous system are still there. Here is my list of concerns about the agreement.

    • 1. Wrong title. The agreement is mostly about fiscal sustainability not about stability, coordination and governance. ...
    • 2. Numerical limits at the center of the fiscal policy framework. The agreement relies again on strict numerical limits to enforce fiscal discipline. So far this has not worked and it is difficult to imagine why it would work going forward. ...
    • 3. Not enough stress on good years. The By focusing so much on the deficit limit of 0.5% we simply ignore that the real issue is on how to generate those surpluses and we put all the emphasis on the bad economic years where getting things right is so much harder. We have not learned much from the last 10 years.
    • 4. Limited focus on governance. Despite the fact that the word governance appears in the title of the agreement, there is very little change in terms of governance and enforcement. The agreement will be enforced by the governments of the member countries. These are the same actors that can potentially be the sinners

European Policy By Sloth - Despite the fizzling out of yesterday's Euro summit there has been little sell-off which leaves TMM thinking that there is a chance of the European "Policy by Sloth" may work. TMM wrote back in December about what they believed the necessary conditions were to bring about an end to the crisis. The classic Anglo-Saxon view (TMM cannot resist the French line) is that the only way out of the crisis is fiscal union. But TMM believe it is far more nuanced than that - strictly, that measures that confirm the path to some sort of fiscal union in the medium term are in place. Specifically, as we wrote back in December, TMM reckon we need to see the following:

(i) A large enough amount of cash to cover Spain & Italy's financing needs for the next two years,
(ii) Incentives to longer term investors to buy Eurozone government bonds,
(iii) Structural reform measures aimed at rebalancing within the Eurozone and, lastly,
(iv) Clarity on the growth outlook.

In TMM's view, clarity on the first three of these conditions is enough of a firewall for the rest of the world to chug along, and the last of these would be enough to unwind at least some of the under-performance of European assets and loosen financial conditions significantly.

Victory for Merkel over fiscal treaty - Twenty-five of the European Union’s 27 countries have signed up to a German-inspired treaty enshrining tougher fiscal rules to help underpin the euro. But Berlin was warned that there were limits to how much sovereignty governments could be expected to surrender for the sake of fiscal discipline. Nicolas Sarkozy, the French president, said the German proposal for the EU to control Greece’s budget decision-making “would not be reasonable, not be democratic nor would it be effective”. He said that he had confronted Angela Merkel, his German counterpart, with his views and insisted she had agreed. “The recovery process in Greece can only be enacted by the Greeks themselves, democratically,” Mr Sarkozy said. “There can be no question of putting any country under tutelage. Having spoken to the chancellor, I can tell you this is exactly her position.” However, Ms Merkel said she still believed that Greece required stricter monitoring to stick to its bail-out targets, saying Athens’ repeated failure to implement agreed reforms warranted more intensive intervention.

Austerity Über Alles - Score another one for Angie. Last night in Brussels, the leaders of 25 of the 27 European Union countries agreed to become more like Germany. Not in so many words, of course. There was talk of spurring growth, creating jobs, and liberalizing trade. But at the heart of the pact was the so-called debt brake. Modeled on Germany’s own 2009 Schuldenbremse, which imposed a tight cap on federal and state deficits, the debt brake compels participating eurozone countries to keep their structural deficits under 0.5 percent of their gross domestic product (GDP). The 25 countries that signed on—that is, every EU country but non-eurozone Britain and the Czech Republic—are now expected to write language into their national constitutions codifying the deficit limit, with violators to be hauled before the European Court of Justice, which can fine member countries as much as 0.1 percent of their GDP. The fiscal pact is a major victory for German Chancellor Angela Merkel, who set it as a precondition for more decisive measures to stem the European sovereign debt crisis.

Germany, Greece, and the conspiracy of the technocrats - Der Spiegel has a long and meticulously reported piece on the state of affairs as it exists right now between Germany and Greece, naturally concentrating on attitudes within Germany. Meanwhile, Yanis Varoufakis has a much more Greek take on the same subject at CNN. And by far the most striking thing, here, is how similar the two pieces are.They’re both saying the same thing: Germany has been treating Greece’s insolvency as though it were some kind of liquidity crisis, which can be solved by lending Greece more money. But of course that’s the worst possible thing you can do with an insolvent debtor: it only makes things worse rather than better.Here’s Varoufakis: German leaders, unwilling to confront their bankers and the fault lines developing throughout the eurozone, pretended to believe that the problem was Greece and that Greece could be “cured” by means of loans and austerity. At the same time, Greek leaders, unwilling to confront their electorate, pretended to believe that they could deliver the targets demanded by Germany. This can be seen as a conspiracy of the technocrats: both sides deliberately agreeing to the impossible so that Europe would be dragged into ever-greater fiscal union.

Is the ECB/EU Achieving Stated Objective of Balanced Growth? - Rebecca Wilder - The primary objective of the European Central Bank is to maintain price stability; however, as a compliment to its primary objective, the Eurosystem shall also ‘support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union’. These include inter alia ‘full employment’ and ‘balanced economic growth’”. These objectives are laid out in Articles 3 and 127 of the Treaty on the Functioning of the European Union. I wonder whether or not the objectives related to ‘balanced economic growth’ and ‘full employment’ are indeed being achieved? One could argue that they are not. Put more simply: nominal GDP is diverging across program and non-program countries. If this economic duress leads to early exit, I would posit that the balanced growth clause has been breached. The charts above illustrate the dynamics of nominal GDP (NGDP) across the largest non-program and program countries (I explicitly refer to a program country as falling under an explicit EFSF program). These charts demonstrate that unbalanced growth may already be in the works. In Q3 2011, Ireland, Greece, and Portugal are producing an average 2.2% above their minimum level of NGDP during the crisis (Greece’s last data point was in March 2011, so this number is clearly biased upward). In contrast, the largest non-program countries are producing at 6.1% above their minimum levels of NGDP during the crisis – a 3.9% differential in recovery patterns. Germany alone is producing 110.3% above its trough during the crisis.

Troika stick delays PSI carrot - Despite its agreement with bondholders on all the parameters of private-sector involvement (PSI) in the Greek debt writedown, the government will have to wait for another week before winning approval from the EU-IMF-ECB troika for a second bailout package worth 130bn euros. A timely PSI deal for the haircut of 50 percent – or 100bn euros – from the 205bn euro privately held portion of Greek debt was crucial to avert a Greek default before March 20 when a 14.4bn euro bond redemption comes due. "If the [new bailout] process is not completed successfully, we could face the spectre of bankruptcy with grave consequences for society and especially for the poor," said Prime Minister Lucas Papademos after his Sunday meeting with the three political leaders backing his transitional coalition.  But whereas the bondholders' chief negotiator Charles Dallara agreed over the weekend to lower the interest rate on the new bonds below the level of 4 percent required to make the state’s debt sustainable, the country's EU-IMF creditors hardened their stance on the new bailout.

Greek officials attack EU and IMF as debt talks stall - Greek officials launched a vociferous behind the scenes attack on European Union and International Monetary Fund negotiators as talks in Athens over the country's mounting debts appeared to stall. Prime minister Lucas Papademos told aides that a crisis meeting of party leaders would be called as early as Thursday to thrash out a response to an increasingly intransigent negotiating team sent by Brussels, which is demanding severe austerity measures before sanctioning a further €130bn (£109bn) of bailout funds. Papademos and his team of aides returned in sombre mood on Tuesday from a round of talks in Brussels and Frankfurt at the offices of the European Central Bank (ECB), despite relief that a German proposal to install an EU commissioner in Athens, with special oversight of Greek finances, had been quashed. On the negotiations over the bailout funds, Greek MPs have objected to demands by the troika for further wage cuts and reductions in the minimum wage. "The troika doesn't appear to be willing to accept any concessions whatsoever on reducing the minimum wage and scrapping bonuses," said the government aide. "No political party is willing to move either, saying wage cuts are a red line they are simply not going to cross. You tell me how this is going to be resolved. We have no idea and we're very worried."

Greece Must Pledge Tough Reforms for Debt Swap Deal - Greece must make "difficult" decisions in the coming days to clinch a debt swap agreement and a 130 billion euro bailout package needed to avoid an unruly default, the government said on Tuesday. Near-bankrupt Greece is struggling to convince sceptical lenders it can ram through spending cuts and labour reform to help bridge a funding shortfall driven by a worsening economic climate and its previous reform plan having veered off track. With a long-awaited debt swap deal largely almost secured, Athens' focus is now squarely on the reform front. Failure to persuade lenders it can follow through on its pledges could put both the bond swap and the country's latest bailout at risk. "Without the new (bailout) programme we cannot have the necessary funding and the debt swap cannot be completed," Finance Minister Evangelos Venizelos told reporters. "In the next few days, our country needs to take difficult decisions and to complete a gigantic effort which rewards the sacrifices, the achievements and the hopes of the Greek people." He reiterated that Athens is "one formal step away" from completing a deal with private bondholders to restructure 200 billion euros of Greek debt, and confirmed that talks on both the swap and the bailout were "converging" and "co-dependent".

Investors face more than 70 percent loss in Greek deal —Investors participating in a deal to slash Greece's massive debt would face an overall loss on their bond holdings of more than 70 percent, a person involved with the negotiations said Tuesday. European leaders at a summit in Brussels said a final debt deal could be signed off in the coming days, together with a second multibillion-euro bailout package designed to save the country from a potentially disastrous bankruptcy. Athens and representatives of investors holding Greek government bonds over the weekend came close to a final agreement designed to bring Greece's debt down to a more manageable level. Without a restructuring, those debts would swell to around double the country's economic output by the end of the year.

Greek debt accord requires involvement - sources (Reuters) - Negotiations between Athens and its private creditors on restructuring Greece's debt could wrap up as early as Wednesday, bankers and officials said, but European Central Bank action to further reduce the burden is now seen as imperative and is proving a sticking point. Banking sources and officials in Athens and Brussels said the private sector talks were on the cusp of being concluded, with banks and insurance companies ready to accept around a 70 percent net-present-value loss on the bonds they hold, reducing Greece's debts by around 100 billion euros. Greek Finance Minister Evangelos Venizelos said the loss could even exceed 70 percent. Despite that scale of writedown, however, officials said it was unlikely to be sufficient to reduce Greece's debts to 120 percent of GDP by 2020, the goal agreed with the International Monetary Fund to make the debt pile sustainable. Instead, there is a growing awareness of the need to involve public sector owners of Greek bonds - the European Central Bank and national euro zone central banks - in the restructuring, European officials and bankers said. "The analysis is being done right now to see what steps the official sector can take in reducing Greece's debts," one EU official familiar with the talks told Reuters.

Central banks may face Greek haircut losses - European officials are preparing to involve public-sector creditors, including national central banks, in a haircut on Greece's sovereign debt because planned losses by private creditors won't be sufficient for the country to escape its debt crisis, German newspaper Handelsblatt reports Thursday, citing high-ranking European Union diplomats. An "official sector involvement" is currently being prepared in Brussels, in which national central banks would participate in a voluntary haircut alongside the European Central Bank, the newspaper reports. Euro-zone governments could also help by reducing the interest rate that Greece pays for its bailout loans from the current level of 4.5%, the newspaper reports. A Greek haircut would be more problematic for national central banks than for the ECB, with some central banks likely to take losses and need recapitalization by the state, Handelsblatt reports. The ECB could withstand a haircut without taking large writedowns because it bought the bonds far below face value, the newspaper reports. The ECB holds Greek debt with a face value of about EUR55 billion, while Germany's Bundesbank and Luxembourg's central bank also own a large amount of Greek bonds, including some purchased before the outbreak of the debt crisis, Handelsblatt reports, citing people in Brussels.

DON'T BE FOOLED: This Greek Debt Deal Is Doomed Even If 'Agreement' Is Reached: There's been some excitement in the air about the fact that the Greek government and representatives of the banking sector are reportedly nearing an agreement on the terms of a deal to restructure the countries debt as part of a controlled default. But don't be fooled: this deal is doomed. In fact, the consequences of the deal actually going through would probably be far worse than a dreaded credit event—something EU leaders are desperately trying to avoid. Back in July, Greece's creditors were told they would take losses of about 21% on their holdings of Greek bonds as part of an orderly Greek default. At the time, Greece asked for a minimum of 90% participation in the bond swap and it looked probable that they would get something close to but still beneath that. Fast forward to October, and the terms of the deal were drastically changed. Now Greece and representatives of the banking sector determined that banks would take haircuts of about 50%. Negotiations about the terms of that deal are the talks that are drawing to a close right now. The problem is that Greece's creditors have to participate "voluntarily" in order for this restructuring not to provoke a credit event, which would induce a payout of credit default swaps—insurance contracts that hedge against the possibility of a Greek default. This contingency could have far-reaching effects, because the CDS industry is relatively opaque.

Greece Warns It Will Soon Be In "Condition Of Absolute Poverty" - And while the bankers (on both sides of the table) haggle about how to best leech Greece even dryer (with a solution due any hour, day, week now), the actual people are starting to wave the white flag of surrender. Because the opportunity cost of every additional coupon payment is having a direct, immediate and increasingly more dire impact on virtually every aspect of the economy. Kathimerini reports that "about 160,000 jobs will be lost this year in the commerce sector, according to the National Confederation of Greek Commerce (ESEE) as the constant decline in disposable income has led to a sharp drop in turnover and a steep rise in the number of enterprises shutting down." Indicatively, the latest Greek employment figures per the IMF, show that 4.156MM people are employed. So commerce alone is about to lead to a 4% drop in total jobs. As the chart below shows, net of just this sector, Greek jobs are about to go back to 2010 levels. What this means for the Greek unemployment rate, and for GDP we leave to our readers, although the ESEE does a good job of summarizing what to expect: the "ESEE warns that soon Greece will be in a condition of absolute poverty."

Europe's debt crisis: Where things stand - After wreaking havoc in global financial markets last year, the debt crisis in Europe has entered a complicated new phase in 2012. There have been signs of progress in Italy and Spain, thanks to the efforts of new governments in both countries and aggressive moves by the European Central Bank. But the outlook for Greece remains uncertain, with key issues surrounding additional bailout funds and a writedown of the nation's debts still unresolved. And Portugal has come under pressure amid speculation that the bailed-out nation could be next on the default watch list if Greece negotiates a restructuring. Greece's deep debt problem Europe's debt problems started in Greece more than two years ago, and the situation there has yet to be fully resolved. Greece is close to finalizing a deal with private sector creditors to write down a portion of the nation's overwhelming debt load, Prime Minister Lucas Papademos said Tuesday. The agreement, which has been held up for weeks amid disagreements over how much of a loss investors will voluntarily accept, is a key condition for Greece to receive more bailout money.

I Still Don’t Get Why the ECB Hiked Rates - Rebecca Wilder - I still don’t get why the ECB hiked rates in April and July of 2011. I questioned this using bond market pricing back in August 2011. Now I question it once more using the ex post trajectory of mortgage rates. Across the Euro area, 43% of total home loans are made on a variable rate basis – this means that mortgage rates are highly elastic to ECB rate setting policy. Average mortgage rates started rising well before the ECB actually hiked rates. The bottom in mortgage rates was seen in June 2010 and hit a local peak in August 2011 when rate cut expectations started to pass through. But the high correlation between ECB policy and average mortgage rates was to be expected and very harmful to those economies with a rising household desire to save. It would be one thing if the variable mortgages were concentrated in the core countries; but they’re not. The Periphery economies drive up the average share of variable rate mortgages. In the most extreme case, Portugal, 99% of all home loans are made at a variable interest rate. It doesn’t take a PhD to figure out the speed at which tighter monetary policy will pass through to the real economy when 99% of all loans are made at a variable rate.

United States of Europe? What it Will Take to Save the Continent from Economic Collapse - The dilemma Europe now faces is complicated -- not least because the European Union comprises 27 separate sovereign nations and the euro area, where the chief problems lie, is a currency union that has 17 members itself. Beyond that, the euro is flawed both in design and in execution. It hearkens back to the gold standard and its fixed exchange rate system which necessitated a deflationary policy response to the deep downturn of 1929, ending in the Great Depression and World War II. Unless drastic action is taken, we will soon find ourselves in another Great Depression. But the problem is this: no state can have a fixed exchange rate, free flow of capital and independent monetary policy at the same time. Therefore, fixed exchange rate systems always end in trade imbalances that can last for decades and across business cycles, creating so-called debtor or deficit states and creditor or surplus states. This is not a problem during an economic boom. However, if boom turns to bust, the debtor states will become distressed as cash flows supporting debts decline.

ECB says eurozone banks more reluctant to lend - Eurozone banks are tightening lending conditions for both businesses and households even as demand falls and the sovereign debt crisis drags on, the European Central Bank found on Wednesday. In its latest quarterly Bank Lending Survey, the ECB said that a quarter of banks expect to tighten the criteria that businesses must meet to take out loans in the first quarter of the year. Almost as many banks said they would also tighten conditions for loans to households for house purchases. At the same time, demand for such loans both from households and firms has declined, the survey found. The poll was conducted between December 19 and January 9 and so will not fully take into account the unprecedented injection of nearly half a trillion euros ($650 billion) of liquidity into the banking system by the ECB at the end of last year. The data will, however, heighten concerns about a possible credit crunch in the 17 countries that share the euro.

Survey of Banks Shows a Sharp Cut in Lending in Europe -  Banks in the euro area cut lending sharply at the end of 2011, according to data published Wednesday, raising concern that Europe was on the verge of a credit crisis that could lead to a deeper recession than expected.  A quarterly survey of commercial banks by the European Central Bank showed a surge in the number of institutions that were becoming more restrictive about who they lent to, because the banks themselves were having trouble raising money and were under pressure from regulators to reduce risk.  The survey, which covered the last three months of 2011, provided more evidence of the harmful effect that the sovereign debt crisis was having on the banking system. It also somewhat validated the European Central Bank policy of providing big emergency loans to euro area banks in an attempt to stave off a full-blown lending drought.  “A credit crunch would tip the euro zone back into a severe recession,”

Euro Banks Swap Cash for Trash - Desperate attempts by the European Central Bank to pump air into the deflating Eurozone are encouraging leading European banks to load up their portfolios with potentially risky debt. This could lead to big problems down the road if some Eurozone countries do actually default or force the banks to accept big writedowns on loans. The problem is what’s known as the carry trade.  In place of totally safe investments, bankers buy risky bonds and reap a substantial profit from “carrying” these hot potatoes. The enhanced earnings typically come from the fact that the yields on these bonds are a lot higher than the cost of borrowing the money to buy them. But the carry trade has become a problem recently because the European Central Bank has started lending huge amounts of money on incredibly easy terms (sort of like mortgage loans in the U.S. a few years ago). The ECB’s new procedures, known as “crisis loans” or LTRO (long-term refinancing operations), are a bit complicated to explain. For a full-length treatment, you can read this article by Ambrose Evans-Pritchard, but here’s the short, oversimplified version:

On the ECB as FDIC - LATE last year, I tweeted a question: what is the single most important reason that America doesn't have internal balance-of-payment crises like that now afflicting the euro zone? My view, at the time, was that it came down to the Federal Deposit Insurance Corporation. The FDIC is backed by the federal government which is itself backed by the Federal Reserve. And the FDIC ensures that a state won't fall prey to a nasty crisis in which a deteriorating local economy breaks local banks which then bankrupt the local government and further destroy the local economy. Today, Buttonwood quotes the Bank Credit Analyst: The problem in Europe is that deposit insurance schemes are administered at the national level. That is where the ECB comes in. While it would never admit it, through a rather circuitous route. the ECB has now assumed a role comparable to the US Federal Deposit Insurance Corporation (FDIC)... It's an interesting point. In the absence of a federal government to back the banks and which the ECB can in turn feel comfortable backing, it has simply opted to support the banks itself.

Bundesbank sinks deeper into debt saving Europe - Germany's Bundesbank has entirely exhausted its stock of private assets and run up a quarter of a trillion euros in liabilities propping up the eurozone system, testing the political limits of EMU solidarity in Germany.  The operations are part of the European Central Bank's 'TARGET2' network of automatic payments between the national central banks of the Euroland club. The Bundesbank has already provided €496bn (£413bn) to countries in trouble, chiefly Greece, Ireland, Italy and Spain.  "This is reaching the danger point. It is already one and a half times the total budget of the German government," said Professor Frank Westermann of Osnabrück University. "If any of the crisis countries exits the euro or if there is an EMU break-up, the Bundesbank bears extreme risks."  The Bundesbank - the dominant body in the euro system - used to keep a stock of €270bn of private securities (refinance credit) before the start of the financial crisis. This was depleted last year as it sold assets to meet growing demands on the TARGET2 scheme.  Once the debt drama began to engulf the bigger economies, the Bundesbank was forced to borrow money to meet its obligations to offset capital flight, since it refused to sell its stash of gold. It now owes €228bn to German banks.

Italy: ‘Pitchfork Movement’ - The fourth day of strikes by truckers continue to disrupt transport across Italy, forcing Fiat SpA to stop production and Coca-Cola Hellenic Bottling Co. SA. to halt two plants, as protests mount against the government’s austerity measures. Truck drivers demonstrating against high fuel prices, with the backing of farmers, livestock owners and fishermen, are maintaining road blocks in parts of the country. Drivers crippled nationwide commerce on the first day of the protests on Jan. 23 when they blocked toll booths across the country’s highway network. Fiat said it won’t be able to restart output before 2 p.m. tomorrow because of a shortage of parts. The maker of the Punto and Panda models has lost production of 8,400 vehicles since the start of the strike. Coca-Cola said in a statement it halted two facilities because it wasn’t receiving supplies and was having trouble distributing its products. Food shortages are driving up prices in parts of the country, and the protests have cost farmers about 100 million euros ($131 million) by preventing delivery of produce, trade association Coldiretti said. Drivers are suffering from higher levies on fuel included in a 20 billion-euro austerity package passed by Prime Minister Mario Monti’s government last month that left Italy with the region’s highest gasoline prices, currently about $9 a gallon. A second plan passed last week aims to open up closed professions, and has prompted protests from taxi drivers, pharmacists, lawyers and notaries.

EU says "Strict Application of Budget Rules Doesn't Make Sense"; Spain Kicks Off the Year Destroying 9,000+ Jobs a Day, 283,700 for Month -- On January 30, 25 of 27 nations signed the Merkozy accord calling for strict budget discipline and "quasi-automatic sanctions" for nations that violate budget rules. Only the UK and Czech Republic refused to sign. Following that ceremonious signing it took precisely two days for European bureaucrats to propose "Application of the rules in a strict manner in the face of a downturn doesn’t make sense". Please laugh along with Spain poses six-pack rules challenge: Spain’s deteriorating economy poses the first challenge to Brussels’ commitment to enforce tough new budget rules intended to repair credibility with financial markets and ease the debt crisis.  “Application of the rules in a strict manner in the face of a downturn doesn’t make sense,” said Andre Sapir, a senior fellow at Bruegel, a Brussels think-tank. “One has to find a compromise.” Olli Rehn, the economics commissioner, threatened to “fully use this powerful set of new tools from day one”. But the EU’s executive arm is also sympathetic to Spain’s plight. Following a meeting in Brussels on Monday with Mariano Rajoy, the Spanish prime minister, José Manuel Barroso, the European Commission president, suggested that a debate was now under way on whether to make some accommodation for Madrid.

Spain Unveils EUR 50bn Bank Sector Clean-Up Spain's government unveiled reforms Thursday that will oblige banks to clean up their bad loans by building up provisions and capital reserves totalling 50 billion euros ($65 billion). The banking sector is weighed down by a mountain of soured loans and property assets that are losing their value after the collapse of the Spanish property market in 2008. According to the Bank of Spain, the sector had 176 billion euros in problem loans and seized real estate in June 2011 -- a figure which has probably increased since, as the economy has weakened. The sector has undergone a major restructuring since 2008 but the government considers it still to be at risk despite banks putting aside a third of this amount to cushion the blow when they sell off the bad assets. The new reform aims to "generate mergers to form viable entities" out of struggling ones so that "the clean-up will be quick and deep", De Guindos said.

Greece’s leaders oppose new austerity measures - All three party leaders in Greece’s teetering national unity government have opposed new austerity measures demanded by international lenders, forcing eurozone finance ministers to postpone approval of a new €130bn bail-out and moving the country closer to a full-blown default. Representatives of the so-called “troika” – the European Commission, European Central Bank and International Monetary Fund – have demanded further cuts in government jobs and severe reductions in Greek salaries, including an immediate 25 per cent cut in the €750 minimum monthly wage, before agreeing the new rescue. But representatives of all three coalition partners, including centre-left Pasok of former prime minister George Papandreou and the centre-right New Democracy of likely successor Antonis Samaras, said they were unwilling to back the government layoffs. In addition, a Greek government official said the EU and IMF negotiators rejected a counter-proposal that would have frozen Greek wages for three years and cut social security contributions by 10 per cent.
Finance ministers from the four remaining triple As – Germany, the Netherlands, Finland and Luxembourg – met in Berlin on Friday where they agreed that Athens must move quickly or they would withhold assistance.

CAC flap - What should private bondholders make of the ESM? It looks like a marginal plus if you're invested in the bonds of euro-zone countries that are already receiving official help (ie, Greece, Ireland and Portugal). That's not just because the bail-out pot looks a wee bit stronger, but also because the treaty says that the ESM will not be senior to other creditors (except the IMF) in the case of countries that are already getting assistance. But if you're a creditor of a country that is wobbly but not yet frozen out of the markets (like Belgium, Spain or Italy), it is less obviously good news. If the ESM lends these countries money, then the treaty states it will have preferred-creditor status over other bondholders except for the IMF (the treaty skips silently over the vexed question of the ECB's seniority). That would subordinate existing investors, which could in turn spark wider contagion by triggering credit-default swaps. But there is another element to the ESM: it requires the inclusion of collective-action clauses (CACs) in all new euro-area bonds of more than a year's maturity that are issued after January 1st 2013. Collective-action clauses are designed to address the problem of holdout creditors in a restructuring negotiation. Rather than having to get unanimous consent for a change in terms, CACs enable changes to be applied provided a pre-specified majority agree to them.

Euro zone sales tumble at Christmas, no sign of growth - (Reuters) - Retail sales in the euro zone tumbled unexpectedly in December, the biggest drop in the Christmas period in three years, data showed on Friday, with rising joblessness and stubborn inflation undercut signs of a stabilization in Europe's economy. Sales across the 17-nation single currency area fell 0.4 percent in December from November, well down from the 0.3 percent rise forecast by economists in a Reuters poll. They were down by 1.6 percent on an annual basis, the European Union's statistics office Eurostat said. That annual drop was the biggest since December 2008 when retail sales also fell 1.6 percent in the month at what turned out to be the start of the world's biggest post-1930s recession. European households cannot yet be relied on to help the euro zone pull out of its latest slump. Joblessness reached a euro-era high of 10.4 percent in December, while inflation remains near recent peaks of 3 percent. Even in Germany, the bloc's biggest economy, sales fell 1.4 percent compared with November and shoppers stayed away from the malls in France and Spain, where sales slid 0.3 percent and 0.8 percent respectively. Consumer confidence is also weak, despite rising slightly in January from a 26-month low in December.

How This Gets Even Uglier, by Tim Duy: At this risk of beating a dead horse, I reiterate that I don't see how the European situation comes to a happy conclusion. Conditions in Greece appear to be deteriorating rapidly. Via Athens News, retail sales are in freefall: Retail sales by volume fell 8.9 percent year-on-year in November after a 10.8 percent drop in October, statistics service data showed on Tuesday. Households, burdened by austerity measures to plug deficits and rising unemployment, have cut back on spending. Consumer confidence has also been hurt by a climb in the jobless rate to 17.7 percent in the third quarter. Officially, hope springs eternal: "Increasing unemployment and austerity are likely to continue weighing on disposable incomes and consumer demand in the first months of 2012. However, a positive conclusion of the PSI deal and the approval of the second bailout package could provide a kind of positive shock to business and consumer sentiment," he added. Right, good luck with that, as the next agreement is only about tightening the screws even more. How exactly will consumer confidence get a boost given an acceleration in wage cuts, a late holiday gift from the Troika. An interview with the IMF's Poul Thomsen, via Kathimerini: Greece still has a large competitiveness gap. Closing this gap will require actions on many fronts, not only wages, but it is clear that wages for the economy as a whole are too large compared to Greece’s productivity.

20 Signs That Europe Is Plunging Into A Full-Blown Economic Depression - An economic nightmare is descending on Europe.  With each passing month, the economic numbers across Europe get even worse.  At this point it is becoming extremely difficult for anyone to deny that Europe is plunging into a full-blown economic depression.  In fact, some parts of Europe are already there.  In Spain the overall unemployment rate is over 22 percent, and in Greece one out of every five retail establishments has already been closed down.  All over Europe economic activity is rapidly slowing down, unemployment is skyrocketing and bad debts are unraveling.  It isn’t even going to take a default by a nation such as Greece or a collapse of the euro to push Europe into an economic depression.  All Europe has to do is to stay on the exact path that it is on right now and it will get there.  Instead of increasing government spending, most governments in Europe are actually cutting back.  All over Europe, national governments are being encouraged to implement even more tax increases and even more budget cuts.  The hope is that all of this austerity will help solve the nightmarish sovereign debt crisis that Europe is facing.  But unfortunately, all of these tax increases and budget cuts are also going to involve a tremendous amount of economic pain.

The experts' view on the euro's future: it doesn't have one - The eurozone cannot survive in its current form – that is the alarming prediction of top economists and politicians of all political hues, among them the former Chancellors Alistair Darling, Nigel Lawson and Norman Lamont. In interviews and articles for The Independent today, the experts were asked for their short-term and long-term predictions for the future of the euro. While most believe the eurozone may well survive the current Greek debt crisis – especially given the political will invested in preventing a disorderly default – none is confident that the contagion could be contained, and most believe the new European Fiscal Compact agreed in principle on Monday is unsustainable as it would take key financial powers from national governments – and their electorates. Many of the politicians and economists criticised the rush to austerity being imposed on Greece and Italy, suggesting it would be counter-productive by depressing growth, and said the competitive imbalances between eurozone members would be impossible to overcome. They suggested the ultimate consequence of the crisis would be a much smaller eurozone with Germany at the centre and countries such as Greece, Portugal, Italy and Ireland on the outside.

Central Bankers in the Line of Fire - Central bankers should not only be above suspicion of wrongdoing, but also appear to be above it. So the decision in January by Philipp Hildebrand, Chairman of the Board of the Swiss National Bank (SNB), to resign over allegations relating to a suspicious currency trade made by his wife, is to be welcomed. But, while Hildebrand’s resignation should serve as a precedent to be followed by central bankers – indeed, all public officials – everywhere, the circumstances surrounding his departure smell much worse than what caused it. On August 15, 2011, Hildebrand’s wife, Kashya, exchanged 400,000 Swiss francs into dollars. On September 6, Hildebrand announced that the SNB would cap the value of the franc against the euro, thus de facto forcing a depreciation of the franc vis-à-vis all other major currencies. As a result, the value of his wife’s investment soared by almost 20%. While Hildebrand claims to have had no knowledge of the transaction that day, he resigned because it was “not possible to provide conclusive and final evidence” that his wife, a former hedge-fund manager, traded without his knowledge. Even if he did not know about the trade, Hildebrand committed an error of judgment in not reversing the transaction immediately. His resignation was warranted – as is enhanced disclosure of central bankers’ personal finances around the world.

European Money Supply Has Been Collapsing Faster Than In 2008-2009: Here are some great pictures from Credit Suisse illustrating what’s happening in the European monetary sector. The monetary aggregates have been collapsing at a greater pace than 2008/09 as banks have been cutting credit and shrinking their balance sheets to meet capital ratios. The European bank run, which really accelerated in the core in the second half of last year was a major contributor to the monetary contraction and loss of confidence by the banks. The last chart is very interesting to us in that it shows the flows of deposit and capital flight from the periphery, German, and French banks. For most of 2011, capital flight from the periphery was flowing to the core, with German and French banks receiving much of it, for example. This partially explains why the Euro was relatively strong for much of last year. The crisis became acute and systemic in Q3 2011 as deposits fled Germany and France causing the steep sell-off in the Euro. The ECB, the Fed, and other global central banks, did a good job preventing the collapse of Europe’s, and, ultimately, the global financial system, by fulfilling their role as lender of last resort to Europe’s banking system. It’s unlikely, at least to us, the European credit spigot turns back on anytime soon, providing more room for ECB balance sheet growth and rate cuts. We’ve noticed this the modus operandi or reaction function of most central banks, post crisis.

Latest ECB data shows how bad things have become in Euroland - I was reading the recently published January 2012 Monthly Bulletin from the ECB yesterday. It provides a massive amount of interesting data about the developments in the Eurozone plus analysis. The descriptive analysis is fine (this went up, this went down) but the conceptual analysis leaves a lot to be desired. This is an institution that still talks about reference values of broad money as a policy target to control inflation. Basically, that idea has no application in our monetary system. But that aside, the release of the latest M3 data tells us how bad things are getting in the Eurozone and do not augur well for the coming year, despite the up-beat forecasts for real GDP that the ECB are still providing. The latest ECB data shows how bad things have become in Euroland. You will note that in Modern Monetary Theory (MMT) there is very little spoken about the money supply. In an endogenous money world there is very little meaning in the aggregate concept of the “money supply”. I will come back to that. But the Central banks do still publish data on various measures of “money” and attach importance to movements in these data series.

French banks would come to Britain to avoid tax: Cameron - British Prime Minister David Cameron took a fresh dig at cross-channel rival France Monday, warning that French banks would flee to Britain if Paris introduces a financial transactions tax. In comments aimed squarely at Nicolas Sarkozy after the French president reportedly criticised British industry, Cameron said the concept of the tax at a time of economic difficulty was "mad" and "extraordinary". "I know I used the word mad, but I do think it's an extraordinary thing to do," he told a press conference after a European Union summit in Brussels, referring to the introduction of the tax. "The European Commissioner has told us this would cost Europe half a million jobs. Now when we're all fighting for jobs and for growth, to do something that would cost so many jobs does seem to me to be extraordinary. "And in the spirit of this healthy competition with France, if France goes for a financial transactions tax then the door will be open and we'll be able to welcome many more French banks, businesses and others to the UK. "We'll expand our economy in that way as well as by rebalancing it, because I think this is the wrong move." In a televised speech on Sunday, Sarkozy announced plans to introduce a 0.1 percent tax on financial transactions to come into effect from August this year in France.

French banks would come to Britain to avoid tax - In comments aimed squarely at Nicolas Sarkozy after the French president reportedly criticised British industry, Cameron said the concept of the tax at a time of economic difficulty was "mad" and "extraordinary". "The European Commissioner has told us this would cost Europe half a million jobs. Now when we're all fighting for jobs and for growth, to do something that would cost so many jobs does seem to me to be extraordinary. "And in the spirit of this healthy competition with France, if France goes for a financial transactions tax then the door will be open and we'll be able to welcome many more French banks, businesses and others to the UK. In a televised speech on Sunday, Sarkozy announced plans to introduce a 0.1 percent tax on financial transactions to come into effect from August this year in France. He said in the same speech that Britain had no industry left, but while the British press played up the French president's comments, Cameron played down suggestions of a rift.

Britain overhauls financial regulations— Britain’s finance ministry will have the power from next year to take charge in any future banking crisis, including being able to tell the Bank of England (BoE) to pump money into the financial system. Finance minister George Osborne published a draft law on Friday reforming the way Britain’s financial system is regulated and setting out who has ultimate authority in a crisis. The legislation is an attempt to draw a line under the regulatory failings that forced taxpayers to stump up hundreds of billions of pounds to shore up the banking sector in 2008. It will scrap the Financial Services Authority from 2013 and hand power to supervise banks and insurers to the central bank. “When taxpayers’ money is at risk in a crisis this legislation gives the Chancellor (of the Exchequer) the power to direct the Bank of England to act,” Osborne said in a speech to world political and financial leaders in Davos, Switzerland.

The Worse-than Club - Krugman - Further thoughts on the observation that the current British slump has now gone on longer than the slump of the 1930s. Is Britain unique? No, it isn’t. The NIESR has developed a monthly GDP series for Britain, which lets it use real-time data for the comparison. I can’t replicate that, but I can use the Maddison historical data and IMF data — including projections for 2012 and 2013 — to do some comparisons. When you do this for the UK, the worse-than pops right out:  And here’s Italy: France and Germany are doing much better than in the early 1930s — but then France and Germany had terrible, deflationist policies in the early 1930s. With two of Europe’s big four economies doing worse than they did in the Great Depression, at least in terms of GDP — and that’s three of five if you count Spain — do you think the austerity advocates might consider that maybe, possibly, they’re on the wrong track?

The Austerity Debacle, by Paul Krugman -  Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.  Nor is Britain unique. Italy is also doing worse1 than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.  And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

Macro amateurs, micro geniuses? - Simon Wren-Lewis says the coalition’s austerity is a “major macroeconomic policy error.” It’s difficult to imagine the government ever acknowledging this. On Wednesday, Cameron resorted to immunizing strategies such as blaming the euro crisis (without noting that exports to the euro area have risen by 11.3% in the last 12 months), or celebrating the “lowest interest rates for a hundred years“, oblivious to the fact that these are a sign of economic weakness. I suspect that even if the GDP numbers had been much worse, he’d have used similar arguments. Macroeconomic policy, then, is not only made by rank amateurs - not one of the five Treasury ministers in the Commons has a postgraduate qualification in economics and only one has significant experience in financial work. It is made by amateurs who seem immune to feedback. Errors are only to be expected. Which raises a paradox. The job of running the economy is entrusted to anyone.  But the job of running companies requires people of such rare and delicate talent that only multi-million salaries will attract and motivate them. Why the inconsistency?

Austerity, or something else? - BRITAIN'S economy shrank a bit in the fourth quarter of 2011 and odds are good that it will contract in the first quarter of this year, putting it in semi-official recession territory. British growth has been very sluggish for a couple of years now, such that its present recovery now looks a bit worse, on some measures, than that from the Depression. What's going on? Paul Krugman credits excessive austerity. Scott Sumner suggests there isn't much austerity and credits tight money. In the past, he's argued that supply-side issues are to blame. Is any of this right? The first thing to note is that the trajectory of British growth, particularly over the past year, isn't much different than that in Europe and America. Industrial production in Britain tracked that in America pretty closely in 2011. It likely faces some meaningful structural problems—import-substitution has been slow to respond to weak sterling, and Britain remains very dependent on financial services—but it's not a total oddball among rich countries.

Chris Giles on UK Austerity - According to Chris Giles in today’s Financial Times, “..the area in which Britain still leads the international debate is fiscal policy”. This might come as a surprise to many, such as Paul Krugman. I should emphasise that Chris does make one point which I totally agree with. Gordon Brown was quick to recognise the need for fiscal stimulus in 2008, and he applauds that. So, unlike some, the argument is not that fiscal stimulus is always and everywhere wrong. Instead it is that fiscal stimulus was appropriate in the downturn, but that once a recovery began, it was necessary to switch sharply from stimulus to austerity. This argument has of course been made for other countries, including the US, as well as the UK..     Chris gives some arguments against austerity that he says range from ‘mad to bad’. The first, which he attributes to Labour politicians, is the suggestion that austerity is entirely responsible for the recent downturn in UK growth. Well, if anyone said this, they are obviously wrong (although not quite mad): there are other important deflationary forces, of course. But it is equally wrong to infer that austerity has little or nothing to do with the recent poor performance. I know of no evidence to suggest that is likely.     The second argument against austerity which he describes as ‘bad’ is that low borrowing rates imply that we can “go on a spending spree”. Let’s forget about the ‘spending spree’ language. What I do take exception to is the suggestion that this is a bad argument. It could be wrong, but the idea that the market price might tell you something about demand and supply is hardly bad.

End this masochism in economic policymaking  - Herbert Hoover, you were right. That is the consensus of all right-thinking people on UK fiscal policy. This view, as my colleague, Chris Giles notes, has even become a much admired British intellectual export.  Interestingly, the Institute of Fiscal Studies, which is as right-thinking as can be, proffered an admittedly lukewarm version of the opposing view in its Green Budget this week. It states that “the case for a short-term fiscal stimulus package to boost the economy is stronger now than it was a year ago.  The case would be strengthened significantly were the outlook for the UK economy to deteriorate sharply”. My only difference from this analysis is that economic performance is already dismal. It does not need to deteriorate further. How masochistic does one need to be? The task is to devise action that is effective and preserves credibility.Fact one: in the fourth quarter of 2011, UK gross domestic product was 3.8 per cent lower than at the pre-crisis peak in the first quarter of 2008. Fact two: the economy is now stagnant, with output in the last quarter of 2011 a mere 0.3 per cent above its level in the third quarter of 2010. Fact three: as Jonathan Portes of the National Institute of Economic and Social Research notes, the UK “depression” – the period during which output is below its pre-crisis peak – is now longer than the Great Depression, let alone subsequent recessions. Fact four: it could be many years before this slump ends.

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