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

Saturday, March 24, 2012

week ending Mar 24

Fed's Balance Sheet Contracts In Latest Week The Fed's asset holdings in the week ended March 21 were $2.895 trillion, down from $2.896 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities grew to $1.663 trillion, up from $1.660 trillion a week earlier. The central bank's holdings of mortgage- backed securities decreased to $851.26 billion, compared with $853.89 billion the previous week. Thursday's report showed total borrowing from the Fed's discount lending window was $7.30 billion on Wednesday, compared with $7.38 billion a week earlier. Commercial banks borrowed $3 million from the discount window, the same as the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.469 trillion, compared with $3.473 trillion the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts totaled $2.733 trillion, compared with $2.734 trillion in the previous week. Holdings of federal agency securities fell to $735.82 billion, compared with $ 739.15 billion the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--March 22 2012

NY Fed: ECB, BoJ Tap $2.328 Billion From Dollar Swap Facility - The European Central Bank and Bank of Japan borrowed dollars from the Federal Reserve during the week ended March 21, the New York Federal Reserve Bank said Thursday. New dollar borrowings from the U.S. central bank totaled $2.328 billion for the week. This includes the ECB’s new $2.318 billion seven-day tap at an interest rate of 0.62%. The BoJ borrowed $10 million in eight-day loans at the same rate. In total, these two central banks, along with the Swiss National Bank, have $65.593 billion worth of dollar loans outstanding from the Fed. That is a slight increase from last week’s $64.873 billion.

Fed Sent $75.42 Billion in Profit to Treasury in 2011 - The Federal Reserve Tuesday said its net income fell slightly last year amid declines in earnings from some of its financial crisis rescue programs as they wind down. The Fed’s combined financial statement showed a net income of $77.38 billion in 2011, compared with $81.74 billion the previous year. Still, the Fed is generating much more money than it did before the financial crisis, the result of a vast portfolio of Treasury and mortgage securities holdings it took during the recovery as part of a broader effort to stimulate economic growth. The securities portfolio generates interest income for the central bank.

What is the Fed telling markets? - LAST year, the Fed began its most aggressive ever use of "forward guidance" as a monetary-policy tool, when it provided a calendar date—initially 2013, now late 2014—through which the Fed was likely to leave rates at exceptionally low levels. The meaning and intention of this language has been hotly debated ever since. On the one hand, a pure focus on the language of the Fed's statement indicates that rates are likely to remain low through that period based on the state of the economy. Here's the text:[T]he Committee...currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. If the Fed is merely communicating its views of the likely trajectory of the economy and the way that trajectory is likely to influence the policy rules the Fed uses to set rates, then the forward guidance in the statement should not be stimulative. On the contrary, if it communicates to observers that the economy is weaker than widely believed the statement could actually be contractionary. On the other hand, the Fed may be hinting that it will be willing to keep rates low through late 2014 even if the trajectory of the economy warrants a rate increase. In other words, the Fed might be attempting to commit itself to a deviation from its normal policy rules of the sort that might generate more rapid growth and inflation.

Fed’s Evans Calls for Stronger Commitment to Low Rates  - Charles Evans, president of the Federal Reserve Bank of Chicago, amplified his call for a stronger commitment by the central bank to keep interest rates low with a new research paper which he says offers mathematical proofs supporting his proposals.  Mr. Evans, a researcher before becoming Chicago Fed president in 2007, wants the Fed to commit to keep short-term interest rates near zero until inflation reaches 3% or unemployment drops below 7%. He likens this approach to the Greek mythological figure Odysseus, who commands his sailors to tie him to a mast to avoid being steered off course by alluring Siren’s song. In this case, Mr. Evans noted in a speech last week, the Fed would be committing itself to avoid prematurely raising interest rates and cutting off the recovery.

Fed’s Bullard: More Stimulus Isn’t Warranted - In a time of improving economic activity, the Federal Reserve should refrain from doing much more on the stimulus front, a key Fed official said. Anything the Fed might do beyond its current efforts “would have effects far into the future, in an environment of continual improvement and repair for the U.S. economy,” Federal Reserve Bank of St. Louis President James Bullard said.

Thinking About the Fed - JKH has magisterial post up on the recent dust-up over Saving as perceived in various sectoral models — one-sector (global, for instance, or government- and trade-balanced domestic private sector); two-sector (government and private including international); the most common MMT construct, the three-sector model (government, domestic private, and international); the rather uncommon four-sector model (government, international, domestic household, and domestic business); or even a seven-billion-plus-sector model, in which each individual (and business, and government) is represented as a sector. His key point, I think — one I agree with profoundly — is that people need to be very clear on which model they’re assuming when they use the word Saving, or the construct “S.” (People sometimes use those two differently, with different implied sectoral models, sometimes within a single discussion or even a single sentence.) In most cases the different constructs of saving and S that people throw around are absolutely valid within their (implicit) sectoral models. The problem arises when people are talking about different sectoral consolidations within the same discussion, without themselves and/or their interlocutors being (fully) aware of it. How do we think about the central bank, and actually the nature of money and the monetary system? I see a lot of people talking past each other because they’re talking about different levels of accounting consolidation.

Roger Lowenstein’s Disgraceful Propagandizing via “Bernanke as Hero” Piece - Yves Smith - The big end of finance, having won decisively in the global financial crisis, is in the process of rewriting history to suit its liking. The cover story in the current Atlantic by Roger Lowenstein on Ben Bernanke, titled simply, “The Hero,” is a classic example of this type of revisionist history. I don’t know what has happened to Lowenstein. His book on the collapse of hedge fund Long Term Capital Management, When Genius Failed, is a terrific piece of reporting. People I know who were on the inside of the LTCM rescue negotiations give his account high marks. But he has increasingly fallen into the role of scrivener for powerful interests, when his previous standards of writing and his knowledge of the finance beat says he must, on some level, know what he is doing. The Fed couldn’t have gotten better PR if it had paid for it. Lowenstein’s account has just enough muted criticism of Bernanke (he was slow to see the severity of the crisis, his critics on the left may have a point in saying he hasn’t been aggressive enough in trying to reflate the economy) to mask its hagiography.

On jobs, is Bernanke aggressive enough? - Federal Reserve Chairman Ben S. Bernanke has left his mark on economic history not once but twice, using almost every weapon in his arsenal to quell the financial panic of 2008 and then to lift the U.S. economy out of the recession that followed.But now, in the latest and perhaps final chapter of his public life, that legacy could be recast if he misjudges the nation’s slow-going economic recovery. A debate is raging over whether Bernanke should become more aggressive about reducing joblessness or continue a more restrained approach. With the Fed’s policymakers taking no new action at their meeting last week, Bernanke is staying cautious for the time being, reserving the central bank’s more powerful weapons in case the recovery stalls. Some economists say this is the right policy for a recovery that seems to be gaining stream. But, if the unemployment rate, which stands at 8.3 percent, does not continue to decline at a fast pace, critics say Bernanke’s legacy could be impugned.“If we end up with a few more years of unemployment in the eights, which is not out of the question, people are going to say Bernanke did a good job at the heart of the crisis but dropped the ball when people were still suffering,” said Christina Romer,

Why the Fed deserves props - We have an unfortunate tendency in this country to treat people as either heroes or villains, with no gradations in between. Take Fed Chairman Ben Bernanke. He’s being called exceptionally vicious names by right-wing types for supposedly undermining our currency and planting the seeds for inflation — while also being excoriated by liberals for not doing enough to help the economy. Now comes The Atlantic, which calls Bernanke a hero on its cover, touching off yet another debate among the chattering classes, which, I suppose, include me. I don’t know about you, but I’ve had enough of the hero-or-villain standard. Bernanke isn’t a villain; he’s not a hero. He’s just a guy trying to do a complicated, high-pressure job the best he can, making plenty of mistakes along the way. The Fed is attracting lots of criticism from both sides because it’s trying to play things down the middle, as Bernanke sees it. In addition, the Fed is the only major Washington institution that seems to be doing anything other than jockeying for position in the November elections. It’s actually trying to do something, with no help from the other major players.

Bernanke Denies Fed Rate Policy Caused Housing Bust - Most evidence suggests the Federal Reserve‘s policy of low interest rates in the early 2000s didn’t cause the recent housing bubble, Chairman Ben Bernanke said Thursday in slides prepared for a college lecture. While some have argued the Fed’s low interest rates in the early 2000s contributed to the U.S. housing collapse, international examples and the timing of the bubble show otherwise, Bernanke said Thursday in slides for the second of his four lectures at George Washington University this month. For example, house prices rose sharply in the United Kingdom in the same time period, even though the U.K. had tighter monetary policy than the U.S., Bernanke wrote. He also noted housing prices began to pick up in the late 1990s before the Fed began cutting interest rates and rose sharply after the central bank began tightening. Bernanke noted an earlier period called the “Great Moderation,” mostly under former Chairman Alan Greenspan, enjoyed economic stability, in part from structural change and also “simple good luck may also have contributed.”

Ben Bernanke - Oil Tycoon - I just read this post by James Delingpole. What can be said?! I just can't understand where views like these emanate from. James writes with reference to Ron Paul's questioning of Ben Bernanke. James says; "The point Ron Paul makes is a very simple one: when you print money everything – including oil – gets more expensive. Sure it may suit the Obama/Cameron narrative to insist that the oil price rise is down to external factors like Chinese demand or the tensions with Iran. But the truth is that a lot of it is a problem of their own making thanks to Quantitative Easing (QE) policies which are not only stealing money from savers, encouraging a misallocation of resources, and punishing pensioners, but which are also massively increasing the cost of living and the price of oil." Firstly, if as James argues, QE makes the price of everything go up, then why should the relative price of oil in comparison to other goods and services increase by a greater amount? Why should inflation be biased towards oil? Do the recipients of newly created money go out and dump all their new acquired currency in spot oil contracts? Of course not. I see no reason to suggest that wages are any more inflexible than the price of an A380 or a recruitment contract. Thus why should the real price of oil actually increase as a result of QE? The answer is it shouldn't.

What do inflation hawks know that we don't? - Steve Williamson expects higher inflation: I think some serious inflation is coming, maybe sooner than later. The Fed thinks it can control this with reverse repos and term deposits at the Fed. No way. When will the inflation happen? In line with this post, look out for increases in house prices.  If Steve is right, then he can make a lot of money by buying assets that are good inflation hedges. Why? Because currently, financial markets do not share Steve's expectations of "serious inflation sooner than later." As Steve points out, the 10-year TIPS spread is now about 2.5%, meaning that financial markets expect inflation to be about 2.5% - above the Fed's 2% target, but not very serious by historical standards. If Steve is right and the market is wrong, he can beat the market. If he's confident enough in his forecast, this is exactly what he should do. Then again, Steve Williamson is a monetary economist, so maybe he is smarter than the market! Why does he think serious inflation is coming soon? Well, maybe he has some reasons he doesn't say, but in his post, he cites two things. The first is Jim Bullard's theory of why there is currently no output gap. Steve says he likes this theory. The second thing he cites is the amount of money that has been created in recent years - which, according to the idea that inflation is a monetary phenomenon, should eventually cause higher inflation.

Fed’s Bullard Sees Inflationary Risks This Year - St. Louis Federal Reserve Bank President James Bullard said Thursday he sees further inflationary risks for the U.S. and the rest of the world this year, as key central banks in developed countries continue to pursue looser monetary policies. Bullard noted that the U.S. and Europe have been running very loose monetary policies for some time, while Japan has embraced quantitative easing. “So that sounds like a very easy global monetary policy to me, and that’s why I think there’s a bit of upward inflation risk,” he told Dow Jones Newswires in an interview.

Bernanke: China’s Dollar Peg Like Being on Gold Standard - The problems of being on a gold standard can be seen in China’s decision to tie its currency to the U.S. dollar, Federal Reserve Chairman Ben Bernanke said Tuesday. China is a modern example of the flaws similar to those of the gold standard, Because China ties it currency to the U.S. dollar, it could experience inflation, Bernanke said, noting that China’s currency has become more flexible lately. “If the Fed lowers interest rates and stimulates the U.S. economy, that means also that essentially monetary policy becomes easier in China as well. Those low interest rates may not be appropriate for China,” Bernanke said. “China may experience inflation because it’s tied to U.S. monetary policy.” Bernanke said, “I understand the impulse” that makes the gold standard attractive, but contended that monetary system will never return.“The world has changed” and there’s not enough gold out there to make such a regime feasible. Also, he argues a gold standard would not allow a central bank to do anything to help employment, and that’s no longer an acceptable way to conduct policy.

Ben Bernanke Murders The Gold Standard: Ben Bernanke just gave the first lecture of his 4-part series on the origins of the Fed. We'll have full transcripts and slides later, but one thing really stood out…. He spent a lot of time talking about the gold standard, and he just murdered it. Among his points:To have a gold standard, you have to go dig up gold in South Africa and put it in a basement in New York. It's nonsensical.The gold standard ends up linking everyone's currencies, causing policy in one country to transmit to another country (sort of how U.S. policy now transmits to China, because they've fixed the yuan price to the dollar). So for example, if the U.K. fixes the number of pounds to an ounce of gold, and the U.S. fixes the number of dollars to an ounce of gold, then the pound and the U.S. dollar inadvertently become linked. It creates deflation, as William Jennings Bryan noted. The meaning of the "cross of gold" speech: Because farmers had debts fixed in gold, loss of pricing power in commodities killed them. The gold standard tends to cause interest rates to rise during downturns and interest rates to fall during good times, the exact opposite of what monetary policy should be doing.

Bernanke Has Trouble Explaining What’s Wrong with the Gold Standard - Ben Bernanke went to George Washington University on Wednesday to give the first of four lectures on about the Federal Reserve System and the financial crisis.   Wednesday’s lecture was entitled “Origins of the Federal Reserve:  Economic Stability Concerns.”  Most of the news coverage and commentary about the lecture seemed to be addressed to Bernanke’s discussion, about mid-way through the 75 minute lecture, of the gold standard and its shortcomings.  Bernanke’s intentions were certainly admirable, inasmuch as a foolhardy attempt to restore the gold standard now, four score years after its slow, agonizing, disastrous demise in the early 1930s, would recklessly risk a repetition of that catastrophic episode.  Unfortunately, Bernanke did not do a great job of explaining why we ought not give the gold standard one more shot.

Expecting Growth... And Inflation? - The recent pop in the 10-year Treasury Note's yield—up about 40 basis points this month to ~2.4%--has inspired cries that the end is near. One Wall Street analyst lamented that the recent pop in this rate was a sign of rising inflation expectations and that this was something to worry about...NOW! He also recognized that the market's repricing of Treasuries for higher yields also reflected a brightening economic outlook. But he couldn't see that the two trends are, in fact, connected these days because the new abnormal continues to rule.  Indeed, higher inflation expectations and the outlook for growth are still closely linked. This may be a revelation in some circles (or ignored or even damned in others), but it's been reality for several years now. The main empirical fact is the high positive correlation between the stock market and the market's inflation forecast (e.g., the yield spread on the 10-year nominal Treasury less its inflation-indexed counterpart).  Higher inflation isn't always associated with good news for growth, of course. Critics rightly point out that Milton Friedman and Robert Lucas long ago warned us to be to wary of blindly accepting the Phillips curve as permanent gospel. There's a price to pay for allowing inflation to rise too far… eventually, especially under certain economic conditions. But in the new abnormal, higher inflation is still useful. There will come a day when it's detrimental, but not now.

Bernanke: Fed Still at ‘Early Stages’ of Understanding New Regulatory Duties - The Federal Reserve is still in the “early stages” of understanding how to best implement new financial regulations, Chairman Ben Bernanke said Friday. The Fed has made “much progress” in tackling its new regulatory responsibilities, but is still learning how to meet them, Bernanke said Friday in remarks prepared for the opening of a Federal Reserve conference on central banking.The financial crisis shook up the conventional view of how central banks should approach the economy, Bernanke said in his remarks. The ensuing recession and the “subsequent slow recovery” forced the Fed and other central banks to try out novel approaches, he said.“In responding to these stressful financial and economic developments, the Federal Reserve and other central banks have had to deploy a variety of new tools and approaches to carry out their responsibilities regarding monetary policy and the provision of liquidity, tools about which we still have more to learn,” he said.

Leading economic indicators rise 0.7% in February - Economic progress may continue through the summer and possibly beyond, the Conference Board said Thursday as it reported that its index of leading economic indicators grew 0.7% in February, led by improving jobless claims. "Continued broad-based gains in the LEI for the United States confirm a more positive outlook for general economic activity in the first half of 2012," said Ataman Ozyildirim, a Conference Board economist. Economists polled by MarketWatch had expected a February gain of 0.6%. The reading for January was revised to 0.2% from a prior estimate of 0.4%. The LEI is a weighted gauge of 10 indicators that are designed to signal business cycle peaks and troughs. Among the 10 indicators that make up the LEI, eight made positive contributions in February.

Fed’s Lockhart: Economy Appears to Be Gaining Traction - Federal Reserve Bank of Atlanta President Dennis Lockhart Friday said the central bank must be careful not to tighten monetary policy prematurely or inadvertently.“Much of our communication has been oriented to trying very hard not to create misinterpretations of our message,” Lockhart told students at Georgetown University.The Atlanta Fed chief said he prefers to wait and see how the economy develops before deciding if the central bank should add further stimulus to an economy that is “gaining traction” but still faces a variety of challenges and risks.“I am at the moment in a position that I’ve called essentially patient vigilance–meaning that I want to see how the economy evolves before drawing conclusions that more stimulus is needed and could actually have the effect where the benefits would outweigh the costs. I don’t rule it out,” Lockhart said.

Europe’s Debt Crisis Eases, a Relief for U.S. - European leaders did not combat the crisis with the force American policy makers had urged. But a Continent-wide agreement to slash deficits and lifelines tossed to European banks have helped reduce borrowing costs, and Washington now seems to be breathing a tentative sigh of relief. \ Serious concerns remain about Europe’s impact on financial markets and growth, the Federal Reserve chairman, Ben S. Bernanke, and the Treasury secretary, Timothy F. Geithner, said Wednesday in testimony before the House oversight committee. But Europe has made progress in assuring investors of the safety of the euro and ensuring that all euro zone economies retain financing for their debts at sustainable rates. “In the past few months, financial stresses in Europe have lessened, which has contributed to an improved tone of financial markets around the world, including in the United States,” Mr. Bernanke said. Mr. Geithner said, “The European economies at the center of the crisis have made very significant progress.”

The National and Regional Economic Outlook -  Speech transcript; William C. Dudley, President and Chief Executive Officer, NY Fed

Fed’s Dudley: Recovery Improving, but Not Out of Woods Yet - A top Federal Reserve official said Monday he was viewing what appears to be an accelerating U.S. recovery cautiously, noting the outlook for monetary policy depends on what happens with the economic data. “The incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be getting better established,” Federal Reserve Bank of New York President William Dudley said in a speech to a meeting of the Long Island Association here. “While these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods in terms of generating a strong, sustainable recovery.” Dudley, the vice chairman of the Federal Open Market Committee, spoke in the wake of last week’s monetary policy gathering in which officials acknowledged the economy’s improving prospects while leaving their policy agenda unchanged.

Fed Watch: Fed Still Lowering Potential Output Growth Estimates? - While financial market participants continued to sell Treasury bonds thinking that the Fed is out of the game, New York Federal Reserve President WIlliam Dudley gave no indication to suggest that either QE3 was off the table or just around the corner. Still, he was clearly concerned that the recovery is more fragile than the data would have us believe, suggesting that he would leap relatively quickly into additional easing if the economy faltered. While Dudley certainly did not ignore the improved tenor of economic data in recent months, The incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be finally establishing a somewhat firmer footing. he also suggested caution: While these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods. In particular, he pointed to the moderate weather as a factor in the recent numbers: Moreover, the United States has experienced unusually mild weather over the past few months,  While this reduces the amount that households and businesses must spend for heating, I suspect that it temporarily boosts economic activity overall. In the question and answer period (via the WSJ), Dudley commits to nothing but a data dependent policy: Dudley was asked by an audience member what he expects will be the future path of interest rates. “We will continue to assess what’s appropriate” for monetary policy, he answered, saying “if the economy were to change in a meaningful way, obviously we’d change” the current plans for interest rates and other stimulus efforts.

Dudley on Growth and Fed Policy - New York Fed President Dudley said recently:While these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods. To begin with, the economic data looked brighter at this point in 2010 and again in 2011, only to fade as we got into the second and third quarters of those years.1 Moreover, the United States has experienced unusually mild weather over the past few months, with the number of heating degree days in January and February about 17 percent below the average of the preceding five years. While this reduces the amount that households and businesses must spend for heating, I suspect that it temporarily boosts economic activity overall. For example, the mild weather is certainly conducive to higher than normal levels of construction activity, and we did see a surge in hours worked in that sector over the past few months. Dudley didn’t make this fully clear but the direct effect of less home heating is that Personal Consumption Expenditures fall – this is where utility bills go in GDP – and that Industrial Production and Capacity Utilization fall as utility output counts towards these totals. His suggestion is that this is overwhelmed by increases in residential construction and other factors, so that the net effect of mild weather is larger measured economic output.

Bernanke: Economy lacks strength to sustain gains - There is still not enough spending and investment to sustain the economic recovery, Federal Reserve Chairman Ben Bernanke said Thursday. Bernanke said consumer demand remains weak relative to its level before the Great Recession. He noted that other contributors to economic growth -- including borrowing and trade -- have declined. "Consumer spending has not ... recovered. It's still quite weak relative to where it was before the crisis," Bernanke said in the second of four lectures he is giving to George Washington University students this month. "We lack a source of demand to keep the economy growing." His comments provided further insight into the reasoning behind the Fed's plan to hold short-term interest rates near zero through 2014. The central bank has stuck with that timetable despite three months of strong job growth and other signs of economic improvement. Many economists believe that Fed officials will not make any changes in policy at their next meeting on April 25-26 and will only ease credit conditions if the economy slows further.

How can debt affect GDP? - I just saw this from Felix Salmon: From 1970 through the beginning of the crisis in 2008, GDP grew at a pretty steady pace. But the amount of debt required to generate that output just got bigger and bigger — the rate of growth of the credit market was much faster than the rate of growth of GDP...In other words, in order to keep up a steady rate of GDP growth, we had to saddle ourselves with ever more cheap and dangerous debt... [W]e might indeed have to resign ourselves to lower potential growth going fowards. If only because we’re taking ourselves off the artificial stimulant of ever-accelerating credit. I have one problem with this, and one question. The problem is this: The way Salmon talks about debt, and debt's effect on GDP, seems to reinforce a common quasi-fallacy in pop economics - the idea that debt can create temporary but "fake" or "artificial" growth. As Paul Krugman is fond of pointing out, the economy is not like a household. A household can temporarily increase its consumption by borrowing money. But how can a nation artificially increase its maximum possible production by borrowing money? A nation's total productive capacity is determined by things like how many workers it has, how good their skills are, how much physical capital it has, what kind of production technologies it has, etc. How can borrowing money increase any of these things?

Fed Watch: The Output Gap Debate Continues - The blogoshpere witnessed some additional contributions to the output gap debate this weekend. Greg Ip offers up the possibility that potential output, both level and trend, are much lower than previously imagined. Karl Smith responds with what I believe is an important point: I’d, however, encourage everyone, as well, to think of the disaggregated story that we are telling here. If trend GDP is overstated, then we are arguing that one or more sectors of the US economy will is less capable of producing output over the next decade or so, than we would have otherwise thought. Smith suggests we focus on the construction of housing, hospitals and medical facilities, public infrastructure, and transportation equipment. He concludes: So, if we think these things will repair themselves then we have an obvious path back to trend. What I like in Smith is the more careful consideration of the structural change story. If we claim the economic potential of the nation has declined - that in aggregate, we can not make as much stuff as we did a few years ago - we need to identify what stuff isn't being made, why it isn't being made, why we don't think it should be made, and why no other sectors are growing to compensate for those in decline. Mark Thoma makes an important contribution to the debate by identifying a short-run path for potential output. Mark notes, however, that policy makers should not focus too intensely on short-run potential output because capacity will grow as the economy recovers.

It's a Dog's Life - I've come across this article by Felix Salmon which itself was based on Greg Ip's post here. Felix's ( and Greg's) post just so happens to be pretty much the same argument proposed by James Bullard back in February that I referred to in my post yesterday. Here's what Felix says; "It makes sense that if we needed ever-increasing amounts of debt to keep up that long-term GDP growth rate, then when the growth of the debt market stops, our potential growth rate might fall significantly." I don't agree with this view and I tend to fall more into the Krugman, Thoma argument that it's a demand side issue that we are referring to in reality. That is since when we are talking about potential GDP we're talking about productive capacity which is determined by real factors such as technological change, labour skills and education, effective physical capital. Just because a factory shuts down because a line of credit dries up doesn't mean the workers that were previously employed disappear off the face of the earth, the machines don't implode the minute the doors to the factory are locked. One could argue that credit has been eroded due to capital write downs by banks, but credit itself has just a nominal value, it doesn't actually produce anything. If the Fed so desired it could just replace the lost financial capital with new money. Of course this would be a ridiculous, inflationary policy, but that is because the money just like a given value of credit is nominal and has no intrinsic productive capacity.

Forever poorer? - ON THURSDAY, my colleague laid out the case for the argument that America's potential output has been permanently reduced by the Great Recession. He didn't say that the bought it, exactly; he just explained what that case might look like. That case rests on three observations: slow growth in recovery, a relatively fast decline in unemployment given slow growth, and surprisingly robust inflation. My colleague notes that there are plenty of good alternative explanations for these dynamics, and he's right. The alternatives, in my view, are considerably better than the hypothesis that America has suffered permanent damage from the downturn. Slow growth is perfectly consistent with an economic recovery amid too-tight monetary policy. As many economists have pointed out, the Americna economy shows many signs of insufficient demand growth. That's not surprising given that interest rates long ago approached zero, that rule-recommended policy rates have long been significantly negative, and that the central bank has only grudgingly and intermittently aimed to move actual interest rates closer to the recommended policy rate via inconventional policy. If a Taylor rule had been consistently recommending a 2% fed funds target rate over the past 4 years and the Fed had instead kept its target rate at 6% over that time, not a single economics writer in America would wonder why growth had been so abysmal.

The Output Gap Debate - Greg Ip and Felix Salmon have sparked renewed interest in the output gap debate. Greg Ip writes Or you could go with a simpler but more pessimistic explanation: both the level and growth rate of American potential output is much lower than we think. This would resolve all these puzzles: GDP growth of 2.5% is above, not at, trend, the output gap is closing, and it was probably smaller than we thought to begin with. That would explain why unemployment is falling so quickly, and why core inflation hasn’t fallen further. The excess supply of workers and products that ought to be holding back prices and wages is not as ample as we thought. You can attack this problem various ways.I’d, however, encourage everyone, as well, to think of the disaggregated story that we are telling here. If trend GDP is overstated, then we are arguing that one or more sectors of the US economy will is less capable of producing output over the next decade or so, than we would have otherwise thought. So then we might want to ask – what are those sectors? The majority of the output gap – over 5 percentage points of GDP – could be closed by a return to trend of the construction of housing, hospitals and medical facilities and public infrastructure as well as an increase to trend in the production of transportation equipment.

Some More on Potential GDP - Following on from yesterday's post I particularly like this point by Tim Duy; "Moreover, Salmon ignores the assets on the other side of the debt.  We really need to look at some story about net worth: Here again I think you are fundamentally telling a demand side story to explain the past two business cycles - both were dependent on asset price bubbles to hold output at potential (or even slightly above at the peaks).  Why did the US become dependent on these bubbles?  Here I tend to find the global saving glut story compelling.  In other words the over dependence of countries such as China, Germany and others on exports due to low domestic consumption in these counties leads to a build up of domestic savings and the accumulation of foreign exchange reserves. The latter is particularly relevant to the US since the the USA consumes a disproportionate amount and as a consequence has a current account deficit. In order to consume beyond its means it borrows from the rest of the world. At the same time the countries that have current account surpluses hold a large amount of reserves in US$ (both because the US$ is a reserve currency and because a large amount of their exports go to the US) which they initially invested in US Treasuries which drove down yields. As foreign investors had to eventually look elsewhere for returns on their dollar investments they began to turn to US (and UK) MBS markets, driving down the cost of borrowing and fuelling a housing bubble.

Fed Watch: On Straw Men - Arnold Kling claims I am using a straw man:Recently, bloggers have been talking about potential output or potential GDP. I find the discussion to be frequently misleading. For example, Mark Thoma quotes Tim Duy: If we claim the economic potential of the nation has declined - that in aggregate, we can not make as much stuff as we did a few years ago... But nobody claims that. The pessimists on potential output only claim that it is growing below some previous trend. They never claim that it has declined in absolute terms. I refer Kling to St. Louis Federal Reserve President James Bullard: The wealth shock view puts a different expectation in play. The negative wealth shock lowers consumption and output. But after the recession ends, the economy simply grows from that point at an ordinary rate, neither faster nor slower than in ordinary times. It is more like an earthquake which has left one part of the land higher than another part. There is no expectation of a “bounce back” to a higher level of output after the recession ends. This is closer to what has actually happened since mid-2009. Output has grown at a moderate rate, but not a rapid rate, since the recession ended. Read carefully: " an earthquake which has left one part of the land higher than another part."  He is clearly saying that the 5% drop in output during the recession was a permanent shift. Unless you really believe that potential GDP was overestimated by 5% - in which case we would expect inflation to have been much higher than actually experienced - the only reasonable conclusion is that at least one person believes that in fact potential GDP declined in absolute terms during the recession.

What's inflation telling us about the output gap? - MY COLLEAGUE makes many excellent points in this morning's post on potential output. We are, for the most part, singing from the same hymnal. For the most part, but not entirely. I must take issue with this: My colleague [that is, me] says sluggish growth is no surprise, but the obvious result of too-tight monetary policy. But if monetary policy were systematically too tight, inflation should have fallen much further than it has; instead, both actual and (survey-based) expected inflation have been surprisingly stable, and higher than forecast by outfits like the IMF and the Fed who assign a relatively large weight to the output gap in the determination of inflation. The stability of inflation may be down to well-anchored inflation expectations, but this is ex-post reasoning; it’s not an unambiguously superior explanation than reduced potential. I disagree. First, the literature suggests that we should not expect accelerating disinflation in the presence of large output gaps. This is not based on an ex-post assessment that expectations are well anchored but on the ex-ante observation that wages and prices display substantial downward nominal rigidity. Inflation could also not have been much lower without becoming deflation, and the Fed has been aggressive in acting to prevent falling prices.  It is also worth pointing out that most upward price pressure has been driven by resource costs; wage growth has been negligible through the recovery.

‘What is the real rate of interest telling us?’  -The real interest rate on US and UK government debt is currently near to zero (see chart 1). This is a remarkable fact. True, real interest rates were negative in the 1970s. But it is extremely unlikely that anybody bought bonds expecting this to be the case. Now, however, the position is quite different. Both of these governments sell index-linked debt that delivers zero real returns. That is a demonstration of the fact that the world has a huge “savings glut”. Indeed, since savings must equal investment at the global level, it is only by its price – the rate of interest – that one can assess whether such a glut exists. To put the same point in another way, the massive fiscal deficits being run by the UK and US are not, on this evidence, crowding anybody out of the market. It is far more plausible that these deficits stand between these economies – possibly even the world economy – and a slump. They are the least bad way available to offset the massive excess savings of the private and foreign sectors in these economies. The only alternative would be strongly negative long-term real interest rates. Fortunately, the fact that governments have been selling index-linked debt for a while helps illuminate not only where we are, but how we got here.

Are the Good Times Never Coming Back? - There is growing chatter in economics circles about the unsettling possibility that the nation may never recover completely from the recent recession. Recessions are generally regarded as abnormal disruptions and recoveries as inevitable returns to normalcy — in large part because that is how the economy has behaved for more than a century. Even after the Great Depression, growth returned to its long-term trend; it just took a while. The bleaker view – which remains, to be sure, the view of a distinct minority — is that the years before the recession were abnormally good, and that while the recession was abnormally bad, reality lies halfway in between. The present situation, in other words, is about as good as it gets.A paper that will be presented Thursday afternoon at a conference organized by the Brookings Institution is the latest contribution to this literature. The paper, entitled “Disentangling the Channels of the 2007-2009 Recession,” will be posted on the general conference Web site Thursday afternoon. The authors argue that the slow pace of recovery reflects a long-term deterioration in economic prospects. Specifically, they estimate that the trend growth rate of gross domestic product fell by 1.2 percentage points between 1965 and 2005.

Recession's Lasting Effects - More grim ruminations on our economic prospects: What if recessions do permanent damage, diminishing a nation’s productive capacity? As I wrote on Thursday, recessions are commonly understood as disruptive rather than destructive to the economy as a whole. But a paper presented Friday at the Brookings Institution warns that recessions may do lasting harm, like an untended house that not only needs a good dusting, but has also started to rot. The term for this possibility sounds perfectly harsh: hysteresis. (The definition is more benign; it simply means that the past affects the present.) The authors, Lawrence H. Summers, a former adviser to President Obama, and J. Bradford DeLong, a professor at the University of California, Berkeley, see evidence that the recession is eroding the capacity of workers and of equipment: Reduced capital investment, reduced investment in research and development, reduced labor force attachment on the part of the long-term unemployed, scarring effects on young workers who have trouble beginning their careers, changes in managerial attitudes, and reductions in government physical and human capital investments as social-insurance expenditures make prior claims on limited state and local financial resources. The fact of reduced investment is clear, as shown in the graph below. The question is whether a rebound in investment eventually will fill the gap, as happened in the United States after the Great Depression, or whether losses will be permanent, as happened in Europe in the 1980s and Japan in the 1990s.

Good and Bad Reasons for Slower Economic Growth - Dean Baker - An NYT Economix blognote discussed a new paper by two economists (James Stock and Mark Watson) that purports to give us the bad news that we are likely to see a permanent slowdown in growth. Stock and Watson attribute this slowdown to a slower rate of growth of the labor force. Before anyone gets too upset about the prospect of slower growth, it is worth reflecting for a moment on the different possible causes of slower growth. There are essentially four:

  • 1) slower productivity growth;
  • 2) higher unemployment or underemployment (involuntary);
  • 3) slower population growth;
  • 4) reduced labor force participation or hours worked.

The first two of these causes of slower growth are unambiguously bad. If productivity growth slows, then we are seeing less improvement in living standard for each hour we work. That is definitely bad news. However, nothing in the Stock and Watson paper suggests that productivity growth has slowed or will anytime soon.

Panel Discussion with: Krugman, Sachs, Phelps, Soros - Just wanted to let everyone know about presentation that aired on Cspan's Book TV.  It is a 2 hour panel discussion titles: Global Economy: Crisis Without End.  It was held 2/17/12.   Click here to bring up the show. What I found most interesting was the different perspectives between Krugman and Sachs. I'm not sure, but I don't think either realized they were talking about the “crisis” from 2 different perspectives which leads to 2 different answers to what needs to be done. Thus, they come across as if the other is wrong, when in my opinion, they are both correct. Krugman says we need to do more now. Yes we do. Sach's says we need to take the long view and start changing the direction we are going, namely calling for higher revenue raising by the government to be spent on the nation's infrastructure, and he did not just mean physical infrastructure. I guess you would say he was calling for the government folks to get real about raising capital and then doing capital expenditures. Not exactly the thinking I would have expected from Sach's considering his start in economic life: Shock Therapy.

Treasuries Update: Operation Twist and the 30-Year Fixed Rate Mortgage - Yields have risen rather noticeably in the past six trading sessions. The 10-year note had been hovering around the two percent level for the past few months after hitting its historic low of 1.72 immediately following the September 21st announcement of Operation Twist. Despite the Fed's stated purpose of lowering long-term interest rates, the 10-year steadily rose to an interim high of 2.42 on October 27th, but it soon settled into a pattern of hovering around 2.00 with the one quick dip to 1.82 and an upper range of 2.11. The pattern now appears to be changing. The 10-year closed at 2.14 on March 13, a one-day increase of ten basis points, and since then it has pushed upward to closing lows of 2.39 and 2.38 -- just below the interim high of last October. Meanwhile's latest update on the 30-year fixed is north of four percent at 4.07%. Here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of Operation Twist.The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed's website for the FFR. Here's a closer look at the past year with the 30-year fixed mortgage added to the mix (excluding points). Here's a comparison of the yield curve at two points in time: 1) today's close and 2) the daily close on the market's interim high on April 29th.

Don't panic - HAVE you heard? Over the past couple of weeks there's been a major sell-off of government debt. Just look at what's happened to the 10-year Treasury: Unnerving, right? Google "Treasury sell off" for lots of breathless news results. Before we all begin panicking, however, it's worth taking a look at the bigger picture:At the very end of the series, there, you can see the recent "surge". The yield on the 10-year Treasury was 2.36% as of today's market close. That's up quite a bit from levels well below 2% last autumn. But those rates were driven by panic, as markets grew very concerned about the potential for a Lehman-like event in Europe. When they economy looked stronger, in early 2011, yields were between 3.0% and 3.5%. Immediately prior to the financial crisis in 2008, yields were over 4%. For most of the late 1990s, when the economy was booming and the budget was moving toward surplus, yields were between 6% and 7%. In the early 1990s, when deficit concerns were driving President Bush (the first) to strike a politically deadly deal on tax increases, the yield on the 10-year Treasury was between 8% and 9%. And in the early 1980s, when Ronald Reagan was hailing morning in America, the yield was in double digits.

Don't Worry, Be Happy: Treasury Yield Edition - Is it time to start panicking about the recent rise in long-term treasury yields?  Are the bond vigilantes finally attacking?  Ryan Avent says no.  I agree and am quite elated to see long-term yields rising.  You should be happy too.  Here is the reason why: Source: Survey of Professional Forecasters, FRED This figure shows that the expected growth rate of nominal GDP or aggregate demand is strongly related to the 10-year treasury yield.  Thus, the recent rise in long-term yields can be interpreted as the bond market pricing in a rise in the expected growth of aggregate demand.  And that is great news given the ongoing aggregate demand shortfall in the U.S. economy.    Gavin Davies agrees with  my assessment:  Another way of saying this is that the long-term natural rate of interest, the long-term interest rate consistent with underlying economic fundamentals, is starting to rise.  This is an important point because it undermines the claim made by folks like Bill Gross that the Fed is harming savers and investors keeping interest rates low.   What really was driving down long-term yields was a weakened global economy.  Now that there are signs that it is improving, savers and investors should begin to earn higher real returns. So much for the financial repression view.    

How Long Can We Finance the Debt? - Everyone should know by now that the Treasury Department can borrow money at historically low rates. That is a major reason why some very smart economists think that the federal government should borrow more money in the short term (i.e., this year and next) and use that money to boost economic growth. In the medium term (say, the next decade), however, the big question is how long we will be able to finance new government borrowing at such low rates. Today’s low rates are a product of several factors. One is certainly the slow rate of economic growth, in particular the depressed housing market, which has reduced demand for credit. But another factor is the Federal Reserve’s aggressive moves to keep long-term interest rates down; another is foreign central banks’ appetite for Treasuries. John Kitchen and Menzie Chinn have written a new paper (pre-publication version here) that attempts to disentangle these factors, which Kitchen summarized in a blog post. They show the large and growing role in the Treasury market played by the foreign official sector: They also estimate that as  central banks increase their holdings of Treasuries by 1 percentage point of potential GDP, long-term interest rates (measured as the spread between 10-year and 3-month rates) fall by 0.33 percentage points.

March, April to Determine How Soon U.S. Hits Debt Ceiling - The U.S. government is projected to hit the $16.394 trillion debt ceiling sometime later this year, but how quickly we get there depends in large part on how things shape up in March and April. March and April are bellwethers because they can bring in a lot of revenue, as Americans rush to pay their income taxes by the mid-April deadline. February is historically a bad month, with the government typically running a huge gap between revenue and spending that widens the deficit. February 2012 was no exception, posting a record one-month $231.7 billion deficit. March and April can be much better, but not always. The $65.4 billion deficit posted in March 2010 was just 30% of the deficit posted in February 2010, and the $48.2 billion deficit posted in March 2008 was just 27.5% of the deficit posted one month earlier. The deficits in March 2008 and 2010, however, were pretty lousy, falling just slightly from the high levels one month before. If the U.S. doesn’t get some sort of respite in March and April, it could hit the ceiling sooner rather than later, forcing the Treasury Department to use emergency measures to buy more time and potentially accelerate the political battle over whether and how to raise the nation’s borrowing limit. Predicting March and April could be difficult. Despite the bad February, the U.S. ran just a $27.4 billion deficit in January, which was the best start to the calendar in several years.

Geithner Asked What Would Be Very Last Debt Ceiling Request; Says "A Lot, Would Make You Feel Uncomfortable" - "If this were the last debt ceiling increase you could ask for, the final one, and you had to make it large enough for all current and future obligations, what would the request need to be?" Congressman Trey Gowdy (R-SC) asked Treasury Secretary Tim Geithner at a Capitol Hill hearing on Wednesday. "I don’t know how to answer that question," Geithner said to Gowdy. After being prodded by the Congressman, Geithner eventually told him, "it would be a lot."“It would be a lot,” Geithner finally said. “It would make you uncomfortable," he added.

Revisiting the Determinants of the Term Premium - In last Thursday’s post, John Kitchen recounted our joint work on what amount of foreign financing would be required to make consistent projections of government debt, and short and long term interest rates. That article from International Finance is now freely available on the Council on Foreign Relations website here. One issue that people have raised is how our specification for the term premium is consistent with expected inflation.  The expectation hypothesis of the term premium would state that the long term rate is equal to the average expected short rates over the relevant period; in that case, higher long rates might be due to the higher short rates associated with anticipated future inflation. However, one can add a liquidity premium for a given maturity, assuming there is a preferred habitat motivation. Then, the yield curve need not necessarily represent merely a measure of expected future inflation. In other words, we assume away complete arbitraging away across maturities. Figure 1 depicts the entire yield curve. We didn’t estimate the determinants of all the term spreads, only the 10 year - 3 month spread

Political Malpractice, Deficit Edition - Krugman - Greg Sargent has more bang-your-head-against-the-wall material about the Obama administration’s “pivot” to deficits. Quoting a new book by David Corn: Plouffe was concerned that voter unease about the deficit could become unease about the president. The budget issue was easy to understand; you shouldn’t spend more money than you have. Yes, there was the argument that the government should borrow money responsibly when necessary (especially when interest rates were low) for the appropriate activities, just like a family borrowing sensibly to purchase a home, to pay for college, or to handle an emergency. But voters needed to know — or feel — that the president could manage the nation’s finances. The depth of political malpractice here is just mind-blowing. Finally, it’s hard not to have the sense that when political types in this administration talk about appealing to “voters”, what they really mean is appealing to self-proclaimed centrist pundits who claim to have their fingers on the pulse of independent voters. Aside from the fact that they don’t — that the complicated psychodramas concocted by pundits exist only in their heads, not the heads of voters — experience shows that nothing Obama can do will satisfy these guys; they need, professionally, to maintain the pretense that both sides of the political divide are equally extreme.

The Case for More Fiscal Stimulus - As a big critic of those who claim that tax cuts pay for themselves, I have been hesitant to embrace the "government spending pays for itself" defense of using government expenditures to stimulate the economy. With tax cuts, there does appear to be some offset, but it is not large, i.e. on net, tax cuts increase the deficit by quite a bit (revenues of 10-15 cents on the dollar is, I think, a generous estimate of the dynamic effects). It's a theoretical possibility that a cut in taxes will pay for itself, but the empirical evidence just isn't there. The people making the claim about government spending are careful to note that it only applies to very depressed economies, and government spending paying for itself in the long-run is a certainly a theoretical possibility in that case. And events in Europe are suggestive that a careful empirical investigation will support the claim that the opposite, austerity in a depressed economy, can worsen the long-run budget picture. Some things do pay for themselves, and then some. A business investment had better do that, or there will be no profits (and infrastructure spending can have similar properties). So I don't mean to imply the claim is outlandish per se, not at all. It may well be true. I just don't have the evidence I need to make a strong statement.

The Future Is Another Country - Krugman - Simon Wren-Lewis has another very good blog post, this time on the very weak case for demanding fiscal austerity right now, even if you believe fiscal consolidation is needed in the long run. I want to tie this together with Brad DeLong’s preview of DeLong-Summers on fiscal policy in a liquidity trap.What Wren-Lewis says, and Delong-Summers argue at greater length, is that there is very little direct connection between spending over the next couple of years and long-run fiscal prospects. Between low borrowing costs and high multipliers, spending now would do little to worsen the debt picture a decade from now; indeed, as DeLong-Summers argue (and some of us have been arguing, less formally, for a while now), there’s a plausible case that spending more now actually improves the long-run fiscal picture — and that austerity worsens it. So what’s the counter-argument? Aside from deeply flawed arguments about crowding out even with zero interest rates, what you usually encounter are assertions that there is no such thing as a temporary spending increase — and the related claim is that spending cuts now will signal spending restraint over the long term too. Such statements are invariably made with an air of worldly wisdom — hey, we all know that stimulus spending never goes away when it’s supposed to. Actually, all the evidence says the reverse. Did the Works Progress Administration survive into the 1950s? No. Have the provisions of the Recovery Act been made permanent? Not a chance.

Summers, DeLong Push for More Government Spending - A temporary boost of government spending can help spur an economic recovery when interest rates are near zero, a former top economic adviser to President Barack Obama argued in a paper released Thursday at a Brookings Institution conference. The view advocated by Lawrence Summers, Obama’s first National Economic Council director and Berkeley economics professor J. Bradford DeLong in Thursday’s paper isn’t likely to be welcomed by those pushing to immediately slash the federal budget deficit. Earlier this week House Budget Committee Chairman Paul Ryan (R., Wis.) introduced a budget plan he said would spend $5.3 trillion less over 10 years than the president has proposed, narrowing the budget deficit by $3.3 trillion over the decade. That’s exactly the kind of economic prescription that Summers and DeLong caution against. Imposing an austere budget on an economy still struggling to recover from a financial crisis could be “self-defeating” in both the short term and the long run, the pair said. Instead, they advocate a temporary spurt of government spending when interest rates are near zero, since it is so cheap for the government to borrow money and the central bank has little left in its arsenal to spur growth. The Federal Reserve’s most recent actions may argue against that, since the central bank has taken many other steps since it lowered its key short-term rate to near zero, including buying bonds and providing longer-term guidance on interest rates.

A theory of fiscal policy: Self-sustaining stimulus - WHEN he was at the Treasury nearly 20 years ago Larry Summers would counsel President Bill Clinton on the merits of “stimulative austerity”: cut deficits, and interest rates will fall by enough to produce stronger economic growth. Now Mr Summers is making the opposite case: stimulate growth through a bigger deficit, and the long-term debt may shrink. In a new paper* written with Brad DeLong of the University of California, Berkeley, Mr Summers, now at Harvard after a stint as Barack Obama’s chief economic adviser, says that in the odd circumstances America faces today temporary stimulus “may actually be self-financing”. This sort of argument is not new. Advisers to John Kennedy and Lyndon Johnson thought their 1964 tax cut might stimulate so much new spending it would pay for itself. In the early 1980s, supply-side economists argued something similar about Ronald Reagan’s tax cuts. Neither claim stood the test of time. Mr DeLong and Mr Summers are careful to say stimulus almost never pays for itself. When the economy is near full employment, deficits crowd out private spending and investment. In a recession the central bank will respond to fiscal stimulus by keeping interest rates higher than they would otherwise be. Both effects mean that in normal times the fiscal “multiplier”—the amount by which output rises for each dollar of government spending or tax cuts—is probably close to zero.

The Gap In Monetary and Fiscal Policy - Thoma - One of the big questions for policymakers is how much of the current downturn represents of temporary cyclical fluctuation and how much of it is a permanent reduction in out productive capacity. If the downturn is mostly temporary, then we will eventually bounce back to the old output trend line. Something like this: In the first case, highly stimulative policy is appropriate to help the economy get back to the long-run trend as soon as possible. There's still a lot of ground to cover, and policy can help. But in the second case the economy is already back to it's long-run trend at most points in time, or nearly so, and there is no need for policymakers to do much of anything at all. At least that's what we're told. However, I think this misses part of the story. What it misses is that AS shocks themselves can be both permanent and temporary, and some people may be confusing one for the other. For example, when there as a large AD shock in the form of a change in preferences, say that people no longer like good A as it has gone out of fashion and have now decided B is the must have good, then there will be high unemployment in industry A and excess demand for labor and other resources in industry B. As workers and resources leave industry A, our productive capacity falls and it stays lower until the workers and other resources eventually find their way into industry B. When this process is complete, productive capacity returns to where it was before, or perhaps goes even higher.

Did the Krugman insurgency fail?  - I encourage everyone to read Henry Farrell and John Quiggin's new article, "Consensus, Dissensus and Economic Ideas: The Rise and Fall of Keynesianism During the Economic Crisis." It gives a good overview of the role of Keynesian ideas in the policymaking consensus in the U.S. and Europe during the recent recession. Basically, Keynesian policy briefly regained its old throne when everyone was panicking in 2009 - everyone became a Keynesian in a foxhole, as Bob Lucas would say - but this brief consensus fell apart under an assault from austerity-minded European central bank economists in 2010-11. This makes me step back and think about the whole econ blogosphere over the past several years. The thing that inspired me to start blogging was the famous Paul Krugman article, "How Did Economists Get It So Wrong", published in September 2009 (that, and John Cochrane's dismissive response). Before that article, I had seen the econ blogosphere as mostly about micro, and mostly about "everyday economics" - pointing out cute little observations about how daily life reflects economic behavior and incentives. It was kind of interesting, but not really. Then, suddenly, it became something very different. A war was on.

The Macro Wars Are Not Over - Krugman - Noah Smith has a post on the current state of the macro controversy that’s justifiably getting a lot of attention.By and large I agree with his points: Keynesian revivalists like Brad DeLong and yours truly have not managed to get a dramatic reversal in policy, nor have we persuaded the freshwater side that it’s all wrong. But we have managed to change the conversation. And by the way, I really like the analogy to Louis XIV’s wars, which involved many great battles but little change in borders. That said, I think Noah underestimates how much this continuing argument matters even in the short run. On the policy side, major new stimulus may not be in the cards — but there is a real divide in the US between modest stimulus proposals that have some chance of getting implemented and major austerity moves that also have some chance of being implemented. The difference between those two policy variants could be the difference between unemployment below 7 percent two years from now and unemployment back above 9 percent. So this argument has real short-term policy relevance.

Macroeconomic Policy Wagers - Krugman - One of key arguments made by the proponents of fiscal austerity, even in a deeply depressed economy, has involved a sort of macroeconomic version of Pascal’s wager. Yes, the more open-minded admit, borrowing costs are very low in the US and the UK. Yes, the arithmetic suggests that cutting spending now will do very little to improve the long-run fiscal prospect. But you never know – maybe the last trillion dollars of spending will be what causes a sudden loss of market confidence, turning you into Greeeeeeece. (Cue scary noises). Leave on one side the enormous difference between countries that do and don’t have their own currencies (and debt in their own currencies). Let me instead point out that there are other risks in the world.Specifically, if allowing an economy to remain persistently depressed reduces long-run growth prospects — and there’s pretty good evidence to that effect — then austerity in a depressed economy has enormous costs, and may even lead to a vicious circle of shrinking potential leading to even more austerity and so on. Indeed, maybe that’s happening to the Cameron government right now. So will the austerians admit that they might be making a terrible mistake, that far from safeguarding the future they may be destroying it?

To Help Address Inequality, Reinvent Fiscal Stimulus - In 2010, 93 percent of all income growth in the US was captured by the top 1 percent, according to Emmanuel Saez.  In her newest policy note, Pavlina Tcherneva explains how a conventional “prime the pump” approach to stimulating the economy does little to alleviate tendencies toward unequal growth—and may even exacerbate them.  The status quo, at best, offers us two choices in fiscal policy flavors:  austerity and stimulus through aggregate demand management.  Here Tcherneva is relying on a recent working paper of hers that models the effects of different fiscal policies on prices and income distribution.  She compares the effects of government as a provider of income transfers (in the form of unemployment insurance and investment subsidies), as a purchaser of goods and services, and as a direct employer of workers and finds that the first two policies are more inflationary and more inequitable than direct job creation:  “pro-investment policies in particular add upward pressure to prices and skew the income distribution toward the capital share of income.” Jumping off from these results, Tcherneva offers a third way on fiscal policy, beyond austerity and pump priming.  This third approach, building off of Hyman Minsky’s “employer of last resort” and Keynes’s “on-the-spot” employment, aims explicitly and directly at securing full employment by guaranteeing a paying job that serves a public purpose to everyone willing and able to work.  “Relabeling a condition of, say, 5 percent unemployment as ‘full employment’,” writes Tcherneva, “is essentially a rhetorical device adopted by the economics profession to sidestep a problem it has failed to solve.”

Chart of the Day: Treasury Completes MBS Portfolio Wind Down, Generates $25 Billion Positive Return for Taxpayers – Treasury blog - Today, the U.S. Department of the Treasury announced the completion of the orderly wind down of its agency-guaranteed mortgage-backed securities (MBS) portfolio, which it acquired as part of its response to the financial crisis. Overall, Treasury’s MBS portfolio generated a positive return of $25 billion for taxpayers. Treasury invested $225 billion in MBS during 2008 and 2009 through authority provided to it by Congress under the Housing and Economic Recovery Act of 2008. These MBS purchases helped preserve access to mortgage credit during a period of unprecedented market stress. Overall, taxpayers received total cash returns of $250 billion from this MBS portfolio through sales, principal, and interest – $25 billion more than their initial investment. The wind down of the program was managed by Assistant Secretary for Financial Markets Mary Miller, Deputy Assistant Secretary for Federal Finance Matthew Rutherford, Treasury policy advisor Brian Zakutansky, and other key Treasury staff. The following chart provides an overview of the wind down of the portfolio and the positive returns it generated for taxpayers.

Did Obama Delay Stimulus Spending to Aid His Reelection? Nope. -- The Washington Post's fact checker gets this one right: Did Obama delay stimulus spending to aid his reelection?,“Stimulus was supposed to be quick. In fact, they never intended to spend it and will not completely have effectively spent it until after the president’s re-elect. Always looking at how do you get the maximum hit when the president was up for re-elect.” — Rep. Darrell Issa (R-Calif.), chairman of the House Oversight and Government Reform Committee, March 19, 2012 This is a pretty serious charge by a senior member of the House of Representatives, made on “Fox and Friends” earlier this week. ... We immediately thought he must have some damning evidence that his investigators had turned up. But when we asked for more information,... his staff could not provide much... Did the law purposely hold back funds so there could be a “maximum hit” during the president’s re-election campaign? We could not find any evidence to support this claim. ... I find it amusing that Issa is asserting that that the stimulus worked, and worked so well that it can be used to strategically manipulate the election. Given that he believes stimulus can be that effective, can we count on his vote if another round of stimulus comes up, or will he put politics ahead of people and vote no?

Graph of the Day: President Obama, Fiscal Conservative? - A graph that purports to establish Bill Clinton and Barack Obama as the two most fiscally conservative presidents in modern history has been making its way through the blogosphere, after first originating on Century Foundation Fellow Mark Thoma's Economist's View blog. Thoma's submitter explains:  Seeing the Krugman commentary comparing real government spending under Obama and Reagan made me curious about what it looks like if you express it in per capita terms?  In particular, how does the Obama period compare with other presidencies in terms of penury/austerity versus spendthriftness?[...]Ranking since Johnson (starting in 1968), and using the first-quarter comparisons, and calculating growth under Obama through 2011Q4, Clinton is the most austere, followed by Obama.  The most spendthrift are (1) Nixon-Ford, (2) Reagan, and (3) Bush II. So, the story one frequently hears on the right about the massive expansion of government spending under Obama—and liberal profligacy in general—just doesn't hold up to the facts. Still, there's been some pushback from commenters wondering about the role of inflation, or whether the story changes when you divide government spending into separate categories for national defense and human resources (employment and social services, Medicare, Social Security, veterans benefits, et cetera). So here is my own version of the graph, which shows annualized growth in government spending on national defense and human resources througout the last seven presidencies, from Q1 to Q1.

Throwing Money at the Pentagon - If you’ve been fretting about faltering math education and falling test scores here in the United States, you should be worried based on this campaign season of Republican math.  When it comes to the American military, the leading Republican presidential candidates evidently only learned to add and multiply, never subtract or divide. Advocates of Pentagon reform have criticized President Obama for his timid approach to reducing military spending.  Despite current Pentagon budgets that have hovered at the highest levels since World War II and 13 years of steady growth, the administration’s latest plans would only reduce spending at the Department of Defense by 1.6% in inflation-adjusted dollars over the next five years. Still, compared to his main Republican opponents, Obama is a T. rex of budget slashers.  After all, despite their stated commitment to reducing the deficit (while cutting taxes on the rich yet more), the Republican contenders are intent on raising Pentagon spending dramatically.  Mitt Romney has staked out the “high ground” in the latest round of Republican math with a proposal to set Pentagon spending at 4% of the Gross Domestic Product (GDP).  That would, in fact add up to an astonishing $8.3 trillion dollars over the next decade, one-third more than current, already bloated Pentagon plans.

Romney: Credit Bush, Not Obama, for Saving Us - Not content with just one horrible gaffe by his campaign today, Mitt Romney steps in it again: "I keep hearing the president say he's responsible for keeping the country out of a Great Depression," Romney said at a town hall in Arbutus, Maryland. "No, no, no, that was President George W. Bush and [then-Treasury Secretary] Hank Paulson." How very like Mitt Romney to think that bailing out Wall Street vultures with TARP was a great idea, but that creating infrastructure jobs through the American Recovery and Reinvestment Act was not. In Mitt Romney's world, only the Mitt Romneys of the world actually matter. Jonathan Chait has even more insight: For one thing, Obama’s plan is to depict Romney as continuing the failed policies of the Bush administration. Praising Bush’s economic stewardship is probably not the wisest strategy. Second, the Wall Street bailout is actually a huge political liability for Obama because it’s incredibly unpopular and most Americans think Obama, not Bush, signed it. So having Romney run around reminding people that Bush bailed out Wall Street is actually Obama’s prayer answered.

Will Obama’s 2013 Budget Raise or Lower Taxes? Yes. -Republicans like to say President Obama is a chronic, unrepentant tax-raiser. Obama himself used to say he was a tax-cutter but now touts himself as a fiscally responsible steward of the budget who would raise taxes—but only on the rich. Who is right? The Tax Policy Center has just completed its analysis of tax proposals in Obama’s 2013 budget and found they both are. This is no surprise to budget geeks, but important for ordinary people to keep in mind, especially as we head into a season of both budget and campaign madness. When Obama quietly sent his budget to Congress last month, he started off like the proverbial economist: He assumed the core of his plan was already going to happen. Almost all of the 2001-2010 tax cuts would be made permanent, the alternative minimum tax would be indexed from its 2011 level, and the estate tax would remain at its 2009 level. By itself, that baseline would add $4.5 trillion to the deficit over the next ten years, a pretty deep hole to dig if you want to show your deficit-cutting chops. By the administration’s calculations, more than $2.1 trillion of tax hikes would offset roughly $400 billion of cuts and net about $1.7 trillion in additional revenues. That’s the bottom line Obama wants to hype, but the gain comes only after he gives away $4.5 trillion to get to his baseline. Compared to the current law baseline, though, where almost all of the temporary tax cuts expire as scheduled at the end of this year, the president’s tax proposals would lose $2.8 trillion over the decade.

Ryan Budget: Medicare Privatization, Big Spending and Tax Cuts - Paul Ryan’s budget was released this morning. He kicked it off with another pretentious video preview and a somewhat less pretentious and more standard op-ed in the Wall Street Journal. Ryan’s budget resolution is similar to last year’s version, which passed the House and went nowhere in the Senate. The charges are similar, too. He claims that Democratic-led Senate hasn’t passed a budget in three years, though the Budget Control Act sets out spending targets for the next ten and, in the mind of Senate Democrats, obviates the need for an annual resolution. He produces a chart that creates a “current path” for the budget and deficits by merely drawing a sharply rising line with no basis in actual numbers. And he asserts that the GOP budget “strengthens the safety net by returning power to the states, which are in the best position to tailor assistance to their specific populations.” This means block grants for Medicaid, which just caps funding for a program that’s growing along with health care costs. “Returning power to the states” means that they have to fend for themselves on any additional funding for the program. It’s a massive cut-off of state funds to the most vulnerable population in the country.

House Republicans Release Budget Blueprint - House Republicans, believing that worries over the deficit will trump affection for Medicare and other popular programs, will unveil a budget blueprint Tuesday morning that would cut deeply into domestic spending, transform the tax code and balance the budget by 2040. Because tax revenues would remain unchanged, the deficit under the plan would be almost as deep as the red ink under President Obama’s feet in the fiscal year that begins in October. But by mid-decade it would drop precipitously, and over decades, significant changes to Medicaid and Medicare, the federal health care plans for the poor and the elderly, would help bring the budget into balance. “We’re back with a budget that offers real solutions again,” Representative Paul D. Ryan of Wisconsin, the chairman of the House Budget Committee, says in a slick video preview that posits the choice between “greater opportunity, greater prosperity” and “debt, doubt and decline.” Ultimately, the House budget is a political document, since the Senate has no intention of passing a budget of its own. The plan amounts to a political bet, with high stakes wagered by both parties. “This isn’t just matter of the House battling with the Senate or arm-wrestling with the president,” said J. D. Foster, a fiscal policy expert at the conservative Heritage Foundation. “For better or for worse, what they produce is going to be the standard for conservatives and Republicans going into this election season.”

Throwing Money at the Pentagon - If you’ve been fretting about faltering math education and falling test scores here in the United States, you should be worried based on this campaign season of Republican math. When it comes to the American military, the leading Republican presidential candidates evidently only learned to add and multiply, never subtract or divide. Despite current Pentagon budgets that have hovered at the highest levels since World War II and 13 years of steady growth, the administration’s latest plans would only reduce spending at the Department of Defense by 1.6% in inflation-adjusted dollars over the next five years. Still, compared to his main Republican opponents, Obama is a T. rex of budget slashers.  After all, despite their stated commitment to reducing the deficit (while cutting taxes on the rich yet more), the Republican contenders are intent on raising Pentagon spending dramatically. Mitt Romney has staked out the “high ground” in the latest round of Republican math with a proposal to set Pentagon spending at 4% of the Gross Domestic Product (GDP). That would, in fact add up to an astonishing $8.3 trillion dollars over the next decade, one-third more than current, already bloated Pentagon plans.

Ryan Plan Revives Deficit Duel  - Rep. Paul Ryan's budget instantly became the centerpiece of an election-year debate over the size of government on Tuesday, thrusting back into the spotlight a topic—the deficit—that has been largely overlooked by the presidential candidates.  Democrats said his plan promises drastic savings without specifying what would be cut and without raising taxes on the wealthy, as President Barack Obama has proposed.  Mr. Ryan (R., Wis.), who heads the House Budget Committee, said his plan would put the U.S. on a sound economic path by spending $5.3 trillion less than Mr. Obama recommends over 10 years, resulting in a budget deficit that would be $3.3 trillion narrower. Mr. Ryan angered Democrats, and privately frustrated some Republicans, by proposing a $1.028 trillion cap on discretionary spending for next year, a figure that excludes formula-based programs such as Social Security and Medicare. The two parties, after weeks of negotiation, had agreed on a level of $1.047 trillion in a deal in August. The plan also would cut the top tax rates for corporations and individuals to 25% from 35%, creating just two brackets for individuals, 10% and 25%.

The Republican's Social-Darwinist Budget Plan - Robert Reich - In announcing the Republicans’ new budget and tax plan Tuesday, House Budget Committee Chairman Paul Ryan said “We are sharpening the contrast between the path that we’re proposing and the path of debt and decline the president has placed us upon.” Ryan is right about sharpening the contrast. But the plan doesn’t do much to reduce the debt. Even by its own estimate the deficit would drop to $166 billion in 2018 and then begin growing again. The real contrast is over what the plan does for the rich and what it does to everyone else. It reduces the top individual and corporate tax rates to 25 percent. This would give the wealthiest Americans an average tax cut of at least $150,000 a year. The money would come out of programs for the elderly, lower-middle families, and the poor. Seniors would get subsidies to buy private health insurance or Medicare – but the subsidies would be capped. So as medical costs increased, seniors would fall further and further behind. Other cuts would come out of food stamps, Pell grants to offset the college tuition of kids from poor families, and scores of other programs that now help middle-income and the poor. The plan also calls for repealing Obama’s health-care overhaul, thereby eliminating healthcare for 30 million Americans and allowing insurers to discriminate against (and drop from coverage) people with pre-existing conditions. The plan would carve an additional $19 billion out of next year’s programs for lower-income families. Not surprisingly, the Pentagon would be spared.

Flim-Flam Fever - Krugman - Way back in 2010 I declared that Paul Ryan — who was rapidly becoming the darling of the “fiscal responsibility” crowd — was a fraud, a flim-flam man. Very Serious People were very seriously annoyed — they’d anointed him, and they didn’t want to hear anything negative. They even gave him a “Fiscy”, an award for fiscal responsibility. So I wonder: are they willing to concede, at long last, that he’s a clown? His latest budget proposal has received some harsh critiques. It calls for huge tax cuts, supposedly offset by closing loopholes and ending tax expenditures — except that in a long report he fails to name a single tax expenditure that he would cut. It assumes drastic cuts in discretionary spending, basically eliminating everything except defense. And over the medium term, of course, it’s a plan to savage the poor while giving big tax breaks to the rich.So actually two questions: are people finally willing to concede that Ryan is not now and has never been remotely serious? And — I know this is probably far too much to ask — are they going to do a bit of soul-searching over how they got snookered by this obvious charlatan?

GOP budget hurts prospects for deficit deal - If anything is obvious from the past several years of budget wrangling, it's that meaningful progress on the federal deficit will require a grand, bipartisan deal of the kind that President Obama and House Speaker John Boehner were negotiating last summer before their talks collapsed. Democrats will have to give ground on the entitlement programs that are swallowing the federal budget. Republicans will have to compromise on tax revenue. If that is too tall an order during a presidential election year, the two parties should at least avoid fanning flames that will make future deals harder to achieve. What's most galling, however, is that the plan would violate the terms of the stopgap budget deal worked out last summer. It would breach the cap on defense spending and take money from other areas. It is hard to imagine a better way to undermine prospects for a broad long-term deficit deal than for one side to go back on its word.

The Ryan budget proposal - Ezra Klein offers some points of clarification: Perhaps the simplest way to understand what’s going on in Paul Ryan’s budget, and whether it’s plausible, is to look at page 13 of the Congressional Budget Office’s summary of the Ryan plan (pdf). That’s where the CBO lists Ryan’s assumptions about how future budgets would differ under his proposal and under an alternative, high-deficit scenario. That lets us see where, exactly, Ryan’s presumed savings are. And they’re not, for the most part, in Medicare. In 2030, spending on Medicare is .75 percent of GDP lower than in the alternative fiscal scenario. In fact, Ryan and the Obama administration have proposed the same rate of growth for Medicare: GDP + 0.5 percent. It’s Medicaid and other health spending, which includes the Affordable Care Act, where Ryan really brings down the hammer: That category falls by 1.25 percent of GDP. So Ryan’s cuts to health care for the poor are almost twice the size of his cuts to health care for the old. And then there’s the “everything else” category, which includes defense spending, infrastructure, education and training, farm subsidies, income supports, veteran’s benefits, retraining, basic research, the federal workforce and much, much more. And this category of spending falls by 2.5 percent of GDP.

The Massive Hidden Safety-Net Cuts in Chairman Ryan’s Budget - A key misunderstood element of House Budget Committee Chairman Paul Ryan’s budget plan is his proposed cut in spending for “other mandatory” programs  — non-discretionary programs other than Social Security, Medicare, Medicaid, and other health programs.  His plan shows almost $1.9 trillion in cuts in such programs over the next ten years compared to what President Obama’s budget proposed for such programs.  His plan does not provide any details about specific program cuts that would add up to that very large amount, although Chairman Ryan reportedly indicated that he would get a significant portion of the savings from not accepting various policies that the President proposed. But any notion that you could get most of the $1.9 trillion in savings in this category simply by rejecting the President’s proposals for new spending would be mistaken.  In fact, the Ryan plan proposes to cut spending for non-health mandatory programs by $1.2 trillion below the spending projected for these programs under current policies. Moreover, you cannot achieve those savings without making very deep cuts in the crucial safety-net programs in this category, such as SNAP (formerly known as food stamps), Supplemental Security Income for the elderly and disabled poor, Temporary Assistance for Needy Families, the school lunch and other child nutrition programs, and unemployment insurance.

Kent Conrad and Paul Ryan: So Close and Yet So Far - Today House Budget Committee chairman, Paul Ryan (R-WI) unveiled the House Republican budget proposal with a lot of fanfare and his latest snazzy video.  The fundamental structure of the proposal itself is not really “news” in that Ryan has remained consistent to his word that the fiscal situation is a spending-side-only problem and that the level of revenues as a share of our economy should be maintained around its 40-year historical average. Relating that to the story on the Senate Budget Committee chairman, Kent Conrad (D-ND) which appeared over the weekend in the Washington Post (written excellently by Lori Montgomery), I find it striking that both of the budget chairmen (from the two different houses and two different parties) now talk about tax expenditures as government spending that just happens to be done by poking holes into the income tax system.  In his own budget, Ryan refers to this “spending through the tax code” (pg. 67) and also points out how the rich benefit the most from these “tax subsidies.”  In other words, like Kent Conrad, Paul Ryan recognizes that if we reduced these tax expenditures, we would not be raising taxes as much as reducing spending. On the other hand, Ryan stresses that his proposal to eliminate these tax subsidies would be “not for the purpose of increasing total tax revenues, but instead to lower rates.” So, revenues relative to GDP remains the huge sticking point in what would otherwise seemingly be complete bipartisan agreement on the shape of badly-needed tax reform. 

The Limits of American Exceptionalism - Simon Johnson - On Tuesday, Representative Paul D. Ryan of Wisconsin, chairman of the House Budget Committee, released a budget that, he asserts, represents the right path to fiscal responsibility. Is cutting revenue in the face of large budget deficits further evidence that Americans are an exceptional people, capable of doing things that elude others? Or does it represent another round of thinly disguised fiscal folly — the kind of thinking that has, in recent decades, undermined the exceptional degree of fiscal responsibility that made this nation great? Mr. Ryan’s plan looks closer to folly, for three reasons: First, the prevailing view among some on the right of the political spectrum is that our current deficit and debt levels are due primarily to runaway spending. But mostly we eroded the revenue base of the federal government, through what are known as the “Bush tax cuts” of 2001 and 2003 (President Obama agreed to the extension of these in 2010). Second, Mr. Ryan resists the notion that his proposals will reduce revenue, contending that they will cause economic growth to accelerate — and as he said in his Wall Street Journal commentary on Tuesday, “The faster the economy grows, the more revenue the government will have to meet its priorities and start paying down the debt.”Third, Mr. Ryan promises to reduce government spending — and suggests that his plans to do so will more than match any revenue lost from tax cuts. These include big cuts to Medicaid and Head Start, among other programs, as well as much of the investment in education and infrastructure (although not military spending, apparently). Yet those items are small relative to total federal government spending, most of which goes for the military, Social Security and Medicare.

Pay No Attention To The Latest Paul Ryan Budget - House Budget Committee Chairman Paul Ryan (R-WI) released his latest budget plan yesterday. As expected, it proposes to reduce appropriations below what was agreed to in the debt ceiling deal -- the Budget Control Act -- last August, cut taxes, and make major changes in Medicare.The Ryan plan is no more of a serious budget than was the budget the White House released in February. And just like the Obama budget, what Ryan released is nothing more than a re-election document that some Republicans will use repeatedly on the campaign trail through November to shore up the base. The Ryan-proposed budget supposedly will be approved by the full House Budget Committee today. It will then go to the House floor where it will be angrily denounced by House Democrats and, although the vote is likely to be closer than you would guess given the GOP majority, passed. At that point the Ryan/GOP fiscal 2013 House-passed budget resolution will be magically and immediately transformed from a fiscal policy proposal to a campaign document. Majority Leader Harry Reid (D-NV) has already said that the Senate will not debate a budget resolution this year so what the House does will not be considered by anyone else and will instead appear in campaign documents everyone.

Ryan’s budget: Should the poor pay for deficit reduction? - Here’s the basic outline of House Budget Committee Chairman Paul Ryan’s 2013 budget in one sentence: Ryan’s budget funds trillions of dollars in tax cuts, defense spending and deficit reduction by cutting deeply into health-care programs and income supports for the poor. At the end of his initial release, Ryan posts a table comparing his budget to the president’s budget. The single largest difference is in the tax section: Ryan raises $2 trillion less in revenue than the White House does. In the president’s budget, those revenues come mostly from increasing taxes on the wealthy. So that’s the first big gap between the two proposals: Under Ryan’s budget, revenue would be lower, and the distribution of taxes more regressive, than under Obama’s budget. On the spending side, Ryan’s biggest cuts come from health-care programs. He eliminates the $1.5 trillion that the Affordable Care Act uses to purchase health insurance for 30 million Americans. Then he cuts Medicaid and related health programs by $770 billion — which is to say, by about a third. Medicare takes $200 billion in cuts on top of that. This graph from the Congressional Budget Office’s analysis of Ryan’s budget tells the story:

Why the Republican budgets make the poor pay - I don't think Paul Ryan intended to write a budget that concentrated its cuts on the poorest Americans. Similarly, I don't think Mitt Romney intended to write a budget that concentrated its cuts on the poorest Americans. But there's a reason their budgets turned out so similar: The Republican Party has settled on four overlapping fiscal commitments that leave them with few other choices.The Republican plans we've seen share a few basic premises. First, taxes are too high, and must be cut. Second, defense spending is too low, and should be raised. Third, major changes to entitlement programs should be passed now, but they shouldn't affect the current generation of retirees. That would all be fine, except for the fourth premise, which is that short-term deficits are a serious threat to the country and they need to be swiftly cut. The first three budget premises means that taxes and defense will contribute more to the deficit, and Medicare and Social Security aren't available for quick savings. That leaves programs for the poor as the only major programs available to bear cuts. But now cuts to those programs have to pay for the deficit reduction, the increased defense spending, and the tax cuts. That means the cuts to those programs have to be really, really, really deep. The authors have no other choice.

In preparation for some awesome SCARE CHARTS!!! - I made this chart last night on the weather in Indianapolis through Sunday. That’s “historical”. Based on the trend of the last two days, I’ve shown our “current path”: Scary! We’re all going to burn to a crisp in a couple of months.Think about this when you go read Rep. Ryan’s op-ed in the WSJ today, especially when you look at the nice chart he made for it. There’s going to be a lot of talk about budgets and policy this week, and this year. Let’s try and keep it grounded in reality.

Ryan’s Mystery Meat Budget - I am weary of mystery meat.  The latest serving was dished out today by House Budget Committee Chairman Paul Ryan (R-WI), who released a fiscal plan that airily promises both trillions of dollars in tax cuts and a nearly balanced budget within a decade, but never says how he’d get there. Ryan isn’t saying that his budget implies cuts of $4.6 trillion in popular tax deductions, credits, and exclusions over 10 years, according to new estimates by the Tax Policy Center. And that ignores the $5.4 trillion in revenue lost from permanently extending the 2001/2003 tax cuts.   Ryan proposes big, specific spending reductions such as cutting Medicaid in half and slashing other federal spending (except for Social Security, Medicare, and Medicaid) by nearly 75 percent from current levels by 2050. But his budget still can’t add up without eliminating or sharply scaling back those popular tax preferences. Which ones, it seems, remain a state secret. 

Assume a Can Opener* - Some reflections on the new Ryan plan. The CBO provides some numbers (it's not a "score"), with a caveat: At the request of the Chairman of the House Budget Committee, Congressman Paul Ryan, the Congressional Budget Office (CBO) has calculated the long-term budgetary impact of paths for federal revenues and spending specified by the Chairman and his staff.  calculations do not represent a cost estimate for legislation or an analysis of the effects of any given policies. In particular, CBO has not considered whether the specified paths are consistent with the policy proposals or budget figures released today by Chairman Ryan as part of his proposed budget resolution. In other words (as stressed by Ezra Klein), Representative Ryan specified revenues and expenditures, and told CBO to calculate how the debt trajectory would change as a consequence. Thus, CBO did not “score” the plan, exactly because so much was unspecified. In this respect, it shares a lot with Romney's plan, but even more so. Klein summarizes the can opener: Ryan tells CBO to assume his tax plan will raise revenues to 19 percent of GDP and then hold them there. He tells them to assume his Medicare plan will hold cost growth in Medicare to GDP+0.5 percentage points. He tells them to assume that spending on Medicaid and the Children’s Health Insurance Program won’t grow any faster than inflation. He tells them to assume that all federal spending aside from Medicare, Medicaid and Social Security will fall from 12.5 percent of GDP in 2011 to 3.75 percent of GDP in 2050.

Bankrupt Rhetoric - I woke up this morning to Paul Ryan, describing his budget proposal, as quoted in the New York Times: “This is about putting an end to empty promises from a bankrupt government.” Bankrupt government? Let’s consider this more closely. The normal meaning of bankrupt is negative net worth, as when your liabilities exceed your assets. By this standard, the US government is hardly bankrupt, since it has enormous hard assets and an even larger soft one, the legal right to tax the income, transactions and property of all individuals and organizations subject to US law. We should all be so bankrupt!So I guess Ryan is not using the normal business meaning of the word. Perhaps for him bankrupt means having negative earnings over some period of time. Here is the federal government’s fiscal record since 1929: So during what periods has the federal government been “bankrupt”? During every year when outlays exceeded revenues? That would include nearly all of modern history since the 1960s.

Paul Ryan’s Budget Plan: More Big Tax Cuts for the Rich - No surprise here, but the tax cuts in Paul Ryan’s 2013 budget plan would result in huge benefits for high-income people and very modest—or no— benefits for low income working households, according to a new analysis by the Tax Policy Center. TPC looked only at the tax reductions in Ryan’s plan, which also included offsetting–but unidentified–cuts in tax credits, exclusions, and deductions. TPC found that in 2015, relative to today’s tax system, those making $1 million or more would enjoy an average tax cut of $265,000 and see their after-tax income increase by 12.5 percent. By contrast, half of those making between $20,000 and $30,000 would get no tax cut at all. On average, people in that income group would get a tax reduction of $129. Ryan would raise their after-tax income by 0.5 percent. Nearly all middle-income households (those making between $50,000 and $75,000) would see their taxes fall, by an average of roughly $1,000. Ryan would increase their after-tax income by about 2 percent. Ryan would extend all of the 2001/2003 tax cuts, and then consolidate individual rates to just two—10 and 25 percent. In addition, he’d repeal the Alternative Minimum Tax, reduce the corporate rate from 35 percent to 25 percent, and kill the tax provisions of the 2010 health reform law.

Ryan Budget Is Now Officially A GOP Problem - We now have some real indications that the fiscal 2013 budget plan proposed by House Budget Committee Chairman Paul Ryan is going to be as much a political albatross as a plus for Republicans.  The first real proof came yesterday when two Republicans members of Ryan's committee --Justin Amash (MI) and Tim Huelskamp (KY) -- voted against the plan because it wasn't conservative enough. According to Ezra Klein, a third budget committee Republican -- Mick Mulvaney (SC) -- voted for it in committee, but may vote against in on the House floor. As Ezra also notes, the uber anti-spending Club for Growth is also very unhappy with the Ryan plan because it doesn't spending fast enough. The Ryan plan eventually was approved, but the vote was by a razor-thin 19-18. That hardly shows a lot of political confidence in a plan proposed by someone who only months ago some Republican leaders were trying to convince to run for president.  The GOP defections in the budget committee could spell big trouble for the plan when it's debated by the full House. Unlike what happened with last year's continuing resolutions and debt ceiling increases, it is as certain as anything can be in politics that Democrats will not provide the votes needed to pass the Ryan plan.

Congressional Progressive Caucus’ Budget for All Deserves as Much Scrutiny as Paul Ryan’s Budget - As long as the news media devotes massive amounts of space to a fantasy budget, why can’t they turn their attention for just a minute to a more legitimate one? Sure, the Congressional Progressive Caucus’ Budget for All isn’t likely to get much more than the 100 or so votes of its members, short of what would be needed to pass the House. But the Paul Ryan budget has about as much of a chance as the Budget for All from becoming law.  There are over $2.4 trillion in public investments in the Budget for All, including direct job creation programs that would create jobs to improve schools and parks, and a focus on infrastructure investment, including a $556 billion surface transportation bill and an ongoing infrastructure bank to identify long-term projects. In addition, the budget would come into balance under the Budget for All much faster than under Paul Ryan’s (which isn’t balanced as of 2030), by ending wars and reducing military expenditures, and increasing revenue through ending the Bush tax cuts. The budget actually extends a lot of middle class tax cuts, but in exchange, it creates new tax brackets for millionaires, raises capital gains and dividends to the corresponding income rates, eliminates corporate welfare for the oil and gas industry and incorporates the Buffett rule, mandating a minimum tax payment for millionaires and billionaires. There’s also a minimum rate for corporate taxation. To account for the end of the payroll tax cut, the Budget for All swaps back in the Making Work Pay tax credit from 2013-2015, which would reduce the tax burden for the middle class and working poor without threatening Social Security. In fact the entire budget protects Medicare, Medicaid and Social Security benefits.

Republicans and Democrats Both Want to Kill You! - What is happening to this country?   Robert Reich points out that, in announcing the Republicans’ new budget and tax plan Tuesday, House Budget Committee Chairman Paul Ryan said “We are sharpening the contrast between the path that we’re proposing and the path of debt and decline the president has placed us upon.” But the plan doesn’t do much to reduce the debt. Even by its own estimate the deficit would drop to $166 billion in 2018 and then begin growing again. The real contrast is over what the plan does for the rich and what it does to everyone else. It reduces the top individual and corporate tax rates to 25 percent. This would give the wealthiest Americans an average tax cut of at least $150,000 a year.  The money would come out of programs for the elderly, lower-middle families, and the poor.   "So what’s the guiding principle here?" asks Reich. "Pure social Darwinism. Reward the rich and cut off the help to anyone who needs it." Most Americans who do have jobs continue to lose ground. New research by professors Emmanual Saez and Thomas Pikkety show that the average adjusted gross income of the bottom 90 percent was $29,840 in 2010 — down $127 from 2009, down $4,842 from 2000, and just slightly more than $29,448 in 1966 (all figures adjusted for inflation).  Ryan says too many Americans rely on government benefits. “We don’t want to turn the safety net into a hammock that lulls able-bodied people into lives of dependency.”

The Budget Message Paul Ryan Really Sent - Paul Ryan may not have intended it, but his 2013 budget is the strongest argument I’ve seen for why any serious fiscal plan must include new revenues. It’s far more convincing than partisan Democratic complaints. Ryan says he wants to balance the budget only by cutting spending. But he proved with hard, relatively specific numbers (on the spending side, at least) that he can’t get there from here. And if you take the second page from the Republican hymnal and add huge tax cuts to the mix, you may find yourself headed off in just the wrong fiscal direction. Ryan’s fiscal math work only works with rapid, historic changes in government—something Congress doesn’t do well and the public struggles to accept (health reform anyone?). It would force Republicans to make one career-killing vote after another. Tea-partiers might rejoice, but there is stuff in this budget that is political death for senators and any House members running in swing districts. Let’s look a few:

Medicare Costs Too Much and They Better Not Cut It - The Republicans, led by House Budget Committee Chairman Paul Ryan, have argued that Medicare threatens to bankrupt the country. They have pointed to cost projections showing the program more than doubling relative to the size of the economy over the next three decades. The Republicans say that the country cannot afford this expense and scream about huge debt burdens for our children.The Republicans’ concern might lead people to believe that they would support measures to contain Medicare costs. But if you thought that was the case, you would be wrong.The latest Republican crusade on Medicare is to eliminate the Independent Payment Advisory Board (IPAB), which was put in place as part of the health care reform bill passed two years ago. IPAB is empowered to impose a cap on Medicare spending if it grows too fast relative to the size of economy. The way it would reduce cost growth is by reducing or eliminating payments for medicines and procedures that have not been shown to be effective. The idea that Medicare would not pay for some medicines or procedures has Republicans in Congress screaming about “death panels” and “rationing.”  These politicians, who like to portray themselves as lovers of free markets, are now claiming that it is rationing if the government will not pay for something.

It's March: Watch As The GOP Plays The Baseline Game Yet Again - It's March, the month when Spring, the NCAA tournament, and "Dancing with the Stars" all begin.  It's also when, in response to the Congressional Budget Office's release of its updated deficit projections and estimates of the president's budget, Republicans carefully pick the comparison that supposedly proves what they want to say even when there is ample and readily available evidence that show what they're saying isn't true.  The first via Paul Krugman, is when House Republican Policy Committee Chairman Tom Price (GA) said that the cost of health care reform had risen dramatically. The only problem was that to be able to say that Price had to use a different 10-year period than the one used when the law was passed. As Krugman notes, CBO said ON THE FIRST PAGE of its update that just the opposite was true because it and the Joint Committee on Taxation "now estimate that the insurance coverage provisions of the ACA will have a net cost of just under $1.1 trillion over the 2012–2021 period—about $50 billion less than the agencies’ March 2011 estimate for that 10-year period." The second is from my column published this morning in Roll Call that shows how the GOP picked the one baseline that allowed it to say the deficit would increase substanially under Obama administration policies. Using CBO's own "alternative" baseline, that is, the one that shows what's most likely to actually happen, the Obama 2013 budget actually reduces the deficit.

The U.S. Cruises Toward a 2013 Fiscal Cliff… At some point, the spectacle America is now calling a presidential campaign will turn away from comedy and start focusing on things that really matter—such as the "fiscal cliff" our federal government is rapidly approaching.  I'll explain shortly, a number of decisions to kick the budgetary can down the road have conspired to place a remarkably large fiscal contraction on the calendar for January 2013—unless Congress takes action to avoid it.  Well, that gives Congress plenty of time, right? Yes. But if you're like me, the phrase "unless Congress takes action" sends a chill down your spine—especially since the cliff came about because of Congress's past inability to agree. Remember the political donnybrook we had last month over extending the Bush tax cuts, the two-point reduction in the payroll tax, and long-term unemployment benefits? That debate was an echo of the even bigger donnybrook our elected representatives had just two months earlier—and which they "solved" at the last moment by kicking the can two months down the road. And that one, you may recall, came about because they were unable to reach agreement on these matters in December 2010. At that time, President Obama and the Republicans kicked one can down the road 12 months (the payroll tax) and another 24 months (the Bush tax cuts).

Consensus among economists? - Jonathon Chait writes in the NYT Paul Ryan: Obama Refuses to Endorse Tax Fairy. Lifted from Robert's Stochastic Thoughts on journalistic rhetorical language and consensus:  there’s not really a growing consensus that tax reform is good. The consensus has existed among economists forever  where he defines tax reform as closing tax deductions and loopholes and lowering rates.  Consensus among economists ? You must be joking. I am an economist and I absolutely oppose lowering rates whether or not loopholes are eliminated. As to loopholes, well it depends. Should we eliminate the mortgage interest deduction ? Sure (but not yet -- and not quickly -- low housing investment is a problem now). The deduction for charitable contributions not so much. Tax employer provided health insurance when the Republicans stop trying to kill Obamacare (that is on the first of never). Eliminate the R&D tax credit ? Why ? Are you nuts ? Eliminate the investment tax credit ? Why tax reinvested profits at all ?  No one likes tax expenditures in the abstract (as almost everyone dislikes high government spending in the abstract). It is impossible to get a consensus once one discusses which deductions to eliminate (Chait went on to note this in the post).  Chait has long supported broadening the base and lowering rates (he was a passionate enthusiast for the 1986 tax reform). The economists who basically agree with Paul Ryan have long supported tax reform. Most non Randian economists do to. But many of us don't.

Just $47B from Buffett rule tax on rich - A bill designed to enact President Barack Obama's plan for a "Buffett rule" tax on the wealthy would rake in just $47 billion over the next 11 years, according to an estimate by Congress' official tax analysts obtained by The Associated Press. That figure would be a drop in the bucket of the over $7 trillion in federal budget deficits projected during that period. It is also minuscule compared to the many hundreds of billions it would cost to repeal the alternative minimum tax, which Obama's budget last month said he would replace with the Buffett rule tax. The alternative minimum tax, originally aimed at ensuring that wealthy Americans pay taxes despite deductions and other breaks, has begun affecting upper middle-class families. Congress acts every year to minimize its impact. The Buffett rule has become a leading symbol of Obama's and congressional Democrats' election-year efforts to persuade voters that they are the party championing economic fairness. Republicans have mocked it as one aimed at scoring political points that would have little real budgetary impact. 

Rich Would Skirt ‘Buffett Rule’ - Americans whose income ranks them in the top 1% of earners would see their taxes rise by more than $90,000 on average next year under President Barack Obama's budget proposal, according to a nonpartisan research group's new estimate. "Almost all of the rich would end up paying a lot more," said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute, which conducted the study. Mr. Obama in his February budget proposed about $1.4 trillion in tax increases over the next decade for higher earners—defined as couples making more than $250,000. That includes allowing the Bush tax cuts for higher earners to lapse, causing the top marginal income-tax rate to return to 39.6% from 35%. He also would impose substantial limits on the value of income-tax deductions and other breaks. The deduction limit was expanded this year to include tax-exempt bond interest, employer-sponsored health insurance and retirement contributions. As a result, for 2013, the top 1% of earners—defined as households making more than $593,000—would see their total federal taxes go up by an average of $93,707 from current tax levels, according to the center's estimate. That includes individual and corporate income taxes, payroll taxes and estate tax. The study found that after-tax incomes for the top 1% would fall by 7.8%, and the average effective federal tax rates would rise 5.3 percentage points to 36.8%.

That Wishful Thinking About Tax Rates, by Christina Romer - At least since Calvin Coolidge, politicians have trumpeted the supply-side benefits of cutting marginal income tax rates. Lower rates will unleash economic growth and the cuts will largely pay for themselves — or so it’s often said. Yet careful studies find little evidence of such effects. Mitt Romney, now seeking the Republican nomination for president, cited a supply-side argument when he proposed cutting all income tax rates 20 percent. History shows that marginal federal income tax rates have varied widely. If you can find a consistent relationship between these fluctuations and sustained economic performance, you’re more creative than I am. Of course, many factors affect the economy, so a lack of correlation doesn’t prove that marginal-rate changes have little impact. That’s why economists have devoted thousands of pages in journals to testing the effects more scientifically. One standard approach is to look for natural experiments in the tax code. But a critical review of several natural-experiment studies concluded that . if the marginal tax rate for high earners decreased from its current level of 35 percent to 28 percent (which Mr. Romney proposes), reported income would rise by just 2 1/2 percent. In a new study, David Romer and I found that changes in marginal rates in the 1920s and ’30s had even smaller effects.

Supply side economics and human nature - Sometimes models are really complicated and seem almost like magic, so part of my blog is devoted to demystifying modeling, and explaining the underlying methods and reasoning. Even simple sounding models, like seasonal adjustments (see my posts here and here), can involve modeling choices that are tricky and can lead you to be mightily confused. On the other hand, sometimes there are “models” which are actually fraudulent, in that they are not based on data or mathematics or statistics at all- they are pure politics. Supply-side economics is a good example of this. First, the alleged model. Then, why I think it’s actually a poser model. Then, why I think it’s still alive. Finally, conclusions.

Video: Simon Johnson Says U.S. Tax Rates Must Rise - In an interview with WSJ’s Jon Hilsenrath, MIT professor Simon Johnson calls for higher income-tax rates as part of a “fiscally conservative” plan to shore up the U.S. budget in the long run. “We have lost track of the fact that deficits do in fact matter…,” he says.

More on Greg Mankiw's weak arguments for the Bain capital gains preference - A few days ago, I commented on the weak arguments Greg Mankiw had put forth in his op-ed to support the preferential treatment of compensation for private equity and real estate partnership "profits" partners. He points out the categorization problem--that it is not always easy to be sure what is a "capital gain" and what is "ordinary income". I concluded along the lines of arguments I have repeatedly made on this blog: the main thing the categorization problem teaches us is that we should eliminate categorization problems that create inevitable inequitable differentiations by eliminating the category difference. Get rid of the preferential rate for capital gains (and with it the need to distinguish capital gains from ordinary income), and you will in one stroke simplify corporate and partnership and individual taxation tremendously. Uwe Reinhardt makes a similar argument in the Economix blog carried by the New York Times. See Capital Gains vs. Ordinary Income, Reinhardt uses Mankiw's own introductory textbook in microeconomics to make the tax equity argument that many have been making about carried interest--it is unfair to tax a money manager at a preferential rate compared to firemen, postal inspectors, college professors, school teachers and neurosurgeons.

No Obvious Relationship between Capital Gains Tax Rates and Economic Growth - If you read the editorial page of financial newspapers, you might conclude that no aspect of tax policy is more important for economic growth than the way we tax capital gains.  You’d be wrong. The chart displayed above shows top tax rates on long-term capital gains and economic growth (measured as the percentage change in real GDP) from 1950 to 2011. If low capital gains tax rates catalyzed economic growth, you’d expect to see a negative relationship–high gains rates, low growth, and vice versa–but there is no apparent relationship between the two time series.  The correlation is 0.12, the wrong sign and not statistically different from zero.  I’ve tried lags up to five years and also looking at moving averages of the tax rates and growth.  There is never a statistically significant relationship. Does this prove that capital gains taxes are unrelated to economic growth? Of course not. Many other things have changed at the same time as gains rates and many other factors affect  economic growth. But the graph should dispel the silver bullet theory of capital gains taxes.  Cutting capital gains taxes will not turbocharge the economy and raising them would not usher in a depression.

A Colossal Mistake of Historic Proportions: The “JOBS” bill -- Simon Johnson - The idea behind the JOBS bill is that our existing securities laws – requiring a great deal of disclosure – are significantly holding back the economy. The bill, HR3606, received bipartisan support in the House (only 23 Democrats voted against). The bill’s title is JumpStart Our Business Startup Act, a clever slogan – but also a complete misrepresentation. The premise is that the economy and startups are being held back by regulation, a favorite theme of House Republicans for the past 3 ½ years – ignoring completely the banking crisis that caused the recession. Which regulations are supposedly to blame? The bill’s proponents point out that Initial Public Offerings (IPOs) of stock are way down. That is true – but that is also exactly what you should expect when the economy teeters on the brink of an economic depression and then struggles to recover because households’ still have a great deal of debt. And the longer term trends over the past decade are global – and much more about the declining profitability of small business, rather than the specifics of regulation in the US (see this testimony by Jay Ritter).

Why You Should Hate the “Jumpstart Obama’s Bucket Shops” Act - Yves Smith - Obama seems determined to roll back the few remaining elements of the New Deal. As we’ve recounted, he’s keen to cut Medicare and Social Security; he said as much in a dinner with leading conservative luminaries shortly after his inauguration. And his JOBS Act, which guts securities law protections on smaller stock offerings, is touted as a way to increase employment by helping to fund smaller businesses. In reality, the only jobs it is likely to create will be due to the resulting explosion in stock scamsters and bucket shop operators. Amar Bhide, who has written the classic, The Origin and Evolution of New Businesses, has decisively debunked the idea underlying the Obama Bucket Shop act, which is that public stock offering are an important source of funding for new businesses. The problem is, as Bhide explained, is that academics focus on the easy to study but relatively inconsequential venture capital funded companies which look to IPOs as an exit. Bhide found that only 1% of new and young businesses were funded by venture capital. Similarly, his multi-year study of Inc 500 companies found that a comparatively small portion had VC backing, and even then, many got VCs in at a late stage, not because they needed the money but having the “right” VCs would lead to a much bigger premium when they went public.  Bhide found that most new businesses are based on an insight about an business opportunity that the founders discovered as employees (ie, they saw a market niche that incumbents were ignoring). These ventures were funded by savings, friends and family, and credit cards.

the kind of JOBS bill that only a crook or a legislator could love  - In Paducah, the beauty parlor operator and the kitcat café owner are besides themselves. In Louisville, they talk about it on sidewalk corners and at bus stops. In Lexington, the subject of horse races has been dropped, and it is the theme of knitting circles and barroom conversations.  I’m talking, of course, of the ardent desire of millions of Kentuckians to see IPO law changed to remove regulation, transparency, and accounting standards that impede the simple pleasure of rentseeking and fraud. The man with his hand on the pulse of Kentucky is Kentucky senator Mitch Mcconnell. Many doubt that Paduchians, for instance, are more fascinated by the possibility that the less than one percent of ‘small” businesses – the American governing class loves the word “small” as much as Starbucks loves the word “tall”, and applies it to all things bright and beautiful – who actually do have an IPO than they are by the fact that, for instance, a prominent Middle School principle was recently arrested for rape and unlawful imprisonment. But those doubters were corrected yesterday by Mitch, who is quoted in the NYT: “Senator Mitch McConnell of Kentucky, the Republican leader, urged members of both parties to approve the bill as it was to avoid further delays. “This bill is exactly the kind of thing Americans have been asking for — greater freedom and flexibility. And that’s one of the reasons it’s had such overwhelming bipartisan support,” Mr. McConnell said.” As Simon Johnson and Bill Black have pointed out, a bill that damages transparency and accounting requirements will in all likelihood be very good – for bucket shops and Wall Street investment banks that like to bet against their clients. It will be very bad for “small” businesses.

“JOBS” Disaster Looms - Simon Johnson - The House “JOBS” bill is a thinly disguised repeal of investor protection in the United States.  This legislation would help unscrupulous people in the securities industry but it would be bad for nonfinancial businesses – by raising the risks to investors, it would push up the cost of capital for honest entrepreneurs.   Investment professionals belonging to the CFA Institute have expressed their serious concerns and strong opposition.  Attempts to amend this legislation – and to make it more sensible – failed in the Senate yesterday. The Senate will vote today on whether to adopt the main provisions of the House bill.   Passing this bill would be a major public policy mistake – akin to the disastrous (and bipartisan) deregulation of the financial sector in the 1990s.  This kind of excessive deregulation leads to disaster – and to fiscal crisis.  (For more background and the historical comparison, see this piece.) President Obama claims he wants strong investor protection.  Where is he on the specifics of the JOBS bill?  Why is the White House staying so much on the sidelines during this critical Senate process?  The president should rally Democratic Senators against the House bill and press again for an amended and more responsible piece of legislation.

Kill the JOBS Act! - Spitzer - Once again, the Puppets on Capitol Hill are about to slam the Muppets on Main Street. The country still hasn’t recovered from the Wall Street-induced financial cataclysm of 2008, yet Congress is preparing to enact the Orwellian ”JOBS Act”—a bill that should in fact be called the “Return Fraud to Wall Street in One Easy Step Act.” The bill will undo some of the most important reforms placed on Wall Street in a generation. Ten years ago, virtually all of the major investment banks on Wall Street were charged with a monumental deception of the American investing public: touting stocks as great investments when in truth the banks believed the stocks to be “dogs,” “pieces of ----,“ and worse. The banks did this because of the conflicts of interest woven into their business model. They were underwriting the very stocks they were also touting, making the investing public dupes helping the banks generate enormous fees.Which brings us to the JOBS Act. The bill that has already passed the House will remove the critical protections imposed in the analyst settlement a decade ago with respect to companies with revenues of less than $1 billion per year, allowing them to return to the fraudulent practices of yore.

JOBS Bill Vote Postponed in Senate - The Senate postponed action Tuesday on legislation to ease the ability of small and start-up companies to raise money from investors after Democrats failed in two tries to make changes to the bill. Senator Harry Reid, Democrat of Nevada and the Senate majority leader, announced at 5 p.m. that an expected vote on whether to bring the so-called JOBS bill to the Senate floor for final action would be delayed until Wednesday morning. The bill, which was overwhelmingly approved by the House this month, would significantly loosen the disclosure requirements on companies that are trying to raise money from public investors. (The bill’s acronym stands for Jump-start Our Business Start-ups.) Democrats wanted to give companies a little less leeway in their disclosure obligation by rolling back some of the measures in the House bill. But an amendment to do so, sponsored by Senator Jack Reed, a Rhode Island Democrat, received only 55 of the 60 votes needed to proceed to full consideration, with 44 senators voting against it. 

The problematic JOBS Act - I have a piece in the latest issue of Wired magazine on the problem with IPOs in general, and technology IPOs in particular. In it, the JOBS Act comes across rather well: It’s about to get easier for tech CEOs to ignore the IPO’s siren song. Legislation wending its way through Congress would change SEC rules, meaning no tech company would find itself forced to go public in the way that Facebook has. The bills, which have been supported quite vocally by a number of CEOs at pre-IPO companies in Silicon Valley, as well as VCs who want more control over the timing of their companies’ IPOs, would not count employees toward a company’s 500-investor limit. The legislation would also raise that limit to 1,000 shareholders.  I do think these changes to the 500-shareholder rule make perfect sense. Right now, companies like Facebook (and Google before it) tie themselves up in knots when it comes to giving equity to employees, handing out variations on the stock-unit theme rather than actual equity, just to get around this rule. That benefits no one, really. And ultimately they’re forced to go public anyway, with the timing imposed upon them by SEC regulations rather than being a matter of their own choice.

Misused Statistics Do Not Help Entrepreneurs - Today, the Senate is debating the Jumpstart Our Business Startups (JOBS) Act and appears set to vote soon. . The JOBS bill is part and parcel of a long-running debate about the IPO market in the United States and why IPOs have not returned to the levels of the 1990s. One of the statistics making the rounds on Twitter, the blogosphere, and in various reports recently is that "92 percent of job growth occurs after a company's initial public offering." The ultimate source is a study done by IHS Global Insight for the National Venture Capital Association and promulgated most prominently in last autumn's report, "Rebuilding the IPO On-Ramp,"In that report, the relevant chart is this:  This is bad, albeit seductive, statistics. The "92 percent" assertion horribly conflates causality--by attributing (implicitly by some, explicitly by others) job growth to the fact of going public, purveyors of this number mix together all sorts of causes and effects. If it was the case that IPOs do in fact cause job creation then, as my colleague Paul Kedrosky has observed, we could easily solve unemployment by--presto!--having every single private company go public. Job growth after a company has gone public occurs for all sorts of reasons, very few of which may be related to the fact of having gone public.

Last Ditch Attempt To Save A Little Bit Of Investor Protection In The United States - Simon Johnson - As it currently stands, the “JOBS” bill now before the Senate would gut investor protection in the United States.  The title of the bill is a complete misnomer – anything that weakens investor protection makes it more risky to invest in companies and increases the cost of capital to honest entrepreneurs.  (For more background on the bill and links, see this piece.) Much of the 1930s-era Securities legislation, which served us well for more than 70 years, is about to be repealed in a moment of bipartisan madness. Almost all attempts to amend the House version of this legislation – and to make it more favorable to investors – have now failed in the Senate, and the “cloture motion” received more than 60 votes (so the bill cannot be filibustered).  But Senator Jack Reed (D., Rhode Island) is leading one last charge to make the Senate version more reasonable. Here is the issue with H.R. 3606 (as the House version of the bill is known), from Senator Reed’s website:“The SEC requires public companies to disclose meaningful financial information to the public. This provides a common pool of knowledge for all investors to judge for themselves whether to buy, sell, or hold a particular security. H.R. 3606 would roll back key investor protections, denying the public critical information that is essential to make sound judgments and would ultimately not lead to the proposed goal of the bill: providing for access to capital, particularly for small emerging companies.”

JOBS Act: Senate Passes Small Business Investment Bill: Legislation to help startup companies raise capital by reducing some federal regulations won easy passage in the Senate Thursday despite warnings from some Democrats that less government oversight would mean more abuse and scams. President Barack Obama supports the measure, which stands to be one of the few bipartisan bills to pass Congress during this politically contentious election year. Sen. Pat Toomey, R-Pa., a leading sponsor of the legislation, said it "might be the most pro-growth measure that this body will consider, perhaps this whole year." Democrats did manage to pass one amendment to increase investor protections, so the legislation will still require another House vote. The House passed the measure two weeks ago on a 390-23 vote. The Senate vote was 73-26, with all the "no" votes coming from Democrats. House Majority Leader Eric Cantor, R-Va., said he would schedule a House vote next week "so we can get this bipartisan jobs bill to the president's desk for his signature without delay." The legislation combines six smaller bills that change Securities and Exchange Commission rules so small businesses can attract investors and go public with less red tape and cost. It eases rules on advertising and permits startups to use the Internet and other social media to solicit a large number of small-scale investors.

JOBS Act Sets Stage For Wall Street Malfeasance - Who says American politicians can't come together to get things done any more? Demonstrating that disregard for sound financial regulation knows no party, the Senate on Thursday passed the Jumpstart Our Business Startups Act, or JOBS Act, rolling back investor-protection regulations, some of which date back to the 1930s, and some of which have been passed as recently as 2002 in the wake of Wall Street shenanigans from the 1990s tech bubble to Enron. The bill, which was supported by both parties, with the urging of small and big businesses, passed fairly easily, despite long and loud complaints from many quarters that the act would break down investor protections left and right, setting the stage for future financial scandals and crises.The bill purports to make it much easier for small firms to raise money, either through private "crowdfunding," essentially raising money online, or by going public. At its heart is the persistent myth, relentlessly propounded by Wall Street, that there are a million Facebooks out there waiting to thrive and create jobs if only the government would just get the heck out of the way.  It's really not true, but it sounds like a good thing to be in favor of during election season. The Obama administration immediately leaped to take credit for the bill, with a statement from White House press secretary Jay Carney:

Push for Bankster-Friendly Rep from the Upper East Side Carolyn Maloney Over Uppity Maxine Waters to Head House Financial Service Committee - Even though the odds are against the Democrats retaking the House of Representatives, the jockeying in case that event takes place is already underway. An effort is afoot to push aside the Democratic heir presumptive of the powerful House Financial Services leadership, Maxine Waters, and install the representative from the Upper East Side’s Silk Stocking district, Carolyn Maloney. What’s striking about the effort to take down Waters is the thinly disguised racism. To put none too fine a point on it, Waters is not culturally white, like Obama or Colin Powell, nor is she well spoken like, say, one of my favorite former Representatives, Cynthia McKinney. She’s from the wrong side of the tracks class-wise as well as color-wise. Of course, to make this sort of bigotry socially acceptable, it’s presented as a style problem. As I pointed out long form in a well-received article for the Conference Board Review, stylistic concerns are an effective way to keep to minorities out of leadership positions. It’s a requirement that candidates maintain a particular class veneer. Out groups typically find it difficult to wear the expected behavior gracefully if they didn’t learn it while they were growing up. This article from Politicker presents an anti-Waters diatribe. It is remarkably transparent in taking a bank point of view, and makes no pretense to be neutral:

Politically Divided Federal Gov't Worries U.S. Investors…-- American investors are most likely to say a politically divided federal government (73%) is hurting the U.S. investment climate "a lot," according to a Wells Fargo/Gallup Investor and Retirement Optimism Index survey. The federal budget deficit (66%) and the unemployment rate (62%) are also among the issues investors are most likely to say are hurting the U.S. investment climate. Investors are least likely to list the availability of credit as a problem from the eight items tested. Although a similar percentage of investors said a politically divided federal government was hurting the U.S. investment climate a lot in the September 2011 survey, the issue then placed fourth -- behind unemployment (83%), the federal budget deficit (79%), and the job growth rate (75%). The Wells Fargo/Gallup Investor and Retirement Optimism Index survey, conducted quarterly, defines investors as those having $10,000 or more of investable assets.

Is Congress drinking Grover Norquist koolaid? (or will it fund IRS appropriately by Linda Beale - IRS Commissioner Doug Shulman testified before the House Appropriations Financial Services and General Government Subcommittee on President Obama’s proposed 2013 budget for the IRS. Shulman wants Congress to provide adequate funding to the IRS to support its enforcement function. The IRS has 5000 fewer employees this filing season than in 2011, and Shulman is worried about the impact of that decline in enforcement capability on compliance and collections. See Rubin, IRS Eliminated 5,000 Jobs in past year amid budget cuts, Bloomberg. Now, those "starve-the-beast" types that drink the Grover Norquist koolaid are generally just eager to kill all government, and particularly government programs that help ordinary people, are concerned with the general public good, or help ensure the vitality of important government programs. And a component of the "starve-the-best; no-tax-increases-ever" koolaid package seems to be a desire to let the rich (the natural constituents of the right) get richer by continuing to be let off the hook on paying their fair share of taxes, while the overwhelming majority of Americans slip back into a much less hospitable context of just barely getting by. Taxes, of course, are one of the ways that is done, because it is so easy to hide the real purpose under a facade of caring about deficits (cut "entitlement" programs to save money) or growth (expand subdidies for the rich, to "grow" the economy).

Change of Subject: Reality checks: Contrary to a widespread misconception, and in part as a result of close attention to empirical evidence, there has been a decrease, not an increase, in federal rulemaking during this administration. During the first three years of the Obama administration, the number of final rules reviewed by OIRA and issued by executive agencies was actually lower than during the first three years of the Bush administration... Cass Sunstein, Meanwhile, Mark Thoma, economics professor of the University of Oregon, has generated this chart: Derek Thompson at the Atlantic blogged this chart, added a fun graphical quiz of his own, anticipated the facile objections of conservatives and concluded: The bottom line is that it is really, truly time for the myth about Big Spender Obama to die. If anything, it is remarkable that, after a recession and a private sector implosion, the public sector expanded less under this administration than it did under Bush or Reagan, especially when you consider the government cuts made at the state and local levels.

The Need for Corporate Tax Reform - On April 1 Japan will cut its corporate tax rate by five percentage points. That move will leave the United States with the highest corporate tax rate in the developed world: 39.2 percent when you add state and local taxes to the 35 percent federal rate. The corporate income tax is a particularly problematic way to collect tax revenues. Corporate taxes are often more harmful for economic growth than ones on personal income or consumption, as noted in a recent study by the Organization for Economic Cooperation and Development. Moreover, a high corporate rate is an invitation for US multinationals to play games with their accounting, locating profits overseas while reporting as many tax-deductible expenses as possible here at home.That’s why there’s a growing bipartisan consensus that the federal rate needs to come down. President Obama recently proposed lowering it to 28 percent. His likely Republican challenger, Mitt Romney, wants to bring it down to 25 percent. Moreover, the high statutory rate isn’t the only problem with our system. The code is riddled with tax subsidies and loopholes. Those tax breaks, more generous than those in many nations, reduce corporate tax burdens significantly. That leaves us with the worst possible system. It maximizes the degree to which corporate managers must worry about taxes when making business decisions but limits the revenue that the government actually collects.

Could Corporations Take Tax Breaks on Political ‘Dark Money’? - The Supreme Court’s 2010 Citizens United decision [1] opened the way for unlimited corporate spending on politics and has led to the proliferation of nonprofit political groups that do not have to disclose the identities of their donors. But corporations may be getting another benefit from anonymous donations to these groups: a break on their taxes. It all starts with the so-called social welfare groups that have become bigger players [2] in the political world in the wake of Citizens United, which knocked down restrictions on campaign activity by such groups. Tax experts say it's possible that businesses are using an aggressive interpretation of the law to wring a tax advantage out of their donations to these groups. It’s almost impossible to know whether that’s happening, partly because the groups — also known by their IRS designation as 501(c)(4)s — aren’t required to disclose their donors. (That’s why the contributions have been dubbed “dark money [2].”)

Tougher Senate bill on insider trading abandoned - Senate leaders on Tuesday abandoned their own, stronger version of legislation to explicitly prohibit members of Congress and other government officials from making investments on insider information. They agreed to accept a scaled down House version instead. Both chambers overwhelmingly passed different versions of the legislation designed to approve Congress' image, but the Senate included two provisions that were stripped out by the House. One would have required registration and public reports — similar to those filed by lobbyists — by anyone selling inside information learned from Congress. The second was designed to strengthen criminal laws in public corruption cases, raise maximum penalties and restore tools used by prosecutors in such cases that were limited by the Supreme Court. Senate Majority Leader Harry Reid, D-Nev., said he lacked the votes to establish a House-Senate conference to work out a compromise between the two versions.

Political intelligence: Wall Street pays handsomely for Washington inside dope - For around 90 minutes, a group of financial industry professionals grilled staffers at the Centers for Medicare and Medicaid Services, seeking information about an obscure policy question: whether CMS, which oversees the two massive federal health programs, planned to change the reimbursement policies under Medicare for a class of  medical devices. The decision stood to affect the bottom line of several companies that produce versions of the device, and the bankers wanted to use what they learned to make investment decisions. "They hammered us for an hour and a half to try to figure out where we were headed, what our process was, how we'd done things like this in the past," one CMS staffer at the meeting told Yahoo News. Still, this wasn't the kind of meeting that any concerned citizen could have set up. It was arranged by the Marwood Group, a "strategic advisory and financial services firm" focused on health care policy and founded in 2000 by Edward Kennedy Jr., son of the late Massachusetts senator. Marwood is one of an increasing number of players in the fast-growing "political intelligence" industry, which provides information or analysis about legislative developments or policy decisions to clients—usually Wall Street hedge funds or other financial institutions—whose business decisions are affected by what happens in Washington.

Money - For a long time I used to regard this as synonymous with “greed is…” or “ambition is…” or similar formulations. I suspect most other people do this as well.  But nowadays I recognize that these are distinct concepts and should be separated. We don’t need to confront allegedly natural traits like greed or competitiveness in order to analyze the fact that we can produce and distribute everything we need and want without using money (we don’t need this “medium of exchange”), and would be much better off without it, practically and in terms of human happiness. The facts are that money is not a natural law, humanity did better without it for 99% of our natural history, and that the road to freedom and happiness includes, as a necessary goal, the abolition of money.

Money Talks - Many journalists give paid speeches to businesses and business groups. And Wall Street, as it happens, is probably the top source of such engagements. Household names like Bank of America as well as obscure hedge funds, private-equity firms, and others in the financial world frequently hire journalists—including scribes who regularly cover Wall Street—to deliver speeches at events ranging from publicized conferences to small private dinners with select clients. Millions of dollars have flowed to journalists in speaking fees in recent years. Is this a scandal, a dark and an indelible stain on journalism, or really not such a big deal? What does Wall Street, which is all about the bottom line, after all, get from such engagements? Is this a matter of journalism ethics? Not surprisingly, what may at first seem a simple judgment call turns out to be a bit more complicated.

On Journalists Moonlighting as Big Ticket Speakers for Financial Firms - Yves Smith  - Paul Starobin has a useful article at Columbia Journalism Review on the way some high profile journalists receive large speaking fees for appearing before financial services industry audiences, most often conferences for investors, when they write about the same industry. Starobin handwrings on whether taking fees biases coverage. He points out that some organizations, such as Wall Street Journal, Bloomberg, and CNBC prohibit any fees or even expense reimbursement (Bloomberg does make an exception for its opinion column writers).  While some writers, such as Martin Wolf, Michael Lewis, and Gretchen Morgenson, were willing to discuss what they considered kosher with Starobin, most were unwilling to comment for the record

Deutsche Bank Sued in US Over Libor - Deutsche Bank said it received subpoenas and requests for information from U.S. and European Union agencies as part of a global probe into interbank offered rates and that it was also being sued over alleged dollar interbank rate manipulation. The requests came from entities including the U.S. Department of Justice, the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, and the European Commission, Deutsche Bank said on Tuesday. The inquiries relate to periods between 2005 and 2011, the bank said, adding it was cooperating with the investigations. In addition, a number of civil have been filed in U.S. federal courts, alleging the bank manipulated the dollar London Interbank Offered Rate (Libor) and prices of dollar Libor-based derivatives, the bank said. "Claims for damages are asserted under various legal theories, including violations of Commodity Exchange Act and the antitrust laws," Deutsche Bank said. The civil actions which have been consolidated in the United States District Court for the Southern District of New York, are in their early stages, the bank said.

What's This "We " Jazz, White Man? Robert Samuelson Edition - Dean Baker - Robert Samuelson uses his column today to complain that: "Four years after the onset of the financial crisis — in March 2008 Bear Stearns was rescued from failure — we still lack a clear understanding of the underlying causes."Wow, it sure doesn't seem very hard to me. The Reagan-Volcker policies of the early 80s broke the link between productivity growth and wage growth for ordinary workers. This meant that demand growth did not necessarily keep pace with output potential as had been true earlier in the post-war period, since higher wages would quickly translate into higher consumption.  That created an environment which opened a door to speculative bubbles. None of this story is new. I was writing about how the stock bubble was driving the economy in the 90s and how the housing bubble was driving the economy as early as 2002. And, I gave the historical picture in Plunder and Blunder: The Rise and Fall of the Bubble Economy. But, folks like Robert Samuelson would rather pretend that the whole story is a great mystery rather than contemplate the possibility that the economic instability of the last decade had its roots in a pattern of growth that was built on redistributing income from ordinary workers to the most highly paid workers and corporate profits.

A Must Read on the Financial Crisis - Bethany McLean has a must-read article on Reuters about the role of the SEC's 2004 change in broker-dealer leverage requirements in the financial crisis.  The article thoroughly debunks the argument that "the SEC did it" by loosening broker-dealer deregulation.  I'm really glad to see this article because there is so much sheer nonsense circulating around regarding the financial crisis and its causes. The "CRA-made-me-do-it" and the "it was the GSEs" arguments have been debunked in plenty of places, but it's good to see someone run down the SEC net capital rule argument. Irrespective of the 2012 election, I suspect we're in for a strong dose of self-serving financial crisis revisionism from financial institutions and anti-regulatory ideologues over the next few years as we hear arguments that there's "too much regulation" of banks.    (Mind you, I'm often sympathetic to arguments that particular regulations are bad regulations, but the "too much regulation" argument is the surest sign that the proponent has no interest in whether regulation is done well; it is an argument against regulation, period, and that's a position that ideology should trump good government, facts be damned.) 

Fed’s Fisher Says ‘Too-Big-to-Fail’ Problem Remains - Despite new laws aimed at reforming the financial system, the nation’s largest banks remain a threat to stability and should be broken up, a Federal Reserve official said Wednesday. The so-called too-big-to-fail banks “remain a hindrance to full economic recovery and to the very ideal of American capitalism,” Federal Reserve Bank of Dallas President Richard Fisher said in a letter accompanying his bank’s annual report. “Downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response,” he said.

Dallas Fed’s Fisher Criticizes Dodd Frank as Not Going Far Enough on TBTF - Yves Smith - I was told last week that the prevailing and accurate view of last year, that Dodd Frank didn’t go far enough, is being supplanted by the Jamie Dimon view that’s it’s too intrusive. Note that those aren’t actually inconsistent: effective bank regulation IS intrusive. Banker unhappiness would ordinarily be a good sign, but the crisis perps have taken to howling at any intrusion on their imperial right to profit. And the worst is that third parties take their kvetching seriously.  it’s also worth noting that Fisher is decidedly right wing. He thinks the Fed should be more transparent, opposed QE too, and thinks that uncertainty over regulation is deterring business investment (note that this actually shows up as #4 or lower as an issue in most surveys).  What is striking is the way the Dallas Fed annual report puts the TBTF issue as the biggest impediment to a return to prosperity. That’s consistent with an IMF study of 124 financial crises, which found that getting tough with banks and forcing them to recognize their losses (which in the US would have resulted in the radical restructuring of at least Citigroup and Bank of America) produced a deep but short fall in growth and a strong rebound. By contrast, our recovery is barely worthy of the name. Fisher’s letter in the just-released Dallas Fed annual report describes the concentration in the US banking industry, with the 10 biggest banks holding 61% of industry assets versus 26% two decades ago. And even though Fisher makes a dig over “uncertainty” in fiscal policy, he points out that the real problem is that bank balance sheets are weaker than the banks or the recent stress tests would have you believe:

Deutsche Dumps Dodd - How Germany's Biggest Bank Ran Circles Around The Fed - Why are we not surprised at the fact, as reported by the WSJ, that Deutsche Bank AG changed the legal structure of its huge U.S. subsidiary to shield it from new regulations that would have required the German bank to pump new capital into the U.S. arm. The bank on Feb. 1 reorganized its U.S. subsidiary, known as Taunus Corp., so that it is no longer classified as a 'bank-holding company' (BHC). The technical change has important consequences. Taunus—which at the end of last year had about $354 billion of assets and 8,652 employees, making it one of the largest U.S. banking companies—won't have to comply with a provision of the U.S. Dodd-Frank regulatory-overhaul law that essentially forces the local arms of non-U.S. banks to meet the same capital requirements that American banks fact. A provision of the Dodd-Frank Act was going to require Deutsche Bank to infuse Taunus, which for years operated with thin capital cushions, with what executives feared could be as much as $20 billion. Taunus is no longer a bank-holding company and won't have to comply with the tougher capital rules, even though Taunus still houses Deutsche Bank's U.S. investment bank, making it unclear what jurisdiction the Fed will have to intervene in the investment-banking arm if it has concerns about how the unit is being run or whether it has adequate capital buffers. So much for all that systemic risk control and lessons learned as hey-presto - everything is sidestepped as the farce continues.

Video: Deutsche Bank Changes Legal Structure of U.S. Subsidiary to Avoid Dodd-Frank Rule

Gretchen Morgenson: Wall Street Really Does Enjoy A Different Set of Rules Than The Rest of Us - Gretchen Morgenson has earned a Pulitzer-winning career from exposing abuse and conflicts of interest on Wall Street. In this interview, she confirms that there is indeed a second set of rules that our elite financial institutions enjoy, largely unfettered by the constraints that apply to the rest of us.Consequences for failure and fraud are very different under this second set of rules - in fact, they're practically rewarded.  Accountability, by all prudent measures, has become non-existent. The extraordinary measures the country deployed to deal with the great contraction in 2008 only served to exacerbate these imbalances. What's sorely needed now is a national dialogue on whether we're willing to allow this to continue. What benefits are we receiving by enabling these elite to enjoy such different standards? What type of system and rules might work better for our interests? Sadly, beyond the disorganized OWS outrage that has waned in visibility, there is no real cogent, organized public debate focused on this right now. A big reason is that Washington is actively avoiding such a dialogue. It was fundamentally complicit in creating the underlying factors resulting in the '08 collapse and it doesn't want brighter light helping the public understand that more clearly.

Speculation Responsible for Portion of Oil Price Run-Up, But Administration Looks Elsewhere for Solutions - Economists at the Federal Reserve Bank of St. Louis estimate that Wall Street speculation is now the second-largest contributor to oil prices, accounting for 15% of the increase in oil prices over the last decade – correlating strongly with the expansion of commodity trading and speculation in oil futures. This makes speculation perhaps the most fertile ground for actually reducing gas prices, says Zach Carter: While politicians have little ability to alter the price swings of commodities like oil, regulators have both the authority and policy tools to do so. The 2010 Wall Street reform bill gave the CFTC new power to limit excessive speculation, but the rule will not go into effect until later this year.. Between 2004 and 2008, the total volume of trading activity in commodity indexes jumped from $13 billion to about $260 billion,  So if you’re looking for a place for the executive branch to actually have an impact on reducing the price of oil, a stronger and more timely anti-speculation rule would be the place to start, and this is now backed by Federal Reserve research. So what does the Administration actually plan to do to lower gas prices? Why, cutting regulations and building old-energy infrastructure, of course. There has been no formal announcement, but it is likely that new rules on smog will be delayed out of concern that they will increase gas prices

Sen. Franken presses for crackdown on oil speculators -  In response to recent reports that excessive oil speculation adds 56 cents per gallon to what consumers in Minnesota and across the country pay at the gas pump, U.S. Sen. Al Franken (D-Minn.) today (Tuesday, March 20) introduced legislation to bring down gas prices by cracking down on oil speculators. Sen. Franken said Minnesotans now pay an average of $3.68 a gallon for gasoline, up a full 10 cents more per gallon in two weeks. He pointed to a recent report in Forbes magazine that found that oil market speculators drive the market price of oil up and add 56 cents to a gallon of gas.The legislation would direct Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler – whom Sen. Franken met with last Thursday to urge him to take immediate action – to utilize all his authority, including emergency powers, to eliminate excessive oil speculation. The emergency directive is identical to bi-partisan legislation that passed the House of Representatives by a vote of 402-19 during a similar crisis on June 26, 2008.

Reforming the OTC Derivatives Market -  NY Fed President William Dudley (speech transcript)

The Role of Speculation in Oil Markets: What Have We Learned So Far? -- pdf -- Abstract: A popular view is that the surge in the price of oil during 2003-08 cannot be explained by economic fundamentals, but was caused by the increased financialization of oil futures markets, which in turn allowed speculation to become a major determinant of the spot price of oil. This interpretation has been driving policy efforts to regulate oil futures markets. This survey reviews the evidence supporting this view. We identify six strands in the literature corresponding to different empirical methodologies and discuss to what extent each approach sheds light on the role of speculation. We find that the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the co-movement between spot and futures prices reflects common economic fundamentals rather than the financialization of oil futures markets.

Nothing Shocks Us Anymore - American society is rapidly disintegrating. It is increasingly divided into the rich and poor, and those left in the middle are being squeezed like never before. It turns out there's not much opportunity for a better life in The Land Of Opportunity. Rip-offs by the financial "services" industry are now commonplace. So-called "white collar" frauds and other crimes are rarely prosecuted, with high-profile cases like Bernie Madoff being the exceptions that prove the rule. (Bernie ripped off the wrong people.) Thus the rule of law is effectively breaking down. I could go on and on describing this or that aspect of our society's disintegration. In a declining society like ours the human capacity to be shocked by the outrageous events going on all around us every day becomes muted. People become inured (de-sensitized) to the ruthless, immoral behavior they experience or read about. They sink into cynicism, hopelessness and not-caring. This jaded, passive attitude is a form of self-protection. We shut down, we create an emotional distance between ourselves and provocative, negative stimuli. We more and more resemble battering victims who are no longer capable of feeling the anger and other emotions which are entirely appropriate to the situation. Mortgage fraud? Who cares? Goes on everyday. There's nothing to be done about the big banks, right? MF Global recently ripped off thousands of ordinary Americans who made the mistake of using them as a broker-dealer. 

Was MF Global Worth More As A Carcass? - Attempts are being made to sweep MF Global under the media rug in hopes that investors simply forget the eighth largest bankruptcy in US history despite clear allegations of documented fraud surrounding the firm and its politically connected former president, Jon Corzine.   The problem is, astute financial observers are aware of the corruptive behavior of Mr. Corzine, certain regulators and the US justice system.  Some are calling into question the security of the entire US financial system, not just the commodity industry.  At the center of questionable activities is the bankruptcy process itself, loaded with recognizable personalities.  Among them, Louis Freeh, the former director of the Federal Bureau of Investigation (FBI), who has been accused of dragging his feet on a fraud investigation of top MF Global executives. Some say Mr. Freeh is rewarding JP Morgan by soft-peddling a fraud investigation despite his role as a federally appointed trustee and the apparent nod by the Department of Justice (DOJ) that anointed Mr. Freeh status as the DOJ’s eyes and ears on the case. Falsification of documents given by MF Global to regulators in the final days of the firm’s survival was alleged in Congressional Testimony by CMEGroup Chairman Terry Duffy, and knowledgeable industry sources speculate a web of fraudulent activity lies underneath the surface. The key to uncovering this evidence could be the MF Global back office, members of which are currently requesting immunity from prosecution in exchange for their testimony.

TBTF Sheriff Bill Black on the MF Global Cover-up: “All those that doeth Evil hateth the light!” - Capital Account video

Corzine approved MF Global fund transfer: probe - — A Congressional committee investigating how $1.6 billion of customer funds went missing from bankrupt brokerage MF Global said Friday it’s found evidence that former CEO Jon Corzine directed a senior official to use $200 million worth of them. In a memo from a House Financial Services Committee, the probe says it found that Corzine authorized the transfer of client money, citing an email from Edith O’Brien, the assistant treasurer.MF Global on Friday Oct. 28 transferred $200 million from a segregated customer account at J.P. Morgan Chase in London, the committee said. O’Brien wrote in an email the transfer was “Per JC’s direct instructions.” Corzine has said that he would never intend to direct to have customer funds transferred, but in testimony in front of Congress has never firmly denied it. “I never intended to break any rules whether it dealt with segregation rules or any other rules,” the former New Jersey governor and senator said to a House Agriculture Committee hearing in December. “I’m not in a position given the number of transactions to know anything specifically about the movement of any specific funds.”

Memo Show Corzine Ordered Raiding MF Global Customer Account of $200 Million -- Yves Smith - We know America is a hopeless kleptocracy, but if Corzine does not go to jail, given the revelation that he approved the raiding of a customer account of $200 million, it means that no one in the officialdom is interested in keeping up the pretense that we have a functioning regulatory and judicial system. The revelation per Bloomberg: (video) Jon S. Corzine, MF Global Holding Ltd. (MFGLQ)’s chief executive officer, gave “direct instructions” to transfer $200 million from a customer fund account to meet an overdraft in one of the brokerage’s JPMorgan Chase & Co. (JPM) accounts in London, according to an e-mail sent by a firm executive. Edith O’Brien, a treasurer for the firm, said in an e-mail sent the afternoon of Oct. 28, three days before the company collapsed, that the transfer of the funds was “Per JC’s direct instructions,” according to a copy of a memo drafted by congressional investigators and obtained by Bloomberg News.  The transfer occurred on October 28, when the firm had an overdrawn London account with JP Morgan and JP Morgan was holding up business in the US as a result. It isn’t hard to imagine the firm would have failed that day as opposed to on the 31st, and with lower customer losses, had the pilfering of the account not taken place. This was also the same transfer in which JP Morgan asked for written assurance that the funds were not coming from customer holdings. The assistant treasurer, Edith O’Brien (who was also the author of the e-mail saying that she had the approval of Corzine for the action) never provided the requested confirmation. Note that this e-mail contradicts Congressional testimony by Corzine.

Corzine Gave ‘Direct Instructions’ To Transfer $200 Million From Customers to JPM London - Jamie's crew is probably safe, but it looks like Jon is facing his 'Kenny Boy' Enron moment, although he may find some shelter in the Sargent Schultz defense. I know nothing. NOTHING. I guess the fellows who said that they had found nothing incriminating in the emails forget to mention this one. Edith O'Brien's appearance before the Congress just became potentially more interesting, although she could still plead the Fifth. I wonder if the email turned up because so did she. Corzine will almost certainly claim that there was a mix up, and that he merely said to meet the margin call, but did not know it involved customer funds. He said, she said. Save the dress. It also looks like the spin might be that it was a 'mistake' because they were mingling customer funds with 'excess firm funds' in some third account. And then the Anti-Bernanke of the financial apocalypse vaporized the money and all traces of it. And everyone was happy, except for a few small specs. No harm, no foul. Just a simple error. Fine and a wristslap and a promise to better when he gets back on his Street feet.

Fed Set to Sell CDOs From AIG Bailout: Why Policymakers Should Care - Last Friday, the Wall Street Journal reported that large banks are interested in buying the “toxic assets” the Federal Reserve Bank of New York (FRBNY) acquired as part of the AIG bailout. Specifically, Goldman Sachs, Barclays, and Credit Suisse have all expressed interest in buying the FRBNY’s $47 billion portfolio of collateralized debt obligations (CDOs). The demand for these assets is partly a reflection of the current monetary policy environment, which has flooded the market with liquidity and substantially reduced expected returns across virtually all asset categories. The FRBNY’s CDO portfolio is one of the few places investors could buy assets with yields near 10%. According to the WSJ, the banks’ plan to buy the assets and then re-securitize them to create additional CDOs to meet their clients’ return targets. The FRBNY previously sold some of the mortgage-backed securities (MBS) it acquired from AIG in mid-2011 and then again in January 2012. These securities were relatively straightforward and easy-to-value, as they represented claims on a well-defined pool of mortgages. . CDOs, by contrast, are relatively new innovations. They are collateralized by (or reference) the tranches of a large number of different MBS deals that are each backed by thousands of mortgage loans. Instead of a claim on a pool of mortgages like traditional MBS, structured finance CDOs are claims on the junior claims on pools of mortgages. This makes them much more difficult to value and much more risky

S&P May Downgrade Almost All U.S. CDOs Backed by Structured Debt -Standard & Poor’s said it may lower almost all of the ratings it has assigned to U.S. collateralized debt obligations backed by structured-finance securities after a change in its methodology for grading the debt. The bonds under review had $63 billion of balances at issuance, New York-based S&P said today in a statement. These types of CDOs, which package assets such as mortgage bonds into securities with varying risks, helped spark the worst financial crisis since the Great Depression as some slices with AAA grades lost all of their value within a year. The ratings review covers 517 bonds from 224 CDOs, with 361 carrying rankings below investment grade, or lower than BBB-, according to the statement.

Credit default swaps are insurance products. It’s time we regulated them as such - CDS obtained their favored status as unregulated insurance policies courtesy of the Commodity Futures Modernization Act of 2000. It was sponsored by then-Sen. Phil Gramm (R-Tex.) — and benefited Enron, where his wife, Wendy, was a director on the board. The energy company had discovered the fast profit of trading energy derivatives, which was much easier to achieve without those pesky regulations. Late in the year, the CFMA was rushed through Congress. Passed unanimously in the Senate and overwhelmingly in the House, it was mostly unread by Congress or its staffers. On the advice of then-Treasury secretary Lawrence H. Summers, the bill was signed into law by Bill Clinton.No one associated with this awful legislation has yet to be rebuked for it. Anyone who actually read this debacle and recommended it should be banned for life from having anything to do with public policy or economics. Why? The act was a radical deregulation of derivatives. It was an example of the now widely discredited belief that banks and markets could self-regulate without problems. Management would never do anything that put the franchise at risk, and if it did, it would be suitably punished by the shareholders.

A top CDS trader quits the CDS market (video) Ben Heller, a man who’s been trading CDS since before they were even called CDS, is out of the CDS market. There have been rumblings about this market for a while: an FT article from March 9 quoted a series of unhappy people on both the buy side and the sell side. One banker working on the Greek bond deal says: “I almost wanted CDS not to be triggered just so it would kill off the instrument and then we could set about designing something better to replace it.” But with Heller going on the record about this, the pressure on ISDA to fix what is widely seen as a broken system is surely going to increase. Because he’s not alone. “Many of the people you know from EMCA,” he tells me at the end of this video, “are people who are very focused on this issue and who are not going to let this one go.”

The argument that could upend Wall Street reform - Scott O’Malia, one of two Republican commissioners at the Commodity Futures Trading Commission, doesn’t believe that his agency’s standards are up to snuff when it comes to Wall Street reform. “In late February, O’Malia submitted a letter to the Office of Management and Budget to raise concerns about new record-keeping and compliance rules for derivatives traders known as swap dealers, which Zach Carter first flagged. O’Malia believes that the CFTC’s analysis “has failed to comply with the standards for regulatory review” outlined by the OMB and President Obama’s own executive orders. So he wants the OMB to review his agency’s own analysis of these regulations--a request that has taken some CFTC-watchers by surprise. Specifically, O’Malia objects to the baseline that the CFTC has used to evaluate the impact of regulations, saying that it only measures changes after Dodd-Frank has already been implemented, failing to account for the costs of complying with the rules in the first place. O’Malia says that he has repeatedly brought up his concerns with other officials at the CFTC on these rules and others but hasn’t seen changes so far. “I’ve raised it internally, in draft rules, and it’s been a consistent concern,” he says.

Goldman Op-Ed Shows Need for Volcker Rule, Democrats Say -  The Goldman Sachs Group Inc. (GS)employee who criticized the company’s culture in a newspaper column bolsters the case for Wall Street restrictions like the Volcker rule, congressional Democrats said. While the March 14 New York Times (NYT) opinion piece by former executive director Greg Smith drew no requests for hearings or investigations, lawmakers including Senators Carl Levin of Michigan and Jeff Merkley said the article showed why the U.S.needs tighter restrictions on Wall Street practices. The two Democrats authored the Volcker rule’s ban on proprietary trading and conflicts of interest in the Dodd-Frank Act.Congress can’t “legislate the culture but I think the heart of this goes to why we needed the Merkley-Levin amendment,” Merkley, a member of the Senate Banking Committee, said in an interview.

Why the Volcker Rule is still a bad idea - Goldman's latest public relations problem has given added impetus to supporters of the Volcker Rule, the part of the Dodd-Frank financial reform law intended to force banks out of "proprietary trading."  The activities which were denounced are not covered by the Volcker Rule, but that's not stopping politicians from drawing spurious connections, taking advantage of Goldman's terrible public image. While I am a strong supporter of Dodd-Frank, this part of the law is fundamentally flawed and will do considerably more harm than good for the economy. The core problem is the Volcker Rule purports to eliminate excessive investment risk at banks without measuring either the level of risk or the capacity of banks to handle it, which would tell us whether the risk was excessive.  Instead, the rule focuses on the intent of the investment.  This subjective and vague approach means the Volcker Rule will do a poor job of identifying or eliminating excessive investment risk, will be costly even when it correctly identifies risk, and will be even more costly when it discourages risk that is incorrectly treated as if it were excessive. Securities markets will be harmed by a substantial reduction in the liquidity currently provided by banks. This will force a widening of bid/ask spreads, equivalent to increasing commissions charged to investors, and will also make new issuances of securities more expensive.

Fiduciary duty and self-interest - Before Glass-Steagal repeal (and similar legal and business culture changes dating back to the fifties) there was an understanding that commercial bankers had a fiduciary responsibility to their customers,that the relation in question was one of agent to principal. And the same for management, managers were agents of the owners whether directly in a private firm, or indirectly via the Directors of either a joint-stock company or as in insurance of a mutual structure where policy holders were 'owners'. On the other hand investment banks ad law firms and reinsurance companies like Lloyd's and it's 'Names' we're generally set up on a partnership basis where the agents were principals, at least at top levels. But that distinction broke down, maybe as early as the rise of the Conglomerate and the Multinational where the link between the manager/agent and the principal/owner the principal/mutual holder became attenuated to the point of near nonexistence with the result that what had been agents, say a plant superintendent, now reported to an executive suite at 'Corporate' where one-time agents were de facto principals. As exemplified by the bastard blend of President and Chairman of the Boardand Chief Executive Officer into a single person whose theoretical agency relation to ownership was at best mediated through a board of Directors often largely serving under his direction. And this attenuation of Agent-Principal relations broke down entirely when Glass-Steagal and other actions simply smushed together the partnership and joint-stock/mutual models where the formal and legal structure remained the latter even as the decision making went with the former.

Barriers to Change, From Wall St. and Geneva - EVEN now, after all we’ve been through, something is still wrong with Wall Street. That’s the takeaway from the extraordinary — and extraordinarily public — resignation of Greg Smith from Goldman Sachs last week. His criticism of Goldman, made in an Op-Ed article in The New York Times, suggested that some of the business practices and inherent conflicts in the financial industry are as troubling today as they were before all of those taxpayer bailouts. Goldman disagreed with him, of course. But Mr. Smith’s Op-Ed article — and the resounding response to it — provide yet another reminder of why it is crucial that we remake our financial markets so that they are safe for investors and taxpayers. And yet, the snail’s-pace progress of this effort is worrisome. Financial institutions, eager to maintain their profitable status quo, have lobbied hard against change. As a result, too-big-to-fail institutions have become even bigger and more powerful. In addition to lobbying, big financial players have another potential weapon in their battle against safety and soundness. This one is more hidden from view and comes from, of all places, the World Trade Organization in Geneva.

With Visit To Goldman, Bloomberg Says, Chin Up - Mayor Michael R. Bloomberg thought Goldman Sachs could use a friend. The mayor, who earned billions on Wall Street and has a reputation as a staunch defender of corporate culture, dropped by the investment bank’s Manhattan headquarters on Thursday in an unannounced show of solidarity that included handshakes on the trading floor and burgers with the chief executive. Mr. Bloomberg’s hourlong visit, first disclosed by the mayor’s eponymous news agency, came as Goldman struggled to cope with an onslaught of negative publicity after a former executive’s scathing Op-Ed article in The New York Times accused the firm of wanton greed and excess. The mayor, who suggested the appearance in a phone call to the bank’s chief executive, Lloyd C. Blankfein, couched his visit as a necessary pick-me-up for a down-on-its-luck city institution. “It’s my job to stand up and support companies that are here in this city that bring us a tax base and that employ our people,” Mr. Bloomberg said on his weekly radio show on Friday. He castigated the news media for “piling on” the bank, saying “ridiculous isn’t even the right word” to describe the coverage.

Goldman Sachs Has Friends in High Places, Led By Mayor Bloomberg - As the fallout over Greg Smith’s public resignation continues to swirl around Goldman Sachs, several powerful figures have rallied to the bank’s defense, including New York Mayor Michael Bloomberg — who made his fortune supplying data terminals to Wall Street — and Morgan Stanley CEO James Gorman. Even as Goldman faces a torrent of negative publicity — as well as the ire of a resurgent Occupy Wall Street movement — it’s clear that the powerful bank still has many friends in high places. Bloomberg stopped by Goldman’s lower-Manhattan headquarters to offer his support, shaking hands on the trading floor and sharing burgers with CEO Lloyd Blankfein, according to The New York Times. The mayor’s visit came just days after Smith, a 32-year-old executive director for Goldman’s equity derivatives business, published a scathing resignation letter in The Times, accusing the bank of putting profits before the best interests of its clients. Smith, who worked in Goldman’s London office, has not commented publicly since he resigned.

A Wall Street Insider's Response To Greg Smith - Greg Smith, the Jerry Maguire of Goldman Sachs, has struck a nerve with his New York Times OpEd admonition of the culture at his former firm, the symbol of all that is successful – and wrong – on Wall Street.  What he did was gutsy, if ill-advised.  But his disillusionment at a once-admired business culture gone bad is also almost adorably naïve and, worse, diverts from the real cancer that has metastasized in our banking “culture” during his years in it. I’ll say it again: Greg Smith has nerve.  He took great risk putting his name to that letter.  He will be getting calls, emails and all else, straight to his person.  He might well face litigation, this from a foe few dare challenge.  And the men at the at the top, CEO Lloyd Blankfein and COO Gary Cohn, are powerful indeed, and Greg Smith has just publicly done them far more damage as individuals than any testimony in front of Congress did. Still, what did Greg Smith really think he was getting into when he signed up to work on Wall Street?  Perhaps when contemplating his career he saw the ads we all see on television for Morgan or Merrill: “We’ll help you build your future with sound financial knowhow…”  And that does sound nice.  Finance is complicated and “lay” people surely can use a hand from a thoughtful ally in the trenches.  It is charming to think Greg Smith was taken in by such a mission.

With ‘Muppet’ Hunt, Will Goldman Sachs End Email Smack-Talk? - Goldman Sachs, still smarting from the scathing public resignation of 32-year-old banker Greg Smith, is conducting a company-wide email scan looking for the word “muppets” and other derogatory terms, according to Reuters. While most Americans associate the Muppets with Jim Hensen’s furry creatures, it turns out that “muppets” is slang for “stupid people” in Britain, where Smith worked in the bank’s London office. Goldman’s “muppet” hunt is part of a broader review being undertaken by the bank to look into Smith’s incendiary charges, the wire said. In an op-ed for The New York Times published last Wednesday, Smith, who had been at Goldman for 12 years, accused the bank of putting its own interests before its clients. It was a familiar charge: In 2010, Goldman paid $550 million to settle SEC charges that it had misled clients about a complex transaction involving hedge fund billionaire John Paulson.“It makes me ill how callously people talk about ripping their clients off,” Smith wrote. “Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets,’ sometimes over internal e-mail.”

Three’s a Crowd  - Today, O Dearest of Long-Suffering and Put-Upon Readers, Your Temperate and Even-handed Critic of All Things Vampyromorphida was led by circuitous paths to an interesting post by a former denizen of that penumbrous region of the abyssal plain known as Goldman Sachs. Said exile, Jacki Zehner, wrote a long, rambling, but ultimately fascinating disquisition entitled “Why I Left Goldman Sachs” in response to Greg Smith’s now-famous self-immolation last week in The New York Times. By her own description, Ms Zehner was the first female trader promoted to partner at the Squid, a 14-year veteran of the firm, and a proud member of both the Executive Office and the all-powerful Partnership Committee. In other words—and in addition—she was a self-described “culture carrier” of the firm. This, as you may suspect, is very important at Goldman Sachs. Since she joined in 1988 and left in 2002, Ms Zehner was witness to the transformation of Goldman from pre-IPO partnership into globe-straddling colossus. In her later years, she participated firsthand in the all-important deliberations of the Partnership Committee, that august body entrusted with the consideration and elevation of those found worthy for entry into the pantheon of pecuniary and socioeconomic greatness. She enjoyed, as it were, a perch in the catbird seat.

How Much Stress Is in Financial System Right Now? - Worried about the state of the financial system? Point your web browser to the Cleveland Fed‘s website to see a new measure of financial stress levels. On Wednesday, the bank announced the launch of its monthly Cleveland Financial Stress index, which it said “can monitor the condition of broad financial sectors and provide insight into the factors that are adversely affecting these markets.” The index’s arrival comes as part of a broad reappraisal of the importance of financial conditions to overall economic health. In the wake of the market meltdown of 2008 and subsequent massive government response and huge economic disruptions, analysts inside and outside of government have come to realize how important finance is to the overall economic vigor. To that end, forecasters are finding new ways to incorporate financial conditions in their traditional pursuit of predicting things like growth, employment and inflation. Recently, private research firm the Conference Board created its own index of financial conditions and inserted it into its venerable monthly index of leading economic indicators, as part of a bid to improve the forecasting value of the report.

Bernanke: Stress Tests Showed Banks Aren’t Hiding Potential Huge Losses - Federal Reserve Chairman Ben Bernanke said Wednesday at a congressional hearing that recent stress tests of banks assured regulators that financial institutions aren’t hiding potential huge losses. Regulators reviewed banks’ credit default swap positions and their counterparties and felt comfortable they were largely protected from an escalation of the European sovereign debt crisis, Bernanke said Wednesday at the House Committee on Oversight and Government reform. “AIG is an example of what we don’t see now,” Bernanke said in response to sharp questioning from Committee Chairman Darrell Issa (R., Calif.) . Last week the Fed released results of the stress tests of 19 bank holding companies, which would suffer losses of $534 billion over nine quarters under the harsh hypothetical economic downturn posed by Fed officials. As a group, the banks would emerge from this scenario–which assumes 13% unemployment and a stock-market decline of 50%–with a bigger cushion against losses than they had prior to the first Fed stress tests in 2009 during the financial crisis, the Fed said.

The Fed's Stress Test Was Merely The Latest "Lipstick On A Pig" Farce - Last week we learned two things: that Jamie Dimon specifically telegraphed he is now more powerful than the Fed, and that the US economy is back down to the same March 2009 optical exercises in financial strength gimmickry to stimulate rallies. Recall that on FOMC day, the market barely budged on Bernanke's ambivalent statement and in fact was in danger of backing off as the readthrough was that of no more QE... until JPM announced a major stock buyback and dividend boost. The catalyst: a successful passing of the latest and greatest Stress Test, which according to experts was "much more credible" than all those before it. Wrong. The test was merely yet another complete farce and a total joke. But as expected, the test had its intended effect: financial shares soared across the board, and banks promptly took advantage of investors and robot gullibility to sell equity into transitory strength. Bloomberg's Jonathan Weil explains. How stressful were the Fed’s tests? One anecdote stands apart: Regions Financial Corp. (RF), which still hasn’t paid back its bailout money from the Troubled Asset Relief Program, passed. The footnotes to the company’s latest financial statements tell the story. There, the Birmingham, Alabama-based lender disclosed that the loans on its books were worth $8.1 billion less than what its balance sheet said, as of Dec. 31. By comparison, the company’s tangible common equity, a bare-bones measure of net worth, was $7.6 billion.

Fed Acknowledges Error in Citi’s Stress Test - The Federal Reserve made an error in its stress test of Citigroup that led it to overstate a crucial measurement of losses on the bank’s mortgages, the central bank acknowledged on Friday. The Fed also issued corrections for Bank of America, Ally Financial, MetLife and Wells Fargo. It said the corrections did not change the capital ratios projected by the stress tests, which estimated the losses that a bank could bear amid situations that include a severe recession and a market meltdown. The tests, published on Tuesday, calculated how much a bank’s capital would be affected assuming losses on a range of loans and securities over a 27-month period that concludes at the end of 2013. Still, Citigroup did not do as well as its big-bank peers in some tests. The revisions at Citigroup were for the most part bigger than the amendments at the other financial firms. In the original test results, the Fed projected losses on Citigroup’s first-lien home loans that would be equivalent to 9.7 percent of its total mortgages. But the Fed now says that the loss rate is 9.3 percent. The change occurred after the Fed moved projected losses on Citigroup’s foreign mortgages to another category. As a result, the 9.3 percent loss rate is just for mortgages in the United States.

In stress tests, Fed may have inflated grades for TARP banks - The Federal Reserve appears to have class favorites. Analysts say two banks, Regions Financial (RF) and Zions Bancorp. (ZION), received better grades in last week's stress tests than they deserved. One possible reason: Regions and Zions have yet to repay the bailout money they got from the government's Troubled Asset Relief Program - money the government seems increasingly eager to get back. Collectively, the two banks owe $4.9 billion to the government - more than any of the other mostly small 361 banks still in the program - or about a third of the TARP funds still owed by banks. And that, analysts say, may have affected how the Fed graded the two banks. Analysts thought a likely outcome of the stress test was that Regions and Zions would be told by the Fed that they had failed and would have to raise more capital. Instead, Regions and Zions passed the test, receiving better grades than many of their larger rivals, and were given the green light to repay government funds, which both banks now say they will do by the end of the year. Shares of Regions and Zions have risen more than other bank stocks since the test, up 10% and 16%, respectively, indicating investors were surprised by the results as well.

The Dallas Fed Is Calling For The Immediate Breakup Of Large Banks - It's hard not to think it's a big deal when a branch of the Federal Reserve system calls for the breakup of major American banks.The bank has just released its annual report, and the title of the letter is: Choosing the Road to Prosperity Why We Must End Too Big to Fail—Now. Here's the full letter from Dallas Fed President Richard Fisher, generally known as one of the most hawkish and conservative Fed Presidents.

Dallas Fed Proclaims: “Break Up the Banks” - The Dallas Federal Reserve Bank released a report yesterday calling for the end of “Too Big To Fail” and the breakup of the largest and most systemically important banks. In a letter signed by Richard Fisher, the conservative president of the bank, he endorses the research report, and he says that the Dodd-Frank law did not do nearly enough to end the dynamic of Too Big to Fail, and that more must be done immediately to reach this outcome. Memory fades with the passage of time. Yet it is important to recall that it was in recognition of the precarious position in which the TBTF banks and SIFIs placed our economy in 2008 that the U.S. Congress passed into law the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank). While the act established a number of new macroprudential features to help promote financial stability, its overarching purpose, as stated unambiguously in its preamble, is ending TBTF. However, Dodd–Frank does not eradicate TBTF. Indeed, it is our view at the Dallas Fed that it may actually perpetuate an already dangerous trend of increasing banking industry concentration. The top 10 banks now account for 61 percent of commercial banking assets, substantially more than the 26 percent of only 20 years ago; their combined assets equate to half of our nation’s GDP.

TAG Actually Gives Big Banks the Advantage - In the depths of the financial crisis, the FDIC under Chairman Sheila Bair extended 100% insurance coverage to non-deposit transactions balances of all banks. Known as the Transaction Account Guarantee program, this extraordinary extension of FDIC insurance coverage to all transaction balances was a good idea at the time, but should be allowed to expire at the end of the year. The first and most important argument against TAG is the cost to community banks. While everyone from Cam Fine at the Independent Community Bankers of America to various state regulators have called for the extension of this subsidy, nobody wants to talk about the cost to community banks. Here's the question: why should community banks, those with assets below $1 billion, spend roughly $100 million in insurance assessments (calculated by Institutional Risk Analytics), when they could acquire private market coverage for a tenth of the cost?

A Seven Day Plan to Finally Hold Wall Street Accountable - It’s now a near certainty that Wall Street executives committed felonies. The recently released audits of robo-mortgage activities by the Office of the Inspector General of the Department of Housing and Urban Development (HUD) details shocking behavior at the five banks constituting the Federal Housing Administration’s largest mortgage servicers. At Wells Fargo, management quashed a midlevel manager’s study of the foreclosure process as negative results began to emerge, and it gave an individual whose last job had been in a pizza restaurant the title of “vice-president of loan documentation” to facilitate robo-mortgage signing. Bank of America evaluated employees on the volume of foreclosure affidavits produced. JP Morgan Chase gave individuals titles such as “vice-president of Chase Home” where “the titles were given by Chase for the sole purpose of allowing individuals to sign documents and came with no other duties or authority.” Citigroup and Ally similarly engaged in seemingly illegal practices. Under federal law, the knowing filing of a false affidavit with the court is a felony offense of perjury, punishable by a prison term of up to five years. An individual violates laws against perjury whether he or she personally appears in court and swears to a false statement or provides the court with a false affidavit. Individual states have their own perjury laws, which were undoubtedly violated as well. The HUD report also suggests that individual banks may be guilty of obstruction of justice and the criminal violation of the False Claims Act for filing insurance claims without following HUD requirements.

Unofficial Problem Bank list declines to 952 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for March 16, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808: As expected, the OCC release its actions through mid-February 2012 this week, which contributed to several changes to the Unofficial Problem Bank List. In all, there were six removals and two additions, which leaves the list with 952 institutions with assets of $379.1 billion.

JPMorgan Joins BofA in Cutting Mortgage Traders - JPMorgan Chase & Co. (JPM) and Bank of America Corp., the two biggest U.S. banks, are cutting senior mortgage traders and salesmen amid a decline in the asset-backed securities market, people with knowledge of the moves said. Raphael Gonzalez, JPMorgan’s co-head of trading in subprime mortgages, and John Angelica, a securitized-products salesman, resigned from the New York-based bank within the past four weeks in exchange for severance packages that included all their deferred stock awards, said the people, who declined to be identified because the terms are private. Roy Kim, who traded adjustable-rate mortgages, left on his own accord with a similar exit deal, the people said. Enlarge image JPMorgan Said to Join BofA in Cutting Mortgage Traders Daniel Acker/Bloomberg JPMorgan Chase & Co. in New York. JPMorgan Chase & Co. in New York. Photographer: Daniel Acker/Bloomberg .JPMorgan and Bank of America, based in Charlotte, North Carolina, are re-evaluating staffing on mortgage-trading desks amid pressure to cut expenses and stricter capital requirements tied to the assets. Some employees were offered severance packages allowing them to keep millions of dollars of deferred stock that otherwise may have been forfeited, the people said

Another Hidden Bailout: Helping Wall Street Collect Your Rent - Taibbi - Here's yet another form of hidden bailout the federal government doles out to our big banks, without the public having much of a clue. This is from the WSJ this morning: Some of the biggest names on Wall Street are lining up to become landlords to cash-strapped Americans by bidding on pools of foreclosed properties being sold by Fannie Mae...While the current approach of selling homes one-by-one has its own high costs and is sometimes inefficient, selling properties in bulk to large investors could require Fannie Mae to sell at a big discount, leading to larger initial costs. In con artistry parlance, they call this the "reload." That's when you hit the same mark twice – typically with a second scam designed to "fix" the damage caused by the first scam. Someone robs your house, then comes by the next day and sells you a fancy alarm system, that's the reload. In this case, banks pumped up the real estate market by creating huge volumes of subprime loans, then dumped a lot of them on, among others, Fannie and Freddie, the ever-ready enthusiastic state customer. Now the loans have crashed in value, yet the GSEs (Government Sponsored Enterprises) are still out there feeding the banks money through two continuous bailouts. One, they continue to buy mortgages from the big banks giving the banks a permanent market for home loans. And secondly, they conduct these quiet bulk sales of mortgages, in which huge packets of home loans are sold to banks at a "big discount."  Banks create the loans, make money selling them off on the market at high prices, then come back and buy them again when they're low.

HARP Update: Fannie Mae updates Desktop Underwriter® (DU) -Back in October, the FHFA announced some changes to HARP to allow 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. The key to this program for the lenders was that the lender was not responsible for any of the representations and warranties associated with the original loan (this is huge for the lenders). The elimination of Reps and warrants for the original loans applies to the automated Desktop Underwriter® (DU) (see Selling Guide Announcement SEL-2011-12) According to Fannie Mae, the updates to Desktop Underwriter® were completed yesterday. Now lenders can use the automated system (and borrowers will now be able to apply for a "HARP 2.0" refinance with lenders other than the lender for their original mortgage). I expect having the automated system - with the elimination of reps and warrants - will lead to surge in refinance activity.

The man blocking America's recovery - He is the most powerful federal employee you’ve never heard of. Edward DeMarco has slowed the economic recovery with the stroke of a pen. His actions are costing taxpayers tens of billions of dollars, forcing millions of homeowners to lose their homes, and contributing to the falling housing prices that are a brake on the recovery. Not bad for an obscure “acting director” who should have departed his position long ago. Edward DeMarco heads the Federal Housing Finance Agency (FHFA). He’s a temp, in office only because — no surprise — Senate Republicans, led by Richard Shelby (Ala.), refused even to allow a vote on the man President Obama nominated for the post. When Fannie Mae and Freddie Mac — holders or guarantors of about 60 percent of housing mortgages — were bailed out, the FHFA was tasked with supervising their activities, with a mandate to minimize taxpayer losses. That gives DeMarco extraordinary power. And DeMarco is philosophically opposed to the common-sense solutions needed to deal with the housing crisis.

Wells Fargo Deals Major Setback to Administration Refinance Program - An unusual technological quirk has delayed the Administration’s signature program for refinancing mortgages, and now it may lead to it becoming significantly narrowed from the original vision. The President announced a new initiative for HARP, the government’s mass refinancing program, all the way back in October. The idea was that Fannie Mae and Freddie Mac would allow a larger eligibility for refinancing on current underwater loans that they owned or guaranteed, and as an incentive to get the servicers to do the job, they would waive “representations and warranties” claims on the loans. This means that, if the loans failed, Fannie and Freddie would not try to get the underlying banks from which they bought them to repurchase the loans back from them. This eliminated a significant liability for the banks, and the thinking was that this would accelerate refinancing for millions of borrowers.  I’ve said consistently that this is more a program for stimulus than a program for saving homes. It only affects current borrowers, for example, and refis usually don’t prevent defaults nearly as well as principal modifications. However, if you believe – and many analysts, like Laurie Goodman at Amherst Securities – that underwater borrowers represent the leading edge of problems in the mortgage market, and their precarious situations put them one bad break away from delinquency or foreclosure, then it’s a good idea to allow them to reduce their monthly payments with a refi, even if ultimately they would continue to stay in negative equity.

The Banks Win, Again - Last week was a big one for the banks. On Monday, the foreclosure settlement between the big banks and federal and state officials was filed in federal court, and it is now awaiting a judge’s all-but-certain approval. On Tuesday, the Federal Reserve announced the much-anticipated results of the latest round of bank stress tests. How did the banks do on both? Pretty well, thank you — and better than homeowners and American taxpayers. That is not only unfair, given banks’ huge culpability in the mortgage bubble and financial meltdown. It also means that homeowners and the economy still need more relief, and that the banks, without more meaningful punishment, will not be deterred from the next round of misbehavior. Under the terms of the settlement, the banks will provide $26 billion worth of relief to borrowers and aid to states for antiforeclosure efforts. In exchange, they will get immunity from government civil lawsuits for a litany of alleged abuses, including wrongful denial of loan modifications and wrongful foreclosures. That $26 billion is paltry compared with the scale of wrongdoing and ensuing damage, including 4 million homeowners who have lost their homes, 3.3 million others who are in or near foreclosure, and more than 11 million borrowers who are underwater by $700 billion.

Breaking Down the Mortgage Settlement: How Far Does $26 Billion Go? - Here’s a breakdown of key settlement numbers, showing where the money is going and how much help it will really provide for homeowners.

  • $1.4 billion: total direct payments [2] from the settlement to homeowners who were wrongfully foreclosed [3] upon between 2008 and 2011.
  • 750,000: foreclosed homeowners expected to qualify [4].
  • $2,000: estimated average payout.
  • 3.8 million: total foreclosures between 2008 and 2011.
  • 25 percent: expected increase [5] in foreclosures in 2012. That would mean about 1 million foreclosures, up from 804,000 last year, partly as a result of banks clearing a backlog held up by the settlement proceedings.
  • $3 billion: total for which banks can be credited for offering refinancing to underwater homeowners who owe more than their homes are worth. (There are questions about exactly how the credits will work and why the banks are being given incentives [6] rather than punishment.)
  • $17 billion: total from the settlement that banks can be credited for offering loan modification ($10 billion) and other forms of “consumer relief” ($7 billion) for underwater borrowers — counted separately from the refinancing incentives.
  • 11.1 million: underwater mortgages in the U.S. [7]
  • $717 billion: negative equity [8] from those underwater mortgages.
  • 3 million: estimated underwater mortgages owned or guaranteed [9]by government-controlled Fannie Mae or Freddie Mac, which are not covered [10] by the settlement.
  • 5 percent: portion of the country’s underwater mortgages that might qualify for modification under the settlement, according to a Brookings Institute estimate [11]. (Officials have put the number closer to 10 percent.)
  • $10.9 billion: Bank of America's total outlay [2] in the settlement, more than any other bank.
  • $2 billion: Bank of America's fourth-quarter 2011 profit [12].
  • $1 billion: settlement of allegations that Bank of America passed bad loans on [13] to the Federal Housing Administration to insure. A government audit [14], made public with the settlement, showed similar patterns at other banks.
  • $6 billion: amount that the FHA paid in insurance claims [15] on defaulted mortgages handled by the five banks between 2008 and 2010.

Yet Another Reason to Hate the Mortgage Settlement: The Release is Botched -- Yves Smith - Do you remember the brouhaha before the mortgage settlement was announced about the release? Recall, sports fans, as we stressed often, that this was a cash for release deal. The only motivating factor for the banks was the scope of the release. The Administration and attorneys general kept claiming the release was narrow, even as both the messaging (unintentionally) and snippets of disclosure suggested otherwise. Remember that the Administration also trumpeted that enforcement would be tough, even as Abigail Field has shown that idea to be a joke. For instance, the servicing standards allow for the astonishing concept of an acceptable error rate. Banks aren’t permitted to make errors with your checking account and ding you an accidental $10,000 and get away with it. But with people’s most important asset, their homes, servicers are allowed a certain level of reportable errors, and many of them can be serious as far as borrowers are concerned. This is one example from her post: Most plainly, the bankers can tell 2.5 million people: “Hey, you didn’t make your payment this month, your check’s short and we’re putting it in the no man’s land of a “suspense account” triggering delinquency and fees, even though you really did pay in full and have the canceled check to prove it. And guess what? No one but you cares; law enforcement won’t even consider dinging us for it. I’m struggling with the same level of disbelief I had when I first learned that banks were systematically committing forgery.

More on the Mortgage Settlement Docs: The Vague Release, the “Work Plan” to Be Named Later - I feel like I’ve covered many of the elements of the foreclosure fraud settlement documents.  See, e.g., here, here, here and here. But others have picked up the mantle and revealed more truths. I did think the release part of the document, which releases everything in the world and then goes back and names exemptions, was a little screwy. It seems like there would be less ambiguity if you named the specific things released instead. And Yves Smith not only backs me up on that, she adds that, because the exemptions are phrased so vaguely, anything state or federal regulators manage to sue over in court could get challenged: I asked a law professor who has written journal articles on matters related to the settlement, and he criticized the release, in particular, the definitions. He said that if a regulator or prosecutor tried going after any of the misdeeds in Paragraph (11) whose description included one of the types of Covered Conduct, he’d give the bank 50/50 odds of winning the argument that the activity in question was not part of the Covered Conduct. Yet another “get out of jail free” card, with the only open question whether this was Administration design or incompetence. The other part that Abigail Field digs out is that the banks and the enforcement monitor still must enter into post-settlement negotiations on a “Work Plan” for how compliance activities will be carried out. This allows defenders of the deal to say that “there will be strong enforcement” without knowing what that enforcement will be.

A Note on Issa’s Brooklyn Foreclosure Hearing, or: The Lucy and the Chocolate Factory Theory of Foreclosure Abuses - Darrell Issa held a hearing in Brooklyn titled  ”Failure to Recover: The State of Housing Markets, Mortgage Servicing Practices, and Foreclosures.”  It was filled mostly with members of the banking and regulatory community, as well as Edward Pinto of the conservative think-tank AEI.  I love the “do-tank” nature of Pinto’s testimony, which states that the best thing we can do for the housing market – currently in the middle of several intense legal and regulatory disputes over allegations of systemic fraud – is to “Start by repealing the two biggest job killers – ObamaCare and Dodd-Frank.”  Can’t find a transcript, but I want to get to something that I hear was said from several people.  Sarah Jaffe, covering the event for Alternet, wrote ”Issa made apologies for banks robo-signing (implying that they committed foreclosure fraud because they were so busy processing foreclosures they simply couldn’t keep things straight)” and Harry Bradford, covering the event for Huffington Post, wrote ”Issa…[implied] that homeowners were partly to blame for banks’ reliance on robo-signing — a practice of rushing through home loans that banks used heavily in the lead up to the foreclosure crisis.” It’s like the I Love Lucy episode where chocolate is coming down the conveyor belt too fast – of course Lucy is going to start rubber-stamping foreclosure documents without even looking at them when they are rolling in so fast.

Federal Reserve to fine eight more banks on foreclosure violations - Eight large banks face will be fined by regulators for foreclosure abuses, the Federal Reserve official said Monday. The banks -- EverBank, Goldman Sachs, HSBC North America, OneWest Bank, MetLife, PNC Financial Services Group, US Bancorp and SunTrust Banks -- face sanctions for "unsafe and unsound practices in their loan servicing and foreclosure processing," the Fed said. No fine amounts were released Monday. But the Fed believes "monetary sanctions are appropriate" for the banks, Suzanne G. Gillian, the agency's senior associate director in the Division of Consumer and Community Affairs, told a congressional hearing in New York on Monday. She did not say when the exact fines would be announced. OneWest Bank, the big Pasadena savings and loan formerly known as IndyMac Bank, declined to comment. The eight banks would join five other large ones regulated by the Fed that were fined a total of $766.5 million last month for foreclosure and servicing abuses.

Where are the Indictments? -  Let’s be clear why there’s a mortgage deal: the banks broke the law. Several laws in fact, in ways that appear criminal as well as civil. Limiting their liability is the only reason the banks did a deal.
In this post I’m going to look at what the banks could be held liable for; how much liability “their” money persuaded law enforcers to ignore will be the next post. But one important kind of peace has not been bought: criminal. So as I detail the wrong doing exposed by the deal, I highlight the crimes our law enforcers seem to allege the bankers committed. After all, a liability release isn’t simply what it says, it’s what law enforcers do with their remaining freedom to act. If crimes were committed, and indictments don’t follow, the release is much broader than its text. A close read of the complaint and the related language that precedes the releases (see Exhibits F and G) reveals:
1) broad origination fraud occurred but is weirdly not detailed in the complaint, probably for ugly, policy damaging political reasons;
2) HUD’s Office of Inspector General (and perhaps others) did a real investigation exposing apparently criminal and civil false claims and statements;
3) The United States Trustees did a real investigation documenting systemic stealing from debtors in bankruptcy and lying to the courts; and
4) the banks criminally abused our soldiers.

Lawler on FHA: Number of Seriously Delinquent SF Loans Down Slightly in February, Way Up from Year Ago - Some interesting data from economist Tom Lawler (the FHA remains a significant problem): Updated data from the FHA’s early warning system shows that the number of FHA-insured SF loans serviced by entities with a combined FHA SF servicing portfolio of almost 7.4 million loans totaled 722,030 at the end of February, down from 732,775 in January. While this report doesn’t always exactly match other FHA reports, it tracks the “official” numbers pretty closely. Here, e.g., are the reported number of seriously delinquent FHA-insured SF loans from the EWS and from the FHA’s monthly Outlook Report. Assuming the EWS numbers are reasonable estimates for February’s SDQ total, here is some historical data. In the table on the next page, the FHA insurance in force is number of loans, and is from the Monthly Report to the FHA Commissioner. These numbers differ from those in the FHA Outlook Report, for reasons unclear to me. The data on the number of SDQ loans in the Commissioner report and the Outlook report are the same save for March 2011, and I believe the Commissioner report has an incorrect number, so I used the March 2011 number from the Outlook report (aarrgh!).CR Note: Fannie and Freddie serious delinquencies are down year-over-year, but the FHA delinquencies are up from 8.94% in Feb 2011 to 9.63%.

LPS: 91,086 completed foreclosures in January 2012 - There has been some discussion on when activity would increase for completed foreclosures. Last month, LPS reported that foreclosure sales increased 29% month-over-month in January. LPS Applied Analytis was kind enough to provide me their estimates of foreclosure sales, by month, since January 2008. Note: The sequence is 1) a loan goes delinquent, 2) if it doesn't cure, after several months, the foreclosure process begins (this is called the "foreclosure inventory"), 3) then the foreclosure is completed "foreclosure sale" and becomes REO (lender Real Estate Owned), and then 4) the REO is sold. Sometimes during this process, the loan will cure or a short sale approved, and not all loans in the foreclosure inventory reach "foreclosure sales". This graph shows the number of foreclosure sales per month since January 2008 according to LPS Applied Analytics.  There was a significant decline in foreclosure sales in late 2010 due to the foreclosure process issues. There is plenty of month-to-month variability, but it appears foreclosure sales have picked up again (sales were up 29% compared to December 2011, and up 15% compared to January 2011).

The Changing Face of Foreclosures - New York Fed - The foreclosure crisis in America continues to grow, with more than 3 million homes foreclosed since 2008 and another 2 million in the process of foreclosure. President Obama, in his speech of February 2, 2012, argued for expanded refinancing opportunities for homeowners and programs to expedite the transition of foreclosed homes into rental housing. In this post, we document the changing face of foreclosures since 2006 and the transformation of the crisis from a subprime mortgage problem to a prime mortgage problem owing to the housing bust and persistent high unemployment. Recognizing this change is critical because the design of housing policies should reflect the types of homeowners who are at risk of foreclosure today rather than those who were at risk at the onset of the financial crisis.

Redistribution of Wealth, Foreclosure Style - Matthew Goldstein and Jennifer Ablan report on the latest US investment craze:  buying up large bundles of foreclosed homes from Fannie Mae and renting them out to take advantage of the hot rental market.  Randall Wray is among the critics quoted in the article who contend that, as Goldstein and Ablan put it, “the federal government is fostering a transfer of wealth of sorts by selling big pools of foreclosed homes to big fund investors and high-net-worth individuals. There’s also concern that some of the players who helped create the housing crisis will now benefit by buying foreclosed homes at a steep discount.” So essentially Wall Street benefited from the ballooning indebtedness of American households on the way up, and now on the way down they’re taking advantage of the flipside of that indebtedness, as families’ assets are seized, transferred, and rented out … likely to some of the same people who just lost their homes.  That feedback loop is galling enough.  But as Wray has pointed out, it’s also a cycle that’s been greased by foreclosure fraud.

Alternative to Foreclosure Tested - Bank of America Corp. is launching a pilot program that will allow homeowners at risk of foreclosure to hand over deeds to their houses and sign leases that will let them rent the houses back from the bank at a market rate. While the initial scope of the "Mortgage to Lease" program is small—the bank began sending letters Thursday offering leases to 1,000 homeowners in Arizona, Nevada and New York—it represents a big change in the way banks deal with borrowers who can't afford their mortgages. Until now, banks have focused the bulk of their borrower outreach on modifying mortgages, usually by reducing the monthly payments. When that doesn't work, most foreclosure alternatives require homeowners to leave their house, typically through a short sale, in which the bank approves the sale for less than the amount owed. Banks often insert clauses forbidding the new owner from renting the property back to the former owner. The new approach is unlikely to be expanded unless banks conclude that avoiding eviction reduces costs associated with taking back, maintaining and reselling properties. If a significant number of borrowers are willing and able to rent the homes, Bank of America could ultimately sell the properties to investors that agree to keep them as rentals.

Bank of America Launches Test “Mortgage to Lease” Program – Should We Be Impressed? -- Yves Smith - The Wall Street Journal and New York Times have reports on a pilot program at Bank of America to allow homeowners who are likely to default a graceful exit. The Charlotte bank will allow 1000 borrowers in New York, Arizona, and Nevada to turn in the deeds to their houses in return for a one year lease with a two one year renewal options at or below market rates. The program will be only with borrowers invited by the bank, which will target homeowners who are at least two months behind on payments but can demonstrate that they can pay the rent.  This is clearly a preferable alternative for homeowners to foreclosure. They escape the credit score damage, stress, and indignity of the foreclosure process and save moving costs. They are also spared the difficulty of finding a landlord who will accept a tenant with a tarnished payment record. It isn’t clear how the program will handle the usual rental deposit. So what’s not to like? The devil, as always, lies in the details. Even if the program turns out to be a positive experience for borrowers and the bank, it is not clear that it is a magic bullet for the foreclosure mess. The bank is conducting the pilot on loans it owns. It appears adhere the IRS rules governing REMICs, which limit leases to two years, so the hope is that this program would be rolled out to Countrywide mortgages, which were almost always securitized. However, it is hard to imagine that balance-sheet-stressed Bank of America would include properties that had bank-owned second liens on them, since the second would be a total loss. Borrowers with second liens have much higher default rates than those with first liens only, so many borrowers in need of help are likely not to be invited to participate.

Principal writedowns of the day, mortgage edition - It’s principal-writedown day today! Jesse Eisinger has uncovered a huge story: that internal analyses at both Fannie Mae and Freddie Mac show that reducing principal on troubled mortgages has a “positive net present value”. That of course directly contradicts the testimony of Frannie’s regulator, Ed DeMarco — but it’s now going to be much harder for DeMarco to maintain his position that principal reductions would never help Frannie’s finances. Meanwhile, Bank of America has launched a pilot scheme which is a variation on the theme of principal reduction. Remember that by far the most common form of principal reduction is the short sale — and it’s also the most damaging form of principal reduction, since homeowners invariably have to leave their homes when they do one. Under BofA’s new scheme, however, that’s not the case: the bank would buy the property from the homeowner, but would then immediately turn around and rent it back at a market rate. This idea is hardly a new one. It’s known under many names, including Right to Rent, and dates back at least as far as August 2007, when it was proposed by Dean Baker. So what changed? The markets did. The WSJ’s charts show how home prices have been falling even as rents have been rising:

Nevada foreclosures may soon reboot - Mortgage servicers are slowly easing into the Nevada foreclosure process again. Notices of default, the first step in the foreclosure process, plunged in October after a new law passed requiring servicers to file a copy of the deed of trust, the mortgage note and each assignment of the note. Servicers filed roughly 5,000 default notices in September, then the new law went into effect, forcing new filings down to less than 40 statewide, said Verise Campbell, deputy director of the Nevada foreclosure mediation program, at a House subcommittee hearing Thursday. But new foreclosure filings did increase to 400 in February, according to the most recent data from Campbell. And servicers are planning to reboot the process soon, she said. "Bank and beneficiary representatives have indicated in recent weeks they will soon begin filing notices of default again in Nevada after a review of their documentation and the announcement of the federal agencies and state attorneys general historical mortgage servicing settlement in February," Campbell said.

LPS: Percent of delinquent mortgage loans declined in February - LPS released their First Look report for February today. LPS reported that the percent of loans delinquent declined in February from January. However the percent of loans in the foreclosure process only declined slightly. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) declined to 7.57% from 7.97% in January. This is the lowest delinquency rate since 2008; however the percent of delinquent loans is still way above the normal rate of around 4.5% to 5%. The percent of delinquent loans peaked at 10.97%, so delinquencies have fallen a little more than halfway back to normal.  The following table shows the LPS numbers for February 2012, and also for last month (Jan 2012) and one year ago (Feb 2012).

Existing Home Sales in February: 4.59 million SAAR, 6.4 months of supply - The NAR reports: February Existing-Home Sales Slip But Up Strongly From a Year Ago Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, slipped 0.9 percent to a seasonally adjusted annual rate of 4.59 million in February from an upwardly revised 4.63 million in January [revised up from 4.57], but are 8.8 percent higher than the 4.22 million-unit level in February 2011. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory increased to 2.43 million in February from 2.33 million in January. Inventory is not seasonally adjusted, and usually inventory increases from the seasonal lows in December and January to the seasonal high in mid-summer. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.  Inventory decreased 19.3% year-over-year in February from February 2011. This is the twelfth consecutive month with a YoY decrease in inventory. Months of supply increased to 6.4 months in February, up from 6.0 months in January.

US home re-sales complete best winter in 5 years - U.S. home sales are gradually coming back. A mild winter and a stronger job market have helped boost sales ahead of the crucial spring buying season. The past two months made up the best winter for sales of previously occupied homes in five years, when the housing crisis began. And the sales pace in January was the highest since May 2010, the last month that buyers could qualify for a federal home-buying tax credit. February sales dipped only slightly to a seasonally adjusted 4.59 million, the National Association of Realtors said Wednesday. That's 13 percent higher than the sales pace last July and just below the revised 4.63 million in January. Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the lower February's numbers "should not detract from the key point, which is that sales are trending upward." The sales pace remains far below the 6 million that economists equate with healthy markets. And the number of first-time buyers, who are critical to a housing recovery, continues to lag normal levels, while foreclosures remain high.

US home Re-Sales Dip But Best Winter in 5 Years - U.S. sales of previously occupied home dipped last month but the sales pace for the winter was the best in five years. The National Association of Realtors said Wednesday that home sales fell 0.9 percent last month to a seasonally adjusted annual rate of 4.59 million. That’s down from a revised 4.63 million sold in January — the highest level since May 2010. The last three months have been the best for winter sales in five years. A mild winter and a stronger job market have helped boost sales ahead of the all-important spring buying season. Even with the gains, sales remain below the 6 million that economists equate with healthy markets. And the makeup of those sales still signals a troubled market. Sales among first-time buyers, who are critical to a housing recovery, fell slightly to 32 percent of all purchases. That’s down from 33 percent in January. In healthy markets, first-time buyers make up at least 40 percent.And homes at risk of foreclosure made up 34 percent of sales, down only slightly from 35 percent in January. In more stable markets, foreclosures make up less than 10 percent of sales.

Existing Home Sales: Inventory and NSA Sales Graph - The NAR reported inventory increased seasonally to 2.43 million in February. This is down 19.3% from February 2011, and up 4% from the inventory level in February 2005 (mid-2005 was when inventory started increasing sharply). This decline in inventory has been a significant story over the last year. There are several possible reasons for the decline:

  • • The NAR reports active listings, and although there is some variability across the country in what is considered active, most "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time .
  • • There are probably a large number of sellers "waiting for a better market", and we could call this pent-up supply.
  • • There is a seasonal pattern for inventory, and usually December and January have the lowest inventory levels for the year. Although there is some variability, usually inventory increases about 10% to 15% from January to mid-summer. That would put inventory at around 2.55 to 2.7 million by July (up from 2.33 million in January).
  • • The number of completed foreclosures declined in 2011 and are expected to increase in 2012. This will probably lead to more REO (lender Real Estate Owned) listed for sale and some increase in the level of inventory.

Housing Is Still ‘Shadowed’ by Excess Supply - Home demand took a step forward in February. But oversupply remains a problem. Sales of existing homes dipped in February to an annualized rate of 4.59 million. But the drop reflected an upward revision to January sales, rather than a sign of weakness. Compared to a year ago, resales were up 8.8%. The uptrend in sales over time has whittled down the number of homes for sale. According to the National Association of Realtors, the inventory of homes for sale is equal to a 6.4 months’ supply at the current sales pace, an improvement from 8.6 months a year ago. But that doesn’t mean housing has overcome its oversupply problem. The market still faces a shadow inventory of millions of homes whose owners will put them on the market once conditions look more stable. Mortgage information tracker CoreLogic calculates homes that are seriously delinquent, in foreclosure or already owned by lenders constituted a pending inventory of 1.6 million units in January. What’s disturbing is that little headway in the number of homes just waiting on the sidelines. Although about 3 million distressed sales have taken place over the past three years, “the shadow inventory in January 2012 is at the same level as in January 2009,” the CoreLogic report says.

CoreLogic: Existing Home Shadow Inventory remains at 1.6 million units - Note: there are different measures of "shadow" inventory. CoreLogic tries to add up the number of properties that are seriously delinquent, in the foreclosure process, and already REO (lender Real Estate Owned) that are NOT currently listed for sale. Obviously if a house is listed for sale, it is already included in the "visible supply" and cannot be counted as shadow inventory. From CoreLogic: CoreLogic® Reports Shadow Inventory as of January 2012 Remains Flat CoreLogic ... reported today that the current residential shadow inventory as of January 2012 was 1.6 million units (6-months’ supply), approximately the same level reported in October 2011. On a year-over-year basis, shadow inventory was down from January 2011, when it stood at 1.8 million units, or 8-months’ supply. Currently, the flow of new seriously delinquent (90 days or more) loans into the shadow inventory has been offset by the roughly equal flow of distressed sales (short and real estate owned). “Almost half of the shadow inventory is not yet in the foreclosure process,” said Mark Fleming, chief economist for CoreLogic. “Shadow inventory also remains concentrated in states impacted by sharp price declines and states with long foreclosure timelines.” Of the 1.6 million properties currently in the shadow inventory, 800,000 units are seriously delinquent (3.1-months’ supply), 410,000 are in some stage of foreclosure (1.6-months’ supply) and 400,000 are already in REO (1.6-months’ supply). This graph from CoreLogic shows the breakdown of "shadow inventory" by category.

Housing: "Signs of Life" - A couple of excerpts from an article by Neil Shah and Nick Timiraos at the WSJ: Housing Shows Signs of Life For the first time since 2005, investment in residential real-estate, including home building and renovation, has contributed to U.S. economic output for the past three quarters. ..."Housing bottoming is going to surprise a lot of people," said Kenneth Rosen, a housing economist at the University of California, Berkeley. "Housing was pulling us down consistently, quarter after quarter, for years. That was really over in 2011." Home-purchase contracts in January and February are up about 20% from a year earlier for HomeServices, a subsidiary of Berkshire Hathaway Inc., the firm now expects sales growth of around 10% this year, upgrading its forecast last fall for flat sales levels in 2012.A few comments:
• There are two bottoms for housing: 1) for residential investment, new home sales and housing starts, and 2) for house prices. (see my post on February on Housing: The Two Bottoms).

• On prices (the 2nd bottom), I'll be looking closely at year-over-year changes in various price indexes. If we are at the housing price bottom on a national basis, then year-over-year price changes should start to get smaller soon - and eventually turn positive in early 2013.
• Professor Rosen was a "housing bear" back at the peak. See these comments from Rosen in February 2006: Barron's: Is It Crunch Time for Housing?

Economists see 10% gain in U.S. home prices - I’m trying real hard to keep a long-term perspective when it comes to statistical real estate trends. So my pledge to ignore short-term moves — read it here — was tested when the folks at Zillow releases their periodic survey of economists across the nation to see their outlook for housing values.  I found some interesting data within a Zillow report entitled “Economists Temper Housing Recovery Expectations” where these real estate trackers chose to look at a three-month dip in economists’ housing expectations. Zillow’s poll of 104 economists found these projected house gains vs. what was the concensus projection in the same survey methodology back in December:

  • 2012 — March projected drop of 0.72% vs. decline of 0.18% seen three months ago.
  • 2013 — Now see  1.39% gain vs. 1.75% three months ago.
  • 2014 — Now up 2.55% vs. 2.71% three months ago.
  • 2015 — Now up 3.18% vs. 3.23% three months ago.
  • 2016 — Up 3.32%, same as three months ago.

Home Prices Miss Large On 9th Consecutive Downward Revision - It will come as no surprise to many that the warm-weather-induced ebullience and renaissance in the US housing market is perhaps floundering as all that demand was dragged forward. Today's notable miss in the FHFA Home Price Index (at unch vs an expectation of +0.3%) is ugly but the huge downward revision from +0.7% to merely +0.1% in the previous month is now the ninth consecutive notable downward revision.Add to that the fact that FreddieMac just reported mortgage rate cracking over 4% (from 3.92% to 4.08%) and the ugly data on MBA applications and...well at least we're decoupling.

Merrill House prices"bottoming now", FHFA House price index - Merill Lynch put out a research note this morning: Home price forecast update We have ... updated our home price model and believe that prices are bottoming now. However, we continue to believe the recovery will not begin in earnest until 2014. ... we expect roughly flat home prices this year and next with modest growth in 2014. Merrill had expected a further decline, but now they expect prices to be mostly flat for the next two years.  From the FHFA: FHFA House Price Index Unchanged in January U.S. house prices were unchanged on a seasonally adjusted basis from December to January, according to the Federal Housing Finance Agency’s monthly House Price Index. The previously reported 0.7 percent increase in December was revised downward to reflect a 0.1 percent increase. For the 12 months ending in January, U.S. prices fell 0.8 percent

Other House Price Indexes: FNC and RadarLogic - As I noted yesterday one of indicators I'm looking at is the year-over-year change in house prices. If we are at the house price bottom on a national basis, then year-over-year price changes should start to get smaller soon - and eventually turn positive in early 2013. In addition to Case-Shiller, CoreLogic, and LPS, I'm also watching the FNC and RadarLogic indexes.  The first graph is based on the FNC index (four composites) through January 2012. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals. The indexes are generally showing less of a year-over-year decline in January (I think prices will fall seasonally through the March report). Also RadarLogic released their January report today.  According to the January 2012 RPX Monthly Housing Market Report released today by Radar Logic Incorporated, the RPX Composite price, which tracks home prices in 25 major US metropolitan areas, declined 5.42 percent during the year ending January 19 to $169.75 per square foot. The last time the RPX Composite was this low was in July 2002. This graph shows the year-over-year decline for the RadarLogic composite index. From RadarLogic:  While the slowing rate of price decline is promising, it is too early to say yet whether housing prices will find a bottom soon. After all, we saw price declines slow in 2009, only to see them start accelerating again in 2010. The third graph shows the RPX futures for house prices.

Zillow's forecast for Case-Shiller House Price index in January - Zillow Forecast: January Case-Shiller Composite-20 Expected to Show 3.7% Decline from One Year Ago On Tuesday, March 27th, the Case-Shiller Composite Home Price Indices for January will be released. Zillow predicts that both the 20-City and the 10-City Composite Home Price Indices (non-seasonally adjusted [NSA]) will decline by 3.7 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from December to January will be zero percent and -0.1 percent for the 20 and 10-City Composite Home Price Index (SA), respectively. Zillow's forecasts for Case-Shiller have been pretty close, and I expect Case-Shiller will report house prices at a new post-bubble low in January for the Not Seasonally Adjusted (NSA) indexes. The seasonally adjusted indexes will probably be close to the level reported in December.  One of the keys this year will be to watch the year-over-year change in the various house price indexes. The composite 10 and 20 indexes declined 3.9% and 4.0% respectively in December, after declining 3.8% in November. Zillow is forecasting a slightly smaller year-over-year decline in January.

Vital Signs: Climbing Mortgage Rates - Mortgage rates are rising. The rate on a 30-year fixed mortgage has increased to 4.07%, up from 3.85% on March 12. Fueling the increase: a jump in Treasury yields driven by signs the economy is picking up as well as worries the Federal Reserve won’t take further steps to lower interest rates. While rising, rates remain below the 4.79% level from a year ago.

Housing Starts decline slightly in February - From the Census Bureau: Permits, Starts and Completions: Privately-owned housing starts in February were at a seasonally adjusted annual rate of 698,000. This is 1.1 percent (±15.9%)* below the revised January estimate of 706,000 (revised up from 699,000), but is 34.7 percent(±16.7%) above the February 2011 rate of 518,000. Privately-owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 717,000. This is 5.1 percent (±1.2%) above the revised January rate of 682,000 and is 34.3 percent (±3.1%) above the February 2011 estimate of 534,000.  Note that January was revised up from 699 thousand.  Single-family starts declined 9.9% to 457 thousand in February. Permits moved higher, so single family starts will probably increase in March. The second graph shows total and single unit starts since 1968.  This shows the huge collapse following the housing bubble, and that total housing starts have been increasing lately after sideways for about two years and a half years. Total starts are up 34.7% from a year ago.

Housing's Uneven Recovery In February - Is the housing market recovering? Yes, but it’s slow and uneven. That’s the message in today’s update for February housing starts and newly issued building permits. Residential construction continues to revive, and that’s a positive for the wider economy, although the revival is modest.  New building permits last month rose to a seasonally adjusted annual rate of 717,000--another post-recession high and a handsome jump over January’s rate of 682,000. The advancing permit levels imply stronger housing activity in the months ahead. New housing starts, however, slipped a bit to a seasonally adjusted annual rate of 698,000 in February, down from January’s upwardly revised 706,000. A sign of weakness? Maybe, but looking at the trend suggests otherwise. Consider the recent history for permits and starts, as shown in the chart below. We can debate the latest data points and try to draw conclusions, but it’s the trend that’s important and by that standard it’s hard to dismiss the recent gains for both starts and permits as statistical noise. Indeed, permits have broken into new post-recession high territory and starts, while down slightly in the latest reading, are holding their ground at just under the highest levels since 2008.

No Housing Recovery On This Chart Either - Minutes ago, the US Census Bureau released the February Housing Starts data, which printing at 698K was a mild disappointment, as it was below expectations of 700K, and down from a revised 706K. However, as usual, the headline gives only half the story. Here is the reality: in February, only 48.1k homes were started (Not Seasonally Adjusted). This compares to 46.5K in January. However, of this number Single Unit houses, those which are relevant for actual housing demand, and not the 5+ units more relevant for rental purposes, declined from 33.0K to 31.5K. In fact, the 31.5K number was the weakest since December's 31.0K, and then all the way back to February 26.6K. What offset this? The surge in multi-family housing units, as usual, which rose from 12.3K to 16.1K. Recall that lately there has been a shift from owning to renting, and as such builders are focusing on this. All of this is summarized in the SAAR based (Seasonally Adjusted) chart below. It gets worse: looking at actual completions, far more important in this New Normal economy, where everyone is willing to take credit for a hole in the ground as "new housing" what really matters is the rate of completions. And in January, it was a meager 28.6K, a tiny rise from January, and lowest than any number in 2011, except for last February. Sorry - there is no housing bottom. If anything, true housing continues to creep along the bottom as can be seen in the chart below.

Housing starts disappoint: what else is new? - The housing starts report was a bit of a bust but not as bad as the headline suggests. Starts came in around their preliminary January level which was revised up leaving a bigger drop in this month's preliminary reading. In terms of momentum three-month growth rates are still positive except for 2-4 unit starts and the NE ans West regions show declines over three-months. Its a mixed bag. We can more broadly gauge how the sector is doing by seeing where the data lie relative to cycle highs and do tell an interesting story: Total starts are down 68% from their cycle high and up 35% from their cycle low. The five units segment of the market is doing better than other unit types as it is up 340% ( yes, not a typo...) from its cycle low and is only off by 46% from its cycle high. The long-awaited recovery in single family units is still not really in gear as that sector is only 18% above its cycle low and 75% down from its cycle high- miserable metrics

US Builders Start Fewer Homes But Permits Jump  — U.S. builders started work on slightly fewer homes in February. But they began laying the ground work for a turnaround later this year by requesting the most building permits in any month since October 2008. The Commerce Department said Tuesday that builders broke ground on a seasonally adjusted annual rate of 698,000 homes last month. That’s down 1.1 percent from January’s revised level of 706,000, also the highest since October 2008. Building permits, a gauge of future construction, jumped 5.1 percent last month to 717,000. Two-thirds are for single-family homes, which are critical to a housing recovery. It can take up to 12 months for a builder to obtain a permit and construct a single-family home. Ian Shepherdson, chief U.S. economist at High Frequency Economics, said he expects further gains over the next few months, based on a measure of builder confidence that has increased in five of the past six months.

Starts and Completions: Multi-family and Single Family - For a couple of years I've been posting a graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment). This month (second graph) I've added a graph for single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer. These graphs use a 12 month rolling total for NSA starts and completions.The blue line is for multifamily starts and the red line is for multifamily completions.  The rolling 12 month total for starts (blue line) has been increasing since mid-2010. And completions (red line) are now following starts up.  It is important to emphasize that even with a strong increase in multi-family construction, it is 1) from a very low level, and 2) multi-family is a small part of residential investment (RI). In February, the rolling 12 month total for starts is above completions for the first time since May 2006. This usually only happens at a bottom, although the recovery for single family starts will probably remain sluggish.

Vital Signs: Home Construction - Builders broke ground on fewer homes in February than in January, but overall housing starts are on the rise. Residential construction fell 1.1% last month from January to a seasonally adjusted annual rate of 698,000 starts. January’s rate was revised up to 706,000 — the best reading since October 2008. Permits for new construction, an indication of future activity, climbed to their highest level since October 2008.

Builders ready for home construction rebound - Home builders are getting ready for a stronger construction season, filing for the most building permits in more than three years, in another sign of recovery in the long-battered housing market. The government reported builders filed for permits at an seasonally adjusted annual rate of 717,000 in February, the strongest reading since October 2008, which was the month after the meltdown in financial markets. It marked a 5.1% rise from January and a 34.3% increase from year-earlier levels.  Actual starts of new homes slipped slightly from a very strong start to the building season in January, down 1.1% to 698,000. Still, that was 35% ahead of starts in February 2011. The starts are more affected by weather factors. But the permits are generally seen as an indication of builders' confidence in the market and the demand they are seeing. Mortgage rates near record lows and an improving jobs market both are feeding stronger demand. The construction and permitting of apartments and condos continue to be particularly strong. Permits for buildings with more than one housing unit rose 61% from prior-year levels, and starts of buildings with five or more units jumped 29% from January and were more than double year-earlier levels.

New Home Sales decline in February to 313,000 Annual Rate -The Census Bureau reports New Home Sales in February were at a seasonally adjusted annual rate (SAAR) of 313 thousand. This was down from a revised 318 thousand in January (revised down from 321 thousand). November and December of last year were revised up. The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Sales of new single-family houses in February 2012 were at a seasonally adjusted annual rate of 313,000 ... This is 1.6 percent (±23.9%)* below the revised January rate of 318,000, but is 11.4 percent (±17.8%)* above the February 2011 estimate of 281,000. The second graph shows New Home Months of Supply. Months of supply increased to 5.8 in February from 5.7 in January.  The all time record was 12.1 months of supply in January 2009.Starting in 1973 the Census Bureau broke inventory down into three categories: Not Started, Under Construction, and Completed. This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale was at 54,000 units in February. The combined total of completed and under construction is at the lowest level since this series started. The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In February 2012 (red column), 25 thousand new homes were sold (NSA). Last year only 22 thousand homes were sold in February (although 2012 is a leap year). This was the second weakest February since this data has been tracked - the third weakest was February 2010 with 27 thousand homes sold. The high for February was 109 thousand in 2005.

New Home Sales Make It 12 Out Of 14 Economic Misses - Following last night's post on the destruction of the positive trend in macro data (as expectations once again extrapolated to infinity have missed miserably), New Home Sales made it 12 of 14 this morning as they missed horribly. Against an expectation of a +1.3% gain, new home sales fell 1.6% MoM but what is even more shocking (and surely in retrospect would have caused the market to subside aggressively) is the massive revision of the previous month. From a -0.9% 'modest' fall, January's data was revised to a massive 5.4% drop MoM - the largest drop in 13 months! This is the largest downward revision since March 2009. Perhaps KB Home is not the outlier and the 80% rally in the Homebuilder ETF was a little overdone, eh? 13 month lows in January for the new home sales MoM change and the largest downward 'reality' revision since March 2009...

Breaking Down New Home Sales - Mesirow Financial Chief Economist Diane Swonk talks with Jim Chesko about the 1.6% decline in new home sales last month to a seasonally adjusted annual rate of 313,000, and about the possibility the Federal Reserve policy makers will decide on another round of quantitative easing to stimulate economic growth. Click here to listen to the podcast.

Home Sales: Distressing Gap - Here is an update to the "distressing gap" graph that shows existing home sales (left axis) and new home sales (right axis) through February. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.  Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders can't compete with the low prices of all the foreclosed properties.  I expect this gap to eventually close once the number of distressed sales starts to decline. Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different. The second graph shows the same information but as a ratio of existing sales to new home sales.The ratio was fairly stable for years until the market was flooded with distressed sales.

Housing Start Numbers May Soon Look Poor - The figures on housing starts may soon start looking disappointing — for reasons that have little to do with the economy and a lot to do with the weather. The report on February housing starts, issued Tuesday, appears to be mixed. New permits are rising, but the seasonally adjusted level of starts dipped a bit from January to February. This has been a very unusual winter. From December through February, the government estimates there were 137,300 units started, up 26 percent from the comparable period last year. We haven’t seen a year-over-year increase that big for a three-month period in nearly 20 years. Those figures include single-family and apartment units. Starts of single-family homes are up 19 percent, also highly unusual. The big question is how much of that is the economy and how much the weather. This was a very mild winter in most of the country, and it seems reasonable to think that units that would have been started in the spring were started earlier. The seasonal adjustments magnify the gain, because normally there are not many units started in the winter. If you believe the adjustments, these have been the three best months since 2008. With spring, however, the comparisons are likely to be disappointing, because units started in January will not be started in April.

Fannie: Job Market, Income Trends May Help Housing Market Turn Corner - Improvements in U.S. job market trends and an upward revision in income growth are important factors that could help the housing market turn a corner, though rising gasoline prices may pose a hurdle, according to Fannie Mae. Fannie Mae Chief Economist Doug Duncan cited the company’s February survey, in which the consumer outlook for U.S. home prices improved modestly and extended an upward trend. Consumer confidence has grown 19% since November, Duncan said. Fannie also said that revised economic data for the fourth-quarter indicated stronger underlying demand, though growing inventories accounted for about two-thirds of the increase.During the last three month of 2011, gross domestic product, the broadest measure of all goods and services produced in the economy, expanded at an inflation-adjusted annual rate of 3%, according to the Commerce Department. An earlier estimate had pegged growth at 2.8%.

How Housing Prices Burden the Economy --Matthew Yglesias, the Moneybox columnist for Slate, is the author of “The Rent Is Too Damn High,” a short new electronic book. The title refers to an obscure political party in New York: The Rent Is Too Damn High Party. In the book, Mr. Yglesias argues that high rent — by which he means both rents and purchase prices — is a major drag on the American economy and society. “The real value of Yglesias’s book,” John Mangin wrote at The Washington Monthly’s Web site, “lies in its explanatory power, and in its potential to recast an important issue.” High rent, Mr. Yglesias writes, is “bad for the environment; it promotes long commutes, traffic jams, misery and smog. What’s more, high rent is not a fact of nature. It’s the result of bad public policy, and it deserves to be taken seriously as one of the critical problems we face.” Below is a transcript of my recent e-mail exchange with him.

Mortgages for Drilling Properties May Face Hurdle - The Department of Agriculture is considering requiring an extensive environmental review before issuing mortgages to people who have leased their land for oil and gas drilling. Last year more than 140,000 families, many of them with low incomes and living in rural areas, received roughly $18 billion in loans or loan guarantees from the department under the Rural Housing Service program. Much of the money went to residents in states that have seen the biggest growth in drilling in recent years, including Pennsylvania, Texas and Louisiana. The program is popular because it generally requires no down payment. As its financing has grown and credit markets have tightened in recent years, the program’s loans have roughly quadrupled since 2004.

NAHB Builder Confidence index unchanged in March - The National Association of Home Builders (NAHB) reports the housing market index (HMI) was unchanged in March at 28 (February was revised dwon from 29). Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Unchanged in March Builder confidence in the market for newly built, single-family homes was unchanged in March from a revised level of 28 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. This means that following five consecutive months of gains, the HMI is now holding at its highest level since June of 2007.This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the March release for the HMI and the January data for starts (February housing starts will be released tomorrow). Both confidence and housing starts had been moving sideways at a very depressed level for several years - but confidence has been moving up recently, and it appears starts are increasing a little too.

Manufactured Home Shipments up 33% year-over-year in January - This is something I rarely mention, since manufactured homes is a very small category of residential investment (the largest categories are new single family homes, home improvement, brokers' commissions, and new multifamily). However it appears activity for manufactured homes is coming off the bottom too. The Census Bureau reported that shipments in January were at a 60 thousand Seasonally Adjusted Annual Rate (SAAR), up 33% from 45 thousand (SAAR) in January 2011. This graph shows shipments of manufactured homes. The spike in 2005 was related to Hurricane Katrina.There were a record low number of manufactured home placements in 2011 (46 thousand) and it appears that this category will increase in 2012. Of course this is a very small part of the economy.

Residential Remodeling Index increases 11% year-over-year in January - From BuildFaxResidential remodels authorized by building permits in the United States in January were at a seasonally-adjusted annual rate of 2,998,000. This is 13 percent above the revised December rate of 2,653,000 and is 11 percent above the January 2011 estimate of 2,705,000. “Residential remodeling this winter is as strong as it has been in more than five years. We expect residential remodeling to continue to grow throughout 2012,”This graph shows the Remodeling Index since January 2000 on a seasonally adjusted basis. Earlier release were not seasonally adjusted. Remodeling is below the peak levels of the housing boom - with all the equity extraction - but up 29% from the bottom in May 2009.Note: Permits are not adjusted by value, so this doesn't mean there is more money being spent, just more permit activity. Also some smaller remodeling projects are done without permits and the index will miss that activity.

Chart of the day: What’s driving US inflation? - The Consumer Price Index for All Urban Consumers (CPI-U) in the U.S. increased 2.9 percent in February before seasonal adjustment. These BLS charts and table illustrate what is driving the increase:

Gasoline prices rise for 9th straight day - Gasoline prices in the U.S. rose on Sunday for a ninth straight day, continuing a climb back toward the record highs set in 2008. The national average price for a gallon of gas rose to $3.838, according to motorist group AAA’s fuel gauge report. That’s up from about $3.53 a month ago. Average prices are above or near $4 a gallon in California, Nevada, Oregon, Washington, New York, and six other states, according to CNN. The nation’s record high of $4.11 was set in July 2008, the news service said. Prices at the pump have increased along with rising crude-oil futures, which are up 8.4% this year, boosted by an improving economic outlook in the U.S. and escalating tensions with Iran, among the world’s top five oil producers. See story on oil futures.

No Relief in Sight at Pump - U.S. gasoline prices jumped 6% in February, and market experts predict they will climb higher because critical refining operations in the Northeast are shutting down. From New York to Philadelphia, refineries that turn oil into gasoline have been idled or shut permanently because their owners are losing money on them. Sunoco Inc. is expected to close the region's largest refinery in July, taking another 335,000 barrels per day in production capacity off the market. The East Coast refineries are getting squeezed by the soaring cost of crude oil, the major component in gasoline. The cost of oil has jumped in the past year due to global economic growth and rising tensions between Western nations and Iran, a major producer. Refineries haven't been able to increase their own prices enough to compensate. The government said Friday that the increase in gas prices had contributed to a 0.4% overall increase in consumer prices in February. Prices at the pump averaged $3.831 a gallon on Friday, according to the AAA, formerly known as the American Automobile Association. Rising gas prices pose a risk to the economic recovery, which is showing signs of gaining steam after faltering last year.

Economy Hasn't Slipped on Oil Prices—Yet -- Rising oil prices haven't stalled the U.S. economic recovery. But that doesn't mean they won't in the months ahead. High oil prices can ripple through an economy, sapping consumer confidence, eating into spending, driving up prices and ultimately slowing hiring and investment. The good news is that hasn't happened yet. "Consumers have yet to get really rattled," On Friday, a Thomson-Reuters University of Michigan report noted a slight decline in consumer sentiment from its previous reading, but the index remains above levels recorded at the end of last year when prices began to rise. Of the 50 economists who responded to the Wall Street Journal's monthly forecasting survey, 37—just shy of three quarters—said oil prices haven't yet had a significant impact on growth. But when it comes to the future, there's much less consensus. Asked what price would have a meaningful impact, economists gave answers ranging from $115 per barrel, only modestly above their current level, to $250 per barrel, a price that implies a near-catastrophic supply disruption.

Weekly Gasoline Update: Regular Up 64 Cents in 13 Weeks - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump, both regular and premium, increased another 4 cents over the past week, continuing their steady increase since mid-December. Regular is up 64 cents and premium 61 cents from the interim weekly low in the December 19th EIA report. The WTIC end-of-day spot price is 5% off its interim high set on April 29th of last year. As I write this, shows seven states plus DC with the average price of gasoline above $4 and another four states with the price above $3.90. The next chart is an overlay of WTIC, Brent Crude and unleaded gasoline (GASO). During much of last year there was a growing spread between WTIC and Brent Crude, but over the last quarter that spread has shrunk considerably.

Gas prices near all-time high  — The national average price for a gallon of gasoline rose for the 10th straight day on Monday to $3.842. That is now only about 6.6% below the record high of $4.114 from July 2008. The average price rose by four-tenths of a penny, according to the survey of gas stations conducted for the motorist group AAA. Gas prices are now up more than 17% this year. The nationwide average was $3.54 a gallon a month ago and $3.76 a gallon on March 9 — the day that prices started rising again after a few days of slight declines. Gasoline averages more than $4 a gallon in seven states: Alaska, California, Connecticut, Hawaii, Illinois, New York and Washington. Gas prices are also above $4 a gallon in the District of Columbia, according to AAA. At more than $4.48 a gallon, Hawaii ranks as the nation’s high. Prices are less than a dime away from $4 a gallon in Michigan, Nevada, Oregon and Wisconsin.

$4 Gas Average Is Here - Based on Bloomberg's US Average Gasoline price index, we are now back above $4 per gallon for the first time since May 2011. We also note that the average price for a gallon of gas across the EU is inching ever closer to the $10 mark.

Price of Gas Matters to Voters, but Doesn’t Seem to Sway Votes - There may be no number stamped more frequently on the American landscape than the price of gas. And as the average price has climbed toward $4 a gallon nationwide, it has generated abundant chatter about the threat to the economic recovery, and to incumbent politicians. Republicans have seized on the issue to attack President Obama’s management of the economy. The president has responded with speeches defending his energy policies, including increased domestic oil production. But there is surprisingly little evidence that gas prices deserve an outsize reputation for economic and political influence. Studies suggest that most voters agree with Ms. Hawks: they are angry about gas prices, but other factors, like the economy and the personal qualities of candidates, ultimately determine their votes.

The impact of rising gas prices isn't as bad as you think - Gas prices are once again dominating the national debate. But despite rhetoric, high gas prices aren't hurting as much as they used to. In 1981, when oil prices spiked following the Iranian Revolution, gasoline represented nearly 5% of the nation's spending, according to the Bureau of Economic Analysis. In 2011, only 3.7% of spending went to gas, even though prices averaged at their highest level ever that year. In addition to spending less, we're driving more than ever -- 90% more than compared to the early '80s, according to the Federal Highway Administration. This isn't to say high gas prices don't hurt -- they do, especially for people living paycheck-to-paycheck or those that drive a lot. But for the average American household, which has an income of over $62,000 a year, the increase in gas prices represents a relatively small portion of total spending. For example, in 2008 gas prices were all over the news when they hit their all time high. But in 2010 when prices fell people barely mentioned them. Yet spending on gas totaled only $12 more per week in 2008 than in 2010, according to numbers provided by the Bureau of Labor Statistics. That $12 per week is roughly the same amount that BLS figures show people spent on "pets, toys, hobbies and playground equipment."

Visualizing the Actual Price of Gasoline Across the U.S. - We've been playing around with Google's Fusion Tables data visualization tools, which have been improved since our last experience in test driving them, and in doing so, we've created three interactive maps showing the price of gasoline around the United States.  First up, using GasBuddy's list of average gasoline prices by state, our map showing the average price a motorist can expect to pay for a gallon of gas as of 18 March 2012: Next, here is our map showing the average combined federal, state and local excise taxes per gallon for each state in the U.S. as of 1 January 2012, as per the American Petroleum Institute:  Our final chart shows the actual average price of a gallon of gas per state, removing the increases in cost imposed by federal, state and local government taxes throughout the United States: You might be pretty surprised to see that the price of a gallon of gasoline in Montana is the lowest in the United States, followed closely by Wyoming and Colorado, which is all the more remarkable because only Wyoming is ranked as an oil producing state. There is a big reason for this observed pattern, which we can illustrate using the following map of major crude oil pipelines in North America from 2001

Highest Price Ever of Gasoline in March; State-by-State Gas Price and Gas Tax Comparison - An ABC consumer report shows Highest Gas Price Recorded in March The average price of a gallon of regular is now $3.87, the highest recorded price in March. The average price is up nearly 4 cents from a week ago, and over 30 cents from a year ago, according to the Department of Energy, as more drivers face gas prices of $4 a gallon or more across the country. Last week, the average gas price was $3.83 a gallon, the previous record according to data going back to 1990. The West Coast was once again the most expensive region with an average gas price of $4.23, up almost 2 cents from last week, with an increase of over 37 cents from a year ago. The least expensive was the Rocky Mountain region with $3.62 a gallon. That region had the highest increase from last week, 14 cents, while the average price there climbed almost 24 cents from a year ago. The AAA Fuel Gage Report by the American Automobile Association tracks gasoline national averages including state-by state comparisons. Site is updated daily. Map above shows prices as of March 20, 2012.

Why do gasoline prices differ across U.S. states? (5 maps) Gasoline prices differ substantially across different parts of the United States. For example, California motorists pay 86 cents/gallon more than the folks in Wyoming. Why is that? The biggest single factor is taxes. The tax on a gallon of gasoline in Illinois is 25 cents higher than in Wyoming, while the California tax is 35 cents higher. But that still leaves 45 cents of the Illinois premium and 51 cents of the California premium unexplained. Political Calculations has created a map of average gasoline prices once you subtract out taxes. (His original map, like that from GasBuddy above, also has a nice mouse-over feature if you want to see more details). Another minor factor in the price differential is differences in the gasoline itself. Motorists in California, for example, are required to use a higher-quality fuel in order to help limit air pollution. A more important factor is differences in the cost of crude oil available to refineries in different parts of the country. For example, sweet crude in Louisiana is currently fetching $125 a barrel, or $27 more than its counterpart in Wyoming. If the refined product market in Wyoming were completely separate from that in the rest of the country, we might then expect gasoline in Wyoming to be 68 cents/gallon cheaper than on the coasts as a result of differences in the cost of crude alone.

Gas Prices Expected To Continue Rising Through Mid-May — An expert says just as the Chicago-area’s shattering weather records, we could soon set less pleasant records – the highest gas prices. As WBBM Newsradio’s Regine Schlesinger reports, Patrick DeHaan, a senior analyst with in Chicago, says with an average of $4.37 a gallon, the Chicago-area now has the fifth highest gas prices, behind only three California cities and Honolulu.DeHaan says Chicago area prices got off to a slower start this winter because of an oversupply of the winter blend.

Unhappy Public Not Sure Who To Blame For High Gas - From all corners of the country, Americans are irritated these days by record-high fuel prices that have soared above $4 a gallon in some states and could top $5 by summer. And the cost is becoming a political issue just as the presidential campaign kicks into high gear.  Some blame President Barack Obama. Some just cite "the government," while others believe it's the work of big, greedy oil companies. No matter who is responsible, almost everyone seems to want the government to do something, even if people aren't sure what, exactly, it should or can do.  A Gallup poll this month found 85 percent of U.S. adults believe the president and Congress "should take immediate actions to try to control the rising price of gas." An Associated Press-GfK poll last month showed 71 percent believe gas prices are a "very" or "extremely" important matter.

DOT: Vehicle Miles Driven increased 1.6% in January - The Department of Transportation (DOT) reported:Travel on all roads and streets changed by +1.6% (3.5 billion vehicle miles) for January 2012 as compared with January 2011. Travel for the month is estimated to be 224.8 billion vehicle miles. The following graph shows the rolling 12 month total vehicle miles driven. Even with a small year-over-year increase in December, the rolling 12 month total is mostly moving sideways. In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months. Currently miles driven has been below the previous peak for 50 months - and still counting!  The second graph shows the year-over-year change from the same month in the previous year.  This is the second consecutive month with a year-over-year increase in miles driven - for the first time since 2010. Looking back, gasoline prices (regular) were around $3.06 per gallon in January 2011, and averaged $3.33 per gallon this year. Even though prices are up sharply over the last couple of months, prices also increased quickly last year in March and April - so we might not see a year-over-year decline in miles driven in the coming months.

Asleep At The Wheel - Americans have an illogical love affair with their vehicles. There are 209 million licensed drivers in the U.S. and 260 million vehicles. The U.S. has a higher number of motor vehicles per capita than every country in the world at 845 per 1,000 people. Germany has 540; Japan has 593; Britain has 525; and China has 37. The population of the United States has risen from 203 million in 1970 to 311 million today, an increase of 108 million in 42 years. Over this same time frame, the number of motor vehicles on our crumbling highways has grown by 150 million. This might explain why a country that has 4.5% of the world’s population consumes 22% of the world’s daily oil supply. Automobiles have been a vital component in the financial Ponzi scheme that has passed for our economic system over the last thirty years. For most of the past thirty years annual vehicle sales have ranged between 15 million and 20 million, with only occasional drops below that level during recessions. They actually surged during the 2001-2002 recession as Americans dutifully obeyed their moron President and bought millions of monster SUVs, Hummers, and Silverado pickups with 0% financing from GM to defeat terrorism. Alan Greenspan provided the fuel, with ridiculously low interest rates. The Madison Avenue media maggots provided the transmission fluid by convincing millions of willfully ignorant Americans to buy or lease vehicles they couldn’t afford. And the financially clueless dupes pushed the pedal to the metal, until everyone went off the cliff in 2008.

Automakers see three-cylinder engines as the next big thing - Imagine a car that gets more than 40 miles per gallon in everyday traffic and 50 on the highway — and it isn't an expensive hybrid and it doesn't require special fuel.Get ready for a new generation of cars equipped with surprisingly powerful three-cylinder engines that, according to early reviews out of Europe, have both the zip and zoom Americans expect in the four-cylinder compact sedans they buy today. "This engine is a game-changer," Steve Cropley of Autocar magazine, a British publication, said of the three-cylinder Ford Focus that just went on sale in Europe. "You barely hear the thing start, and it idles so smoothly you'd swear it had stalled."

Vital Signs: Rising Container Shipments - Imports are rising to meet the economy’s growing needs. Imports that are shipped in containers climbed 4.1% in January from a year earlier, the third straight month of increases, according to the Journal of Commerce. That followed a 3.8% jump in December. As the recovery picks up, rising sales of cars and homes are spurring demand for imported auto parts and furniture.

Vital Signs: Continuing Manufacturing Expansion - Manufacturing continues to be a bright spot for the economy. The Federal Reserve said Friday that manufacturing output grew 0.3% in February, the third straight month of expansion. That followed a 1.1% jump in January driven by car production. The data mesh with the Institute for Supply Management’s latest snapshot of manufacturing activity, which also showed continued, but slower, expansion.

Philly Fed State Coincident Indexes increased in January - From the Philly Fed: The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for January 2012. In the past month, the indexes increased in 48 states, decreased in one (Alaska), and remained unchanged in one (Wisconsin) for a one-month diffusion index of 94. Over the past three months, the indexes increased in 48 states, decreased in one, and remained unchanged in one for a three-month diffusion index of 94. Note: These are coincident indexes constructed from state employment data. This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged). In January, 49 states had increasing activity, up from 47 in December. This is the highest level since January 2007. Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession. Now only Alaska is red, and Wisconsin unchanged. The recovery may be sluggish, but it is widespread geographically.

Just Released: January’s Indexes of Coincident Economic Indicators Show Fairly Robust Activity across the Region - NY Fed - The January Indexes of Coincident Economic Indicators (CEIs) for New York State, New York City, and New Jersey, released today, show fairly robust economic growth entering 2012. Importantly, this month’s release incorporates the annual benchmark employment revisions for 2010 and 2011, with the revised indexes revealing that the regional economy had more momentum in the second half of 2011 than previously thought.  The CEIs reported here are single composite measures designed to provide a monthly reading of economic activity. They are constructed from four data series: payroll employment, the unemployment rate, average weekly hours worked in manufacturing, and real (inflation-adjusted) earnings. Details of the construction of the CEIs can be found in a 1999 Federal Reserve Bank of New York Current Issues in Economics and Finance article; a more recent article in the series illustrates how the CEIs are used to analyze regional economic trends.

A new and revised and more pessimistic view of U.S. manufacturing - Between 2000 and 2010, manufacturing output of computer and electronic products rose at a remarkable rate of almost 18 percent per year. Over the same period, output in the rest of U.S. manufacturing remained roughly flat, according to Bureau of Economic Analysis figures tallied by Houseman. That’s a dismal showing for a decade. It is only when computer and electronic products are included that overall manufacturing output registers the impressive increases. Though it represents 15 percent or less of manufacturing output, the sector’s strong growth makes the rest of U.S. manufacturing seem much more robust than it really is. At the same time: …much of the nation’s production of computers and electronics has moved overseas. The number of consumer electronics shipped from U.S. factories dipped about 70 percent between 2000 and 2010, according to the Census Bureau’s Current Industrial Report. And: …at least some of the productivity gains shown in U.S. computer manufacturing reflect the increasing power and decreasing prices that come with innovation. When a computer chip doubles in efficiency, that can turn up in a doubling of output and productivity in computer manufacturing. But that is not what is ordinarily thought of as manufacturing efficiency. The article is here.

The Washington Post On Productivity - From the Washington Post: As calculated by federal statisticians, the productivity growth of U.S. factories has seemed quite impressive. Between 1991 and 2011, productivity more than doubled, meaning that a single worker today produces what two did 20 years ago, according to Bureau of Labor Statistics figures. Except that it doesn’t mean this. And, unless there is just some weird co-incidence, it never has and never will mean this. It means the ratio of output-to-workers has doubled, which could be achieved by lots of means – not least of which is simply changes in the composition of output. So, if people were consuming  mostly processed food which required a lot of labor per output, but over time the consumption share moved to laptops which require much less labor per unit of output then productivity would rise, even though nothing at all has happened to any manufacturing process. Indeed, this is possible even if labor productivity in each sector actually falls. Also, the reverse is true, labor productivity can fall even if the productivity in each sector rises.

Why we debate - Atlanta Fed's macroblog - It's been a while since we featured one of my favorite charts—a "bubble graph" comparing average monthly job changes during this recovery with average changes during the previous recovery, sector by sector.(enlarge) If you try, it isn't too hard to see in this chart a picture of a labor market that is very close to "normalized," excepting a few sectors that are experiencing longer-term structural issues. First, most sectors—that is, most of the bubbles in the chart—lie above the horizontal zero axis, meaning that they are now in positive growth territory for this recovery. Second, most sector bubbles are aligning along the 45-degree line, meaning jobs in these areas are expanding (or in the case of the information sector, contracting) at about the same pace as they were before the "Great Recession." Third, the exceptions are exactly what we would expect—employment in the construction, financial activities, and government sectors continues to fall, and the manufacturing sector (a job-shedder for quite some time) is growing slightly. For the skeptics, I below offer a familiar chart, which traces the level of total employment pre- and post-December 2009, compared with the average path of pre- and post-recession employment for the previous five downturns:

Worker Ownership for the 99%: The United Steelworkers, Mondragon, and the Ohio Employee Ownership Center Announce a New Union Cooperative Model to Reinsert Worker Equity Back into the U.S. Economy - Announcement of a “Union Co-op” model, which combines worker ownership in a cooperative business with the collective bargaining process, developed as part of the ongoing collaboration between the USW and Mondragon, and with the assistance of the Ohio Employee Ownership Center (OEOC).The USW is North America’s largest industrial union representing some 1.2 million active and retired members in a diverse range of industries. Mondragon is the world’s largest worker industrial cooperative, headquartered in the Basque region of Spain, with 85,000 worker-owners and over $24 billion in annual sales.  The Ohio Employee Ownership Center is an outreach center of Kent State University, founded in 1987 by John Logue who worked tirelessly to bring the successful Mondragon business practices and employee ownership structure and governance to the U.S.

Cheap Natural Gas Is Having A Big Effect On American Industry -- We have this sense that the global economic tectonic plates are shifting before our very eyes.  America the land of cheap energy and the new efficient production frontier? Here’s Reuters last week, America’s steel industry, for decades a symbol of industrial decline, is betting on natural gas to make it more competitive against foreign producers. U.S. Steel Corp (X.N) and Nucor Inc (NUE.N), the two largest U.S. steel producers, are changing their traditional manufacturing processes as relatively cheap domestic natural gas supplies become more plentiful. Some experts believe the new techniques will not only allow steelmakers to cut costs and lower selling prices at home, but also give U.S. companies a chance to compete with Japanese, South Korean and European rivals for a slice of the export pie. The U.S. competitive in steel?   We were once asked in an interview at the Council of Economic Advisers what we thought of the U.S. government writing a $100K (1986 dollars!) check to steel workers displaced by foreign imports. Stratfor also weighs in on the potential consequences of the collapse in natural gas prices.

Job Creation Policies and the Great Recession - FRBSF - The adverse labor market effects of the Great Recession have intensified interest in policy efforts to spur job creation. The two most direct job creation policies are subsidies that go to workers and hiring credits that go to employers. Evidence indicates that worker subsidies are generally more effective at creating jobs. However, the unique circumstances of recovery from the Great Recession, especially the weak demand for labor, make hiring credits more effective in the short term.

Bureau of Labor Statistics Reports 3.1 Million U.S. Green Jobs: Top 5 Takeaways - Green Goods and Services (GGS) accounted for 2.4 percent of total U.S. employment in 2010, with almost a third of all jobs supporting the badly hit construction and manufacturing sector, says a new analysis released today by the Bureau of Labor Statistics (BLS). The vast majority of these jobs were in the private sector (2.3 million) while the public sector accounted for 860,300. While the GGS sector certainly got a boost in 2010 from the stimulus, considered the “Most Important Energy Bill in American History,” a similar analysis of the clean economy by the Brookings Institution finds that this snapshot is part of a wider trend showing green jobs is on the rise. The BLS has also taken a stab at defining green jobs:

  • Jobs in businesses that produce goods or provide services that benefit the environment or conserve natural resources. Green goods and services fall into one or more of five groups: energy from renewable sources, energy efficiency, pollution reduction and removal, natural resources conservation, and environmental compliance, training, and public awareness.
  • Jobs in which workers’ duties involve making their establishment’s production processes more environmentally friendly or use fewer natural resources. These workers research, develop, or use technologies and practices to lessen the environmental impact of their establishment, or train the establishment’s workers or contractors in these technologies and practices.

The BLS spent over a year analyzing and accounting these figures, at times fighting through bitter criticism and resistance from political opponents and their supporters from Big Oil.  We suspect that we have not heard the last from them.

Making 9 Million Jobless “Vanish”: How The Government Manipulates Unemployment Statistics - When we look at broad measures of jobs and population, then the beginning of 2012 was one of the worst months in US history, with a total of 2.3 million people losing jobs or leaving the workforce in a single month.  Yet, the official unemployment rate showed a decline from 8.5% to 8.3% in January - and was such cheering news that it set off a stock rally.   How can there be such a stark contrast between the cheerful surface and an underlying reality that is getting worse? The true unemployment picture is hidden by essentially splitting jobless Americans up and putting them inside one of three different "boxes":  the official unemployment box, the full unemployment box, and the most obscure box, the workforce participation rate box.     As we will explore herein, a detailed look at the government's own data base shows that about 9 million people without jobs have been removed from the labor force simply by the government defining them as not being in the labor force anymore.  Indeed - effectively all of the decreases in unemployment rate percentages since 2009 have come not from new jobs, but through reducing the workforce participation rate so that millions of jobless people are removed from the labor force by definition.

New Unemployment Claims Drop To A New 4-Year Low - New filings for unemployment benefits dropped to another post-recession low last week, the Labor Department reports. The case for expecting economic growth, in other words, just got a bit stronger. Initial jobless claims slipped to a seasonally adjusted 348,000 for the week through March 17, the lowest level in four years. With each new low in this series, arguing that a recession is brewing looks a touch more challenged. It's dangerous to read too much into any single economic report, of course. That said, history shows that the onset of recession is accompanied by rising claims for unemployment, either in advance of the official recession start date (as determined after the fact by NBER) or in the early stages of a new downturn. That leaves three interpretations for the recent decline in jobless claims: 1) the pro-growth message is wrong this time; 2) claims will soon reverse course and trend higher to reflect deteriorating economic conditions that aren't yet reflected in new unemployment filings; or 3) the economy is poised for expansion for the foreseeable future.

Initial Claims Beat Expectations, To Miss Next Week Following Revision - Same old, same old from the BLS: with initial claims expected to print at 350K, we get a number that is just better, or 348K - supposedly the best since February 2008, however one which will be revised to about 351K next week, hence a miss, in line with the perpetual +3K upward statistical bias each and every week demonstrated by the BLS, which is no longer even funny. To be sure, last week's 351K was just raised to 353K, just so that headlines can announce a 5K drop in claims week over week. Continuing claims printed at 3.352MM, down from an upward revised 3.361MM. And yes, initial claims are lowest since February 2008... Until one adds the continuing claims, EUCs and Extended Claims as seen in the chart below. The 99 week cliff saw a total of 18K drop from total rolls: these are now 1MM lower compared to a year ago.

Where is the Unemployment Rate Headed? Interactive Mapping Lets "You" Set the Parameters, and Plot a Graph - I have a pretty cool interactive map below that will let you graph the unemployment rates based on parameters that you can choose.  First let's take a look at the current unemployment rate and a discussion of the parameters that define it. Whether the unemployment rate rises or drops is a function of two factors:

  1. How many jobs are created or lost
  2. How fast the labor force is rising or contracting

Bernanke estimates it takes about 125,000 jobs a month to keep up with population growth. Demographically speaking, I agree with that number but it should decline over the next few years as boomers retire. The math is straight forward, all things being equal (they aren't) the labor force should rise by about 1.5 million jobs per year. Next determine how many jobs it will take per month to keep up with demographics. With that backdrop ....You Make The Call..

Why 3.5 Million Job Openings Isn’t Great News - If you’re out of work and hungry for a paycheck, the news from the government on March 13 sounded almost too good to be true: Employers have literally millions of jobs going unfilled. To be precise, there were 3.5 million job openings in the U.S. as of the last business day in January, the U.S. Bureau of Labor Statistics said. That was an increase of 45 percent since the depth of the recession in 2009. The news is accurate, but it’s not entirely a good thing. There’s a reason those jobs aren’t being filled. In fact, it’s a sign of ill health in the job market that employers can’t seem to find the people they need, even as 12.8 million Americans are officially searching for work. (That’s the February number.) Typically, one would expect to see this many openings only if the unemployment rate were down between 5.5 percent and 6 percent, economist Ian Shepherdson of High Frequency Economics in Valhalla, N.Y., said: ”The most likely explanation for this startling development is that employers regard people who have been out of work for some time with a degree of suspicion, worrying that perhaps their skills are stale or obsolete, or that they will find it hard to get back into the habit of working.” If Shepherdson is right, it’s terrible news for America’s jobless. It’s also bad for the overall economy. Because it means the economy could start overheating—with “tight” labor markets and fast-rising wages—even with an unsatisfactorily high unemployment rate.

Year-over-year Change in Public and Private Payroll Employment - Jon Lansner at the O.C. Register wrote about looking at year-over-year changes: Forget the debate about the true oomph of February's 227,000 job gain from January. Look at this same data on a year-over-year basis! What do you learn? American bosses added 2.021 million jobs in the year ended in February. That's a 1.5 percent job growth pace. It's the fastest bout of hiring since January 2007. That requires a graph! Instead of just looking at the year-over-year increase in total nonfarm payrolls, I divided the data into changes in private and public payrolls. The red line is the year-over-year changes for private payrolls; the blue line is for public payrolls. Whereas total payrolls are up 1.5 percent, private payrolls are up 2.0% year-over-year, the fastest rate of increase since early 2006. However public payrolls are down 1.0%, and public payrolls have been falling since mid-2009 with the exception of the decennial Census hiring (note the spike every 10 years in public hiring).

Public and Private Sector Payroll Jobs: Bush and Obama - The following two graphs compare public and private sector job losses (or added) for President George W. Bush's first term (following the stock market bust), and for President Obama's current term (following the housing bust and financial crisis). The first graph shows the change in private sector payroll jobs from the beginning of Mr. Bush's first term compared to Mr. Obama's current term.The employment recovery during Mr. Bush's first term was very sluggish, and private employment was down 913,000 jobs at the end of his first term. The recovery has been sluggish under Mr. Obama's presidency too, and there are still 247,000 fewer payroll jobs than when Mr. Obama's term started (although it appears this will turn positive in a couple of months). A big difference between Mr. Bush's first term and Mr. Obama's presidency has been public sector employment. The public sector grew during Mr. Bush's term (up 900,000 jobs), but the public sector has declined since Obama took office (down 590,000 jobs). These job losses are at the state and local level, but they are still a significant drag on overall employment.

Presenting The American Sweatshop: An Infographic Of The Online Retail Warehouse Temp Job - One of the biggest surprise stories of the past several months, in addition to economic activity skewing record warm weather, and the New Normal seasonal adjustments (which as Albert Edwards noted earlier are giving data an upward bias for each of the past three years), is the consistently "better than expected" jobs numbers. There is one problem: as discussed previously, the rising jobs are purely a quantity over quality trade off, as every month more and more temp jobs take the place of permanent ones, especially those of former professionals from the FIRE sector. In fact, in January temp jobs soared by the most on record, and the total number of temp workers was just shy of all time highs. Ironically, as this happened, discretionary online retail companies have seen their stock price soar to record highs. One of the primary drivers for this has been the increased "efficiency" at these companies' hubs - their warehouses. Which just happen to be staffed with temp workers. The following infographic presents the reality behind these American "sweatshops" - because this is the "quality" of job that is rising rapidly in the current economy (at the expense of traditional permanent jobs) to give the impression of an economic recovery. There is no point in making an ethical judgment - work conditions are as they are. Just as workers at FoxConn likely have far better conditions than their peers, at least in their view, so do these temp workers view their life as better than the alternative, which is unemployment. It is, as they say, what it is

How Far Would You Go for a Comeback? - He heard talk around town about plentiful work in North Dakota, where new drilling technologies are driving an oil boom. “And I decided, ‘Well, I’m going to go make some money,’ ” he recalled in an interview. So on Memorial Day weekend, Mr. Ripka, 48, threw some clothes in a bag, said goodbye to his family and drove 10 hours west to Williston — ground zero in the North Dakota petroleum explosion. After filling out a round of applications and sleeping in his car for several nights, Mr. Ripka was offered a job driving heavy trucks for an oil services company, helping to pour cement to secure casings for new wells. He passed a drug test and trained for two weeks in Denver before settling, in July, into his new home away from home: a 7-by-11-foot cubicle at a “man camp.” A sort of cross between a military barracks and a college dormitory, temporary man camps have sprung up in and around Williston to help house the influx of workers from around the country. Mr. Ripka is one of thousands of men with similar stories. They have descended on Williston and its environs over the last two to three years, pulled by the magnet of jobs created by an oil boom with the potential to make the region one of the largest petroleum resources in the country, and pushed by the hope that a steady income can put their finances back on track after a grueling downturn.

Charles Murray's White Male Problem - Charles Murray is back in the Wall Street Journal rejecting the idea that poor economic prospects had anything to do with the fact that so many whites without college degrees dropped out of the labor force. There are a few points that are worth noting about this story. First Murray does a bizarre comparison by looking at real wages between 1960 and 2010. This is bizarre because wages rose rapidly through the sixties and into the early seventies, then largely stagnated..(I am using manufacturing workers to pick a typical job held by non-college educated white makes.) Note that there is some increase in real wages in the late 90s, the first period of sustained low unemployment since the late 60s. Interestingly, these wage gains coincided with the first period of sustained low unemployment since early 70s. Also, if we look at the graph that Murray has with his article we see that the labor force participation for whites with just a high school degree actually rose slightly in this period, reversing the long-term trend. That might suggest that labor market conditions are a big part of this story

How the housing bubble increased segregation - Black and Hispanic homebuyers received a disproportionate number of subprime mortgages during the housing boom, leading some to theorize that easy credit may have helped desegregate low-income neighborhoods as minorities became more upwardly mobile. But two economists have discovered that the opposite actually happened: between 1995 and 2006, the country’s top metropolitan areas became more segregated, not less so. How did this happen? In a VoxEU paper, Amine Ouazad and Romain Ranciere found that while black families tended to move to more integrated neighborhoods, upwardly mobile Hispanics were more likely to self-segregate. They tended to use easy credit “to buy houses in predominantly Hispanic neighbourhoods with the consequence of enrolling their children in schools with fewer black peers, and more Hispanic and white peers,” the authors write. By 2006, black students had 2 percent fewer Hispanic peers as a result. By contrast, Hispanic students moved to school districts “with about 1,600 fewer black students.” Secondly, while blacks and Hispanics received more subprime mortgages, richer home buyers — who are more often white — received even more leverage, prompting them to move as well and reducing potential residential integration. So the racial segregation that’s linked to the wealth gap also continued.

What Race Tells Us About Anti-Government Attitudes - We might expect black Americans to show more distrust toward government relative to other racial and ethnic groups. Why? Consider just a few trends since the 1980s: persistently high levels of black unemployment, rising to Depression-like numbers in many urban areas during the Great Recession; increasingly punitive criminal justice policies and the disproportionate imprisonment of minority offenders; a reneged government commitment to addressing inequality and poverty, as seen in welfare reform and the declining real value of the minimum wage; and an ongoing failure to provide equal access to high-quality public education, whether K-12 or higher. The federal government has either aided and abetted these trends (the “war on drugs,” mass incarceration) or failed to respond to crises that have ravaged black communities (unemployment, HIV/AIDS, Hurricane Katrina).Yet it turns out that in the Obama era, blacks have about twice the level of trust in government compared with whites and Latinos. According to a 2010 Pew poll, only two in ten whites “trust the government in Washington to do what is right” either always or most of the time, compared with roughly four in ten blacks. When asked in the same poll whether the “federal government threatens your own personal rights and freedoms,” one in three whites thinks it is a “major threat,” compared with nearly one in four blacks.

The High Cost of Being a Woman - It turns out being a woman is an expensive undertaking. Despite laws on the books meant to prevent companies and firms from charging women more for the same products and services, we’re still shelling out more than men for a variety of things. And we do it on less pay. A new report out this week from the National Women’s Law Center found that insurance companies have been charging women $1 billion more than men for the same coverage. In fact, in the states that haven’t banned the practice of jacking up prices for women – known as gender rating – women were charged more for 92 percent of the best-selling health plans. The difference can’t be explained by a higher cost of maternity care: even when that care is left out, almost a third of plans charged women at least 30 percent or more, and that care is usually not part of a standard benefits package. Why might insurers decide women are more expensive? Because they tend to use more services – like going to the doctor more often for regular check ups. Damn them being preventative.

Marital Status and the Recession - Job losses among women during the recent recession exhibit a curious pattern by marital status that is revealing about the importance of labor demand and supply factors. During the 2008-9 recession, job losses were not equitably shared; employment rates fell more for some groups than others. Not surprisingly, employment changes varied by industry, with the greatest percentage job losses in residential construction and large job losses in manufacturing. It is also well known that job losses were greater among men than among women – the so-called mancession – largely because men had been more likely to work in the residential construction and manufacturing industries that were hit hardest. The chart below displays quarterly employment rates separately for married women and unmarried women who were heads of households, both under age 65. Not surprisingly, the latter are somewhat more likely to work because they have no spouse to help provide for the family. More surprising is that employment rates fell so much more for these unmarried women who were heads of household. Employment per capita fell 4.7 percentage points among them, compared with 1.6 percentage points among married women. The job-loss gap associated with marital status turns out to be as large as the more widely recognized job loss gap associated with gender.

Baby boomer joblessness lasts longer, hits harder - Seemingly overnight, members of a generation once called forever-young have been made to feel over-paid, over-experienced and over-aged. Baby boomers suffered layoffs and setbacks at record rates in recent years. Many will never fully recover, having lost too much too late in life. Unemployment spiked for all age groups in the recession and it remains highest for young workers. But displaced baby boomers face their own special purgatory. Once unemployed, older workers are out of work longer. And the older they are, the harder it is to get back to hard-earned careers.A recent national survey found that job seekers 55 and older had been out of work a numbing 56 weeks, which is 20 weeks longer than the average furlough for younger job seekers. More than half of older job-seekers were considered long-term unemployed, having been out of work six months or more.Throw in plummeting home values, diminished 401k plans and threats to Medicare and Social Security, and it's no wonder many baby boomers now look warily toward retirement and question what happened to their world.

Too Old to Get Hired, Too Young to Retire  - A friend of mine had his name in the paper the other day.  It was an article speculating about who might inherit a prestigious post in the literary world when the current grandee retires. The article said that my friend would have led the list 10 years ago. Ouch! The obvious though unstated implication is that now he’s too old. He just turned 60. He says he already has his dream job and didn’t mind the idea that, because he is 60, some career opportunities have moved beyond his reach. But I mind. Another friend of mine, whom we’ll call “Nick” (because that’s his name), is doing something about it: He’s suing.

"Right to Work" Means the Government Redistributes from Union Supporters to Non-Supporters -The NYT began an article discussing a "right to work" measure in Minnesota by describing it as a "measure ... that would allow workers to avoid paying fees to unions they choose not to join." It would have been helpful to remind readers that under federal law a union is legally obligated to represent all the workers in a bargaining unit regardless of whether or not they choose to join the union. This rule means that workers who do not join the union not only gain from whatever wage and benefit increases the union negotiates with the employer, they also are entitled to the union's representation in any disputes that are covered under the contract. For example, if the employer wants to discipline or fire a worker who is not a member of the union, the union is obligated to represent this worker in the same way as if they were a dues paying member of the union. In this context, the Minnesota measure means that workers who support a union can effectively be required to pay for the representation of workers who do not support the union. This is not an obvious step toward promoting individual freedom. Contrary to what the article asserts every worker in Minnesota can already "avoid paying fees to unions they choose not to join." They have the option to not work at a company where there is a union contract that requires workers to pay for their union representation

The surprising new alliance between the Tea Party and labor - When Republicans rode Tea Party anger to large majorities in Georgia’s state Legislature in 2010, it seemed inevitable that sooner or later some of these restive constituents would turn against them. Few, though, would have predicted the cause of an uprising that went down this week: an anti-picketing bill aimed at silencing union members. On March 7, the Georgia Senate passed SB 469, a bill backed by the state’s Chamber of Commerce and introduced by state senators including Waffle House executive Don Balfour. Along with a battery of other anti-union measures, the bill bans picketing that targets private residences and causes “intimidation” or disturbs the “quiet enjoyment” of local residents. (“Quiet enjoyment” apparently being a more fundamental right than freedom of speech.) SB 469 would increase potential punishments for picketing or “conspiracy,” and it would make it easier for companies to request and receive injunctions from judges halting demonstrations. Unions began rallying in opposition to the bill shortly after it was introduced last month and have been active ever since. They’ve been joined by several non-labor groups that also see the bill as a threat to their right to demonstrations. Occupy, environmentalist and civil rights activists have warned for weeks that the broadly written bill put their protest rights at risk as well. On Monday, so did the Atlanta Tea Party.

The Not-Much-Opportunity Society - Mitt Romney, the Republican presidential contender, likes to contrast his vision of an Opportunity Society in which people choose whether to pursue an education or hard work with an Entitlement Society, offered by President Obama, in which government provides every citizen the same or similar rewards. I’m not sure what Entitlement Society he’s talking about, since after-tax income has grown far more rapidly at the top than elsewhere, and federal taxes and transfers became less redistributive between 1979 and 2007. As far as I can tell, President Obama hasn’t done much to reverse this trend. But what is even more misleading about Mr. Romney’s vision is its emphasis on grown-ups. Children, after all, can’t simply choose to pursue an education. They are dependent on their parents, their communities and their fellow citizens for the opportunities to do so.Public spending aimed at children in low-income families, including programs like Head Start, has garnered substantial political support precisely because it promises to enhance opportunities. Yet the Head Start program has never served more than 60 percent of eligible children in extreme poverty.

Why Millennials Want To Be Rich - A new study on different generations' priorities does not make Millenials look good. The report from the American Psychological Association [PDF] claims we are selfish, fame-seeking, politically disengaged, and don't give a shit about the environment. We also want to be rich. A stunning 75 percent of Millennials said that being wealthy was very important to them, compared to 45 percent of baby boomers and 70 percent of Generation X.  Contrary to middle-aged pundits' rants, Millennials are not inherently more selfish or materialistic than previous generations. It's just that we are seeing the middle class vanish before our eyes. Even before the recession, we heard the message loud and clear: If you don't want to be poor, you have to be rich.

Jobless in 15 states to lose extended benefits Lower state unemployment rates are usually a cause for celebration. But in as many as 15 states, that good news also has triggered the loss of unemployment benefits for thousands of workers starting next month. More than 135,000 workers risk losing jobless benefits next month, according to the National Employment Law Project, an advocacy group. These workers have already exhausted their state benefits and will no longer qualify for extended jobless benefits that Congress approved through the end of 2012.  Extended benefits will end the week of April 7 for Kansas,1 Kentucky2, Massachusetts3, Missouri4, Ohio5, Oregon6, South Carolina7, Tennessee and Wisconsin8, because the job picture improved in those states, state and federal officials said.  The Indiana9 Department of Workforce Development has already announced that the last benefit payments for Hoosiers receiving extended benefits will be made on April 16.  Extended benefits also are expected to expire the week of April 21 in Alabama, Delaware, Georgia, Maryland and Washington state, according to NELP, an advocacy group based in New York City that tracks10 when these benefits end and calculates how many people may be affected. South Carolina has one of the country’s highest unemployment rates at 9.3 percent, higher than the national average of 8.3 percent, but still made the list because of the complicated way the trigger is calculated. To stay on extended benefits, the average unemployment rate in the last three months must be at least 110 percent of one of the rates from a comparable three-month period in one of the last three years. So for the states affected, their current average three-month unemployment rate is lower than at any of the same three month periods in the last three years.

Unemployed Is Bad Enough; ‘Unbanked’ Can Be Worse - Mr. Macias stopped banking after losing his job and incurring debt, which in turn led to bad credit. For now, fringe financial companies — businesses like check cashers, payday lenders and pawnshops that lack conventional checking or savings accounts and frequently charge huge fees and high interest for their services — are the only places Mr. Macias can cash his paychecks and borrow money. Mr. Macias is not alone in his difficulty in maintaining or getting a bank account: 5.7 percent of San Francisco households lack conventional accounts, according to a 2009 survey by the Federal Deposit Insurance Corporation. Over the past few years, the issue of “unbanked” people has come under increasing scrutiny. Lacking a bank account imposes limitations on a person’s financial options, He said that check-cashing fees at the fringe institutions could total $1,000 a year and interest rates for loans are as high as 425 percent. And there are related issues: those without a bank account cannot rent a car, buy plane tickets online, mortgage a house or make any purchase that requires a credit card.

Inequality Undermines Democracy —Americans have never been too worried about the income gap. The gap between the rich and the rest has been much wider in the United States than in other developed nations for decades1. Still, polls show we are much less concerned about it than people in those other nations are. Policy makers haven’t cared much either. The United States does less2 than other rich countries to transfer income from the affluent to the less fortunate. Even as the income gap has grown enormously over the last 30 years, government has done little to curb the trend. Our tolerance for a widening income gap may be ebbing, however. Since Occupy Wall Street and kindred movements highlighted the issue, the chasm between the rich and ordinary workers has become a crucial talking point in the Democratic Party’s arsenal. There are signs that the political strategy has traction. Inequality isn’t quite the top priority of voters: only 17 percent of Americans think it is extremely important for the government to try to reduce income and wealth inequality, according to a Gallup survey last November. That is about half the share that said reigniting economic growth was crucial.

What To Do About Inequality -- David B. Grusky - If we’re serious about reducing inequality, we need to do more than raise taxes on the rich. We need to correct the market failures in labor and education that generate it. The Experts Respond

  • Rick Perlstein The educated unemployed are our rising social problem.
  • Mike Konczal The real battle is not about eliminating rents but determining who will benefit from them.
  • Shikha Dalmia America has done a remarkable job of closing the only gap that matters: the personal well-being gap.
  • Ruy Teixeira Taxing the rich would raise vitally needed revenue.
  • Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva The top tax rate could be as high as 83 percent without harming economic growth.
  • Barbara R. Bergmann Call it socialistic if you want, but it’s what we need.
  • Neal McCluskey Problems in education can’t be blamed on market failure, because American education is dominated by government.
  • Susan E. Mayer If anything, tax policy has moderated the increase in inequality since 1979.
  • Anne L. Alstott Financial inequality replicates itself in nearly every sphere of life—health, leisure time, even marriage.
  • Glenn C. Loury Inequality is a product of our impoverished ideas about autonomy, community, and solidarity—not our economy.
  • David B. Grusky replies The legitimacy of levying taxes to recoup illicit gains is beyond dispute.

The Food Stamp Explosion - For starters, Food Stamps have a new name. The 2008 farm bill changed the name to the Supplemental Nutrition Assistance Program, or SNAP. But whatever the name, enrollment rose from 17.3 million in 2001 to 46.2 million in October 2011. In the March 2012 issue of Amber Waves, published by the U.S. Department of Agriculture,  Margaret Andrews and David Smallwood ask: "What’s Behind the Rise in SNAP Participation?" Here's a graph showing SNAP enrollment, along with the unemployment rate and the poverty rate. The decline in SNAP enrollment after 1996 is part of the aftermath of the welfare reform act that passed that year, which led to much smaller welfare rolls and also tightened rules for receiving Food Stamps. the run-up in SNAP enrollment since the start of the recession is large, but Andrews and Smallwood point out that it's within the historical parameters of what one would expect given the rise in unemployment rates and poverty rates over that time.  What's perhaps less expected in the graph is that Food Stamp enrollment was rising steadily from 2001 up through 2006, although unemployment rates were low and falling during much of that time. The authors trace much of this change to changes in federal rules making it easier for people to apply, and easier for states to certify to the federal government that the benefits are being targeted. Here's a graph showing the maximum SNAP benefit for a household of four and the average benefit.

I Get By With a Little Help From My Parents - Nearly 1 in 10 American adults regularly receive money or financial assistance from their parents or other family members, according to a poll conducted by the Pew Research Center. As you might expect, the youngest Americans are most likely to rely on the family for social assistance. More than a third of respondents 18 to 24 years old are in that camp: The poll found no differences in financial reliance on family by gender or race. It also found that among the young, those who work full time are among the least likely to receive money from their parents. That makes sense — young people who are working full time probably do so because they have no other choice. Many of those who are not working full time are in school, and they’re able to go to school because they have a financial support system.

Number of the Week: What if Young Adults Don’t Want to Leave Home? - 78%: Percent of 25-34 year olds who have lived with their parents and are satisfied with the arrangement. One boon to a housing recovery would be young adults moving out of their parents’ homes and starting their own households. But what if they don’t want to? The recession has caused an increase in young adults living in multigenerational households. According to Census data analyzed by the Pew Research Center 21.6% of 25-34 year olds lived in such an arrangement in 2010, up from 11% in 1980. One argument for a coming rebound in home sales and construction has centered on those young adults being able to form their own households. The recession has created financial barriers for younger Americans looking to start their own households, including high unemployment and debt. Recent improvements in the job market and overall economy have sparked hopes that those barriers are beginning to break down. But that assumes 25-34 year olds want to go it alone. “If there’s supposed to be a stigma attached to living with mom and dad through one’s late twenties or early thirties, today’s ‘boomerang generation’ didn’t get that memo. Among the three-in-ten young adults ages 25 to 34 (29%) who’ve been in that situation during the rough economy of recent years, large majorities say they’re satisfied with their living arrangements (78%),” writes Kim Parker, senior researcher at the Pew Social & Demographic Trends Project.

This Week in Poverty: Me, Mom and Reagan - Here’s the new American reality: about half of all kids will spend at least part of their childhood in a family headed by a single mother, and the typical single mother is white, has one kid, is separated or divorced, works and probably earns less than $25,000 a year. Because when I was a kid being raised by a white single mom, President Reagan basically promised me we that we were different, special even. My Mom put herself through school and worked. The typical single mom, according to the president, was a “welfare queen” taking “government handouts” so she could drive her “Cadillac” and raise her “strapping young bucks” on “T-bone steaks.” He didn’t have to say she was black, lazy and never married—everyone knew it. This image persisted through welfare reform in 1996 when basic cash assistance was gutted, and it still grips the American psyche today. But a new report from Tim Casey, senior staff attorney at Legal Momentum—the nation’s oldest legal defense and education fund for women and girls—departs from this iconic portrayal of single moms. Instead, Casey goes out on a limb and turns to data from crazy outfits like the US Census Bureau. The report is a lot less fun than the alternative universe offered by the current crop of Republican presidential candidates, because Casey stubbornly insists on using “facts.”

The New Suburban Poverty - In many of America’s once pristine suburbs, harbingers of inner-city blight — overgrown lots, boarded up windows, abandoned residences — are the new eyesores. From the Midwestern rust-belt to the burst housing bubbles of Nevada, California and Florida, even in small pockets of still affluent regions like Du Page County, Ill., the nation’s soaring poverty rates are visibly reclaiming last century’s triumphal “crabgrass frontier.” In well-heeled Illinois towns like Glen Allyn and Elgin, unkempt, weedy lawns blot the formerly manicured, uniform and tidy landscape.The Brookings Institution reported two years ago that “by 2008 suburbs were home to the largest and fastest growing poor population in the country.” In the previous eight years, major metropolitan suburbs had seen poverty rates climb by 25 percent, almost five times faster than cities. Nationwide, 55 percent of the poor living in the nation’s metropolitan regions lived in suburbs. To add insult to injury, a new measure to calculate poverty — introduced by the Census Bureau just last year — darkens an already bleak picture: nationally, 51 million households had incomes less than 50 percent above the official poverty line, and nearly half of these households were in suburbs.

Partial equilibrium intuitions about choice - I think it’s fair to say that economists, in general, are disposed to favor “choice”. It is easy to understand why. If you model the world as being composed of rational and well-informed optimizers of their own welfare, giving a person a new alternative cannot possibly harm her, and may well make her better off. In the financial world, the value of an option (which is nothing more than a choice, the right but not the obligation to take some action) is never negative. On the contrary, when they are priced, options often turn out to be very expensive. There are behavioral and psychological critiques of this intuition. If people are not well-informed and rational, the availability of poor alternatives can increase the likelihood of costly mistakes. A bewildering array of alternatives may impose a cognitive burden on the chooser, the “cost” of which may outweigh the benefit of a marginally better result. Outcomes that are objectively identical may be subjectively worse when they are the result of open choice than when they result from compulsion or acts of God. Human beings may unpleasantly second-guess or hold themselves accountable for choices whose outcomes are less than perfect, but stoically reconcile themselves to imperfections they could not have prevented.

The States Get a Poor Report Card -- State governments have long been accused of backroom dealing, cozy relationships with moneyed lobbyists, and disconnection from ordinary citizens. A new study suggests those accusations barely scratch the surface.  The study, issued Monday by a consortium led by the Center for Public Integrity, a nonpartisan watchdog group, found that most states shy away from public scrutiny, fail to enact or enforce ethics laws, and allow corporations and the wealthy a dominant voice in elections and policy decisions. The study gave virtually every state a mediocre to poor grade on a wide range of government conduct, including ethics enforcement, transparency, auditing and campaign finance reform. No state got an A; five received B’s, and the rest grades of C, D or F.  For all the reform talk by many governors and state lawmakers, very little has really changed in most capitals over the decades. Budgeting is still done behind closed doors, and spending decisions are revealed to the public at the last minute. Ethics panels do not bother to meet, or never enforce the conflict-of-interest laws that are on the books. Lobbyists have free access to elected officials, plying them with gifts or big campaign contributions. Open-records acts are shot through with loopholes.  And yet all the Republican presidential candidates think it would be a good idea to hand some of Washington’s most important programs to state governments, which so often combine corruptibility with incompetence.

Enterprising thieves steal X-ray film to extract silver - Posing as an employee of a recycling company, a man is alleged to have walked into hospitals in the Toronto, London and Ottawa areas and made away with barrels of X-ray film. He was caught with 30,000 X-rays and now faces fraud charges. The film contains a small amount of silver, a commodity whose price has been soaring in recent years, hitting $35 an ounce last week, up from $17 in 2010. That’s prompting enterprising thieves to find increasingly creative methods (or scams) to extract the precious metal. There have also been cases of X-ray film theft at hospitals across the United States, most recently in Philadelphia and Delaware.

“Are You Hungry?” - Is there anybody out there listening? Stop Mayor Michael Nutter’s ban on feeding homeless Philadelphians on the streets. The policy excludes homeless persons, homeless veterans, disabled homeless veterans and homeless families from receiving meals in public spaces. Since there has never been an epidemic of homeless persons being poisoned or sick on the streets from receiving meals from churches, civic organizations or non-profit organizations, the Mayor’s contentions that they would receive a safe meal in a confined space at the mayor’s discretion is baseless because there is no data that lends credence to this argument. The church started public “soup kitchens” and should be allowed to fulfill its moral and spiritual duties of feeding the hungry and clothing the naked. We find the mayor’s actions as a way to persuade these organizations from feeding people who really need it. What is the Mayor’s plan to help these people beyond confining them a space to eat? The homeless don’t want to be confined to a space so that they can be served in an inhumane atmosphere while tourists can take pictures of them and the media can use this policy to take camera footage of them set up in an arena-like setting. These people are not refugees; they are Americans who have fallen on hard times. Provide abandoned buildings to organizations who are trying to feed them and keep them off the streets Mr. Mayor.

Conflict Kitchen Reaching Hearts & Minds Through The Stomach - Conflict Kitchen is a take-out restaurant that only serves cuisine from countries with which the United States is in conflict. The food is served out of a take-out-style storefront that rotates identities every six months to highlight another country.  Each iteration of the project is augmented by events, performances, and discussions that seek to expand the engagement the public has with the culture, politics, and issues at stake within the focus country. These events have included live international Skype dinner parties between citizens of Pittsburgh and young professionals in Tehran, Iran; documentary filmmakers in Kabul, Afghanistan; and community radio activists in Caracas, Venezuela.. Upcoming iterations will include Cuba and North Korea

Groups Say They Won’t Stop Feeding Homeless in City Parks - The city of Philadelphia will institute a ban on the outdoor feeding of the homeless, but groups who provide meals to the needy vow not to stop.Mayor Michael Nutter introduced a series of actions designed to encourage hungry Philadelphians, and those who feed the hungry outdoors, to move to indoor locations over the next year. Since Wednesday, the leaders of several organizations that feed the hungry have angrily spoken out against it, publicly stating they plan to defy the regulation, that's set to take effect next month. Mayor Nutter defended it, saying the new policy initiative is aimed at increasing the health, safety, dignity and support for those vulnerable individuals who now gain their daily and often less than daily sustenance from well-intentioned people distributing food on city streets.

Feeding The Homeless BANNED In Major Cities All Over America - What would you do if you came across someone on the street that had not had anything to eat for several days?  Would you give that person some food?  Well, the next time you get that impulse you might want to check if it is still legal to feed the homeless where you live.  Sadly, feeding the homeless has been banned in major cities all over America.  Other cities that have not banned it outright have put so many requirements on those that want to feed the homeless (acquiring expensive permits, taking food preparation courses, etc.) that feeding the homeless has become "out of reach" for most average people.  Some cities are doing these things because they are concerned about the "health risks" of the food being distributed by ordinary "do-gooders".  Other cities are passing these laws because they do not want homeless people congregating in city centers where they know that they will be fed.  But at a time when poverty and government dependence are soaring to unprecedented levels, is it really a good idea to ban people from helping those that are hurting? This is just another example that shows that our country is being taken over by control freaks.  There seems to be this idea out there that it is the job of the government to take care of everyone and that nobody else should even try. But do we really want to have a nation where you have to get the permission of the government before you do good to your fellow man?

Austerity in Heaven’s Corridor - The Left should be paying attention to Florida. If you’ve ever desired a nightmarish vision of the legislature-driven austerity measures sure to proliferate around the country in the coming years, look no further than the Sunshine State’s 2012 budget. With little protest, Florida lawmakers are eviscerating public welfare and rapidly turning the state into a haven for the exploitation of workers. Despite the laughable “moderation narratives” now propagating in local newspaper coverage–which depict it as part of a trend away from rightist absolutism –the 2012 budget is nothing less than an unqualified victory for free market zealots everywhere: its legislatively-imposed austerity measures and multi-billion dollar tax cuts will no doubt serve as a useful model for other “business friendly” Southern states and the country as a whole. For thirteen consecutive years, Republicans have controlled the governor’s office and both houses of the state legislature. Florida is effectively a one-party dictatorship: local papers treat any mild disagreement among the conservative faithful as evidence of moderate tendencies in the legislature. The reality is that Governor Rick Scott, elected during the 2010 wave of Tea Party victories, is so stridently right-wing (and the state Democrats so weak) that opposition to the leadership’s more draconian proposals inevitably comes from other Republicans.

States' Tax Revenue Growth Softened in 4th Quarter - State tax revenue growth weakened in the fourth quarter of 2011 due to weak economic conditions as well as the expiration of temporary tax increases and the stimulus provisions of the American Recovery and Reinvestment Act of 2009, the Rockefeller Institute said in a report Monday.\The preliminary data show all 50 states’ collections from major tax sources increased by 2.7% in the fourth quarter of 2011 compared to the same quarter of 2010 — the lowest growth rate since mid-2010. The report said this is a “noticeable slowdown” from the 11.1% and 6.1% year-over-year growth reported in the second and third quarters of 2011 respectively. Legislative changes in California and Illinois affected year-over-year gains in the fourth quarter. California saw a decline in total tax revenues of 8.9% while Illinois saw an increase of 24.1%. Excluding those two states, overall state tax receipts during the quarter were 4.4% higher than the previous year.

Raking it in: States where taxes are soaring - As the economy struggles to recover, state and federal budget deficits continue to be the subject of increased attention. Just last week, the congressional budget office said that President Barack Obama’s budget will produce a $1.3 trillion deficit in 2012 if enacted. It would be the fourth straight year of $1 trillion-plus deficits. Many states have not been faring much better in their attempts to balance the budget. The recent recession resulted in some of the worst declines in state revenue since World War II, according to a recent report on state budgets by the Brookings Institution. In fiscal year 2010, a record 43 states faced budget deficits. In their fight to shrink their deficits, states have cut spending by slashing programs and lowering costs, while increasing revenue mostly by raising taxes. According to a report by Brookings, a whopping 40 states raised taxes between fiscal year 2009 and 2011. Only eight cut taxes. Based on the report, 24/7 Wall St. examined the six states that increased revenue from taxes by 9 percent or more during the period. While these states increased revenue the most, spending cuts appear to be critical to managing deficits for nearly all of the states.

Gas prices may impact county budgets - Many public leaders didn't figure this sort of price jump into their 2012 budgets, and they have hundreds of vehicles that need to be fueled up every week. Dozens of the trucks in the Kent County Road Commission's fleet only get about four miles to the gallon, and they run all day. The trucks will be traveling all over the county at the peak of construction season this summer, just as gas prices are projected to climb to $4.50 and possibly $5 a gallon. Fixing potholes instead of plowing snow in March should make Kent County Roads Maintenance Director Jerry Byrne a happy man. He's saved $750,000 on snow removal costs this year. But just as he was starting to envision all the summer road improvements he could do with that money, gas prises started to rise. "So if it goes up 50 cents, we're going to spend another $250,000 on fuel costs annually," said Byrne. It's projected to go up a buck, bumping that to $500,000. Of his fleet of 170 plows, cars, trucks, and more, 80% run on diesel. "A truck that leaves here and throughout the course of the day will drive 100-150 miles throughout the course of the day if they're hauling blacktop or gravel," he said.

Moody’s downgrade of debt may force Detroit to pay $350 million to end swap agreements - Detroit had more than $2.5 billion of debt downgraded by Moody’s Investors Service as the city faces a deficit approaching $270 million. The move may force the city to pay $350 million over seven years to terminate swap agreements. “Although efforts to stabilize the city’s finances and improve liquidity are ongoing and could be resolved over the very near term, protracted discussions continue and this uncertainty increases bondholder risks,” Moody’s said today in a report. The ratings remain on review for possible downgrade. Gov. Rick Snyder has proposed placing Detroit’s finances under a nine-member advisory board to avoid a state takeover. Mayor Dave Bing rejected the plan and said he will offer a counterproposal that would preserve his authority. “The downgrade announced by Moody’s today isn’t unexpected,” Chris Brown, Detroit’s COO, said in a statement. “In December, we narrowly averted a downgrade. Since then, we’ve been concerned about the continued possibility, and we’ve worked to avoid it.” Michigan’s scrutiny “could result in bringing the city one step closer to bankruptcy,” according to Moody’s.

Review Team Declares ‘Severe Financial Emergency’ In Detroit – A state review team has determined that a “severe financial emergency” exists in Detroit, meeting the threshold necessary for the state to appoint an emergency manager. The team voted 9-0 Wednesday afternoon during a public meeting in Detroit. The next step: Gov. Rick Snyder will determine whether an emergency manager is appointed. City and state officials have been trying to forge a consent agreement that would prevent an emergency manager from being appointed in the city. Detroit faces a nearly $200 million deficit and the specter of possible payless paydays. Before Wednesday’s vote, review team member and former Michigan Supreme Court Justice Conrad Mallett Jr. said the city’s “old way of doing things has got to stop.”

Municipal Defaults — Already 21 in 2012 — Another Blow for Bond Insurers - A growing number of U.S. cities are choosing to fund essential services like public safety and garbage collection over making payments on their outstanding debt, as rising costs and falling revenue deplete their budgets. So far, the bond defaults are not roiling the $3.7 trillion municipal market because insurance companies are stepping in to make payments to bond holders in some cases. But defaults on insured bonds are putting pressure on these insurers, which never fully recovered from the last decade’s financial crisis. The California cities of Stockton and Hercules, as well as Pennsylvania’s capital, Harrisburg, have opted to default on some of their insured debt in recent months. “Municipalities are saying this is what bond insurance is for – bond holders get paid,” said Richard Lehmann, publisher of Distressed Debt Securities Newsletter. So far in 2012, there have been 21 muni defaults totaling $978 million, versus 28 defaults totaling $522 million for the same period in 2011, said Lehmann, who sees the number rising. A breakdown of defaults on insured munis was not available.

More recycling in Palo Alto means city can’t afford trash collection - Many Palo Alto residents were aghast last week when the city decided to hike trash rates for the second time since last year. The city said consumers have done such a good job in recycling that they have less trash, so that now the city’s garbage fund is going broke. Palo Alto has been using money from collecting garbage to pay for the recycling, which, for residents, is free. It seems that Palo Alto is not the only city facing this financial dilemma. Most cities on the Peninsula encourage residents to conserve by using smaller trash containers, so they are also seeing their income drop drastically. Each is struggling to right the ship. In January, San Mateo County hiked its garbage-collection rate by 14.7 percent in some unincorporated areas, including Burlingame Hills, San Mateo Highlands, Baywood Park and others.

"Intelligent Urban Design" - Two months ago, I was introduced to a start-up called CityMart, a for-profit marketplace dedicated to helping vendors and city managers to find one another – and to spreading municipal innovations outside of their home turf. This month, in Thailand, I met Jonathan Hursh, who runs Compassion for Migrant Children (soon to be renamed), which focuses on migrant populations in the slums that surround almost every large city in the world. In mid-May, I'll be attending the New Cities Summit in Paris, a three-day forum focused on the future of cities. Cities matter, as they always have, but now more of the world is starting to take notice of their problems and possibilities. At their worst, cities are slums, places where the social constraints of the village are loosened, people can misbehave in anonymity, and poor and unemployed people live in squalor. At their best, they are places where the best and the brightest congregate, new wealth is created, and scholars and artists sharpen their wits and hone their creativity. Most cities have grown through evolution, from unpremeditated beginnings. Moreover, they rarely die. Cities (and their imperfections) persist in a way that large political entities, even those of which they are a part, do not. And, as we are seeing worldwide nowadays, national governments are difficult to overturn and also difficult to (re)build. Democracy does not always lead to liberty or good outcomes.

How demolishing freeways is reviving American cities - Excerpted from a longer interview in Next American City. One of John Norquist’s best-known achievements as mayor of Milwaukee — an office he held from 1988 to 2004 — was demolishing the Park East Freeway, a 1960s-era expressway that restricted access to the city’s downtown. Today, he is CEO of the Congress for the New Urbanism, an organization that promotes urban highway removal and walkable, mixed-use urban development. Norquist, who is also author of The Wealth of Cities, an argument for using the free market to achieve urbanist goals, will be one of the featured speakers at the Congress’ 20th annual gathering in West Palm Beach, Fla., this May. Here, he discusses urban highway removal — where it’s been done, where it will happen next, and why we as a nation must overcome our obsession with reducing congestion.

Disrepair of Pa. locks & dams threaten failure - Pittsburgh's three rivers, an economic engine since Lewis and Clark departed the city for their epic exploration of the West, are flirting with disaster. The region's 23 locks and dams, which annually move 33 million tons of coal, petroleum and other commodities that fuel the local economy, are on the brink of failure, according to the U.S. Army Corps of Engineers, the federal agency charged with maintaining them. The failure could come at Elizabeth, the locks and dam on the Monongahela River completed in 1907. The Corps says there "are significant structural, mechanical and hydraulic problems" with the locks, including the collapsing roof of the tunnel that carries water used to fill and empty the lock chambers. "We've had chunks of concrete coming down for many years," said Jim Fisher, acting chief of operations for the Corps' Pittsburgh district. Or it could come 18 miles farther up the Monongahela at Charleroi, where the walls of a Depression-era lock sway back and forth each time the lock is filled and emptied. Water inside the chamber is helping to hold the walls up.

Police Unleash Attack Dogs, Suspend Students for “Thought Crimes” After Students Protest Conditions at School - A group of enterprising public school students in Maryland tried to stage a basic protest over poor conditions, including 40-person classes, bad food, and poor treatment of both teachers and students. In response, police brought attack dogs to the school and a number of students were suspended for what they call "thought crimes."  It's an incredible example of the confluence of crackdowns like the ones on Occupy encampments and the increasing attacks on public schools as well. Watch one intelligent, brave young student's interview with Thom Hartmann below (and wish you were as articulate as she is!):

San Jose schools may not see redevelopment agency funds for decades - The city of San Jose expects to spend 20 to 30 years paying off the $3.9 billion debt its recently dissolved redevelopment agency incurred, said Richard Keit, the city’s managing director of redevelopment. Until the debt is paid off, funds previously intended for redevelopment can’t be distributed to school districts and colleges, as the state had promised. Last month, the state dissolved redevelopment agencies across California. Governor Jerry Brown signed the legislation last summer in an attempt to help balance California’s budget. The law promises to distribute money that had gone to the redevelopment agency to schools, community colleges and special districts that provide services like sewage treatment, fire protection and street lighting. But first San Jose and the other districts must pay off their debts. When Brown signed the bill last year, no one was talking about this. California redevelopment agencies incurred debt to function, and depending on the city, that debt could take longer to pay off than expected.

It is a Fact that Charter Schools Don't on Average Improve Performance, Not Just Something that the Teachers' Union President Says -  The NYT had a bad case of he said/she said reporting this morning in an article that reported on a panel's recommendations for improving the nation's education system. The article noted the panel's recommendation for increased the choice of schools available for parents to select among. It then cited comments from Randi Weingarten, the President of the American Federation of Teachers, saying: "school choice options like vouchers and charters, which use public funds but are run by a third party, have not proved to be sustainable or to improve schools."This is not just something that Ms. Weingarten says, it also happens to be true. Extensive research has found that the vast majority of charter schools do not result in better performance by standardized test measures than the public schools, and a substantial portion do markedly worse.The NYT should have pointed out that Ms. Weingarten's assertion was true and not left it to readers to try to decide between competing claims.

Anti-Science ‘Monkey Bill’ Passes Tennessee Senate -  “The Senate approved a bill Monday evening that deals with teaching of evolution and other scientific theories,” the Knoxville News-Sentinel (March 19, 2012) reported, adding, “Critics call it a ‘monkey bill’ that promotes creationism in classrooms.” The bill in question is Senate Bill 893, which, if enacted, would encourage teachers to present the “scientific strengths and scientific weaknesses” of “controversial” topics such as “biological evolution, the chemical origins of life, global warming, and human cloning.” Among those expressing opposition to the bill are the American Association for the Advancement of Science, the American Civil Liberties Union of Tennessee, the American Institute for Biological Sciences, the Knoxville News Sentinel, the Nashville Tennessean, the National Association of Geoscience Teachers, the National Earth Science Teachers Association, and the Tennessee Science Teachers Association, whose president Becky Ashe described (PDF) the legislation as “unnecessary, anti-scientific, and very likely unconstitutional.”

Monsanto ‘Biotechnology Book for Kids’ Caught Brainwashing Children - Facing direct opposition from the public, biotechnology giants like Monsanto and Dow are now making a disturbing attempt to brainwash developing minds into accepting their genetically modified foods using blatant lies and propaganda. In a last ditch effort to potentially sway public opinion, the Council for Biotechnology Information (CBI)  has launched the “Biotechnology Basics Activity Book” for kids. With the intent to be used by ‘agriculture and science teachers’, the activity book spreads absurd lies about GMO crops — even going as far as to say that they ‘improve our health’ and ‘help the environment’. The book can be seen on the organization’s website, and makes it extremely apparent that it is full of misinformation and propaganda that completely ignores scientific research surrounding genetically modified organisms (GMOs).

Should K-12 Teachers Have Tenure? Becker - The traditional case for tenure at the university level rests on two pillars. The first and most prominent is that this gives professors freedom to express unpopular views in their writings and lectures. The second is that professors in the same field are the best ones to judge the qualifications and promise of potential new hires and existing colleagues. This is why departments rather than central administrators choose who to hire and who to let go. Tenure insures the existence of a core of faculty with a long-term commitment to their departments who make the hiring and firing decisions.For reasons I have expressed elsewhere (see my 1/15/06 “Comment on Tenure”), I do not believe that these arguments are powerful enough to justify the rigidities introduced by having the tenure system at colleges and universities. Whether that conclusion is correct or not, neither of these arguments made for having tenure in higher education has close applicability to teachers at the K-12 level. They publish very little, and mainly teach materials that are not controversial.

Should public school teachers have tenure? Posner - The narrow question whether public school teachers should continue to have tenure, as they mostly still do, opens into the broad question of the extent to which education should be provided by a free market or by the government. It is rare for private employers to offer tenure contracts to their employees unless the employees are represented by a union, as public school teachers often are; and so the question of tenure for public school teachers is unavoidably a question about the desirability of permitting teachers to unionize. However, quite apart from unions, public school teachers have traditionally obtained tenure after a short probationary period, by statute. Teacher tenure is now under fire in many states as are teachers’ unions. There is general recognition that education provides significant external benefits—significant enough to warrant public subsidy. But public subsidy needn’t imply public provision of the subsidized service. Government subsidizes health care but does not provide the health care itself, with a few exceptions, such as for soldiers (including veterans) and prison inmates, and, in big cities primarily, for indigents. There are many private schools, religious and secular, and a good deal of home schooling. There are also many “charter” schools, which are quasi-private. But most Americans continue to be educated in public schools, owned by local governments (I do not discuss higher education, and hence state-owned as distinct from local schools) Is this a mistake? Should education be privatized? Conversely, should private schools be discouraged?

Cal State Freezes Spring Enrollment - With an uncertain budget, the California State University system has stopped accepting new admission applications for the spring 2013 semester. The CSU system is struggling to come to grips with a $750 million budget cut this  year and it is facing another $200 million cut if it cannot pass a tax measure for the November ballot.The measure has yet to qualify for the ballot.\The problems could get worse for the CSU system if the tax measured is not approved. In addition to automatically enacting a $200 million state cut, it would also put in jeopardy the admission of another 20,000 to 25,000 qualified students for the 2013-2014 year.This all comes as student anger continues to rise as quick as their tuition. Tuition will jump to $7,017 a year, not including room, board and books next year. That is double what the system charged in 2007-2008.

Public Higher Education Gets Less State and Local Support - The association of State Higher Education Executive Officers has published their report on "State Higher Education Finance FY 2011." The basic story is rising enrollments in public institutions of higher education, but falling per-student support.  The blue bars in the figure show educational appropriations for public higher education [per full-time equivalent student, adjusted for inflation. The support starts relatively high at $8,156 per student in 1987), sags in the early 1990s to $7,054 in 1993, rises again in the late 1990s and early 2000s as high as $8,316 in 2001, drops off in to $6,875 in 2005, rises to $7,488 in 2008, and now has dropped off to $6,290 in 2011. Meanwhile, tuition revenue per full-time student is gradually rising. Overall, it rises from $2,422 in 1986 to $4,774 in 2011. And over these 25 years, the number of full-time equivalent students in public higher education has risen from about 7 million back in 1986 to almost 12 million in 2011. Put these together, and here's tuition as a share of public education total revenue, rising from 23.2% back in 1986 to 43.3% at present.

Who Shouldn't Go to College? - Rick Santorum’s recent diatribe against higher education, in which he called President Obama a “snob” for wanting “everybody in America to go to college,” has reinvigorated the seemingly endless debate over whether college is worthwhile.. Economic evidence consistently and compellingly documents the value of postsecondary education in general (as Economix contributors have written about more than once). But high average returns do not necessarily imply that everyone should invest in college. So is there anyone who should not go to college – and if so, who? The answer is clearly yes: some folks do have good reasons to skip (or at least delay) college. But the good reasons are more limited than the ones Mr. Santorum and other college skeptics typically cite. First, Mr. Santorum and others often suggest that those who “want to work out there making things” don’t need to go to college – instead they should pursue vocational or on-the-job training. But most vocational training, and even some highly specific job training, now occurs on community and technical college campuses. Mr. Santorum’s perception that “college” refers primarily to baccalaureate education is several decades out of date, as the chart below shows. In fact, only about half of the credentials awarded by undergraduate institutions are traditional bachelor’s degrees. The rest are either associate’s degrees or certificates, the vast majority of which are in applied fields.

The higher education bubble - Yesterday there was a Bloomberg article that explained how badly students understand their student debt. It occurred to me reading this, and not for the first time, that students are really the perfect choice of victim for the educational financing machine: they are typically naive about money, and a combination of incredibly hopeful and incredibly thoughtless about their futures – if they think about the future at all, they project themselves to be as successful as some chosen role model, against all odds. I was lucky enough to go to a state school which my parents could afford and were willing to pay for, graduating in 1994, but looking back I would have signed away on whatever dotted lines if I’d been asked. Students don’t think to shop around for a better deal, or even bother to understand the deal they’re in. What’s the incentive for good deals in these circumstances? More generally, the existence and price of college itself is a perfect trap for students. It’s been a growing assumption in the past few decades that one needs a college education to get a good job, and certainly in a poor job market like the one right now that is certainly true. And yet, the student debt load is increasing faster than the opportunities higher education provides.

International PPP for faculty salaries - Not exactly what I would have thought: Canada comes out on top for those newly entering the academic profession, average salaries among all professors and those at the senior levels. In terms of average faculty salaries based on purchasing power, the United States ranks fifth, behind not only its northern neighbor, but also Italy, South Africa and India. You will note however that this is not covering the extreme right hand tail of top faculty salaries in top U.S. universities, but rather a measured mean from public institutions.  There is more here, hat tip goes to Jacob Levy.  In percentage terms, the biggest gap between entry salaries and top salaries is found in China.  There is much more data here.

Big Brother on campus - Campus spies. Pepper spray. SWAT teams. Twitter trackers. Biometrics. Student security consultants. Professors of homeland security studies. Welcome to Repress U, class of 2012. Since 9/11, the homeland security state has come to campus just as it has come to America’s towns and cities, its places of work and its houses of worship, its public space and its cyberspace. But the age of (in)security had announced its arrival on campus with considerably less fanfare than elsewhere — until, that is, the “less lethal” weapons were unleashed in the fall of 2011. Today, from the City University of New York to the University of California, students increasingly find themselves on the frontlines, not of a war on terror, but of a war on “radicalism” and “extremism.” Just about everyone from college administrators and educators to law enforcement personnel and corporate executives seems to have enlisted in this war effort.  Increasingly, American students are in their sights.

For 2nd Year, a Sharp Drop in Law School Entrance Tests - The organization behind the Law School Admission Test reported that the number of tests it administered this year dropped by more than 16 percent, the largest decline in more than a decade.  The Law School Admission Council reported that the LSAT was given 129,925 times in the 2011-12 academic year. That was well off the 155,050 of the year before and far from the peak of 171,514 in the year before that. In all, the number of test takers has fallen by nearly 25 percent in the last two years.  The decline reflects a spreading view that the legal market in the United States is in terrible shape and will have a hard time absorbing the roughly 45,000 students who are expected to graduate from law school in each of the next three years. And the problem may be deep and systemic.  Many lawyers and law professors have argued in recent years that the legal market will either stagnate or shrink as technology allows more low-end legal work to be handled overseas, and as corporations demand more cost-efficient fee arrangements from their firms. That argument, and news that so many new lawyers are struggling with immense debt, is changing the way law school is perceived by undergrads. Word is getting through that law school is no longer a safe place to sit out an economic downturn — an article of faith for years — and that strong grades at an above-average school no longer guarantees a six-figure law firm job.

Number of LSAT Tests Drop to an 11-Year Low -- Chronicle of Higher Education -- "The number of Law School Admission Tests administered this year declined by 16.2%, the largest drop in more than a decade, the Law School Admission Council reported. The numbers reflect widespread pessimism about the value of a legal education today as education debts soar and job prospects remain dim.The decline, from 155,050 tests in 2010-11 to 129,925 this year, follows the previous year's 9.6-percent fall (see chart above, data here). The drop comes at a difficult time for the nation's law schools. A team of lawyers representing disgruntled law-school graduates has filed 15 lawsuits against law schools for allegedly publishing inflated data on the jobs and salaries of their graduates. The lawyers recently announced plans to sue 20 more schools if they round up enough plaintiffs to pursue class-action lawsuits, and to continue cranking out batches of suits every few months. In the meantime, unhappy graduates have taken to so-called "scam blogs" to decry what they see as deceptive reporting on jobs and salary data."

Students, Your Loan Interest Rate Is About to Double - Prepare yourself: on July 1, as many as 8 million college students will see their interest rates on federally subsidized student loans double, from 3.4% to 6.8%. According to the U.S. Public Interest Research Group, that increase amounts to the average Stafford loan borrower’s paying $2,800 more over a standard 10-year repayment term for loans made after June 30. It’s worse for those students who take out the most money. Those who borrow the maximum $23,000 in subsidized student loans will see their debt load upped by $5,000 over a 10-year repayment plan and $11,000 over a 20-year repayment plan. With the deadline looming, college students last week delivered some 130,000 letters to Congress, urging legislators to keep the interest rate at 3.4%. Like many things in Washington this election year, the issue has become a partisan battle. President Obama and other Democrats have urged Congress to act to extend the low rate (Democrat Representative Joe Courtney of Connecticut has introduced legislation that would stop the rate hike), while Republicans favor allowing the rate to return to 6.8%. Even the cost estimates vary: Democrats predict that keeping the rate at 3.4% for one additional year would cost about $3 billion, while Republicans say it would cost nearly $7 billion.

CFPB Details Growing Danger of Rising Student Debt - In a rare moment of disagreement among major federal agencies, the Consumer Financial Protection Bureau has found in its preliminary research of student debt that the problem is even greater than they at first surmised. A speech before the Consumer Bankers Association by Rohit Chopra, the student loan ombudsman for the agency, termed the student debt market “too big to fail,” with a total outstanding debt of well over a trillion dollars, far more than previous estimates. Unlike other consumer credit products, student debt keeps growing at a steady clip. Students borrowed $117 billion in just federal student loans last year. And students continue to borrow private student loans, which lack the income-based repayment and deferment options of federal student loans. If current trends continue, there will be consequences not just for young people, but for all of us. According to data from the Department of Education, federal student loan debt isn’t growing just with new originations – with so many borrowers unable to keep up with interest payments, debt is growing even for many who have left school. Too much debt means too much risk for a generation of young people, many of whom are struggling in today’s economy. Chopra smartly tackled how rising student debt has ripple effects through the economy. First-time homebuyers inevitably come from the pool of recently graduated. Yet this mass of debt makes them unable to step up to that first home. Indeed, we’re seeing more adult children living at home with no plans to leave, the start of what could be a permanent condition. This reduces new sales and housing starts, with ramifications for the greater economy.

A costly lesson in student debt for young Americans34 percent of all student debt saddled to those under the age of 30. 47 percent of student loan borrowers appear to be in deferral or forbearance. The student loan market has expanded like a financial virus in the last decade.  Even during the financial meltdown where credit was being restricted across all sectors of the economy, student debt kept on growing at a feverish pitch.  It would be one thing if the quality of education had increased or wages were going up for college graduates but the opposite occurred.  The quality of education especially at many of the for-profits is suspect at best and borders on thievery.  This is where a massive expansion has occurred thanks to the financialization of our entire economy.  Student debt has grown from $97 billion in 1997 to a stunning $870 billion according to conservative Fed reports to inching closer to $1 trillion this year by other measures.  Higher education is definitely in a bubble and younger Americans are dealing with the brunt of this new predatory financial epidemic.

The Twilight of Retirement's Golden Age - On Tuesday, March 13th, the Employee Benefits Research Institute (EBRI) released its annual retirement confidence survey (entitled, The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings). Since 1990, EBRI has been measuring American households' self-assessment of their financial preparedness for retirement. In the almost four years since the 2008 financial crisis, only a minority of workers (14 percent) feel "very confident" in the provisions they have made for life during their golden years. This compares to 23 percent who voiced an opinion of being "not at all" confident in sufficient funds to see themselves through retirement. The recent and post-crash results flip the comparative assessments expressed in EBRI's 2007 survey. Before the crash, 27 percent of respondents expressed a high level of confidence, while only 10 percent lacked confidence. Certainly the stock market crash has dented expectations. The decline in home prices and the continuing stagnation in residential real estate markets around the nation have also taken its toll. The housing market bubble and the subsequent crash (in both real estate and the financial markets) have accelerated the erosion of faith in the old certainties prior generations counted on to see them through retirement. With few, apparent alternatives to replace them, the respondents' pessimism is understandable.

Retirement Insecurity: A Problem that Needs a Solution (so here’s one!) While I’ve written a fair bit on Social Security, I’ve not paid enough attention to other dimensions of retirement security, in particular, pension reform.I was reminded of this omission upon reading this great oped by one of my favorite pension experts, Teresa Ghilarducci. Here’s the basic lay of this troubled landscape: First, based on long-term wage erosion, low savings, and the shift from defined benefit (DB) pensions to defined contribution pension plans (DC)—see figure—there are a lot fewer people who will reliably be able to replace enough of their lost earnings when they retire. DB plans guarantee a pension benefit; DC plans are individual retirement accounts that fluctuate with the markets; thus, the figure shows the locus of risk in retirement security shifting from employers to workers. Second, some pension plans held by public workers—and thus a liability for their public sponsors, like municipal governments—are in trouble, often due to a collision of irresponsible funding practices and the Great Recession. Though cases facing potential defaults dominate the headlines—including today’s—they are the exception. Yes, there exists a serious funding shortfall in many public plans, but no, that doesn’t imply the need for massive restructuring, benefits cuts, and defaults. Moreover, most—not all—have time to fix the problem through funding increases, along with some sensible eligibility and benefit reductions (from the CBPP link above):

The challenge of getting Americans to save more - CLIVE CROOK nails the retirement problem. The issue is not Social Security per se; its finances can be put on track (not quite as painlessly as Mr Crook suggests, but it's manageable) and the sooner that happens the better. The problem is confusion about who’ll get what. Social Security tries to be many different things. It is both insurance against poverty in old age and income replacement for the middle class. Its muddled mission means people tend to see it as a saving scheme, where their contributions entitle them to a comfortable retirement, but that’s not technically true. On the other hand I often hear people say “Social Security will not be there when I retire”; that’s also not true. This level of confusion is a major problem. No matter what happens, Social Security will not provide enough retirement income for most people. A 45-year old who earns $35,000 can only expect about $16,000 a year from Social Security when he retires. If he earns the median income, about $50,000, he’ll get about $20,000. According to the 2009 Survey of Consumer Finance the median financial (does not include housing) wealth for people approaching retirement is about $70,000. That will provide about $3,500 of inflation-protected income a year in retirement—not much to live on. People need to save more.

AARP vs. Social Security? - Last week Huffington Post reported that AARP was embarking on a "Social Security and Medicare "listening tour" called "You’ve Earned a Say and We’re Listening." Through "town halls, community conversations, bus tours and other events," the influential organization promises to offer members a chance to speak out on the simmering debate over the future of Social Security and Medicare. "The outreach is part of the group's campaign to restore trust it lost during last year's spending debate, when a top AARP official told the Wall Street Journal the organization was open to cuts to the entitlement programs. "The ship was sailing. I wanted to be at the wheel when that happens," AARP policy chief John Rother said, according to the Wall Street Journal. "But while AARP staffers fan out across the country to hear from members, the group's CEO, Barry Rand, will be listening to a different cast of characters. An AARP invitation to a secret "Relaxed and Robust Evening of 'Salon Style' Conversation" to be held at a Capitol Hill home on March 27, obtained by The Huffington Post, indicates that the organization is still very much interested in a "grand-bargain" style deal that puts Social Security and Medicare cuts on the table.""AARP is not pursuing any closed door deals or grand bargains," . That's precisely why we're launching 'You've Earned a Say.' We are interested in hearing from all sides and having civil discourse on these issues."

AARP Back in Bed With Effort to Cut Social Security and Medicare - Yves Smith - Wow, the AARP must be taking lessons from the Democratic Party, that you can afford sell out your putative base if you do the bidding of really big moneyed interests. In case you missed this saga (it wasn’t one we posted on till now) in June last year, AARP’s board approved supporting Social Security cuts. That followed a multi million dollar ad campaign against the very same stance. They planned to sell the future of old people living off dog food to the membership via a series of town hall meetings. The backlash from the membership led to the purge of the policy chief John Rother, who was made a scapegoat. The latest development, reported in the Huffington Post, shows the housecleaning didn’t go far enough. AARP members need to demand resignation of all directors who are behind this scheme, which is probably all of them. Protests at their homes might be necessary to rein in an board which is so insistently defying its members wishes and interests. And to add insult to injury, the AARP plans a “listening tour” which is of course not at all about listening but selling a “Grand Bargain” which is more Newspeak, in this case the idea of a budget deal that includes retirement program cuts. The Huffington Post does a great job of exposing how the leadership of the AARP is flat out lying to its members about its conduct:

Yes, Virginia, Heads of Nonprofits Get Egregious Salaries Too - One of the side effects of increased income disparity is the assumption in some circles that anyone who has a “big” job deserves a lot of money, whether or not the circumstances or their performance warrants it. It wasn’t all that long ago that the prevailing assumptions were radically different: CEOs (except maybe in the auto industry) did not see themselves as near royalty, and most well run businesses recognized that firing staff in downturns and rehiring was costly (search time and training are bigger costs than most top brass admit to themselves).  A great piece at the Village Voice, “The Nonprofit 1 Percent” describes how this logic plays out in the not-for-profit sector. The centerpiece of the story is the Jewish Guild for the Blind. The opening anecdote describes how a meagerly-paid music therapist who worked there 20 years was fired, and she is in despair of the impact on her charges, who are elderly, poor,and have little else in the way of enrichment. The ostensible reason for the cut was that the Guild had a bad year in 2009. But its CEO, Alan Morse, saw his pay increase 82%, from $844,000 to over $1.5 million. And it’s not as there is a ready justification for either the pay level or the increase. The Guild’s main source of revenue is Medicare. It was closing an operation in Yonkers because it was “unprofitable” at a time when employees were raising questions about the use of funds.

Texas Has Highest Percentage Of Uninsured (Audio) Almost a quarter of people in Texas lack health insurance. We take a look at what that means for a patient struggling to get treatment for a health condition.

Healthcare Costs and Household Income: Median versus Average - The Post's Wonkblog had an interesting post about a new study showing that the cost of health insurance for a typical family will be equal to the median family income by 2037, if current trends continue. Unfortunately, the post inaccurately reported that the comparison was with average family income. Given the growth of inequality in the last three decades this makes a big difference. According to the Census Bureau, median household income in 2010 was 49,445, whereas average income was $67,530. Perhaps more importantly, average income by definition grows in step with the economy whereas median income has been growing slowly as a result of upward redistribution. (The confusion actually is in a chart in the original paper, so Wonkblog can be forgiven for not catching it.)  The story is still an important one, if not quite as dramatic as reported. The vast majority of people in the United States will soon be unable to afford health care if nothing is done to contain costs. This is the second most predictable crisis in history, after the housing bubble, and almost no one is talking about it.

The Collapse of Employment-Based Coverage - Krugman - Reed Abelson at Economix points us to a startling study on the effects of the Great Recession on health insurance. You can see similar trends in the Census data, but for whatever reason this survey — carried out by a highly reputable group — is even stronger. Here’s the key picture: What this says is that the system that has provided workable insurance coverage to many (but not enough) Americans is coming apart at the seams. And this in turn means that if health reform goes down, we’re going to be looking at a wave of misery spreading across the land.

Sources of health system (in)efficiency, in one chart

Healthcare Might be in Healthier Shape Than We Think - Austin Frakt posts a chart today showing that productivity growth in the healthcare sector sucks. In the durable goods sector, for example, productivity doubled between 1995-2005. In the healthcare sector, it went down by a few percent. In the middle of an economic boom, healthcare actually got less productive. But wait. What does this mean? If I run a widget factory, measuring productivity is straightforward. If I make twice as many widgets with the same amount of labor and capital, my productivity has doubled. Hooray! But what does healthcare produce? What precisely needs to double to say that healthcare productivity has doubled? Austin links to a paper by David Cutler, who admits that "Productivity growth is notoriously difficult to measure in health care." Why? Because "Accurate productivity assessment requires a good output measure." Official figures put productivity growth in the healthcare sector at -0.2% per year, but: Figure 2 shows the cost per additional year of life attributable to medical care between 1960 and 2000. The value of a year of life is generally taken to be about $100,000 (Cutler, 2004). Thus, costs per year of life below this amount are generally considered to be good value, while costs above this amount are considered to be poor value. Most of the estimates of cost per year of life are below $100,000. Thus, medical care on average is giving good value for the dollar.

Hurray for Health Reform, by Paul Krugman- It’s said that you can judge a man by the quality of his enemies. If the same principle applies to legislation, the Affordable Care Act — which ... for the most part has yet to take effect — sits in a place of high honor. ObamaRomneycare isn’t easy to love, since it’s very much a compromise. Can such a system work? It’s already working! Massachusetts enacted a very similar reform ... while Mitt Romney was governor. Jonathan Gruber ... has surveyed the results — and finds that Romneycare is working pretty much as advertised. The number of people without insurance has dropped sharply, the quality of care hasn’t suffered, and the program’s cost has been very close to initial projections. Given this evidence, what’s a virulent opponent of reform to do? The answer is, make stuff up. We all know how the act’s proposal that Medicare evaluate medical procedures for effectiveness became, in the fevered imagination of the right, an evil plan to create death panels. And rest assured, this lie will be back in force once the general election campaign is in full swing.

Senate Bill Could Roll Back Consumers’ Health Insurance Savings -  This summer, health insurance companies may have to pay more than a billion dollars back to their own customers. The rebate requirements were introduced as part of the 2010 health-care reform law and are meant to benefit consumers. But now an insurer-supported Senate bill aims to roll back the rebate requirements. Known as the medical loss ratio rule, it’s actually pretty simple. Under the health-care law provision, 80 to 85 cents of every dollar insurers collect in premiums must be spent on medical care or activities that improve the quality of that care. If not, they must send their customers a rebate for the difference. The goal, according to the Department of Health and Human Services, is to limit the money insurers spend on administrative costs and profit.“It essentially ensures that consumers receive value for every dollar they spend on health care,” HHS spokesman Brian Chiglinsky told ProPublica. Last month, Sen. Mary Landrieu, D-La., introduced a bill that would change what costs companies can include in the 15 to 20 percent they are allotted for overhead, salaries and marketing. The bill, similar to a House bill introduced in March 2011 that has yet to come up for a vote, focuses on payments to insurance agents and brokers. Traditionally, these commissions are bundled into the administrative costs when making the final calculation. But insurance regulators have argued that fees paid to insurance agents and brokers shouldn’t count.

Will the Cost of Health Insurance Eventually Eat Up Your Entire Paycheck? Study Says Yes. - Here’s a depressing thought, at least for those of us who occasionally get sick or injured, or take prescription medicine, and who own fewer than three mansions: If current trends continue, the cost of health insurance for a typical American household will eat up all of its paycheck(s), and then some, by 2033. That’s the conclusion, at least, of a new study conducted by Richard A. Young and Jennifer E. DeVoe and published in Annals of Family Medicine. The two doctors reached this depressing conclusion by comparing recent increases in health insurance costs with considerably less hefty increases in family income. Here’s how they explain it: If health insurance premiums and national wages continue to grow at recent rates and the US health system makes no major structural changes, the average cost of a family health insurance premium will equal 50% of the household income by the year 2021, and surpass the average household income by the year 2033. It gets worse:If out-of-pocket costs are added to the premium costs, the 50% threshold is crossed by 2018 and exceeds household income by 2030.

The Supreme Court health care litigation in one chart

Health-care ruling could be a blow to insurers - When the Supreme Court weighs a closely watched challenge to the overhaul of the U.S. health-care system, few observers will be on edge as much as the insurance industry. The high court has the opportunity to set several landmark precedents as it decides the fate of legislation that has polarized political debate and divided much of American society into pro- and anti-reform camps. The central issue before the court is whether Congress can mandate that all individuals buy insurance, as spelled out in the Affordable Care Act that was passed in 2010. But if the court strikes down the mandate and leaves the rest of the law intact—a distinct possibility—that could spell disaster for health insurers and result in skyrocketing premiums for policyholders. “This is a huge problem for insurers,”  If the court only strikes down the mandate while upholding parts of the law that force insurers to cover anyone regardless of pre-existing conditions, policyholders could simply buy insurance when they get sick without contributing to an ongoing risk pool.  “Without a mandate, there is a very powerful incentive for people to wait to purchase coverage,"

Insurers Look at Options if Individual Mandate Overturned - Next week, the Supreme Court begins three days of hearings on the Affordable Care Act. The justices will have to rule on the constitutionality of the individual mandate and the Medicaid expansion, unless they rule that the plaintiffs lack standing to sue because the penalties under the law have not come into existence yet. Jeffrey Toobin has a nice piece about the relevant issues, as seen through conservative appeals court judge Brett Kavanaugh, who warned his colleagues to be careful what they wished for, that if they struck down a mandate based on using private companies to deliver benefits, the only recourse for the government would be to retreat to public options where the constitutionality is more well-grounded, But I’m more interested in what happens in the event of one “worst-case scenario.” If the mandate is upheld along with the Medicaid expansion, or even if the court rules a lack of standing, business as usual continues and the implementation goes forward to 2014, when the exchanges begin. But if the mandate is severed from the bill, then things get interesting. Louise Radnofsky writes about that scenario today: The insurance industry and advocates of the health-care overhaul are sketching out contingency plans in case the Supreme Court strikes down a central part of the law in the coming months. Their worst-case scenario: The court knocks out the law’s mandate that most Americans carry insurance or pay a fee but leaves in place requirements that insurers sell policies to all applicants. The result, they say, would be spiraling insurance premiums, because sick people would buy insurance and nothing would stop healthy people from waiting to buy it until they needed it.

Health Insurers: We’ll Deny Coverage for Pre-Existing Conditions if Health Mandate Is Repealed - Health insurers and supporters of the Obama administration's health-care reform law are currently in the midst of drawing up possible contingency plans in case the Supreme Court overturns the Affordable Care Act's individual mandate. The insurance industry argues that premiums are likely to skyrocket without the individual mandate in place to aid in pushing millions of new enrollees into the marketplace, as healthy people will be less likely to buy insurance, while insurers will still be required to sell policies to all applicants. In fact, a repeal of the individual mandate would increase insurance premiums by 25 percent, according to a study released by the Robert Wood Johnson Foundation. "The insurance reforms would have to change if the mandate were struck," Health-insurance officials say that if the mandate is repealed, "their first priority would be persuading members of Congress to repeal two of the law's major insurance changes: a requirement to cover everyone regardless of his or her medical history, and limits on how much insurers can vary premiums based on age." Their next step would be to "set rewards for people who purchase insurance voluntarily and sanction those who don't."

Generic Drugs Prove Resistant to Damage Suits - Across the country, dozens of lawsuits against generic pharmaceutical companies are being dismissed because of a Supreme Court decision last year that said the companies did not have control over what their labels said and therefore could not be sued for failing to alert patients about the risks of taking their drugs.  Now, what once seemed like a trivial detail — whether to take a generic or brand-name drug — has become the deciding factor in whether a patient can seek legal recourse from a drug company. The cases range from that of Ms. Schork, who wasn’t told which type of drug she had been given when she visited the hospital, to people like Camille Baruch, who developed a gastrointestinal disease after taking a generic form of the drug Accutane, as required by her health care plan.  “Your pharmacists aren’t telling you, hey, when we fill this with your generic, you are giving up all of your legal remedies,”

Drug-resistant white plague lurks among rich and poor | Reuters Tuberculosis is often seen in the wealthy West as a disease of bygone eras - evoking impoverished 18th or 19th century women and children dying slowly of a disease then commonly known as "consumption" or the "white plague". But rapidly rising rates of drug-resistant TB in some of the wealthiest cities in the world, as well as across Africa and Asia, are again making history. London has been dubbed the "tuberculosis capital of Europe", and a startling recent study documenting new cases of so-called "totally drug resistant" TB in India suggests the modern-day tale of this disease could get a lot worse. "We can't afford this genie to get out of the bag. Because once it has, I don't know how we'll control TB," said Ruth McNerney, an expert on tuberculosis at the London School of Hygiene and Tropical Medicine. TB is a bacterial infection that destroys patients' lung tissue, making them cough and sneeze, and spread germs through the air. Anyone with active TB can easily infect another 10 to 15 people a year.

Gut Infections Are Growing Much More Lethal - Deaths from the infections more than doubled from 1999 to 2007, to more than 17,000 a year from 7,000 a year, the Centers for Disease Control and Prevention reported. Of those who died, 83 percent were over age 65.  Two thirds of the deaths were caused by a bacterium, Clostridium difficile, which people often contract in hospitals and nursing homes, particularly when they have been taking antibiotics. The bacteria have grown increasingly virulent and resistant to treatment in recent years.  But researchers were surprised to discover that the second leading cause of death from this type of illness was the norovirus. It causes a highly contagious infection, sometimes called winter vomiting illness, that can spread rapidly on cruise ships and in prisons, dormitories and hospitals.

Health chief warns: age of safe medicine is ending - The world is entering an era where injuries as common as a child's scratched knee could kill, where patients entering hospital gamble with their lives and where routine operations such as a hip replacement become too dangerous to carry out, the head of the World Health Organisation (WHO) has warned.There is a global crisis in antibiotics caused by rapidly evolving resistance among microbes responsible for common infections that threaten to turn them into untreatable diseases, said Margaret Chan, director general of the WHO. Addressing a meeting of infectious disease experts in Copenhagen, she said that every antibiotic ever developed was at risk of becoming useless. "A post-antibiotic era means, in effect, an end to modern medicine as we know it. Things as common as strep throat or a child's scratched knee could once again kill." She continued: "Antimicrobial resistance is on the rise in Europe, and elsewhere in the world. We are losing our first-line antimicrobials. "Replacement treatments are more costly, more toxic, need much longer durations of treatment, and may require treatment in intensive care units.

Mysterious ‘zombie’ disease afflicts thousands of Ugandan children - Agnes Apio has to tie up her son Francis before she can leave the house. In his state, he is a danger to himself. Where once he walked and talked like a normal child, now he is only able to drag himself along in the dirt. Francis is suffering from “Nodding Disease,” a brain disorder that, according to CNN, afflicts at least 3,000 children in northern Uganda, leaving them physically stunted and severely mentally disabled. “I feel dark in my heart,” Apio says as waves flies away from her son’s face and mops up his urine after a seizure, “This boy has become nothing.” “Reportedly the children gnaw at their fabric restraints, like a rabid animals,” says The Daily Tech. The article calls them “zombie children,” having “no cure” and “no future.” First the victims become restless, can’t concentrate. They say they have trouble thinking. Then comes the nodding, an uncontrollable dipping of the head that presages the disease’s debilitating epilepsy-like seizures. It is this nodding motion that gives the illness its name. Nodding Disease first attacks the nervous system, then the brain. As the epilepsy-like seizures progress and worsen, the children become less and less like themselves, and more and more distant and blank. Eventually the brain stops developing and the victims’ bodies stop growing. So far, no patients have recovered.

The REAL Cause of the Global Obesity Epidemic - Some 68% of all Americans are overweight, and obesity has almost doubled in the last couple of decades worldwide. As International Business Tribune reports: Studies conducted jointly by researchers at Imperial College London and Harvard University, published in the medical journal The Lancet, show that obesity worldwide almost doubled in the decades between 1980 and 2008. *** 68 per cent of Americans were found to be overweight while close to 34 percent were obese. Sure, people are eating too much and exercising too little (this post is not meant as an excuse for lack of discipline and poor choices). The processed foods and refined flours and sugars don’t help. And additives like high fructose corn syrup – which are added to many processed foods – are stuffing us with empty calories. But given that there is an epidemic of obesity even in 6 month old infants (see below), there is clearly something else going on as well. Are Toxic Chemicals Making Us Fat?

Study: Genetically Modified Corn Increases Body Weight in Rats - We previously reported: Many crops in the U.S. are now genetically modified. For example, 93 percent of soybeans grown in the US are genetically engineered, as are 86% of all corn, 93% of canola, 93% of cottonseed oi. Between 2008 and 2009, 95% of all sugarbeets planted were genetically engineered to be able to tolerate high doses of the pesticide Roundup Some allege that Roundup kills healthy gut bacteria, and that genetically modified crops cause other health problems. Many people claim that genetically modified (GM) foods increase obesity: But is there any evidence for that claim? One study implies that there might be. Scientists tested GM corn at Monsanto laboratories, and found that the GMs increase body weight in rats. Specifically, a paper published in the International Journal of Biological Sciences reported in 2009: We present for the first time a comparative analysis of blood and organ system data from trials with rats fed three main commercialized genetically modified (GM) maize (NK 603, MON 810, MON 863), which are present in food and feed in the world. Crude and relative liver weights are also affected at the end of the maximal (33%) GM maize feeding level as well as that of the heart which for corresponding parameters to a comparable extent, showed up to an 11% weight increase. Several parameters indicate increases in circulating glucose and triglyceride levels, with liver function parameters disrupted together with a slight increase in total body weight. This physiological state is indicative of a pre-diabetic profile.

Monsanto’s Roundup is Killing Human Kidney Cells - Monsanto’s ‘biopesticide’ known as Bt is not only developing mutated insects and requiring excessive pesticide use, but new findings show that it is also killing human kidney cells — even in low doses. Amazingly, Monsanto’s superweed-breeding Roundup also has the same effect. Scientists have demonstrated in new research that the Bt pesticide, in addition to Monsanto’s best-selling herbicide Roundup, exhibit direct toxicity to human cells. These dangerous Bt crops currently engulf 39% of globally cultivated GMO crops, and Monsanto does not seem to be slowing down on their campaign to expand usage. Led by Gilles-Eric Séralini, a French scientist from the University of Caen, Séralini and his team are no strangers to the toxic effects of both Bt and glyphosate — the main component used in Roundup. Previously, Séralini and a group of other scientists found that Roundup is linked to infertility, killing testicular cells in rats. The report stated that within 1 to 48 hours of exposure, testicular cells of the mature rats were either damaged or killed.

Honeybee Deaths: Colony Collapse Disorder Linked To Corn Insecticides - Scientists in recent years have attempted to identify the factors behind the increasing numbers of honeybee deaths in North America and Europe -- and new research has found the use of a specific class of insecticides in cornfields may be responsible.  The American Chemical Society recently published a study titled "Assessment of the Environmental Exposure of Honeybees to Particulate Matter Containing Neonicotinoid Insecticides Coming from Corn Coated Seeds"3 in its Environmental Science & Technology journal. The study explores the impact of industrial pesticides on honeybee colonies. In recent years, scientists have observed a phenomenon known as colony collapse disorder (CCD), which is characterized by worker bees mysteriously disappearing from a colony, leading to its collapse. While many factors have been proposed -- from insect viruses to cell-phone radiation -- and they may all play a part, the new study shows a strong correlation between CCD and the use of neonicotinoid insecticides.  These insecticides are designed to target crop-eating pests, and are applied to corn seeds before planting. However, the study found the insecticides inadvertently affect honeybees when the seed-drilling machines emit particles into the air.

Honeybee die-offs linked to insecticides - A newly published study draws a stronger link between mass die-offs of honeybees and an insecticide widely used on corn. The study sheds more light on the worrisome phenomenon known as Colony Collapse Disorder. Bees play a critical role in the pollination of crops, and thus a threat to bee colonies can potentially affect entire ecosystems. The latest study, conducted by Italian researchers at the University of Padova and published in the journal Environmental Science and Technology, focuses on a class of pesticides known as neonicotinoids. The pesticides are popular because they kill insects by paralyzing nerves but are less toxic to other animals. Springtime die-offs of honeybees coincided with the introduction in Europe in the late 1990s of neonicotinoids as coatings of the corn seeds, according to a report by UPI, citing researchers.

Bees still sick, EPA still stuck...time to get serious! - Today, PAN joined beekeepers and partners Beyond Pesticides and Center for Food Safety in filing a legal petition that calls on EPA to suspend registration of Bayer’s controversial bee-toxic pesticide, clothianidin.  We also delivered over a million signatures from individuals around the world — including over 20,000 PAN supporters — calling on EPA to take decisive action to protect honey bees from neonicotinoid pesticides before it is too late. Bees and other pollinators continue to die off at catastrophic rates; according to the U.S. Department of Agriculture (USDA), commercial beekeepers lost an average of 36% of their hives last year. As an indicator species, honey bees serve as sentinels we ignore at our own peril. They are also responsible for pollinating one in every three bites of food we eat. We rely on them, and they're relying on us. With today’s petition, we’re redoubling our efforts to protect these vital pollinators.

ENN: Mild winters may shift spread of mosquito-borne illness - Mild winters appear to speed annual menu changes for disease-carrying mosquitoes. And the revised biting patterns might play an overlooked role in worsening the risk of brain infections in people and horses. The mosquito Culex erraticus spreads the virus that causes eastern equine encephalitis. It's an uncommon but often lethal disease, killing about half of the people who contract it and virtually all the infected horses. Populations of C. erraticus, like some other mosquitoes, start their biting season targeting mostly birds but end up focusing on deer, horses, people and other mammals. The timing of when the insects shift from birds to mammals varies a lot from year to year among C. erraticus mosquitoes in Alabama, says entomologist Nathan Burkett-Cadena of the University of South Florida in Tampa. He and his colleagues discovered this variation after eight years of trapping mosquitoes and genetically identifying which bird and mammal species had provided the blood the insects were digesting. In years such as 2007, mosquito populations went mammalian in May or June, but in 2003 waited until August. "This is the first time that anyone has documented strong year-to-year variation in the timing of the host shift,"  Milder winters typically meant earlier shifts, whereas harsher winters more often led to delayed shifts.

The water data hub is LIVE! - Who gets water at what prices in the US still appears to be considered a local issue in the US at its core, and at best regional during droughts that cross borders or as it pertains to agricultural use and 'retail' (cities and burbs).  The issue of private versus public ownership is not very visible yet in US news, nor our need to repair our infrastructure (see my series on water  links to Part 1-5) .  And our friends in Texas haven't sent any recent alerts to me on their current problems (have any of us followed any other drought concerns on the national stage?). Water distribution questions did actually make national news in 2007/2008 droughts along the east coast and southwest but quickly disappeared.  However, the fault lines on who has access to water, news on how we actually obtain fresh water,  and questions on price structures became quite sharp and very legal in a only a year or two. The question on an international scale remains largely invisible to US and perhaps is time to revisit.  The IMF and World Trade Organization ownership rules are considered arcane and not relevant unless it involves the occasional town water supply and a company like Nestle's. Ian Wren and David Zetland have begun the Water Data Hub to help centralize primary source material worldwide. The authors announced the hub to help centralize data at David's Aguanomics

World Water Day: Understanding Water Risk - It’s rare for water to make waves at the World Economic Forum’s annual gathering of business leaders and finance ministers. But the most recent Davos summit was an exception. A new eye-opening report ranked water supply among the top five global risks in terms of impact– on par with systemic financial failure and fiscal imbalances. As we mark World Water Day, the alarming statistics underlying water scarcity are worth repeating. Worldwide 2.7 billion people are currently affected by water shortages. As the global population races toward 8 billion and beyond, upward trends in food demand and economic growth promise to further strain freshwater resources, especially in the developing world. Climate change, of course, is exacerbating these water challenges. Clean, abundant water is essential for life and economic growth. Since it is a finite resource, we need to find solutions that will ensure we can use water more efficiently and mange water systems more wisely.

World Water Day - In Focus - Tomorrow, March 22, is World Water Day, an event established by the United Nations in 1993 to highlight the challenges associated with this precious resource. Each year has a theme, and this year's is "Water and Food Security." The UN estimates that more than one in six people worldwide lack access to 20-50 liters (5-13 gallons) of safe freshwater a day to ensure their basic needs for drinking, cooking, and cleaning. And as the world's population grows beyond 7 billion, clean water is growing scarcer in densely populated areas as well as in remote villages. Collected here are recent images showing water in our lives -- how we use it, abuse it, and depend on it. [36 photos]

Las Vegas bets on desert water pipeline as Nevada drinks itself dry - In a 21st-century version of an existential struggle in the desert, the city of Las Vegas wants to pump up to 300bn litres of water a year out of this landscape and transport it 300 miles south to the thirsty metropolis of casinos and golf courses. The most advanced of three such projects as the US south-west struggles to adapt to recurring droughts, the pipeline could get the go-ahead on Thursday from the state's chief engineer. Supporters say the $7bn (£4.4bn) project is a matter of life-or-death for Las Vegas, which, some projections suggest, could run out of drinking water in 20 years. Opponents of the pipeline say draining the desert of groundwater would destroy the livelihoods of the cattle ranchers, Native American tribes, and Mormon enterprises that call this expanse home, and reduce a vast swath of the state to a dust bowl.

Push Comes to Shove Over Water Restrictions - — J. O. Dawdy, who has been a farmer for 36 years, is so worried about getting enough groundwater that he is considering a lawsuit to protect his right to it. Mr. Dawdy and three other farmers said that new regulations — which limit the amount of water they can withdraw from the Ogallala Aquifer and require that new wells have meters to measure use — could have crippling effects on their livelihoods. “We view it as a real property-rights violation,” said Mr. Dawdy, who grows cotton. If the restrictions had been in place last year during the drought, he said, his land would not have produced a crop. Water is a contentious issue across Texas, but tensions have been especially high in a 16-county groundwater conservation district stretching from south of Lubbock into the Panhandle, an area considered part of America’s “breadbasket.” There, farmers reliant on the slowly diminishing Ogallala are fighting to maintain their right to pump unrestricted amounts of water. The issue gained urgency last month when a landmark Texas Supreme Court opinion confirmed that landowners own the water beneath their property, in the same way they own the oil and gas.

U.S. intelligence: Future shortages will lead to ‘water as a weapon’ - The world may see the failure of key states and even regional wars dotting the globe, all over one thing that’s seemingly ubiquitous today in most industrialized societies: water.  A report (PDF) by the U.S. Director of National Intelligence, released Thursday but originally prepared for U.S. Secretary of State Hillary Clinton in early February, paints a grim picture of the potential for chaos as demand for clean water begins to outstrip supply. It adds that there is hope for poorer nations that will be hit the hardest by growing water scarcity, but only if technology and rapid efficiency gains rise to meet the challenge. While the report’s most ominous predictions are not likely to happen any time in the next 10 years, by 2040 the U.S. intelligence director foresees “problems” that will “hinder the ability of key countries to produce food and generate energy, posing a risk to global food markets and hobbling economic growth.”

US intel: water a cause for war in coming decades - Drought, floods and a lack of fresh water may cause significant global instability and conflict in the coming decades, as developing countries scramble to meet demand from exploding populations while dealing with the effects of climate change, U.S. intelligence agencies said in a report Thursday. An assessment reflecting the joint judgment of federal intelligence agencies says the risk of water issues causing wars in the next 10 years is minimal even as they create tensions within and between states and threaten to disrupt national and global food markets. But beyond 2022, it says the use of water as a weapon of war or a tool of terrorism will become more likely, particularly in South Asia, the Middle East and North Africa. The report is based on a classified National Intelligence Estimate on water security, which was requested by Secretary of State Hillary Rodham Clinton and completed last fall. It says floods, scarce and poor quality water, combined with poverty, social tension, poor leadership and weak governments will contribute to instability that could lead the failure of numerous states. Those elements "will likely increase the risk of instability and state failure, exacerbate regional tensions and distract countries from working with the United States on important policy objectives," said the report, which was released at a State Department event commemorating World Water Day.

Fukushima Farmers Face Decades of Tainted Crops as Fears Linger - Farmers in Japan’s Fukushima face years of additional losses as consumers continue to doubt the safety of produce from the region devastated a year ago by the tsunami and nuclear fallout, which may taint crops for decades. Almost 100,000 farmers lost about 58 billion yen ($694 million) by March 1, or 25 percent of production, according to JA, the country’s biggest agricultural group. Imports of farm products jumped 16 percent to 5.58 trillion yen in 2011, according to the agriculture ministry. Inadequate testing by the government of rice, milk and fish from the region has prompted consumers to leave them on supermarket shelves and instead select produce from other regions or from overseas. Checks conducted nationwide so far are only 1 percent of what Belarus checked in the past year, a quarter century after the Chernobyl disaster, according to Nobutaka Ishida, a researcher at Norinchukin Research Institute.

Air pollution 'will become bigger global killer than dirty water': OECD report says pollution will become biggest cause of premature death, killing an estimated 3.6 million people a year by 2050  -Urban air pollution is set to become the biggest environmental cause of premature death in the coming decades, overtaking even such mass killers as poor sanitation and a lack of clean drinking water, according to a new report. Both developed and developing countries will be hit, and by 2050, there could be 3.6 million premature deaths a year from exposure to particulate matter, most of them in China and India. But rich countries will suffer worse effects from exposure to ground-level ozone, because of their ageing populations – older people are more susceptible. The warning comes in a new report from the Organisation for Economic Cooperation and Development (OECD), which is a study of the global environmental outlook until 2050. The report found four key areas that are of most concern – climate change, loss of biodiversity, water and the health impacts of pollution. If current policies are allowed to carry on, the world will far exceed the levels of greenhouse gas emissions that scientists say are safe, the report found. The report said that global greenhouse gas emissions could increase by as much as half, as energy demand rises strongly, if countries fail to use cleaner forms of energy. Water demand is also likely to rise by more than half, and by 2050 as much as 40% of the global population is likely to be living in areas under severe water stress. Groundwater depletion would become the biggest threat to agriculture and to urban water supplies, while pollution from sewage and waste water – including chemicals used in cleaning – will put further strain on supplies.

February Climate - Given the exceptionally warm and early spring we are having here in the eastern US, following a very mild winter, I was curious to know whether it was globally very warm. I checked the NOAA State of the Climate report for February and the map above tells the story: it's remarkably warm across much of the US and the North Atlantic into the UK, and also in northern Siberia, but it's exceptionally cold in much of continental Europe and Asia.  Overall, it's not a particularly warm February by the standards of the last couple of decades: So this spring is more an unusual distribution of warmth and cold, rather than a global warmth anomaly.  (Although worth noting that it would be a record-breaking warm February globally had it occurred any time between 1880-1970).

It’s a Broken Record of Record-Breaking Heat - Another day, another slew of temperature records set, as the extraordinary March heat wave shows no signs of completely abating. Along with the record warmth, Monday brought a line of severe thunderstorms that stretched in a line from the Texas-Mexico border to the U.S.-Canadian border in Minnesota. Thunderstorm wind damage was reported near Minneapolis, a city more accustomed to March snowstorms than thunderstorms. The presence of warm, humid air so far north was extremely unusual for this time of year, but then again, so is nearly everything else about this heat wave. In fact, the broad geographic scope of this heat event, along with the margins by which records are being broken, the time of year this is occurring, and the duration of the event are all indications that this may be an unprecedented event since modern U.S. weather records began in the late 19th century.

With Blow-Out March Heat Wave, Meteorologist Masters Says ‘This Is Not The Atmosphere I Grew Up With’ - It has been a summer to remember. In winter. Like a baseball player on steroids, our climate system is breaking records at an unnatural pace. As Weather Channel meteorologist Stu Ostro says of the current heat wave:This remarkable warmth is associated with a bulging ridge of high pressure aloft that is exceptionally strong and long-lasting for March. While natural factors are contributing to this warm spell, given the nature of it and its context with other extreme weather events and patterns in recent years there is a high probability that global warming is having an influence upon its extremity. This year, U.S. heat records have been outnumbering cold records by a stunning amount — 14-to-1 (19-to-1 in March) – as this chart from Steve Scolnik at Capital Climate makes clear: I like the statistical aggregation across the country, since it gets us beyond the oft-repeated point that you can’t pin any one record temperature on global warming. If you want to know the historical ratios, see the 2009 analysis, “Record high temperatures far outpace record lows across U.S.,” which shows that the average ratio for the 2000s was 2.04-to-1, a sharp increase from previous decades. “If temperatures were not warming, the number of record daily highs and lows being set each year would be approximately even.”

Why Does Fat Al Gore Hate Flower Festivals? - This is not really my beat, but after spending the weekend in an unseasonably warm DC and returning to even warmer temperatures here in MI, I felt it deserves a post. In DC all weekend, people were enjoying the gorgeous cherry blossoms, but bemoaning the fact that the peak bloom pretty much has preceded the Cherry Blossom Festival. Now in Holland, MI, they’re facing the likelihood that not even moving up its Tulip Fest will ensure there are still blooms on the stems come May. It is 85 degrees here at the moment (though there’s a pleasant breeze coming off the river), and predicted to climb higher. Tomorrow it is predicted to break 90. Nine. Zero. In March. In MI.(If posts are thin tomorrow, you can presume McCaffrey the MilleniaLab and I have gone to the beach.) As the map above makes clear, temperatures this week are 25 degrees above where they’re supposed to be this time of year.. Wunderblogs notes that some of the the “coldest places” in the nation are setting repeated record highs. I’m loving having summer on the first day of spring and all, but at some point we need to get serious about climate change.

An eerie winter - Last week's summerlike weather provided an exclamation point on the end of the fourth warmest winter in the lower 48 states. It is not always easy to pin down the causes of any specific weather pattern. And yet, the unprecedented rate of change in temperature and weather patterns worldwide should give us concern that the winter just past is but a preview of coming attractions. What the geologic record shows has previously taken 5,000 to 20,000 years to occur--namely, a 100 ppm rise in carbon dioxide concentrations in the atmosphere--has taken only 120 years in our era. What that implies is that in the past no single human being could have witnessed the kind of changes in climate we are now seeing in the space of a single lifetime or even a single generation. In a way we have become inured to rapid change. The ever increasing drumbeat of industrial civilization and technological change has made us think that rapid change is both inevitable and good. At least that's what we tell ourselves. So, when the rhythm of seasons is disrupted, it seems like just one more change. Of course, climate change isn't just one more change. And, it is the rate of change which tells us something is awry. It is the very fact that I can detect the general trend of warming winters in the Great Lakes in the course of my lifetime that ought to set off loud, buzzing alarms.

Mind-boggling warm weather records swell in Midwest, Great Lakes, Northeast - The record warm weather in the Midwest, Great Lakes, and Northeast continues to destroy century old records by unthinkable margins. Let’s take a tour of some of the latest unfathomable records...
Chicago: Hit 85 degrees as of 4 p.m. (CT) setting (or tying) a new record high for the 7th straight day there - the second most records in a row in any season of the year (since 1871). Chicago has hit 80 six times in the last 7 days whereas it only averages one day of 80s in April per year. Only once in 140 years of observations has April produced as many 80+ days as this March. Today’s high of 85 is third warmest March temperature on record, only topped by 88 (3/29/1986) and 87 (3/31/81). More info from Chicago’s National Weather Service (NWS) office: Historic and Unprecedented March Warmth Continues
Detroit: Soared to at least 84 today, the warmest March day on record. More info from Detroit’s NWS office: Unprecedented Warm March Weather Continues
Milwaukee: Set an all-time March high of 83 today, its earliest 80+ day on record. More info from Milwaukee’s NWS office: Record Setting Warmth
Rochester and International Falls, MN: Amazingly, in both of these towns, the morning low temperatures tied or broke record highs in recent days! In Rochester Sunday, the low dropped to 62, two degrees above the record high of 60. In International Falls, the low Monday morning of 60 tied the record high for the date.

90 Degrees in Winter: This Is What Climate Change Looks Like -The National Weather Service is kind of the anti–Mike Daisey, a just-the-facts operation that grinds on hour after hour, day after day. It’s collected billions of records on countless rainstorms, blizzards and pleasant summer days. So the odds that you could shock the NWS are pretty slim. Beginning in mid-March, however, its various offices began issuing bulletins that sounded slightly shaken. “There’s extremes in weather, but seeing something like this is impressive and unprecedented,” Chicago NWS meteorologist Richard Castro told the Daily Herald. “It’s extraordinarily rare for climate locations with 100+ year long periods of records to break records day after day after day,” the office added in an official statement.  It wasn’t just Chicago, of course. A huge swath of the nation simmered under bizarre heat. International Falls, Minnesota, the “icebox of the nation,” broke its old temperature records—by twenty-two degrees, which according to weather historians may be the largest margin ever for any station with a century’s worth of records. Winner, South Dakota, reached 94 degrees on the second-to-last day of winter. That’s in the Dakotas, two days before the close of winter. Jeff Masters, founder of WeatherUnderground, the web’s go-to site for meteorological information, watched an eerie early morning outside his Michigan home and wrote, “This is not the atmosphere I grew up with,” a fact confirmed later that day when the state recorded the earliest F-3 strength tornado in its history.

Jeff Masters: Summer in March peaks in U.S. and Canada; record late snow in Oregon - A spring heat wave like no other in U.S. and Canadian history peaked in intensity yesterday, during its tenth day. Since record keeping began in the late 1800s, there have never been so many temperature records broken for spring warmth in a one-week period -- and the margins by which some of the records were broken yesterday were truly astonishing. Wunderground's weather historian, Christopher C. Burt, commented to me yesterday, "it's almost like science fiction at this point." A few of the more remarkable records from yesterday: Pellston, Michigan, in the Northern Lower Peninsula is called "Michigan's Icebox" since it frequently records the coldest temperatures in the state, and in the entire nation. But the past five days, Pellston has set five consecutive records for hottest March day. Yesterday's 85 °F reading broke the previous record for the date (53 °F in 2007) by a ridiculous 32 °F and was an absurd 48 °F above average. The low temperature at Marquette, Michigan, was 52 °F, yesterday, which was 3 °F warmer than the previous record high for the date! The low (44 °F) at Mt. Washington, NH, yesterday,  also beat the previous record high for the date (43 °F). Not only was yesterday the warmest March day in recorded history for many of Canada's major cities, it was also warmer than any April day at St. John, New Brunswick. The city hit 25.4 °C (78 °F). Not only did this crush the record high for March (previous record: 17.5 °C), it is well above any temperature ever measured in April (extreme April temperature on record: 22.8 °C). Halifax, Nova Scotia, hit 25.8 °C yesterday, beating their all-time March record of 25.6 °C and falling just short of their all-time April record of 26.3 °C, set on April 30, 2004. As of 1 p.m. today, Halifax was at 27 °C, beating their all-time April record. Other major cities in Canada that set all-time warmest March records yesterday included Ottawa (27.4 °C), Montreal (25.8 °C), Windsor (27.8 °C), Hamilton (25.6 °C), London (26.4 °C), and Fredericton (27.1 °C).

Jeff Masters: "Summer in March 2012" heat wave  - The most incredible spring heat wave in U.S. and Canadian recorded history is finally drawing to a close today, after a 10-day stretch of unprecedented record-smashing intensity. Since record keeping began in the late 1800s, there have never been so many spring temperature records broken, and by such a large margin. Airports in 15 different states have set all-time records for March warmth, which is truly extraordinary considering that the records were set in the middle of the month, instead of the end of the month. The 29.2 °C (85 °F) measured at Western Head, Nova Scotia, yesterday, was the third warmest temperature ever recorded in Canada in March, according to Environment Canada and weather records researcher Maximiliano Herrera (top two records: 31.1 °C at Alberini Beaver Creek, BC, on March 29th 1926, and 29.4 °C in 1921 at Wallaceburg). Michigan's all-time record for March warmth was toppled on Wednesday, when the mercury hit 90 °F at Lapeer. The previous record, 89 °F at Lapeer in 1910, was matched at three stations yesterday -- Ypsilanti, Dearborn, and Lapeer. The duration, areal size, and intensity of the Summer in March 2012 heat wave are simply off-scale, and the event ranks as one of North America's most extraordinary weather events in recorded history. Such a historic event is difficult to summarize, and in today's post I will offer just a few of the most notable highlights.

As climate changes, Louisiana seeks to lift a highway - Here on the side of Louisiana’s Highway 1, a spindly pole with Global Positioning System equipment and a cellphone stuck on top charts the water’s gradual encroachment on dry land. In 1991 this stretch of road through the marshlands of southern Louisiana was 3.9 feet above sea level, but the instrument — which measures the ground’s position in relation to sea level — shows the land has lost more than a foot against the sea. It sank two inches in the past 16 months alone. That’s a problem because Highway 1, unprotected by levees, connects critical oil and gas resources in booming Port Fourchon to the rest of the nation. Ten miles of the highway is now standing 22 feet above sea level on cement piles. But another seven miles is not, and if less than half a mile of this highway succumbs to the 14-foot storm surges expected in the future, the highway will need to be shut down, cutting off the port.

Met Office: World warmed even more in last ten years than previously thought when Arctic data added. 2010 now hottest year - The controversial record of climate change, put together by the Met Office Hadley Centre and the University of East Anglia, is one of only a handful of global temperature data sets stretching back since the end of the 19th century. The temperature series was at the centre of the Climategate scandal in 2009, after hacked emails from the University of East Anglia showed scientist were unwilling to release original data. Critics claimed that the whole argument for global warming could not be trusted if the data set was questioned. However a series of inquiries found the science was correct, although the University of East Anglia was criticised for failing to share information. Now a new analysis of land and sea temperatures, that includes new data from weather stations in the Arctic, has found the world is warming even more than previously thought. Between 1998 and 2010, temperatures rose by 0.11C, 0.04C more than previously estimated. The new data set also shifts around the hottest years on record, so that the new temperature series, known as HadCRUT4, is more in line with other global records held by NASA and NOAA in the US. The American series had already added Arctic temperatures from extrapolated information.

'Global warming' gets a rebranding - Shhhh! Don’t talk about global warming! There’s been a change in climate for Washington’s greenhouse gang, and they’ve come to this conclusion: To win, they have to talk about other topics, like gas prices and kids choking on pollutants. More than two years since Democrats’ cap-and-trade plan died in Congress, the strategic shift represents a reluctant acknowledgment from environmentalists that they’ve lost ground by tackling global warming head-on. Their best bet now lies in a bit of a bait and switch: Help elect global warming fighters by basing campaigns on kitchen-table issues. “You don’t have to be James Carville to figure out that talking about people’s health and the health of their children … is going to make a difference to the average voter,” Earlier this month, the Sierra Club and Natural Resources Defense Council made a seven-figure ad buy in swing states featuring young children with asthma inhalers making their way through the Capitol. “We’re going to talk a lot about the health implications of dirty air,” said Heather Taylor, director of NRDC’s political arm. “I think that the Midwest is one of those places where [there are] a million great clean energy stories, especially. And they’re not being told right now, because we’ve tended to be in other markets. That’s an area where we feel like it’s time to go tell those stories.”

With Gas Prices Rising, Smog Rules May Stall - The Obama administration, facing political heat over high gasoline prices, may delay new rules that would cut pollution from cars but also could bring higher prices at the pump, environmental and industry leaders said. The rules would require refiners to make cleaner-burning gasoline and auto makers to build cars that emit fewer smog-forming pollutants. The Environmental Protection Agency was scheduled to roll out the rules before April, but it hasn’t yet submitted them for White House review. “We expect that timing will begin to slip, perhaps for political considerations” said American Petroleum Institute President Jack Gerard.

The Right v. the EPA - - This Real News Network story describes how the EPA is under attack from a very specific group of right wing interests are suing to try to prevent the EPA from acting to implement anti-carbon measures as stipulated in a Supreme Court decision. The intriguing bit is the group one might assume would be most opposed to new standards, the auto industry, is actually supportive.

Air pollution could become China’s biggest health threat, expert warns - Air pollution will become the biggest health threat in China unless the government takes greater steps to monitor and publicise the dangers of smog, the country’s leading respiratory disease specialist warned this week. Lung cancer and cardiovascular illnesses are already rising and could get worse in the future because of factory emissions, vehicle exhausts and cigarette smoke, Zhong Nanshan, the president of the China Medical Association, told the Guardian.The outspoken doctor – who won nationwide respect for revealing the cover-up of the Sars epidemic in 2002 – said the authorities are starting to learn the lessons of past health crises by being more transparent about the risks posed by contaminated air. Unless there is more openness, he said, public trust will be eroded. “Air pollution is getting worse and worse in China, but the government data showed it was getting better and better. People don’t believe that. Now we know it’s because they didn’t measure some pollutants,” said Zhong. “If the government neglects this matter, it will be the biggest health problem facing China.”

Asian Development Bank Says Climate Migration Poses Growing Threat - The Asian Development Bank says climate change is likely to become a key cause of migration in Asia in the coming decades. In a new report, the bank says more than 42 million people in the region were displaced by environmental disasters over the past two years alone. In 2010, it said, more than 30 million people were displaced, some permanently, primarily by devastating floods in Pakistan and China.In a video statement posted on the bank’s website, Asian Development Bank Director Bart Edes said that “the fact that we see people displaced now and many of them becoming migrants gives us a taste of what is to come as climate change begins to have a greater impact.” “So we are releasing this report to present governments with policy options, with actions that they can take to address this challenge and to turn migration, climate-induced migration from a threat to an opportunity,”

EU defies carbon trade war threats-- The threat of a trade war will not make the European Union back down on climate legislation, Connie Hedegaard, the bloc's climate chief, said on Tuesday following pressure from foreign governments who want the EU to drop plans to charge airlines for carbon emissions. In an interview with the Financial Times, Ms Hedegaard, the commissioner for climate action, said the bloc was determined to work with the US, China and other nations to reach an international agreement to curb airlines' emissions. But she also sought to make clear that commercial threats would not sway Brussels, saying: "You can't threaten a trade war just because you don't like European legislation." The EU's policy to require all carriers to pay for their carbon emissions for flights that take off or land in the 27-member bloc have met with fierce resistance from non-European governments. India is the latest country to consider asking its airlines to defy measure. Airlines that do not comply can be fined, or -- in extreme cases -- banned from the EU. 

China Halts 10 More Airbus Orders - China has suspended the purchase of 10 more Airbus jets, two people familiar with the matter said on Thursday, raising the stakes in a potentially damaging trade row over European Union airline emissions charges. The move to delay the purchase of extra A330 planes brings to $14 billion the value of European aircraft caught up in tensions over the EU's Emissions Trading Scheme, which has angered countries including China, India and the United States.It comes amid urgent efforts to find a solution to the row, which airlines fear could provoke an aviation trade war capable of causing travel disruption and hitting air traffic rights. The row is over a cap-and-trade scheme which could levy charges for carbon emissions for flights in and out of Europe. Foreign governments say the EU is exceeding its legal jurisdiction by charging for an entire flight, as opposed to just the part covering European airspace.

O.E.C.D. Warns of Ever-Higher Greenhouse Gas Emissions — Global greenhouse gas emissions could rise 50 percent by 2050 without more ambitious climate policies, as fossil fuels continue to dominate the energy mix, the Organization for Economic Cooperation and Development said Thursday.“Unless the global energy mix changes, fossil fuels will supply about 85 percent of energy demand in 2050, implying a 50 percent increase in greenhouse gas emissions and worsening urban air pollution,” the Paris-based O.E.C.D. said in its environment outlook to 2050.The global economy in 2050 will be four times larger than today and the world will use around 80 percent more energy. But the global energy mix is not predicted to be very different from that of today, the report said. Fossil fuels such as oil, coal and gas will make up 85 percent of energy sources. Renewables, including biofuels, are forecast to make up 10 percent and nuclear the rest.

Climate change to cost Pakistan up to $14 billion annually - Climate change could cost the economy of Pakistan up to $14 billion each year for natural disasters and other losses, which is almost 5 percent of the country’s gross domestic product, this was stated by Former Federal State Minister for Environment Malik Amin Aslam. He was addressing a seminar titled ‘Outcomes of Post Durban Climate Change Negotiations’ organised by Centre of Excellence, Environmental Economics and Climate Change, Pakistan Institute of Development Economics (PIDE) here on Thursday to discuss the implications of these negotiations on Pakistan as climate change is directly impacting the economy of Pakistan…. Talking about its implication on Pakistan he said that Pakistan is a very low emitter but one of the worst victims of climate change, as according to Germanwatch places Pakistan as ‘most affected’ for 2010 and in top 10 for 1990-2010.

Damage to oceans could cost $2tr by 2100 - Damage to natural services provided by oceans could cost the world $2tr a year by the end of the century if steps to curtail climate change are not taken, a study by the respected Stockholm Environment Institute (SEI) said today. Researchers warned that without action global temperatures could rise by 4°C by 2100, leading to acidification, reduced oxygen content, stronger tropical storms and sea-level rises, all of which would in turn threaten fish stocks and other marine life. The Valuing the Oceans paper warns valuable services provided by the ocean are inadequately integrated into economic analyses and plans, and calls for marine ecosystems to be included in carbon offset schemes. A new market in "blue carbon" could see investors receive carbon credits for projects protecting mangroves or sea grasses, which contain more carbon than forests but are being degraded far quicker. Without radical change the tourism industry would incur annual costs of $639bn, while a warmer ocean with less ability to soak up CO2 could cost $458bn, the study showed.

Arctic climate ‘tech fixes’ urged - An eminent UK engineer is suggesting building cloud-whitening towers in the Faroe Islands as a "technical fix" for warming across the Arctic. Scientists told UK MPs this week that the possibility of a major methane release triggered by melting Arctic ice constitutes a "planetary emergency". The Arctic could be sea-ice free each September within a few years. Wave energy pioneer Stephen Salter has shown that pumping seawater sprays into the atmosphere could cool the planet. The Edinburgh University academic has previously suggested whitening clouds using specially-built ships. At a meeting in Westminster organised by the Arctic Methane Emergency Group (Ameg), Prof Salter told MPs that the situation in the Arctic was so serious that ships might take too long. "I don't think there's time to do ships for the Arctic now," he said. "We'd need a bit of land, in clean air and the right distance north... where you can cool water flowing into the Arctic." Favoured locations would be the Faroes and islands in the Bering Strait, he said.

A World Without People - For a number of reasons, natural and human, people have recently evacuated or otherwise abandoned a number of places around the world -- large and small, old and new. Gathering images of deserted areas into a single photo essay, one can get a sense of what the world might look like if humans were to vanish from the planet altogether. Collected here are recent scenes from nuclear-exclusion zones, blighted urban neighborhoods, towns where residents left to escape violence, unsold developments built during the real estate boom, ghost towns, and more. [41 photos]

Commerce Department Announces Small Tariffs On Chinese Solar Panels - After months of speculation and debate about unfair Chinese subsidies to domestic solar manufacturers, the U.S. solar industry finally has an answer to one piece of the ongoing trade case: Solar panels imported from China will be hit with a small tariff. The Department of Commerce issued a preliminary decision today based upon the agency’s impartial review of Chinese subsidies to domestic solar companies. The tariffs range from 2.9 percent to 4.73 percent — dramatically lower than the 20 percent expected by many industry analysts. But this decision from Commerce is just the first of two key tariff rulings. While today’s ruling addressed the issue of subsidies, a separate decision on whether Chinese companies are dumping panels into the U.S. market below cost is expected in May.

I wish Guiness was dumping Extra Stout - Dumping is pricing a export good below cost (and losing money), why would anyone do that? In a move that seems likely to increase trade tensions, the Commerce Department plans to impose tariffs on solar panel imports from China, Keith Bradsher and Matthew L. Wald report. The tariffs are relatively small — 2.9 percent to 4.73 percent — but additional ones could be imposed in May, when the Commerce Department is to decide whether China is dumping panels in the United States. The department has already ruled that the Chinese government is providing illegal export subsidies to its solar manufacturers. via Dumping and providing illegal export subsidies can only help the U.S. consumer, the same consumer that is suffering from higher gas prices. Unless you use some dynamic argument that this temporary protection will afford the domestic industry time to achieve scale economies or savings from learning by doing. Both of these industry effects are speculative.

The Lovins Paradox: “this old canard” - Amory Lovins has responded to David Owen's commentary at the New York Times on "Efficiency’s Promise: Too Good to Be True." In his Times comment, Lovins cites his complete response at the Rocky Mountain Institute blog, wherein he asserts: "There is a very large professional literature on energy rebound, refreshed about every decade as someone rediscovers and popularizes this old canard."The Lovins Paradox thus can be stated as: even if Amory Lovins is right about the Jevons Paradox (or rebound effect) being an "old canard", the implications for energy consumption are troubling because of the intricate linkage between energy consumption and employment. In other words, dispensing with the rebound still leaves us with what David Owen calls The Conundrum (see video embedded below). The following chart compares the energy intensity of GDP in the U.S. with the energy intensity of employment (energy consumption per worker). The green line shows the index Lovins likes to cite, energy intensity of GDP from 1949 to 2009. The blue line shows energy intensity of employment in the U.S. for the same period. The red line shows the energy intensity of the labor force (because employment data is not available) for the world from 1980 to 2006.

Tom Murphy Interview: Resource depletion is a bigger threat than climate change - Rising geopolitical tensions and high oil prices are continuing to help renewable energy find favour amongst investors and politicians. Yet how much faith should we place in renewables to make up the shortfall in fossil fuels? Can science really solve our energy problems, and which sectors offers the best hope for our energy future? To help us get to the bottom of this we spoke with energy specialist Dr. Tom Murphy, an associate professor of physics at the University of California. Tom runs the popular energy blog Do the Math which takes an astrophysicist’s-eye view of societal issues relating to energy production, climate change, and economic growth. In the interview Tom talks about the following:

Why we shouldn’t get too excited over the shale boom
Why resource depletion is a greater threat than climate change
Why Fukushima should not be seen as a reason to abandon nuclear
Why the Keystone XL pipeline may do little to help US energy security
Why renewables have difficulty mitigating a liquid fuels shortage
Why we shouldn’t rely on science to solve our energy problems
Forget fusion and thorium breeders – artificial photosynthesis would be a bigger game changer

Space-Based Solar Power - A solar panel reaps only a small portion of its potential due to night, weather, and seasons, simultaneously introducing intermittency so that large-scale storage is required to make solar power work at a large scale. A perennial proposition for surmounting these impediments is that we launch solar collectors into space—where the sun always shines, clouds are impossible, and the tilt of the Earth’s axis is irrelevant. On Earth, a flat panel inclined toward the south averages about five full-sun-equivalent hours per day for typical locations, which is about a factor of five worse than what could be expected in space. More importantly, the constancy of solar flux in space reduces the need for storage—especially over seasonal timescales. I love solar power. And I am connected to the space enterprise. Surely putting the two together really floats my boat, no? No.  First, let’s understand the ground-based alternative well enough to know what space buys us. But in comparing ground-based solar to space-based solar, I will depart from what I think may be the most practical/economic path for ground-based solar. I do this because space-based solar adds so much expense and complexity that we gain a large margin for upping the expense and complexity on the ground as well.

Rethinking Recycling - A growing number of large food and beverage companies in the United States are assuming the costs of recycling their packaging after consumers are finished with it, a responsibility long imposed on packaged goods companies in Europe and more recently in parts of Asia, Latin America and Canada.  Several factors are converging to make what is known as “extended producer responsibility” more attractive and, perhaps, more commonplace in the United States.  “Local governments are literally going broke and so are looking for ways to shift the costs of recycling off onto someone, and companies that make the packaging are logical candidates,”  “More environmentally conscious consumers are demanding that companies share their values, too.” Perhaps most important, he said, “companies are becoming more aware that resources are limited and what they’ve traditionally thrown away — wow, it has value.” It is now cheaper to recycle an aluminum can into a new can than it is to make one from virgin material, and the same is becoming true for plastic bottles.

Startup Converts Plastic To Oil, And Finds A Niche - Only 7 percent of plastic waste in the United States is recycled each year, according to the Environmental Protection Agency. A startup company in Niagara Falls says it can increase that amount and reduce the country's dependence on foreign oil at the same time. It all starts with a machine known as the Plastic-Eating Monster. Thousands of pounds of shredded milk jugs, water bottles and grocery bags tumble into a large tank, where they're melted together and vaporized. This waste comes from landfills and dumps from all over the United States. "Basically, they've been mining their piles for us and sending them here," says John Bordynuik, who heads his namesake company, JBI Inc. He invented a process that converts plastic into oil by rearranging its hydrocarbon chains. Vying For Mainstream Acceptance According to tests by the New York Department of Environmental Conservation, JBI's patented technology is efficient, with close to 90 percent of plastics coming out as fuel. Bordynuik says that makes the case for this kind of recycling to go mainstream.

U.S. Army to Invest $7 Billion in Renewable-Energy Projects - The U.S. Army plans to invest more than $7 billion in renewable-energy sources, wind, solar, biomass and geothermal, and has released a draft request for proposal, or RFP, that could allow multiple projects to begin nationwide. Speaking at a media roundtable March 15, Katherine Hammack, assistant secretary of the Army for Installations, Energy & Environment, said the cumulative investment will help the Army reach its goal of having 25 percent of the Army’s energy come from renewable sources by 2025. She began the roundtable by restating the Army’s “net-zero strategy.”

Counting the cost: the hidden price of coal power - Each year, the US sets off the equivalent of 20-30 atomic bombs worth of explosives, effectively obliterating entire features of its own landscape. Why? To get at the coal that's inconveniently located beneath the mountains of Appalachia.That jaw-dropping figure came towards the end of a session at last month's meeting of the American Association for the Advancement of Science called "The True Cost of Coal." Most methods of resource extraction and use come with various forms of what are called externalities, or costs that aren't included in the final product, but distributed across society as a whole in the form of things like environmental degradation and damage to health. Calculating these hidden costs is obviously a challenge, and the researchers involved doing so tend to produce a range of values to reflect the uncertainty. But for coal, most of the estimates suggests that its true cost is about double the price of the energy produced with it, and may be quite a bit more. Melissa Ahern of Washington State University described some of the environmental impacts that have resulted from the mountaintop removal process in Appalachia: over 500 peaks gone, 2,000 miles of streams eliminated, and over 140 billion gallons of coal slurry currently held in storage ponds. But her research has focused primarily on the health costs of the mining.

Germany $263 Billion Electric Shift Biggest Since War: Energy -- Not since the allies leveled Germany in World War II has Europe's biggest economy undertaken a reconstruction of its energy market on this scale. Chancellor Angela Merkel is planning to build offshore wind farms that will cover an area six times the size of New York City and erect power lines that could stretch from London to Baghdad. The program will cost 200 billion euros ($263 billion), about 8 percent of the country's gross domestic product in 2011, according to the DIW economic institute in Berlin. Germany aims to replace 17 nuclear reactors that supplied about a fifth of its electricity with renewables such as solar and wind. Merkel to succeed must experiment with untested systems and policies and overcome technical hurdles threatening the project, said Stephan Reimelt, chief executive officer of General Electric Co.'s energy unit in the country. Utilities running gas-generating plants in Germany lost 10.92 euros a megawatt-hour today at 12:16 p.m. local time, based on so-called clean-spark spreads for the next month that take account of gas, power and emissions prices. That compared with a profit of 20.95 euros in October 2009, according to data compiled by Bloomberg. U.K. generators earned 2.06 pounds ($3.27), down from a profit of 7.02 pounds in October.

IAEA: “significant” nuclear growth despite Fukushima (Reuters) – Global use of nuclear energy could increase by as much as 100 percent in the next two decades on the back of growth in Asia, despite a slump in the construction of new reactors after the Fukushima disaster, a U.N. report says. The report by the International Atomic Energy Agency (IAEA), which has not yet been made public but has been seen by Reuters, said a somewhat slower capacity expansion than previously forecast is likely after the world’s worst nuclear accident in a quarter of a century. But, it said: “Significant growth in the use of nuclear energy worldwide is still anticipated – between 35 percent and 100 percent by 2030 – although the Agency projections for 2030 are 7-8 percent lower than projections made in 2010.”

Gas Boom Unplugs U.S. Nuclear Revival - The U.S. nuclear industry seemed to be staging a comeback several years ago, with 15 power companies proposing as many as 29 new reactors. Today, only two projects are moving off the drawing board. What killed the revival wasn't last year's nuclear accident in Japan, nor was it a soft economy that dented demand for electricity. Rather, a shale-gas boom flooded the U.S. market with cheap natural gas, offering utilities a cheaper, less risky alternative to nuclear technology.  "It's killed off new coal and now it's killing off new nuclear,"  "Gas has come along at just the right time to upset everything."  Across the country, utilities are turning to natural gas to generate electricity, with 258 plants expected to be built from 2011 through 2015, federal statistics indicate. Not only are gas-fired plants faster to build than reactors, they are much less expensive. The U.S. Energy Information Administration says it costs about $978 per kilowatt of capacity to build and fuel a big gas-fired power plant, compared with $5,339 per kilowatt for a nuclear plant.

Oil, gas taxes vary widely by state - Several states have used taxes on oil and natural-gas production to reduce the burden on everyone else, a club that Gov. John Kasich would like Ohio to join. He lists Texas, Michigan, West Virginia and North Dakota as examples of places that have higher taxes on oil and natural gas than Ohio. At the same time, oil-industry advocates say that the absence of such a tax — as is the case in Pennsylvania — serves to encourage investment. Legislative leaders have said they sympathize with this view, setting up a fight with the governor. As the debate unfolds, both sides will use examples from other states. Researchers warn that there are big challenges to comparing the vastly different approaches, and many reasons to proceed with caution in deciding how to structure a tax.

Study: ‘Fracking’ may increase air pollution health risks - Air pollution caused by hydraulic fracturing, a controversial oil and gas drilling method, may contribute to “acute and chronic health problems for those living near natural gas drilling sites,” according to a new study from the Colorado School of Public Health. The study, based on three years of monitoring at Colorado sites, found a number of “potentially toxic petroleum hydrocarbons in the air near the wells including benzene, ethylbenzene, toluene and xylene.”  The Environmental Protection Agency has identified benzene as a known carcinogen. Soon to be published in an upcoming edition of Science of the Total Environment, the report said that those living within a half-mile of a natural gas drilling site faced greater health risks than those who live farther away.  Colorado allows companies to drill for natural gas within 150 feet of homes.

Natural Gas Wells Proliferation Poisoning Children’s Air, Research Suggests - If everything goes as planned, Angie Nordstrum's son may look out the window of his second-grade classroom at Red Hawk Elementary this fall and see a full-scale natural gas drilling operation.  He and his classmates, Nordstrum noted, will then have no choice but to breathe emissions of volatile organic compounds (VOCs), benzene and other toxic pollutants -- even while they tend to a 1,500-square-foot organic garden at their LEED-certified school.  "This is so disturbing on so many levels," said Nordstrum, of Erie, Colo. Natural gas production is rapidly increasing across the country -- from Pennsylvania to Colorado. According to many public health experts, the natural and manmade chemicals released during drilling, hydraulic fracturing (or fracking) and reinjection steps are making more and more people sick. Adding to the concern are new findings showing the associated air pollution, and the dangers of exposure to very small doses of certain chemicals. Developing fetuses and young children can be the most vulnerable to these effects.

Fracking: Pennsylvania Gags Physicians -This is Part One of a Three-Part Series. A new Pennsylvania law endangers public health by forbidding health care professionals from sharing information they learn about certain chemicals and procedures used in high volume horizontal hydraulic fracturing. The procedure is commonly known as fracking.Fracking is the controversial method of forcing water, gases, and chemicals at tremendouspressure of up to 15,000 pounds per square inch into a rock formation as much as 10,000 feet below the earth’s surface to open channels and force out natural gas and fossil fuels. Over the expected life time of each well, companies may use as many as nine million gallons of water and 100,000 gallons of chemicals and radioactive isotopes within a four to six week period. The additives “are used to prevent pipe corrosion, kill bacteria, and assist in forcing the water and sand down-hole to fracture the targeted formation,” explains Thomas J. Pyle, president of the Institute for Energy Research. However, about 650 of the 750 chemicals used in fracking operations are known carcinogens, according to a report filed with the U.S. House of Representatives in April 2011. Fluids used in fracking include those that are “potentially hazardous,” including volatile organic compounds, according to Christopher Portier, director of the National Center for Environmental Health, a part of the federal Centers for Disease Control. In an email to the Associated Press in January 2012, Portier noted that waste water, in addition to bring up several elements, may be radioactive. Fracking is also believed to have been the cause of hundreds of small earthquakes in Ohio and other states.

If Fracking Is Benign, How Come PA'ers Can't Find Out What's Making Them Sick? - Oh, my friends in Pennsylvania, what Tom Corbett and the Repubs in the legislature have done to you on fracking. Again. New PA Law Gags Doctors: Physicians and others who work with citizen health issues may request specific information [from the drilling companies in terms of what chemicals they use], but the company doesn’t have to provide that information if it claims it is a trade secret or proprietary information, nor does it have to reveal how the chemicals and gases used in fracking interact with natural compounds.If a company does release information about what is used, health care professionals are bound by a non-disclosure agreement that not only forbids them from warning the community of water and air pollution that may be caused by fracking, but which also forbids them from telling their own patients what the physician believes may have led to their health problems.A strict interpretation of the law would also forbid general practitioners and family practice physicians who sign the non-disclosure agreement and learn the contents of the “trade secrets” from notifying a specialist about the chemicals or compounds, thus delaying medical treatment. In other words, if you live in an area where fracking is taking place, and you start having symptoms which you think might have something to do with your being exposed to chemicals which might have been used in fracking, your doctor or any other doctors involved in your treatment can ask for information on chemicals that companies drilling in your area use in fracking. But they don’t have to tell anyone and in order to get that information, your doctor will have to sign a legally binding NDA which will prevent him from passing on that info.

As natural gas production grows, questions arise about methane leaks — As natural gas production in the United States hits an all-time high, a major unanswered question looms: What does growing hydraulic fracturing mean for climate change? The Obama administration lists natural gas as one of the "clean energy sources" it wants to expand. When burned, natural gas emits about half the heat-trapping carbon dioxide as coal. Yet natural gas production can result in releases of methane into the atmosphere. Methane, the primary component of natural gas, is 25 times more potent as a greenhouse gas than carbon dioxide. Methane can enter the atmosphere when gas is stored or transported, but it's particularly a concern with shale gas production during flowback — when fracking fluids, water and gases flow out of a well after drilling but before the gas is put into pipelines. Companies often burn or capture the methane during flowback. How extensively or effectively that's done overall, however, isn't clear.The oil and gas industry is the biggest source of U.S. methane emissions, accounting for about 40 percent, according to the Environmental Protection Agency. Industry says that figure is inflated, because equipment is widely used to keep methane from entering the air. It's generally agreed, however, that there isn't good data on how much methane is entering the atmosphere from natural gas operations.

Obama to celebrate (part of) Keystone pipeline next week - Under fire for painfully high gas prices, President Barack Obama next week is scheduled to head to Cushing, Oklahoma, to highlight his support for the controversial Keystone XL pipeline--well, part of it, anyway. The Obama administration blocked the overall project, which was to carry oil from Canada to the Gulf of Mexico, on environmental grounds. But it also endorsed plans to build the section of the pipeline that is to stretch from Cushing to the Gulf, which analysts say will help ease a bottleneck and get more oil--and therefore ultimately more gas -- to market. Republicans have pounded away at the administration's energy policy, using the high cost of filling up as shorthand for the incumbent's failure. "Interesting choice for a President who just successfully lobbied Senate Democrats to defeat the Keystone XL pipeline jobs bill. Will he be touting the fact that his plan to raise taxes on energy manufacturers will increase the price of gas, disadvantage the smaller independent companies, and send American jobs overseas?"

Obama to fast-track part of Keystone XL pipeline - Under fire over painfully high gas prices, President Barack Obama embarks Wednesday on a two-day trip to defend his energy policy from a Republican onslaught linking his policies to painfully high gas prices. He will announce plans to fast-track the permit process for the southern portion of the controversial Keystone XL pipeline, according to CNN. The White House announced last week that Obama would use a stop in Cushing, Oklahoma on Thursday to highlight his support for the southern portion of the pipeline after he blocked the overall project amid anger from environmentalists. Republicans have used the issue to bludgeon Obama's energy policy, blaming him for the high cost of filling up at the pump.Now CNN reports, citing "a source familiar with the president's announcement," that Obama will announce in Cushing that his administration will put the southern section of Keystone on the fast-track to approval. "The permit process for a project like this can typically take a year or more. The source familiar with the president's announcement says the administration could shave several months off that timeline," says the network.

Obama Now Scrambles To Approve Transcanada Pipeline... Or At Least Half Of It; Environmentalists Furious - What a difference two months of record high gas prices make. After Obama unceremoniously killed the Keystone XL pipeline proposal in January, and has since seen his popularity rating slide in inverse proportion to the surge in gas prices, which as noted yesterday have now passed $4 (still quite a bit better than Europe's $9.81 average/gallon), he is now actively seeking to fast-track its approval. Or at least half of it. Per Reuters: "President Barack Obama will issue a memo on Thursday directing federal agencies to prioritize permitting of TransCanada's southern leg of the Keystone oil pipeline, a senior White House official said on Wednesday. With his Republican opponents hammering away at the president over high gasoline prices, Obama will visit Cushing, Oklahoma on Thursday to promote his energy policies, which include support for the southern leg of the pipeline."

Obama wants southern segment of Keystone XL expedited - President Obama on Thursday will call for expediting construction of the southern segment of the Keystone XL pipeline, according to a White House official. Obama will press for fast-tracking construction of only the southern segment of a pipeline that is part of the larger controversial proposal by TransCanada that would stretch from northwest Canada to the Gulf of Mexico. While the State Department blocked permitting of the entire project earlier this year, the White House late last month expressed support of TransCanada’s plan to move forward with building the southern segment from Cushing, Okla., to the Gulf of Mexico.

Obama to order expedited action on Keystone pipeline’s southern piece - President Obama will issue a memo Thursday telling federal agencies to expedite permitting for an Oklahoma-to-Texas oil pipeline that makes up the southern portion of the Keystone XL project, the White House said. He'll also issue a broader executive order demanding faster permitting and review decisions for energy- and transportation-related infrastructure. The upcoming memos, to be announced formally during a visit to Oklahoma, are among a series of steps the White House is taking to parry GOP attacks on Obama’s energy record amid rising gasoline prices.Obama, as part of a four-state energy-themed tour that began Wednesday, will be in Cushing, Okla., tomorrow to emphasize support for a planned pipeline from that area to Gulf Coast refineries.

Obama hits back at energy policy critics - Barack Obama, the US president, has hit back at his energy critics over sharply rising petrol costs, amid fears that economic recovery and his re-election prospects are being undermined by a rise in oil prices.  “Anyone who says that we’re somehow suppressing domestic oil production isn’t paying attention,” Mr Obama said in Cushing, Oklahoma, during a two-day, four-state sweep through traditional and alternative energy centres. “We are drilling more. We are producing more. But the fact is, producing more oil at home isn’t enough to bring gas prices down overnight.” On a dash through Oklahoma, New Mexico, Nevada and Ohio, Mr Obama announced that he was supporting construction of the Keystone XL pipeline’s southern leg, which will be built by TransCanada and link Cushing to the Gulf Coast in Texas. TransCanada operates another pipeline, known simply as Keystone, that runs from Canada’s Alberta province to Cushing and Illinois. Mr Obama also reiterated his support of some government subsidies for solar and other alternative energy projects – measures that conservatives opposed. His announcement on Keystone XL will, however, do little to accelerate construction of the pipeline, which was scheduled to start in June to help ease a distribution bottleneck in the Oklahoma oil hub.

Keystone pipeline: Separating reality from rhetoric - -- President Obama stopped in Cushing, Okla., on Thursday to announce a fast-track approval process for a portion of the Keystone XL oil pipeline -- although it's not the part for which he's taken political heat for blocking. The portion likely to start construction soon runs from Cushing, a key repository of U.S. oil, to the Gulf Coast.The full proposed pipeline, which would cross the U.S. border in Montana, is designed to bring between 500,000 to 700,000 barrels a day from the Canadian oil sands region to refineries on the Gulf Coast. It would shortcut to an existing pipe that goes through much of Canada before cutting into the United States in North Dakota on the way to Cushing. Republican presidential candidates have used the rejection of the shortcut pipeline as a hammer when attacking the Obama administration over high gas prices. They also say the Keystone will create much needed jobs. Here are three facts about what the decision will and won't mean.

U.S. gasoline politics should boost Canadian producers - Oil producers in Canada and the northern United States stand to be big beneficiaries of U.S. President Barack Obama’s effort to insulate himself from political fallout over rising pump prices. Amid warnings that U.S. pump prices could hit $5 (U.S.) a gallon if the standoff with Iran escalates, Mr. Obama is engaged in a campaign swing through the U.S. Midwest to offset Republican attacks on his energy policy. On Thursday, he will stop in Cushing, Okla., and his aides have already signalled that the President will endorse the speedy approval of TransCanada Corp.’s TRP-T plan to build the southern leg of its proposed Keystone XL pipeline, connecting the Cushing pipeline hub to the refineries on the U.S. Gulf Coast. The project would connect Canadian oil producers to the vast Gulf Coast refining region, and help shrink the discount that crude producers from Canada and North Dakota’s Bakken field receive for their oil.

New Keystone XL Route Could Still Threaten Ogallala Aquifer … while the [Keystone XL oil pipeline's new route through Nebraska] will avoid the Nebraska Sandhills—a region of grass-covered sand dunes that overlies the critically important Ogallala aquifer—it could still pass through areas above the Ogallala, where the water supply is vulnerable to the impacts of an oil spill. The original Keystone XL would have crossed through 100 miles of the Sandhills on its way from the tar sands mines of Alberta, Canada to refineries on the U.S. Gulf Coast. But TransCanada agreed to reroute it in November, after thousands of Nebraskans joined environmentalists to protest the pipeline’s path over the aquifer.The aquifer spans eight states and supplies 83 percent of Nebraska’s irrigation water. It’s also connected to the High Plains aquifer, which in many places lies above the Ogallala aquifer. Although residents of the Sandhills technically rely on the High Plains aquifer for drinking and irrigation, most refer to the Ogallala aquifer when talking about their water supply. “It was always about the water,”. “This isn’t over until they get [the pipeline] out of the Ogallala aquifer.

Securitizing Environmental Risk and the Keystone XL Pipeline - The Economists' Voice (audio) Edlin, Aaron S. / Stiglitz, Joseph / Cragg, Michael / Jaffee, Dwight / Zwiebel, Jeffrey - When faced with irreversible decisions with significant uncertainty about the environmental costs of accidents, such as the Keystone XL Pipeline or hydro-fracking for natural gas, policymakers should use an environmental bond to securitize self insurance.

Plan to Build East Coast Gateway for Canada's Oil Sands Hits Legal Snag - Court of Quebec ruling could hinder plans to reverse the flow of a pipeline to carry oil sands from Montreal to Maine, environmentalists say. —A little-publicized Canadian court decision has thrown a monkey wrench into an on-again, off-again proposal to transport oil from tar sands mines in Alberta to a U.S. seaport in Maine for export. Last month, judges with the Court of Quebec rejected a Montreal-based oil pipeline company's request to construct a pumping station near the Quebec-Vermont border. The pumping station is a crucial piece of Montreal Pipe Line Ltd.'s plan to reverse the flow direction of its pipeline. Currently, that pipeline carries conventional crude oil from a tanker facility in South Portland to refineries in Montreal.

"The Energy Deficit" - I have been surprised by the recent coverage in the American press of gasoline prices and politics. But, in view of America’s long history of neglect of energy security and resilience, the notion that Barack Obama’s administration is responsible for rising gas prices makes little sense. Four decades have passed since the oil-price shocks of the 1970’s. We learned a lot from that experience. In terms of policy, there was a promising effort in the late 1970’s. Fuel-efficiency standards for automobiles were legislated, and car producers implemented them. In a more fragmented fashion, states established incentives for energy efficiency in residential and commercial buildings. But then oil and gas prices (adjusted for inflation) entered a multi-decade period of decline. Policies targeting energy efficiency and security largely lapsed. Two generations came to think of declining oil prices as normal, which accounts for the current sense of entitlement, the outrage at rising prices, and the search for villains: politicians, oil-producing countries, and oil companies are all targets of scorn in public-opinion surveys. A substantial failure of education about non-renewable natural resources lies in the background of current public sentiment. And now, having underinvested in energy efficiency and security when the costs of doing so were lower, America is poorly positioned to face the prospect of rising real prices.  Given the upward pressure on prices implied by rising emerging-market demand and the global economy’s rapid increase in size, that day has arrived.

Oil slips towards $124 on Saudi, Libya supplies - Brent crude fell towards $124 a barrel on Tuesday as signs of increased supply from Saudi Arabia and a return to pre-war exports from Libya eased pressure on the market, while a slowdown in Chinese demand and a stronger dollar also weighed. Saudi Arabia has said it stands ready to fill in for any gap created by the loss of Iranian oil, and late on Monday said it would work to return oil prices to "fair" levels, according to a state news agency. Supply concerns were also eased by Libya, where oil exports in April are set to exceed pre-war levels, according to a senior official at its National Oil Corporation."We have been seeing articles about increases in Saudi supply offsetting a reduction in Iranian oil since Friday ... I'm surprised the market hasn't reacted until now,"

Oil falls from close to 10-month high to near $107 - Oil prices fell to near $107 a barrel Tuesday in Europe, slipping from close to 10-month highs ahead of new data on the U.S. economy and energy demand. Benchmark oil for April delivery was down 74 cents to $107.35 a barrel at late morning European time in electronic trading on the New York Mercantile Exchange. The contract rose $1.03 to settle at $108.09 in New York on Monday. Brent crude for May delivery was down $1.34 at $124.37 a barrel in London. Crude has jumped from $96 last month and $75 in October on signs of an improving U.S. economy. The focus Tuesday will be on new statistics on U.S. stockpiles of crude and refined products.Data for the week ending March 16 is expected to show a build of 2.1 million barrels in crude oil stocks, while gasoline stocks are seen falling by 1.8 million barrels, according to a survey of analysts by Platts, the energy information arm of McGraw-Hill Cos.

Oil Drops From Three-Week High on Speculation of Rising Supplies - Oil dropped from the highest price in almost three weeks in New York on signs U.S. crude supply is rising and speculation that Saudi Arabia may boost output. Futures fell as much as 1 percent, their first decline in three days. A government report tomorrow may show that U.S. stockpiles rose to the highest level in six months last week, according to a Bloomberg News survey. Saudi Arabia’s cabinet will work with crude consumers and producers to restore “fair” prices, according to the state news agency. Prices may be boosted as much as 30 percent by a European embargo on Iranian oil to take effect in July, said Christine Lagarde, managing director of the International Monetary Fund. ... “The market is currently well-supplied with oil, but supply disruptions and looming supply shortage from Iran is keeping uncertainty high,”. “Without an intensifying Iran conflict, further price gains aren’t justified.”

Exclusive: Iran sanctions seen spurring more Saudi oil sales to U.S.(Reuters) - Saudi Arabia is preparing to extend this year's unexpected jump in oil sales to the United States, adding to speculation about the response of the world's top oil exporter to sanctions against Iran and a rally in prices. The kingdom's shipments to the United States have quietly risen 25 percent to the highest level since mid-2008, according to preliminary U.S. government data, a sizeable leap that appears at least partly related to the imminent completion of a major expansion at its joint-venture Motiva refinery in Texas. But some say the scale of the increase, plus other U.S. data showing Gulf Coast inventories are still subdued, suggest the potential for a political dimension as well, evoking comparisons to 2008 when the OPEC kingpin was driving up production to knock oil prices off record highs near $150 a barrel. The surge appears set to continue. Vela, Saudi Arabia's state oil tanker company, has booked at least nine very large crude carriers (VLCCs) capable of carrying 2 million barrels of crude each from the Middle East Gulf to the U.S. Gulf since the start of March, the biggest such wave of fixtures in years, analysts say.

A Spike In U.S. Oil Production Is About To Make It The New Middle East  - Oil and gas production in the United States and North America is going to skyrocket in the next 8 years due to strides in natural resource extraction, write Citi analysts in a report published yesterday. In fact, they went so far as to call North America "the new Middle East," at least in terms of oil production. This—as well as a trend towards declining U.S. energy consumption—will completely transform both the domestic economy and the threats the U.S. will face in the future. Indeed, Citi economists expect total liquids production to as much as double for the continent in the next decade, and predict that the U.S. could overtake both Russia and Saudi Arabia in oil production by 2020 (see chart above).  That's because there is incredible potential to extract and refine energy products on domestic soil, see map above.   This energy boom would have a transformative effect on the domestic economy. Here are just a few of the most astonishing consequences in a "good-case" scenario:

More on Domestic Energy Boom and New Industrial Revolution as N. America Becomes New Middle East - Larry Kudlow interviewed Ed Morse last night on The Kudlow Report, watch the segment above, where Citigroup's head of global commodities says the United States is on the verge of a new industrial revolution as the result of a domestic energy boom.   “There’s no doubt that we’re seeing an industrial revolution — a reindustrialization of the United States — taking place because of the shale revolution taking place lowest, because we have the lowest natural gas prices in the world,” Ed Morse told Larry Kudlow. “We will for one or two or three generations.”  In a WSJ editorial yesterday titled "Move Over OPEC, Here We Come," Ed Morse wrote that North America already has become the most important marginal source of oil and gas globally, and is quickly becoming the new Middle East for energy production: "The United States has become the fastest-growing oil and gas producer in the world, and it is likely to remain so for the rest of this decade and into the 2020s. Add to this output the steadily growing Canadian production and a likely reversal of Mexico's recent production decline, and theoretically total oil production from the three countries could rise by 11.2 million barrels per day by 2020, or to 26.6 million barrels per day from around 15.4 million per day at the end of 2011.

The Peak Oil Crisis: Parsing the Bakken - A recent pronouncement by a noted analyst says that America's "tight oil" (shale oil) production could reach 3 million barrels a day (b/d) by 2020 which will again put us among the top few global oil producers. On digging a little deeper into the issue, however, many have a problem with all the optimism. Now a North Dakota shale oil well is not in the cost class of a deepwater offshore platform which can run into the billions, but they do cost about three times as much as a classic onshore oil well as they first must be drilled down 11,000 feet and then 10,000 horizontally through the oil bearing layer before the fracturing of the rock can take place. The "fracking" involves at least 15 massive pumps that inject water and other chemicals into the well. Take a Google Earth flight over northwestern North Dakota. The fracked wells are hard to miss as there are now about 9,000 of them and they are each the size of a football field.There is still more -- fracked wells don't keep producing very long. Although a few newly fracked wells may start out producing in the vicinity of 1,000 barrels a day, this rate usually falls by 65 percent the first year; 35 percent the second; and another 15 percent the third. Within a few years most wells are producing in the vicinity of 100 b/d or less which is why the state average for January is only 82 b/d despite the addition of 1300 new wells in 2011.

Inching Toward Energy Independence in America - Across the country, the oil and gas industry is vastly increasing production, reversing two decades of decline. Using new technology and spurred by rising oil prices since the mid-2000s, the industry is extracting millions of barrels more a week, from the deepest waters of the Gulf of Mexico to the prairies of North Dakota. At the same time, Americans are pumping significantly less gasoline. While that is partly a result of the recession and higher gasoline prices, people are also driving fewer miles and replacing older cars with more fuel-efficient vehicles at a greater clip, federal data show. Taken together, the increasing production and declining consumption have unexpectedly brought the United States markedly closer to a goal that has tantalized presidents since Richard Nixon: independence from foreign energy sources, a milestone that could reconfigure American foreign policy, the economy and more. In 2011, the country imported just 45 percent of the liquid fuels it used, down from a record high of 60 percent in 2005.  How the country made this turnabout is a story of industry-friendly policies started by President Bush and largely continued by President Obama — many over the objections of environmental advocates — as well as technological advances that have allowed the extraction of oil and gas once considered too difficult and too expensive to reach. But mainly it is a story of the complex economics of energy, which sometimes seems to operate by its own rules of supply and demand.

What US Energy Independence Would Take - The New York Times has a big story on moves toward US oil independence: Across the country, the oil and gas industry is vastly increasing production, reversing two decades of decline. Using new technology and spurred by rising oil prices since the mid-2000s, the industry is extracting millions of barrels more a week, from the deepest waters of the Gulf of Mexico to the prairies of North Dakota. There's a lot more color in the story, but I wanted to focus on the quantitative trends.  Accordingly here is US production and consumption since 1965 (together with completely notional extrapolations out to the point of energy independence):It's worth understanding exactly what's plotted here - in particular for production I am using "all liquids" - ie including biofuels, natural gas liquids, etc. in addition to oil proper. I use EIA data except before 1980 when I use BP data with an extrapolated correction to account for the difference between the BP and EIA all liquids series.  I think the use of all liquids is most appropriate here since things like biofuels are being burnt in auto engines and reducing the need for imports, while NGLs do substitute for petroleum demand in things like petrochemicals or using propane instead of heating oil.  It also counts as domestic production the refinery gains in US refineries on imported oil: that might be a bit more problematic, but it's not that big a piece of the curve.

U.S. Oil Drilling May Not Improve Gas Prices, Study Says: — It's the political cure-all for high gas prices: Drill here, drill now. But more U.S. drilling has not changed how deeply the gas pump drills into your wallet, math and history show. A statistical analysis of 36 years of monthly, inflation-adjusted gasoline prices and U.S. domestic oil production by The Associated Press shows no statistical correlation between how much oil comes out of U.S. wells and the price at the pump. If more domestic oil drilling worked as politicians say, you'd now be paying about $2 a gallon for gasoline. Instead, you're paying the highest prices ever for March. Political rhetoric about the blame over gas prices and the power to change them – whether Republican claims now or Democrats' charges four years ago – is not supported by cold, hard figures. And that's especially true about oil drilling in the U.S. More oil production in the United States does not mean consistently lower prices at the pump. Sometimes prices increase as American drilling ramps up. That's what has happened in the past three years. Since February 2009, U.S. oil production has increased 15 percent when seasonally adjusted. Prices in those three years went from $2.07 per gallon to $3.58. It was a case of drilling more and paying much more. U.S. oil production is back to the same level it was in March 2003, when gas cost $2.10 per gallon when adjusted for inflation. But that's not what prices are now. That's because oil is a global commodity and U.S. production has only a tiny influence on supply. Factors far beyond the control of a nation or a president dictate the price of gasoline.

Latest EIA Fuel Breakdown - Recall that the recent history of total liquid production looks like this (not zero scaled): There was a sharp jump in total production last fall - October and Novermber particularly - but then it tentatively looks like it's been rather flat since December (subject to confirmation by further data and revisions).  However, overall the world is at the highest level of liquid fuel ever (ie peak liquid fuel on a monthly basis is still not in the past). The EIA releases a breakdown of total liquid into various components, and they are now up to November - thus we can see how the rise last fall breaks down (but not yet the flattening since Dec).  Here's the total breakdown: [...] The "Crude plus Condensate" (C&C) is unambiguously oil - hydrocarbon liquids coming out of the ground.  The natural gas liquids is molecules larger than methane that come out in the gas stream (ethane, propane, butane, etc).  These aren't exactly oil, but are substitutable to some degree as petrochemical feedstocks.  Then the "Other Liquids" is mostly biofuels.  Refinery gains is volume gains in the refinery from cracking heavy oils down to lighter fluids.  In any case, the important point is that "crude plus condensate" is pretty much flat since 2005, with the gain in total liquids over that time mainly coming from natural gas liquids and biofuels:

Strategic Petroleum Reserve to the rescue - The United States and Britain have apparently been discussing a joint release of strategic petroleum stockpiles. ... In fact we ran that exact experiment last year... Specifically, the IEA announced on June 23, 2011 that the OECD countries would release 60 million barrels from their joint stockpiles, half of which came from the U.S. Strategic Petroleum Reserve. There was an initial modest drop in the price of oil on the day of the announcement, though within two weeks the price was back up above where it had been before the announcement. The price of oil did decline later in the summer, though surely this should be attributed to deteriorating news from Europe rather than the SPR release. For example, last summer's drop in WTI was mirrored by a drop in other financial indicators such as the S&P500. ... I see no evidence that last year's SPR release accomplished anything, and would not expect the outcome of another release this year to be very different.

U.S. crude oil imports drop to lowest level since 1999 as domestic oil production rises - US EIA  - U.S. crude oil imports during 2011 fell to their lowest level in twelve years and were down 12% from their peak in 2005, as higher domestic oil production and decreased consumption of petroleum products reduced American refiners' purchases of foreign crude.  U.S. crude oil imports averaged 8.9 million barrels per day (bbl/d) in 2011, down 3.2% (0.3 million bbl/d) from the year before. Imports of crude oil fell below 9 million bbl/d for the first time since 1999, according to full-year trade data in EIA's February Petroleum Supply Monthly. Since reaching a peak of 10.1 million bbl/d in 2005, oil imports are down 12%, or 1.2 million bbl/d.  Purchases of imported crude oil have declined because U.S. refiners had more supplies from domestic crude production to use, particularly higher oil output from Texas and North Dakota's Bakken formation. Texas oil production last year reached its highest level since 1997, and North Dakota appears to have pushed past California in December as the third biggest oil producing state.

Energy crisis only joke to Obama - President Barack Obama’s shtick on energy is getting old. The latest version in response to rising gasoline prices goes something like this: He can’t really do anything about high gasoline prices.... According to the first part of his shtick, high gasoline prices are not his fault; they result from high crude oil prices driven by geopolitical forces — Middle East instability and increased demand by China and India.... But wait. He has done something about high oil prices . . . by drilling more! In the second part of his routine, touted in a new White House report on energy security, he assures us that the United States is producing more oil today than at any time in the last eight years. In addition, he said, he is all about opening new areas in the Arctic Ocean and the Gulf of Mexico to exploration. The problem with this claim is that most of the expansion in domestic oil and gas production over the past three years is the result of steps taken by the Bush administration. Obama has actually reduced output from what it would have been had his administration not reversed many of President George W. Bush’s policies.

Republicans launch new attacks on Obama, Chu over gas prices - Republicans launched fresh attacks on the Obama administration on Tuesday over the soaring price of gasoline, ripping the White House in an election-year bid for the upper hand with consumers. Testifying before the House Oversight and Government Reform Committee, Energy Secretary Steven Chu was peppered with questions about what the administration has done to bring down gasoline prices, which are now averaging $3.85 a gallon versus $3.55 a gallon a year ago. Republican presidential candidates Mitt Romney and Newt Gingrich have called for Chu to be fired as gasoline prices climb. On Tuesday, Gingrich released an ad highlighting Chu’s September 2008 statement (retracted since he became head of the Energy Department) that he’d like to see gasoline prices at similar levels to Europe’s and his support for the Chevrolet Volt. Gingrich has touted a plan to bring gasoline prices down to $2.50 a gallon if elected president. The White House has criticized that plan as unrealistic.

Paranoia Strikes Deeper, by Paul Krugman - Stop, hey, what’s that sound? Actually, it’s the noise a great political party makes when it loses what’s left of its mind. And it happened — where else? — on Fox News on Sunday, when Mitt Romney bought fully into the claim that gas prices are high thanks to an Obama administration plot. This claim isn’t just nuts; it’s a sort of craziness triple play — a lie wrapped in an absurdity swaddled in paranoia. ... First, the lie: No, President Obama did not say, as many Republicans now claim, that he wanted higher gasoline prices. The claim is a lie, pure and simple. And it’s a lie wrapped in an absurdity, because the president doesn’t control gasoline prices, or even have much influence over those prices.  Finally, there’s the paranoia, the belief that liberals in general, and Obama administration officials in particular, are trying to make driving unaffordable as part of a nefarious plot against the American way of life. And, no, I’m not exaggerating. This is what you hear even from thoroughly mainstream conservatives.  And it’s not just gas prices, the conspiracy theories are proliferating so fast it’s hard to keep up. Thus, large numbers of Republicans firmly believe that global warming is a gigantic hoax involving thousands of scientists.  Meanwhile, others are attributing the recent improvement in economic news to a dastardly plot to withhold stimulus funds, releasing them just before the 2012 election. And let’s not even get into health reform.

Domestic drilling and gasoline prices - In international trade we could invoke the "small country" assumption without worry: Analyzing 36 years of gasoline prices and U.S. oil production, the Associated Press finds no statistical correlation between how much is pumped out of the ground and how much is paid at the pump. AP says four independent statisticians came to the same conclusion. .. AP's statistical analysis examined monthly, inflation-adjusted prices and production from the Energy Department stretching back to January 1976, when they were first recorded. AP then turned over its analysis to Melnick and three others -- Phil Hanser, an economist and statistician at the energy consulting firm the Brattle Group; University of South Carolina statistics professor John Grego; and David Peterson, a retired Duke University statistics professor. AP writes that the four "looked at the analysis, ran their own calculations, including several complicated formulas, and came to the same conclusion."via The change in supply from additional U.S. drilling is so small compared to the rest of the world's production that the supply shift has no effect on prices.

20 Experts Who Say Drilling Won’t Lower Gas Prices - In a pretty impressive act of journalism, the Associated Press recently conducted a “statistical analysis of 36 years of monthly, inflation-adjusted gasoline prices and U.S. domestic oil production.” The result: “No statistical correlation between how much oil comes out of U.S. wells and the price at the pump.” It’s neat to see math cut through the talking points and get straight to the truth of the matter — which is that expanding drilling is a fundamentally ineffectual response to gas price spikes. Given that changes in U.S. oil production don’t move gasoline prices, it should be clear that U.S. government policies related to drilling are of even smaller consequence. Indeed, 92 percent of economists surveyed by the Chicago Booth School of Business agreed this week that “changes in U.S. gasoline prices over the past 10 years have predominantly been due to market factors rather than U.S. federal economic or energy policies.” Still not convinced? How about another 20 economists and analysts from across the political spectrum who will tell you the same thing:

Shock ‘n’ oil - Vox EU - Oil prices are again on the rise – will this derail the economic recovery? And what if there is an oil shock on the horizon? This column presents an overview of the oil market and its possible effects on the global economy. It argues that if there is a shock, the list of casualties will have Europe at the top with the US close behind.

Saudi Arabia And China Team Up To Build A Gigantic New Oil Refinery – Is This The Beginning Of The End For The Petrodollar? - The largest oil exporter in the Middle East has teamed up with the second largest consumer of oil in the world (China) to build a gigantic new oil refinery and the mainstream media in the United States has barely even noticed it.   The following is how the deal was described in a recent China Daily article…. In what Riyadh calls “the largest expansion by any oil company in the world”, Sinopec’s deal on Saturday with Saudi oil giant Aramco will allow a major oil refinery to become operational in the Red Sea port of Yanbu by 2014. The $8.5 billion joint venture, which covers an area of about 5.2 million square meters, is already under construction. It will process 400,000 barrels of heavy crude oil per day. Over the past several years, China has sought to aggressively expand trade with Saudi Arabia, and China now actually imports more oil from Saudi Arabia than the United States does.  So why is this important?  Well, back in 1973 the United States and Saudi Arabia agreed that all oil sold by Saudi Arabia would be denominated in U.S. dollars.  This petrodollar system was adopted by almost the entire world and it has had great benefits for the U.S. economy.  But if China becomes Saudi Arabia’s most important trading partner, then why should Saudi Arabia continue to only sell oil in U.S. dollars?  And if the petrodollar system collapses, what is that going to mean for the U.S. economy?

Iraq ascendant as power shifts in OPEC  - -- Amid the threats to global oil supplies caused by the Persian Gulf confrontation between the United States and Iran, the longtime oil-power rivalry between the Islamic Republic and a resurgent Iraq is mounting. Industry analysts say that, spurred by the international sanctions aimed at choking off Iran's oil exports, this will likely mean Iraq will push Iran out of its position as the oil cartel's second-biggest producer after Saudi Arabia. As it is, Iraq's ambitious plan to quadruple production to as much as 12 million barrels per day by 2017 will one day challenge the kingdom itself. Analysts are skeptical Iraq can achieve that target. But that's years down the road -- if it ever happens at all. Usurping Iran's position in the Organization of Petroleum Exporting Countries is happening now. Two weeks ago, Hussein Shahristani, Iraq's deputy prime minister for energy affairs, declared the country's oil production has topped 3 million bpd for the first time since 1979. Baghdad aims to boost that to 4.5 million bpd by 2013-14.

No Policy In U.S. Energy Debate - U.S. President Barack Obama visited a plant in Cushing, Okla., that is slated to build the southern domestic leg of the longer Keystone XL oil pipeline. The project has become less about the energy debate in the United States and more about partisan tag lines during this year's presidential campaign season. Using political rhetoric as a debating tool during broader discussions on energy issues is doing little to address broader market concerns, however. Republican leaders in the House of Representative have tried to move Keystone XL around the president's desk through various unsuccessful legislative maneuvers. Before Obama left for Cushing this week, his critics called his trip a "road show" mired in "political theater." Rife with allegorical statements, including a depiction of the president as the Grinch from Dr. Suess, the Republicans claims on political theater hold zero merit, however.   But the blame doesn't stop there. During a weekend appearance on CBS News' "Face the Nation," the president's top campaign adviser, David Axelrod, said Obama's would-be challengers aren't discussing oil as much as "snake oil" during their energy debates. It's Obama's critics, said Axelrod, who are the ones playing politics with energy.

Citi's Report: Fuelish or Farsighted? - Earlier this week, Citigroup’s Ed Morse previewed the bank’s new energy report, “Energy 2020: North America, the New Middle East?” in a Wall Street Journal op-ed. Yesterday the bank released the full report—and it’s a doozy. In the report, Citi’s strategists argue that North America could become the largest provider of new energy during the next decade, as new technology adds once inaccessible sources of fuel to the mix. That technology would solve the world’s energy crisis has long been the argument of those who dispute the notion of “peak oil,” the theory that production of oil is has gone as high as it can and must decline from here, forcing oil prices ever higher. And as investors experienced in 2007 and yet again in 2011, higher oil prices are definitely not good for the economy—or stock markets. Citi, however, envisions a world where the impact of new production, reduced consumption and other related energy-related business may increase real GDP by 2% to 3.3%. If Citi’s vision bears out, the days of oil shocks derailing the U.S. economy could be numbered—and energy will be the new engine of American growth.Whether the report proves prescient or just another starry-eyed fantasy remains to be seen. BusinessInsider has more on the report here. And click here for a look at how investors might benefit from the trend.

U.S. Weekly Supply Estimates: (Stocks in Thousand Barrels, All Other Volumes in Thousand Barrels per Day)

Two major U.S. oil cos interested in TAPI pipeline | Reuters: (Reuters) - Two major U.S. oil companies are interested in a four-country pipeline that would ship gas worth billions of dollars from Turkmenistan to India and Pakistan, a U.S. government official said on Friday. The building of the U.S.-backed "TAPI" pipeline through some of Afghanistan's most volatile regions presents a major challenge, adding to the project's other hurdles such as gas pricing and transit fees. "A couple of major U.S. oil companies are interested," said Daniel Stein, senior advisor to the special envoy for Eurasian Energy in the United States. "We would like to see a U.S. company involved at some point in TAPI." He declined to name the companies. The governments of Turkmenistan, Afghanistan, Pakistan and India are aiming to sign by July 31 the TAPI pipeline deal.

How High Will Global Oil Prices Rise? - If you’re watching global oil markets and getting a sickening feeling in your stomach, you’re in good company. Oil prices have spiked precipitously in recent weeks, with the U.S. benchmark price at over $107 and Brent rising to $125. Those increases are already being felt at the pump. Gas prices in the U.S. are creeping towards a wallet-busting $4 a gallon. How much higher will oil prices go? It is a critical question. Just like in 2011, when hopes of an economic rebound were squelched, in part, by rising energy costs, high oil prices could again dampen a global economy that looks more promising but is still struggling to climb out of the Great Recession. With consumers paying more to drive to work each morning, they have less money left over to buy TV sets or take vacations, curtailing global consumer spending and dragging down growth. Goldman Sachs figures that a persistent 10% increase in oil prices shaves two-tenths of a percentage point off growth over one year. The European Central Bank a few days ago lowered its growth forecast for the euro zone, to a possible small contraction in 2012, and at the same time hiked its expectations for inflation, due in part to rising oil prices. Even robust emerging markets would feel the pinch. By adding to inflationary pressures, policymakers could be forced to hike interest rates and reduce growth rates.

Naimi calls high oil prices ‘unjustified’ - Saudi Arabia’s powerful oil minister Ali Naimi sought to cool overheating oil markets on Tuesday, saying high oil prices were “unjustified” and that the kingdom could boost its output by as much as 25 per cent if necessary. Supply was much more robust than it had been in 2008 when crude rose to $147 a barrel, he said.  As the west’s nuclear stand-off with Iran escalates, oil prices have rallied this month to a post-2008 peak of $128 a barrel with markets bracing for European Union sanctions on Iranian crude that could knock out a chunk of global supply. Jitters have been fuelled by supply outages in Syria, Yemen and South Sudan.
High quality global journalism requires investment. Christine Lagarde, managing director of the International Monetary Fund, said on Tuesday that rising energy prices had now overtaken Europe’s sovereign debt crisis as the biggest worry for the global economy. Speaking in New Delhi, she said that while the world financial system had strengthened over the past three months, volatile oil prices would have “serious consequences. But Mr Naimi insisted that supply was “much more firm today than in 2008”, the time of the last big oil increase. Saudi Arabia had 2.5m b/d of additional production capacity, which it could bring online if necessary.  Saudi Arabia is likely to be producing about 9.9m b/d of oil in April and exporting roughly 7.5m-8m b/d of that, he said. Asked if the kingdom could ease prices by exporting more oil, he said customers were not asking for additional crude. “We are ready and willing to put more oil on the market, but you need a buyer,” he said.

The price that launched a wall of ships - In a matter of days, Saudi Arabia has hired the largest number of super-tankers in years. When the tankers load their cargo in Ras Tanura, the world’s largest oil terminal, in the next couple of weeks and start a 40-day voyage towards the US Gulf coast, they will deliver a wall of oil with a single aim: to bring prices down.  “This is the first time in several years for [Saudi Arabia] to hit the market with such volume – and in such a short time frame,” says Omar Nokta, a shipping expert at specialist investment bank Dalham Rose & Co. Last week, Vela, the shipping arm of Saudi Aramco, hired over a few days 11 so-called very large crude oil carriers, each capable of shipping 2m barrels, to deliver to US-based refiners. “In 2011, Vela fixed one VLCC to the US every other month,” Mr Nokta says. The hiring spree was the most public move by the kingdom in a series of efforts aimed at bringing down oil prices from $125 a barrel towards $100. “They want to bring prices down. That is it,” says a former Western oil official.

Mr Al-Naimi Beats Oil Markets with Jawbone Again - In a rather breathless top-of-website story, the FT's Guy Chazan writes: Saudi Arabia’s powerful oil minister, Ali Naimi, made a rare intervention into overheating oil markets on Tuesday, declaring that high oil prices were “unjustified” and vowing that the kingdom would boost its output by as much as 25 per cent if necessary. Mr Chazan must not have been paying attention or he would know that Mr al-Naimi trying to cause the supply and demand curves for oil to intersect at a different place by jawboning them is a regular feature of the oil world.  It usually has a rather small effect on the price that lasts a day or two.  The thing that would actually affect prices, pumping more oil, he always rejects on the same tired grounds: Asked if it could ease prices by exporting more oil, he said customers were not asking for additional crude. “We are ready and willing to put more oil on the market, but you need a buyer,” he said. There was one interesting new comment: “I think high prices are unjustified today [on] a supply-demand basis,” he said. “We really don’t understand why the prices are behaving the way they are.” Supply was “much more firm today than in 2008” when crude rose to $147 a barrel, he said, with global supply now exceeding demand by 1m-2m barrels a day. So he is now admitting that maybe supply was a little strained in 2008.  Of course back then he was making no such admission, but instead was making exactly the same excuses as today:

Tech Talk - Going Back to the First Look at Saudi Arabian Oil Production - The United States Government has just asked the Kingdom of Saudi Arabia (KSA) to raise the levels of its oil production in summer 2012. Oil production is otherwise anticipated to be at some 9.8 mbd this summer, with fluctuations of around 200 kbd about that number. (There are rumors it has just hit 10 mbd.) It is reported that the KSA could raise production to 12.5 mbd if needed. Saudi Oil Minister Ali al-Naimi has now stated that the KSA is able to meet that commitment.  Since I started writing about peak oil back in 2005, the possible maximum sustainable production achievable from the Kingdom has been one of the recurring issues at The Oil Drum, and there have been a number of very perceptive analyses carried out by folk such as Euan Mearns, Stuart Staniford, and JoulesBurn that I do not intend to try and surpass. I will, however, try to summarize some of their conclusions as I work through a few posts that look at the overall production from the various fields that are found both on and offshore Saudi Arabia.  As an initial point, not all the oil that comes from the country is of the same quality, and this is often one of the initial factors that folk do not appreciate when they look, for example, at the two numbers I gave above, The problem arises with the heavier crudes that make up a part of the surplus, for which there is not a great market, as yet.

Based On This Chart, Can Saudi Arabia Bail Out The US Motorist From $5 Gas? - No conclusions here, just a simple chart showing monthly Saudi Arabia crude oil production based on OPEC data, which has been rangebound in a tight 8,000 - 9750 tb/d range, superimposed with Brent prices over the past decade. The last time Brent soared to record highs back in the summer of 2008, Saudi production peaked at 9,522 tb/d (despite similar promises for spikes in crude production and exports). During last spring's spike, Saudi produced around 9,000 tb/d. In the past two months, production has been at record highs, even as oil keeps setting new highs, entirely due to liquidity, but not because speculators are evil incarnate as Nancy Pelosi will want her brainwashed fans to believe, but simply because for the most part they are Primary Dealers, and other entities attached at the hip to the Fed, who serve as Ben Bernanke's transmission mechanism of record liquidity being dumped into the system. Our advice: if anyone is hoping that Saudi Arabia can pump the 12,500 tb/d needed if Iran truly goes offline, buy a bike, as failure from Saudi to satisfy lofty demands will promptly send unleaded to new all time highs. Couple that with the Treasury debt ceiling fiasco in 5-6 months, and those Obama InTrade reelection contracts may seem a tad rich.

Saudi Oil Supply Claim Unlikely, Hofmeister Says - Video - John Hofmeister, chief executive officer of Citizens for Affordable Energy and the former president of Shell Oil Co., talks about Saudi Arabia's oil supply and the outlook for the oil market. Hofmeister speaks with Betty Liu on Bloomberg Television's "In the Loop."

Charts Of Truth - I hate to interrupt your regularly scheduled dose of MSM and government misinformation and propaganda, but this just in – GAS PRICES ARE HEADED HIGHER. As usual, if you want some facts and truth about the world of oil, you go to the Oil Drum website.  This first chart shows that Saudi Arabia and these other key OPEC nations have doubled the number of oil rigs pumping oil since 2003 and oil production is absolutely flat. Zip. Nada. A 100% increase in oil rigs and 0% increase in production. Ever heard of peak oil?  Now for the coup de grace. This is a busy chart but tells the whole story. The Ghawar oil field is the biggest in the world. It generates 50% of all Saudi Arabian production at 4.5 million barrels per day. It started producing in 1951. That makes it 61 years old. Please observe the production line on the chart. Do you notice a trend? Please check out the cumulative discoveries. Do you notice a trend? Look at how many oil rigs it is taking to keep oil production flat.

IMF sees $160 oil risk despite Libyan boost - Libya's oil exports have rebounded much faster than expected and will exceed pre-Arab Spring levels as soon as April, plugging a crucial gap in world crude supply as the Iranian crisis comes to the boil.  The announcement came after Saudi Arabia said it had boosted output to a near record level of 9.87m b/d in January and stood ready to cover any shortfall as European sanctions against Iran bite deeper. "I want to assure you that there is no shortage of supply in the market," said Saudi oil minister Ali al-Naimi. " Despite the soothing words from Mid-East suppliers, the global oil market remains stretched with OECD inventories lower than during the Arab Spring last year. Most analysts believe Saudi spare capacity is below the safety threshold of 2m b/dm, though Mr al-Naimi said the Kingdom still has a 2.5m cushion. Barclays Capital said it remained "sceptical" about the ability of Saudi Arabia to boost output much beyond 1m b/d quickly and on a sustained basis. It also doubted that Libya will come close to its new target given the depletion rate of aging oil fields and the country's "political backdrop". Christine Lagarde, the head of the International Monetary Fund, has warned over recent days that high oil prices risk choking global recovery before a fresh cycle of growth is safely underway. 

Iran oil sanctions: India tells West to appreciate its needs - India will continue to import oil from Iran without violating any international law and has requested the United States and the European Union to take into account the country's oil needs, oil minister Jaipal Reddy said on Friday. "We have a systematic plan for receiving oil from Iran," Reddy told reporters at the Asia Gas Partnership Summit, but did not elaborate. The United States gave exemptions on Tuesday from its crippling financial sanctions to Japan and 10 EU nations it said had cut purchases of Iranian crude, but left Asian economic giants India and China exposed to the risk of such steps. "We continue to receive representations from the US and other countries. With respect to their sentiments, we have requested to appreciate our needs," Reddy said. India is Iran's second-biggest oil client after China and Tehran used to supply about 12 percent of the south Asian country's needs, worth about $11 billion a year. Reddy also said there would be no supply shortage.

U.S. Exempts Japan, 10 EU Nations From Iran Oil Sanctions - The Obama administration is sending a message to major buyers of Iranian oil -- in particular China, India and South Korea -- that they can avoid new U.S. sanctions by curtailing their imports of Iranian crude by the end of June, several U.S. officials said. Secretary of State Hillary Clinton announced yesterday that an “initial group” of countries -- Japan and 10 European Union nations -- have “significantly reduced” their Iranian oil purchases and thus qualified for an exemption from sanctions for a renewable period of 180 days under the law.The U.S. didn’t grant waivers to China, the leading importer of Iranian crude in the first half of last year, or to India and South Korea, which were the third- and fourth-largest buyers, according to the U.S. Department of Energy. Clinton praised the EU and Japan, which the Energy Department lists as the No. 2 importer of Iranian oil in the first half of last year, for taking actions that “were not easy” to cut back Iranian oil imports. “They had to rethink their energy needs at a critical time for the world economy and quickly begin to find alternatives to Iranian oil, which many had been reliant on for their energy needs,” she said in a statement. 

Barack Obama Prepares for War Footing - Last Friday, March 16, President Barack Obama may have quietly placed the United States on a war preparedness footing, perhaps in anticipation of an outbreak of war between Israel, the West, and Iran. A newly-propounded Executive Order, titled "National Defense Resources Preparedness," renews and updates the president's power to take control of all civil energy supplies, including oil and natural gas, control and restrict all civil transportation, which is almost 97 percent dependent upon oil; and even provides the option to re-enable a draft in order to achieve both the military and non-military demands of the country, according to a simple reading of the text. The Executive Order was published on the White House website. The timing of the Order -- with little fanfare -- could not be explained. Opinions among the very first bloggers on the purpose of the unexpected Executive Order run the gamut from the confused to the absurd. None focus on the obvious sudden need for such a pronouncement: oil and its potential for imminent interruption. If Iran was struck by Israel or the West, or if Iran thought it might be struck, the Tehran regime has promised it would block the Strait of Hormuz, which would obstruct some 40 percent of the world's seaborne oil, some twenty percent of the global supply, and about 20 percent of America's daily needs. Moreover, Tehran has promised military retaliation against any nation it feels has harmed it. The United States is at the top of the list.

Oil Could Rise to ‘Astronomical’ Levels: Pro - As demand continues to rise and geopolitical risks continue push prices higher, many wonder if oil prices will halt their ascent. "The oil game is a lot different than the last time we had an oil price spike," Robert Brusca, Chief Economist at FAO Economics told CNBC. "We’re underpinned by this growing demand for new sources and that keeps oil prices from really falling sharply." Brusca explained that demand continues to grow even in countries such as China and India where retail fuel prices are at a record high. "Their demands are still growing because we’re seeing a growing standard of living in these countries. We’re drawing more people into the modern economy." The increased consumer base is preventing oil prices from falling. Geopolitical risks are also fueling the rise in oil prices, he said. "The Saudis are in the midst of a program to pump out and ship a lot of oil to try to drive these prices down close to $100 per barrel, Brusca said. "I don’t think you can take any price off the table where the Middle East is concerned. If anything were to happen to escalate tension in the area, you could see oil going to levels that would be astronomical."

U.S. not ready for oil shock, Lugar says -- The White House is called on to take action to ensure the United States can handle any potential oil supply disruption, a U.S. Senate leader said. Crude oil prices on the global market are rising in part because of tensions with Iran, one of the top oil-producing countries among members of the Organization of the Petroleum Exporting Countries. U.S. Sen. Dick Lugar, R-Ind., ranking member of the Senate Foreign Relations Committee, said oil markets are in "a precarious position" because of sanctions on Iran's oil sector. Saudi Arabia has given assurances that it could increase oil production to offset market concerns but Lugar said "going hat-in-hand to Riyadh" isn't good policy. "Emergency planning must not wait for the emergency to arrive," he said in a statement.

Why The Huge Spike in Oil Prices? “Peak Oil” or Wall Street Speculation?… Since around October last year,  the price of crude oil on world futures markets has exploded. Different people have different explanations. The most common one is the belief in financial markets that a war between either Israel and Iran or the USA and Iran or all three is imminent. Another camp argues that the price is rising unavoidably because the world has passed what they call “Peak Oil”—the point on an imaginary Gaussian Bell Curve (see graph above) at which half of all world known oil reserves have been depleted and the remaining oil will decline in quantity at an accelerating pace with rising price. Both the war danger and peak oil explanations are off base. As in the astronomic price run-up in the Summer of 2008 when oil in futures markets briefly hit $147 a barrel, oil today is rising because of the speculative pressure on oil futures markets from hedge funds and major banks such as Citigroup, JP Morgan Chase and most notably, Goldman Sachs, the bank always present when there are big bucks to be won for little effort betting on a sure thing.  They’re getting a generous assist from the US Government agency entrusted with regulating financial derivatives, the Commodity Futures Trading Corporation (CFTC).

Peak Oil: The Race for What's Left - YouTube - Michael T. Klare, one of the great resource writers, outlines the "death wish" we are involved in, as we mine and drill the planet in a desperate attempt to maintain our unsustainable lifestyles. It's more than possible that we will change the planet beyond recognition, in even attempting to do so. "And don't forget the final cost: If all these barrels of oil and oil-like substances are truly produced from the least inviting of places on this planet, then for decades to come we will continue to massively burn fossil fuels, creating ever more greenhouse gases as if there were no tomorrow. And here's the sad truth: if we proceed down the tough-oil path instead of investing as massively in alternative energies, we may foreclose any hope of averting the most catastrophic consequences of a hotter and more turbulent planet."

Scary Oil  - Nouriel Roubini - Today’s fragile global economy faces many risks: the risk of another flare-up of the eurozone crisis; the risk of a worse-than-expected slowdown in China; and the risk that economic recovery in the United States will fizzle (yet again). But no risk is more serious than that posed by a further spike in oil prices. The price of a barrel of Brent crude, which was well below $100 in 2011, recently peaked at $125. Gasoline prices in the US are approaching $4 a gallon, a damaging threshold for consumer confidence, and will increase further during the high-demand summer season. The reason is fear. Not only are oil supplies plentiful, but demand in the US and Europe has been lower, owing to decreasing car use in the last few years and weak or negative GDP growth in the US and the eurozone. Simply put, increasing worry about a military conflict between Israel and Iran has created a “fear premium.” The last three global recessions (prior to 2008) were each caused by a geopolitical shock in the Middle East that led to a sharp spike in oil prices. Even the recent global recession, though triggered by a financial crisis, was exacerbated by spiking oil prices in 2008. With the barrel price reaching $145 in July of that year, oil-importing advanced economies and emerging markets alike faced a recessionary tipping point.

Lagarde Says World Can’t Be Lulled Into Sense of Security - International Monetary Fund Managing Director Christine Lagarde urged policy makers to be vigilant as oil prices, debt levels, and the risk of slowing growth in emerging markets threaten global economic stability. “Optimism should not give us a sense of comfort or lull us into a false sense of security,” Lagarde said today at a speech in Beijing at the China Development Forum. “We cannot go back to business as usual.” The IMF last week approved a 28 billion-euro ($36.6 billion) loan for Greece as part of a 130 billion euro second bailout by the European Union that requires more austerity and an overhaul of its economy. “The measures that were proposed are ambitious and it will be important to focus on steady rigorous implementation of the situation on the ground,” Lagarde said about Greece. “We have made important steps forward.” Brent crude oil futures have rising 18 percent this year on concern Iran’s standoff with the West over its nuclear program will escalate into military action in a region that holds 54 percent of global petroleum reserves. Increased gasoline prices threaten to slow consumer spending in the U.S., tempering the recovery in the world’s largest economy. Oil prices are “becoming a threat to global growth,”Lagarde said. “I think it’s a major threat.”

The oil price is the new eurozone crisis - No sooner has the pressure on markets from the eurozone crisis begun to ease than investors have found something else to worry about – the oil price.  There are a number of reasons why the oil price has pushed above $120 for a barrel of the costlier Brent variety. Stocks are low and production has been below expectations in a number of countries around the world. Libya has only partially restored production, Syrian output is under embargo, while conflict has pared production in Yemen and South Sudan.  Against this backdrop of tighter supply, emerging market demand is increasing each year at an incremental 1m to 1.5m barrels a day. To that can be added the impact of quantitative easing, which, by raising the supply of paper money, increases the relative price of more reliable stores of value like oil. Throw in geo-political uncertainty and the recipe is in place for a persistently high and probably volatile oil price for the foreseeable future.  The situation in Iran is the market’s particular worry at the moment and it is not hard to see why, given the casual manner in which the prospect of an Israeli strike on Iran’s nuclear capability is being discussed. A particularly sobering piece of analysis from Nomura this week calmly pinpointed the most likely date of an attack. The likelihood of an early Israeli poll and the timing of the US Presidential election suggest September is the date to pencil in your diary.

U.S. exempts 11 states from Iran sanctions; China, India exposed - (Reuters) - The United States exempted Japan and 10 EU nations from financial sanctions because they have significantly cut purchases of Iranian oil, but left Iran's top customers China and India exposed to the possibility of such steps. The decision means banks in these countries have been given a six-month reprieve from the threat of being cut off from the U.S. financial system under new sanctions designed to pressure Iran over its nuclear program. The list did not include China and India, Iran's top two crude oil importers, nor U.S. allies South Korea and Turkey, which are among the top-10 consumers of Iranian oil. Japan, China and India combined buy close to half of Iran's crude exports of 2.6 million barrels a day, providing crucial foreign exchange for the OPEC member. But the U.S. sanctions and an EU oil embargo have cut Iran out of financial networks, making it difficult to transfer funds to pay for trade and disrupting some oil shipments because of the difficulty of securing shipping insurance. Domestic prices in Iran have spiraled higher and the rial has slumped in value.

China to up fuel prices 6 to 7 percent; biggest hike in 33 months (Reuters) - China will raise retail gasoline and diesel prices by 6 percent to 7 percent from Tuesday, marking the biggest increase in 33 months, a move that will help refiners reduce heavy losses but is unlikely to hit demand in a big way. Retail ceiling prices will rise 600 yuan ($95) per ton, oil company officials who received official notice of the change said. After the hike, diesel will be about $1.22 per liter and 90-octane gasoline $1.17. Though the timing of the increase - the second in just over five weeks - was much anticipated due to a spike in global crude prices, the range of the rise was bigger than expected. "It's a bold move by the NDRC...looks like inflation has fallen off quite sharply recently, so it is a good politically-timed window." The hike will help compensate refiners for most of the recent rises in crude costs, which rallied more than 10 percent during February, and help maintain production.

Confused About China? So Is Credit Suisse - How divided are the experts on the near-term prospects for China’s economy? If an attempt by Credit Suisse analysts to predict China’s appetite for commodities is any indication, the answer is very. On March 5, Credit Suisse’s “Economics Research” group boldly forecast “China’s super-cycle for commodities is behind us.” Why? China’s economy is likely to grow more slowly over the coming years, Credit Suisse said, and would rely less on infrastructure spending. That meant that demand for commodities wouldn’t match the super-crazy growth rates of the past. Well, that forecast appears to have been too bold for others at the Swiss bank. On Monday, Credit Suisse put out another “super-cycle” paper, this time attributed to the “Securities Research & Analytics” group. That report made clear that Credit Suisse wasn’t clear about whether the cycle was over or not. According to the new paper, Credit Suisse’s “China Economics Team” believed that that the China’s commodity- demand super-cycle was history. But other parts of the company’s research group didn’t agree.

Bank lending in China - That is from Christopher Balding’s Asia/China blog, the post is here.  It is entitled “Why I am Concerned About the Chinese Economy in One Picture.”  If you would prefer the words: From 2008 to 2009 new local currency loans rose from 3.48 trillion rmb to 10.32 trillion according to the PBOC for an annualized increase of nearly 300%. I do not know if those who praised the Chinese in 2009 for their aggressive stimulus program are having second thoughts, or fearing that the stimulus simply postponed — and intensified — a much-needed adjustment.

China Home Prices Post Worst Performance in a Year on Curbs (Bloomberg) -- China's February home prices posted the worst performance in a year with almost half of the cities monitored by the government falling from a year ago as the country maintained curbs on the property market. New home prices fell in 27 of 70 cities last month from a year earlier and prices were unchanged in six cities, the national statistics bureau said in a statement on its website yesterday. That is the worst since the government began at the start of 2011 releasing individual data for 70 cities instead of a national average. Premier Wen Jiabao said last week housing prices remain far from a reasonable level and called on the government not to slacken efforts to regulate the home sector. Relaxing the curbs could cause "chaos" in the market, Wen said. China's two-year campaign to rein in home prices has included measures such as higher down payments and mortgage rates, and home purchase restrictions in 40 cities.

Corruption threatens China’s future - Widespread corruption at the local government level remains a threat to China’s economic development. If stories are to be believed, Chongqing’s disgraced party boss Bo Xilai even used an anti-corruption drive to put the squeeze on local business people. Beijing faces more immediate problems, however. Recent policies have pushed the country’s well-known macroeconomic imbalances to extreme levels, its real estate market is glutted and its credit system appears increasingly vulnerable. Premier Wen Jiabao has talked repeatedly of the need to address China’s “imbalanced, uncoordinated, and unsustainable development”. Yet its growth continues to depend on increasing amounts of investment. Last year fixed-asset investment accounted for 90 per cent of economic growth. The trouble is that much of the money has been frittered away on trophy infrastructure projects, such as the country’s expensive high-speed rail network, with low prospective returns. Mr Wen may fret but if investment were to stop expanding, China’s growth rate would slow dramatically. Beijing is holding a tiger by the tail and doesn’t dare let go.

Enter the dragon: China’s PM calls for reform - AUSTRALIANS have grown used to thinking of China as the guarantor of this country's economic growth and prosperity. That confident but insufficiently questioned assumption depends in turn on the expectation that Chinese demand for Australian iron, coal and other commodities will continue to be insatiable. Yet this is more an act of faith than a prediction supported by firm evidence. There are already signs that the Chinese economy is beginning to slow, although the consequences of the slowdown are not clear. What is apparent, however, is that China's economic difficulties are sufficiently serious to have ignited a new debate about political reform.At the final press conference of last week's National People's Congress, Premier Wen Jiabao spoke with unusual frankness about the mismatch between the market economy that has driven China's emergence as an economic superpower and the sclerotic political system overseen by the Communist Party. He did not call for an end to the party's rule, or indeed, prescribe any specific reform. But those who heard his comments, which were broadcast live on state television, were in no doubt about the object of his criticism. Citing the example of Wukan, a village in southern China that last year held free and open elections after the villagers threw out the local party secretary, Mr Wen said: "If a people can run a village well, I like to think they could run a town, and if they can run a town, they can manage a county."

China’s Real Choices for Growth - Pettis - Last week’s news was dominated by the sudden but not wholly unexpected removal of Bo Xilai as mayor of Chongqing. After the initial shock wore off, much of the speculation within China has moved on to what his ousting says about the evolution of power and, for economists, how it will affect the reform and rebalancing of the Chinese economy. More importantly, it seems to me that too many analysts over emphasize the intentions of the Chinese leadership when projecting China’s future. If Beijing announces that it plans to accomplish a specific goal – e.g. raise the consumption share of GDP, or double the length of railroad track – analysts quickly incorporate that goal into their projections even when it isn’t at all clear how Beijing will do it. This failure to focus on constraints rather than intentions is why I think most analysts have gotten China wrong in the past five years. By misunderstanding how China’s growth model works, and how the functioning of the model forces certain kinds of behavior and prevents others, they have been much less skeptical about Beijing’s ability to execute its intentions than they should have been.

The best thing for China is more companies with Foxconn’s standards - Long time China correspondent Adam Minter has a good interview in Time Out Shanghai that anyone interested in labor standards in China should read. Here is how he answered a question about whether Foxconn’s labor standards need to be improved: My expertise is not in high-tech manufacturing, but rather recycling facilities like scrap yards, and raw material processing facilities like aluminum smelters. I wouldn’t want to generalize either of those industries, but I can tell you that companies engaged in raw materials are far more dangerous, unhealthy, and unpleasant places to work than somewhere like Foxconn. Indeed, I can think of a range of industries that are more dangerous than Foxconn: textile dying, batttery manufacture, paper making, the list is endless.The goal should not be raising the standards of Foxconn, but rather the much more difficult task of raising up China’s other industries to the level of a Foxconn. Responsibility for that, however, belongs to the various levels of the Chinese government, ultimately. I don’t think any amount of consciousness raising on the part of foreigners can make a bit of difference.

Waiting for the Chinese consumer - LAST week I noted that neither a Chinese trade deficit or a yuan that's trading near fair value imply that China's economy has successfully rebalanced. A piece in the latest print edition helps explain why it would be wrong to conclude that the necessary structural transformatino has taken place: Unfortunately, China has rebalanced externally without rebalancing internally. Its current-account surplus has narrowed largely because of an increase in domestic investment, not consumption. Some economists therefore worry that China’s trade surpluses will soon reappear. An investment boom from 2001-04, for example, paved the way for the ballooning surplus of 2004-07, according to Jonathan Anderson, formerly of UBS. That investment poured into heavy industries, such as aluminium, machine tools, cement, chemicals and steel. This domestic supply displaced imports of the same products. And when a slowdown in China’s construction industry subsequently depressed domestic demand for these items, China sold abroad what it could no longer sell at home. Big surpluses were the result. In the past three years, China has also enjoyed a terrific investment boom. And with the property market weakening, the construction industry is also liable to slow again. Is the stage therefore set for a repeat of the surpluses of 2004-07?

China Makes iPads. So Why Does It Still Cut Corners For Its Own Consumers? - Consumers in China are all too familiar with the realities of shopping locally. In the kingdom of “caveat emptor,” the buyer who doesn’t beware faces a daily gamut of frustration and disappointment with substandard purchases — clothes unraveling in the first wash, lids not fitting pots and pans, and kitchen gadgets exploding as soon as they’re switched on are as frequent as the scandals involving substandard, and often toxic, food and medicines. Call it one of the paradoxes of modern industry: Countless consumer goods multinationals have built global empires by contracting out manufacturing to partners in China, generally without cutting corners or letting quality standards slip. Yet for one reason or another, Chinese firms aren’t replicating that success at home. Shaking off the shackles of low-quality manufacturing is a mammoth challenge for many. But as China’s once formidable cost advantage shrinks and the country aims to reduce its reliance on exports, the need to address the issue is intensifying by producing more products that can collectively escalate the country up the “value chain” of manufacturing.

China to be world's biggest importer soon: commerce minister - (Xinhua) -- Minister of Commerce Chen Deming said Sunday that China, now the world's second largest importer, will become the biggest in a few years. China not only provides the world with high-quality products at low costs, but also buys high-end goods supplied by global brands, Chen said at the China Development Forum 2012. The growth rate of China's retail sales stayed between 16 percent and 18 percent over recent years, higher than its GDP growth, indicating the country's huge purchasing potential, the minister said. Chen said many Western politicians blamed China for global trade imbalance, but they seldom mentioned that China, with its population only accounting for 19 percent of the world total, is also the world's second largest importer. Trade remedy measures adopted by some developed countries are undesirable, because they are neither fair to other economies, nor just to domestic citizens and enterprises, Chen added.

The Japan debt disaster and China’s (non)rebalancing - Pettis - In this issue of the newsletter I want to sketch out a scenario in which rather than analyze policy announcements or make predictions I try to lay out what are the various possible paths open to China. The scenario concerns trade. China’s current account surplus has declined sharply from its peak of roughly 10% of GDP in the 2007-2008 period to probably just under 4% of GDP last year. Over the next two years the forecast is, depending on who you talk to, either that it will rise significantly, or that it will decline to zero and perhaps even run into deficit. The Ministry of Commerce has argued the latter and the World Bank the former. I am not sure which way the surplus will go, but I would argue that either way it is going to be a very strained and difficult process for both China and the world. On the one hand if the Ministry of Commerce is arguing, as many do, that the rapid contraction in the surplus indicates that China is indeed rebalancing and will continue to do so, I think they are almost certainly wrong. China is not rebalancing and the decline in the surplus was driven wholly by external conditions. In fact until 2010, and probably also in 2011, the imbalances have gotten worse, not better.

Analysis: The AIJ Scandal And Japan's Pension Time Bomb(Reuters) - Tarumi Taxi in western Japan's port city of Kobe is teetering on the brink of bankruptcy, offering a glimpse of the crisis facing tens of thousands of small and mid-sized companies across Japan with little hope of meeting their pension obligations. Owner Satoshi Nagata, 59, has been pressing banks for a loan before a deadline in September when a contractual trigger will quadruple the hole in the firm's pension account. Without it, Tarumi Taxi and its fleet of 40 cars and 80 drivers will likely fold. "We've been in the red every year since 2007. The additional funds needed for this pension installment is killing our business. I've sold everything from stocks to golf memberships to keep us afloat," said Nagata, sitting on a torn sofa on the second floor of the old wooden building that has served as company headquarters for half a century. "I'm talking with banks now in preparation to make the repayment by the end of August. But if I can't then we'll be in serious trouble." Nagata didn't invest in AIJ Investment Advisors, the Tokyo-based advisory firm at the centre of a $2 billion fraud that came to light late last month. But he says he knows why other pension funds struggling to meet the obligations for their growing ranks of retirees would.

China signs $31bn currency exchange deal with Australia - China and Australia have signed a currency swap agreement in a bid to promote bilateral trade and investment. It will allow for the exchange of local currencies between their central banks, worth up to 30bn Australian dollars ($31bn; £20bn) over three years. The deal is expected to reduce cost for businesses, as they will be able to settle trade terms in local currency. It is the latest in a series of similar deals signed by Beijing as it seeks a more global role for the yuan. "The main purposes of the swap agreement are to support trade and investment between Australia and China, particularly in local-currency terms," the Reserve Bank of Australia said in a statement. China has been trying to promote the yuan as an alternative global reserve currency to the US dollar. It has signed currency deals with many of its trading partners, including Hong Kong and Japan. That has seen a rise in the amount of Chinese trade being settled in yuan instead of US dollars.

Australia Passes 30% Tax on Iron-Ore, Coal Mining Profits - Australia passed legislation that will reap about $11 billion in taxes within three years from BHP Billiton Ltd. (BHP), Rio Tinto Group and other iron-ore and coal miners as the government seeks to turn its budget to surplus. Prime Minister Julia Gillard’s Minerals Resource Rent Tax was passed in the upper house yesterday and will become law on July 1 after receiving backing from the ruling Labor party and the Greens, who hold the balance of power in the Senate. Passing the legislation is a success for Gillard, whose predecessor Kevin Rudd was ousted amid a campaign by mining companies against a broader 40-percent levy that he initially proposed. Gillard, the country’s first female prime minister, is trying to hold together a minority government that relies on the support of independent and Green party lawmakers. “It’s a victory for Labor and will help the nation’s bottom line,”

Understanding the Australian economy - This post is a continuation of my “adult conversations” thread. In case you have come to this post directly I advice you to pop back to the original post  for some frame of reference. On Friday I discussed the Australian balance of payments in order to explain the economic circumstances the country finds itself in with regards to the external sector. A circumstance very few people in the Australian financial elite appear to even recognise, let alone discuss. However, as you may have noticed, ideas floated on MacroBusiness have a funny way of becoming topical in the mainstream media, so here’s hoping. Australia’s external sector has been in an ever-growing deficit since 1975. In order to fund this debt with the rest of the world the country continues to sell ever-increasing amount of financial assets. This has led to the situation where the outflows of capital stemming from those financial assets is greater than inflows gained from trade of goods and services, even with the historically high terms of trade stemming from the commodities-led mining boom. It is no wonder Wikipedia is calling us “secluded”.

Austerity budgets in Ottawa, Ontario raise risk of labour unrest - A coast-to-coast spring of labour unrest is poised to escalate next week as Ontario and Ottawa deliver budgets that aim to save billions by shedding thousands of government jobs.Many Canadians are already feeling the effects of public-sector labour disputes involving Halifax bus drivers, Toronto librarians and B.C. teachers. Next week’s budgets from Queen’s Park and Parliament Hill are expected to heighten the tension that ensues when governments cut back.  Mr. Poirier’s union has estimated that federal cuts at the high end of Ottawa’s $4-billion-to-$8-billion target range would translate into more than 50,000 lost federal jobs and over 100,000 lost jobs economy-wide. Mr. Flaherty has dismissed those estimates but has not hinted at how many jobs will be lost. The minister’s claims that he is not preparing an “austerity” budget is being met with skepticism by federal unions.

BRICS bank could change the money game - India's proposal to set up a bank of the BRICS nations (Brazil, Russia, India, China and South Africa) will top the agenda at the group's summit on March 28. India believes a joint bank would be in line with the growing economic power of the five-nation group. The bank could firm up the BRICS position as a powerful player in global decision-making.  "The BRICS bank does not need much capital for a start," Alexander Appokin, senior expert at the Moscow-based Centre for Macroeconomic Analysis and Forecasting, said. "What is more important is that the BRICS development bank presents a unique opportunity for indirect investment of central bank foreign reserves inside the countries."

India budget negative for credit rating - Moody's -- The government's budget for the coming fiscal year starting in April is "credit negative" for India's sovereign debt, rating agencies Moody's said on Monday. The country's sovereign rating currently stands at Baa3 with a stable outlook. "A dependence on corporate tax revenue and vulnerability to commodity prices and exchange rates weakens the government's credit profile," Moody's said. "And the [...] budget's lack of specific policies to address these weaknesses is credit negative." In its budget announcement on Friday, the government presented a fiscal deficit target of 5.1% of gross domestic product. However, it would take improved GDP growth and corporate profitability, lower commodity prices and stability in the exchange rate to achieve the target, Moody's said.

New data since I posted yesterday - From this morning's Economic Times (one of India's leading newspapers): The number of India's poor fell to 29.8% of its population in 2009-10 from 37.2% in 2004-05, one of the sharpest falls ever. This suggests India has not only grown faster than the world economy, but that this growth has lifted millions out of poverty.  In absolute terms, the number of poor in the country declined by around 13% to 354 million during the fiveyear period with rural poverty falling faster thanurban poverty. During the period, rural poverty declined by 8 percentage points to 33.8%, almost double the decline of urban poor by 4.8 percentage points to 20.9%.  "This is not surprising. Such an outcome is on expected lines as this is the period when the government increased the expenditure on flagship programmes substantially. We gave money to the people and the result is a direct impact of that," said Mihir Shah, member, Planning Commission.  The numbers also re-affirm the impact of the government's flagship Mahatma Gandhi National Rural Employment Guarantee Scheme that entitles 100 days of work at a minimum rate of Rs 100 per day to all rural households. The scheme was launched in 2006 and has single-handedly transformed rural India.

$1.5 billion: The cost of cutting London-Toyko latency by 60ms - Starting this summer, a convoy of ice breakers and specially-adapted polar ice-rated cable laying ships will begin to lay the first ever trans-Arctic Ocean submarine fiber optic cables. Two of these cables, called Artic Fibre and Arctic Link, will cross the Northwest Passage which runs through the Canadian Arctic Archipelago. A third cable, the Russian Optical Trans-Arctic Submarine Cable System (ROTACS), will skirt the north coast of Scandinavia and Russia. All three cables will connect the United Kingdom to Japan, with a smattering of branches that will provide high-speed internet access to a handful of Arctic Circle communities. The completed cables are estimated to cost between $600 million and $1.5 billion each. All three cables are being laid for the same reasons: Redundancy and speed. As it stands, it takes roughly 230 milliseconds for a packet to go from London to Tokyo; the new cables will reduce this by 30% to 170ms. The massive drop in latency is expected to supercharge algorithmic stock market trading, where a difference of a few milliseconds can gain (or lose) millions of dollars. It is for this reason that a new cable is currently being laid between the UK and US — it will cost $300 million and shave “just” six milliseconds off the fastest link currently available.

World Trade and Output Set New Records in Jan. - The CPB Netherlands Bureau for Economic Policy Analysis released its monthly report this week on world trade and world industrial production for the month of January 2012.  Here are some of the highlights:
1. World trade volume increased in January by 0.9% on a monthly basis and by 2.8% on an annual basis, bringing the global trade index to a new all-time record high of 167.5 (see blue line in chart).  World trade is now 4.6% above the previous April 2008 peak of 160.2 in the early part of the U.S. and global recessions.  
2. By region, annual export growth was led by the United States at 10%, followed by 9% export growth for Latin America and 9% for Central and Eastern Europe.
3. World industrial output increased by 0.8% in January from the previous month and by 3.6% on an annual basis, reaching a new all-time high of 146.2 (see red line in chart), with especially strong annual output growth in Asia (8.2%) and emerging economies (6.3%).   Output declined in Europe (-0.9%), Latin America (0.4%), and Japan (-1.0%) on an annual basis, and increased by 3.5% in the United States 4. World output is now 8.3% above its pre-recession level in February 2008 (135.0) and 24% above the recessionary low in February 2009.

World Trade - Mark J. Perry reports on the latest world trade data from The CPB Netherlands Bureau for Economic Policy Analysis.  He presents a graph from 2000 on showing that the levels of world trade and world industrial output have both reached new post-recovery highs. He takes this to be very good news, and draws some broad conclusions. Bottom Line: Both world trade volume and world industrial output reached fresh record monthly high levels in January. Trade and output are now far above their pre-recession levels, providing evidence that the global economy has made a complete recovery from the 2008-2009 recession. For the U.S., the annual growth rates for exports (10%) and industrial output (3.5%) reflect the underlying strength in America's manufacturing sector. The graph tells me rather a different story.  I went to the source, got the raw data back to 1991, and made my own graph.

Vital Signs: Slowing Global Manufacturing - Manufacturers around the globe continue to expand output, but more slowly. J.P Morgan Chase & Co. estimates that its index of global manufacturing fell to 51.9 in March, from 52.5 last month, based on preliminary data. A reading above 50 indicates expansion. But this gauge remains below the 59.8 peak hit two years ago when the global recovery was stronger.

IMF chief urges prominent Chinese role in global policy discussions - (Xinhua) -- China should maintain a prominent role in global policy discussions amid lingering weaknesses in the global outlook, visiting chief of International Monetary Fund Christine Lagarde said here on Sunday. Lagarde said China's successes have for many years captured the world's attention as China has posted spectacular growth and in the space of three decades, created 370 million jobs and lifted half a billion people out of poverty. When the global crisis hit, China again showed leadership and adept policy skills, she said at the China Development Forum held Sunday in Beijing by the Development Research Center of the State Council, the think tank of the Chinese Government. "Indeed, the global economic situation might have been even more calamitous had it not been for the impetus that China provided to growth and stability," she said. Meanwhile, she said China should also sustain its efforts to accelerate the transformation of the Chinese economy. She listed three priorities for China, namely, supporting growth, continuing shifting the drivers of economic growth away from investment and exports and toward domestic consumption, and improving household livelihoods.

End the monopoly: let's make it a real World Bank at last - Robert Zoellick announced on February 17 that he would not seek a second mandate as president of the World Bank. As chief economists and senior vice-presidents of the World Bank from 1997 to 2007, we urge the US administration and the international development community to end an outdated and counterproductive monopoly on selecting the head of that global institution. We believe it is time to adopt an open and efficient selection procedure, clearly open to candidates from developing countries. And it is time that the pious declarations of commitment to such a process showed some sincerity. To say it is merit-based, and to choose an American repeatedly, shows scant respect to the citizens of other countries. Developed countries have a majority of voting shares in the World Bank and the IMF, and so control the leadership of these institutions. We are now close to the turning point where developing countries will represent half of real global output. They already drive global growth. More important, the developing countries represent 6bn of the 7bn world population. Our recommendation is not to swap an arbitrary rule, by which the president of the World Bank must be American, for another, only slightly less arbitrary, by which he or she should come from a developing country. It is to allow the best people to be considered for that position, whatever their origin.

With Larry Summers’ World Bank Bid in Trouble, Mexico Insists on Open Process - Early last week the New York Times reported that despite all the previous fine rhetoric about the G20 and consultation and open process, the U.S. Treasury Department had decided to rule by decree and impose its own candidate for the next president of the World Bank, the G20 be damned. U.S. officials informed G20 officials that the U.S. intended to "retain control of the bank," as the Times put it. According to the Times, the G20 countries grumbled but showed no sign of being willing to fight Treasury. The U.S. candidate would be a "lock," the Times said, "since Europe will almost certainly support whomever Washington picks."  Since the International Monetary and the World Bank were created, the U.S. and Europe -- which control around half of the voting shares of these institutions -- have colluded behind closed doors to determine the institutions' top leaders, with Europe selecting the head of the IMF with U.S. support and the U.S. selecting the head of the World Bank with European support. In recent years, developing countries have complained loudly about this practice -- a practice which would be illegal if the World Bank were subject to the Illinois Open Meetings Act -- and under pressure the World Bank has adopted governance reforms that are supposed to guarantee an "open, merit-based process" in selecting the president. But Treasury was claiming that there wasn't going to be any open process, it was going to be Treasury diktat.  But over the course of the last few days, the world has changed.

Which is the world’s biggest employer? - One of my favourite little statistical gems has always been the claim that the NHS is the world’s third largest employer, after the Indian Railways and the Chinese army, so it is deeply disappointing to find that this is not true - it’s actually only the fifth on the list with 1.7 million staff. Ahead of the NHS are McDonalds’ global workforce in 4th place (1.9 million), Walmart, including Asda in the UK in third (2.1 million), the Chinese army 2nd with 2.3 million and, at the top of the table, the US Department of Defense with a whopping 3.2million staff - although only 1.6 million of these are on active service,with the rest in civilian and other support roles. This article in the BBC website’s magazine sets out the data and some of the difficulties in making comparisons. A couple of items which stand out here are the unsurprising fact that Chinese organisations take four of the top ten places, and that the Indian Railways are actually down the table at 8th, rather than 2nd. Tenth place goes to Foxconn, the Chinese manufacturer of Apple i-pads which became notorious in 2010 when news spread that 10 of its workers had committed suicide. However this data suggests that, given the size of their workforce, the average number of suicides amongst their staff is actually lower than the Chinese average.

China, the Number One Foreign Investor in Germany - Chinese companies have been on buying spree. In 2011, Chinese companies invested in 158 projects in Germany, according to Germany Trade & Invest (GTAI). It made China “by far the most important investor in Germany,” said GTAI CEO Michael Pfeiffer. The US has dropped to second place with 110 projects in Germany (based on number of deals, not size). “Europe is a gigantic market, and investors are looking for the safest and largest location, and that is Germany,” . On the other hand, the amount that German companies want to invest overseas dropped sharply from €100 billion in 2011 to €70 billion in 2012, according to a survey by the Association of German Chambers of Industry and Commerce (DIHK). They’re reacting apparently “to the slower pace of the world economy, the debt crisis, and the risk-averse banks.” Chinese companies are following the government’s five-year plan to buy into strategic areas, such as IT, finance, and the auto industry. They’re buying turnaround situations, like bankrupt automotive component supplier Saargummi, or healthy companies such as concrete-pump maker Putzmeister whose pumps made history in Chernobyl where they were used to dump concrete on the reactor, and in Fukushima where they were used to douse the reactors with water. And perhaps this fame induced Sany Group, a Chinese construction-equipment maker, to acquire Putzmeister in January 2012. And in a different kind of deal, the State Administration of Foreign Exchange (SAFE), which manages China’s foreign reserves, quietly accumulated stock in Munch Re Group, whose largest single shareholder, with 10.2%, is Warren Buffet’s insurance empire.

"The Dying Bear: Russia's Demographic Disaster" - The overall magnitude of Russia’s downward health spiral is catastrophic. According to estimates from the Human Mortality Database, a research consortium, overall life expectancy at birth in Russia was slightly lower in 2009 (the latest year for which figures are available) than in 1961, almost half a century earlier. The situation is even worse for Russia’s adult population: in 2009, life expectancy at age 15 for all Russian adults was more than two years below its level in 1959; life expectancy for young men sank by almost four years over those two generations. Put another way, post-Soviet Russia has suffered a cumulative “excess mortality” of more than seven million deaths, meaning that if the country could have simply held on to its Gorbachev-era survival rates over the last two decades, seven million deaths could have been averted. This figure is more than three times the death toll World War I inflicted on imperial Russia.

Housing Bubbles: Less Frothy but Europe is Behind - Rebecca Wilder -  Wolfgang Muenchau’s article in the Financial Times, There is no Spanish siesta for the Eurozone, inspired me to update my post on housing bubbles around the world (really just Europe and the US). He argues that Spain’s bubble was much more extreme, and that the price adjustment is less mature compared to the others. I would add here that it’s European housing markets more broadly that look overvalued compared to that in the US, as measured by the price to rent ratio. The chart below illustrates the housing bubble, as measured by the house price to rent ratio, in the US, Spain, the UK, and Ireland that is normalized to Q1 1997 and through Q1 2011. The price to rent ratio can be compared to a price to earnings or a price to dividend ratio in finance. It measures the relative value of the asset: the price of the asset (purchase price of a home) divided by its flow of fundamental value (rental income earned or the value of having a roof over your head). As the price-rent ratio falls, the market home values moves closer to fundamental value. Spanning the years 2005 to Q4 2011 and indexed to 1997 Q1, home values peaked at roughly 1.7 times rent in the US, 1.8 times rent in Spain, and north of 2 time rent in Ireland and the UK. Since the peak, though, US home values have fallen to 1.0 times rent - a considerable reduction in asset prices toward fundamental value. In contrast, home values in Spain, the UK, and Ireland remain quite elevated to rents, 1.3 times, 1.6 times, and 1.4 times, respectively in Q4 2011.

European New Car Sales Have Worst February Of The Millennium - The European new car market crashed in February. According to data released by the European manufacturers’ association ACEA, new car sales were down 9.7 percent in February. Two months into the year, car sales in the EU are down 8.3 percent from the same period a year earlier. The harmless looking percentages hide the fact that this February was the worst of the millennium. Only 888,878 units changed hands in the EU27 in February, the lowest level since comparing months made sense (going back further is futile, the EU was much smaller then…) Even during carmageddon, European had not seen a February as bad as this one. EU basket cases Greece and Portugal saw their new car sales nearly halved. These are relatively unimportant markets, by now, tiny Luxemburg has more car sales than Greece. If Greece would leave the EU, it would not even register in the car statistics. What hurts much more is the deterioration of the volume markets. France is down 20.2 percent, not boding well for PSA and Renault. Italy is down 18.9 percent, putting pressure on Fiat. Flat sales in Germany spared Europe a double digit tanking.

Facts about Italy - Industrial output in January was five per cent down on a year earlier, while a study by Intesa Sanpaolo, a bank, shows that national consumption of food, drink and tobacco fell in 2011 to levels last seen 30 years ago. And:John Elkann, chairman of Fiat, expects Italians to buy fewer cars this year than they did in 1985. Registration of new Fiat group cars in Europe fell 16.7 per cent in February from a year earlier.And: Whereas electricity producers were fretting four years ago that Italy lacked generating capacity, one senior utility executive told the Financial Times he feared that industrial consumption would never return to the then levels. Analysts warn the worst is yet to come. This month Italians will feel the first impact of Mr Monti’s revenue-raising measures when they start paying higher regional income tax. In June reintroduction of a tax on first homes and higher rates on second homes come into force, to be followed in October by a further rise in value added tax. The article is here.

Italy Holds Derivatives on $211 Billion of Debt - Italy holds derivatives contracts on about 160 billion euros ($211 billion) of debt or almost 10 percent of government securities in circulation, a government official said. “The notional value of derivatives to cover debt issued by the Italian Republic amounts to about 160 billion euros, and the circulating securities on Jan. 31 were 1.624 trillion euros worth,” Education Undersecretary Marco Rossi Doria told the Italian Parliament on March 15, according to minutes posted on the Lower Chamber’s website. Italy has lost more than $31 billion on its derivatives at current market values, according to data compiled by the Bloomberg Brief Risk newsletter from regulatory filings. In the mid-1990s Italy began using interest-rate swaps and swaptions, options to enter into a swap, to cut the cost of servicing that debt, a person with knowledge of Italy’s contracts said. Out of the notional value of the derivative contracts Italy currently holds, about 100 billion euros are in interest-rate swap contracts, 36 billion in cross-currency swaps and 20 billion euros in swaptions, Doria said.

The Hungarian crisis - Hungary was the front-runner in market reforms among the former socialist countries in Central and Eastern Europe, gradually liberalising its economy in the 1980s. In the early 1990s, it seemed to be in the best position to converge fast with the European Union, both in terms of income level and institutional quality. However, convergence has stalled since 2005. The expansive fiscal policy and the build-up of a large external debt prior to the worldwide economic crisis in 2008 turned Hungary into one of the most financially vulnerable countries in Europe. Moreover, recent policy measures aiming to improve the fiscal balance and the household financial position have undermined the security of property rights and of private contracts. By the end of 2011, Hungary was asking the IMF for help.This column outlines the missteps that have seen it become one of the most financially vulnerable countries in the region.

The fiscal compact - The Treaty for Stability, Coordination and Governance, also known as Fiscal Compact has been negotiated and signed in a record amount of time. Its ratification is now the source of an important debate, especially in Ireland where it will have to be ratified through a referendum but also amongst the European Social Democrat parties that are now openly challenging it. Meanwhile, experts are increasingly divided over its effectiveness but they seem to converge on the importance of its symbolic nature. It has become an important pillar of the current European institutional changes and its growing challenge could have important repercussions on other ongoing negotiations (ESM, Eurobonds…).  The ECB issued an opinion on the “2 pack” which helps clarify the changes embedded in the fiscal compact. Bryan G summarized these changes over the existing Stability and Growth Pact in a response to Philip Lane:

  • (a) Requiring rapid convergence to Medium Term Objective (Glidepath rule);
  • (b) Limiting the scope for temporary deviations due to exceptional circumstances;
  • (c) Requirement for an automatic correction mechanism;
  • (d) Requirement for Member States that have been made subject to the excessive deficit procedure to put in place budgetary and economic partnership programmes;
  • (e) The ex-ante reporting of public debt issuance plans;
  • (f ) and defining the scope and procedures for Euro Summit meetings.

Fiscal consolidations for debt-to-GDP containment? - With the signing of the Fiscal Compact agreement, fiscal consolidations have surged as the main response to the Eurozone debt crisis. EU politicians (willingly or unwillingly) have bound their fiscal policy to the respect of super-tight fiscal rules. At first sight, this, combined with centralised monetary policy, leaves little room for discretionary national-based economic policies. While we avoid judging such a decision out of the emergency context in which it has been signed, we examine whether a fiscal consolidation can reduce or contain the debt-to-GDP ratio.  This column examines past episodes and finds that following fiscal adjustment may have favourable effects in the short term but that the two-year cumulated changes have been mainly adverse.

The Euro’s Imagined Community - Robert J Shiller  - Great significance – probably too much – has been attached to a possible breakup of the eurozone. Many believe that such a breakup – if, say, Greece abandoned the euro and reintroduced the drachma – would constitute a political failure that would ultimately threaten Europe’s stability. Speaking before the Bundestag last October, German Chancellor Angela Merkel put the matter starkly: “Nobody should believe that another half-century of peace and prosperity in Europe is guaranteed. It is not. So I say: If the euro fails, Europe fails. That must not happen. We have a historical obligation to protect by all prudent means at our disposal Europe's unification process begun by our forefathers more than fifty years ago after centuries of hatred and spilling of blood. None of us can foresee what the consequences would be if we were to fail.” Europe has had more than 250 wars since the beginning of the Renaissance in the mid-fifteenth century. So, it is not alarmist to worry aloud about preserving the sense of community that Europe has enjoyed for the past half-century.

“The Eurozone in Crisis: Origins and Prospects” - Time to breathe a sigh of relief, with resolution of the Greek bailout? Not so fast. Greece is likely to need re-adjustments to its plan [0] Plenty of challenges remain in the eurozone; PIMCO's El-Erian says Portugal is next [1]. In fact, as Jeffry Frieden and I argue, the resolution of the problems facing eurozone policymakers is likely to be contentious and prolonged. From an article forthcoming in the Spring issue of the La Follette Policy Report, by me and Jeffry Frieden (since the article is not yet published, the working paper version is here): The financial crisis gripping the eurozone countries seems incredibly complex, and although the reasons why their finances have come to grief are quite simple, the solution will not be easy. For the eurozone to resolve its crisis requires the political will to undertake painful measures, with serious distributional effects. As long as certain groups seek to avoid those costs, resolution of the crisis will be elusive. The European financial crisis and the ensuing recession are of critical importance. The euro area is the world’s largest economy; its trajectory has a powerful impact on the fortunes of Asia and even the United States. This effect is even stronger at a time when the world economy is so fragile.

Portuguese death rate rise linked to pain of austerity programme - Maria Isabel Martins got up at 5am to catch a bus from the eastern Portuguese country town of Portalegre to see a consultant in Lisbon about her diabetes. It is a 130-mile journey that takes three hours. It used to be free, but not any more. "This is shameful. Now each visit costs me €44 (£36) and I have to come back in a few weeks," the 53-year-old said, wheezing as she left the consultant's surgery at the Santa Maria hospital. There is a chart on the wall beside a machine that accepts credit cards. It shows the charges for seeing a doctor in one of western Europe's poorest countries, where opposition politicians blame budget cuts for a thousand extra deaths in February, 20% more than usual. "They hiked the fees in January," said the receptionist, pointing to the new charges for everything from jabs and ear washes to having stitches removed. "Now a visit to the emergency room costs €20 instead of €9. A consultant costs €7.50. People are angry."

Madrid Official: Region's Deficit Larger Than Anticipated -Report -The 2011 deficit of the Madrid region is expected to be larger than anticipated dragged down by an economic relapse, Percival Manglano, Economy advisor of Madrid's government told Expansion in an interview published on its Tuesday Internet edition. "We've had EUR1 billion revenue less than what we had anticipated," he said, adding the drop will force the Madrid government to revise the deficit figure previously announced. Madrid was expected to end 2011 with a deficit of 1.13%. He added he wouldn't be surprised that other Spanish regions would have also experienced a drop in revenue, the paper says.

Bad Loans At Spanish Banks Rise To 7.91% In January - The bad debt ratio of Spain's banking sector rose to a fresh 17-year high in January, data released Tuesday by the Bank of Spain showed. According to the data, 7.91% of loans held by banks, or EUR140.03 billion, were more than three months overdue for repayment in January, up from 7.61% in December. That is the highest percentage recorded since November 1994, and constrasts with bad debt levels below 1% of all loans in the years prior to the country's 2008 property bust. The numbers also showed that overall credit shrank 3.2% on the year in January, the latest indication that cash-strapped banks are unwilling to give loans amid a deepening economic downturn. Bad loans are expected to continue rising throughout this year, as Spain's economy may contract over 1%.

How much did the IMF, ECB and EU bailouts harm Greek bondholders? - The Greek CDS auction results are in, and the implied recovery rate on the Greek bond swap is 21.5 percent – so a 78.5 percent loss. What isn't widely appreciated is that most of this loss was created by the bailouts. That is of course true in the sense that the Greek bailouts have delayed the process of adjustment in Greece, so it continued on an unsustainable path for longer meaning its eventual defaults are larger. And no one thinks the new situation is really sustainable – new Greek bonds are pricing in of order a 75 per cent further write-down. But that's not what I'm referring to here. I mean something much simpler: because Greece was bailed out with loans from the IMF, ECB and EU that have been treated as senior to the bonds of the private sector (i.e. any losses were to be experienced first by the private sector – all loans to the IMF, ECB and EU were to be repaid with a higher priority than loans to the private sector), that meant that the losses to those Greek private sector bondholders that ended up taking losses were much greater.The bailouts mean that those bondholders that eventually take losses take a 75 per cent loss rather than a 33 per cent loss – they are badly harmed by the bailout process. Anyone with bonds in another eurozone state in receipt of bailouts had better beware. Portugal, anyone?

Greek Debt Insurance May Short-Change Investors (Video)

Greece creditors get $2.5bn CDS payout - The market will pay out $2.5bn to creditors who have bought insurance-like products to protect them from a Greek default, according to results of an auction on Monday. Fourteen dealer banks set a value of 21.5 per cent of par for Greek bonds, which means credit default swaps will have to pay 78.5 cents on the euro to settle contracts triggered by the nation’s debt restructuring, which led to the declaration of a credit event earlier this month. This works out at a market-wide payout of $2.5bn in an auction being held under the rules of the International Swaps & Derivatives Association, the industry body. The results had little impact on the market, as it is a small amount that had been widely expected. The auction process was launched after investors were forced to exchange their bonds at a loss in the biggest ever debt restructuring. The auction ends more than two years of speculation over whether the derivatives are viable for insuring sovereign debt after European policymakers sought to prevent payouts on concern they would prompt a deterioration in the region’s crisis.

Greek Parliament Approves Second Bailout - Greece's Parliament approved a new international bailout deal, which will see the crisis-hit country receive an additional €172 billion ($227 billion) in rescue loans, setting the stage for a round of harsh measures that the country's international creditors have set as a precondition for the funds. The approval came in the early hours of Wednesday, with 213 lawmakers supporting the loan deal, and with 79 deputies voting against it. Eight didn't cast a vote. Next up is an election in late April or May.

Greece’s Third Bailout Seen in Debt With Junk Grade: Euro Credit - Greece’s bonds and credit ratings are factoring in a third bailout for the nation that analysts and investors say will require greater concessions from its international creditors. Within a week of euro-area member states giving their formal approval to a second bailout package for Greece, the International Monetary Fund said the country may require additional funding or a further debt restructuring. Pacific Investment Management Co., which runs the world’s biggest bond fund, said it remains “cautious” on euro-area government debt even after the largest-ever sovereign refinancing because the risk remains that Greece will leave the single-currency area.

Bank of Greece sees deep recession in 2012 - The Bank of Greece is predicting that the Greek economy will contract by 4.5 percent in 2012 and remain in mild recession next year. In its annual report issued Monday, the central bank also predicted that unemployment would remain above 19 percent this year. The gloomy predictions were made despite the coalition government successfully negotiating financial rescue deals with both its private creditors and emergency lenders from the eurozone and International Monetary Fund.

One third of land in debt-ridden Greece is up for sale - One third of all land in Greece is up for sale as the debt-crippled country tries to raise money from state assets, a state official reportedly said Wednesday – but little of it will help those wanting to snap up a dream home in the sunshine. Greek authorities are touting billions of euros worth of government-owned land in order to finance international bailout loans totaling $227 billion over the next few years. However, most of the sites are in industrial zones or tied to facilities such as airports, highways and energy firms, according to a report by Turkey-based news Web site Hurriyet Daily News. The report said Greece is targeting its immediate neighbor, Turkey, as potentially a large source of investment. “One third of Greek land is on sale,” the report quoted Panos Protopsaltis, head of the Privatization Program of the Hellenic Republic Asset Development Fund, as saying.

ECB Official Wants Growth and Austerity in Greece - Ewald Nowotny, a member of the European Central Bank‘s governing council, Tuesday said a two-track approach was necessary for Greece, by both supporting growth as well as ensuring it sticks to its austerity plan. “Especially important is foreign direct investment as a means to support exports,” said Nowotny, who is also the head of the Austrian central bank, in a live internet chat with readers of Austrian daily Der Standard. In earlier comments, Nowotny said the high levels of youth unemployment in Greece and Spain are a dangerous situation. The central banker said that a feeling of fairness was important for a society. He also added that a social state is a successful model for Europe, but that it was important that such a state be based upon solid financing.

Europeans choose sides over financial crisis - Even as many European nations recoil from the obligations of economic union (because neither borrowers nor lenders are very happy these days), a radical cross-border European politics is being born. Ironically, the founding document of a genuinely pan-European politics isn’t one that unites the continent. To the contrary, the fiscal compact that German Chancellor Angela Merkel persuaded her European Union colleagues to embrace — with an assist from French President Nicolas Sarkozy — has given rise to bitter dissents both within and among European nations. The pact, which codifies fiscal constraints that will inflict years of economic stagnation, if not accelerated decline, on such debtor nations as Spain and Greece, has divided Europe into rival camps — the Keynesian leftists against the austerity rightists. Nothing new there. What’s new is that these camps extend across national borders. An embattled Sarkozy, facing a strong reelection challenge from Socialist Francois Hollande, has sought and received Merkel’s endorsement. The German chancellor has not only expressed her support for Sarkozy but also her willingness to take to the stump on his behalf. Although heads of government often meet with opposition candidates, Merkel rebuffed Hollande’s request for a meeting; fellow conservatives David Cameron and Mariano Rajoy, respectively the British and Spanish prime ministers, have also said they did not wish to meet with Hollande.

Something not wholly uninteresting happened the other day at the EFSF - As you know, the EFSF is the Special Purpose Vehicle that was set up in May 2010 as the eurozone’s temporary bailout fund; an outfit for amassing the billions necessary to ‘save’ Greece et al from default.  The nugget of gold was uttered during the briefing by the EFSF’s Chief Financial Officer Christophe Frankel. Here is how Bloomberg related his words: “The EFSF is moving to a new system for recouping its funding costs that will charge all countries the same rate. Funds raised will be pooled and no longer attributed to a particular country, and all countries will pay the same rates.”      This is a significant statement. Depending on how it is interpreted, it amounts, almost, to a declaration that the EFSF’s eurobonds may be turning less toxic and more akin to genuine union bonds. Alas, none of the financial journalists present bothered to ask Mr Frankel what he meant precisely. If he meant that Greece, Ireland and Portugal are going to be repaying at the same interest rate, this is only a small step in the right direction. If, on the other hand, he intimated that the donor countries, who are guaranteeing the debt, will be paying the same interest rates in order to provide the EFSF with its funding basis, then the EFSF’s eurobonds are edging toward the status of jointly and severally guaranteed eurobonds. Still, whatever Mr Frankel meant, this small announcement deserved more attention than it got.

How Much Longer Can Transaction Tax Be Delayed? - When European Union Commissioner Algirdas Šemeta meets with representatives of the financial industry, he likes to confront them with impressive numbers. Two-thirds of all Europeans support finally imposing a tax on the people who caused the financial crisis, he says. "We owe it to our citizens to deliver results." But his plans failed last Tuesday at a meeting of the 27 EU finance ministers. German Finance Minister Wolfgang Schäuble, a strong advocate of the transaction tax, had unsuccessfully warned his counterparts, saying: "We are risking the legitimacy of the European model of democracy." Speaking directly after Schäuble, Luxembourg Finance Minister Luc Frieden showed why the lobbyists, and not democracy, were going to win out on that day. "We have to think about the competitiveness of the financial industry," he said. The small country between the Mosel and Sauer Rivers earns 24 percent of its gross domestic product with banking products.

Euro Area Employment - The above shows Eurostat's index for total employment, including the just released estimate for the last quarter of 2011.  Essentially this is just further confirmation of the overall pattern clear in recent European data that, after a very weak and partial recovery from the great recession, Europe is slowly sliding into a second recession.

Is the worst of the euro crisis over? - Maybe. But several pitfalls still lie ahead. (We're looking at you, Portugal.).... The immediate risk of catastrophe has receded, but the euro zone is far from finding its way out of the woods — and the big bad wolf of currency collapse is still lurking among the trees. Portugal might still be forced into a Greek-style default. Greece could still backslide after its impending elections. The frontrunner in France’s presidential election wants to pick apart new rules on fiscal discipline. Soaring oil prices may still drag the euro zone recession down to unsustainable levels, and southern Europe’s inability to generate growth could vanquish all efforts to stem those countries’ rising debt.

Draghi Says Worst of Debt Crisis ‘Is Over,’ Bild Reports - European Central Bank President Mario Draghi said the worst of the sovereign debt crisis is over, Germany’s Bild newspaper reported, citing an interview. “The worst is over, but there are still risks,” Draghi was quoted as saying. “The situation has stabilized. The important indicators for the euro zone, like inflation, current account and above all the budget deficits, are better than, for example, in the United States.” Investor confidence has returned and “the ball is now with governments,” Draghi said, according to Bild. “They must sustainably secure the euro zone against crises.”  Draghi also said Germany is a “role model” in Europe, and the ECB’s 23-member Governing Council, which contains two Germans, has “internalized” Germany’s stability culture, Bild reported. Draghi shares Bundesbank President Jens Weidmann’s concerns about the risks the ECB has taken and there is no north-south divide on the council, the newspaper said.

Merkel: Eurozone crisis not over yet - German Chancellor Angela Merkel on Wednesday (21 March) said the eurozone crisis is "not over" yet, but merely in one of its "various phases," even as investor confidence seems to be returning to troubled euro-countries. "Concerning the development of the crisis, we cannot say today that it is over, we still find ourselves in one of the various phases of the crisis," she told a meeting organised by her Christian Democrat parliamentary group. The German economy was "not on a bad path," she said, adding that Europe is at an "absolutely decisive point." "How are the conditions and how much hope can investors in Europe, in America, in Japan who put their money in these [eurozone] countries have of seeing their money again?" Merkel asked. Investor confidence seems to be returning to countries like Italy and Spain, who have seen their borrowing costs shrink, while the 'safe-haven' German bund - whose value was boosted in the past years by the lack of trust in southern countries - is slightly depreciating.

A Few Quick Reminders Why NOTHING Has Been Fixed In Europe (And Why LTRO 3 Is Not Coming) - While Europe is once again back on the radar, having recently disappeared therefrom following the uneventful Greek CDS auction (which in itself was never an issue - the bigger question is any funding shortfall to fund non variation margined payments, as well as the cash to make whole UK and Swiss law bonds) following Buiter's earlier announcement that Spain is now in greater risk of default than ever, coupled with Geithner and Bernanke discussing how Europe is 'fine' in real time, here are three quick charts which will remind everyone that nothing in Europe has been fixed. In fact, it is now worse than ever. As a reminder, when thinking of Europe, the shorthand rule is: assets. And specifically, the lack thereof. Why is the ECB scrambling to collateralize every imaginable piece of trash that European banks can procure at only some valuation it knows about? Simple - quality, encumbrance and scarcity. When one understands that the heart of Europe's problem is the rapid "vaporization" of all money good assets, everything falls into place: from the ECB's response, to Europe's propensity for infinite rehypothecation, to the rapidly deteriorating financial system. It also explains why America will be increasingly on the hook, either via the Fed indirectly (via FX swaps), or indirectly via the IMF (such as two days ago when US taxpayers for the first time funded the first bailout check to the ECB using Greece as an intermediary).

European Housing Still Slumping - After a disappointing home sales print in the US (as the shadow overhang remains heavy), some perspective on just how bad it is in Europe is worthwhile. With Spanish yields starting to blow out again, it likely comes as no surprise that, as Goldman notes, the Spanish housing market (and for that matter the periphery in general) is bad and getting worse. However, Ireland remains the worst of the worst and Goldman sees yet another growing divide between the haves and have-nots of Europe as the residential property price performance can essentially be split into four groups: Strong, Recovering, Weak, and Ireland/Spain; with the latter perceived as considerably worse than the 'reported' data would suggest. Is it any wonder that Spain trades wide of Italy again now and as Citi's Buiter noted earlier, Spain is now the fulcrum market (Spanish 10Y spreads +30bps from Friday's tights).

Spain Risks Default Now More Than Ever, Buiter Says: Spain has never been so close to default and Greece, Ireland and Portugal may need further bailouts, Citigroup Inc. chief economist Willem Buiter said. “Spain is the key country about which I’m most worried,” Buiter, a former Bank of England policy maker, said in a radio interview today. “It’s really moved to the wrong side of the spectrum and is now at greater risk of sovereign restructuring than ever before.” Two years of debt-driven stresses in European markets have eased as Greece avoided a disorderly default, the building blocks of a new euro economic management system fell into place and the European Central Bank pumped over 1 trillion euros ($1.3 trillion) into the banking system. “The European Central Bank has drowned the markets and the banks in liquidity,” Buiter said. “There’s a general feeling of near euphoria at the moment which leads those drowning in liquidity to believe that all troubles are over.” 

European Sovereign Debt Shows First Weakness In 3 Months - Whether it was the truthiness of Willem Buiter's comments this morning, the sad reality of Spanish housing, or more likely the ugly fact that LTRO3 is not coming (as money-good assets evaporate), today was broadly the worst day of the year for European sovereigns. Spanish 10Y spreads jumped their most since the first day of the year, Italian yields broke back above 5% (and spreads broke back over 300bps), and Belgium, France and Austria all leaked notably wider. Since Friday's close, Italian and Spanish bonds have suffered their largest 2-day losses in over 3 months. Notably the CDS markets rolled their contracts into Monday and perhaps this derisking is real money exiting as they unwound their hedges - or more simply profit-taking on front-run LTRO carry trades but notably the LTRO Stigma has exploded in the last few days back to near its highs. European equity markets are now underperforming credit - having ridden the high-beta wave far above credit markets in the last few months (a picture we have seen in the US in Q2 2011 and HY is signaling risk-aversion rising in the US currently in the same way). Just how will the world react to another risk flare in Europe now that supposedly everything is solved?

Spanish Bonds Fall on Restructuring Concern; German Bunds Gain - Spanish bonds fell, pushing 10-year yields to the highest level in a month, after Citigroup Inc. chief economist Willem Buiter said the nation faced an increasing risk of a debt restructuring. Ten-year Spanish securities slid for an eighth day, widening the extra yield over similar-maturity German bunds to the most in two weeks. German two-year notes advanced for a second day after the government sold 5 billion euros ($6.61 billion) of the securities. Portugal’s bonds gained as borrowing costs fell at its first debt auction in more than a month. “Spanish spreads moved much wider after Buiter’s comments,” . “This highlights concern over further debt restructuring. Bunds recovered on the resulting safe-haven demand.” The Spanish 10-year yield jumped 18 basis points, or 0.18 percentage point, to 5.41 percent at 4:30 p.m. London time, the highest since Feb. 16.

Spain's borrowing rates rise on bailout fears - Spain's borrowing rates continue to rise as uncertainty in global financial markets and concerns about economic growth raise worries the country might eventually need a bailout. Yields on 10-year bonds are up to 5.47 percent mark after rising all week. In March, the yield was below 5 percent. The spread between the Spanish yield and the benchmark German equivalent hit 358 basis points on Friday, the highest since early January. Analysts say the rise is due to doubts over the new conservative government's commitment to meet deficit reduction targets and concerns that a global growth slowdown and market jitters will hurt Spain's chances of avoiding a bailout.

Debt Deflation Woes - I previously talked of the need for Northern states in the euro zone to provide a more conducive backdrop for countries in the periphery (i.e. the PIIGS) to devalue against. Specifically I argued here that the creditor nations such as Germany should allow their inflation rates to appreciate somewhat so that the relative internal devaluation that the PIIGS have to go through is more palatable and easier to sell to their national constituencies. The internal devaluation is an attempt to re-align competitiveness within the currency bloc, and the task of doing so is daunting, as can be seen from the difference in unit labour costs and the differences in labour productivity (I was unable to find seasonally adjusted data for the countries that are missing);

Blunder of Blunders -Krugman - DeLong and Summers on fiscal policy in a depressed economy is out. The headline point is the argument that austerity when you’re in the liquidity trap may well worsen, not improve, your long-run fiscal position; I’ve been making the same point for a couple of years, but Brad/Larry present some evidence from the birth of Eurosclerosis and the downgrading of US potential output estimates since the crisis began. They also emphasize the crucial point that even if austerity doesn’t literally worsen the long-run position, it does at best very little to improve that position — yet imposes large current costs. So the cost-benefit analysis is overwhelmingly in favor of stimulus as long as you’re in the liquidity trap. And what that says, in turn, is that the embrace of austerity by policy and political elites in late 2009 and early 2010 was an almost inconceivably terrible blunder. The result of that embrace was the imposition of huge economic and human costs, with little if any benefit. I’ve been posting various versions of a scatterplot showing the relationship between one indicator of fiscal policy and growth since the crisis began. Here’s a version restricted to eurozone countries and countries maintaining a fixed exchange rate against the euro, with many of the countries labeled:

Rating agencies found to be falling short according to EU regulator - Credit rating agencies Moody's, Standard & Poor's (S&P) and Fitch have been told to improve internal processes or face possible enforcement from the European Securities and Markets Authority (ESMA).  A hard hitting report flowing from the first examination of the credit rating market by the regulator found the companies were deficient in seven areas. These included staffing levels, transparency, internal control functions and the length of time dedicated to making ratings decision.  The report will come as a major concern to the three agencies. However, it should offer some cheer to national Governments, including Germany, France and Greece, all of whom have criticised ratings agencies over recent decisions. The agencies have also faced criticism in the UK from the Treasury Select Committee (TSC) for failing to spot problems in the months leading up to the financial crisis of 2007 and 2008.

How the German Economy Became a Model - Steven Rattner previously served as an economic adviser to President Bill Clinton. Barack Obama had been intending to make him a secretary in his administration, but then he assigned him the job of rescuing the American auto industry during the financial crisis. People in Washington are listening to what Rattner has to say on how things should go forward with the rest of America's stagnating economy. And Rattner is saying: "Germany is a model for the United States."  By now, Rattner has become quite knowledgeable about the issue, as well. He calls the German idea of Kurzarbeit "a model," referring to the "short-time work" program that the German government used during the crisis to avoid layoffs by encouraging companies to reduce workers' hours while making up for some of the workers' lost salaries and benefits itself. Likewise, he says that Germany's system for training skilled workers is a "clear role model for us or any other country" and that its intelligent industrial policies are also worthy of being imitated by Americans.

A rumour concerning €1 trillion in German bad debt - When the Chief Market Analyst of FX Solutions, Mr Joseph Trevisani, in an interview on CNBC on 23rd Sept 2011,was asked about fluctuating currency values, his reply created a stir. What he said was that you had to look at what was going on in Europe – everyone then expected him to mention Greece – but instead he said, “There was a story out in a German newspaper this morning talking about a trillion euros, supposedly, unconfimed. of losses hidden in German Banks.” He offered nothing further but the implication was that big players believed that the one stable and solvent European nation, the nation that was supposed to bail out the others was sitting on a time bomb of its own. Which would mean that Germany, the nation that liked to lecture others about lying, was lying. Lying about a potential trillion euro hole in its banks. The story was around for a while but then faded because no one could add much to it, let alone confirm it. Could it really be that German banks were hiding, and lying about, a trillion in undeclared bad debts? What debts could they be if they weren’t just the exposure to bad debts in Greece and the other southern nations we already knew about? And where could they have been hidden? No answers no story.

German Bond Prices Decline, Unsettling Confidence in a Safe Haven - Havens can pose their own risks. That is the reality that holders of Germany’s government bonds now must face. The value of German bonds — considered a shelter from Europe’s debt storm during the last two years — has started to fall, now that investors sense a calming in other European waters. On Wednesday the yield — or effective interest rate demanded by markets — on the benchmark 10-year German bond rose as high as 2.07 percent, an 18 percent increase from last week. Later in the day, it fell back somewhat, to 1.98 percent. Because bond yields rise as their prices fall, that means investors holding them now feel proportionately poorer than they did last week. A lot of those holders are big European banks, which have enough problems already without having to worry about their bunds, as German bonds are known. The spiking yields partly reflect a shift by hedge funds and asset managers into debt issued by countries like Italy and Spain. Those offer a much higher interest rate — but are evidently not considered quite as risky as they were just a few months ago, as Europe shows signs of having muddled through the worst of the crisis.

Disappointment in Core, but Some Positive News in Periphery - The shockingly weak euro zone flash PMI, especially the sub-50 reading for German manufacturing, is the main focus today. New orders have been weak and the Bloomberg consensus does expect the euro zone economy to contract not only in Q1 but in Q2 and Q3 as well. Many participants seem to have confused the dramatic equity market rally in Q1 and reduced tail risks with economic strength.  There is also a bit of a double-whammy for Germany. It had diversified its exports away from the periphery in Europe toward Asia, especially China just as fears of a harder landing–more pronounced slowdown, have been "confirmed" by the drop in the HSBC flash manufacturing PMI.  As the core of Europe is the flash point today, there have been some encouraging developments on the periphery that should not be overlooked.  First, Greece’s Jan-Feb budget deficit (excluding social security and local government figures) fell 53% year-over year to 495 mln euros. This compares with a target of 879 mln and 1.05 bln in the Jan-Feb 2011 period. Greece also reported that the January current account deficit of 1.5 bln euros is more than a 40% reduction from January ’11 2.75 bln deficit. Second, Portugal also reported a sharp reduction in its current account deficit. The January shortfall of 808 mln euros represents roughly a 35% reduction from a year ago.Third, Ireland has a 3.1 bln euro promissory note coming due at the end of the month. It appears an agreement is in the works to allow it to be replaced by a 25 year government bond.

ECB Lets National Central Banks Veto Some EU Collateral -- The European Central Bank is giving its national central banks more leeway to reject certain types of securities issued by banks in Ireland, Portugal and Greece as collateral for ECB lending operations.In a decision taken at its mid-month meeting Wednesday and posted on the ECB’s website Friday, the ECB said the 17 central banks that make up the euro “are not obliged to accept as collateral for Eurosystem credit operations eligible bank bonds guaranteed by a Member State under an EU-IMF financial assistance program” or whose credit rating falls below minimum standards.

Sweden Moving Toward Cashless Economy - Sweden was the first European country to introduce bank notes in 1661. Now it's come farther than most on the path toward getting rid of them. "I can't see why we should be printing bank notes at all anymore," says Bjoern Ulvaeus, former member of 1970's pop group ABBA, and a vocal proponent for a world without cash. The contours of such a society are starting to take shape in this high-tech nation, frustrating those who prefer coins and bills over digital money. In most Swedish cities, public buses don't accept cash; tickets are prepaid or purchased with a cell phone text message. A small but growing number of businesses only take cards, and some bank offices — which make money on electronic transactions — have stopped handling cash altogether. "There are towns where it isn't at all possible anymore to enter a bank and use cash," complains Curt Persson, chairman of Sweden's National Pensioners' Organization. 

Stuck in Recession, Italy Takes on Labor Laws That Divide the Generations— Assunta Linza, a bright-eyed 33-year-old with a college degree in psychology, has been unemployed since June, after losing a temporary job as a call-center operator. Her father, who is 60 and has a fifth-grade education, took early retirement with full benefits at age 42 from a job as a workman at the Italian state railway company. “Everyone said that kids should study to get ahead, but I graduated with highest honors, and the only thing my degree is good for is to hang on the wall,” Ms. Linza said dryly. The Linza family is emblematic of a yawning generational divide that experts say is crippling the Italian labor market. While older workers came of age with guaranteed jobs and ironclad contracts granting generous pensions and full benefits, younger Italians — the best-educated in the country’s history — are now paying the price. They are lucky to find temporary work, which offers few benefits or stability. It is precisely that two-tier labor market that Prime Minister Mario Monti is proposing to correct with changes to Italian law that are the subject of intense, politically delicate negotiations. The government is proposing measures to make it easier for companies to hire and fire, and to create shorter-term contracts with greater pension and unemployment benefits, a middle ground in a divided market. 

Portugal's 'core' public deficit tripled in January-Febuary - Portugal's 'core' public deficit tripled in January-Febuary this year, due to a drop in revenues and an increase in expenditure. It is the demonstration that Lisbon is struggling to remain within the planned targets in exchange for the 78 billion euro international aids. The deficit rose to 799 million euros from 274 compared to the same period in 2011. Finance Minister Vitor Gaspar denied Portugal, that is facing a hard recession, is overrunning the commitments taken as part of the rescue plan, but rumours are spreading that the country may end up like Greece. Public spending rose 3.5% to 7.06 billion euros, including transfers to state controlled companies. Revenues dropped 4.3% to 6.26 billion euros. In 2011 Lisbon managed to stay below the 5.9% debt ceiling, mostly thanks to extraordinary transfers from pension funds to state banks. . . 

Portuguese Struggle Amid Austerity Measures (audio)

Portugal sees nationwide strike over austerity -- Public transport services across Portugal came to a halt Thursday amid a nationwide strike called by the country's largest confederation union, The Wall Street Journal reported. The action closed subway stations in central Lisbon, while buses ran a minimum service, the report said, citing CGTP, the nation's largest confederation union and strike organizer. The union said it would hold 38 demonstrations across the country Thursday afternoon, arguing that the nation can't take any further austerity under the 78 billion euro ($103 billion) bailout provided by the European Union and International Monetary Fund. The yield on 10-year Portuguese government bonds rose 0.02 percentage point to 12.75%, according to electronic trading platform Tradeweb. Yields rise as bond prices fall.

Portugal Town Halls Face Default Amid $12 Billion Debt - Portugal’s town halls face default amid 9 billion euros ($12 billion) of debt unless the government provides aid soon, said Fernando Ruas, president of the nation’s association of municipalities. “At a company we call it insolvency,” Ruas said in a telephone interview from Lisbon on March 21. “It could happen that some town halls could have to restructure their debt if the government doesn’t intervene.” Ruas blamed a decline in money transfers from the government in Lisbon to municipalities for their growing financial woes. Portugal last year became the third euro-area country to request external aid, following Greece and Ireland. Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of the 78 billion-euro rescue. “A sharp decrease in money transfers has made it harder for many town halls to comply with their ongoing commitments,” said Ruas. His association estimates town halls face about 9 billion euros in liabilities. About 1.5 billion euros of the total is in bills to suppliers overdue by more than 90 days while the remainder is mostly made up of debt to banks, he said.

Ireland fell back into recession in fourth quarter -- Ireland's economy fell back into recession in late 2011, according to government data released Thursday. Ireland's Central Statistics Office said gross domestic product in the final three months of 2011 shrank 0.2% on a quarterly basis after contracting 1.1% in the third quarter. A recession is widely defined as two consecutive quarters of contraction. Strong growth in the first half of the year allowed Ireland to post annual growth of 0.7% in 2011, the first such expansion since 2007. The latest figures "are certainly not disastrous when compared to those of Greece and Portugal. But neither do they alter our view that Ireland's domestic slump is far from over," said Ben May, European economist at Capital Economics.

Eurozone ‘poster child’ Ireland slumps back into recession - Ireland tumbled back into recession at the end of last year, dousing political claims that the "Celtic Tiger" has benefited from its tough austerity programme.  The Central Statistics Office (CSO) said that Irish gross domestic product (GDP) shrank 0.2pc in the fourth quarter after a contraction of 1.1pc in the third quarter, putting the country back into a technical recession.  Worse, the Irish gross national product (GNP) plunged 2.2pc in the fourth quarter after a 1.9pc decline in the previous three months. GNP is regarded by the Irish government as a more accurate barometer of the country's economic performance as it strips out substantial profits earned by multi-national companies in Ireland that are then taken out of the country. The CSO said the Irish economy grew by 0.7pc for the whole of 2011. But it shrank by 2.2pc in GNP terms.  Ireland, which received an €85bn (£71bn) international bailout in 2010, has won plaudits from eurozone members for its implementation of tough spending cuts and austerity measures.  European leaders, including Angela Merkel, the German Chancellor, have held up the country as a poster child for other "sinner states" to copy. "The Irish model [of recovery] is the one we all need. I don't see that we have any choice… there is no short cut to heaven."

Europe’s Counterproductive Economic Policies Proceeding as Expected - Anyone who has been following my European commentary for any length of time will know that I have been running a number of risk themes on Europe due to what I consider to be misguided and one-sided policy which will ultimately be counterproductive. These themes come under the major trend that I see in the Eurozone:.. Periphery nations weakening, France in the middle, Germany outperforming, but the whole ship slowly sinking. This analysis is based on the sectoral view of the European periphery which I explained on Monday in a discussion of the Australian economy: As we have seen from nations like Greece and Portugal, a country with a long running current account deficit and a private sector with a desire – or no choice to save (austerity) – has significant problems trying to reach a government surplus. Once you understand that the external sector and the private sector are a net drain on national income it isn’t hard to see the problem. Under these circumstances there is simply no room left in the economy for savings in the government sector and attempts to reach government surpluses become counter-productive as this simply accelerates the decline.

The ECB swallowed the market -  In even quite large quantities debt can be fairly harmless. But beyond a certain accumulated mass it changes. There is now, I think, enough debt in the Fed, the Bank of Japan and the ECB that each of them is in the process of becoming a debt black hole. That is, the debt in them is so massive that it is gravitational, sucking at any and all of the debt and finance around it pulling more and more in to itself.The problem is this. The Central banks have chosen to lend to insolvent private banks and to the nations that already bankrupted themselves trying to bail out their unbailable banks. In an attempt to make their lunacy seem sensible, the central banks assured everyone that they would only accept as collateral for the money they were lending out, the best assets the banks possessed. So the best of the insolvent banks’ assets were sucked in and cheap central bank loans flooded out.  The central banks said that ‘now the banks were stabilized’ they hoped the banks would lend to the market and to each other thus allowing the broader economy and the banks themselves to be funded ‘by the market’. Neither happened. Why? Well the banks continued not to trust the quality of the assets they were offering each other as collateral. Not entirely surprising since the banks had already pledged the best of them to the central banks. Without trust-able assets as collateral – no loans.

Back-to-work schemes to face court hearing - Government will face accusations of forced labour at hearing in two cases at the Royal Courts of Justice in mid-May. The government will have to defend two of its back-to-work schemes against accusations they exploit the unemployed as forced labour after a high court judge granted a hearing that could see benefit regulations overturned. Mr Justice Ouseley granted solicitors from the law firm Public Interest Lawyers a judicial review in the case of 22-year-old Cait Reilly, who says she was made to stack and clean shelves for three weeks in Poundland without pay or face losing all benefits under the government's sector-based work academy (SBWA) scheme. Reilly's lawyers argue that being compelled to work represents a form of forced labour under the Human Rights Act.

National pay rates will be scrapped in budget -Millions of teachers, nurses, civil servants and other public sector workers are to lose their right to national pay rates, the Chancellor George Osborne will announce in next week’s Budget. George Osborne will say that public sector employees in poorer parts of the country should have their pay frozen until it is brought into line with local private sector workers. Mr Osborne originally intended to introduce local pay rates in April 2013, but has decided to bring the plans forward by a year in an attempt to boost growth. The move is likely to be met with a furious response from unions, which are already threatening industrial action over cuts to pensions. The Chancellor will publish figures that show that in some parts of England and Wales public sector workers earn almost a fifth more than those in equivalent jobs in the private sector. The Treasury argues that the pay gap leaves private companies struggling to compete for the best staff against public sector organisations, whose workers also enjoy better pensions and job security.

David Cameron unveils plan to sell off the roads - David Cameron will clear the way for a multibillion-pound semi-privatisation of trunk roads and motorways as he announces plans to allow sovereign wealth funds from countries such as China to lease roads in England. Just 48 hours before the budget, the prime minister will give a speech calling for radical action to improve Britain's infrastructure, which is falling behind those of key competitors in Europe. In his most eye-catching proposal, Cameron will announce that the Treasury and Department for Transport are to carry out a feasibility study looking at using private-sector funds to improve and maintain trunk roads and motorways. The prime minister's plan, modelled on the funding of the mains water and sewage network, would see sovereign wealth funds and pension funds given the right to lease roads over a long period. They would be set a series of targets to, for example, reduce congestion and carry out improvements. George Osborne recently travelled to China to persuade the world's largest fiscal-surplus country to invest in Britain's infrastructure. If the road companies met the targets they would receive a proportion of the vehicle excise duty, which currently all goes to the Treasury. This would be seen as a particularly radical step because it would be a form of hypothecation – allowing a stream of revenue to be directed at a particular project. The Treasury normally resists this because it likes to keep control of prioritising spending across government.

Why privatize the roads? - There are two arguments for road privatization that are plain daft.  One is that it will “unlock large-scale private investment” from pension and sovereign wealth funds. This argument fails because the government can already borrow from these through the gilt market at almost zero cost - the yield on 50-year index-linked gilts is below 0.2%. The cheapest way to invest in roads is for the government to borrow. To think otherwise is merely irrational debt phobia. The second argument is that the private sector can manage the roads better than the Highways Agency. This fails because, insofar as the private sector is more efficient than the public, it is because the pressure of competition forces it to be so. But giving private firms long-lived leases over natural monopolies is no way to increase competition. So, what is the case for privatization? Jonathan sees it as a step towards road pricing. But there is another argument. It originates in perhaps the most important fact about western capitalism in recent years - that there is a dearth of investment opportunities; Faced with this problem, one function of the state is to create new investment opportunities. And road privatization - like steps towards NHS privatization - does just this.

Doctors make last-ditch warning over NHS shake-up - The coalition's health reforms could lead to the NHS ceasing to provide key services and may make tragedies like the death of Baby P harder to prevent, leading doctors have warned. Their analysis of the health and social care bill found the changes will result in worse care for millions of patients, with serious conditions such as cancer, wider health inequalities and poorer patients being disadvantaged. The dramatic warnings by leading doctors are contained in an assessment by the Faculty of Public Health (FPH) of the risks involved in the forthcoming overhaul of the NHS in England. The bill poses "significant risks … to patients and the general public" and could well damage "people's health and patients' experience of care," according to the faculty, which represents 3,300 public health specialists in the NHS, local councils and academia. "It is likely that the most vulnerable who already suffer the worst health outcomes will be disadvantaged as a result of the enactment of the bill," the document states. Poorer people are unlikely to be able to use the greater patient choice that the bill entails, it adds.

The UK Budget and the Political Dangers of Inequality - The symbolic centre piece of the UK budget was cutting the top rate of income tax. There has been and will be plenty written on the merits or otherwise of this (see Chris Dillow for example), but I want to raise a broader point about political influence. To do that I will start with the UK and US, but then move to Uzbekistan and Nepal, before returning to the US and finally back to the UK. Let us start with trends in inequality. The distribution of income in the UK has been getting steadily more unequal over the last two decades. As this chart makes clear, we are following in the footsteps of the US in this respect. There has been a great deal written about this trend. Is there a similar trend in inequality of opportunity, and are they linked? Just how many measures of health and social wellbeing are negatively correlated with inequality? But rather than discussing this, I want to move to Uzbekistan, Sierra Leone and Nepal.    In a fascinating series of blog posts Daron Acemoglu and James Robinson tell stories about why these economies failed to develop over long periods of time. The common theme is that an economic and political elite (a dictator, a tribe) had established a system of extracting the surplus from an economy, and either that system prevented development (children spent a large amount of school time picking cotton in Uzbekistan) or development threatened this extractive system (the caste system in Nepal).

Video: Debt fears as U.K. payday loans boom

UK manufacturers hit by drop in demand - Britain's manufacturers have suffered a drop in demand but the majority are still optimistic that business will pick up over the coming months, according to a survey. Order books in recent weeks deteriorated from a month earlier and undershot City economists' expectations, the latest manufacturing poll from business lobby group the CBI indicated. Its balance of firms reporting orders were above normal against those reporting them below normal came in at -8%. The CBI said that was stronger than the long-run average for that measure but it was down from -3% in February's report and worse than forecasts for -6%. But a majority of the 436 manufacturers surveyed did see output rising in the next three months. With 39% expecting a pickup and only 15% predicting a fall, the resulting balance of +24% was the strongest for a year. The CBI's chief economic adviser, Ian McCafferty, said: "The recovery in the manufacturing sector seems to be building some momentum. Firms again expect a strong rise in output over the next three months, on the back of above-average order books."

U.K. Budget Deficit Doubles as Taxes Fall - Britain’s budget deficit almost doubled in February as taxes fell and spending surged, leaving Chancellor of the Exchequer George Osborne little room to meet his full-year goal as he prepares to announce the annual budget. Net borrowing excluding support for banks was 15.2 billion pounds ($24.1 billion), the highest for any February on record, compared with 8.9 billion pounds a year earlier, the Office for National Statistics said in London today. The median of 17 forecasts in a Bloomberg News survey was for a shortfall of 8 billion pounds. Osborne has rejected calls to relax his program of cuts, saying warnings from Fitch Ratings and Moody’s Investors Service that Britain could lose its top credit rating reinforce the need to stick to his plan to erase the structural deficit by 2017. “It provides a very uncomfortable background for the budget,”

Scattergun Economics – The BBC’s Stephanie Flanders Muddies an Already Impenetrable Argument - Last Friday the BBC’s economics editor Stephanie Flanders ran one of the most terrible economics articles I’ve ever read: ‘The Truth About UK Debt.’ The problem is that it contains very little truth.  The reason it contains so little truth is because, not to put too fine a point on it, Flanders comes off as having quite literally no idea what she’s talking about. In fact, the piece comes across as less an article and more a smattering of graphs and uncontextualised facts. To say that it reads like something on the Zerohedge website would be unfair. But in terms of sheer incomprehensibility and vagueness it is certainly poised in that direction. The article sets out to convince the reader that the UK does not have a problem with private sector debt. Sounds pretty fishy, right? Well, it is fishy. Very fishy. Especially given that the author starts out with the following graph: That chart, to me, looks pretty damning – and it doesn’t even take into account the financial sector (more on that in a moment). Clearly the private sector has been leveraging itself up to the eyeballs. You can also see that after 2008 they started slowing their accumulation of debt.None of this is particularly hard to interpret. As private sector debt increases more money is spent into the economy. As it decreases we must assume that, all else being equal, less money is entering the economy. When less money enters the economy we must assume that less people are spending and investing. This should lead to a fall in economic activity.

Banks urged to raise fresh capital - The taxpayer could be asked to stump up yet more cash to support Britain's banks after the Bank of England's new risk watchdog urged them to raise more capital to weather future financial shocks. The Financial Policy Committee, set up last year to spot potential risks building in the financial system, said it was "concerned" banks were not holding enough capital - despite already being the best capitalised in Europe - and said they should raise more "as early as feasible."  The industry reacted with dismay at the FPC's comments, with one analyst branding them "barking mad" and others warning it could hinder growth by further limiting lending. In a statement released following its meeting on March 16, the FPC said that while banks had made progress in building capital by keeping down pay, dividends and share buy-backs, more needed to be done.

U.K. Inflation Stays Above BOE Limit on Alcohol, Food: EconomyU.K. inflation slowed less than economists forecast in February as higher alcohol and food costs helped keep consumer-price gains above the Bank of England’s upper limit. Consumer prices rose 3.4 percent from a year earlier, the least since November 2010, compared with 3.6 percent in January, the Office for National Statistics said today in London. The median estimate of 36 economists was for a reading of 3.3 percent last month, according to a Bloomberg News survey.  The pace of the slowdown in inflation may be curbed by rising oil costs, which have surged in the past six months. While the Bank of England has forecast that price growth will ease to its 2 percent goal this year, policy maker Martin Weale said last month there is a “risk that there may be more persistence to inflation.”  One can “expect further declines in inflation to be more modest going forward,”

The strange case of the disappearing productive capacity - Have a very quick look at the chart below. It looks like recent developments in actual output relative to potential. But it is not. It is various assessments of UK potential output against the pre-recession trend.      It comes from the post-budget forecast produced by the Office for Budget Responsibility (OBR), the independent body that the UK government has contracted out the job of producing the official budget forecast to. It shows that the OBR, and other international forecasters, think that the recession will in a few years time have led to a permanent loss of UK output of over 10%. That is an extraordinarily large number. It makes the recent US debate on the subject look positively tame by comparison.     The OBR estimates mainly come from survey evidence. The following chart is from a recent OBR working paper which describes their methodology.   We can see the problem by comparing 1981 with 2009. Between 1979 and 1981 UK GDP fell by about 3.5%, whereas between 2007 and 2009 it fell by 5.5%. Yet movements in the output gap look quite similar. More significantly, from 2009 to 2011 UK GDP grew at an average annual rate of just less than 1.5%, yet this survey evidence suggests the output gap was almost halved as a result!

Jobseekers forced to clean private homes and offices for nothing - Unpaid jobseekers have been forced to clean private homes and offices for more than a month at a time under government employment schemes, despite mounting evidence that the controversial policy is reducing the overall availability of paid work by replacing temporary jobs and overtime for other staff. A succession of high street shops have pulled out of the schemes this week amid criticism that using unpaid labour to carry out routine tasks such as filling shelves amounts to a public subsidy for employers, but the practice extends far beyond the retail industry. The Guardian has now discovered through a freedom of information request that a major government contractor, Avanta, has compelled jobseekers to work as unpaid cleaners in houses, flats, offices and council premises under the work programme. The Department for Work and Pensions (DWP) has previously stated that all mandatory schemes must be for "community benefit". However, under government rules, this can be defined as increasing the profit of organisations where the unemployed are sent to work without pay.

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