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

Saturday, March 3, 2012

week ending Mar 3

 Fed Balance Sheet Down To $2.928 Trillion - The balance sheet of the U.S. Federal Reserve fell over the last week as the central bank continued with a plan to adjust its portfolio and stimulate an economy it expects to grow only modestly this year. The Fed's asset holdings in the week ended Feb. 29 were $2.928 trillion, down from $2.935 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities grew to $1.662 trillion from $ 1.657 trillion a week earlier. The central bank's holdings of mortgage-backed securities fell to $840.80 billion from $853.05 billion. The Fed's portfolio has more than doubled since the financial crisis of 2008 and 2009, as the central bank bought mortgage-backed securities and government bonds to keep interest rates low and stimulate the economy. Thursday's report showed total borrowing from the Fed's discount lending window was $7.58 billion on Wednesday, down from $7.63 billion a week earlier. Commercial banks borrowed $15 million from the discount window. They borrowed $3 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts was $3.460 trillion, down slightly from $3.461 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts fell to $2.719 trillion from $2.723 trillion in the previous week. Holdings of federal agency securities rose to $740.80 billion from the prior week's $737.93 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--March 1 2012

Bernanke Hopes to Eventually Normalize Fed Balance Sheet - Federal Reserve Chairman Ben Bernanke said Thursday that he hopes over time to reduce the Fed’s balance sheet to a more normal size. Testifying before the Senate Banking Committee, Bernanke said his goal was to eventually shrink the size of the Fed’s holdings and shift their composition so the central bank would only hold Treasurys. As part of its efforts to keep interest rates low and spur economic growth, the Fed has more than doubled the size of its balance sheet since the financial crisis after embarking on two rounds of bond-buying and purchasing mortgage-backed securities in an effort to support the weak housing market. The Fed’s asset holdings were $2.935 trillion in the week ended Feb. 22. Responding to lawmakers’ questions, Bernanke said the Fed didn’t expect the recent recession had permanently damaged the economy’s ability to grow. “We don’t see at this point that the very severe recession has permanently affected the growth potential of the U.S. economy,” Bernanke said.

How the High Level of Reserves Benefits the Payment System - NYFed - Since October 2008, the Federal Reserve has increased the size of its balance sheet by lending to financial intermediaries and purchasing assets on a large scale. While these actions have increased the amount of reserves in the U.S. banking system and therefore raised concerns about excessive bank lending and inflation, we can document an important and overlooked benefit of the high level of reserves: a significantly earlier settlement of payments on Fedwire, the Federal Reserve’s large-value payment system. Quicker settlement on Fedwire improves liquidity throughout the economy, reducing uncertainty and risk for people and firms that rely on banks. At the same time, the Fed has been extending less intraday credit, which reduces the public’s risk exposure.    We focus our analysis on the Fedwire Funds Service, the major large-value payment system (LVPS) in the U.S. financial system. (The analysis is based on our forthcoming article in the New York Fed's Economic Policy Review.) LVPSs allow the transfer of large, time-sensitive payments between banks and some other financial institutions. They form part of the basic structure, or “backbone,” that allows banks and other parts of the financial system to function better. Payments on Fedwire are settled by the transfer of reserves from the sender’s Federal Reserve account to the receiver’s Federal Reserve account. Like LVPSs in many other countries, Fedwire is a real-time gross settlement (RTGS) system, meaning that payments are settled one at a time, as soon as the payment instruction has been issued.

Fed's Williams Says Central Bank Should Keep Applying Stimulus Vigorously - Federal Reserve Bank of San Francisco President John Williams said the Fed should maintain an “extraordinarily supportive policy” to reduce an unemployment rate that will probably exceed 7 percent for years.  “This is clearly a situation in which we have to keep applying monetary policy stimulus vigorously,” Williams said yesterday in a speech in Honolulu. “Looking ahead, we may need to do more if the recovery falters or if inflation stays well below 2 percent.”  Chairman Ben S. Bernanke told a U.S. Senate committee yesterday that sustained stimulus is warranted even as the expansion gains strength. He gave no indication the Fed is considering providing more accommodation. The policy-setting Federal Open Market Committee in January pledged to maintain low interest rates through at least late 2014 and is scheduled to meet on March 13.  “If the economy does need more stimulus, restarting our program of purchasing mortgage-backed securities would probably be the best course of action,”

Fed’s Lockhart: Benefits of Low-Rate Policy Outweigh Costs - The benefits of the Federal Reserve‘s low-rate policy “outweigh the costs,” a top central banker said Thursday at an annual banking outlook conference in Atlanta. “The economy remains far from its optimal condition,” said Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta. U.S. growth in the current quarter is tracking “a little lower” than in the fourth quarter, the housing market is still “a mix of positives and negatives” and Tuesday’s durable goods orders report was “a disappointment,” he said. In 2012, he estimates full year growth in the 2.5% to 3% range “assuming no significant adverse shocks.” The central banker, who this year rotated into a voting seat on the Fed’s policy-setting committee, said the economic challenges are “still formidable” and “monetary policy support remains an important and necessary contributor to the ongoing recovery.” The Fed has kept interest rates at historically low levels since late 2008 and conducted two rounds of large-scale asset purchases to ease conditions. “The current stance of monetary policy, in my view, is a sober response to the reality of economic conditions, both actual and projected,” Lockhart said.

Monetary Policy and the Credit Channel - Dennis Lockhart - Speech at Annual Banking Outlook Conference -

  • Federal Reserve Bank of Atlanta President Dennis Lockhart believes the current stance of monetary policy is a sober response to the reality of economic conditions, both actual and projected.
  • Lockhart says the pace of economic recovery has been inconsistent, with sporadic growth periods, in part because of problems with the transmission mechanism of monetary policy.
  • Lockhart believes banks today are facing challenges, including issues related to the supply and demand of credit. Business and consumer loan demand has been soft, and banks are using tighter underwriting standards. New data show loan demand is beginning to pick up.
  • Lockhart believes given the circumstances of the economy, the benefits of low rate policy outweigh the costs at present.

How to read a central bank - When a central bank expands its balance sheet, is it bullish or bearish? It depends. In today’s world where liquidity traps prevail, the reason why the balance sheet expands is as important as how much. Two data points today help illustrate. First, the European Central Bank conducted its second three-year Long Term Refinancing Operation. (You can read my colleague’s take here.) Second, Ben Bernanke, chairman of the Federal Reserve testified to the House Financial Services Committee, and hinted that more quantitative easing - the purchase of bonds by printing money - was a bit less likely. Which is the more bullish development? I would argue it is the Bernanke testimony. This may seem counterintuitive, so let me explain. Both the ECB’s LTRO and the Fed’s QE result in a larger balance sheet. But the mechanism is quite different. The size of the ECB’s loan operation was determined not by the ECB (i.e. the supply of funds), but by the banks (i.e. the demand for funds). The more fearful the banks are of losing access to private funding, the more they borrowed.  By contrast, QE is such a pro-active policy. As with LTRO, the Fed’s QE results in an expansion of its balance sheet: it buys a bond (an asset), and creates an equivalent amount of reserves (liabilities) in the process. But how much the balance sheet expands is the Fed’s choice. It has decided, whether the banks like it or not, that it will force several trillion dollars of extra reserves into them.

Bernanke Quells Talk of Fresh Fed Stimulus to Ease Jobless Rate -  Federal Reserve Chairman Ben S. Bernanke said elevated unemployment and subdued inflation mean interest rates are likely to stay low, without offering any sign that the economy needs an additional monetary boost.  Bernanke, in testimony to lawmakers yesterday in Washington, described “positive developments” in the job market while saying it’s still “far from normal.” He said the inflationary impact of higher gasoline prices is likely to be temporary.  Stocks and Treasuries fell as the testimony damped speculation the Fed might embark on a further round of large- scale bond purchases, known as quantitative easing. Yesterday’s semiannual testimony to Congress was a contrast to last July, when Bernanke outlined steps that the Federal Open Market Committee took at later meetings, and to the Fed’s January gathering, when some policy makers said more bond-buying might be needed.

Philly Fed's Plosser: More to do on communication-- Philadelphia Fed President Charles Plosser, who was part of a Federal Reserve committee that changed the way the central bank describes interest-rate forecasts, said Wednesday it should go further in boosting communication to enhance effectiveness of monetary policy. Plosser said the summary of economic projections should include more information about the linkages among the economic variables and the associated policy paths. "A natural next step would be to include a matrix of output, inflation, and unemployment, and the associated policy path assumptions that each policymaker submitted," Plosser said in a speech at the Forecasters Club in New York. He also said the Fed should do a more comprehensive monetary policy report four times a year, that the Federal Open Market Committee should adopt clearer guidelines on how policy evolves with economic conditions and that the Fed should describe policy in terms of the "variables in a rule that is robust across models."

Housing and the Transmission of Monetary Policy - In this report, we focus on weakness in housing. Our analysis makes two broad points. First, weakness in housing and residential investment is a main impediment to a robust recovery. Second, problems related to housing have affected the transmission of monetary policy. More specifically, the unprecedented decline in house prices and residential investment has introduced headwinds that may require a more aggressive monetary response than in normal downturns. Further, problems related to housing markets may reduce the sensitivity of real economic activity to the interest rates that monetary policy can affect. Or in the parlance of textbook intermediate macroeconomics, housing problems have likely shifted the IS curve leftwards and steepened the slope of the curve by introducing a gap between policy rates and effective rates. For both of these reasons, problems related to housing introduce significant challenges to monetary policy-making.

More on Interest on Reserves - I did a couple of posts a while back asking (and concluding) what would result from the Fed ending their interest on reserves policies. I got a lot of good answers and discussion, but nobody mentioned the very interesting paper by Alex Tabarrok discussed here (emphasis mine): …there was typically a daily shortage of reserves which the Fed made up for by extending hundreds of billions of dollars worth of daylight credit. Thus, in essence, the banks used to inhale credit during the day – puffing up like a bullfrog – only to exhale at night. Today, the banks are no longer in bullfrog mode. The Fed is paying interest on reserves and they are paying at a rate which is high enough so that the banks have plenty of reserves on hand during the day and they keep those reserves at night. Thus, all that has really happened – as far as the monetary base statistic is concerned – is that we have replaced daylight credit with excess reserves held around the clock. This explanation finds support in a post from Liberty Street Economics (NY Fed blog). The key graphic:

Has the Fed Learned Its Lesson?, Mark, Thoma - Federal Reserve Chairman Ben Bernanke seems to have learned an important lesson. In his appearance before House Committee on Financial Services, Chairman Bernanke said the monetary policy committee does "not anticipate further substantial declines in the unemployment rate over the course of this year. Looking beyond this year, FOMC participants expect the unemployment rate to continue to edge down only slowly toward levels consistent with the Committee's statutory mandate." In addition, "participants agreed that strains in global financial markets posed significant downside risks to the economic outlook." There were other cautionary statements as well. That is quite a change from Bernanke's pronouncement that the Fed was seeing "green shoots" in the economy back in 2009, and similar optimistic statements about the prospects for recovery many times after that. Time and again, however, the green shoots withered and policy ended up in catch up mode rather than out in front of the economy as it ought to be. Policymakers were consistently behind. I don't think either monetary or fiscal policymakers have been aggressive enough throughout the crisis, and I'm still very worried about Congress turning to budget balancing before the economy is ready to handle it. Premature austerity could damage our recovery prospects.

Bernanke in theory versus Bernanke in practice- Larry Ball - From 2000 to 2003, when Ben Bernanke was an economics professor and then a Fed governor (but not yet chair), he wrote extensively about a problem in monetary policy, ie how to stimulate a slumping economy if short-term interest rates are near zero. Bernanke suggested policies for Japan, where interest rates were near zero at the time, and he discussed what the Fed should do if it were confronted with a similar situation (Bernanke 2000, 2002, 2003a). In these early writings, Bernanke advocated aggressive actions to stimulate aggregate demand. He proposed four specific policies:

  • Targets for long-term interest rates;
  • Depreciation of the currency;
  • An inflation target of 3%–4%; and
  • A money-financed fiscal expansion.

With all these tools available, Bernanke argued, the zero bound on interest rates was not a significant impediment to demand stimulus.  What explains Bernanke’s caution as Fed chair? This column argues that one possible factor is ‘groupthink’, where individuals go along with what they perceive as the majority view. Many of the Fed’s features – its tradition of decision-making by consensus, limited interaction with outsiders, and atmosphere of camaraderie – encourage groupthink. And Bernanke’s personality, often described as modest and unassuming, may have reinforced the effects of groupthink.

Fed turns $2.8 billion profit on AIG bonds -- Remember those pesky mortgage-backed securities the Federal Reserve had to take off AIG's hands at the worst of the financial crisis? The Fed just finished selling all of them, and their return on investment isn't too shabby. The sales of the $19.5 billion portfolio turned a $2.8 billion profit for taxpayers. "The completion of the sale of the Maiden Lane II portfolio has resulted in significant gains for the public and marks an important milestone in the wind-down of the extraordinary interventions necessitated by the financial crisis," William Dudley, president of the New York Fed, said in a statement. The New York Fed first indicated last year that it would put the so-called Maiden Lane II securities up for auction. It sold off the first piece of the pie to Credit Suisse in January. Goldman Sachs bought another chunk and Credit Suisse bought the remainder of the portfolio, announced today. And just who is buying the assets from Credit Suisse and Goldman Sachs? None other than AIG itself.

Analysis: New central bank cash glut risks "monetary anarchy" (Reuters) - The scale of money printing in the West has become so massive that the world may fall prey to "monetary anarchy," with traces of bubbles appearing everywhere. At least that's what some critics see in the latest round of cash pumping by major central banks. It is also an eerily reminiscent of 2011, when similarly generous monetary easing sparked higher oil prices, slowed the recovery and stoked speculative hot money flows into vulnerable emerging markets. The European Central Bank alone is expected to lend another half trillion euros or more of super-cheap money to banks on Wednesday, following Japan and Britain which have already injected fresh cash. The Federal Reserve has promised to keep interest rates low until 2014 and act further if needed. There is a sense of deja-vu in financial markets. Just like the last time a wave of money was pumped into the world financial systems in 2011, crude oil - fuelled also this time by Middle East tensions - has jumped 15 percent this year. As a result, riskier assets such as equities are already coming off new year highs. Rising emerging market currencies are forcing some central banks there to intervene. The scale of money creation since the onset of the global credit shock can be seen in the size of central banks' balance sheet expansion. JP Morgan says G4 central bank balance sheets have more than doubled since 2007 to 24 percent of combined gross domestic product and will reach 26 percent this year.

Fed Watch: Opportunistic Disinflation? -- Ryan Avent responding to Brad DeLong's interpretation of the most recent FOMC statement, comes down easy on the Fed:...a strict reading of the Fed statement suggests that the central bank is planning to keep rates low because the economy is likely to remain weak. In that case, the rate forecast wouldn't be expected to raise inflation and wouldn't be stimulative. I shy away from the strict interpretation of the statement, because it would make no sense to add the language in the first place if that's what the Fed were actually saying. I lean toward a view that the Fed is trying to raise inflation expectations without spooking its critics, internal and external. Fair enough, I see that. But what has been nagging at the back of my mind is the decline in TIPS measured inflation expectations since the recession: The interesting question, however, is does the Fed want to return inflation expectations to the pre-recession rates? The transfer from TIPS inflation expectations to Fed policy is not perfectly smooth. TIPS returns depend on the CPI; the Fed targets the PCE price index. So instead of focusing on the level of TIPS inflation expectations, consider the roughly 30bp decline in the ten-year horizon. Presumably, the longer-run fits better with the Fed's objectives. And we know the target is 2%, courtesy of the explicit policy statement released at the last FOMC meeting.

Conditions Ripe for Inflation Inferno, St. Louis Fed Economist Warns - New research from the Federal Reserve Bank of St. Louis warns there is more than enough kindling to start an inflation inferno. The paper, written by staff economist Daniel Thornton, stands in opposition to the views of key central bank officials like Chairman Ben Bernanke and others, who argue that even as the Fed has pumped liquidity into the financial system, it has the tools it needs to control the inflationary potential of those actions. In his paper, Thorton bases his warnings on the interaction between Fed liquidity actions and growth in the money supply. He acknowledges that in focusing on what happens with money supply, he is standing apart from the current view of many economists. Also, Thorton isn’t asserting the inflation environment has turned sour, only that central bank policy has created conditions for trouble, and that problems could develop quickly. “Both economic theory and historical experience suggest that a significant and persistent expansion in the money supply will be associated with a significant increase in the longer-run inflation rate,” Thornton writes.

Fed Watch: Oil Prices - It's What Everyone is Talking About- Via Ryan Avent, Matt Yyglesias opines on the link between oil prices and monetary policy: But it looks to me as if a demand-side oil issue is really just the same old issue of the trade deficit and the international balance of payments and not the second coming of a 1970s-style oil price shock. Perhaps it's a monetary policy issue. We send dollars abroad in exchange for oil, but then the dollars get sent back in exchange for bonds. That ought to lower interest rates and induce investment in the United States, but nominal interest rates are already at zero so the loop is cut. Even so, higher gas prices should push the price level up which pushes real interest rates down which induces investment in the United States. The chain will only be broken here if the Fed decides to ignore its own self-guidance and target headline inflation instead of core inflation. There is a lot going on in these few sentences, but I am going to focus on the last two lines. As a point of clarification, the Fed does not target core inflation. That's headline inflation, not core inflation. Of course, there is a near-term focus on core inflation, but not as a target, but as a guide to the path of headline inflation. Monetary policymakers should be wary about overreacting to movements in headline inflation if they are not evident in core inflation.

When the supply shocks are demand shocks and the demand shocks are supply shocks - MATT YGLESIAS muses on the threat of oil prices to the American economy: As Michael Levi writes we've traditionally wanted to distinguish between supply shocks and demand shocks as drivers of price spikes. When oil gets expensive because of a supply disruption, that hurts America. But when oil gets expensive because there's lots of demand and economic growth, that's just a sign of growth...For things to go wrong for the U.S. economy something else has to go wrong over and above the oil. We can see what those "somethings" might be, related to exchange rate issues or the failure of the US government to issue a quantity of bonds commensurate to global demand. But it looks to me as if a demand-side oil issue is really just the same old issue of the trade deficit and the international balance of payments and not the second coming of a 1970s-style oil price shock. We need to be careful here, in a few different ways. First, one can talk about different fundamental changes in oil markets that potentially contribute to economic activity in different ways. For instance, there might be a shortfall in oil production generated solely by action that results in pipes that had been running full to run dry. Or there might be secular stagnation in oil supply. Or there might be a rise in price generated by rapid growth in global demand. Or their could be an oil-specific increase in demand prompted by concerns about the stability of future supply. These changes are likely to impact the American economy in different ways, but it's sure to be tricky to pull apart the different oil-market causes and trickier still to separate out oil-market causes from other shifts in the global economy.

Why Oil Matters - Ryan Avent writes: Second, we also need to note that rising oil prices represent both demand shocks and supply shocks to the American economy. Dear oil can impact demand directly, by reducing real household income, and indirectly, by influencing consumer confidence. If rising oil prices were purely a problem of demand, then the only thing to fear would indeed be fear itself—by households or by overactive central banks. They are not, however. Soaring oil prices can also dent an economy’s productive capacity. America relies on petroleum as an input to production in lots of different ways—directly, in the case of things like chemicals and plastics, indirectly, in the role oil plays in supply chains and labour markets (as in commuting). When oil prices spike some American production becomes uneconomic. Were the central bank to treat this disruption as a purely demand-oriented phenomenon, it would generate lots of inflation without returning the economy to its previous output peak. Much of the confusion on the blogosphere comes from conflating consumption and output. The point is that it matters what happens to the flow of funds. The fact that consumers in other countries bid up the price of scarce resources is a reason why consumption of those resources by US consumer might fall but it is not a reason why US unemployment should rise.

Another Unintended Consequence: $80 Billion 'Gas Price' Tax On Consumption - Although U.S. demand for crude oil has fallen by 1.5 million barrels per day since 2007, anyone spending more than a few minutes on the road, watching TV, or surfing the internet will be more than unpleasantly aware of the rapid rise in gas prices recently. As we noted earlier, following January's record high average gas price, February just surpassed its own record and TrimTabs quantifies the impact of this implicit tax on consumption, noting three key factors that will remain supportive of high oil prices: Central Bank liquidity provision (ZIRP), political tensions, and implicit USD devaluation. Critically, around 70% of the benefits of the payroll tax extension has already been removed thanks to 60-80c rise in gas prices nationwide whose growth has far outstripped wage and salary growth in recent years. As Madeline Schnapp points out, while the latest round of oil speculation is likely to end with a pop, she doubts oil prices will drop much below $100/bbl as the erosion of purchasing power from high energy prices is here to stay.

Federal Reserve Chairman Sees Modest Growth — The Federal Reserve chairman, Ben S. Bernanke, said on Wednesday that the central bank retained its modest expectations for the American economy this year, despite some recent signs of stronger growth.  Mr. Bernanke said the recent rise in oil prices also had not shifted the Fed’s view that the economy would expand 2.2 to 2.7 percent this year, about the same pace as during the second half of last year.  He acknowledged that rising oil prices were “likely to push up inflation temporarily while reducing consumers’ purchasing power.” But the Fed expects the overall pace of increases in prices and wages to remain “subdued,” Mr. Bernanke said in testimony before the House Committee on Financial Services.  Some economists see evidence that the pace of growth is increasing. The Bureau of Economic Analysis, an arm of the federal government, said on Wednesday that the economy grew at an annual rate of 3 percent in the last three months of 2011, somewhat higher than its initial estimate of 2.8 percent. The unemployment rate has declined to 8.3 percent in January from 9.1 percent last July.  But the Fed has remained cautious, and Mr. Bernanke repeated a familiar list of reasons for that stance, including the depressed housing market and turbulence in Europe. The Fed also has overestimated the pace of recovery several times in recent years.

Fed's Beige Book: Economic activity increased at "modest to moderate" pace -- Fed's Beige Book: Reports from the twelve Federal Reserve Districts suggest that overall economic activity continued to increase at a modest to moderate pace in January and early February. Activity expanded at a moderate pace in the Cleveland, Chicago, Kansas City, Dallas, and San Francisco Districts. St. Louis noted a modest pace of growth and Minneapolis characterized the pace of growth as firm. Economic activity rose at a somewhat faster pace in the Philadelphia and Atlanta Districts, while the New York District noted a somewhat slower pace of expansion. The Boston and Richmond Districts, in turn, noted that economic activity expanded or improved in most sectors.Reports of consumer spending were generally positive except for sales of seasonal items, and the sales outlook for the near future was mostly optimistic.  And on real estateResidential real estate activity increased modestly in most Districts. Boston, Cleveland, Richmond, Atlanta, Kansas City, and Dallas reported growth in home sales, while New York noted steady to slightly softer home sales. Philadelphia reported strong residential real estate activity. In contrast, home sales declined in St. Louis and San Francisco noted that home demand persisted at low levels. Contacts' outlooks on home sales growth were mostly optimistic.

The Fed Beige Book is out: Everything Is Getting Better All Around The Country: The Fed Beige Book was just released. The gist: The economy is improving in just about every district: Reports from the twelve Federal Reserve Districts suggest that overall economic activity continued to increase at a modest to moderate pace in January and early February. Activity expanded at a moderate pace in the Cleveland, Chicago, Kansas City, Dallas, and San Francisco Districts. St. Louis noted a modest pace of growth and Minneapolis characterized the pace of growth as firm. Economic activity rose at a somewhat faster pace in the Philadelphia and Atlanta Districts, while the New York District noted a somewhat slower pace of expansion. The Boston and Richmond Districts, in turn, noted that economic activity expanded or improved in most sectors. Full announcement below

Most Regions Experienced Modest Growth - Graphic - A roundup of regional economic conditions in the Federal Reserve’s 12 districts, according to survey results released by the Fed on Wednesday. The survey is based on information collected on or before Jan. 31.

Economy Grew at a Faster Pace at End of 2011 - The economy grew at a slightly faster pace in the final three months of last year, and Americans earned more income than previously reported. That could set the stage for stronger growth this year.The Commerce Department said Wednesday that the economy expanded at a 3 percent annual rate in the October-December quarter — the fastest pace since the spring of 2010. It exceeded the previous estimate of 2.8 percent. And it was better than the third quarter’s 1.8 percent growth rate. The growth estimate was revised up because consumers spent more than first thought, and businesses cut spending by much less. Imports rose by a smaller amount. The report also showed that incomes rose in the second half of last year by more than previously estimated. Americans saved more, too. Income growth is crucial. Economists have worried that recent gains in consumer spending weren’t sustainable without more pay. Higher incomes also make it easier for Americans to pare debts. After taxes, inflation-adjusted incomes rose 1.4 percent in the fourth quarter. That’s nearly double the first estimate. And in the third quarter, incomes rose 0.7 percent, compared with earlier estimates of a 1.9 percent drop.

Economy grew faster than expected in fourth quarter - Gross domestic product expanded at a 3 percent annual rate, the quickest pace since the second quarter of 2010, the Commerce Department said on Wednesday in its second estimate. The reading, which was up from the 2.8 percent pace the government reported last month and reflected modest upward revisions to almost all components of GDP, added to the recent run of fairly upbeat economic reports. Consumer spending, which accounts for about 70 percent of U.S. economic activity, was raised to a 2.1 percent rate of increase from 2 percent. At the same time, growth of real disposable income was revised up to a 1.4 percent rate from 0.8 percent. "Consumers are spending from rising income rather than digging into their savings to spend,"  Business investment in capital goods was lifted to a 2.8 percent pace from 1.7 percent, but still weak compared to the recent trend. Outlays on home building were firmer than previously estimated, while investment on nonresidential structures was modestly weak. While a rebuilding of inventories added a hefty 1.88 percentage points to GDP in the last quarter, the increase was revised down to $54.3 billion from $56.0 billion.

GDP Q4 Second Estimate Is 3.0%: An Upward Revision from 2.8% - The Second Estimate for Q4 GDP came in at 3.0%, up from the 2.8% Advance Estimate. The consensus at was for GDP to remain at 2.8%. Here is an excerpt from the Bureau of Economic Analysis news release: The increase in real GDP in the fourth quarter reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.  The acceleration in real GDP in the fourth quarter primarily reflected an upturn in private inventory investment and accelerations in PCE and in residential fixed investment that were partly offset by a deceleration in nonresidential fixed investment, a downturn in federal government spending, an acceleration in imports, and a larger decrease in state and local government spending.  Final sales of computers added 0.12 percentage point to the fourth-quarter change in real GDP after adding 0.22 percentage point to the third-quarter change. Motor vehicle output added 0.43 percentage point to the fourth-quarter change in real GDP after adding 0.12 percentage point to the third-quarter change. [Full ReleaseHere is a close-up of GDP alone with a line to illustrate the 3.3 average (arithmetic mean) for the quarterly series since the 1947. I've also plotted the 10-year moving average, currently at 1.7. The Second Estimate for Q4 GDP puts us closer to the mean.

Latest Data Suggest Output Gap is Closing but Employment Gap is Closing Faster - The latest GDP data from the Bureau of Economic Analysis indicate that the output gap narrowed in Q4 2011 at a slightly more rapid pace than previously estimated. The second estimate, released February 29, showed US real GDP growing at a 3 percent annual rate last quarter, up from the 2.8 percent advance estimate released at the end of January. Growth was revised upward for all major sectors of the economy.

  • The contribution of consumption to the quarter’s growth was revised up to 1.52 percentage points form 1.45 in the advance estimate. Strong sales of motor vehicles led the way.
  • Investment growth contributed 2.42 percentage points to growth, rather than the 2.35 points reported earlier. The growth of private inventories accounted for the biggest share of the increase in investment.
  • The government sector continued to shrink. Total government spending made a  negative .89 percentage point contribution to growth in the quarter.
  • Export growth remained strong, although it contributed slightly less than reported in the advance estimate (.59 percentage points rather than .64 percentage points). However, imports were revised downward by slightly more, so on balance, the contribution of net exports to real GDP growth was  a negative .06 percentage points rather than a negative .11 percentage points.

Nominal GDP grew at a 3.9 percent annual rate in Q4, up from 3.3 percent reported in the advance estimate. That included 3.0 percent real growth and an implied 0.9 percent inflation. It is important to remember that potential real GDP is not an observable variable. There has been considerable recent controversy as to whether the widely-publicized CBO estimate overstates potential real GDP, and therefore also the output gap between current and potential real GDP. (See this post by Menzie Chinn for an excellent summary of the methodological issues and links to some recent Economonitor commentary.) With that in mind, it is interesting to compare the estimated output gap with the employment gap, as in the following chart:

Vital Signs: Accelerating U.S. Growth - Gross domestic product accelerated going into 2012. GDP — the total value of goods and services produced in the U.S. — grew at a 3% annual rate in 2011’s fourth quarter, faster than the 2.8% pace the government initially estimated. The 3.0% growth rate, the fastest since the second quarter of 2010, was driven by consumer spending and growth in company inventories.

The U.S. Economy in Charts - Treasury - After the worst financial crisis since the Great Depression, America’s economy is gradually getting stronger. Despite the lingering effects of the crisis, despite severe cutbacks by state and local governments, despite all the headwinds from global markets, the economy has grown for 10 straight quarters. Private employers have added 3.7 million jobs over the last 23 months. Businesses are ratcheting up investments and boosting productivity. Exports, from agriculture to manufacturing, are growing. Meanwhile, the cost of the government’s emergency response to the financial crisis is dramatically lower than anyone expected, which is welcome news for taxpayers. Earlier this month, in testimony before Congress on the President’s Budget, Secretary Geithner provided an update on the nation’s economic and financial health. Today, we offer you a more in-depth look – in charts – at the data behind many of the key points he discussed and look forward to sharing similar briefings in the future. Here are just a few examples of what you'll find in the full pdf:

Raskin Says Expansion Is Likely to Remain ‘Modest’ on Weakness in Housing - Federal Reserve Governor Sarah Bloom Raskin said the economic expansion has been strengthening, while predicting its pace will remain “modest” in part due to weakness in the housing market and fiscal tightening. “Of late, we have had some relatively encouraging economic news,” Raskin said today in the text of remarks given in Westport, Connecticut. Still, “the pace of expansion is likely to remain modest over coming quarters.” The U.S. economy’s headwinds “have been easing, at best, only gradually,” and include a “very depressed” housing market, government spending cuts and tight credit conditions, she said. Fed Chairman Ben S. Bernanke said today in Washington that elevated unemployment and subdued inflation mean interest rates are likely to stay low, without offering any sign that the economy needs an additional monetary boost. Bernanke, in testimony to a Senate panel that is identical to his remarks yesterday to the House, described “positive developments” in the job market while saying it’s still “far from normal.” Joblessness fell to 8.3 percent in January, the lowest since February 2009.

False Starts  - This recovery has taken us on several emotional ups and downs. After a truly horrifying 2008-09, when the financial crisis and plunging real economic activity threw the US economy into the deepest recession since the 1930s, there were glimmers of optimism in 2010. But that proved to be a false start, and by late 2010 the economy was doing little better than during the darkest days of the recession. Again in early 2011 things seemed to be getting decidedly better... only to turn worse again and remain pretty lousy through most of last year. But over the past couple of months we have now been experiencing a third round of positive signs on the recovery in the US. Is this spring likely to reveal yet another false start for the US economy? I don't think so. I think this time the improvements are for real, and more sustainable. There are two primary reasons that I say this. First, the housing market finally appears to be well and truly near its cyclical bottom. Yes, house price indexes are still showing some declines, but there is good reason to think that there's very little further for house prices to fall. House price-to-rent ratios and real housing prices are just about where they were in the late 1990s, before the housing bubble was even a glimmer in any home-owner's eye. The second reason is that the process of debt deleveraging by American households is further along than it was during the false economic starts of 2010 and 2011.

Bank Of America Joins Goldman In Cutting Its Q1 GDP Forecast - Yesterday, when we reported about Goldman not one, but two GDP Q1 forecast cuts in one day, we said to "watch for the Wall Street lemming brigade to quickly follow in Goldman's footsteps." Sure enough, here is Bank of America, rushing first into the bandwagon, trimming its Q1 forecast from 2.2% to 1.8%. This is perfectly expected: recall that from day 1 of 2012, most banks had been pushing for QE3, ignorant of the massive liquidity tsunami that was going on behind the scenes. Well, the impact of that has now come and gone, with no more easing from the ECB on the horizon for a long time. Which means that the focus can again shift to how "bad" the US economy is in preparation for the inevitable Bernanke gambit. Needless to say this will make the pre-election economy appear like a total farce in the months before the re-election: soaring employment and plunging everything else. Good luck explaining that away. Incidentally explains why the EURUSD has resumed its slide: the market is now pushing Bernanke to halt the appreciation of the USD against the EUR, and thus the implicit benefit of German's economy over that of the US, which can only happen with further promises of easing.

Dynamics of US slowdown - So, my thesis of a US mini-cycle culminating in slowing growth is firming up. Last night we had a raft of important data that showed the current bounce is on thin ice. First up was the ISM manufacturing index slowed 2.1 points to 52.4 in February in defiance of regional indexes: The slowing is visible across the board with the exception of new export orders, which rose handsomely. However, this was offset by slowing local new orders. Note too the accumulation of inventories that drove the bounce is finished: The second big release of the night helps explain this pattern. The Personal Income and Outlays report for January showed a plateauing of US household income growth that must be haunting the sleep of one Ben Bernanke: 

Why We Should Still Be Worried about a Double-Dip Recession - The late summer and fall of 2011 was filled with fears of a double-dip recession in the United States coming hard on the heels of the 2007-2009 recession, frequently referred to as the Great Recession. With improved economic news lately including lower unemployment, lower initial claims, higher growth, and higher stock prices, this recession talk has died down. That's why Lakshman Achuthan, the highly respected head of the Economic Cycle Research Institute, caused a stir last week when he repeated his earlier claim that a recession later this year was almost inevitable despite the better news. Achuthan makes the point that improved news on the employment front is a lagging indicator from the end of the last recession and doesn't reveal what's ahead. He adds that higher asset prices in stocks and housing are the expected result of Federal Reserve money printing and don't say much about fundamentals. To make his case for a new recession, he focuses more on year-over-year growth in GDP versus the more popular quarter-over-quarter data, and indicators like changes in industrial production and personal income and spending.

There will be another economic crisis in 2012. It will be bad. These are the economic lessons we should learn from it. - I'm breaking my recent silence not just to reiterate my previous predictions but also (in one of those slightly snarky, arrogant ways) to propose a solution for those in the future who may be reading this. First of all, consider this graph:Regular readers (whoever you people are) will recognise this graph as being part of series of posts I have made in 2011 predicting another economic downturn in 2012. This is based upon a study of Real Ten Year Bond Rates (Bonds minus annual inflation) averaged over a three month period. The methodology I use and historical graphs can be found here. Basically the conclusion I came to was this: While recessions can occur without negative real interest rates, whenever negative real interest rates do occur, they are always followed by an eventual recession.This conclusion is based upon the fact that every instance of negative real interest rates (which I define here as negative real 10 year bond rates) there is an eventual recession. This occurred in the following periods:

  • In March 1957, rates went negative. A recession followed in October 1957. (Rates also went negative during the recession)
  • In October 1973, rates went negative. A recession followed in January 1974.
  • In November 1978, rates went negative. A recession followed in April 1980.
  • In January 2008, rates went negative. A recession followed in April 2008.
  • In June 2011, rates went negative. I'm therefore predicting a recession to occur in 2012.

Extend & Pretend Coming To An End - The real world revolves around cash flow. Families across the land understand this basic concept. Cash flows in from wages, investments and these days from the government. Cash flows out for food, gasoline, utilities, cable, cell phones, real estate taxes, income taxes, payroll taxes, clothing, mortgage payments, car payments, insurance payments, medical bills, auto repairs, home repairs, appliances, electronic gadgets, education, alcohol (necessary in this economy) and a countless other everyday expenses. If the outflow exceeds the inflow a family may be able to fund the deficit with credit cards for awhile, but ultimately running a cash flow deficit will result in debt default and loss of your home and assets. Ask the millions of Americans that have experienced this exact outcome since 2008 if you believe this is only a theoretical exercise. The Federal government, Federal Reserve, Wall Street banks, regulatory agencies and commercial real estate debtors have colluded since 2008 to pretend cash flow doesn’t matter. Their plan has been to “extend and pretend”, praying for an economic recovery that would save them from their greedy and foolish risk taking during the 2003 – 2007 Caligula-like debauchery.

How Debt-Ridden Housing Holds Back U.S. Recovery - There is an emerging consensus that housing is weighing down the U.S. economy. The Federal Reserve’s housing white paper in January declared that “ongoing problems in the U.S. market continue to impede the economic recovery.” The 2012 Economic Report of the President argued that “declines in housing wealth can have a far greater effect on the economy than equivalent losses in other financial assets.”  Are these arguments sensible? Why should declines in house prices affect the broader economy? And why should the drop in housing wealth matter more than, say, a drop in stock-market wealth?  The key to understanding these questions is a four-letter word: debt.  In the absence of debt, economic theory tells us that house-price declines should have a negligible impact on aggregate output.

Housing is the rotting core of the US recovery - Economic cheerleaders on Wall Street and in the White House are taking heart. The US has had three straight months of faster job growth. American consumers in recent months have let loose their pent-up demand for cars and appliances. Businesses have been replacing low inventories and worn equipment. The richest 10 per cent, owners of approximately 90 per cent of the nation’s financial capital, have felt freer to splurge. Consumer confidence is at a one-year high, according to data released on Friday.  Yet the US economy has been down so long that it needs substantial growth to get back on track – far faster than the 2.2 to 2.7 per cent projected by the Fed for this year (a projection which itself is likely to be far too optimistic). A strong recovery cannot rely on pent-up demand for replacements or on the spending of the richest 10 per cent. Consumer spending is 70 per cent of the US economy, so a buoyant recovery must involve the vast middle class. But America’s middle class is still hobbled by net job losses and shrinking wages and benefits. Although the US population is much larger than it was 10 years ago, the total number of jobs today is no more than it was then. Yet the biggest continuing problem for most Americans is their homes. Purchases of new homes are down 77 per cent from their 2005 peak. They dropped another 0.9 per cent in January. Home sales overall are still dropping and prices are still falling – despite already being down by a third from their 2006 peak. January’s average sale price was $154,700, down from $162,210 in December. Houses are the major assets of the middle class. Most Americans are therefore far poorer than they were six years ago. Almost one out of three homeowners with a mortgage is now “underwater”, owing more to the banks than their homes are worth on the market.

Bernanke warns lawmakers country headed for 'massive fiscal cliff' - Congress risks taking the economy over a “massive fiscal cliff,” Federal Reserve Chairman Ben Bernanke warned lawmakers on Wednesday. In remarks that hit Wall Street stock prices, the central bank boss suggested the economy could hit a serious roadblock if Congress allows the Bush tax rates and a payroll tax cut to expire and $1.2 trillion in spending cuts to be implemented simultaneously in January. “Under current law, on Jan. 1, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases,” Bernanke told the House Financial Services Committee. “I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date. “All those things are hitting on the same day, basically. It’s quite a big event.” The tax hikes and spending cuts could knock GDP growth in 2013 down from 2.6 percent to 1 percent,

The Two Issues that Can Bring Down the Economy - The term “crisis” is frequently overused in Washington, never more so than in budget debates. The problem is that a real crisis requires a hard deadline by which time something must happen or something terrible will happen.  There are two hard deadlines approaching, the need to raise the debt limit and expiration of all expiring tax cuts at the end of the year. These two action-forcing events, when combined with more than the usual political uncertainty over control of Congress and the White House next year, mean that the long-awaited fiscal crisis is now here. As we saw last year, Republicans are perfectly willing to risk default on the national debt to force action on their agenda. Many have said that they will never vote to increase the debt limit, no matter what. Now Republican presidential hopeful Mitt Romney is piling on by criticizing Rick Santorum, his principal opponent for the GOP nomination, for having voted in favor of raising the debt limit while in the Senate.

The WaPo MMT Post Explosion: Dean Baker's Second Try On MMT - This is the third and last installment of a critical review of Dean Baker’s second reaction to the debate kicked off by the WaPo’s piece on Modern Monetary Theory, written by Dylan Matthews. The first two installments starting with this one, discussed Dean’s views on using the monetary channel to boost aggregate demand, devaluing the currency and increasing exports, and work sharing. In this final installment I’ll evaluate Dean Baker’s view of the problems associated with relying primarily on the fiscal channel, ”One of the problems is the potential for creating large structural imbalances that could be difficult to correct, as noted in the case of large trade deficits. But there are other reasons why exclusive reliance on the government channel may not be the best route.” As I said above, I don’t think that Dean Baker makes a convincing case for the claim that the trade deficit is a structural balance that will be difficult to correct, or for that matter that its costs necessarily outweigh its benefits. Above all, I don’t think that Dean has made the case that we need to do something about the trade deficit rather than just letting it change as other nations decide that they’d rather consume more of their own output. So, here is a disagreement between myself and, I think, the MMT economists, and Dean and (I suspect) other Keynesians as well.

The Political Economy of Artificial Constraints on Government Money - Bill Black - I’ll begin by addressing today the dominant concern critics have expressed here — the government might act badly with the funds. This is, of course, a real concern. But it is some ways a very odd concern and not a logical objection to MMT. The extreme variant of this critique argues that MMT is "fascist."  The good news from the standpoint of MMT is that this critique agrees that MMT is accurate and makes available policy choices that are effective in increasing income and employment — and claims that MMT’s effectiveness is the problem because the government leaders might use the increased income and wealth for evil purposes.  If that is a valid criticism of an economic theory (it works — it increases income, wealth, and employment) then virtually any accurate economic theory that improves the economy is "fascist" because the government might be ruled by a fascist and the ruler might use the increased wealth and income to do evil. No one (economist or otherwise) can ever guarantee that a government ruler will not be evil and use the increased national wealth to do evil. Under this logic all effective economic theories are fascist and we should try to make the world as poor as possible so that fascistic governmental leaders have fewer resources with which to do evil.  It is also an odd criticism because it suggests that we should try to hide knowledge about MMT from governments because they might use the knowledge to improve their economies. Trying to hide knowledge about how a monetary system works is a fruitless task. There are tens of thousands of people who understand much of the mechanics of fiat currency systems. Even if we could wipe out the knowledge people would relearn it because their jobs required them to understand monetary operations.

Public vs. Private Debt: The Long View - Poking around in FRED while thinking about money created by banks and by government, I came up with the following graph, which I found to be pretty eye-popping: Federal Debt Held by the Public as a Percentage of Total Credit Market Debt Owed. That’s a pretty profound secular shift. But far from delivering any obvious conclusions for me, it raises several questions.

  • • First, what’s included in TCMDO? (Is there a glossary of these measures available somewhere? I haven’t been able to find one.) I assume government bills and bonds are included — including those held by the Fed. I assume it does not include bonds held by the Social Security trust fund — nonpublic debt. (Or does it?)
  • • Since financial industry debt is “different,” what does the graph look like if we exclude that?
  • • Should we adjust for credit-market instruments held by the Fed?
  • • Are there more illuminating measures to display in this graph?
  • • What does this say about the stock of “safe assets” in the economy?

China’s Holdings of Treasuries Decline for First Time - China, the largest foreign U.S. creditor, reduced its holdings of U.S. government securities last year for the first time since the Treasury Department began compiling the data in 2001. The world’s second-largest economy held $1.15 trillion Treasuries as of Dec. 31, down from $1.16 trillion at the end of 2010, according to Treasury data released yesterday. The U.S. revised the figures to show that China held about $51 billion more than reported earlier last month. The revision shows nation’s holdings peaked at $1.3149 trillion in July. China’s policy makers have advocated diversification of the nation’s foreign-exchange reserves away from U.S. assets after more than doubling its holdings of Treasuries since 2007 in the wake of the global financial crisis. Yields on benchmark 10-year Treasury notes dropped to a record low of 1.67 percent in September as investors sought a haven from Europe’s sovereign- debt crisis and the Federal Reserve pledged to keep borrowing costs close to zero to sustain economic growth.

What Are 30-year Treasury Yields Suggesting? - Below is a chart of 30yr T-Bond yields, dating back to late 1993. Notice the down-trending channel formation that the yields have formed as they have steadily moved lower. This channel is depicted as the downward running parallel blue lines. Also notice the large wedge formation (e.g. the green triangle) that was formed when the global financial crisis began to unfold. You can see how in August of last year yields broke out of the wedge formation and began moving lower, a very bearish signal for yields. The yields have currently consolidated into the 2.7% to 3.3% range since September of last year. This consolidation is represented by the much smaller red triangular wedge that may be the flag on an inverted bear-pennant. A break-out down from this pennant flag would project a move below 2.5%, and down to the 2.12% level. I know your jaw just hit your desk, but an even bigger observation follows that likewise projects yields down to this absurdly low level.

Era of Low-Cost Borrowing Benefits U.S. Government -— These are the best of times for the world’s most ravenous borrower, the United States of America. A combination of unusual and unsustainable forces has pushed the cost of borrowing as low as it has ever been, so low that many investors effectively are paying to lend money to the government. Investors buying five-year federal debt are accepting such low interest rates that inflation is on pace to reduce the value of their investments by more than 1 percent each year. Yet demand for United States Treasuries remains much greater than the supply. The glut of cheap money has allowed the government to keep its annual deficits much smaller than it had expected, holding down the growth of the federal debt. The Treasury Department, seeking to milk the moment, may start issuing debt with negative interest rates, making investors pay for the privilege of lending money to the government. But a wide range of experts agrees that the bubble will eventually pop. The question, they say, is not if but when. There are signs that the era of low borrowing costs may be approaching its end, as the domestic economy shows signs of strength and Europe pulls back from economic immolation.

Austerity, American Style - Krugman - Via Mark Thoma, Antonio Fatas has a good piece on the exceptional weakness of government spending in this recovery. I thought I might add to that observation. Let’s look at real government consumption and investment spending — basically purchases of goods and services — from all levels of government during three recoveries: the current expansion, the Bush Boom (such as it was), and Morning in America. Here’s what you get: Which one is different? Now, this doesn’t include safety-net spending, which has indeed soared in this slump. But actual government purchases have been uniquely weak, largely because of budget distress at the state and local level. And think of the way conservatives love to contrast Obama’s recovery with Reagan’s. It is, of course, a stupid comparison: the Reagan recession was brought on by very high interest rates, and a quick recovery took place when the Fed loosened up, whereas the 2007-2009 slump was a financial crisis that occurred despite low rates, leaving little room for Fed action. But it’s also true that when it came to government spending, Reagan was in effect much more Keynesian than Obama.

California Man Sues Geithner to Stop “Bankrupting” the U.S. - A Federal Court suit by Clifford Johnson of Gualala, CA was refiled 29 February 2012 in the U.S. District Court, Northern District of California, San Francisco Division. The suit seeks to end the current monetary system where the U.S. government borrows money from the banks rather than creating money by Treasury action. The suit was originally filed 28 December 2011 and was refiled for procedural reasons. The focus of the complaint is that the official web site of the U.S. Treasury contains three times an incorrect statement: "United States Notes serve no function that is not already adequately served by Federal Reserve Notes." The relief sought by the complaint, as a result of correction of the alleged incorrect statement and resulting dependent falsehoods on the Treasury website, is for the plaintiff (and all others) to be enabled to seek through political action for future Social Security payments to be made with Treasury currency, thus retiring debt held in the so-called Social Security Trust Fund. An extension of the relief sought by removal of the Treasury policy statements is addressed in an attachment to the filing document which lists proposed legislation: A bill sponsored by Representatives Dennis Kucinich and John Conyers, the N.E.E.D. Act, HR 2990 (formerly HR6550), would produce U.S. Notes, specifically for infrastructure, Social Security, and universal healthcare, and make the Federal Reserve a department under Treasury - for the first time, a true branch of government.

The Coming Budget Showdown of 2012 - My latest column at the Christian Science Monitor discusses the many fiscal pressures that will come to a head at the end of the year. Here’s an excerpt: Start with our tattered tax code, which now contains a six-pack of temporary tax cuts. The largest are the Bush-era cuts originally enacted in 2001 and 2003 that were scheduled to expire in 2010. Rather than decide their fate, President Obama and Congress extended them another two years. That legislation also included additional tax cuts championed by Mr. Obama and an estate tax compromise, all of which expire – along with the original tax cuts – at the end of 2012. Then there’s the dreaded alternative minimum tax. It expired Dec. 31, but Congress for years has passed an annual “patch” preventing the AMT from hitting more middle-class families. A hodgepodge of temporary tax breaks known, tellingly, as the “extenders,” also expired at the end of last year, but many lawmakers and beneficiaries want to bring them back. Various stimulus measures, including the payroll tax holiday and corporate investment incentives, are set to lapse soon, too. If those six tax-cut packages expire, annual federal tax revenues would rise by about $1 trillion annually, the Congressional Budget Office projects. It’s hard to imagine that lawmakers will actually let that happen.

Debt ceiling fight may come sooner than expected - Remember the bitter debt ceiling debate in Washington last summer? The one that resulted in the first-ever downgrade of the U.S. credit rating? Well, another showdown could be in the offing sooner than planned. The deal cut this summer to end the debt ceiling standoff provided for a $2.1 trillion increase in the country's legal borrowing limit, which now stands at $16.394 trillion. At the time, it was estimated that such an increase could carry the Treasury Department safely beyond the contentious presidential election season and into early 2013. But now that Congress has extended the payroll tax cut, emergency unemployment benefits and the so-called Medicare doc fix -- only some of which was paid for -- there is a greater chance that U.S. borrowing could reach the debt ceiling sooner. Treasury Secretary Tim Geithner recently told lawmakers that even with passage of the payroll tax bill -- which will add an estimated $101 billion to deficits in fiscal year 2012 -- he doesn't expect the debt limit to be reached "until quite late in the year." That's a hair past the Nov. 6 election but smack dab in the middle of the fiscal firefight that Congress is expected to have over the expiring Bush tax cuts. Meanwhile, the Bipartisan Policy Center, which analyzed projected monthly deficits and other factors that could play a role in Treasury's borrowing, now projects that the debt ceiling could be hit between late November 2012 and early January 2013.

GOP candidates' policies would raise federal debt by whopping trillions - The GOP likes to pretend to take the high road, proclaiming itself to be against increasing the federal debt, running big deficits, or otherwise not running our government like a person runs their household. Pundits on the right tend to look at Greece and warn--watch out, America, you're gonna be there next. Of course, there's a big difference in a family on a limited budget and the federal government. The government can print money to pay its bills; when people do that, it's called counterfeiting. The amount of quantitative easing is limited, though where the limits are difficult to establish with any certainty--at some point. And there's a big difference between the US and Greece. Unlike Greece, we have a sovereign money supply (Greece is tied to the European Union, unless it decides to break away and suffer the consequences). And unlike Greece, though our debt is high, it is still only about 70% of GDP. And lucky for us, the foreign nations who buy our debt need somewhere to put all those dollars that they've acquired through their cheap exports to us.

The Myth of the Out-of-Control Federal Government - Are the size and reach of the federal government exploding, as some have suggested?  While overall federal spending is well above its historical average as a share of the Gross Domestic Product (GDP) and is expected to remain so even after the economy recovers, our new examination of the latest Congressional Budget Office (CBO) data belies claims of a large and permanent expansion of the federal government.Here’s what we found:

  • If we continue current policies, federal expenditures outside of interest payments on the debt are projected to decline in the decade ahead as the economy recovers. In fact, these expenditures (which analysts call “primary outlays”) have already fallen from 23.9 percent of GDP in 2009 to a projected 22.0 percent of GDP in the current year, 2012.  They are projected to fall further, to 20 percent of GDP or lower in the latter part of this decade.
  • Total non-interest spending outside of Social Security and Medicaretwo programs whose costs are being driven up by the aging of the population and the rise in health care costs throughout the U.S. health care system — will fall well below its 50-year historical average in the decade ahead (see graph).  By 2022 it will fall to 10.8 percent of GDP, compared to an average over the 1962-2011 period of 13.0 percent (see table).

Tea Party/GOP Are Wrong: Federal Government Should Be Borrowing More Right Now - Yesterday's The New York Times had a good story by Binyamin Appelbaum about how low interest rates are significantly driving down the government's borrowing costs. Appelbaum's piece is factually correct and interesting but misses the real story. As Jesse Eisinger of ProPublica wrote about a months or so ago in The Times and I posted about here, there are three important budget implications of this situation. First, as any business and many individuals would be doing in a similar very low interest rate environment, this is the time the federal government should be borrowing more rather than less, especially if the funds were used to pay for capital projects. Second, it demonstrates that, to the extent possible, the government should be doing whatever it can to lock-in these low/negative interest rates by borrowing as much long- rather than short-term as it can. As some of those quoted in the story say, these rates eventually will increase and federal interest payments will rise when short-term debt rolls over. Third, given the facts in the story, the real question is why government borrowing has been and continues to be such a political issue and why the tea partiers in the Republican Party continue to insist it's the tool of the devil.

Why the Government Must Keep Running Deficits. Forever. - Imagine an economy that consists of two households, one firm, one bank, and one government. The government issues $50 to each household (maybe they do some work for it), crediting their bank accounts and running a $100 deficit. Voila! There’s money! Now one household works for the firm, creating $50 in value, goods. The firm gives the household $50 in equity — company stock — basically a promise to give them some amount of money in the future. (The firm posts the $50 in newly created value as an asset on the lefthand side of their balance sheet, and $50 as shareholder equity on the righthand side — a liability). The household can’t use that equity to buy a pack of gum today, so they want to monetize it — sell it to someone else. There’s only one “someone” — the other household. But what if the other household doesn’t want to buy it because they’ve only got $50 and want hold it for the future? (It’s the babysitting coop dilemma.) This is why in a growing economy where extra value is being created through people’s efforts, the government has to run deficits — creating money by crediting people’s/firms’ accounts with newly “printed” dollars.

The myth of rising domestic spending strikes again! - I happen to love Kevin Drum’s blog, so I hope he takes this as a helpful correction. In a post yesterday, he echoed the very important point from the Center on Budget and Policy Priorities that there hasn’t been an “explosion of government’s size,” but rather that over the last few decades, health costs and demographics have driven primary (i.e., non-interest) spending trends. But then he went on and veered toward an issue very near and dear to my heart: domestic spending. Quote:“Assuming I did my sums properly, federal spending on ‘everything else’ — that is, everything except Social Security, Medicare, and interest on the debt — has indeed gone down from 15.2% of GDP in 1962 to a projected 11.3% of GDP in 2017. (That’s from Table 3.1 here.) However, the national defense piece of that has declined from 9.2% to 2.9%, while the nondefense piece has increased from 6.0% to 8.4%. Domestic nondefense spending hasn’t gone up a lot, but it has gone up.” Actually, the shape of the river changes pretty significantly if you take Medicaid, veterans benefits, and other security spending (i.e., homeland security, international affairs, and nuclear weapons security, which oddly enough is embedded in the Department of Energy) out of the domestic spending category.

GOP: Candidate For All-Time Budget Hypocrites - Congressional Republicans so far have been adamant that reductions in the projected spending assumed in the federal budget baseline for projected continuing military activities in Afghanistan must not be used to offset the cost of anything. They’re not wrong in making this line-in-the-sand stand. They are, however, being astounding, perhaps even top-10 all-time, hypocrites in the process. The key concept the GOP is misusing to qualify for the budget hypocrisy hall of fame is “the baseline.” The federal budget baseline is an estimate of what would happen if the federal government were put on automatic pilot and just continued to do what it is doing now. Pentagon programs, including overseas military activities such as those currently being conducted in Afghanistan, are assumed to continue. The baseline for taxes and mandatory programs assumes they will be implemented as current law provides — that is, the amount collected or spent will change according to what’s already enacted and from changes in demographics and the economy. The frequently used GOP statement that, because of the baseline, Washington is the only place where an increase in spending is characterized as a cut is doubly wrong.

Making the United States More Like Greece - One of the big problems in Greece over the past decade or so is that the government was not honest with its data.  Various people assisted in the matter – including Goldman Sachs with respect to some debt issues – but ultimately this was a political decision at the highest level.  The people running the country decided to conceal the true nature of their budget and their debt.  This deception ended up costing the country dearly – completely undermining its credibility under pressure and making it much harder to turn the fiscal and economic situation around. House Republicans are now proposing something similar for the United States.  In the modern United States, cutting taxes leads to lower revenue and larger budget deficits. But many Republicans feel that this is not true – in my conversations with them, for example in congressional hearings over the past year, the conviction seems to be that the research on this topic is bad science, even when done by Republicans.   If you cut taxes, revenues will fall and deficits will increase.  If you change the CBO’s scoring process to hide this fact – as is under consideration by leading Republicans on the House Budget Committee and the House Ways and Means Committee – you are engaging in exactly the same sort of deception that brought down Greece.

Transportation Bill Faces a Wall of Opposition From Both Parties - In contrast to the hundreds of pieces of legislation that cleave Congressional Republicans and Democrats, the one that pays for transportation projects has traditionally drawn a warm embrace from both parties, largely because of the giant piles of cash it bestows on states and communities to repair and maintain their roads, bridges and transit systems. So it was noteworthy that three House members — two Republicans and a Democrat, all from Illinois — gathered here for a news conference this week to denounce the latest House transportation bill, one championed by the House speaker, John A. Boehner.  The three, like scores of Democrats and a fair number of Republicans, were particularly rankled by the bill’s plan to stop the 30-year practice of putting aside 20 percent of the highway trust fund dollars for public transit, which is a crucial mode of getting around in many areas of the country. “Suburban commuters and motorists, who pay millions in federal fuel taxes, deserve a transportation bill that is responsive to their needs,”

GOP Leaders Optimistic on Energy, Jobs After Meeting With Obama - House Speaker John Boehner (R., Ohio) and Senate Minority Leader Mitch McConnell (R., Ky.) on Wednesday sounded an unusually optimistic note after meeting with President Barack Obama, saying they came away feeling they could find common ground on energy and jobs policies. The meeting also included Senate Majority Leader Harry Reid (D., Nev.) and House Minority Leader Nancy Pelosi (D., Calif.). The two Republicans did not get into specifics about which areas were ripe for compromise. But the tone was noteworthy because Republicans typically highlight their differences with the Democrats. “The president believed that there were some areas where we could find common ground, and frankly I was encouraged by that,”  Mr. Boehner told reporters. He cited “a number of areas where we have common ground between the two political parties, particularly on jobs and on energy.” Mr. McConnell called the lunch “productive” and said “we talked about a number of energy policies. We talked about those bills that have come out of the House. The president thought that some of those, we could find some common ground.”

Obama proposes to exempt some IRS spending on enforcement from budget cap - The 2011 debt ceiling compromise, known as the Budget Control Act, establishes automatic cuts in spending for various categories if no further deal is reached to overturn them.  In many ways, it might be ideal to allow the Budget Control Act to come into play. It would force significant reductions in the overall amount allocated to Defense, an area that has fed incessantly on revenues since Reagan's priority on militarization, coupled with Bush II's preemptive wars of choice in Afghanistan and Iraq. Further, the Budget Control Act explicitly protects Social Security and Medicare, so those programs won't be curtailed in the process. A good thing, again, since it is important for the nation to see that the fearmongering about Social Security as "insolvent" is just that.  But there's at least one category of spending that an across-the-board cut makes little sense for--the spending necessary to collect tax from deadbeat/scofflaw or criminal taxpayers. The IRS enforcement budget essentially is an investment in better tax compliance, and returns more dollars to the federal fisc than it takes out.  Obama has recognized that, and seeks to exempt $277 million of the IRS enforcement spending from the Budget Control Act's cuts. See the discussion here at OMB Watch.

The payroll tax law's best measure - One of the little-noticed items attached to the extension of the payroll tax cut was a provision that would promote work-sharing as part of state unemployment insurance systems. The provision would reimburse states for money spent on work-sharing programs that are part of their unemployment insurance system. It would also provide funds for the states that do not currently have work-sharing systems to establish them.. The basic logic of work-sharing is straightforward. Under the current system of unemployment insurance, workers who lose their jobs can get roughly half of their pay in benefits. However, if a worker has their hours cut back because of inadequate demand, they don't get in any way compensated for the lost pay. This effectively encourages employers to go the route of layoffs, rather than shortening work hours, Work-sharing gets around this asymmetry. It allows workers to be compensated for part of their lost pay when their employer reduces their work hours. This means that if an employer decides to reduce the work hours of 50 workers by 20%, as opposed to laying off 10 workers, the 50 workers can get half of their lost pay (10% of their total pay) covered by unemployment insurance. This means that workers will end up working 20% fewer hours for roughly 10% less pay. This is an outcome that is likely to better for workers, employers, and the economy as a whole. It is better for workers because it keeps them on the job and in a situation where they can be continually upgrading their skills in accordance with changes in the workplace.

Deal on Unemployment Benefits Leaves Out Poorest - Congresswoman Barbara Lee, co-chair of the Congressional Out of Poverty Caucus, voted against the recent extension of unemployment benefits because it shortened the maximum number of weeks a jobless worker could qualify. “Instead of scaling back unemployment benefits we need to be adding weeks to help people get by when there continues to be four workers in line for each job,” said Lee. She makes a hell of a point. While most of the media have focused on the Democrats “pretty much getting what they wanted,” it has given short shrift to what this deal means for the long-term unemployed, currently at near-record levels, with 43 percent of unemployed people jobless for more than six months. Under the new deal they will receive fewer weeks of unemployment benefits than were available between the end of 2009 and last year, with the maximum reduced from ninety-nine weeks to seventy-three weeks by September 2012. So what are the consequences of the Democrats’ “win” for the long-term unemployed? A new report from the US Government Accountability Office (GAO)— notes that of the 15.4 million workers who lost jobs from 2007 to 2009, half received Unemployment Insurance (UI), half didn’t and about 2 million exhausted benefits by early 2010.

Obama’s Unacknowledged Debt to Bowles-Simpson - Mitt Romney, a Republican presidential candidate, recently charged that Mr. Obama “simply brushed aside” the plan by the so-called Bowles-Simpson commission (named after its two chairmen) — even though he and most Republicans reject it for its proposed tax increases. Warren E. Buffett, an Obama ally, has said ignoring the plan was “a travesty.” Former Representative John M. Spratt Jr., a Democrat on the commission, said the administration had had an opportunity “to stand up and be counted, and for the most part they weren’t there.”  Yet starting with that April speech, Mr. Obama has come to adopt most of the major tenets supported by a majority of the commission’s members, though his proposals do not go as far. He has called for cutting deficits more than $4 trillion over 10 years by shaving all spending, including for the military, Medicare and Social Security; overhauling the tax code to raise revenues and lower rates; and writing rules to lock in savings.  But he did so months after the commission’s report in December 2010, and largely without acknowledging that he was borrowing from its recommendations. That caution reflected White House concerns about liberals’ hostility to the plan and, aides say, Mr. Obama’s certainty that Republicans would reject anything he endorsed.

The reason the White House didn’t embrace Simpson-Bowles - Perhaps the most common Washington criticism of the White House is that they didn’t embrace the Simpson-Bowles plan. That was, in the eyes of many pundits, the moment when President Obama revealed himself as a typical liberal rather than a postpartisan reformer. But the New York Times today suggests that much of Washington is misreading a tactical decision as an ideological one. It’s a frustration for many White Houses that the best way to get things done is not necessarily to support them. For all that Washington thrills to the spectacle pf presidential leadership, the opposition party tends to recoil from proposals that are too closely associated with the White House. The calculus is simple: If a bill belongs to the president, then its passage is a defeat for the opposition. This dynamic is, in part, why both parties spend so much time negotiating behind closed doors. The trick is to agree on a proposal before it can become associated with either party, and thus before its passage can become a loss for one side. In her long takeout on the Obama administration’s decisionmaking around the Simpson-Bowles proposal, this is essentially what Jackie Calmes suggests happened. The president’s caution reflected his “certainty that Republicans would reject anything he endorsed.” He told Alan Simpson that if he’d “put his arms around” the plan, it “would have been savaged by Republicans, and that would have killed it.” And Simpson himself told Calmes that Obama’s “endorsement would never have won over Republicans, and might have been toxic.”

There Was No Bowles-Simpson Commission Report - Dean Baker - The New York Times badly misled readers by repeatedly referring to a report of the deficit reduction commission led by former Senator Alan Simpson and Morgan Stanley Director Erskine Bowles. There was no report from this commission. The report discussed in this article was exclusively the report of the co-chairs. It did not receive the necessary support of 14 members of the commission that would have made it an official commission report, a point noted only in passing toward the end of the piece. This mis-characterization is extremely important in the context of the piece, because the main point of the article is that President Obama ignored the report of a commission he appointed. Since this commission did not approve a report, the premise of the article is wrong. The piece also misled readers when it asserted that, "benefits for an aging population soon would increase deficits to unsustainable levels." In fact, the main problem is rising private sector health care costs that were projected to make Medicare and Medicaid unaffordable. The increased costs due to aging alone are quite gradual and affordable. It is also worth noting that much of the projected long-term deficit would disappear if the Affordable Care Act is as successful in containing costs as projected by the Medicare Trustees.

Matthew Yglesias: Do Low Taxes Cause Inflation? - It’s nice to see Matthew Yglesias embracing Modern Monetary Theory, but I wonder if he totally gets it: The point of collecting taxes isn’t that the government needs money (it can print money) it’s that if the quantity of taxes is too low relative to the stock of money, then the money loses its value and the price level rises. He’s riffing on the the idea that tax obligations are the ultimate source of sovereign currencies’ value, the reason everyone has to accept that currency’s value, but I think he’s simplifying things to the point of error. At least, he should be talking about deficits/surpluses and their Inflation/deflation effects, not just taxes. Now I suppose if you add ceteris paribus re government spending to his statement, it carries more water. But still, this doesn’t really follow: A) the ultimate value of dollars derives from their utility in retiring tax obligations, so B) more taxation makes dollars more valuable.

In Second Term, What Will Obama Do About Bush Tax Cuts? - Should Barack Obama win re-election this fall, he’ll almost immediately face one of the biggest issues of his second term: the looming expiration of the Bush tax cuts. George W. Bush originally passed the tax breaks in two quick bursts—slashing income taxes in 2001, and lowering taxes on investment income in 2003. Then, just before these cuts were set to expire on January 1, 2011, Obama struck a deal with congressional Republicans to extend them for two more years. To this day, the tax cuts are a highly emotional issue for partisans on both sides. Liberals regard them as a sop to the wealthy, who receive the largest share of the benefits. When Obama signed off on the extension, the left jeered him with charges of rank capitulation. Among Republicans, meanwhile, the tax cuts stand as one of the few untarnished legacies of the George W. Bush era. Without them, the conservative narrative of the Bush presidency collapses into a sorry tale of big government at home (No Child Left Behind, a Medicare prescription-drug benefit) and miscues abroad. So how is Obama likely to handle this unwelcome inheritance? 

Democrats and the Bush Tax Cuts - Mark Thoma provides an excerpt from Noam Scheiber on Peter Orszag’s attempt to let all of the Bush tax cuts expire. In short, Orszag wanted to extend the “middle-class” tax cuts for two years (letting the tax cuts for the rich expire); then he expected the middle-class tax cuts to expire as well. President Obama was interested in the plan, which Scheiber takes as evidence that “the president is a true fiscal conservative.” Thoma frames this as a bad thing: “The explanation, of course, is that despite hopes to the contrary (and denial by some), the president is, ‘a true fiscal conservative’ — it’s not just an act in an attempt to capture the middle — and that could be bad news not just for middle class tax cuts, but also for important social insurance programs such as Social Security.” I like and respect Mark Thoma a great deal, and I generally think of him as a mainstream Democrat on economic issues, neither a socialist nor a “moderate Democrat” (what we used to call a Republican). To me, his post is evidence that many Democrats think that most of the Bush tax cuts were an are a good thing.  Let’s leave aside the question of whether Barack Obama is a fiscal conservative and focus on the narrower question of whether it would be good to let the “middle class” tax cuts (usually defined as tax cuts for married couples making less than $250,000) expire.

"Democrats and the Bush Tax Cuts" – Thoma - Busy day, so just a few quick words in response to James Kwak's post "Democrats and the Bush Tax Cuts." He wonders why I suddenly embrace tax cuts, even if it's for lower income households. In response to the post below this one he says, among other things: To me, his post is evidence that many Democrats think that most of the Bush tax cuts were and are a good thing. This confuses me. When did we become the party of tax cuts? I do not think the tax code is progressive enough (and that remains true even if we allow all tax cuts, which benefitted the wealthy the most, to expire). If we tilt the distribution toward more progressivity first, and then lift the entire distribution to address any remaining buget problems, that's better than doing it the other way around. That is, if the first step is to let all the Bush tax cuts expire returning us to the unsatisfactory levels of progressivity we had in the past, and then we try to increase progressivity as the second step, then it's much less likely that the second step will actually happen. It may not happen in any case, but I think the first scenario improves the odds. So before doing anything else -- while the "we have to close the budget gap" iron is still red hot -- I'd like to see the tax code made more progressive than it was before the Bush tax cuts. Then, if and when that is achieved, fight to preserve the progressivity (as well as social programs) as taxes are raised more generally to try to get the budget on stable footing.

When Does Atlas Shrug–Why Does Atlas Shrug - -Via Mark Thoma a paper a self-recommending paper by David Romer. A key take away – I think this comes from James Kwak paraphrasing. To put this in perspective, an elasticity of 0.19 implies that tax revenues would be maximized with a tax rate of 84 percent; that is, you could raise taxes up to 84 percent before people’s reduced incentives to make money would compensate for the higher tax rates. This is roughly inline with my reading of the data which says a marginal tax rate of around 70 – 80% would maximize the government’s take. An important thing that is not commonly talked about is the way income and work effects interact and this has important implications. We usually think of income effects as causing people to substitute away from work towards leisure. However, causal empiricism suggests that one important use of income is to substitute out of household production. For example, one definition of the “work” I do is attempting to interpret data for the benefit of public officials and my blog readers. However, at my current wage I also have to cut my own grass and wash my own dishes. If I were paid more I would use some of that money to have my grass cut and a maid do my housework which would leave me with more time to look at data.

Is it time to raise taxes on capital gains? (CNNMoney) -- The tax bills of Mitt Romney and Warren Buffett raise a long-running question: Why do Americans get taxed less on their investment gains than on their paychecks? In fact, for much of the past century, long-term capital gains have been taxed at lower rates than ordinary income, although often at levels higher than today's 15% rate. And for much of the past century it's been a contentious issue. One side says preferential treatment for capital gains is just plain unfair. The tax code, they say, is being used to help the rich1 get richer, since they make more of their income from capital gains than anyone else. Their solution: Tax capital gains as regular income.

America's Fiscal Future Hinges on Tax Reform - Larry Summers - However the U.S. presidential election turns out, the trifecta of the Bush tax cut expiration, the debt limit ceiling on the horizon once again, and the congressionally mandated sequesters - cuts in domestic spending - will force the president and Congress to wrestle with fiscal issues, either in a lame-duck session after the election or in early 2013. The decisions they make will have profound impacts on America's fiscal future. For many observers, the central question on the table is about entitlement programs: What will be done with them? Growth in entitlement spending associated with our aging population and its rising healthcare costs is the major factor in overall federal spending growth. But the capacity of near-term policy changes to have large impacts on that spending is less than many would suppose. The rising ratio of retirees to workers means that Social Security benefits at current levels will not be sustainable without some kind of tax increase. Sooner or later, revenue will have to rise or else outlays will have to be curtailed. While it is surely better to act sooner, the reality is that, out of necessity, action on entitlements is inevitable.

Growing Consensus on Corporate Tax Reform? Not So Much - At first glance, it looked like President Obama and congressional Republicans were miraculously headed in the same direction on corporate tax reform. Reform plans by Obama and GOP leaders such as House Ways & Means Committee Dave Camp (R-MI) seemed simpatico. Both sides embraced lower rates. Both endorsed ending business tax subsidies, through neither had much to say about which ones.  But on one fundamental issue the gap between Obama and the GOP remains wide. How would they tax foreign earnings of U.S.-based multinationals? Both sides agree that the current system is the worst of all worlds: It is immensely complicated, wildly distorts economic decisions, and collects little revenue. But when it comes to the solution, Obama and the Republicans seem headed down different roads. Obama wants to force U.S. companies to pay more tax on their overseas profits. Many Republicans would exempt offshore earnings from U.S. tax liability.

Fitting the Tax Code to Today's Businesses - One area where Republicans and Democrats are in agreement on tax policy is that the United States should reduce its statutory corporate tax rate to no more than 28 percent from 35 percent. While this is a good idea, provided that it is paid for with base-broadening so that it does not add to the deficit, it is important to look beyond corporations when thinking about the taxation of businesses. Traditional corporations – called C-corporations – have been declining as a form of business organization for many years. A recent report by the Joint Committee on Taxation found there were 1.9 million C-corporations in 1978 and 1.8 million in 2008. Over that period, the total number of businesses in the United States grew to 33.6 million from 15.2 million. The number of C-corporations peaked at 2.6 million in 1986, when they constituted 13 percent of all businesses. By 2008, they had fallen to 5.4 percent. The key reason is that the Tax Reform Act of 1986 lowered the top federal income tax rate beneath the corporate tax rate for the first time. Historically, the corporate tax rate was well below the top individual rate.

General Electric paid 2.3 percent in taxes on $81 billion in profits: report - U.S. corporation General Electric (GE) paid just 2.3 percent in federal taxes over the last 10 years, even as it reaped more than $81 billion in profits over that same period, according to an analysis of the company’s most recent tax filings. Nonpartisan watchdog group Citizens for Tax Justice said the company’s latest filing with the Securities and Exchange Commission (SEC) reveals that it massively avoided the official U.S. corporate tax rate of 35 percent by using deductions and loopholes in the tax code, allowing them to reap benefits from taxpayers during years when its profits were down. GE came under fire last year after its 2010 tax return showed that it paid nothing on $14.2 billion in profits, and actually took in $3.2 billion in refunds from the government. In the wake of reports about GE’s finances in 2010, some of President Barack Obama’s Democratic allies called for GE CEO Jeff Immelt to quit his post leading the president’s council on jobs.

Is Corporate Debt Worth Subsidizing? - Americans have always treated debt as a favorite vice.  And that is why you should read this contrarian paper from two professors at the University of Chicago, arguing not only that borrowing is good, but that borrowing is so good that it should be heavily subsidized by the federal government. The paper, it should be said, is about corporations. It seems to me that some of the most interesting implications are for large banks and mortgages. More on that point at the end of this post. But first the article itself: The authors write that debt is good because it hastens inevitable failures. That borrowing hastens failure is widely accepted, but it is generally taken as a bad thing. The Obama administration, to take a timely example, suggested in its recent proposals for corporate tax reform that the government should reduce subsidies for borrowing to limit failures. “A tax system that is more neutral towards debt and equity will reduce incentives to overleverage and produce more stable business finances, especially in times of economic stress,” the administration said.

The right's phony debt and tax cuts logic - Every single GOP candidate complains that Democratic spending is a problem because it creates deficits that lead to borrowing that leads to high debt.  But they don't really care about the deficit or debt.  What they care about is having an argument for cutting spending on social safety net programs and reducing the role of government in preventing corporate malfeasance. If they cared about debt and the deficit, they would let the gimmick they wrote into law in  2001 take effect as it is slated to do--they would let all of the Bush tax cuts expire and return us to that saner pre-Bush tax policy. From there we could eliminate loopholes and phase out giveaway tax breaks for the wealthy and big corporations, and we'd be well on our way to dealing with the deficit and debt without creating any new holes in the social safety net. But that's not what they want.  The reason they support trillions of dollars of new tax cuts for the wealthy and big corporations is that they really don't want a viable federal government that works for the general public good rather than serving the militaristic objectives promoted since Reagan--and particularly not one that provides a social safety net. 

Four Fiscal Phonies - Krugman - The Committee for a Responsible Federal Budget – not my favorite people, but they can do their arithmetic – has put together evaluations of the four remaining GOP candidates’ tax and spending plans. Annoyingly, however, they compare these plans to a so-called “realistic baseline” that assumes, among other things, that all the Bush tax cuts are made permanent. So for all the talk of the urgency of deficit control, the need to cut basic social insurance programs, the CRFB is in effect willing to accept as a fait accompli the biggest, most gratuitous budget-busting action of the past couple of decades. How to fix this? One way would be a current-law comparison, which would involve allowing all the Bush tax cuts to expire. But it also seems to me useful to compare the Republican plans with the Obama administration’s plan, which would at least allow the high-end tax cuts to expire. How does debt under this plan compare with the four Republicans? Well, here’s debt as a percentage of GDP in 2021 (using the OMB numbers (pdf) for Obama and CRFB for the others): Yep: as Republicans yell about Obama’s deficits and cry that we’re turning into Greece, Greece I tell you, all of them, all of them, propose making the deficit bigger. And for what? For reverse Robin-Hoodism, taking from the poor and the middle class to lavish huge tax cuts on the rich.

Cutting Tax Rates by 20 Percent Could Add $3 Trillion to the Deficit Over a Decade - Last week, Mitt Romney proposed a new tax plan that would, among other things, reduce individual tax rates by 20 percent across the board and repeal the Alternative Minimum Tax. To get a rough sense of what those two tax cuts would cost, the Tax Policy Center crunched the numbers. The result: They would be really, really expensive. TPC found that repealing the AMT and cutting rates by 20 percent would increase the deficit by more than $3 trillion over the next 10 years, even after the 2001/2003/2010 tax cuts are extended. Romney says the rate cuts and AMT repeal would be paid for by faster economic growth, changes in taxpayer behavior, and reductions in individual tax credits, exemptions, and deductions. This being the middle of a campaign, Team Romney won’t say what tax breaks he’d eliminate. Nor will it say how much growth it expects the tax cuts will generate. And while aides insist his overall plan including the unspecified offsets would raise roughly as much money as the existing system, even this gets complicated because Romney has created a new baseline against which he’d measure these changes.

Romney 2.0: Generous Tax Cuts, But How Will He Pay for Them? - The Tax Policy Center has updated its analysis of Mitt Romney’s platform to reflect his proposed new tax cuts. And the result: Lower taxes for nearly everyone. The highest-income households would pay significantly less, while few with the lowest incomes would benefit.  And without offsetting revenue increases or new spending cuts, Romney’s plan would significantly increase the budget deficit. Romney’s initial tax plan was blasted by many Republicans as too cautious, so last week he rolled out a far more ambitious proposal. Instead of simply making the 2001/2003 tax cuts permanent , abolishing the estate tax,  eliminating taxes on investment income for those making less than $200,000, and cutting corporate tax rates,  Romney threw the long ball. On top of his original plan, Romney proposed cutting all ordinary income tax rates by 20 percent and eliminating the Alternative Minimum Tax. While Romney said he’d offset the lost revenue from these new tax cuts by trimming deductions, credits, and exclusions, he did not say how.  The cost of the new Romney plan? For 2015, when changes would be fully effective, he’d add nearly $500 billion to the budget deficit, even after extending the 2001/2003/2010 tax cuts. If the tax cuts are allowed to expire, he’d add $900 billion to the deficit in 2015.

Study: Romney Tax Plan Cuts Revenue $3.4 Trillion in Decade -  Tax breaks in Mitt Romney’s latest plan would cut government revenues by at least $3.4 trillion over the coming decade, potentially deepening federal budget deficits, according to a new analysis by the nonpartisan Tax Policy Center. The Romney campaign repeated that the former Massachusetts governor intends to take unspecified steps to avoid worsening the government’s grim budget outlook. Still, the findings add to the arsenal of potential criticisms for Mr. Romney’s rivals, including President Barack Obama. Republicans say Mr. Obama’s own tax plan would stifle job creation and investment, mainly by raising taxes on higher earners and small business owners. The two big changes in Mr. Romney’s new plan include a 20% drop in rates from current levels, as well as a repeal of the Alternative Minimum Tax, which was originally intended to snare wealthy people who pay little tax, but now increasingly reaches middle-class households. The Tax Policy Center analysis concluded that the AMT repeal would cost the government at least $670 billion over a decade, while the rate reduction would be about $2.75 trillion. (Mr. Romney also wants to extend all the current Bush-era tax cuts, which means another $5.4 trillion bite out of future government revenues, including more money for AMT relief.)

Republicans and Fiscal Responsibility - Simon Johnson - The United States has a great deal of public debt outstanding – and a future trajectory that is sobering (see this recent presentation by Doug Elmendorf, director of the Congressional Budget Office). Yet the four remaining contenders for the Republican nomination are competing for primary votes, in part, with proposals that would – under realistic assumptions – worsen the budget deficit and further increase the dangers associated with excessive federal government debt. Politicians of all stripes and in almost all countries claim to be “fiscally responsible.” You always need to strip away the rhetoric and look at exactly what they are proposing. The nonpartisan Committee for a Responsible Federal Budget does this for the Republican presidential contenders. I recommend making the comparison using what the committee calls its “high debt” method. This is the toughest and most realistic of its projections – again, a good and fair rule of thumb to use for assessing politicians everywhere.

Romney can’t pay for his tax cuts by repealing Obamacare - I find it frustrating when people assert that there is a massive amount of money to be saved by repealing the Affordable Care Act. There isn’t.  In 2016, Mitt Romney has promised to cut $500 billion from the federal budget. One way hell pay for it is “with the easiest cut of all: Obamacare, a trillion-dollar entitlement we don’t want and can’t afford.” So let’s say he repealed the Affordable Care Act in full. As you can see in the above graph, or in this report, in 2016*, that would cut spending by $110 billion, or a fifth of Romney’s promised total.  But if you repeal the Affordable Care Act, you also repeal the measures it uses to pay for itself. In 2016, that means repealing $35 billion in tax increases and $65 billion in spending cuts — most of which are the Medicare cuts that Romney routinely attacks on the campaign. Subtract them from the spending and now Romney’s only saving $10 billion, or 1/50th of his promised total, by repealing the Affordable Care Act.

Beware of “Centrists” Bearing Consensus - Floyd Norris has written another good column skewering the Republican candidates’ tax proposals. It’s not hard: all you have to do is list the many ways they want to cut taxes—which make George W. Bush look like a veritable communist, out to confiscate all private wealth—and point out the vast increase in budget deficits that would follow. Near the end, Norris has this paragraph: To some deficit hawks, like Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, the campaign so far has been a disappointment. In tax policy circles, she said, there has been growing agreement that a reform similar to the 1986 Reagan tax reform is needed — cutting rates and eliminating loopholes and deductions. But while that reform was revenue-neutral, she said, this one would need to raise revenue. I wouldn’t call myself a member of “tax policy circles,” so maybe there is such a consensus. “Cutting rates and eliminating loopholes and deductions” was a feature of Bowles-Simpson, Domenici-Rivlin, and the Gang of Six. But that doesn’t make it right.

Michael Hudson: A Planned Economy for the 1% - [Video - Transcript here.] In our everyday discourse, there are many tropes, narratives, and models for elites, elite behavior, and changes in the nature of elites: The eternal question: Stupid and/or evil?, the Greek’s cycle of democracy, aristocracy, and monarchy, and back to democracy again (OK, oversimplified); socio- and psychopathy; “big government vs. small government”; William Black’s accounting control fraud; kleptocracy; and the idea that statism as such is the problem. (Did I miss one?) The grand theories, and not conspiracy theories, a la Weber, Marx, Hegel seem not to figure in every day discourse at all (unless one considers religiously derived theories of government grand). The most rigorous model in that list — Black’s model of accounting control fraud — shows that a large number of the ruling elite (C-level executives of very large institutions) are unindicted criminals, and exposes their modus operandi — but that’s not the same as having a solidly grounded explanatory narrative of elite behavior as such. Is it?

Romney’s Top Funders Made Billions on Auto Bail-Out -Re­pub­li­can Pres­i­den­tial can­di­date Mitt Rom­ney called the fed­eral gov­ern­ment’s 2009 bail-out of the auto in­dus­try, “noth­ing more than crony cap­i­tal­ism, Obama style... a re­ward for his big donors to his cam­paign." In fact, the biggest re­wards ­­– a wind­fall of more than two bil­lion dol­lars care of U.S. tax­pay­ers ­­­–– went to Rom­ney's two top con­trib­u­tors. John Paul­son of Paul­son & Co and Paul Singer of El­liott In­ter­na­tional, known on Wall Street as “vul­ture” in­vestors, have each writ­ten checks for one mil­lion dol­lars to Re­store Our Fu­ture, the Super PAC sup­port­ing Rom­ney’s can­di­dacy. The two hedge fund op­er­a­tors turned a breath­tak­ing three-thou­sand per­cent profit on a rel­a­tively neg­li­gi­ble in­vest­ment by using hard­ball tac­tics against the U.S. Trea­sury and their own em­ploy­ees.Gov. Romney last week asserted that the Obama Administration’s support for General Motors was a, “payoff for the auto workers union.” However, union workers in GM’s former auto parts division, Delphi, the unit taken over by Romney’s funders, did not fair so well. The speculators eliminated every single union job from the parts factories once manned by 25,200 UAW members.

… And Whom Would President Romney Pay Off? Do Tell! - Car sales “are growing so fast that Detroit can barely keep up,” according to an AP report published this evening bearing a Detroit dateline.  “Three years after the U.S. auto industry nearly collapsed, sales of cars and trucks are surging. Sales could exceed 14 million this year, above last year's 12.8 million.” The report says that as a result, carmakers and their suppliers are adding shifts and hiring thousands of workers around the country.  Most of the added jobs in the upper Midwest are for the Big Three carmakers and their suppliers.  That’s the good news.   But two of these carmakers, and many of the suppliers in the Midwest and elsewhere in the country, would have collapsed in 2009 but for the government bailout of those two carmakers. So the good news is really bad news, Romney told Fox News today, in sticking to his anti-bailout stance.  “The president ‘was paying off the people that supported him and that, by the way, are trying to get him re-elected,’ Romney said,” according to the AP report.

Our Anti-Government Hypocrisy - Last Thursday, the Pew Research Center for the People and the Press released a survey that revealed what Pew termed “Mixed Views of Government Regulation.” But “mixed,” in this case, means anti-regulatory in matters of ideology and pro-regulatory in practice. Asked whether they believed that government regulation of business was necessary to protect the public or that such regulation usually does more harm than good, just 40 percent answered that regulation was necessary, while 52 percent said it did more harm than good. But then came the specifics. Pew asked whether federal regulations should be strengthened, kept as is, or reduced in particular areas. When it came to food production and packaging, 53 percent said strengthen, 36 percent said keep as is, and just 7 percent said reduce. In environmental safeguards, the breakdown was 50 percent strengthen, 36 percent keep as is, 17 percent reduce. In car safety and efficiency, the split was 45, 42, and 9 percent. In workplace safety and health, it was 41, 45, and 10 percent. And with prescription drugs, it was 39, 33, and 20 percent. Pew then followed up by asking whether there were too few regulations on particular kinds of businesses, the right amount, or too many. For the oil and gas industry, 44 percent said too little, 14 percent the right amount, and 36 percent too much. For banks and financial institutions, it was 43 percent too little, 20 percent just right, and 30 percent too much. For the health insurance industry, the breakdown was 40,18, and 37.

The Volcker Rule: Return to Sender - Paul Volcker deserves better. In the hands of Tim Geithner's Treasury, the Rule named for Volcker supposedly limiting speculative mischief by government-guaranteed banks is fast becoming a cumbersome parody of itself.  Financial regulatory officials, at the behest of Wall Street, have turned a simple bright line into a convoluted monstrosity. The questionnaire alone, inviting comments, runs 530 pages.  The bankers and their allies in government have succeeded once again in making their financial engineering too complex to regulate. The Volcker Rule, in the spirit of the 1933 Glass-Steagall Act, was supposed to simplify matters. But the regulators are helping Wall Street by adding to the complexity. See Jesse Eisenger's analysis from Propublica.  The capacity of Wall Street to create new mutations of derivatives that are not quite explicitly covered by this or that sub-sub-sub rule is of course endless. In the absence of a clear line, Wall Street can always field more lawyers than the government can spare regulators, and what an awful waste of taxpayer money.

Not What Paul Volcker Had in Mind - The Volcker rule, a crucial provision of the Dodd-Frank financial reform law, is supposed to stop banks from doing the sort of risky trading that was one of the big causes of the financial meltdown. The banks hate the rule because less speculation means less profit and lower bonuses for traders and bank executives. And ever since it was signed into law in mid-2010, they have pressed Congress and regulators to weaken it. Sure enough, in late 2011, regulators issued proposed rules that are ambiguously worded and lack the teeth to rein in the banks. Paul Volcker — the former chairman of the Federal Reserve for whom the rule was named — and other reformers have rightly urged significant changes before the rule becomes final in mid-July. Regulators need to listen. Here are important changes that must be included:

  • SPECIFICITY - Under a strong Volcker rule, banks would be barred from amassing complex securities for resale later at a higher price. The proposed regulations also do not impose additional leverage and liquidity requirements on banks that engage in permissible securities trading. That is essential to prevent the big losses and fire sales that occurred during the crisis.
  • RISK, FAST AND SLOW To limit speculation, the proposed regulations advise banks to avoid short-term trading. But they fail to specifically ban broader trading strategies, like the high-frequency trading that was implicated in the infamous flash crash of 2010 and that has become a profitable source of banks’ proprietary trading.
  • PENALTIES The proposed regulations lack clear, stiff penalties, beyond threats that banks found to be engaged in proprietary trading will be forced to stop.

Occupy Vigilantes Write New Volcker Rule Script - It isn’t every day that a reporter gets to sit in on a high-stakes policy meeting in New York’s financial district, but that’s exactly what I did on a balmy evening in late February at 60 Wall Street, the U.S. headquarters of Deutsche Bank AG.  The confab I dropped in on was taking place under potted palm trees in the bank’s ground-floor public atrium, and the participants were 13 members of Occupy the SEC, a spinoff group of the Occupy Wall Street movement. I can’t help but conclude that their plans for petitions, marches, op-eds and sit-down meetings with banking regulators will be inflicting Wall Street with a long, nasty attack of agita.  Occupy Wall Street and its working groups, including Occupy the SEC, were supposed to be dead, in case you missed the obituaries. Now the protesters are messing with detractors’ heads with the emergence of a media-savvy collection of legal, banking and activist members who come off as sane and authoritative. This is not the way the Occupy bashers’ “welfare-bum hippies” propaganda script was supposed to play out. 

Explainer: Why Do We Need a Volcker Rule? - The Volcker Rule is best understood as an attempt to update the New Deal–era Glass-Steagall for the twenty-first century. Glass-Steagall called for a complete separation of investment banking—the activities of underwriting and dealing with stocks and debt—from deposit taking. Consistently weakened from the 1980s onward, Glass-Steagall was fully repealed in the late 1990s to allow Citicorp to merge with an insurance company. The Volcker Rule seeks to keep activities essential to banking within a safety net, while excluding other, riskier, activities from this safety net. There are a variety of special regulations, and protections, banks get, ranging from federal deposit insurance (known as FDIC) to access to the Federal Reserve’s discount borrowing window, designed to keep the system working through panics. Banks currently engage in a wide variety of non-banking activities with safety net protection. For example, they speculate in currencies and run hedge funds and proprietary trading desks for their own benefit. These activities made the financial crisis worse; one estimate has the major Wall Street firms suffering $230 billion dollars in prop trading losses a year into the crisis. And right now, these activities are subsidized by access to the banking safety net.

Volcker Rule Explainer; Scheiber on The Escape Artists - I have an explainer on Why We Need a Volcker Rule online at The Nation.  Hope you check it out. Watching the Volcker Rule evolve, it’s clear that the lack of a regulatory agency closely associated with it is hurting its chances.  I write: “Most of the other major pieces of Dodd-Frank are matched with an agency that wants strong implementation. The FDIC wants to end ‘too big to fail’ through resolution authority. Gary Gensler at the CFTC wants to see strong derivative rules. The staff of the CFPB wants to see their agency start off strong. But no single regulator is trying to get the strongest Volcker Rule possible. Assigned to five different agencies, it is important that activists fight for a strong Volcker Rule to be enacted.” I thought that before I read The Escape Artists by Noam Scheiber, and that book makes me think it even more.    For example, it describes how Geithner didn’t want to go hard on derivatives.  Scheiber quotes a financial industry lobbyist as having Geithner tell him “Don’t worry about derivatives, I think you’ll like what you see on derivatives.”  Start weak, and then the industry can weaken it further.  The book then walks through how Gary Gensler of the CFTC, formerly of Goldman Sachs, lead the fight to make derivatives much stronger through forcing them onto exchanges. 

Letter to the Editor: "In defence of Dodd-Frank" - Treasury - Appearing today on, Deputy Secretary of the Treasury Neal S. Wolin responded to The Economist's February 18th article “Too big not to fail.” Read his full letter to the editor: SIR – You asserted that the costs of the financial reforms are “staggering,” but provided no evidence to support that assertion. The sensible question to ask is: are the costs worth the benefits in reducing the risk of future crises? We believe they are. And by any measure, the direct costs themselves look quite small. If they were too punitive then credit would be much less available and much more expensive than it is today. Furthermore, you used a JPMorgan chart that vastly overstates the complexity of our oversight system of multiple regulators. Our system is more integrated and modestly more simplified than it was before the reforms. It is hard to argue from the evidence of other recent financial failures, such as in Britain, that consolidating those specialised authorities in one agency produces better outcomes. Counting the pages in a bill (or comment pages from an industry resisting reform) is a silly way to measure cost. The complexity of the rules is mostly the consequence of the complexity in designing exemptions that you seem to recognise are important. The fact that markets expect future earnings for the financial system to be lower than during the bubble is not surprising, and not principally the result of the costs of reform.

Financial Crisis Amnesia - Tim Geithner - In the spring of 2008, more Americans were starting to face higher mortgage payments as teaser interest rates reset and they could no longer refinance out of them because the value of their homes stopped rising—the leading edge of a wave of foreclosures and a terrible fall in house prices. By the time Bear Stearns failed, the recession was then already several months old, but it would of course get much worse in coming months. These problems were partly the result of amnesia. There was no memory of extreme crisis, no memory of what can happen when a nation allows huge amounts of risk to build up outside of the safeguards all economies require. When the CEO of Bear Stearns called that night, it was not because I was his firm's supervisor or regulator, but because I was then the head of the Federal Reserve Bank of New York, which serves as the fire department for the financial system.  The financial safeguards in the law at that moment were tragically antiquated and weak. Neither the Fed, nor any other federal agency, had the necessary comprehensive authority over investment firms like Bear Stearns, insurance companies like AIG, or the government-sponsored mortgage giants Fannie Mae and Freddie Mac.

Geithner's Latest Alibi - Treasury Secretary Tim Geithner, chiding Wall Street for trying to undermine enforcement of the Dodd-Frank financial-reform bill, is trying to rewrite history. He would have us believe that regulators lacked the power to prevent the financial collapse. In fact, they had plenty of power. The problem was that Geithner and company were in industry’s pocket, and didn’t use the power they had. Writing in today's Wall Street Journal, in an op-ed piece titled “Financial Crisis Amnesia,” Geithner contends: Regulators did not have the authority they needed….A large shadow banking system had developed without meaningful regulation, using trillions of dollars of short-term debt to fund inherently risky financial activity. The derivatives market grew to over $600 trillion, with little transparency or oversight. Household debt rose….with a large portion of those loans originated with little or no supervision and poor consumer protections. Jesus wept! The amnesia is Geithner’s.

Why Is Finance So Big? -This is a chart from “The Quiet Coup,” an article that we wrote for The Atlantic three years ago next month. Many people have noted that the financial sector has been getting bigger over the past thirty years, whether you look at its share of GDP or of profits. The common defense of the financial sector is that this is a good thing: if finance is becoming a larger part of the economy, that’s because the rest of the economy is demanding financial services, and hence growth in finance helps overall economic growth. But is that true? Thomas Philippon is trying to figure this out. In an earlier paper, he looked at demand for financial services from the corporate sector and concluded that growth in the financial sector from 2001 could not be attributed to increasing demand. In a recent working paper, “Has the U.S. Finance Industry Become Less Efficient?“* he now measures the finance share of GDP against the total production of financial intermediation services by the sector. For the latter, he uses time series of corporate debt, corporate equity, household borrowing, deposits, and government debt. The conclusion is that the per-unit cost of financial intermediation has been going up for the past few decades: that is, the financial sector is becoming less efficient rather than more, and that accounts for two percentage points of finance’s share of the economy.

Wall Street Fixer Rodge Cohen – Big Banks Key to American Global Dominance - It’s not often that the people in charge admit what is really going on: a global game for political dominance. I just saw an interview with Wall Street superlawyer Rodgin (“Rodge”) Cohen of Sullivan & Cromwell, the secret force behind (among other things) the expanded emergency lending power of the Federal Reserve through section 13(3). You know, that’s the law allowing the Fed to lend unlimited sums based on whatever it wants to lend, a section amended in 1991 at Cohen’s behest. He was involved in “more than 17 deals” during the crisis in 2008, including the bankruptcy of Lehman Brothers, the $85 billion AIG bailout deal, and the takeover of Fannie Mae by the federal government. He is, as Bill Black said, the fixer of Wall Street. Here’s his quote, at minute 3:39 of this Bloomberg interview: Hopefully we will not see the major financial institutions in this country disappear because if we do we will also see a loss of ability to influence events not only financially but also politically throughout the world.

Credit Default Swaps (CDS) Are Insurance Products, Not Tradeable Assets - Our story thus far: The Commodity Futures Modernization Act of 2000, sponsored by Texas Senator Phil Gramm as a favor to his wife Wendy (who sat on the Board of Directors of Enron, which wanted to trade energy derivatives without oversight) was rushed through Congress in 2000. Unread by Congress or their staffers, it was signed into law by President Bill Clinton on the advice of his Treasury Secretary Lawrence Summers. The CFMA radically deregulated derivatives. The law changed the Commodity Exchange Act of 1936 (CEA) to exempt derivatives transactions from regulations as either “futures” (under the CEA) or “securities” under federal securities laws. Further, the CFMA specifically exempted Credit Defaults Swaps and other derivative products from regulation by any State Insurance Board or Regulators. This rule change exempting CDS from insurance oversight led to a very specific economic behavioral change: Companies that wrote insurance had to explicitly reserve for expected losses and eventual payout in a conservative manner. Companies that wrote Credit Defaults Swaps did not. Hence, AIG was able to underwrite over THREE TRILLION DOLLARS worth of derivatives, reserving precisely zero dollars agianst potential claims. This was enormously lucrative, except for that whole crashing & burning into insolvency thingie.

Pravda The Economist’s Take on Financial Innovation - In the old Soviet Union, Pravda, the official news agency, set the standard for “truth” in reporting. Discriminating readers needed to be adroit in sifting the words to discern the facts that lay beneath. Readers of The Economist’s “Special Report on Financial Innovation”would do well to equip themselves with similar skills in disambiguation. The Economist sees financial innovation as positive; regarding it in the same sense as charity and goodwill to one’s fellow creatures. The reader is told that: “Finance has a very good record of solving big problems, from enabling people to realise the value of future income through products like mortgages to protecting borrowers from the risk of interest-rate fluctuations.” The definition of the “big problems” of our time is obviously subjective. The Report lacks doubt: “The evidence of this special report suggests that the market does a brilliant job of nurturing and refining instruments that people want.”  “Here is the conclusion on which I base my facts.”The approach is puzzling as the Report repeatedly admits the difficult of actually measuring the benefits of financial innovation: “… quantifying the benefits of innovation is almost impossible” and “To sift through the arguments on both sides is to confront a basic problem with any financial innovation: the difficulty of measuring its benefits.”

Is Risk Rising in the Tri-Party Repo Market? - At the New York Fed, we follow the repo market closely and, with some of my colleagues, I’ve tried to keep readers of this blog informed about how the market works, how it’s being reformed, and what risks remain. We’re always encouraged when others share our interest in this market, so we read a recent Fitch report—“Repo Emerges from the ‘Shadow’”—closely (the report is available at At first glance, the report is a bit worrisome, as it argues that the repo market has recently seen a large increase in riskier types of collateral. So we decided to take a close look at some data to see if we could validate this finding. In this post, I use data made publicly available by the Tri-Party Repo Infrastructure Reform Task Force (the Task Force) to show that there is in fact no evidence of a broad-based increase in riskier types of collateral. The Task Force’s objective in publishing the data was to give a comprehensive view of the market, so the data represent 100 percent of the market’s volume. In contrast, the Fitch study is based on data from a sample of prime funds, representing only 5 percent of the market’s size.   Let me first provide a short overview of the Fitch report, which was published in a recent Financial Times article.

Bernanke: Money Market Funds Still at Risk of Runs - The nearly $3 trillion money market mutual fund industry remains at risk in times of panic, Federal Reserve Chairman Ben Bernanke warned Thursday, echoing calls from other federal regulators to address risks from the industry. “They still could be subject to runs,” Bernanke told Senate lawmakers, suggesting the ability of policy makers to step in to stem a panic is now limited. “Some of the tools we used in 2008 to arrest the run on the funds are no longer available; Treasury can no longer provide ad-hoc insurance.” Bernanke’s comments come as Securities and Exchange Commission staff seek to finalize a proposal intended to place money market funds on more solid footing. SEC Chairman Mary Schapiro warned last week the industry and regulators are “living on borrowed time” until reforms are put in place. “Funds remain vulnerable to the reality that a single money market fund breaking of the buck could trigger a broad and destabilizing run,” Schapiro said at a conference of securities lawyers.

Cathy O’Neil: Economists Don’t Understand the Financial System (Quelle Surprise!) - A bit more than a week ago I went to a panel discussion at the Met about the global financial crisis. The panel consisted of Paul Krugman, Edmund Phelps, Jeffrey Sachs, and George Soros. They were each given 15 minutes to talk about what they thought about the Eurocrisis, especially Greece, the U.S., and whatever else they felt like. It was well worth the $25 admission fee, but maybe not for the reason I would have thought when I went. I ended up deciding something I’ve suspected before. Namely, economists don’t understand the financial system, and moreover they don’t get that they don’t get it. Let me explain my reasoning. The panelists all were pretty left-leaning guys, and each of them talked about how the U.S. government should stimulate the economy in one way or another. . Here are these expert economists, two of whom have Nobel Prizes and the third who runs the Earth Institute at Columbia and is considered a huge swinging dick in his own right, and they don’t seem to acknowledge how much power they actually have over the situation (specifically, not much). For that matter, they clearly don’t know the nitty gritty of the financial system. To listen to them, all you need to do is spread a thick paste of money on the system and it would revive whole cloth.  At the end I asked a question, since they allowed a few questions, and as you know I’m not shy. I asked how we are going to make the system simple enough to actually make it possible to regulate it. Krugman basically said that Dodd-Frank is going to do it. My conclusion from that is that Krugman must really have only an outline in his head of how this stuff works- the devil, as we know, is really in the detail, and I’m too acquainted with the Volcker Rule’s list of exemptions to have a lot of hope on this score.

Alternative Banking Group Accepts Invitation to Meet With Citigroup CEO, Vikram Pandit - via Yves Smith - Text of the message sent to Vikram Pandit by the Alternative Banking Group, in cooperation with the PR Working Group: Dear Mr. Pandit, Last October, in an interview with Fortune Magazine, you extended an invitation to Occupy Wall Street for a face-to-face meeting. The Alternative Banking Group, an official working group of Occupy Wall Street, hereby accepts. As CEO of Citigroup, you recently announced “a new Citi.” You said that you are now “working hard to create a culture of responsible finance.” Our mission as the Alternative Banking Group is exactly the same. We look forward to a fruitful dialogue. Since this conversation is of importance to the general public, we will have a small camera crew with us to document it. The video will be shared on the website, an emerging media platform for the Occupy movement. Please respond to this email at your earliest convenience to schedule a time and place. Sincerely, Cathy O’Neil, Facilitator, The Alternative Banking Group, Occupy Wall Street

Basel regulation needs to be rethought in the age of derivatives - The systemic threat originating from sovereign debt problems in the Eurozone points to the need for recapitalisation of Eurozone banks well in advance of the (exceptionally slow) Basel III timetable. Eurozone authorities have recognised this and, with market pressure intense, taken some action. Helpful and welcome as recent moves have been, a more fundamental rethink of the Basel framework for determining minimum capital requirements for banks is needed. Basel III is just a quick and dirty repair job, consisting of patches applied to fix things that went visibly wrong during the past four years. But it involves no reconsideration of the structure of a fundamentally flawed system that is opaque and far too complex. The risk weight system at the core of the approach for calculating capital charges needs to be scrapped in its entirety and a more coherent approach to exposures arising from derivatives, notionally in excess of $600 trillion at the end of 2010, must be found.

Federal judge weighs whether to let regulators rein in oil speculators - A federal judge on Monday refused to halt efforts by a key regulator to limit excessive speculation in the trading of oil contracts — which is driving up oil and gasoline prices — but hinted that he might soon rule in favor of Wall Street and let speculation go unchecked.  Robert Wilkins, a judge on the U.S. District Court for the District of Columbia, declined a request for a preliminary injunction to halt the Commodity Futures Trading Commission from implementing a congressional mandate to limit how many oil contracts any single financial speculator or company can control. However, Wilkins told both the CFTC and lawyers for the Securities Industry and Financial Markets Association and the International Swap and Derivatives Association that he expected to make a ruling soon on whether to hear the case. His line of questioning left both sides with the impression that he was concerned about how the regulatory agency has proceeded.  The two influential lobbies for Wall Street sought the injunction hoping to thwart what are called “position limits,” which were ordered by Congress as part of the landmark Dodd-Frank Act in 2010. The act was the broadest revamp of financial regulation since the Great Depression. The limits sought to prevent excessive speculation not just in oil but across the broad range of commodities, including farm products and metals.

The SEC Mulls An Investigation Calls Grow For John Boehner To Resign - It is an ethics violation for elected officials to use their political office to perform official acts on behalf of special interests, and particularly when special interests are campaign donors. On Thursday, the Securities and Exchange Commission (SEC) received a complaint from an environmental group with accusations that the proposed Keystone XL pipeline’s owners (TransCanada) are in violation of SEC Rule 10b(5) – Employment of Manipulative and Deceptive Practices to bolster stock prices. The complaint sent to the SEC said TransCanada is using “false or misleading statements about the proposed Keystone XL pipeline” and that they “consistently used public statements and information it knows are false in a concerted effort to secure permitting approval of Keystone XL from the U.S. government.” The complaint continues that the fallacious information misleads investors, U.S. and Canadian officials, the media, and the public “in order to bolster its balance sheets and share price,” and who is the point-man pushing the Keystone XL pipeline with lies and misinformation? Speaker of the House John Boehner.

SEC Reviewing U.S. Trading Practices After Decade-Long Shift to Automation - The U.S. Securities and Exchange Commission is examining equity trading practices that gained dominance in the past decade amid a shift to automation, according to an official in the agency’s enforcement division.  Daniel Hawke, head of the market-abuse unit, said at an event yesterday that the SEC is looking into techniques such as co-location, in which exchanges let traders place computers close to the market’s systems to shave time off executions. He said other practices under examination include the rebates that venues pay to spur transactions, direct market access where brokers let investors send orders to venues themselves, and whether the types of orders exchanges offer are being misused.  Regulators are evaluating U.S. markets after rules since the 1990s boosted competition and spread stock trading across 13 exchanges and dozens of private, broker-run venues. While the shift cut investors’ costs, it made trading more complex, and scrutiny increased after a May 2010 rout erased $862 billion from equities in less than 20 minutes. Several practices Hawke highlighted are used by firms engaged in high-speed trading.  “No one’s been able to prove whether high-frequency trading is good or bad,”

MF Global Was Sloppy, But Not Criminal - Federal law enforcement officials investigating the implosion of MF Global are concluding that sloppy bookkeeping rather than criminal activity is to blame for the firm’s demise that resulted in more than a $1 billion of customer funds that remains missing, FOX Business Network has learned. Though officials haven’t totally ruled out bringing a criminal case against MF Global executives, including former chief executive Jon Corzine, the odds are long that a criminal case will be filed, according to people with direct knowledge of the matter. The evidence that law enforcement officials have gathered so far shows that the firm’s sloppy bookkeeping rather than direct criminal intent to commit fraud is at the heart of both the bankruptcy and the missing customer funds, which could total as much as $1.6 billion, these people tell FOX Business.

Tavakoli: The Great MF Global Comedy Cover Up - MF Global's October 2011 bankruptcy was the eighth largest bankruptcy by assets in the United States. James Giddens, the bankruptcy trustee, issued a press release on February 6 stating that his investigation found that money from customer accounts that was supposed to be segregated was improperly used to fund MF Global's daily activities. Improper transfers of customer money occurred regularly in amounts under $50 million before MF Global's bankruptcy. MF Global wasn't caught, because it put the money back before customers knew it was missing. On January 30, 2012 the Wall Street Journal did a hilariously bad job of reporting when its front page article stated that a "person close to the investigation" said that as a result of chaotic trading in the week before MF Global's October 31 bankruptcy, customers' money "vaporized." Money doesn't vaporize. It's true that tracing money transfers can be tedious, but that's why we call it work. As for the Wall Street Journal's article, the editor should have made it vaporize. I was having breakfast with several traders at Chicago's East Bank Club. One trader read the passage aloud. The entire table burst out laughing. Then he got up and ceremoniously threw the paper in the trash. The entire table applauded.

James Koutoulas: MF Global Financial Collapse And the Shadow Banking System - RT video - Here is James Koutoulas of Typhoon Capital Management, and the founder of the Commodity Customer Coalition, discussing what happened with MF Global on Russia Today. As an aside, I would be more than pleased to present an informative interview with Mr. Koutoulas on US or British television, but there do not appear to be any. What could be alarming is that the conditions that led to the loss of customers' funds at MF Global have not been corrected, and it could be happening again at some other firm even now. We just may not realize it because the losses have not yet been publicly disclosed. As in the case of MF Global, the insiders and powerful customers learn about the impending loss first, and take steps to secure their accounts before the collapse and downfall occurs.

Will Wall Street Ever Face Justice? - Phil Angelides - LAST week, Attorney General Eric H. Holder Jr. proclaimed in a speech that when it comes to fighting financial fraud, the Obama administration’s “record of success has been nothing less than historic.” Such self-congratulation is not only premature, but it also reveals a troubling lack of understanding about what is required to win the war against financial wrongdoing. Four years after the disintegration of the financial system, Americans have, rightfully, a gnawing feeling that justice has not been served. Claims of financial fraud against companies like Citigroup and Bank of America have been settled for pennies on the dollar, with no admission of wrongdoing. Executives who ran companies that made, packaged and sold trillions of dollars in toxic mortgages and mortgage-backed securities remain largely unscathed.  Meager resources have been applied to investigate the financial assault on our country, which wiped away trillions of dollars in household wealth and has resulted in 24 million people jobless or underemployed. The Financial Crisis Inquiry Commission, which Congress created to examine the full scope of the crisis, was given a budget of $9.8 million — roughly one-seventh of the budget of Oliver Stone’s “Wall Street: Money Never Sleeps.” The Senate Permanent Subcommittee on Investigations did its work on the financial crisis with only a dozen or so Congressional staff members.

Brace Yourself for Election-Driven Enforcement Theater: Token Roughing Up of Crisis Bad Banksters, While Corzine Gets a Free Pass -  Yves Smith - It’s bad enough that we are being subjected to relentless propaganda about how housing is just about to turn the corner and the state-Federal mortgage settlement is such a great deal for homeowners. In fact, as we’ve stressed, and bond investors such as Pimco have reiterated, the deal is above all a back door bailout of the banks. Bloomberg weighed in yesterday: Bank of America Corp., Wells Fargo & Co. and three other banks that settled a nationwide probe of foreclosure practices this month will get a bonus from the deal: protection for $308 billion of home-equity loans they hold… It’s “a gift to the banks, at investors’ expense,”  But to add insult to injury, the chump public will be given bread and circuses enforcement theater to distract it from the fact that the banks are getting a sweetheart deal. The show is already on the road. The Financial Times tells us that Wells Fargo and Goldman have reported that they have received so-called Wells notices, which is an advanced warning that the SEC staff plans to file civil charges. This all sounds great, right? Wrong. Take a look at your calendar.The toxic phase of subprime issuance started in the late summer-early fall of 2005 and screeched to a halt in June 2007. But the statute of limitations for securities liability is five years. So the ONLY deals the SEC can pursue now are the last gasp transactions of March- June 2007, and on those, the clock is ticking.

Massive insider Secret dealing scheme with STRATFOR and G Sachs, maybe - Talk about the paranoid discussing the paranoid… Anonymous, the anonymous hacking group, has pinged 5m emails it stole from Stratfor, the political intelligence consultancy, to Wikileaks. It would be rude of us not to read them, although the FT is not amongst the 25 media partners involved in this “investigation”. The first thing in the files on Wikileaks that catches our eye, among the purported emails and reported highlights: …The emails show that in 2009 then-Goldman Sachs Managing Director Shea Morenz and Stratfor CEO George Friedman hatched an idea to “utilise the intelligence” it was pulling in from its insider network to start up a captive strategic investment fund. CEO George Friedman explained in a confidential August 2011 document, marked DO NOT SHARE OR DISCUSS : “What StratCap will do is use our Stratfor’s intelligence and analysis to trade in a range of geopolitical instruments, particularly government bonds, currencies and the like”.

Pirates of the Corporation - Let’s play make-believe (sorry, lawyers call it “counterfactual”) with Justice Stephen J. Breyer. Imagine that Edward Teach, known as Blackbeard, had incorporated his buccaneering business as Pirates, Inc. Now Blackbeard is captured. And sued. “Do you think in the 18th century if they'd brought Pirates, Incorporated [to court], and we get all their gold, and Blackbeard gets up and he says, oh, it isn't me; it's the corporation—do you think that they would have then said: Oh, I see, it's a corporation. Good-bye. Go home[?]” Kathleen Sullivan, the lawyer for the Royal Dutch Petroleum Company, did not flinch: “Justice Breyer, yes, the corporation would not be liable.” She helpfully added that under maritime law, Blackbeard’s victims could sue his ship and get its value. But as for the corporation, no. A few minutes later, Breyer was back. “What about slavery? ... That seems like contrary to international law norms, basic law norms, it could be committed by an individual. And why, if it could be committed by an individual, could it not also be committed by a corporation in violation of an international norm?” Sullivan replied that corporate liability would have to be established by a specific rule of international law. “There is no international norm applicable to corporations for violations of the human rights offenses” in the case before the Court, she said.

Bending the Tax Code, and Lifting A.I.G.’s Profit - Last week, the American International Group reported a whopping $19.8 billion profit for its fourth quarter. It was a quite a feat for a company that was on its death bed just a little over three years ago, so sick that it needed a huge taxpayer bailout. But if you dug into the numbers, it quickly became clear that $17.7 billion of that profit was pure fantasy — a tax benefit, er, gift, from the United States government. The company made only $1.6 billion during the quarter from actual operations. Yet A.I.G. not only received a tax benefit, it is unlikely to pay a cent of taxes this year, nor by some estimates, for at least a decade. The tax benefit is notable for more than simply its size. It is the result of a rule that the Treasury unilaterally bent for A.I.G. and several other hobbled companies in 2008 that has largely been overlooked. This rule-twisting could deprive the government of tens of billions of dollars, assuming the firm remains profitable. The tax dodge, and let’s be honest, that’s what it is, also will most likely help goose the bonuses of A.I.G.’s employees, some who helped create many of the problems that led to its role in the financial crisis.

Bailout Ingrate Bank of America to Impose Monthly Fees on Many “Basic” Checking Account Customers - Yves Smith -  Of all the big US banks that managed to survive the global financial crisis, Bank of America and Citigroup were the two widely recognized to be at risk of failure in late 2008-early 2009. Sheila Bair, then head of the FDIC, really wanted to replace Citi’s CEO, Vikram Pandit, but settled for forcing the bank to do some pretty serious downsizing and streamlining. By contrast, Bank of America has not only been spared this sort of treatment (save being told it can’t pay dividends until its balance sheet is stronger) but it’s also the biggest beneficiary of the most recent “help the banks” full court press, namely, the mortgage settlement.  So how does Bank of America propose to shore up its equity base?  BofA has ruled out another way to improve its earnings: cutting manager and executive pay, as the Japanese banks did in their bubble aftermath.  Nah, the path of least resistance is to charge customers more.  The Wall Street Journal reports on latest plan for preserving BoA’s imperial right to profit: Bank of America Corp. is working on sweeping changes that would require many users of basic checking accounts to pay a monthly fee unless they agree to bank online, buy more products or maintain certain balances…Bank of America pilot programs in Arizona, Georgia and Massachusetts now are experimenting with charging $6 to $9 a month for an “Essentials” account. Other account options being tested in those states carry monthly charges of $9, $12, $15 and $25 but give customers opportunities to avoid the payments by maintaining minimum balances, using a credit card or taking a mortgage with Bank of America, according to a memo distributed to employees.

Bank of America Running Debit Card System for Tax Returns in South Carolina - Via Pat Garofalo, here’s another income stream for the banks that has opened up in the past few years. Call it another “financial innovation.” I’m talking about debit cards to deliver benefits. Banks issue the debit cards, which allow recipients to access welfare or unemployment benefits, and they make a small profit on fees from the services. This service doesn’t work for people who live many miles from an ATM of that particular bank, but they often have no recourse. And now, the system is expanding, at least in South Carolina, into tax refunds: Last week, the Charleston Post & Courier’s David Slade wrote a column about South Carolina’s new practice of issuing tax returns in the form of prepaid debit cards from Bank of America. The state Department of Revenue announced the program back in December, but conveniently left off the long list of fees which customers without BofA accounts will be subject to. For every withdrawal from a non-Bank of America ATM, BofA will take $2.50 off the top — in addition to any fees the ATM owner might charge. Want to get your money directly from the bank? The first time’s free, but every withdrawal after that comes with a $10 fee. Leaving the country? Bank of America takes 2% of every single transaction you make outside the United States. Had enough and want to close your account? No problem — after a $5.00 closure fee, of course.

Wall Street was never on your side - We have received a great deal of positive feedback on our recent post entitled “There has never been a better time to be an individual investor.”  Most of the negative feedback thinking that we had made some sort of market call.  All we are saying in this post was that individual investors now have the greatest array of tools and services to manage their own portfolios.The most substantive feedback we got was in a post by Tim Richards at the Psy-Fi Blog entitled: “There has never been a more dangerous time to invest.”  The point being that the outpouring of research into behavioral finance has given Wall Street ever more precise tools to (legally) exploit the behavioral biases of individual investors.  He writes:Prior to the general appreciation of the behavioral biases that accompany our every living breath the ability of financial firms to exploit our behavioral weaknesses was limited to the relatively simple ways they could find through evolutionary happenstance. Sometimes they figured out how to make money out of peoples’ cognitive biases, but mainly they just threw money around in the hope that it would stick. However, what do you think they’re going to do when they realise that there’s science behind these traits and you give them the best minds and vast quantities of investment dollars to start looking at them?

Average Wall Street Bonus Dips to $120k After Bad 2011 - After a dreadful 2011 that saw Wall Street profits plunge, many financial industry workers feared that bonuses, which typically make up a large chunk of their compensation, would fall off a cliff. But according to a new report by New York State Comptroller Thomas DiNapoli, the total amount Wall Street firms paid in bonuses only declined by 14% last year, despite the fact that financial industry profits fell by half. DiNapoli’s report painted a picture of a financial sector that is shrinking. Overall profits on Wall Street were $13.5 billion in 2011, compared to $27.6 billion in 2010 and $61.4 billion in 2009, when the industry snapped back — “with the benefit of federal assistance,” the report notes — after the financial meltdown.“Cash bonuses were down in 2011, reflecting a difficult year on Wall Street,” DiNapoli said in a statement. “Profits were down sharply and securities firms in New York City resumed downsizing in the second half of the year. The securities industry, which is a critical component of the economies of New York City and New York State, faces continued challenges as it works through the fallout from the financial crisis and adjusts to regulatory reforms.”

Bonuses Dip on Wall St., but Far Less Than Earnings - It is apparently going to take more than shrinking bank profits to put a big dent in Wall Street bonuses. The total payout to security industry workers in New York is forecast to drop only 14 percent during this bonus season, according to a report issued on Wednesday by the state comptroller, Thomas P. DiNapoli. By comparison, profits last year plunged 51 percent. “The securities industry, which is a critical component of the economies of New York City and New York State, faces continued challenges as it works through the fallout from the financial crisis and adjusts to regulatory reforms,” Mr. DiNapoli said in a statement. Hurt by the European debt crisis, a sluggish economic environment at home and the introduction of new regulations that have threatened once-profitable business lines, the nation’s largest banks had a weak 2011. Goldman Sachs reported that profit dropped 67 percent from 2010. Morgan Stanley’s earnings fell more than 40 percent

Unbelievable Stress of Making "Only" $200,000 After Taxes - People who have nothing to eat, no job, and are about to be tossed out of their homes in foreclosure, really do not know what stress is.  To fully appreciate stress, please consider the sorry "plights" of Andrew Schiff, marketing director for Euro Pacific Capital, Daniel Arbeeny, a Wall Street headhunter, and hedge-fund manager Richard Scheiner. Bloomberg describes the out-and-out horror stories of all three in Wall Street Bonus Withdrawal Means Trading Aspen for Coupons Andrew Schiff said the $350,000 he earns, enough to put him in the country’s top 1 percent by income, doesn’t cover his family’s private-school tuition, a Kent, Connecticut, summer rental and the upgrade they would like from their 1,200-square- foot Brooklyn duplex.  “People who don’t have money don’t understand the stress,” . “Could you imagine what it’s like to say I got three kids in private school, I have to think about pulling them out? How do you do that?” Wall Street headhunter Daniel Arbeeny said his “income has gone down tremendously.” On a recent Sunday, he drove to Fairway Market in the Red Hook section of Brooklyn to buy discounted salmon for $5.99 a pound. Scheiner said he spends about $500 a month to park one of his two Audis in a garage and at least $7,500 a year each for memberships at the Trump National Golf Club in Westchester and a gun club in upstate New York. A labradoodle named Zelda and a rescued bichon frise, Duke, cost $17,000 a year, including food, health care, boarding and a daily dog-walker who charges $17 each per outing, he said.  He described a feeling of “malaise” and a “paralysis that does not allow one to believe that generally things are going to get better,”

Wall St. Cuts Bonuses for Poor Little Rich Bankers - It’s official: Wall Street had a lousy year and that means that for some people the annual ski trip to Aspen will be put on hold. Time for Occupy Wall Street to pack up its tents?  The New York State Comptroller reported Wednesday that the pool for Wall Street bonuses shrank by 14 percent during the 2011 season to a total $19.7 billion. Some firms reported slashing bonuses 20 percent to 30 percent. Still, that’s not nearly as steep as the drop in profits at the broker/dealer members of the New York Stock Exchange – they plunged 51 percent to $13.5 billion, the second year in a row that profits plunged by more than half. The bonus cuts would have been worse, but Wall Street has downsized dramatically since the financial crisis began and is now 22,700 lighter – including 4,300 layoffs last year. That means the shrunken bonus pool was divided among fewer people.  So the 1 percent may be wounded, but down-and-out they are not. The average cash bonus alone was $121,150 in 2011, up 13 percent from 2010. The total 2010 compensation package tallied $361,180 – 5.5 times as the average salary in the private sector. Figures for 2011 are not yet available.

I care about rich people, but not about their riches - An incredibly interesting article in Bloomberg this week reveals the devastating power of the economic phenomenon known as "habit formation." Basically, if you have enjoyed a high-consumption lifestyle in the past, it is extremely painful to switch to a lifestyle of moderate consumption. This is why so many finance-sector workers are unhappy right now, despite being so much richer than the vast majority of Americans - they are doing great relative to others, but not so good relative to the astronomical heights they reached in the early 2000s. Conservatives sometimes use habit formation to try to get sympathy for the rich. When we redistribute income, they say, we have to realize that the rich are actually hurt, since they have gotten used to consuming a certain amount, and raising their taxes will bump them down to a less lavish lifestyle. We should care about the rich people too, they say. But most conservatives don't say this too loudly, because the instincts of the public are more Rawlsian than Benthamite; people are likely to respond by saying "Oh boo hoo hoo, no vacation in Aspen this year! Cry me a river!" In other words, I think most people don't really care that much about the happiness of the rich. But I do.

Is Incentive Compensation a Giant FIB? - Harvard Business School professor Mihir Desai believes American companies and investment firms have erred–horribly–by linking manager compensation so tightly to financial market performance. In the current Harvard Business Review, he identifies this as a giant FIB, a Financial Incentive Bubble: American capitalism has been transformed over the past three decades by the idea that financial markets are suited to measuring performance and structuring compensation. Stock-based pay for corporate executives and high-powered incentive contracts for investment managers have dramatically altered incentives on both sides of the capital market. Unfortunately, the idea of compensation based on financial markets is both remarkably alluring and deeply flawed: It seems to link pay more closely to performance, but it actually rewards luck and can incentivize dangerous risk-taking. This system has contributed significantly to the twin crises of modern American capitalism: governance failures that cast doubt on the stewardship abilities of U.S. managers and investors, and rising income inequality.

The invisible welfare state of the top one percent - Pop quiz: What is a government program? And are you on one right now? Those are the questions Cornell University political scientist Suzanne Mettler has been posing. For her book “The Submerged State,” she asked a scientifically selected sample of 1,400 Americans whether they had ever used a government social program. Only 43 percent copped to having done so. Then she read off 21 social programs, such as Medicare and the home-mortgage interest deduction, and asked the same question again: Have you ever used a government social program? This time, 96 percent said yes, in fact, they had. Most of the welfare state for rich and upper-middle class Americans is, in Suzanne Mettler’s words, “submerged.” (Alamy) According to Mettler’s survey, 60 percent of those who benefit from the home-mortgage interest deduction didn’t think they had ever used a government social program. Fifty-three percent of those with student loans didn’t think they had used one. Among Social Security beneficiaries, 44 percent thought themselves unsullied by the touch of government, and among Medicare beneficiaries, 39 percent said the same. Twenty-seven percent of those in public housing answered in the negative, as did 25 percent of those on food stamps.

So, how can bankers live with themselves? - A little while ago I put this question to a financial recruiter. I'll call him Philippe. Philippe is working with the well-paid bankers everyone else seems so angry with. They come to him when they want to move to a new job, or he poaches them on behalf of banks or financial firms. Being at the high end of the industry he has extensive conversations with clients about their motives, fears and ambitions.So how can they live with themselves? "They feel unjustly singled out", said Philippe. "What I hear is: look, nobody would run a bank with the intention of wrecking it, would they? Banks lent to people who couldn't repay. But nobody forced these people to take out loans that they must have known were far beyond their means. Banks may have been enablers, but in the end it was reckless individuals who did this." This is a common refrain in the City, where people like to compare themselves to "over-enthusiastic waiters", in the recent words of one CEO. "Then again", Philippe continued, "many of my clients simply don't seem to care a whole lot about what the general public think. These are extremely well-educated and multilingual professionals. Many are in mixed marriages with kids who have lived on two or three continents. These people don't belong anywhere and don't feel beholden to any national project. They want to pay as little in tax as they can, and they want to be safe. That's it. Rule of law is very important for them.'

The Shocking Statistic About Psychopaths On Wall Street - The March/April issue of the CFA Magazine has a fascinating article titled "The Financial Psychopath Next Door."  A shocking statistic jumped out at us.  From the article: Studies conducted by Canadian forensic psychologist Robert Hare indicate that about 1 percent of the general population can be categorized as psychopathic, but the prevalence rate in the financial services industry is 10 percent. And Christopher Bayer believes, based on his experience, that the rate is higher. Bayer is a well-known psychologist who provides therapy to Wall Street traders. The type of psychopath the author is writing about is characterized by compulsive gambling.  And the Wall Street psychopath doesn't necessarily show up to his or her first day of work in this condition.  From the article: Taken to the extreme, some traders become compulsive gamblers. The behavior is often latent--neither they nor anyone else knows they have this propensity. They hide small losses and keep doubling their position to try to eliminate them. When those trades turn sour, they dig themselves into a deeper hole and deny ay wrongdoing or failure. They rationalize by telling themselves that poor investment decisions are an occupational hazard. They lie to family members or others to conceal the extent of their involvement with gambling and commit forgery, fraud, theft, and embezzlement to support their habit.

Dividing Dimon? Analyst Offers Case for a JPMorgan Split - A day before JPMorgan Chase’s annual investor conference, Michael Mayo, an analyst with Crédit Agricole Securities and author of “Exile on Wall Street,” is wondering aloud if the firm might be better off as firms, plural. Mr. Mayo, who is known for taking aggressive stances on big banks, released a report ahead of the bank’s Tuesday conference titled, “Should It Get Broken Up?” In the note, Mr. Mayo argues that while JPMorgan, the nation’s largest bank by assets as of Dec. 31, has fared better than its rivals in the last several years, it still might be worth more to shareholders as individual businesses than as one huge conglomerate. In the note, Mr. Mayo estimates that “the pieces of JPMorgan are worth one-third more than the current market value (est) based on a sum-of-the-parts analysis,” and says that the bank should consider splitting off businesses that could flourish under separate ownership. He also notes that big banks are subject to “increasingly higher regulatory and capital requirements,” while smaller businesses are nimbler and subject to less regulatory hoop-jumping.

FDIC: Bank profits at 5-yr high, but revenue fall - Bank profits rose in 2011 to five-year high while operating revenue declined for only the second time since 1938, according to the Federal Deposit Insurance Corp.'s quarterly banking report released Tuesday. Bank net income in 2011 was $119.5 billion, a hike of $34 billion from full-year 2010 earnings. The FDIC said that in 2011 bank net operating revenue dropped by $3.8 billion from 2010, a reduction that was caused by a $4.4 billion reduction in non-interest income. However, the number of banks on the FDIC's "problem list" fell to 813 from 844 during the fourth quarter of 2011 and the assets of "problem" institutions fell to $319 from from $339 billion. FDIC acting chief Martin Gruenberg said 2011 represented the second full year of improving performance by the banking system. "Banks reported higher positive aggregate earnings, the number of 'problem' banks and failures declined, and loan balances increased in the final three quarters of the year," he said. The FDIC said that lower provisions for loan losses "lifted fourth quarter net income."

FDIC says U.S. banks in position to help economy (Reuters) - The U.S. bank industry has recovered to the point that it can boost the economic recovery by extending more loans, the top bank regulator said on Tuesday. Martin Gruenberg, acting chairman of the Federal Deposit Insurance Corp, said he was encouraged by banks' increased lending but said they must do more to continue reaping the profits seen in recent quarters. Bank loan balances rose $130.1 billion, or 1.8 percent, in the 2011 fourth quarter compared to third quarter, according to a quarterly report by the FDIC released on Tuesday. Gruenberg said that with balance sheets now greatly strengthened from their weak state following the 2007-2009 financial crisis, the industry can lend more if demand increases. "The industry is now in a much better position to support the economy through expanded lending," he said.

More Customers Leaving Big Banks-- New fees and poor customer service have sparked an exodus among big bank customers, many of whom switched to smaller institutions last year.  The defection rate for large, regional and midsize banks averaged between 10% and 11.3% of customers last year, according to a J.D. Power and Associates' survey of more than 5,000 customers who shopped for a new bank or account over the past 12 months. In 2010, the average defection rates ranged from 7.4% to 9.8%.Meanwhile, small banks and credit unions lost only 0.9% of their customers on average last year -- a significant decline from the 8.8% defection rate they saw in 2010.  These smaller institutions were also able to attract many of the customers who left the big banks. Over the course of last year, 10.3% of customers who shopped for a new bank landed at these smaller institutions -- up from 8.1% in the prior year. New and higher bank fees at the nation's biggest banks led many customers to switch to smaller institutions over the past year, with about a third of customers at big banks reporting fees as the reason for looking elsewhere.

Unofficial Problem Bank list increases to 960 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Feb 24, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808: As anticipated, the FDIC released its enforcement actions for January 2012 this Friday. Moreover, after playing footsie with community bankers last week as part of an effort to stem proposed Congressional action to broaden the examination appeal process, the FDIC got back to closing a couple this week. The release of these actions and closings contributed to many changes in the Unofficial Problem Bank List. In all, this week there were four removals and eight additions, which leave the list at 960 institutions with assets of $389.7 billion. A year ago, the list held also held 960 institutions but assets were higher at $413.8 billion.

Wells Fargo, Goldman receive Wells notices over MBS disclosures - Wells Fargo and Goldman Sachs received Wells notices over mortgage-backed securities disclosures, according to regulatory filings. Goldman Sachs disclosed the Wells notice in its 10-K, while Wells reported the notice in its 2011 annual report to shareholders. The notice from the Securities and Exchange Commission concerns "the disclosures contained in the offering documents used in connection with a late 2006 offering of approximately $1.3 billion of subprime residential mortgage-backed securities underwritten by GS&Co.," Goldman said in its regulatory filing. "The firm will be making a submission to, and intends to engage in a dialogue with, the SEC staff seeking to address their concerns."  As of December 2011, the outstanding balance of loans transferred to trusts and other mortgage securitization vehicles during the period 2005 through 2008 was approximately $42 billion, according to Goldman's regulatory filing. At Wells Fargo, the Wells notice also relates to the bank's disclosures in mortgage-backed securities offering documents.

Brace Yourself for Election-Driven Enforcement Theater: Token Roughing Up of Crisis Bad Banksters, While Corzine Gets a Free Pass -  Yves Smith - It’s bad enough that we are being subjected to relentless propaganda about how housing is just about to turn the corner and the state-Federal mortgage settlement is such a great deal for homeowners. In fact, as we’ve stressed, and bond investors such as Pimco have reiterated, the deal is above all a back door bailout of the banks. Bloomberg weighed in yesterday: Bank of America Corp., Wells Fargo & Co. and three other banks that settled a nationwide probe of foreclosure practices this month will get a bonus from the deal: protection for $308 billion of home-equity loans they hold… It’s “a gift to the banks, at investors’ expense,”  But to add insult to injury, the chump public will be given bread and circuses enforcement theater to distract it from the fact that the banks are getting a sweetheart deal. The show is already on the road. The Financial Times tells us that Wells Fargo and Goldman have reported that they have received so-called Wells notices, which is an advanced warning that the SEC staff plans to file civil charges. This all sounds great, right? Wrong. Take a look at your calendar.The toxic phase of subprime issuance started in the late summer-early fall of 2005 and screeched to a halt in June 2007. But the statute of limitations for securities liability is five years. So the ONLY deals the SEC can pursue now are the last gasp transactions of March- June 2007, and on those, the clock is ticking.

Bank of America Wins Venue Appeal in $8.5 Billion Mortgage Settlement - Yves Smith - This is a real shame. Bloomberg reports that Bank of American and Bank of New York have prevailed in their effort to have the $8.5 billion Bank of America mortgage settlement returned to state court in New York. The use of a Article 77 proceeding for the settlement (a rarely-used New York state procedure) looked really sus, and the initial Walnut Place filing was very persuasive, and Judge William Pauley’s ruling approving the removal to Federal court was blistering (as in he was appalled by the conflicted role played by Bank of New York). I attended the hearing on the appeal and I suppose should not have been surprised at the absence of anyone from New York attorney general Eric Schneiderman’s office. Even though he filed an objection to the settlement, the use of a Section 77 procedure (which has a strong presumption that the trustee is acting in good faith, which is clearly bogus in this case) places a very high bar for the settlement to be overturned.  And that is further compounded by the fact that the New York judge to which this case has been assigned, Barbara Kapnick, is widely depicted as at best bank friendly and at worst clueless. So this is a big win for Bank of America, since it looks like any scope of investigation will be severely limited and the deal will sail through. As we wrote before, this settlement is a screaming bargain relative to the liability that BofA faces on these deals.

BONY-Countrywide Settlement Removal Reversed by 2d Circuit - Lost in the attention to the state-federal mortgage servicing settlement is the other major servicing fraud settlement:  the $8.5B deal between BofNY as trustee for various MBS trusts and Countrywide (Bank of America) over putback claims for securitization of mortgages that didn't comply with the requirements of the securitization documents.   BONY filed an Article 77 action in NY state court, which is a CYA procedure for a court to bless BONY's actions as trustee.  A large group of institutional investors (the Institutional Investors) supported the deal, but many other MBS investors (and the NY Attorney General) intervened in opposition.    The investors removed the case to Federal District court under the Class Action Fairness Act (CAFA), where the sharp-eyed district judge immediately saw what was up and noted that BONY was dancing around like a marionette with strings being pulled by BoA and the Institutional Investors, rather than acting as an independent trustee and fiduciary.  The removal order was appealed to the 2d Circuit, which reversed.  [Yves Smith is surprised that the NY AG did not file a brief supporting removal.  I'm not (and don't think it would have affected the outcome here).  State AGs have to be very careful about how they treat their state courts; these are relationships that affect many cases. Pushing for removal is not how an AG makes nice with home court judges.  Silence here speaks loudly.]

Fannie Mae, Freddie Mac, and the MBS sleeper defense - The statute of repose sets an absolute deadline for certain causes of actions. Unlike the statute of limitations, which can be extended based on agreements between the parties or certain external circumstances, the statute of repose is drawn in permanent marker: If you don't file particular claims within the specified time period, you're flat out of luck. (Here's an analysis of a pair of recent decisions holding that a Supreme Court ruling that stops the clock on the statute of limitations in certain cases doesn't apply to the statute of repose.) As it happens, state and federal securities laws usually include an absolute deadline for claims under statutes of repose. That's why the defense has become so popular in mortgage-backed securities cases. Remember, there was a lag between when a lot of these notes were sold in 2005 and 2006 and when they went bad in 2008, and another lag as investors figured out how to structure suits based on securities that weren't ordinary stocks or bonds. Those years between offering dates and suit filings have turned out to be a big issue: In a major ruling in the Countrywide MBS litigation before U.S. District Judge Mariana Pfaelzer in Los Angeles, for instance, the judge held that the statute of repose on federal securities claims is inviolable, leaving Countrywide MBS investors who haven't already filed claims on notes issued before 2008 out in the cold.

BofA Clash With Fannie Intensifies - Bank of America Corp. said it’s facing more demands by Fannie Mae for refunds on flawed home loans because mortgage insurers who cover defaults rejected 25 percent more claims last year. Unresolved insurance rejections rose to 90,000 at the end of 2011 from 72,000 the year earlier, Bank of America said last week in its annual filing with regulators. Last year’s denials equal $1.2 billion in unpaid loan balances, according to a note yesterday by Compass Point Research and Trading LLC.  The rejections heighten tension between Brian T. Moynihan, the bank’s chief executive officer, and U.S.-owned Fannie Mae in their disputes over who must pay for billions of dollars in failed loans made during the housing boom. When mortgage insurers deny claims, the two firms are left to squabble over whether losses will be borne by bank shareholders or the taxpayers who bailed out Fannie Mae.  Pressure on Bank of America, the second-biggest U.S. lender by assets, may rise in July when Fannie Mae shrinks the amount of time it gives a bank to appeal an insurer’s denial to 30 days from 90 days before pressing for a refund. Repurchase costs probably would rise if the firm is forced to adhere to Fannie Mae’s policy, Bank of America has said.

Mortgage plan seeks single securities platform - The US may create a public utility to process all mortgage securitisations in the future after the main regulator of housing finance said it wants to invest in a single platform. In a strategic plan published on Tuesday, the Federal Housing Finance Agency said that it aims to build a single securitisation platform for Fannie Mae and Freddie Mac, the two housing finance agencies that guarantee and bundle most US mortgages. The plan points to a revolutionary future for the $8,500bn US mortgage-backed securities market, in which all public and private issuers use a single platform to process and track payments from mortgage borrowers through to MBS investors, and Fannie and Freddie may no longer exist. “Right now, Fannie and Freddie each have their own proprietary systems,” said Edward DeMarco, acting director of the FHFA. He said it made little sense for taxpayers to keep investing in two different platforms when they could instead build a single system that could be used regardless of whether Congress keeps Fannie and Freddie or scraps them. “It’s about building out an infrastructure for the secondary mortgage market but doing so in a way that is not dependent on any particular policy path,” said Mr DeMarco. In the medium-term, such an infrastructure could mean a single agency MBS, instead of different Fannie and Freddie securities.

Mortgage Fraud Task Force Skeptics Wait For Strong Leader, Swift ActionCritics of the Feb. 9 settlement reached between big banks, state attorneys general and the Justice Department are closely watching the formation of a Wall Street fraud working group co-chaired by New York Attorney General Eric Schneiderman, who has been a public champion of tougher action against banks for their role in the financial and mortgage crises and the resulting recession. Schneiderman, in an effort to assuage the skeptics, said as the $25 billion mortgage settlement was being announced that it was merely a "down payment" in holding the financial industry accountable. Schneiderman's backing of the deal effectively extinguished broad-based progressive opposition to it. Whether the government collects the remaining balance has much to do with how the fraud task force is set up and who's chosen to run it on a day-to-day basis.

Year-end bank filings offer clues to SEC/DOJ MBS probes - Since the Obama administration's announcement in January that it was forming a sprawling new state and federal task force to examine the mortgage-backed securitization process, we've seen piecemeal revelations about what government investigators are up to. The deadline for big banks to file their year-end reports with the Securities and Exchange Commission came and went this week, so I figured I'd see if we could learn any more about the MBS probes from the 10-Ks filed by the five banks that participated in the $25 billion national mortgage servicing settlement. They are JPMorgan Chase, Wells Fargo, Bank of America, Citigroup, and Ally Financial. I also looked at the 10-Ks of Morgan Stanley and Goldman Sachs. The good news: It looks like regulators are indeed collecting information from MBS sponsors. The bad news: The banks aren't saying much more than that. The most tantalizing tidbits came from Ally Financial and Citigroup, both of which disclosed that they've been hit with Justice Department subpoenas.  Three other banks, however, admitted to being targeted by the SEC in MBS investigations: Goldman Sachs, JPMorgan Chase, and Wells Fargo. Wells Fargo's 10-K disclosed that it "has received a Wells Notice from SEC staff relating to Wells Fargo's disclosures in mortgage-backed securities offering documents."

Fed’s Duke to Defend Focus on Housing - A top U.S. Federal Reserve official is expected to defend the central bank’s recent focus on the U.S. housing market on Tuesday in the face of Republican criticism. In testimony prepared for a Senate Banking Committee hearing on Tuesday, Fed governor Elizabeth Duke said that the central bank was right to highlight the housing market in a paper published last month. That paper has come under fire from Republicans in Congress, who argue it was laying out positions that are close to that of the Obama administration and strays from the central bank’s role of policy issues that are the domain of Congress and the White House, rather than the central bank. Duke said housing market issues are “are important factors in the Federal Reserve’s various roles in formulating monetary policy, regulating banks, and protecting consumers of financial services.” She noted that “the failure of the housing market to respond to lower interest rates as vigorously as it has in the past indicates that factors other than financial conditions may be restraining improvement in mortgage credit and housing market conditions and thus impeding the economic recovery.” Led by Duke, fellow governor Sarah Bloom Raskin and New York Fed President William Dudley, the central bank’s staff have spent more time studying housing policy recently because huge losses in household wealth over the last few years threaten to weigh on the broader economy.

Fed's Duke: Much Less Lending Would Occur Without Fannie, Freddie - Private investors in the U.S. mortgage-securities market would likely be hesitant to take on the loans currently handled by mortgage finance companies Fannie Mae (FNMA) and Freddie Mac (FMCC) if the two were immediately shut down, Federal Reserve Gov. Elizabeth Duke said Tuesday. If the government-sponsored entities were closed, there would probably be "much, much less lending going on," Duke said Tuesday at a hearing held by the Senate Banking Committee, responding to questions from the committee's chairman, Tim Johnson (D., S.D.). Private investors would need more certainty about the future mortgage environment before taking on such large infrastructure investments, she said. "For the private market to come in and take up that slack, it's going to take some certainty, more visibility as to what's going to happen in the mortgage market in the future," Duke said. Many Republicans favor a mortgage system in which Fannie Mae and Freddie Mac are eventually wound down. However, legislation to do so has stalled in Congress, even in the GOP-dominated House. Sen. Bob Corker (R., Tenn.) expressed frustration that lawmakers have not been able to develop a path forward for the two mortgage giants.

Fannie Asks Gov't for Nearly $4.6 Billion for 4Q - Mortgage giant Fannie Mae said Wednesday that it lost money in its fourth quarter and is asking the federal government for $4.57 billion in aid to cover its deficit. Washington-based Fannie said it lost $2.41 billion in the October-December quarter, stung by declining home prices. Revenue was $4.53 billion. The government rescued Fannie and sibling company Freddie Mac in September 2008 to cover their losses on soured mortgage loans. Since then, a federal regulator — the Federal Housing Finance Agency — has controlled their financial decisions. Taxpayers have spent more than $150 billion to prop up Fannie and Freddie, the most expensive bailout of the 2008 financial crisis. The government estimates that figure could top $259 billion to support the companies through 2014 after subtracting dividend payments. Fannie has received more than $116 billion so far from the Treasury Department, the most expensive bailout of a single company.

Bank of America Clash with Fannie Mae Intensifies; Insurance Disputes Put Taxpayers On the Hook For Still More Losses - Taxpayers are already on the hook for $180 billion in losses at Fannie Mae and Freddie Mac. That number is going to rise, perhaps significantly.  The clever synonym for more taxpayer losses is "treasury Advance". With that understanding, please consider Fannie Mae's Losses Narrow but Treasury Advance RequestedFannie Mae is reporting a net loss of $2.4 billion for the fourth quarter of 2011 compared to a net loss of $5.1 billion in the third Quarter. For the entire 2011 year it reports a net loss of $16.9 billion compared to $14.0 billion in 2010.  The net worth of the company had a net deficit of $4.6 billion as of December 31 reflecting the $1.9 billion loss and its payment to Treasury of $2.6 billion in senior preferred stock dividends during the fourth quarter compared to $2.5 billion in Quarter Three. The Federal Home Mortgage Finance Agency (FNFA), conservator of Fannie Mae, will submit a request to the Treasury Department for a draw of $4.57 billion to eliminate the net worth deficit.  In simple terms, Fannie Mae will cost taxpayers another $4.6 billion. That's not the worst of it. Taxpayers may be on the hook for still more losses as BofA Clash With Fannie Intensifies.

FHFA announces Pilot REO Bulk Sales Offer - From the FHFA: FHFA Announces Pilot REO Property Sales in Hardest-Hit Areas The Federal Housing Finance Agency (FHFA) today announced the first pilot transaction under the Real Estate-Owned (REO) Initiative, targeted to hardest-hit metropolitan areas — Atlanta, Chicago, Las Vegas, Los Angeles, Phoenix and parts of Florida. With this next step, prequalified investors will be able to submit applications to demonstrate their financial capacity, experience and specific plans for purchasing pools of Fannie Mae foreclosed properties with the requirement to rent the purchased properties for a specified number of years. Here is an over view of the properties being offered. The offer is for 2,490 Fannie Mae properties with a total of 2,854 units (some properties are 2, 3 and 4-units).What is surprising is that most of these units are already rented (85% of the units are rented) and almost 60% of the units on term leases (the rest are month-to-month). The original idea behind the REO-to-rental program was to sell vacant REO to investors and only in certain areas. These investors would agree to rent the properties for a certain period, and that would reduce the number of vacant units on the market (or coming on the market). This offer doesn't seem to match that goal.

FHFA: "Tremendous" interest in new HARP Refinance Program -  From Bloomberg: U.S. Refinancing Program Garners ‘Tremendous Borrower Interest,’ FHFA Says A program designed to help homeowners who have lost equity in their properties has generated “tremendous borrower interest,” said Edward J. DeMarco, acting director of the Federal Housing Finance Agency.  DeMarco made his comments in written testimony prepared for delivery tomorrow to the Senate Banking Committee.  The key to the new HARP program is the elimination of the representations and warranties on the original loan for the lenders. If the lenders can get borrowers to refinance (only loans owned or guaranteed by Fannie and Freddie), the lenders will no longer be responsible if the original loan defaults. This is important for the banks (these are well seasoned loans, so it makes sense for Fannie and Freddie too).

Housing regulator to hike mortgage fees - The Federal Housing Administration on Monday said it will hike fees on mortgages it insures as a means of limiting losses to its diminishing reserves, a cost that will be past on to borrowers raising the cost of homebuying, according to reports. The insurance fee FHA charges will rise by 75 basis points or 0.75 percentage points on most 30-year-mortgages, according to reports. Jaret Seiberg, analyst at Guggenheim Securities, said it will make it "that much more expensive" for first time homebuyers to enter the market. The new fee hikes are effective April 1. Read the full story:  FHFA chief DeMarco on defensive over refinancing

Buffett: Banks Victimized by Excesses of Ousted Homeowners - Warren Buffett, who controls the biggest shareholding of the No. 1 U.S. mortgage lender, said banks were victimized by some homeowners who refinanced their loans before getting evicted. “Large numbers of people who have ‘lost’ their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost,” Buffett, chairman and chief executive officer of Berkshire Hathaway Inc. (BRK/A), said Feb. 25 in his annual letter. “In these cases, the evicted homeowner was the winner, and the victim was the lender.” Foreclosures have claimed about 5 million homes since the property market began its slide in 2006. That has saddled lenders like Bank of America Corp. with defaults, vacated properties and lawsuits. Berkshire, whose stake in Wells Fargo & Co. (WFC), the largest U.S. mortgage lender, is valued at more than $11 billion, invested $5 billion in Bank of America last year. “It’s the mercenary side of Buffett,” “Rationally, it’s an interesting observation. But it ignores the huge human- cost side of the equation.”

Donovan Pressed on Foreclosure Fraud Settlement in Senate Banking Committee - HUD Secretary Shaun Donovan faced the Senate Banking Committee today, and he said that the foreclosure fraud settlement will shortly be made public. Democrats on the panel voiced support for efforts to help these underwater homeowners, while some Republicans took jabs at the recent $25 billion settlement between the government and the nation’s largest lenders over foreclosure abuses. Alabama Senator Richard Shelby, the leading Republican on the panel, suggested the settlement could be overly broad. “Homeowners who suffered no legal harm appear to be eligible for compensation,” he said. Donovan said court filings spelling out the terms of the settlement will be made public as soon as next week and will provide further clarity on who is being helped. This way of dealing with the settlement, where the initial announcement comes out in broad strokes with no details, only to follow up with a court filing weeks later, is terrible for accountability and transparency. If the public wants to see the settlement terms right now, they can’t. They only get a view of it after it goes into court, at which point nothing can be changed. There are a lot of names for that, but none of them sound like democracy.

Moody's Analytics Outlines Settlement Impact for Banks and Borrowers - After more than a year of intense negotiations, 49 state attorneys general and the nation’s five largest mortgage servicers reached a $25 billion settlement on February 9. While the agreement allotted specific amounts to go towards certain areas of relief for borrowers, including $10 million to write down principal on underwater mortgages, many are wondering how the decision between federal and state officials and the nation’s top servicers will impact the housing market. Moody’s Analytics released a report with an analysis of the settlement’s expected impact on banks and borrowers. Impact on banks As for the servicers included in the settlement – Bank of America, Wells Fargo, J.P. Morgan and Citigroup, and Ally Financial – the report stated, “the settlement will have little to no financial effect on the banks and will remove some of the uncertainty surrounding mortgage servicing.” More specifically, the report stated, “Bank of America, Wells Fargo, J.P. Morgan, and Citigroup have each publicly disclosed that the settlement will have little to no additional financial effect on the banks, outside of a modest reduction in interest income over the life of any modified loans.” This is in part due to the fact that “existing litigation and loan-loss reserves mostly cover the related costs” for the banks.

Banks Win Reprieve on Home Equity Loans in Settlement: Mortgages  -- Bank of America Corp., Wells Fargo & Co. and three other banks that settled a nationwide probe of foreclosure practices this month will get a bonus from the deal: protection for $308 billion of home-equity loans they hold. The banks that service about half the nation's mortgages on behalf of investors will be able to share losses on their junior loans with bondholders and get credit toward the cash they pledged to spend in the settlement, said an Obama administration official involved in drafting the $25 billion agreement. Second liens would typically be wiped out before senior-mortgage investors take a loss, said Laurie Goodman, managing director at Amherst Securities Group LP in New York. It's “a gift to the banks, at investors' expense,” . “A proportionate write-down of the first and second represents a reversal of normal lien priority.” Loss-sharing will break the logjam that occurs when banks drag their feet processing modifications on mortgages that outrank their junior liens, said the Obama official, who declined to be identified because this arrangement hasn't been made public. Government foreclosure-prevention programs have resulted in less than 1 million modifications, a quarter of the goal the administration set three years ago. Home-equity mortgages have been a reason for that, said Arthur Wilmarth, a professor at George Washington University Law School in Washington.

Foreclosure settlement a failure of law, a triumph for bank attorneys - After many months of wrangling, a foreclosure settlement1 has been reached between 49 state attorneys general and a consortium of banks.It is an epic failure of law and a triumph for bank attorneys. It will accomplish little of value, as I’ll explain. First, let’s recall what the “robosigning” foreclosure scandal was all about.  Foreclosure is an extremely serious issue in American jurisprudence. As a nation of laws with strong respect for property rights, we have always treated this process appropriately. After all, having a sheriff forcibly evict a family that typically made a down payment, moved into a home, lived there for some years, made payments, etc., is disruptive — for the family, the lender and the neighborhood.  Foreclosure laws vary from state to state. However, all are specific and precise as to the legal steps that must be followed, from the homeowner’s initial delinquency onward. There are benefits to giving the homeowner a chance to “cure their default.” It is in everyone’s interest for the homeowner to catch up if possible.

Corker to Donovan: How Will $26B Mortgage Settlement Impact People Saving for Retirement? - In a letter to Housing and Urban Development Secretary Shaun Donovan, U.S. Senator Bob Corker, R-Tenn., a member of the Senate Banking committee, requested information regarding how the $26 billion settlement with banks over improper foreclosure practices would impact Americans’ retirement savings. “I would like to know how the settlement will impact the retirement funds of millions of Americans who have 401(k) or pension plans that may be invested in mortgage securities. It appears that the draft proposal may allow losses from principal write downs to be borne by private mortgage investors who are investing on behalf of retirees and pensioners,” Corker wrote in his letter to Donovan. “While press coverage of this settlement and statements by the administration make it sound like the biggest banks are the ones paying into the $26 billion fund, it appears that the losses will actually be borne by private investors, which actually includes the savings of hard working public and private sector workers of all stripes like teachers, firefighters, computer programmers, nurses, among others. Using the funds of these individuals to provide principal reductions or cash payments to homeowners who did not pay their mortgage is un-American, and it is wrong…We absolutely must not shun the concerns of these investors, who are acting largely on behalf of savers and retirees, or we risk entrenching ourselves even further in a dangerous cycle of government dependence and taxpayer losses for mortgage credit.”

Bank deal dollars not enough - Wisconsin will see $140 million out of a $25 billion settlement over mortgage foreclosure abuses, but those who deal with foreclosures in Winnebago doubt it will make a significant dent in the hundreds of foreclosure actions that have been filed in the county each year since 2008. A majority of the money, according to the settlement, is allocated to programs to help struggling mortgage holders and those improperly foreclosed on by their lender. But real estate professionals, community developers and those involved in the foreclosure process themselves say there are few signs the rate of foreclosure filings will slow down, and help from the settlement will be a case of too little and too late for many struggling property owners. First Weber Realtor Dennis Schwab said the settlement is not likely to keep many homeowners who are thousands of dollars behind on their mortgage payments from falling into foreclosure. "It likely will only delay the inevitable," Schwab said. "What's $2,000 going to do in many of these cases?"

Pity the Poor Judges - Now that the 49 State AG settlement has immunized manufacturing evidence, forgery and perjury, it’s going to be a lot tougher to be a judge. After all, how can you ever rule on a motion based upon affidavits and documentary evidence if it’s now OK to lie and to manufacture phony documents? Will judges need to take courses in document forensics in order to rule on simple motions? Or will courts become even more clogged, because each affiant must be made to appear and confirm their own knowledge of the evidence in their affidavits or even that their own signature appears on the document? Will every motion now necessitate a mini trial? This settlement corrupts the court system completely. That or it bogs it down to a point where the cost of litigation, no bargain to begin with, will become out of reach of all but the billionaires.  Think about it, if every bit of testimony on every matter, including pre-trial motions, must be had live and in court to avoid perjured and forged documents; the costs of litigation increases by orders of magnitude. In that case, this settlement screws the banks themselves. Honest judges will no longer be able to accept their motions for Summary Judgment in foreclosure cases and will be forced to make the banks produce the affiants in court to testify from their own knowledge. Since these affiants are usually nowhere near the states where their affidavits are used, the travel costs alone will make the cost of foreclosing on an average house prohibitive.

Robosigning 2.0: Coming to a Foreclosure Review Near You -- Last October, I wrote a post entitled "Robosigning 2.0" that discussed some job ads for outsourced OCC foreclosure reviews.  I predicted based on the job ad qualifications that the foreclosure reviews would be nothing other than a whitewash. The OCC doesn't want anyone digging too deeply into the solvency of the major banks or into the mess they've made of the mortgage paperwork system. Well, now there's evidence that this is exactly what's going on.  he interview with this whistleblower is well worth reading. Put this one in the suspension of belief category:  Supervisors told his entire group that “Wells Fargo had submitted over 10,000 files to Promentory.  Only 4 were found to be in question, and upon final review by Wells, no harm was found.”  So, 10,000 homeowners submitted their complaints and all 10,000 were deemed to be models of perfection.

Abigail Field: Insider Says Promontory’s OCC Foreclosure Reviews for Wells are Frauds. Brought to You by HUD Sec. Donovan -U.S. Housing Secretary Shaun Donovan has embarrassed himself yet again. This time, though, he’s gone in for total humiliation. See, he praised the bank-run Office of the Comptroller of the Currency’s (OCC) foreclosure reviews as an important part of the social justice delivered by the mortgage “settlement“. But thanks to an insider working on an OCC review, we know that process is a sham. Worse, the insider’s story shows that enforcement of the settlement is likely to be similar, which is to say, meaningless. Doesn’t matter how pretty the new servicing standards are if the bankers don’t have to follow them. The full revelations of the temp hired, trained and supervised by Promontory Compliance Solutions, working on the Wells Fargo’s OCC independent foreclosure reviews project, are available as a Mandelman blog post and a Mandelman Podcast. But here’s a few highlights to show how rigged the process is:“I have found errors that should be moved up through the ranks, but am told “quit digging so deep”…”put your shovel away”…Focus on the questions “in scope”… The review forms are set up so no harm could ever be found. It’s equivalent of an attorney presenting his case to a judge with just 20% of the evidence.” and “The foreclosed victims don’t realize if they do not provide specific dates on the intake forms… their complaints are considered “general comments” out of scope.

Harris wants Fannie and Freddie to halt foreclosures - California Attorney General Kamala Harris is going after the two giant government-owned mortgage companies -- demanding that they push the pause button on home foreclosures. Harris is asking Fannie Mae and Freddie Mac to stop all home foreclosures for now. It would be a massive move, because between them, they own more than 60 percent of California mortgages. Earlier this month, Harris secured for California $18 billion out of a $26 billion settlement with five banks, to help underwater homeowners. Most of the money is slated to reduce the mortgage principle for underwater homeowners. Fannie and Freddie have so far balked at doing the same. Harris has written a letter to the Federal Housing Finance Agency -- which oversees Fannie and Freddie. Before foreclosing on another home, she wants the agency to do a full analysis -- and figure out if principle reduction would really help homeowners and save taxpayer money. She says the homeowners deserve at least that. Apparently, the agency has responded to the letter, but we don't yet know what that response said.

Pressure Grows on Fannie and Freddie to Cut Principal on Loans - California’s attorney general, Kamala D. Harris, has ratcheted up the pressure on Fannie Mae and Freddie Mac to allow debt reduction on their home loans by asking the mortgage finance giants to halt foreclosures in the state.  In a letter to Edward J. DeMarco, the regulator who controls Fannie and Freddie, Ms. Harris asked that foreclosures be suspended until his agency, the Federal Housing Finance Agency, completes a promised review of its policy forbidding debt reduction for delinquent homeowners who owe more than their home is worth.  Her letter, which was sent on Friday and disclosed on Monday, requests “a thorough, transparent analysis of whether principal reduction is in the best interest of struggling homeowners as well as taxpayers.”  Mr. DeMarco has come under increasing pressure to allow debt forgiveness, also called principal reduction, since the announcement of a multibillion-dollar foreclosure abuse settlement that requires banks to write down mortgage debt for some eligible homeowners. Loans backed by Fannie and Freddie — more than half of all outstanding mortgage loans — are not eligible for relief under the settlement.

Lawmakers To The Rescue? Legislation Filed To Fix “Ibanez” Foreclosure Title Defects - Finally, Massachusetts lawmakers have taken action to help innocent purchasers of foreclosed properties in the aftermath of the U.S. Bank v. Ibanez and Bevilacqua v. Rodriguez decisions, which resulted in widespread title defects for previously foreclosed properties. The legislation, Senate Bill 830, An Act Clearing Titles To Foreclosed Properties, is sponsored by Shrewsbury State Senator Michael Moore and the Massachusetts Land Title Association. Full text is embedded below. The bill, if approved, will amend the state foreclosure laws to validate a foreclosure, even if it’s technically deficient under the Ibanez ruling, so long as the previously foreclosed owner does not file a legal challenge to the validity of the foreclosure within 90 days of the foreclosure auction. The bill has support from both the community/housing sector and the real estate industry. Indeed, the left-leaning Citizens’ Housing and Planning Association (CHAPA), non-profit umbrella organization for affordable housing and community development activities in Massachusetts, has filed written testimony in support of the bill. Properties afflicted with Ibanez title defects, in worst cases, cannot be sold or refinanced. Homeowners without title insurance are compelled to spend thousands in legal fees to clear their titles. Allowing such foreclosed properties to sit and languish in title purgatory is a huge drain on individual, innocent home purchasers and the housing market itself.

Massachusetts, Florida Look to Wrap Up Foreclosure Due Process - As much as state and federal officials want to describe the foreclosure fraud settlement as a beginning, in many respects it was most certainly an ending. Analysts invested in the meme that “uncertainty” was crippling the housing market now are heavily invested in saying that the clearing of this uncertainty through the settlement will speed up the foreclosure machine. Diana Olick gives a version of that today which makes absolutely no sense, because all the data comes from the fourth quarter of 2011. But nevertheless, she’s on to something. With state AGs releasing liability for foreclosure fraud, legislators in some key states are picking up where they left off, removing additional barriers to foreclosure, shutting down due process and subverting the implications of judicial rulings.  For example, in Massachusetts, lawmakers have introduced a bill to indemnify buyers of foreclosed properties from title defects that have been exposed by the Ibanez case. But Massachusetts’ effort pales in comparison to the legalization of theft they’re trying down in Florida, one of the biggest states for foreclosures: A faster, significantly overhauled foreclosure process is close to becoming state law after legislators in the House approved the changes by a wide margin on Wednesday [...] The law would require homeowners to mount a stronger defense against foreclosure more quickly, providing for fewer initial hearings and less likelihood of slowing down a final judgment for lenders. It also empowers condominium and homeowners associations to push foreclosures along, shortens the time that banks can go after homeowners for the difference between the mortgage balance and what a foreclosed property sells for and requires stronger efforts to identify abandoned properties.

Yet Another Mortgage Scam: Homeowners Not Getting Cancelled Notes After Foreclosures, Hit by Later Claims - Yves Smith - As we’ve discussed the “where’s the note?” problem of mortgage securitizations, some readers who are old enough to have sold a home more than once have said that while they’d gotten a cancelled mortgage note back on their first sale, on a more recent one, they hadn’t. They were concerned, and as this post will show, they are right to be. By way of background, the popular press has done the public a disservice by talking about “mortgages”. A “mortgage” consists of two instruments: a promissory note, which is a IOU, and a lien against the property, which is referred to as a mortgage (in non-judicial foreclosure states, they are typically called a deed of trust and confer somewhat different rights, but we’ll put that aside for purposes of this discussion). What appears to be happening on all too often in Florida is that when borrowers signed warranty deeds in lieu of foreclosure when they can no longer keep these homes, they often get only a satisfaction of mortgage, not a cancelled note. This is not what is supposed to happen. When a borrower deeds his property to the bank, the objective of the exercise is to cancel the debt. If the note has not been extinguished, it is referred to as a “zombie note”. As the Fort Myers News-Press reported last year: Carol Kaplan, a spokeswoman for the Washington-based American Bankers Association, said leaving the note off the satisfaction of mortgage is “not a practice we’ve ever heard of.” Turns out that’s a bit disingenuous. The article quoted Jack Williams, resident scholar at the American Bankruptcy Institute and a bankruptcy professor at Georgia State University: “We saw something very similar to this in the debacle in the ’80s, people buying notes from the government and suing,” Williams said. “I won’t rule out that could happen again. They sold the note to collection agencies and law firms and places like that.”

Banks Colluding with Insurers to Rip Off Homeowners, Lawsuit Alleges - A class-action lawsuit in Florida that moved forward this week highlights a little-appreciated aspect of the housing market — the cozy relationship between banks and insurance companies that often results in overpriced home insurance for already struggling borrowers. As American Banker reported [1], a federal judge in Miami on Tuesday opened the door to a class action against Wells Fargo. More than 20,000 Florida homeowners can now sue Wells Fargo and an insurance company, QBE, for allegedly overcharging for insurance. More than $50 million in insurance premiums are at issue, according to American Banker. The suit itself, filed last year, is sealed, but the judge, Robert Scola, laid out the allegations [2] against Wells Fargo. The judge didn’t rule on the case but allowed it to go forward as a class action. In his decision, the judge cited the plaintiffs' claims that Wells Fargo and QBE “colluded in a scheme to artificially inflate the premiums charged to homeowners.” The judge also said Wells Fargo has actually threatened to retaliate against homeowners who join the suit.

Fannie Mae Serious Delinquency rate declines, Freddie Mac rate increases - Fannie Mae reported that the Single-Family Serious Delinquency rate declined in January to 3.90%, down from 3.91% in December. This is down from 4.45% in January 2011. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate increased to 3.59% in January, up from 3.58% in December. This is the fifth month in a row with a small increase in the delinquency rate. Freddie's rate is down from 3.82% in January 2010. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. These are loans that are "three monthly payments or more past due or in foreclosure". The serious delinquency rate has been declining, but declining very slowly. The recent uptrend for Freddie Mac would seem to require an explanation (I have none). The reason for the slow decline is most likely the backlog of homes in the foreclosure process due to processing issues (aka robo-signing), and with the mortgage servicer settlement, I'd expect the delinquency rate to start to decline faster.

For the Costliest Homes, Foreclosure Comes Slowly‏ - A new analysis for The Wall Street Journal shows that high-end homeowners are able to remain in their houses, without making payments, for far longer than those with smaller mortgages. Nationally, borrowers with loans of at least $1 million were in default for an average 792 days last year before banks repossessed their homes, according to an analysis by data provider Lender Processing Services. For loans under $250,000, the wait stood at an average 611 days—a difference of about six months. The numbers are current through November.

Why banks are reluctant to foreclose on expensive homes - The WSJ has an interesting if unsurprising article today, showing that expensive homes are less likely to be foreclosed on than cheaper homes. This stands to reason, of course. For all the talk of strawberry pickers buying McMansions at the height of the subprime bubble, expensive homes are much more likely to be owned by rich people than cheap homes are. And if a rich person owes a bank somewhere north of a million dollars, the bank is likely to be quite aggressive in attempting to get all of the money it’s owed, rather than simply letting the borrower walk away from their house. For a $200,000 house, by contrast, the cost of aggressively pursuing the homeowner is much less likely to be worth the marginal benefit. On top of that, there’s a reasonably liquid market for smaller homes — if you put them on the market in a fire sale, there’s a good chance that they will sell, quickly, for within $25,000 or so of their fair market price. In the million-dollar-plus range, however, homes stay on the market much longer, the discounts for fire sales are larger, there’s no real rental market, and the cost of maintaining the home while it’s unsold can be substantial.

Fannie Mae: REO inventory declines 27% in 2011 - This morning Fannie Mae reported results for Q4 and all of 2011. Fannie reported that they acquired 47,256 REO in Q4 (Real Estate Owned via foreclosure or deed-in-lieu) and disposed of 51,344 REO. This has been the pattern all year; Fannie has sold more REO than they acquired (acquisitions slowed because of the process issues, but dispositions picked up sharply in 2011). Here is a table for the last two years: This has been true for most lenders4 - they sold more REO than they acquired in 2011 - not just Fannie and Freddie. A common misperception is that when the lenders start foreclosing again at a higher level, that there will be a surge in REO sales. Fannie could increase acquisitions by 20%, and keep the sales pace the same, and their REO inventory wouldn't increase.  The following graph shows Fannie REO inventory, acquisition and dispositions over the last several years.  When the blue line is above the red line, acquisitions are higher than dispositions, and REO inventory increases. In 2011 the opposite was true, and REO inventory declined by 27% from Q4 2010. A few comments from Fannie:  Foreclosures generally take longer to complete in states where judicial foreclosures are required than in states where non-judicial foreclosures are permitted. The average number of days it took to ultimately foreclose ranged from a low of 391 days in Missouri, a non-judicial foreclosure state, to a high of 890 days in Florida, a judicial foreclosure state. As of December 31, 2011, Florida accounted for 30% of our loans that were in the foreclosure process.

FDIC-insured institutions’ 1-4 Family Real Estate Owned (REO) decreased in Q4 - The FDIC released the Quarterly Banking Profile today for Q4. The report showed that 1-4 family Real Estate Owned (REO) by FDIC insured institutions declined to $11.64 billion in Q4, from $11.9 billion in Q3 - and from $14.05 billion in Q4 2010. Using an average of $150,000 per unit would suggest the number of 1-4 family REOs declined from 79,335 in Q3 to 77,584 in Q4. Here is a graph of the 1-4 family REO carrying value for FDIC insured institutions since Q1 2003.  The left scale is the dollars reported in the FDIC Quarterly Banking Profile, and the right scale is an estimate of REOs using an average of $150,000 per unit. Using this estimate for the average per REO gives 77.6 thousand REO at the end of Q4.  Note: FDIC insured institutions have other REO and this is just the 1-4 family residential REO (other REO includes Construction & Development, Multi-family, Commercial, Farm Land). Of course this is just a small portion of the total 1-4 family REO. The FHA has already reported that REO declined sharply in Q4, and Fannie and Freddie are expected to report declines in REO later this week.

FHA to raise insurance premiums in April - The Federal Housing Administration will raise mortgage insurance premiums this April in order to repair the health of its emergency fund. The FHA upfront mortgage insurance premium will increase to 1.75% from 1% of the base home loan amount. This will apply regardless of the term or loan-to-value ratio beginning in April. The annual mortgage insurance premium will increase by 10 basis points for loans under the $625,500 limit beginning April 1 and by 35 bps for home loans above that amount starting in June, the FHA said Monday. Authority for these raises come under the payroll tax cut extension agreed to last fall. The FHA said the changes will boost the Mutual Mortgage Insurance Fund by $1 billion. The UFMIP can still be financed into the mortgage. The increase to the upfront premium will cost new borrowers roughly $5 more per month. Reverse mortgages and borrowers in special loan programs would be exempt from the changes, according to the FHA. FHA Commissioner Carol Galante said there would be upcoming insurance premium changes for the streamline refinance program. An FHA spokesman said these changes would be included in a letter to lenders due soon.

Pushing on a string of vacant homes - I HAVE been mulling over a paper presented at the University of Chicago's Monetary Policy Forum called, descriptively, Housing, Monetary Policy, and the Recovery. It's a nice analysis that proceeds in three main steps: defining the role of housing in most recoveries and comparing that to the present rebound, examining the interaction between monetary policy and housing markets, and testing whether monetary policy seems to have been more potent in places where the bust was less severe. On the first point, they present this useful table: It is interesting, however, in that housing is among the most interest-rate sensitive sectors in the economy; when a central bank slashes interest rate, it is in the expectation that one of the key channels through which this will boost the economy is by increased investment in housing.  Monetary easing makes homeownership more attractive by reducing mortgage costs, reducing the cost of housing relative to a rising price level, and through expectations of higher future home-price appreciation. Why might these effects not have materialised as in normal recoveries? A large physical overhang might be to blame. If the economy is saddled with many more homes than it actually needs, then even with a mortgage rate of zero new residential investments might be unattractive. The longer the recovery has gone on, however, the less binding this constraint is likely to have been. The authors reckon there is still a physical overhang in America. I'm not so sure.

CoreLogic: 11.1 Million U.S. Properties with Negative Equity in Q4 - CoreLogic released the Q4 2011 negative equity report today.  CoreLogic ... today released negative equity data showing that 11.1 million, or 22.8 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2011. This is up from 10.7 million properties, 22.1 percent, in the third quarter of 2011. An additional 2.5 million borrowers had less than five percent equity, referred to as near-negative equity, in the fourth quarter. Together, negative equity and near-negative equity mortgages accounted for 27.8 percent of all residential properties with a mortgage nationwide in the fourth quarter, up from 27.1 in the previous quarter. Nationally, the total mortgage debt outstanding on properties in negative equity increased from $2.7 trillion in the third quarter to $2.8 trillion in the fourth quarter. This graph shows the break down of negative equity by state.  From CoreLogic:  "Nevada had the highest negative equity percentage with 61 percent of all of its mortgaged properties underwater, followed by Arizona (48 percent), Florida (44 percent), Michigan (35 percent) and Georgia (33 percent). The second graph shows the distribution of equity by state- black is Loan-to-value (LTV) of less than 80%, blue is 80% to 100%, red is a LTV of greater than 100% (or negative equity). Note: This only includes homeowners with a mortgage - about 31% of homeowners nationwide do not have a mortgage.

Report: 22.8 Percent of U.S. Homes Are Underwater - The number of homes with negative equity, also known as underwater homes, went up for the 2011 fourth quarter to 11.1 million, or 22.8 percent, CoreLogic revealed in a release today. Third quarter numbers showed 10.7 million properties to be in negative equity, or 22.1 percent. Borrowers with less than 5 percent equity in their homes, also known as near-negative equity, stood at 2.5 million for the fourth quarter. In total, those with negative equity and near-negative equity equaled 27.8 percent of all residential properties. This figure was also up from the third quarter, when negative and near-negative equity had a combined totaled of 27.1 percent. Nationally, the total mortgage debt outstanding on underwater properties stood at $2.8 trillion in the fourth quarter, compared to $2.7 trillion in the previous quarter. “Due to the seasonal declines in home prices and slowing foreclosure pipeline which is depressing home prices, the negative equity share rose in late 2011,” . “The negative equity share is back to the same level as Q3 2009, which is when we began reporting negative equity using this methodology.” Fleming further explained that the high level of negative equity coupled with the inability to pay is the “double trigger” of default, but with the economic recovery, there should be a reduction in the “inability to pay trigger.”

Housing Still Drowning in Underwater Mortgages -- $715 billion is a lot of money. That’s the estimated amount of “underwaterness” hobbling the housing sector in the fourth quarter. A mortgage is considered underwater when the amount of the loan is larger than the value of the underlying property, resulting in a negative equity position for the owner. The more negative equity a homeowner has, the more likely the owner will default. The resulting foreclosures are a negative rippling through the entire recovery. As Federal Reserve Chairman Ben Bernanke told Congress this week, “problems in U.S. housing and mortgage markets have continued to hold down not only construction and related industries, but also household wealth and confidence.” According to mortgage-data firm CoreLogic, 11.1 million of homeowners had an underwater mortgage in the fourth quarter, representing a large 22.8% of all residential properties with a mortgage. The share has not come down much since the recovery started in 2009. Of those underwater borrowers, 6.7 million have only a primary mortgage, with an average negative equity of $51,000. Of the 4.4 million with first and second liens, the average amount is $84,000. According to CoreLogic, an estimated $715.3 billion in negative equity is floating throughout the housing market.

Twice as Many Lower Income Owners Sink Underwater - Moderate income to low income homeowners are twice as likely to be underwater on their mortgages, owing more than their homes are worth, making them much more vulnerable to default than those who bring home a bigger paycheck. The latest negative equity report from CoreLogic found that for low-to-mid value homes valued at less than $200,000, the negative equity share is 54 percent for borrowers with home equity loans, over twice the 26 percent for borrowers without home equity loans. Of the total $717 billion in aggregate negative equity, first liens without home equity loans accounted for $342 billion aggregate negative equity, while first liens with home equity loans accounted for $375 billion. Over $230 billion in negative equity is from homes valued at $200,000 or less. There were 8.8 million negative-equity conventional loans with an average balance of $269,000 that are underwater by an average of $70,000. There were 1.7 million underwater FHA loans with an average balance of $169,000 that are underwater by an average of $26,000.

12 States Where Homeowners Are Sinking Deeper Into Negative Equity - In the fourth quarter of 2011, 11.1 million residential properties with a mortgage were in negative equity, i.e. the property owners owed more on their mortgages than their property was worth. The figure is up from 10.7 million the previous quarter, according to latest data by CoreLogic. Of all residential properties with a mortgage, 22.8 percent were in negative equity, or underwater. CoreLogic's chief economist Mark Fleming said mortgages in negative equity as a share of all mortgages rose late in 2011 because of seasonal decline in home prices, and a slowdown in the foreclosure pipeline which also weighed on home prices: "The high level of negative equity and the inability to pay is the ‘double trigger’ of default, and the reason we have such a significant foreclosure pipeline. While the economic recovery will reduce the propensity of the inability to pay trigger, negative equity will take an extended period of time to improve, and if there is a hiccup in the economic recovery, it could mean a rise in foreclosures.” Using CoreLogic data, we ranked the 12 states that had the most underwater mortgages as a percentage of all mortgages. On average, the five worst states had an average of 44.3 percent of mortgages underwater, up from 41.4 percent the previous quarter.

Debunking the “Housing Has Bottomed” Meme - The normally astute Bill McBride of Calculated Risk has joined the chorus of cheerleaders to argue that an alleged decrease in housing inventory means that house prices are near their ethereal bottom. Living in W. Palm Beach, FL, the epicenter of the foreclosure crisis, it seems more likely that analytical ethics related to housing finance is the only element nearing a bottom, and only then because the home price pundits on which people like McBride rely can’t go much lower.  McBride uses data from the National Association of Realtors (NAR), analysis by Goldman Sachs, trends in completed foreclosures, and traditional seasonal housing patterns to make his case. My first inclination was to cross-reference whether the NAR data McBride relies on is before or after the NAR’s massive adjustment late December, when the real estate group admitted to overstating home sales by over one million in some years.  However, when I went to do preliminary research I found the NAR revised their post revision December sales estimate from +.5 percent to -.5 percent. I could almost hear them playing “Oops, we did it again,” as they wrote the press release. This group is so devoid of credibility nobody should use their estimates except maybe scholars writing about business ethics.

Case Shiller: House Prices fall to new post-bubble lows in December - S&P/Case-Shiller released the monthly Home Price Indices for December (a 3 month average of October, November and December).This release includes prices for 20 individual cities, two composite indices (for 10 cities and 20 cities) and the quarterly national index. From S&P: All Three Home Price Composites End 2011 at New Lows According to the S&P/Case-Shiller Home Price Indices Data through December 2011, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that all three headline composites ended 2011 at new index lows. The national composite fell by 3.8% during the fourth quarter of 2011 and was down 4.0% versus the fourth quarter of 2010. Both the 10- and 20-City Composites fell by 1.1`% in December over November, and posted annual returns of -3.9% and -4.0% versus December 2010, respectively. These are worse than the -3.8% respective annual rates both reported for November. With these latest data, all three composites are at their lowest levels since the housing crisis began in mid-2006.The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices The Composite 10 index is off 34.0% from the peak, and down 0.5% in December (SA). The Composite 10 is at a new post bubble low (both Seasonally adjusted and Not Seasonally Adjusted). The Composite 20 index is off 33.9% from the peak, and down 0.5% in December (SA). The second graph shows the Year over year change in both indices. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

December Prices Hit New Post-bust Lows - All three Case-Shiller price indices ended 2011 at new lows since the housing crisis began in mid-2006, wiping out all price gains achieved since 2002. The Case-Shiller national composite fell by 3.8 percent during the fourth quarter of 2011 and was down 4.0 percent versus the fourth quarter of 2010. Both the 10- and 20-city composites fell by 1.1′percent in December over November, and posted annual returns of -3.9 percent and -4.0 percent versus December 2010, respectively. These are worse than the -3.8 percent respective annual rates both reported for November. In addition, 18 of the 20 MSAs saw monthly declines in December over November. Only Miami and Phoenix were up, 0.2 percent and 0.8 percent, respectively. At -12.8 percent Atlanta continued to post the lowest annual return. Detroit was the only city to post a positive annual return, +0.5 percent in December versus the same month in 2010. In addition to the three composites, Atlanta, Las Vegas, Seattle and Tampa each saw average home prices hit new lows. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 4.0 percent decline in the fourth quarter of 2011 over the fourth quarter of 2010. In December, the 10- and 20-city composites posted annual rates of decline of 3.9 percent and 4.0 percent, respectively.

Housing Prices Dip For the Fourth Time in Three Years - After the Great Recession, there were some pundits who theorized that real estate would make a “W-shaped” recovery. With the S&P/Case-Shiller housing prices out this morning, it’s now clear that there are not one, but two “Ws” in the chart — and that’snot a good thing. Index prices fell 1.1% from November to December. In other words, we’ve now experienced a quadruple dip. That’s the bad news. The good news is that the market oscillations we’ve been seeing over the past three years are contained in a fairly narrow band. While the index is technically at its lowest level in five years, it really hasn’t been bouncing around that much compared to the collapse of 2006-2008. In fact, at any time in the past three years, you could have said that “the housing market is at 2003-2004 prices” and you would have been right. In other words, in 2006, real estate prices were a boxer that got knocked out and hit the mat, hard. The past three years have been a story of watching him struggle to get up again and fail repeatedly. He’s on his knees, but at least he hasn’t fallen to the floor again, either. Currently, the 20-City Case-Shiller index is down 33.8% from peak housing prices in the summer of 2006. That puts it back at the levels of mid-2003.

A Look at Case-Shiller by Metro Area - S&P/Case-Shiller reported that its indexes ended 2011 at new lows. The national composite, which covers the entire country and is only released on a quarterly basis, was down 4% from a year earlier and fell 3.8% in the fourth quarter compared with the third. The composite 20-city home price index, a key gauge of U.S. home prices, dropped 1.1% in December from the previous month and fell 4% from a year earlier. Eighteen cities posted monthly declines, with just Phoenix and Miami showing increases. Nineteen of the 20 cities posted annual declines in December, with just Detroit notching a gain. On a seasonally adjusted basis, which aims to take into account the slower selling season in the winter, things looked a little better. The overall 20-city index was down 0.5% from the previous month, and just 12 cities posted monthly declines. Although the housing market has been showing some signs of stabilization, prices continue to be under pressure. “We suspect we will see a bottom forming over the first half of this year as jobs and a host of other underlying metrics point to firmer conditions. In real terms, however, home prices will fall again in 2012 as more supply from a bulging shadow inventory tests the markets ability to absorb it.”See a sortable table of home prices in the 20 cities in the Case-Shiller index. Read the full story. Read the full S&P/Case-Shiller release.

Housing Prices at 2002 Levels - We’re about four years into every Mark Zandi and Mark Zandi-wannabe pointing to this or that green shoot and predicting the great housing comeback. It hasn’t happened. It’s not going to happen for some time. If anything, the rock-bottom mortgage financing rates are starting to go away out of necessity. This uptick will blunt the effectiveness of HARP refinancing when it, supposedly, comes on line in March. Anyway, that’s more of a stimulus measure than a housing policy. Another housing policy, the sale of foreclosed properties to investors, designed to remove supply, is moving extremely gingerly, and the first batch of properties up for bid aren’t even vacant, for the most part, so that does nothing to reduce supply. There’s been no change whatsoever to unlock the private mortgage finance market, so Fannie and Freddie remain the only secondary market player willing to take on risk. Higher underwriting standards (thankfully) persist. The Administration’s programs have done more harm than good, and principal reductions from the foreclosure fraud settlement, if the banks even go that route, are many months away. Of course, this is supposed to be a recovery, and when those supports eventually get kicked out – not to mention the drag on fiscal policy that begins in FY2013 – the housing market’s continued sluggishness will be a lead weight on getting the economy moving. That’s what people overlook when they talk about the settlement. This is not just about seeking justice and relief, though that’s part of it. The systematic fraudulent activities carried out by the banks broke the largest market in the world. And nothing that has been done has healed it. Not even close

Real House Prices and Price-to-Rent fall to late '90s Levels - Case-Shiller, CoreLogic and others report nominal house prices. It is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices, and the price-to-rent ratio, are back to late 1998 and early 2000 levels depending on the index. The first graph shows the quarterly Case-Shiller National Index SA (through Q4 2011), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through December) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to Q3 2002 levels, the Case-Shiller Composite 20 Index (SA) is back to January 2003 levels, and the CoreLogic index is back to February 2003. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to Q4 1998 levels, the Composite 20 index is back to March 2000, and the CoreLogic index back to December 1999. This graph shows the price to rent ratio (January 1998 = 1.0). On a price-to-rent basis, the Case-Shiller National index is back to October 1998 levels, the Composite 20 index is back to March 2000 levels, and the CoreLogic index is back to December 1999.

House Prices and Future Contracts - From HUD: Housing Scorecard:The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of the Treasury today released the February edition of the Obama Administration's Housing Scorecard. This monthly housing report is an overview of the U.S. housing market, and has data (and sources) for prices, inventory, foreclosures, modifications and much more. One of the graphs shows house prices (using Case-Shiller composite 20 NSA) and future expectations of house prices from two different points: January 2009 and current. From the report: The dark blue line is actual prices using the Case-Shiller Composite 20 index (NSA). The light blue dashed line shows the market expectations for the Case-Shiller index as of January 2009. Expectations in January 2009 were for prices to fall further, and for prices to bottom at the beginning of 2011 (prices didn't fall as far as expected, and, as of December 2011 (the most recent Case-Shiller report), still haven't bottomed. The darker blue dashed line is current expectations for the Case-Shiller index. Investors now think the Case-Shiller composite 20 index has bottomed.

Is Housing an Attractive Investment? - In a previous report, Headwinds for Housing, I examined structural reasons why the much-anticipated recovery in housing valuations and sales has failed to materialize. In Searching for the Bottom in Home Prices, I addressed the Washington and Federal Reserve policies that have attempted to boost the housing market. In this third series, let’s explore this question: is housing now an attractive investment? At least some people think so, as investors are accounting for around 25% of recent home sales. Superficially, housing looks potentially attractive as an investment. Mortgage rates are at historic lows, prices have declined about one-third from the bubble top (and even more in some markets), and alternative investments, such as Treasury bonds, are paying such low returns that when inflation is factored in, they're essentially negative. On the “not so fast” side of the ledger, there is a bulge of distressed inventory still working its way through the “hose” of the marketplace, as owners are withholding foreclosed and underwater homes from the market in hopes of higher prices ahead. The uncertainties of the MERS/robosigning Foreclosuregate mortgage issues offer a very real impediment to the market discovering price and risk. And massive Federal intervention to prop up demand with cheap mortgages and low down payments has introduced another uncertainty: What happens to prices if this unprecedented intervention ever declines?

Warren Buffett Says “Hormones” Will Fix the Housing Crisis - Last week, Warren Buffett made some news with his folksy, charming as always shareholder letter.  Most people focused on his admission that he was wrong about the housing crisis.   Buffett pointed to his year ago statement that “a housing recovery will probably begin within a year or so.”  And he said, graciously, that this prediction “was dead wrong.”  Buffett is a very important man, not just because of his immense wealth, but because he has the ear of policy-makers and the President.   Buffett’s advice to the President over the past few years has been that America built too many homes, and that the country is working through this excess supply naturally.  Eventually, that will lead the economy to turn around (a thesis Joe Weisenthal has tracked for months now in the data).  Here’s what he has to say about the housing sector today. This hugely important sector of the economy, which includes not only construction but everything that feeds off of it, remains in a depression of its own. I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy. That devastating supply/demand equation is now reversed: Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while “doubling-up” may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure. Essentially, he argues that household formation is artificially low, and that this will naturally be cured by hormones, as it has in the past.  Only, the lack of family household formation is actually a new phenomenon.

Buffett's Views on Housing - Housing will come back – you can be sure of that. Over time, the number of housing units necessarily matches the number of households (after allowing for a normal level of vacancies). For a period of years prior to 2008, however, America added more housing units than households. Inevitably, we ended up with far too many units and the bubble popped with a violence that shook the entire economy. That created still another problem for housing: Early in a recession, household formations slow, and in 2009 the decrease was dramatic. That devastating supply/demand equation is now reversed: Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while “doubling-up” may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.  At our current annual pace of 600,000 housing starts – considerably less than the number of new households being formed – buyers and renters are sopping up what’s left of the old oversupply. While this healing takes place, however, our housing-related companies sputter, employing only 43,315 people compared to 58,769 in 2006. This hugely important sector of the economy, which includes not only construction but everything that feeds off of it, remains in a depression of its own. I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy.

Foreclosures made up one in four home sales -- Homes in some stage of foreclosure accounted for nearly one in four homes sales during the fourth quarter, according to RealtyTrac.  During the three months that ended December 31, homes that were either bank-owned or going through the foreclosure process accounted for 24% of all home sales, up from 20% in the previous quarter and down only slightly from a year earlier when foreclosures accounted for 26% of sales, RealtyTrac said.  In total, 204,080 distressed properties were purchased during the fourth quarter, down 2% from the year-ago quarter. For all of 2011, foreclosure-related sales were down 2% year-over year to 907,138, accounting for 23% of all home sales.  "Sales of foreclosures in the fourth quarter continued to be slowed by questions surrounding proper foreclosure paperwork and procedures," said Brandon Moore, chief executive officer of RealtyTrac, referring to the delays cause by the robo-signing scandal that broke in late 2010. "Even so, foreclosures accounted for nearly one in every four sales during the quarter and for the entire year."

Smith/Yglesias Thesis in One Chart - Bill McBride – who strikes a more Smithian tone by the day – delivers one chart that shows the core observation I made over a year ago now. Probably my most concise early statement comes from a guest blog I did at the Atlantic. I’ve argued that whatever its flaws might have been, the subprime boom should be viewed as a technological innovation that allowed millions of households to switch out of the market for mutli-family homes and mobile homes and into the single family market. This drove both a switch in the type of construction and pushed up the price of existing single family homes. Yet, even more important for understanding the current state of the economy is appreciating that while the increase in home building during the boom was not historic, the collapse in homebuilding has been. For several years now the United States has been building fewer homes than any single month in the 40 years proceeding. And remember time-to-build. Not many homes will be completed in 2012 either because not many were started in 2011. Perhaps not as deep of a record low as 2011 was but still completion this year will be dramatically low by historical standards, running, well over a million homes below the long run average.

Vital Signs: Home Resales Rising - Sales of previously occupied homes rose in January, the latest sign of a possible gradual recovery in the moribund housing market. Existing-home sales rose 4.3% from December to a seasonally adjusted annual rate of 4.57 million units, the National Association of Realtors said. While low historically, the pace was the highest since May 2010, when sales were boosted by tax credits.

Vital Signs: New Home Sales - Sales of new homes in the U.S. slipped in January, after climbing for several months. Sales declined 0.9% from December to a seasonally adjusted annual rate of 321,000. However, January’s sales were 3.5% higher than a year ago. The recent decline could reflect buyers opting for less-expensive previously occupied homes rather than new ones as Americans’ wages and the overall economy grow modestly.

NAR: Pending home sales increase in January - From the NAR: January Pending Home Sales Rise, Market on Uptrend The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 2.0 percent to 97.0 in January from a downwardly revised 95.1 in December and is 8.0 percent higher than January 2011 when it was 89.8. The data reflects contracts but not closings. The January index is the highest since April 2010 when it reached 111.3 as buyers were rushing to take advantage of the home buyer tax credit. December was revised down from 96.6, so most of the 2% increase was due to the downward revision. Without the downward revision, this was below the consensus of a 1.5% increase. Contract signings usually lead sales by about 45 to 60 days, so this is for sales in February and March.

2011: Record Low Placements of Manufactured Homes, and Record low Total Completions - Last week the Census Bureau released the placements of manufactured homes in December and for all of 2011. Placements were at 3.4 thousand in December, and at a record low of 46.0 thousand for all of 2011. Although the manufactured home data only goes back to 1980, it is pretty clear that total housing completions (single and multi-family) and manufactured home placements were at record low levels since at least the early '60s. Here is a table of the worst years on record:Unfortunately there is no timely count of household formation, so it is hard to tell how quickly the excess supply of housing is being absorbed.  Note: Household formation is a function of changes in population, and also of changes in household size. We can't directly compare the level of total completions in the '00s to the '70s or '80s - we need to know the number of households being formed. This graph shows total housing completions and placements since 1980. The net additional to the housing stock is less because of demolitions and destruction of housing units. Although we don't know the exact number, it is pretty clear that there are more households being formed than housing units completed last year - and the excess supply is being absorbed.

Consensus Housing Forecast for 2012: 700,000 starts - I guess we can call this the "consensus" forecast for housing starts, from the NABE: NABE Outlook February 2012 Housing starts are expected to increase 19 percent in 2012. The economists surveyed expect housing starts to reach 700,000 units in 2012, up from 610,000 in 2011 and an upward revision from the November forecast. The forecast for 2013 shows continued improvement, with housing starts reaching 850,000 units. Correspondingly, real residential investment is forecast to increase 6.6 percent in 2012, slightly higher than the 4.3 percent predicted in November, and then strengthen further, rising 10 percent in 2013. The projection for home prices in 2012 was lowered slightly from a projected increase in the FHFA index of 0.9 percent (Q4/Q4) in the November survey to home prices remaining unchanged in the February survey. In 2013 home prices are expected to increase slightly more than 2 percent. Here was housing economist Tom Lawler's forecast for 2012.  The following table shows several forecasts for 2012:

Construction Spending declines slightly in January - This morning the Census Bureau reported that overall construction spending declined slightly in January:  The U.S. Census Bureau announced today that construction spending during January 2012 was estimated at a seasonally adjusted annual rate of $827.0 billion, 0.1 percent (±1.1%)* below the revised December estimate of $827.6 billion. The January figure is 7.1 percent (±1.8%) above the January 2011 estimate of $772.0 billion. Private construction spending was unchanged in January: Spending on private construction was at a seasonally adjusted annual rate of $538.7 billion, nearly the same as (±1.1%)* the revised December estimate of $538.7 billion. Residential construction was at a seasonally adjusted annual rate of $253.6 billion in January, 1.8 percent (±1.3%) above the revised December estimate of $249.2 billion. This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Private residential spending is 62.5% below the peak in early 2006, and up 13% from the recent low. Non-residential spending is 31% below the peak in January 2008, and up about 17% from the recent low. Public construction spending is now 11% below the peak in March 2009. The second graph shows the year-over-year change in construction spending. On a year-over-year basis, both private residential and non-residential construction spending are positive, but public spending is down slightly on a year-over-year basis. The year-over-year improvements in private non-residential are mostly due to energy spending (power and electric).

There is No Shortage of Rental Housing and Rents Are Not Rising Rapidly - The NYT told readers that a shortage of rental housing is driving up rents. This is wrong and wrong. The NYT story is that the flood of foreclosures has forced people out of their homes and led them to look for rental housing. While this is true to some extent (homeownership rates have fallen), former homeowners would have discovered that there was a glut of rental housing. Furthermore, ownership units can become rentals and vice-versa. This is true even for multi-family units, but 30 percent of rental properties nationwide are single family homes. These obviously can be converted very quickly to ownership units or more have been ownership units in the recent past. So, if we look at the data on rental vacancy rates, we find that in the fourth quarter of 2011 the vacancy rate was 9.4 percent. This is down from the peak of 11.1 percent in the third quarter of 2009, but it is higher than any rate recorded in the 50s, 60s, 70s, 80s, or 90s.

When Housing Goes Critical - This graph – again from Bill McBride – shows us how in general terms housing is close to a criticality. You can see that price-to-rent is approaching multi-decade lows. However, 30 year real interest rates are also near mulit-decade lows. If housing were homogenous and there weren’t significant and idiosyncratic transactions costs involved in renting out single family units, you would see a genuine criticality. One month there would be lots of “excess supply” then it would cross a line and boom within-in days it would all be sold to investors. The gritty nature of housing, renting and the loan market means that this can’t happen. But, you can none-the-less have a very rapid acceleration where it seems like nothing is happening and then all of a sudden everything is happening at once.

More households are spending more than half of their income on housing - According to the new Housing Landscape 2012 report from the Center for Housing Policy, nearly one in four working households spends more than 50 percent of its income on housing. Let that sink in for a moment. The new report, based on the latest data from the American Community Survey (2010), took a look at the housing costs for working households – those earning up to 120 percent of their area median income and who worked at least 20 hours each week. The picture is not good. The percent of severely burdened households increased significantly between 2008 and 2010, driven in large part by low-income renters. They saw the costs of renting increase by 4 percent during those two years, even while their incomes declined. Twenty-four states and nineteen metro areas also saw their rates of housing cost burden increase, while the number that declined can be counted on one hand (with a couple of fingers left over). The underlying causes are lower employment, lower incomes and, for most, increased costs. Homeowners present some exceptions to this latter case, but only if they’ve taken advantage of the down market and been able to refinance or purchase at newly lower prices. Many have not had those opportunities. For many more details, check out the report in its entirety at

Nearly 1 in 4 Households Use Over 1/2 of Income for Housing Costs - Even with falling home prices, a study from the  Center for Housing Policy found that affordability is still becoming increasingly out of reach for homeowners and renters. According to the 2012 Housing Landscape report released by the Center, the share of working households paying more than half their income for housing between 2008 and 2010 went up from 21.8 percent to 23.6 percent. As home prices dropped between 2008 and 2010, working homeowners also dealt with shrinking paychecks. For working homeowners over the two-year period, incomes dropped twice as much as housing costs, according to the study. This was primarily due to a drop in average hours worked among moderate-income homeowners. “The data show that homeowners have been hit hard by the housing crisis in more ways than just lost equity,” Lubell explained. “Many working homeowners have been laid off or had their hours cut.” According to the study, the monthly median income for working homeowners’ fell from $43,570 in 2008 to $41,413 in 2010, which is about a 5 percent decrease. The median number of hours worked per week dropped from 50 to 48 between the two years, which partly explains the decrease in income. For renters, the monthly median income fell 4 percent from $31,570 to $30,229 between the two years. Housing costs for renters also increased, up by 4 percent over the same period

Time-to-Build and Household Formation in US - I’ve seen some commentary questioning when new home sales are going to turn northward and whether or not that’s key sign for the recovery. Yet, there is one thing we can say for nearly certain – New Home Sales aren’t going to hit records anytime soon. How can we be so sure? Because there aren’t any new homes to sell !!! What’s more with completions running just above sales, the number of new homes for sales is likely to decline in coming months. This in turn implies that new sales only have so far Northward to go. The market for new houses more or less clears in the sense that the homes for-sale run at roughly the rate of homes being purchased. However, what that implies is that changes in household formation will show up as a reduction in new home building – exactly what a competitive market should do. On the other hand slowdowns in household formation will result in an overhang of existing homes, as people move out – or are pushed out – of their existing home and into the arms of relatives. So as always the key driver is household formation. As it picks up the overhand will fall and new home sales will pick up. But neither of the two are pushing on each other. They are both being pushed on by household formation.

Student Debt a Factor in Preventing Housing Recovery - In discussing Warren Buffett’s claim that housing will come back simply due to structural factors (he calls it “hormones”), Matt Stoller makes the point that the significant drop in household formation is a new phenomenon. Only three years since 1947 have shown a negative household formation, and they include three of the past four years – 2008, 2010, and 2011. Matt has a hypothesis for this: And what is behind this lack of household formation? There are possibly many reasons, but one sure driver is student debt. The average college graduate now carries $25k in student debt after graduation. It’s no surprise that young people aren’t buying homes, but are increasingly renting and doubling up with others. “According to a recent Federal Reserve study, only 9 percent of 29- to 34-year-olds got a first-time mortgage from 2009 to 2011, compared with 17 percent 10 years earlier.” Let’s go over to the link Matt provides and look at the connection between student debt and home sales. It turns out that even six-figure income earners cannot qualify for a mortgage because of liabilities with student debt. And unless a family has significant means, the students cannot come out of college debt-free anymore, given the economics of higher education.

The End of Ownership - When older generations wonder what's the matter with Millennials, they often judge their younger cohorts against such financial and social benchmarks as finding a job, getting married, and buying a home. These observations often come wrapped in weak science -- "blame Facebook for their indolence" -- or dripping with judgment -- "blame their parents for making them weak." The science is weak, but the observations are true. Fewer young people are finding jobs. Fewer young people are getting married. Fewer young people are buying homes. Between 1980 and 2000, the share of late-twenty-somethings owning homes had declined from 43% to 38%. The share of early-thirty-something home owners slipped from 61% to 55% in that time. After the boom and bust were over, both rates kept falling. The rate of young people getting their first mortgage between 2009 and 2011 was chopped in half from just 10 years ago, according to a recent study from the Federal Reserve.  One headwind is student debt. "Close to $1 trillion, America's mounting pile of outstanding student debt is a growing drag on the housing recovery, keeping first-time home buyers on the sidelines and limiting the effectiveness of record-low interest rates," Bob Willis reported in Bloomberg Businessweek

Why the Rent Is Too Damn High - There are two housing markets in the United States: the owner-occupied market and the rental market. Since most people live in houses they own and since renters are disproportionately poor and young, media coverage tends to treat the market for owner-occupied housing as “the” housing market. But the rental market is still a big piece of the overall economy, and unlike the owner-occupied housing market, it’s primed for a boom. Let’s start with the basic facts. National average rents are way up from their recession lows. At the same time, prices for owner-occupied housing have been basically stagnant for years after plunging when the bubble popped. As a result, the purchase-price to rent ratio has fallen about as low as it ever gets. On the other hand, owning is risky. If the value of your house goes up, you make money, but if it goes down, you may end up owing the bank more money than your place is worth. But people don’t vanish just because they don’t want to buy a house. The collapse in house-building since 2006 has been massive. Meanwhile, the population has kept on growing. The only reason we have enough space for everyone to live in is that so many broke young people are living with their parents. According to a recent Goldman Sachs analytic note, during the past four years, America has added 2.7 million “shadow” households—young people living with parents or siblings who under normal conditions we’d expect to be heading their own households.

Consumer Debt Falls on Less Mortgage Borrowing Total consumer debt levels fell 1.1% to $11.53 trillion in the fourth quarter of 2011 compared to the prior quarter, largely due to developments in the housing market, a report from the Federal Reserve Bank of New York said Monday. Bloomberg NewsThe figure released by the bank included mortgage-related borrowing, which by itself fell by 1.6% in the quarter. The bank noted household mortgage debt is now 11% under its peak level. With housing related borrowing taken out of the mix, consumer debt levels with mortgages and home equity loans stripped out rose by 0.8% in the fourth quarter to $2.635 trillion. The New York Fed said that those with credit-related troubles fell. Total delinquency rates moved to 9.8% of total outstanding debt from 10% in the third quarter. The bank noted $1.12 trillion in consumer debt is delinquent; some $824 billion is deemed “seriously delinquent.” The report found housing related borrowing remained a troubled arena for households. While the fourth quarter level is 35.3% under its fourth quarter 2010 peak, there was nevertheless a 9.5% increase in the last three months of 2011 for those with a foreclosure noted on their credit record.

NY Fed: Delinquent Debt Shrinks while Real Estate Debt Continues to Fall - From the NY Fed: Delinquent Debt Shrinks while Real Estate Debt Continues to Fall Quarterly Report on Household Debt and Credit4. Here are two graphs:  The first graph shows aggregate consumer debt5 decreased slightly in Q4. From the NY Fed:  Aggregate consumer debt fell slightly in the fourth quarter. As of December 31, 2011, total consumer indebtedness was $11.53 trillion, a reduction of $126 billion (1.1%) from its September 30, 2011 level. Mortgage balances shown on consumer credit reports fell again ($134 billion or 1.6%) during the quarter; home equity lines of credit (HELOC) balances fell by $12 billion (1.9%). Household mortgage and HELOC indebtedness are now 11.0% and 11.7%, respectively, below their peaks. Consumer indebtedness excluding mortgage and HELOC balances again rose slightly ($20 billion or about 0.8%) in the quarter. Consumers’ non-real estate indebtedness now stands at $2.635 trillion. Student loan indebtedness rose slightly, to $867 billion.The second graph shows the percent of debt in delinquency. In general, the percent of delinquent debt is declining, but what really stands out is the percent of debt 90+ days delinquent (Yellow, orange and red). The percent of seriously delinquent loans will probably decline quicker now that the mortgage servicer settlement has been reached.

The Relentless Household Deleveraging In Charts -  While the narrower spreads in Europe created the unintended consequence of perversely reducing the urgency for banks to delever their over-stuffed balance sheets (and in fact in many cases likely make them worse thanks to the ECB), the US Household continues to (sensibly) slowly but surely reduce their leverage. As today's Bloomberg Brief notes though, the slow pace of deleveraging will continue to weigh on growth over the next few years - even as they have drawn down debt as a percentage of personal income from its peak in June 2009 at 114.76% to 101.1% at the end of 2012. There is a long way to go to the apparent Maginot line of supposedly sustainable 90% and with wage growth stagnant, the bulk will come from debt reduction in true balance-sheet-recession style - putting still more pressure on a perniciously polarized government to do anything about it. While progress has been made, there is still a long way to go for the US Household to get to supposedly sustainable levels of debt to personal income... ...and it seems there is no interest in ramping up the spending that we do not have as credit card accounts remain dramatically lower than pre-debt super-cycle peaks...

Towards a Creditor State – One in Seven Americans Pursued by Debt Collectors - I went through the Federal Reserve’s Quarterly Release on Household Debt and Credit released today, and there were two notable trends.  One is that the amount of consumer debt is declining, but that delinquency rates are stabilizing above what they were before the crisis.  And the second is in this graph, which is that the number of people subject to third party collections has doubled since 2000, from a little less than 7% to a little over 14% of consumers.  Ten years ago, one in fourteen American consumers were pursued by debt collectors.  Today it’s one in seven. The experience of debt collection can be chilling, as this 2007 ABC News report suggests. Consumers around the country have taped threatening phone calls from collectors who have called in the middle of the night, used abusive language and have threatened to have people fired from work or thrown in jail.  All of these tactics are illegal under federal law. One of the characteristics of the new social contract ushered in by both George W. Bush and Barack Obama is the increasing power of creditors to govern outright, from tax farming by banks to the use of credit checks to access employment opportunities. There are now thousands of people legally jailed because they aren’t paying their bills, ie. debtor’s prisons have returned.  Occasionally elites let it slip that this is not an accident, but is their goal – former Comptroller General David Walker has wistfully pined for debtor’s prisons overtly (on CNBC, no less).

US February Consumer Confidence Rises to One-Year High  -- Confidence among U.S. consumers rose in February to the highest level in a year, showing households may sustain spending and drive the economy. The Conference Board’s index increased more than forecast, to 70.8 from a revised 61.5 in January, figures from the New York-based private research group showed today. Economists predicted the gauge would climb to 63, according to the median estimate in a Bloomberg News survey. A drop in firings, bigger payroll growth and higher stock prices are supporting consumer sentiment and may spur the spending accounting for about 70 percent of the economy. Americans were more upbeat about job and income prospects in February, helping allay concerns tied to a 44-cent jump in the price of a gallon of gasoline so far this year. “The consumer feels better,” . “Gas prices are certainly a worry for folks, but you don’t want to discount the fact that the labor market continues to have legs.”

Personal Income increased 0.3% in January, Spending 0.2% - The BEA released the Personal Income and Outlays report for January:  Personal income increased $37.4 billion, or 0.3 percent ... in January, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $23.2 billion, or 0.2 percent. Real PCE -- PCE adjusted to remove price changes -- increased less than 0.1 percent in January, in contrast to a decrease of less than 0.1 percent in December. ... The price index for PCE increased 0.2 percent in January, compared with an increase of 0.1 percent in December. The PCE price index, excluding food and energy, increased 0.2 percent, compared with an increase of 0.1 percent. The following graph shows real Personal Consumption Expenditures (PCE) through January (2005 dollars). PCE increased 0.2% in January, and real PCE increased less than 0.1%.  Note: The PCE price index, excluding food and energy, increased 0.2 percent. The personal saving rate was at 4.6% in January.

U.S. January Consumer Spending, Personal Income Rise Less Than Estimated - Consumer spending in the U.S. rose less than forecast in January after little change the previous month, showing a lack of improvement in the biggest part of the economy. Purchases climbed 0.2 percent, while incomes increased 0.3 percent, Commerce Department figures showed today in Washington. The median estimate of economists surveyed by Bloomberg News called for a 0.4 percent increase in spending and a 0.5 percent rise in incomes. Warmer weather may have restrained spending on services such as utilities. .Households, whose spending accounts for about 70 percent of the world’s largest economy, may be reluctant to increase purchases as gas prices continue to climb and home prices keep falling. Bigger gains in employment and wages may be needed to give consumers the confidence to boost spending.

Personal Consumption Expenditures: Price Index Update - The monthly Personal Income and Outlays report was published today by the Bureau of Economic Analysis. The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation.  The latest Headline PCE price index YOY rate of 2.36% is a decrease from last month's 2.55%. The Core PCE index of 1.88% is a decrease from the previous month's 1.91%.  I've calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But PCE is a key measure of inflation for the Federal Reserve, and the price increase in oil and gasoline, although now well off their interim highs, puts consumer behavior in the spotlight.  In the past, a core PCE range of 1.75% to 2% is generally mentioned as the target for the Federal Reserve's price-stability mandate. However, the Fed has now explicitly identified 2% as the long-term target:

Income Revisions Suggest Consumers Have More Cash - More domestic demand, less stockpiling. It’s a win-win situation for the economic outlook and the Federal Reserve. The Bureau of Economic Analysis took a second look at the data and decided real gross domestic product grew faster in the fourth quarter than previously thought: at a 3.0% annualized rate versus 2.8%. While upward revisions to growth are always welcome, the GDP report contained two even more important pieces of new information that are positive for early 2012. One, the mix of GDP sectors now more favors future production gains and, two, consumers had more income than originally thought. According to Wednesday’s report, consumer and business spending were a bit stronger last quarter than first thought, while inventory growth was slightly slower. While the changes were small, the mix means inventories and sales are better balanced. Instead of satisfying customers by pulling goods out of warehouses, businesses will be ordering new merchandise and supplies, supporting further production and hiring gains. Consumers spent more because it turns out they had more cash to spend. Personal income in the third and fourth quarters were revised up so that income at the end of 2011 was almost $100 billion higher than first thought. The new-found money went both to increased spending and higher savings.

"Real" Disposable Income Per Capita: No Growth for 20 Months - Earlier today I posted my monthly update of the year-over-year change in the Bureau of Economic Analysis (BEA) Personal Consumption Expenditures (PCE) price index since 2000. My focus was on the PCE index as a measure of inflation. Now let's look at the PCE data to understand what the latest numbers are telling us about a key driver of the U.S. economy: "Real" Disposable Income Per Capita. What we discover is that, adjusted for inflation, per-capital disposable incomes have flatlined for the past 20 months. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000.  The BEA uses the average dollar value in 2005 for inflation adjustment. But the 2005 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000. Do you recall what you we're doing on New Year's Eve at the turn of the millennium? Nominal disposable income is up 48.3% since then. But the real purchasing power of those dollars is up a mere 14.6%. Real DPI per capita is at a level first attained in the closing months of 2006 and remains about 1.5% below the level at the beginning the 2007-2009 recession. In fact, this metric of consumer well-being has essentially hovered around a flatline since June of 2010.

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

Slowing Income & Spending Levels Cloud Economic Outlook - Consumer income and spending eked out gains last month, although the increases are enough to dispel doubts about the strength and staying power of economic growth. But initial jobless claims are still holding at the lowest levels in four years and so there’s still hope that the cyclical demons can be held off. The critical variable remains the labor market, and the ability of job growth to keep wages growing, which in turn will help keep the pace of income and spending from falling further. The good news is that wage growth rolls on, and so the case for optimism is far from hopeless. But energy prices rising and fears of a fresh round of Middle East turmoil, there's precious little room for disappointment in the economic reports in the weeks ahead. As for today's news, let’s start by reviewing the latest weekly update for jobless claims. As the chart below shows, new fillings for unemployment benefits dipped slightly to a seasonally adjusted 351,000 last week. If you're an optimist, that's a sign that the recent declines are holding and the flat lining over the past three weeks is merely a pause that will soon give way to further declines. The alternative view is that the economic revival of late is slowing, and the inability of new claims to continue falling is a fresh sign of trouble ahead.

Prices Cut Into Household Incomes - Rising prices took a toll on Americans’ incomes as the year began, halting a four-month streak of gains and renewing concerns about the consumer’s resilience amid higher gas prices. That’s according to a report Tuesday that found real median annual household income in the U.S. declined by 1.3% in January from December, to $50,020 from $50,673. The tick downward follows monthly increases in income from September through the end of 2011, according to the analysis of Census Bureau data conducted by Sentier Research, an Annapolis, Md., firm run by two former Census officials. Sentier’s Gordon Green said there are three factors behind the downshift to consider:

  • First, median U.S. household income, both nominal and real, declined in January from December.
  • Second, the drop in inflation-adjusted income fell as the Consumer Price Index climbed; the late-2011 runup in income was accompanied by a decline in the CPI, hitting the consumer with what Mr. Green described as a “double whammy,” of falling nominal income and rising prices.
  • Third, while the unemployment rate has eased — to 8.3% in January from 9.0% in September — the duration of long-term unemployment hasn’t, nor has the unemployment measure that includes those who are working part-time but seeking full-time work.

Inflation: Not as low as you think - Forget the modest 3.1 percent rise in the Consumer Price Index, the government's widely used measure of inflation. Everyday prices are up some 8 percent over the past year, according to the American Institute for Economic Research.The not-for-profit research group measures inflation without looking at the big, one-time purchases that can skew the numbers. That means they don't look at the price of houses, furniture, appliances, cars, or computers. Instead, AIER focuses on Americans' typical daily purchases, such as food, gasoline, child care, prescription drugs, phone and television service, and other household products. The institute contends that to get a good read on inflation's "sticker shock" effect, you must look at the cost of goods that the average household buys at least once a month and factor in only the kinds of expenses that are subject to change. That, too, eliminates the cost of housing because when you finance your home with a fixed-rate mortgage, that expense remains constant until you refinance or move.

Cost Of Living Now Outweighs Benefits - A report released Monday by the Federal Consumer Quality-Of-Life Control Board indicates that the cost of living now outstrips life's benefits for many Americans. "This is sobering news," said study director Jack Farness. "For the first time, we have statistical evidence of what we've suspected for the past 40 years: Life really isn't worth living." To arrive at their conclusions, study directors first identified the average yearly costs and benefits of life. Tangible benefits such as median income ($43,000) were weighed against such tangible costs as home-ownership ($18,000). Next, scientists assigned a financial value to intangibles such as finding inner peace ($15,000), establishing emotional closeness with family members ($3,000), and brief moments of joy ($5 each). Taken together, the study results indicate that "it is unwise to go on living." "Since 1965, the cost-benefit ratio of American life has been approaching parity," Farness said. "While figures prior to that date show that life was worth living, there is some suspicion that the benefits cited were superficial and misreported." Analyzed separately and as one, both the tangible and intangible factors suggest that life is a losing investment.

Sorry, Inflation Isn't "Really" 8 Percent - Kathy Kristof at CBS has a story headlines "Inflation: Not as low as you think" that should probably be given the reverse headline, inflation is much lower than you think. The basis of her story is the American Institute for Economic Research's "everyday price index" which is showing 8 percent inflation, in start contrast to the CPI's 3.1 percent increase. As Josh Barro explains, you get the discrepancy by "excluding about 60 percent of the typical household’s expenditures, most notably spending on housing and automobiles." This is why I say inflation is almost certainly lower than you think. People buy different kinds of things on different schedules. The typical American buys gasoline and groceries much more frequently than he buys cars or washing machines. But the rare purchases are more expensive, and turn out to be a very large share of overall household expenditure. Our perceptions, however, are dominated by the things we buy frequently. That often leads us to overestimate the overall quantity of inflation based on rapid increases in the price of gas or milk or eggs or something else we buy all the time.  Oil and food can get more expensive for all kinds of reasons—bad weather, civil war in Libya, demand from China, whatever. By contrast, the world is not facing any severe supply-constraints regarding toasters.  But most people go so long between purchases of toasters that they have no idea what the toaster price trend is.

Two Measures of Inflation: New Update - The BEA's Personal Consumption Expenditures Chain-type Price Index for January, released today, shows core inflation below the Federal Reserve's 2% target at 1.88%. In contrasst, the Core Consumer Price Index, at the end of January, is above the target at 2.28%. The Fed, of course, is on record as using Core PCE as its inflation gauge:  The October 2010 core CPI of 0.61% was the lowest ever recorded, and two months later the core PCE of 0.93% was an all-time low. However, we have seen a significant divergence between the headline and core numbers for both indicators, especially the CPI, at least until a few months ago, when energy prices began moderating. The latest headline CPI and PCE are both off their respective interim highs set in September.

Real Personal Consumption Data - Today's personal income data release was interesting. Overwhelming, everyone is reaching the conclusion that the economy is strengthening and that stronger consumer spending is a major factor behind this conclusion. But today's report shows that we now have three consecutive months of zero growth in real personal consumption expenditures( PCE ) -- the single largest component of real GDP. The report shows that as of January the first quarter growth rate for real PCE is zero. Just a warning to be careful of accepting the consensus view of a strengthening economy.

For Lasting Recovery, Savings as Important as Spending - Even with faster income growth and more confidence in the labor markets, U.S. consumers are not rushing to shop. The latest numbers, out Thursday, show after accounting for prices, consumer spending has been flat for three consecutive months. Some of the weakness can be traced to the warm winter weather. Mild temperatures have meant less need to turn up the thermostat. The Federal Reserve said utility use plunged 2.4% in December and another 2.5% in January. The drag from higher gasoline prices is also diverting spending on other items. Economists at Wells Fargo point out that the impact from higher gasoline prices tends to fall heaviest on middle and lower income households, which probably explains some of the weakness. Another explanation to the weak spending trend is that households have not abandoned the New Frugality adopted–willingly or not–during the recession. The savings rate is hovering around the 5% mark for the past two years. That’s a bit down from 6%-plus during the panicky days of the recession, but a whole lot better than the 3.1% average of the decade before the downturn.

Rhythm and melody - The Hill: Rick Santorum on Monday blamed the housing crisis on high gas prices. During a campaign appearance in Michigan, Santorum said the housing bubble burst in 2008 because people could no longer afford to pay their mortgages because of high gas prices. This is worth a look since real gas prices peaked at over $4/gallon from May-July 2008 and remained close to $4 in August and September (gas prices from the EIA and the CPI from FRED): Let's do some numbers, suppose the average U.S. household enjoys $2/gallon gasoline (average 2003 price = $2.02/gallon), drives 20,000 miles in a 20 MPG automobile. Annual household expenditure on gasoline is $2000, or about $167 per month. Since February 2004, monthly increases in gas expenditures, relative to the 2003 average, look like this:The Santorum assertion would go like this, with an almost $150+ additional monthly expenditure on gasoline in the summer of 2008, households were unable to change their transportation habits, eat out less often and do other things so that they could pay their mortages. U.S. households stupidly refused to change their behavior and defaulted on their mortgages, triggering the housing crisis.

Spending on Energy in 2011 Was Lowest Since '98 - The charts above show annual personal consumption expenditures from 1995-2011 on "Energy Goods and Services," which "consists of gasoline and other energy goods and of electricity and gas," based on BEA data available here.  Some interesting observations:
1. The top chart shows that American consumers spent $460 billion (in real 2005 dollars) on "energy goods and services" in 2011, which was the lowest level of spending on energy since $454 billion in 1998, more than a decade ago.
2. On a per-capita basis (using population data here), annual real energy spending per person was lower in 2011 than in any year going back to 1995, and about 11% below 2005 when real energy spending peaked at  $494 billion.  Compared to the first year in the series, 1995, real spending on energy per person in 2011 was 7.5% lower.
3. The bottom chart displays real energy spending as a share of total personal consumption expenditures, which has fallen from slightly more than 7% in 1995 to slightly less than 5% in 2011.

Number of the Week: Energy Bills Heading Down (Really!) $25: How much less the typical American household will spend on energy this winter than last. That’s right: less. Soaring gasoline prices have dominated headlines recently. The average price of a gallon of regular gas hit $3.65 on Friday, according to the auto club AAA. That’s up 12 cents in the past week alone. Less noticed, but no less dramatic, has been the plummeting price of natural gas. Natural-gas prices on the New York Mercantile Exchange ended the week down 13.4 cents at $2.55 per million British thermal units. It’s down more than a third in the past year. Natural gas is the most common home heating fuel in the U.S., warming about half of American homes. It’s also a major generator of electrical power, the second-biggest source of heat for U.S. households. So residential customers are seeing lower rates for both gas and electric heat this winter.

Adding Natural Gas into the Energy Equation - The price of gasoline has made the headlines many times in recent weeks. The theme that goes with the headlines is generally the same: Gasoline has never been more expensive for this time of year, and the rise in price will deliver a blow to disposable income that can set back our recovery. The price of gasoline does seem to impact consumer confidence, as we see here: This chart shows the wholesale price of gasoline in blue, overlaid with a graph of the University of Michigan Consumer Confidence Index. As we see, the rapid rise in gasoline prices began to weigh on consumer confidence during 2007, prior to the full impact of the financial crisis. The rise in gasoline dragged down confidence until the price peaked in 2008 and reversed.  This past Friday, however, the most recent University of Michigan Consumer Confidence number was released, coming in at 75.3. This number was significantly higher than last month's 72.5. This rise can be partially explained by the recent stock market rally, but what about the impact of gasoline? Consumer confidence depends largely upon disposable income, and a household's energy bill is made up of more than just gasoline. It also depends on natural gas and electricity. In fact, the cost of natural gas has fallen much more dramatically than the rise of gasoline, and this drop explains why consumer confidence has remained firm.

Weekly Gasoline Update: Up 49 Cents in Ten 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 13 cents over the past week, continuing their steady increase since mid-December. Regular is up 49 cents and premium 48 cents from the interim low in the December 19th EIA report. WTIC closed today at 108.56. It is 4.7% off its 2011 interim high, which dates from early May 2011. As I write this, shows three states, Hawaii, Alaska and California, with the average price of gasoline above $4 and another 12 states with the price above $3.75.  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. The price volatility in crude oil and gasoline have been clearly reflected in recent years in both the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE). For additional perspective on how energy prices are factored into the CPI, see What Inflation Means to You: Inside the Consumer Price Index.

Dollar, Gold and Gasoline: Much Ado About Nothing - U.S. regular gasoline price has spiked almost 4% in one week to $3.688 a gallon as of Feb. 26, the highest level since last September, with residents in three states--Alaska, Hawaii, California-- are already seeing above $4 at the pump, based on AAA's Daily Fuel Gauge Report. The current price level is roughly 11% above a year ago.  Analysts estimate that every 1-cent increase in the price of gasoline costs the economy $1.4 billion.  Consumers are starting to feel the pinch, and a new Associated Press-GfK poll says 7 in 10 Americans find the issue "deeply important".  Crude oil is one of the oldest and most complex commodities in the world heavily underpinned by geopolitics, and market speculation throughout its history.  Now, with Iran, Israel, U.S. and Europe exchanging sanctions, threats in daily new headlines, it is hard to imagine anyone in the business world would miss the connection between surging oil, gasoline prices, and escalating tensions over Iran's nuclear program.To our surprise, Forbes published an op-ed by Louis Woodhill dated Feb. 22 titled "Gasoline Prices Are Not Rising, the Dollar Is Falling" blaming the surging gasoline prices on the dollar depreciation

David Rosenberg: "It's A Gas, Gas, Gas!" - Meanwhile, what is largely being ignored is the rapid move up in oil prices as Iran-based tensions escalate further. The WTI crude price rose to nearly $110/bbl and more importantly. Brent has soared over $125/bbl (highest level since August 2008), and forward contracts are pointing to gasoline breaking back above $4 a gallon in the next two to three months (already there in California and within 10 cents in New York state). The nationwide average has already risen 37 cents in just the past month and 7 cents last week alone — it hasn't been long enough to show through in the confidence surveys, though let's face it, we are seeing early signs already of some fraying at the edges in the retail sector — despite the apparent improvement in the labour market (indeed, it is income that people spend, and growth on this front, let's be honest, has been less than stellar). Meanwhile, as if to represent the consensus of opinion out there. page A2 of the weekend WSJ quotes a pundit as saying "$4 probably isn't going to be the threshold that changes peoples' behavior this time. I think people have gotten used to $4". What claptrap. Its not that people have gotten used to $4 — it's only there in the Golden State, Hawaii and Alaska ... wait until it grips the whole country. And consumers have yet to fully process this rapid move up in gas prices, but recall what happened a year ago. To be sure, there was no recession, but economic growth came to a virtual halt in the first half of the year because of the impact that energy costs exerted on the GDP price deflator. Second, it is not the level but the change in prices at the pump that influences the growth rate of the economy — every penny at the pumps siphons away around $1.5 billion from consumer wallets into the gas tank.

Why are Gas Prices High?  - Gas prices are going up again, resulting in a lot of discussion by people who don't normally think about the oil markets, and therefore aren't necessarily that well informed about the subject.  As a certified oil-obsessive these last seven years, I thought I'd put up a "cheat sheet" with just the key graphs that would allow you to understand the major forces that affect the behavior of gas prices over time. First, I've got this graph of gas prices adjusted for inflation:1As you can see, gas prices are not as high as they were in 2008 or even last year.  However, they are going up and they are certainly much higher than they've been at most points in the last five years, and way higher than the happy days of the nineties.  Plus most people probably think in terms of the nominal prices (ie without adjusting for inflation) and that makes it seem worse:The first thing to understand is that the price of gas over time is fairly closely related to the price of oil.  This next graph shows the weekly retail price of gasoline versus the price of oil (per gallon, vs the usual per barrel) for the same 1995-2012 period as above: You can see that there's a very strong relationship over time. Technically, 97% of the variance of the price of gas is explained by the price of oil.  Less technically, the blue 45 degree line is what would happen if gasoline cost exactly the same as the bulk price of the oil in it.  The blue dots are what it actually cost.  The difference is what refiners and distributers and retailers get.

U.S. exported more gasoline than imported last year - For the first time since 1949, the United States exported more gasoline, heating oil and diesel fuel last year than it imported, the Energy Department reported today. Bloomberg writes that to offset weak U.S. demand, refiners exported 439,000 barrels a day more than were imported the year before. In 2010, daily imports averaged 269,000 barrels, according to the Petroleum Supply Monthly report. Imports of crude oil and related products fell 11% last year, reaching a level not seen since 1995. News of record gasoline exports comes as the pump price rose today for the 22nd straight day ($3.78 a gallon average) and the Energy Department reported separately that gasoline inventories fell last week while crude oil inventories and imports rose. Crude oil inventories swelled by 4.2 million barrels last week, more than four times what analysts expected and eight times the estimate of the American Petroleum Institute, 24/7 Wall St. says, adding, "To say that the increase in imports is counter-intuitive is not an overstatement."

Obama, chart in hand, presses his case on gas prices - Obama repeated his case, outlined in a speech last week, that there is “no silver bullet” to rising gas prices. He highlighted his administration’s effort to reduce dependence on foreign oil and boost development of alternative energy. This week he introduced a new prop to illustrate his point. As Obama spoke, a chart popped up on television screens behind him. The graph showed U.S. dependence on foreign oil falling since 2005 — from 60% of net imports to 45% in 2011. The White House handed out copies to the crowd. Obama told them to take it home — “it makes for a great conversation piece at parties.” “Now, one reason our dependence on foreign oil is down is because of policies put in place by our administration and my predecessor’s administration. And whoever succeeds me will have to keep it up. This won’t be solved by one party or administration. It won’t be solved by slogans and phony rhetoric.”

Gas in the US Elections - While the economy is still weak by almost any measure, growth is likely to be in the 2.5-3.0 percent range for 2012. This should lead to the creation of close to two million jobs and a modest drop in the unemployment rate. That is not much to cheer about in an economy that is still down close to ten million jobs from its trend level, however compared to the recent past, this is good news. And research shows that voters tend to focus primarily on the direction of change. This means that if the unemployment rate is falling and the economy is creating jobs at a respectable pace throughout the year, President Obama stands a very good chance of being re-elected in November. This explains the decision of the Republican Party to focus on the price of gas. The price of gas has long played a pivotal role in US politics. High gas prices will be forever a symbol of the economic malaise of the Carter presidency in the late '70s. The drop in gas prices under President Reagan was associated with a resurgence of America's political and economic power. The fact that both the rise in the price of oil in the '70s and the subsequent decline in the '80s had little to do with domestic policy decisions and much more with international politics (e.g. the Iranian revolution in 1979) mattered little.

Why retail gasoline prices are nearing a record - Gasoline prices have climbed every day for the last 36 days so it’s no wonder why consumers are worried that record levels are destined for the pump in the next few months. But the many reasons behind the climb aren’t quite so easy to decipher — making prices even harder to predict. The simplest explanation for high gasoline prices goes like this: “you’re paying more for gasoline because oil refiners are paying more for crude,” Recent political and military tension with Iran has added a “war risk” premium to the markets, he said. “War is bad for business, but rumors of war are good for the oil business.” “It doesn’t matter that the U.S. imports exactly zero Iranian oil,” King said. “The U.S. competes for oil with every other oil-importing nation and the tensions with Iran have set a higher price at the margin. The margin sets the price for everything else.” The average U.S. retail price for a gallon of regular gasoline stood at $3.741 a gallon Friday, up 29 cents from a month ago and 31 cents higher from a year ago, AAA data show. Prices have shot well over $4 in some parts of the country, such as California. Average national prices have been climbing from Jan. 26, when unleaded was at $3.38 and midgrade was at $3.51, after starting the year at the highest–ever level for the beginning of a new year, according to the Oil Price Information Service, which compiles the AAA data

Will higher gasoline prices change the way we live? - Rising gasoline prices may finally kill the milkman,  as an article in The Times notes. As gas prices continue to climb – 26 cents in the last week in California, 57 cents in the last year – they may also fundamentally change the way we live. Picture $1,000 cross-country flights, no school buses, more expensive mail. Homes concentrated around job centers, extensive train networks and far fewer things made out of plastic – which contains petroleum. “For us to avoid those types of prices, we’re going to have to dramatically change,” said Chris Steiner, author of "$20 Per Gallon, How the Inevitable Rise in Gasoline Prices Will Change Our Lives for the Better." Already, factories that made gas-guzzling vehicles such as the Hummer are kaput, as are urban food delivery services and even school buses in many rural locations. Down the line, people will fly much less often, which is bad news for places such as Disneyland and Las Vegas that depend on faraway tourists; they’ll live closer to cities, which could worry housing developers in far-flung suburbs; and they’ll have to pay more for many products that contain petroleum, Steiner said. They’ll also eat more local food and consumer products made close by.

How High Gas Prices Affect the Number of Layoffs in the U.S. - The chart below shows the nine major trends we have observed in U.S. layoff activity from 7 January 2006 through 25 February 2012:  For the most recently broken trend in U.S. layoff activity, we observed that average fuel prices in the U.S. rose above $3.50 per gallon in the week between 19 March 2011 and 26 March 2011, which showed up in the data for new jobless benefits being filed in the week ending 9 April 2011, which marked the beginning of the trend. The effect on U.S. layoffs was to derail the pace of post-recession economic recovery in the United States, sending it on a much slower pace of improvement from that point forward.  That continued until the week between 5 November 2011 and 12 November 2011, when the average price of motor gasoline in the United States fell back below the $3.50 per gallon mark. As we saw before, the drop in gasoline prices below this level corresponds to a sudden improvement in the pace of layoff activity in the United States, which began improving more rapidly just 2-3 weeks later, after 26 November 2011.

Airlines Respond to Rising Fuel Costs with Fresh Fare Hikes -- Airlines are raising their fares again because of skyrocketing fuel prices, and that has people thinking twice about flying. The price of oil is going up. Drivers in Southern California are feeling the pain at the pump, and airlines are paying more for jet fuel. Now, they're looking to pass that extra cost on to passengers by raising fares. United Continental was the first airline to do so. A few days ago, they raised prices between $4 and $10 per round trip ticket. Other airlines, including American, Delta, U.S. Airways, Frontier and Virgin, followed suit. This is the third airfare hike since the beginning of the year. Southwest and Jet Blue have not raised fares this time around. But Southwest already increased its fares by about $10 per ticket about a week-and-a-half ago. Airlines are also figuring out more ways to bring in more cash. They're packing more people on each flight and charging more for baggage, food and entertainment.

How Higher Fuel Prices Could Help American Manufacturing - The revival of Detroit has been a big story over the past couple of weeks. The truth is that in the short to mid term, at least, the growth of manufacturing jobs in American may have less to do with cars than it does with fuel. Gas prices are climbing, up 13.3% in 2012 and edging close to $4 a barrel. That, along with a weak dollar and rising wages in China “is driving up shipping costs for companies”  Indeed, for a long time, low energy costs have meant that American business focused mainly on the cost of labor when making outsourcing decisions, and that was almost always likely to be cheaper in the developing world. Now, higher energy prices are changing that equation, as is the notion of just-in-time production. As Free points out, “When you order from a factory on the other side of the world, it typically needs to be a big order, say 1 million widgets. There are big risks involved when placing such large orders – consumer demand may fade, a competing product may arrive on the scene, etc. Some companies prefer to have their products produced in smaller lot sizes to mitigate the risk of being stuck with inventory they can’t sell.”

ATA Trucking index declined in January - From ATA: ATA Truck Tonnage Retreated 4% in January The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index fell 4.0% in January after surging 6.4% in December 2011. The latest contraction put the SA index at 119.4 (2000=100), down from December’s record level of 124.4. “Last month I said I was surprised by the size of the gain in December. Today, I’m not surprised that tonnage fell on a seasonally adjusted basis in January simply due to the fact that December was so strong,”  Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The dashed line is the current level of the index. This index stalled early in 2011, but increased sharply at the end of the year. From ATA:  Trucking serves as a barometer of the U.S. economy, representing 67.2% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9 billion tons of freight in 2010. Motor carriers collected $563.4 billion, or 81.2% of total revenue earned by all transport modes.

U.S. Light Vehicle Sales at 15.1 million annual rate in February - Based on an estimate from Autodata Corp, light vehicle sales were at a 15.1 million SAAR in February. That is up 14.1% from February 2011, and up 6.9% from the sales rate last month (14.13 million SAAR in Jan 2012). This was well above the consensus forecast of 14.0 million SAAR. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for February (red, light vehicle sales of 15.1 million SAAR from Autodata Corp). The annualized sales rate is up sharply over the last two months, and this is the highest sales rate since February 2008 - and above the August 2009 rate with the spike in sales from "cash-for-clunkers". The second graph shows light vehicle sales since the BEA started keeping data in 1967. This shows the huge collapse in sales in the 2007 recession. This also shows the impact of the tsunami and supply chain issues on sales, especially in May and June of last year.

Auto Sales Pick Up Pace Despite Rising Gas Prices - Auto sales jumped 16 percent last month to the highest level since before the recession, helped by declining unemployment and improving consumer confidence even as gasoline prices topped $4 a gallon in parts of the country. The seasonally adjusted, annualized selling rate for new vehicles, a closely watched indication of the auto industry’s health, climbed to 15.1 million in February. It was the first time the rate reached that level since 2008.  Analysts said it was too early to predict if the February rate was sustainable — March is typically a much stronger month for auto sales and therefore more indicative of long-term trends — but the outlook was bright enough that General Motors, Ford and Chrysler were seeking ways to increase production. "We don’t see any major risks to industry sales going below 14 million this year,”

Halftime in America? Car Sales Data Smash My Personal Estimates - I assume Feb, especially in a leap year is tricky. And, I may be willing to concede that unseasonably warm weather is a factor – though I am deeply adverse to this type of ad hocery, as it is ripe for confirmation bias. All that having been said, autosales smashed even my best guesses. I had stopped trying to give month-to-month but the last time I looked carefully I was thinking we would hit about 14.5 Million SAAR sometime early to the middle of this year. Feb came in at 15.2 Million SAAR. You can see the strong discontinuity in Bill McBrides chart. At this rate the vehicle stock in America is now growing and may be close to growing in per capita terms. If this is not an outlier – and of course that remains to be seen – then that would suggest we have broken through the liquidity trap and the process of convergence to the long run growth path has begun.

Big Sales for Small Cars in February - With gasoline prices spiking 30 cents last month, demand soared for compact cars like the Focus and Civic. That lifted U.S. sales for Ford, Honda and other major automakers that reported February sales on Thursday. Gasoline — which now average $3.74 per gallon — has sent more buyers looking for fuel-efficient vehicles. Erich Merkle, Ford’s top U.S. sales analyst, says small cars made up around 19 percent of industry sales in December. That rose to 21 percent in January and could go as high as 24 percent in February, once final sales are tallied. Other trends are also helping sales. The average car on U.S. roads is now a record 10.8 years, so there is an increasing need to replace older vehicles. Credit availability is improving, bringing more people back into the market. Japanese automakers have largely recovered from last year’s earthquake and now have more cars to sell. And consumer confidence rose dramatically in February, making people more likely to consider a big-ticket purchase. That could add up to a third straight year of improving sales for the industry. Sales bottomed in 2009 during the financial crisis, but rose the next two years.

Vital Signs: Companies Invest More in Equipment - U.S. companies are investing more in equipment than they were a year ago. The Equipment Leasing and Finance Association said its monthly index of business volume rose 21% to $5.1 billion last month compared with January 2011. The rise reflects moves by companies to replace computers, vehicles, construction equipment and other assets as the economy improves. It also reflects thawing credit markets, the association said.

Durable Goods orders decline 4% in January - Durable goods is always very volatile. Durable goods orders were expected to decline due to lower aircraft orders (Nondefense aircraft and parts declined 19%) and the expiration of a tax credit that allowed for faster depreciation of equipment purchases. From the Census Bureau: Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders New orders for manufactured durable goods in January decreased $8.6 billion or 4.0 percent to $206.1 billion,the U.S. Census Bureau announced today. This decrease, down following three consecutive monthly increases, followed a 3.2 percent December increase. Excluding transportation, new orders decreased 3.2 percent. Excluding defense, new orders decreased 4.5 percent. Transportation equipment, down following two consecutive monthly increases, had the largest decrease, $3.6 billion or 6.1 percent to $55.2 billion. This was due to nondefense aircraft and parts, which decreased $3.8 billion.

Durable Goods Orders Dropped Sharply Last Month - New orders for durable goods tumbled in January, falling 4.0%, the U.S. Census Bureau reports. That’s the biggest monthly decline in three years and it’s sure to spark a new round of heated debate about what happens next for the economy. Nonetheless, it’s premature to use today’s numbers to argue that the economy’s destined for the skids. Indeed, the annual trend for new orders is still solidly in the black as is the year-over-year pace for business investment (non-defense capital goods ex-aircraft orders). It’s true that the annual rate of change for both measures of new orders has been slowing, but that’s not necessarily fatal, at least not yet. It’s debatable if the decelerating pace is part of the economy’s transition from post-recession rebound to something closer to a normal expansion. It was always inevitable that the 15%-to-20% year-over-year increases posted in early 2010 were destined to fall. The question is whether the slower rate of annual growth is signaling trouble ahead? Yes, if the deceleration rolls on. For now, however, the latest numbers—new durable goods orders growing at 8% a year and business investment spending rising by 6%--are still quite strong.

Durable Goods Orders Down a Stunning 4%, Far Below Expectations - The February Advance Report on January Durable Goods was released this morning by the Census Bureau. Here is the summary on new orders:  New orders for manufactured durable goods in January decreased $8.6 billion or 4.0 percent to $206.1 billion, the U.S. Census Bureau announced today. This decrease, down following three consecutive monthly increases, followed a 3.2 percent December increase. Excluding transportation, new orders decreased 3.2 percent. Excluding defense, new orders decreased 4.5 percent.  Transportation equipment, down following two consecutive monthly increases, had the largest decrease, $3.6 billion or 6.1 percent to $55.2 billion. This was due to nondefense aircraft and parts, which decreased $3.8 billion. Download full PDF The new orders at -4.0 percent came in significantly worse than the consensus estimate of -1.4 percent. This is the largest monthly decline since January 2009. Likewise the ex-transportation -3.2 percent was far below the consensus forecast of 0.2 percent. The first chart is an overlay of durable goods new orders and the S&P 500. An overlay with unemployment (inverted) also shows some correlation. An overlay with GDP shows some disconnect in recent quarters between the recovery in new orders and the slowdown in GDP — another comparison we'll want to watch closely.

Durable Goods Orders Drop by Most in 3 years — Businesses slashed spending on machinery and equipment in January after a tax break expired, pushing orders for long-lasting manufacturing goods down by the largest amount in three years. Orders for durable goods fell 4 percent last month, the Commerce Department said Tuesday. A big reason for the decline was demand for so-called core capital goods, which are viewed as a good measure of business investment plans, tumbled 4.5 percent. That’s the biggest drop in a year. Economists attributed much of the decline in January to the end of the tax credit. They noted that demand for core capital goods hit an all-time high in December as most companies raced to qualify for the tax credit. Many said the underlying trend remained strong and predicted further business investment in the coming months. “We see no evidence of underlying slowing in the industrial economy so we look for a rebound in February and the re-emergence of the upward trend over the next couple of months,”

Vital Signs: Behind the Durables Fall - U.S. factory orders for long-lasting goods fell in January. The value of new orders for durable goods, such as refrigerators and automobiles, declined 4% from December to a seasonally adjusted $206.1 billion, ending several months of gains, the Commerce Department said. Economists said factors behind the drop include the Jan. 1 reduction of tax incentives for equipment purchases and the usual decline that occurs at the start of a quarter.

The ''Real'' Goods on the Latest Durable Goods Orders - Earlier today I posted a commentary on the February Advance Report on January Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation. Here is a chart of the same data shown with two adjustments, the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in current dollars. This gives us the "real" durable goods orders per capita. Here is the same chart, this time ex Transportation.  Now we'll exclude Defense orders. And finally we'll exclude both Transportation and Defense for a better look at core durable goods orders.

Secret Commerce Department Report Shows the Economy May be Faltering - Dean Baker - Actually, it wasn't secret, it's right here on the Census Bureau's website, but for some reason no one in the media thought it was worth reporting a drop in durable goods orders of 4.0 percent in January. I am always the first to say that we should not make too much of any single report. Monthly data are often erratic and if one report seems out of line with most other data, odds are that the report was driven by some flukish factor or just sampling error. Nonetheless, this is a big drop that can't be explained by the usual suspects. New orders excluding transportation (airplane orders are especially erratic) fell by 3.2 percent. Excluding military goods, new orders fell by 4.5 percent, so this is not a result of the peace dividend. The weather goes the wrong here since January was unusually warm this year meaning that businesses were not shut by snow storms. New orders for non-defense capital goods (i.e. investment) fell by 6.3 percent, or 4.5 percent if we exclude aircraft.  In short, this is an unambiguously bad report. My view is that it is probably an anomaly. We will perhaps see upward revisions in the second report for January or a big bounceback in the February numbers. But, this report definitely deserved some attention. It might seem rude to spoil the celebrations over our 3.0 percent growth rate last quarter, but that is what reporters are supposed to do.

Equipment Demand Hasn’t Dropped Out, Just Taking a Breather - After weeks of positive surprises, the U.S. economy had to handle some disappointing data Tuesday. New orders for durable goods fell 4.0% in January. And bookings for nondefense capital goods excluding aircraft — a measure of future business spending on equipment — dropped 4.5%. Although the declines were larger than expected, they shouldn’t raise alarm bells. That’s because much of the weakness traces to special factors. The first is the end of a tax credit that allowed 100% deduction for equipment bought last year. Not surprisingly, businesses front-loaded their purchases early in 2011. The second reason is a quirk in the very volatile orders series: New bookings tend to fall in the first month of a quarter, then rebound in the second or third months. When looked at in the longer run, demand for capital equipment is rising and should remain on an uptrend this year as long as companies remain confident of future demand for their products. In addition to better expectations for demand, companies are spending because of old age. Even the best-maintained machinery only lasts for so long. Just as vehicle sales are rising because consumers no longer want to repair their old junkers, companies are deciding it is more cost effective to buy new rather than maintaining inefficient or technologically obsolete equipment.

Dallas Fed: Texas Manufacturing Expansion Strengthens in February - This was released earlier today. These high frequency surveys are useful because they provide a glimpse of what was happening just a week or two ago - as opposed to other data that is released with a long lag. From the Dallas Fed: Texas Manufacturing Expansion Strengthens: Texas factory activity continued to increase in February, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from 5.8 to 11.2, suggesting a pickup in the pace of growth. Other measures of current manufacturing conditions also indicated expansion in February. The new orders index was positive for a second month in a row but fell from 9.5 to 5.8. Similarly, the shipments index moved down from 6.1 to 4.2. Capacity utilization increased further in February; the index edged up from 8.5 to 10. ... The general business activity index rose to 17.8, its highest reading since November 2010. ... Labor market indicators reflected a sharp increase in hiring and longer workweeks. The employment index jumped to 25.2, its highest level since the beginning of 2006. ... Prices and wages increased in February.

Texas-Area Manufacturing Expands - Business conditions in Texas-area manufacturing expanded at a faster rate this month, according to a report released Monday by the Federal Reserve Bank of Dallas. The bank said its general business activity index increased to 17.8 in February after it swung to 15.3 in January from -0.3 in December. Readings below 0 indicate contraction, and positive numbers indicate expanding activity. The subindexes were mixed this month but generally remained in expansion mode. The pace of new demand slowed. The volume of new orders dropped to 5.8 in February from 9.5 in January, and the growth rate of new orders remained at 6.6. The production index for the current month improved to 11.2 from 5.8 in January. The employment index more than doubled to 25.2 from 12.2. The shipments index fell to 4.2 from 6.1 in January. Price pressures heated up again. The prices-paid index increased to 25.2 from 24.4, while the prices-received index rose to 16.2 from 9.0.

Four Regional Fed Banks Report Economic Growth In February - Early clues about February’s economic activity via several regional Federal Reserve banks suggest that growth prevails. Month to date, four regional banks have released manufacturing activity updates for February and in all four cases the numbers show improvement. That suggests that the rest of this week’s economic news on manufacturing will bring more statistical encouragement. Later today, the Richmond Fed will release its update of manufacturing activity and the January summary of durable goods orders for the U.S. arrives. Tomorrow we’ll learn the latest for the ISM-Chicago Business Barometer and on Thursday the ISM Manufacturing Index for February hits the streets, offering the first broad look at the U.S. activity for the month. Meantime, the four regional Fed surveys available at the moment suggest that February overall is shaping up to be another month for expansion. Here’s a brief look at each of the four regional Fed reports released so far based on the accompanying press releases:

Richmond Area Manufacturing Activity Expands - Economic activity among manufacturers in the central Atlantic region of the U.S. expanded for the third consecutive month, the Federal Reserve Bank of Richmond reported Tuesday. The service sector saw its expansion slow. The bank’s manufacturing general-business index rose to 20 from 12 in January. Numbers above zero indicate expanding activity. The Richmond report follows other regional Fed bank surveys that indicate the factory sector around the U.S. is doing well. The Richmond subindexes generally increased. The shipment index increased to 25 from 17 last month, and the employees index jumped to 13 from 4. The new orders index advanced to 21 from 14. Looking out over the next six months, the shipments-expectation index slowed to 30 from 36 in January. The orders-expectations index stood at 31, from 32 last month. Richmond area manufacturers saw some relief on cost pressures. The current prices paid index slipped to 2.25 from 2.53, while the prices received index rose to 0.97 from 0.57.

Chicago PMI accelerates in February - The Chicago business barometer, which also is known as the Chicago PMI, accelerated to a reading of 64.0% in February from 60.2% in January, ISM-Chicago said Wednesday. The index measuring production was the highest since April, new orders hit an 11-month high, order backlogs moved out of contraction and employment had the biggest one-month gain since March 2008. Economists polled by MarketWatch had anticipated a small dip to 60.0%.

Chicago PMI rises to highest since April 2011 - Manufacturing activity in the Chicago area increased more-than-expected in February, rising to the highest level since April of last year, industry data showed on Wednesday. In a report, market research group Kingsbury International said its Chicago purchasing managers’ index rose by 3.8 points to a seasonally adjusted 64.0 in February from a reading of 60.2 in January. Analysts had expected the index to rise by 1.6 points to 61.8 in February. On the index, a reading above 50.0 indicates expansion, below indicates contraction. The New Orders Index rose to 69.2, the highest since March 2011, while the Employment Index increased to 64.2 from 54.7 in January.

Chicago PMI Soars To 64, Beats Estimate Of 61, Employment Index Highest Since 1984 - Earlier today, when forecasting the Chicago PMI, we warned to "expect another massive beat courtesy of consumers confident that they can have Apple apps, if not so much food, since they still don't pay their mortgages." Sure enough, the economic data is now straight out of China, with the Chicago PMI not only trouncing expectations, printing at 64, on consensus of 61 (the highest since last April when the peak of the liquidity bubble popped and the stock market rolled over), but, wait for it, the Employment index came at 64.2, up from 54.7, which was the highest employment print since April 1984! At this point it is no longer worth commenting on economic data, as between this, the NAR, the consumer confidence, it was all become farce of a blur. we now expect February unemployment to print negative as the labor participation rate slides to 50%, and seasonal adjustments and birth/date fixtures account for 5 million "additions" to jobs. One thing that is sure. There will be no more easing for a looooooooong time. Kiss any hope of more trillions in central bank liquidity goodbye.

ISM Index: Manufacturing Activity Cools A Bit In February - The modest retreat in the ISM manufacturing index for February may be nothing more than monthly noise, although a fall in this benchmark certainly won't help sentiment after this morning's disappointing news for personal income and spending in January. The Institute for Supply Management’s factory index slipped to 52.4 last month, down from January's 54.1 reading. That's hardly fatal, but it's definitely not helpful, particularly today. In any case, it's something of a surprise: Economists were expecting a rise, according to Bloomberg. The ISM dip is all the more notable given the strength in several regional Fed manufacturing surveys for February. Even so, today's ISM number still reflects an expanding manufacturing sector (any reading above 50 indicates growth) and so it's premature to read too much into this update. One number, as they say, a trend does not make. But it's hard to forget that today's ISM news comes after Tuesday's news that new orders for durable goods dropped sharply in January.

ISM Manufacturing index indicates slower expansion in February - PMI was at 52.4% in February, down from 54.1% in January. The employment index was at 53.2%, down from 54.3%, and new orders index was at 54.9%, down from 57.6%.  From the Institute for Supply Management: January 2012 Manufacturing ISM Report On Business®  . "The PMI registered 52.4 percent, a decrease of 1.7 percentage points from January's reading of 54.1 percent, indicating expansion in the manufacturing sector for the 31st consecutive month. The New Orders Index registered 54.9 percent, a decrease of 2.7 percentage points from January's reading of 57.6 percent, reflecting the 34th consecutive month of growth in new orders. Prices of raw materials increased for the second consecutive month, with the Prices Index registering 61.5 percent. As was the case in January, new orders, production and employment all grew in February — although at somewhat slower rates than in January. Here is a long term graph of the ISM manufacturing index. This was below expectations of 54.6%. This suggests manufacturing expanded at a slower rate in February than in January (the opposite of all the regional surveys). It appears manufacturing employment expanded slowly in February with the employment index at 53.2%.

Vital Signs: U.S. Manufacturers Hiring - U.S. factories added workers in February, but at a slower pace than in previous months. The Institute for Supply Management’s employment index fell 1.1 points from the previous month to 53.2. Readings above 50 indicate expansion. February marked the index’s 29th consecutive month of employment gains. Hiring is coming from a range of industries, including apparel, coal, transportation equipment and computers.

Bye Bye American Pie: The Challenge of the Productivity Revolution - Robert Reich - Here’s the good news. The economic pie is growing again. Growth in the 4th quarter last year hit 3 percent on an annualized rate. That’s respectable – although still way too slow to get us back on track given how far we plunged. Here’s the bad news. The share of that growth going to American workers is at a record low. That’s largely because far fewer Americans are working. Although the nation is now producing more goods and services than it did before the slump began in 2007, we’re doing it with six million fewer people. Why? Credit technology. Computers, software applications, and the Internet are letting us produce more with fewer people. In theory, this is a huge plus. We can live better and have more time off. But as Tonto asked the Lone Ranger, “who’s ‘we,’ kemosabe?” The challenge at the heart of the productivity revolution – and it is a revolution – is how to distribute the gains. So far, we’ve been failing miserably to meet that challenge. 

Competitiveness is about capital much more than labor: Besides justifying labor-hostile monetary policy, unit labor costs are often trotted out to blame unreasonable wage expectations for troubled economies’ “lack of competitiveness”. For example, here’s a chart published last year by Paul Mason (ht Paul Krugman): It is a common trope that labor costs in the European periphery have grown to unsustainable levels, while in the prudent and virtuous North, costs have been contained. But the chart is misleading. Let’s take a look at the same information presented a bit differently, from a wonderful Levy Institute working paper by Jesus Felipe and Utsav Kumar, “Unit Labor Costs in the Eurozone: The Competitiveness Debate Again”: Rather than lazy Mediterraneans demanding high pay for little output, what has happened since 1980 is a convergence to prudent German norms. Workers in Southern europe are now paid roughly the same amount per unit of goods produced as their counterparts in Mitteleuropa. This is macroeconomics, so the meaning of a “unit of goods produced” is a fuzzy and contestable. But to the degree that unit labor cost statistics capture what they claim to capture, what they tell us is that European workers, North and South, have come to earn roughly equal pay for equal product. Southern European workers do earn less overall, simply because they produce fewer or lower-value goods and services than their Northern neighbors. Unit labor costs are not the problem at all: it is the scale of aggregate output. And what determines the scale of aggregate output? Is it the laziness of workers? No, of course not. We all know that when residents of poor countries emigrate to rich ones, the same weak bodies and flawed characters that produce very little at home suddenly explode into economic vigor. The difference is “capital depth”, broadly construed to include all the physical equipment, business organization, public infrastructure, and governance that collude to enable two small hands and a broken mind to accomplish outsize things. Workers’ pay level is not the problem in Southern Europe. It is deficiencies in the arrangement of capital, again broadly construed, that have left Greece and Spain unable to produce value in sufficient quantity to compete with their neighbors.

How to Bring Jobs to People Who Need Them Most, by Mark Thoma: Is manufacturing special? Should the US do more to preserve its manufacturing base? President Obama brought these questions to the forefront with his recent proposal to use tax breaks and other encouragements to revive the manufacturing sector. Some people such as former Clinton economic advisor Laura Tyson argue that “manufacturing matters.” But others such as her UC Berkeley colleague and former Obama advisor Christina Romer argue against such special treatment. Who is right? In the past, I have given a lukewarm endorsement to the president’s proposal. I believe manufacturing is one of the more promising avenues for the future economic growth, but I’m wary of picking winners. I’d prefer that we create the conditions for winners to emerge instead of putting too much emphasis on any one area. But perhaps a more targeted approach is justified after all. Recent research by David Autor, et al highlights the large detrimental effects that the loss of manufacturing jobs has had on some communities. This research finds that increased competition from low-wage countries causes unemployment to go up, labor force participation to fall, and wages to decline leading to “a steep drop in the average earnings of households” throughout the community..

2 Charts That Explain The Most Important Problem In The American Economy: Paul Krugman just published a superb presentation on the American economy, and these two charts are the key to understanding why unemployment is still so darn high. It's all about job vacancies in relation to the percentage of unemployed persons. To start, this chart shows the current relationship between the unemployment rate (red) and the inverted rate of nonfarm job openings (blue): What's important here is that the percentage of unemployment far exceeds the rate at which positions are becoming available, at least relative to the last decade. Although the rate of job openings is increasing and unemployment is falling in tandem, the sustained difference between the two rates suggests that there just aren't enough jobs for all the available workers—and this is not just a momentary thing. While the data from the St. Louis Fed doesn't go back farther than 2001, Krugman nonetheless points to the following chart, which appears to show that this relationship between unemployed persons and job openings is abnormally high:

Unemployment Applications Dip to a Four-Year Low — The number of people seeking unemployment benefits fell slightly last week to the lowest point in four years, a further sign that the U.S. job market is improving. A seasonally adjusted 351,000 people sought unemployment aid, down from 353,000 the previous week, the Labor Department said Thursday. That matches the four-year low reached three weeks ago. The improving numbers show that steadily fewer people are being laid off and suggest that some companies are stepping up hiring. The four-week average of applications, which smooths out weekly fluctuations in the data, also fell last week, to 354,000. That’s also the lowest in four years. Applications for unemployment aid have fallen steadily since the early fall and are now down nearly 15 percent since October. When applications drop consistently below 375,000, it usually signals that hiring is strong enough to lower the unemployment rate.

A Break in the Trend for New Jobless Claims - A quick story in pictures, as we're still sorting things out:  Officially, the previous trend, which we've identified as "H" in the chart above, began on 9 April 2011 and ran through 26 November 2011. Here's where we've described each trend in seasonally-adjusted initial unemployment insurance claims since 2005.  For those playing along at home in deciphering the notes on our statistical control chart-inspired analysis, here's a quick review of the Western Electric Rules via Wikipedia, which are the ones we follow in determining whether a trend for initial unemployment insurance claims is in effect or has broken down.  Yeah, breaks in the trend are sometimes easier to see after the fact! See our previous chart to understand why we didn't see it sooner! But hey, what does the new trend look like?  The new trend officially began on 3 December 2011 and has continued through at least 18 February 2012. We suspect our previous prediction that the trend will flatten out in the weeks ahead will come true, given that we're closing in on the typical level of new jobless claims recorded before the recession began in December 2007, as the U.S. economy peaked at that time.

The Unemployment Paradox: Could A Better Economy Make Jobless Rates Worse? - Yesterday, I read an interesting report from Barclays Capital debunking a piece of conventional economic wisdom. American labor force participation — that is, the percentage of working-age persons who are employed or are looking for a job – has been down since the financial crisis in 2008, putting us on par with Europe, as I noted last year in my cover story on economic mobility.  Labor force participation in the U.S. now stands at only 63%. Lots of investors and economists believe that’s because so many job seekers out there during the Great Recession and the jobless recovery grew  frustrated and gave up looking. Remember that official unemployment rate calculations count people who are looking for work — but not those who have given up and stopped looking — as unemployed. As a result, when people give up looking for work, it can have the counter-intuitive effect of making the unemployment rate look better. And theoretically, the reverse can also be true — but here’s where the conventional wisdom goes astray: Now that the economy is truly expanding once again, many observers are predicting that formerly discouraged workers will flood back into the labor market and reverse the decline in unemployment that we’ve seen over the last few months.

GallupData Suggest Increase in Unemployment - Gallup finds U.S. unemployment, as measured without seasonal adjustment, to be 9.1% in February, based on almost 30,000 interviews with a random sample of Americans. When Gallup applies the 0.5-percentage-point seasonal adjustment that the government applied to its unadjusted data for February last year, it produces an adjusted unemployment rate for February 2012 of 8.6% -- a substantial increase from the 8.3% adjusted rate the government reported for January.  The findings provide a preview of what Gallup will report in its monthly employment release next Thursday, March 8. Because Gallup’s data are collected continuously throughout the month, the data are available now, one week ahead of the BLS report scheduled for Friday, March 9. Three key factors help determine the relationship between Gallup's measurement of the unemployment rate and the unemployment rate reported by the government. The first involves the relationship between Gallup’s and the government’s unadjusted survey results. Data from the past two years show that on an unadjusted basis, Gallup’s and the government's unemployment measurements track fairly closely in both direction and magnitude.

Federal budget cuts could cost Mass. 50,000 jobs - Looming federal budget cuts could cost Massachusetts more than 50,000 jobs over the next decade - mainly in key sectors such as defense, technology, and health care - and "strike at the very heart" of the state's innovation economy, an analysis by researchers at the University of Massachusetts Donahue Institute shows.  Automatic across-the-board cuts are scheduled to start in 2013 unless the deeply divided Congress agrees to a better deal to lower the national debt. The automatic cuts would reduce federal spending by $1.2 trillion over the next 10 years by slashing the defense budget and support for other programs, including Medicare. Such reductions could hurt industries that have helped the state recover from the recent recession faster than the rest of the nation, according to the UMass analysis. Roughly half of the jobs the state would lose would be in defense, health care, and professional and technical services. ''A lot of these sectors that have made Massachusetts so strong - and so strong in the recovery - are essentially underwritten by federal aid," The automatic reductions, established by the Budget Control Act of 2011, were originally meant to force Congress to compromise on cutting the nation's mounting debt, but the so-called supercommittee of lawmakers charged with finding the compromises failed to reach an agreement.

Postal Service to Close 14 Mail Processing Centers in California - The U.S. Postal service plans to close nearly half of the nation’s mail processing centers beginning May 15 -- fourteen of which are in California alone. The move, which follows a five-month study on 264 of the country’s 461 centers, puts more than 35,000 workers’ jobs at stake. The plan is USPS’s latest attempt to stem mounting losses. At the current rate, the postal service’s debt is projected to reach $18 billion by 2015. The mail center consolidations are part of a plan to save $2 billion per year and $20 billion by 2015. While it is still not clear exactly how these changes will affect delivery, a recent plan currently under consideration would make overnight delivery for first class mail impossible in many locations. The USPS is the first to point out that mail volume has declined precipitously because of electronic mail and the downturn in the economy. This places the postal service in an untenable position as it relies on revenue from mail service instead of tax dollars.

I Was a Warehouse Wage Slave - "Don't take anything that happens to you there personally," the woman at the local chamber of commerce says when I tell her that tomorrow I start working at Amalgamated Product Giant Shipping Worldwide Inc. "What?" I ask. "Why, is somebody going to be mean to me or something?" She smiles. "Oh, yeah." ."But look at it from their perspective. They need you to work as fast as possible to push out as much as they can as fast as they can. So they're gonna give you goals, and then you know what? If you make those goals, they're gonna increase the goals. But they'll be yelling at you all the time. It's like the military. They have to break you down so they can turn you into what they want you to be. So they're going to tell you, 'You're not good enough, you're not good enough, you're not good enough,' to make you work harder. Don't say, 'This is the best I can do.' Say, 'I'll try,' even if you know you can't do it. Because if you say, 'This is the best I can do,' they'll let you go. They hire and fire constantly, every day. You'll see people dropping all around you. But don't take it personally and break down or start crying when they yell at you."

Job Market Toughest for New Entrants - Even with the recent improvement in the job market, it’s a tough time to be looking for work. It’s even tougher if you’re just entering the work force. Jonathan James, an economist at the Federal Reserve Bank of Cleveland, took a look at unemployment among young workers, and it’s not a pretty picture. The unemployment rate among workers aged 20-24 is over 13%, versus 8.3% for the population at large. The job woes aren’t evenly distributed, Mr. James notes. Men in their 20s have a significantly higher rate of unemployment than women of the same age, 14.2% vs. 12.3%. Even more striking is the effect of education: More than a fifth of 20-something men with just a high school diploma are unemployed. Among men with at least some college, the number is just one in ten.  For young people trying to find work — both men and women — the scars of their early-career unemployment could last a lifetime. Mr. James notes that the early years of a career are meant to be a critical period for developing new skills, advancing up the job ladder and boosting earnings. On average, Mr. James says, two-thirds of lifetime wage growth come in the first 10 years of a person’s career. Millions of unemployed young people are missing out on those opportunities.

Only 54% Of Young Adults In America Have A Job - A month ago, Zero Hedge readers were stunned to learn that unemployment among Europe's young adults has exploded as a result of the European financial crisis, and peaking anywhere between 46% in the case of Greece all they way to 51% for Spain. Which makes us wonder what the reaction will be to the discovery that when it comes to young adults (18-24) in the US, the employment rate is just barely above half, or 54%, which just happens to be the lowest in 64 years, and 7% worse than when Obama took office promising a whole lot of change 3 years ago.  And while technically this means 46% are unemployed, or the same percentage as in Greece, the US ratio, which comes from Pew, shows the ratio as a % of the total population: a very sensitive topic now that every month we see another 250,000 drop off mysteriously from the total labor force. However, unlike those on the trailing age end, young adults by definition are the labor force in their age group demographic, so it would be difficult to explain away this horrendous number by claiming that ever more 24 year olds are retiring. Although, yes, we agree that some may be dropping out of the labor force in order to go to college, incidentally the locus of the latest credit bubble, where they meet a fate worse even than secular unemployment: they become debt slaves of the Federal System, with non-dischargable debt at that, which even assuming they can get a job would take ages to pay back!

Growth, Interrupted - If you look across the demographic survey’s what looks to be the biggest effect of the recession has been to delay adulthood for folks born around 1990. Rather than graduating high school or college and getting their own apartment and their own car, they stayed with or moved back in with their parents. This drove down household formation and drove down the demand for automobiles. Indeed, the per capita stock of both homes and cars has been shrinking and the actual stock of cars has been shrinking over this period. However, this will not last. There is nothing about America which says that lifestyles are forever changed. Young people themselves don’t say that in surveys. Firms of all shapes and sizes do not seem to be repeating that perception. Folks think that this is unusual. That times are tough and people are having to rough it. Not, that it just doesn’t make sense anymore to move out in your 20s. The more complete economic-y story address how the long term growth path was affected by financial innovation, the resulting deviation and the resulting return.

Bernanke expresses concern about damage from long-term unemployment -   Federal Reserve Chairman Ben Bernanke reiterated his concern Thursday that chronic long-term unemployment threatens to reduce the nation’s supply of skilled workers. In a second day of congressional testimony, Bernanke noted that the economic recovery has been slower than normal. But he said he doubts that the Great Recession permanently reduced the economy’s growth potential. Bernanke said he did worry that more than 40 percent of America’s unemployed — 5.5 million people — have been out of work for more than six months. He said that if the problem persists, more of the long-term unemployed will lose job skills and struggle to regain them.

Why Are Harvard Graduates In The Mailroom? - For most companies in the business, it doesn’t make economic sense to, as Google does, put promising young applicants through a series of tests and then hire only the small number who pass. Instead, it’s cheaper for talent agencies and studios to hire a lot of young workers and run them through a few years of low-paying drudgery.This occupational centrifuge allows workers to effectively sort themselves out based on skill and drive. Over time, some will lose their commitment; others will realize that they don’t have the right talent set; others will find that they’re better at something else.  When it’s time to choose who gets the top job or becomes partner, managers subsequently have a lot more information to work with. In the meantime, companies also get the benefit of several years of hard work from determined young people at below-market pay. (Warner Brothers pays its mailroom clerks $25,000 to $30,000, a little more than an apprentice plumber.) While far from perfect, this strategy has done a pretty decent job of pushing those with real promise to the top.

Adam Davidson Praises Economic Exploitation - Yves Smith - There has been so much news on the mortgage beat the last few weeks that I managed to neglect one of my missions, which is my personal Ben Stein watch on Adam Davidson, who operates as the Lord Haw Haw for the 1% in his column in the Sunday New York Times Magazine.  His latest piece, “Why Are Harvard Graduates in the Mailroom?” is more accurately titled “In Praise of Exploitation.” When you strip his argument down, it amounts to: “A lot of people choose to be exploited, and voluntarily take jobs where they are paid less than they deserve because they hope to be big winners.” As in really big winners. Davidson repeatedly compares the payoffs to various activities (working the the mail room at William Morris, being a low level drug dealers, acting, working in a law firm or investment bank) to a lottery. The lottery analogy, which Davidson uses through the entire piece, is wonderfully, nails-on-the-chalkboard screechingly at odds with his claim: “That’s the spirit of meritocratic capitalism!” Lotteries involve random, blind draws of “lots”. Modern lotteries, the kind that plug holes in government deficits, are such astonishingly low odds affairs that they are described as “a tax on people who are bad at math.” So Davidson appears to be telling us that success in modern capitalism is painfully unlikely and pretty much random.

Should income growth over the life course lessen concern about the great decoupling? - Since the 1970s, the incomes of Americans in the lower half have risen very slowly. That’s not because economic growth has been slow. Instead, as this chart shows, it’s because growth of incomes has lagged well behind growth of the economy. This isn’t good. In a growing economy, the benefits of growth should accrue not just to those in the upper half (or in the upper 5% or 1% or 0.1%), but to everyone. The income gains needn’t be spread perfectly equally, but those in the bottom half ought to get more than a crumble. Yet is the story conveyed by this graph misleading? The income data are from the Current Population Survey. Each year a representative sample of American adults is asked what their income was in the previous year. But each year the sample consists of a new group; the survey doesn’t track the same people as they move through the life course. If we interpret the above chart as showing what happens to typical American households over the life course, we’ll conclude that they see very little increase in income as they age. That’s not correct. In any given year, some of the people with below-median income are young. Their wages and income are low because they are in the early stage of the work career and/or because they’re single. Over time many of them will in fact experience a significant income rise. The following chart offers one way to see this. The lower line shows median income among families with a “head” age 25 to 34.

Ralph Nader: Raise the Minimum Wage - Chris Hedges - The Occupy movement may be able to forge a powerful alliance with millions of working men and women around a national call to raise the minimum wage to $10 an hour.   Some 70 percent of the public supports raising the minimum wage. This is an issue that resonates across political, ethnic, religious and cultural lines. It exposes the vast disparities in wealth and the gross inequalities imposed by our corporate oligarchy. Barack Obama promised during his 2008 election campaign to press to raise the minimum wage to $9.50 by 2011, a promise that, like many others, he has ignored. But the ground is fertile.   “The 24-hour encampments, largely on public property, broke through,” Ralph Nader told me. “But people began asking after a number of weeks what’s next. Once the movement lost the encampments, it did not have a second-strike readiness, which should be the raising of the minimum wage to $10 an hour.” The federal minimum wage of $7.25, adjusted for inflation, is $2.75 lower than it was in 1968 when worker productivity was about half of what it is today. There has been a steady decline in real wages for low-income workers. Meanwhile, corporations such as Wal-Mart and McDonald’s, whose workforce earns the minimum wage or slightly above it, have enjoyed massive profits. Executive salaries, along with prices, have soared even as worker salaries have stagnated or declined. But the call to raise the minimum wage is not only a matter of economic justice. The infusion of tens of billions of dollars into the hands of the working class would increase tax revenue, open up new jobs and lift consumer spending.

Can Occupy pull off a general strike? - For some months now, the allure of the general strike has quietly persisted in the Occupy movement.  In recent weeks, calls for a nationwide general strike on May 1 have grown louder; more than two months in advance of the date, a deluge of propaganda –  posters, banner drops and short online videos – portends a May Day that promises to up the Occupy ante. The Arab Spring was galvanized by general strikes in Tunisia and Egypt, while in Greece general strikes regularly rupture business-as-usual and bring thousands onto the streets. In headier conceptions, the general strike – a withdrawal from and an attack on capitalism – is the most radical act of defiance available. Little wonder, then, that a general strike was attempted in Oakland, Calif., on Nov. 2. The call for a nationwide general strike, originated in Occupy Los Angeles, has gleaned support from Occupy groups around the United States, with the help of a Twitter hashtag (#M1GS) and a Facebook event that  has more than 12,000 promised attendees. For a movement seeking new directions and escalations, the general strike is historically resonant and attractively bold. But can it work in the United States? And, if so, how?

Wealthy More Likely to Lie, Cheat: Researchers - Are society’s most noble actors found within society’s nobility?  That question spurred Paul Piff, a Ph.D. candidate in psychology at the University of California, Berkeley, to explore whether higher social class is linked to higher ideals, he said in a telephone interview.  The answer Piff found after conducting seven different experiments is: no. The pursuit of self-interest is a “fundamental motive among society’s elite, and the increased want associated with greater wealth and status can promote wrongdoing,” Piff and his colleagues wrote yesterday in the Proceedings of the National Academy of Sciences.  The “upper class,” as defined by the study, were more likely to break the law while driving, take candy from children, lie in negotiation, cheat to raise their odds of winning a prize and endorse unethical behavior at work, the research found. The solution, Piff said, is to find a way to increase empathy among wealthier people.  “It’s not that the rich are innately bad, but as you rise in the ranks -- whether as a person or a nonhuman primate -- you become more self-focused,” Piff said.

Upper classes ‘more likely to lie and cheat’  - Members of the upper classes are more likely to lie, cheat and even break the law than people from less privileged backgrounds, a study has found. In contrast, members of the "lower" classes appeared more likely to display the traditional attributes of a gentleman. It suggests that the traditional notion of the upper class “cad” or “bounder” could have a scientific basis. But psychologists at the University of California in Berkeley, who carried out the study, also suggested that the findings could help explain the origins of the banking crisis – with self-confident, wealthy bankers more likely to indulge in reckless behaviour. The team lead by Dr Paul Piff, asked several groups of people from different social backgrounds to perform a series of tasks designed to identify different traits such as honesty and consideration for others. Each person was asked a series of questions about their wealth, schooling, social background, religious persuasions and attitudes to money in an attempt to put them into different classes.

Upper class people more likely to cheat: study - People from the wealthy upper classes are more likely than poorer folks to break laws while driving, take candy from children and lie for financial gain, said a US study on Monday. The seven-part study by psychologists at the University of California Berkeley and the University of Toronto analyzed people’s behavior through a series of experiments. For instance, drivers of expensive vehicles such as Mercedes, BMW and Toyota’s Prius hybrid were seen breaking the rules more often at four-way intersections than people who drove a Camry or Corolla. They were also more likely to cut off pedestrians trying to cross the street than drivers of cheaper cars. In another test using a game of dice, given the opportunity to win a $50 prize, people who self-reported high socio-economic status were more likely to lie and say that they had rolled higher numbers than they actually had. “Even in people for whom $50 is a relatively small amount of money, cheating was three times as high,” said lead author Paul Piff of UC Berkeley.

The Rotten Parent Theorem - Wealthy kids are usually wealthy because their wealthy parents left them a lot of money.  You might think that’s because parents are altruistic towards their kids.  Indeed every dollar bequeathed is a dollar less of consumption for the parent.  But think about this:  if parents are so generous towards their kids why do they wait until they die to give them all that money?  For a truly altruistic parent, the sooner the gift, the better.  By definition, a parent never lives to see the warm glow of an inheritance. A better theory of bequests is that they incentivize the children to call, visit, and take care of the parents in their old age.  An inheritance is a carrot that awaits a child who is good to the parent until the very end.  That’s the theory of strategic bequests in Bernheim, Shleiffer and Summers. But even with that motivation you have to ask why bequests are the best way to motivate kids.  Why not just pay them a piece rate?  Every time they come to visit they get a check.  If the parent is even slightly altruistic this is a better system since the rewards come sooner.

Welfare Reform Worked - Brookings: The primary election campaign has intensified a justified concern about inequality in America: People at the top are rising much faster than everyone else. Even low-income Americans consider relatively high levels of inequality acceptable if they have a decent opportunity to improve their condition. But because they may work fewer hours and at stagnant wages, their gains are very limited.Among the poor, surprisingly, never-married mothers have gained the most in recent decades. Their story shows the best way to reduce poverty and inequality: by encouraging individuals to work more and by supplementing their earnings with tax credits, child-care subsidies and other benefits for low-income working parents.  Until the mid-1990s, never-married mothers seldom worked outside the home, had poverty rates of over 60% and were at least five times more likely than married-couple families to be poor. Then in 1996, congressional Republicans and President Clinton collaborated on a welfare reform law requiring adults on welfare, including never-married mothers, to work.

What a difference a decade makes on income inequality- For much of the Obama era, issues such as income inequality have been deemed largely off limits by the right. ... But it wasn't too terribly long ago that Republicans felt this was at least a problem worth considering. Our pal James Carter flagged a fascinating item from 2002, written by one of the Republican presidential candidates for an academic journal. [T]oday, growing disparity between the rich and poor is one of the critical social dilemmas we face in the 21st century. I believe that the growing wealth gap is one of the key reasons for this increasing disparity. Despite a strong economy through the 1990s, the gap between the rich and the poor expanded. Among Americans who reach age seventy, the top ten percent own more wealth than the bottom ninety percent. How do we address this inequity? [...] Initiatives that encourage individual wealth creation are imperative to closing the gap between the rich and the poor. I believe the government can play a role in helping many Americans who struggle to enter the economic mainstream. ...The author was then-Sen. Rick Santorum, in a piece for the Notre Dame Journal of Law, Ethics, & Public Policy.

Silicon Valley Homeless Feel The Grip Of Recession’s Long Reach - The first time Michele arrived at the Maple Street homeless shelter three years ago, she was still driving her BMW 325xi, the final remnant of her Silicon Valley affluence. Her paper wealth of more than $2 million had evaporated a decade earlier, she says, via a stock options fiasco.  This time, she arrived on foot, carrying a backpack that contained all she had left in the world: some clothes, about ten dollars in cash, her laptop computer and her mother's Omega watch.  Though her plunge from executive-level wealth to street-level homelessness is extreme, it has become a not-unfamiliar story among case workers at the seven shelters and transitional housing facilities operated by Shelter Network here in San Mateo county, where the wait list for space is at an all-time high. Overall, the number of homeless people in San Mateo increased by 17 percent between 2009 and 2011, according to a recent county census.

Growing Number Of Americans Can’t Afford Food, Study Finds - More Americans said they struggled to buy food in 2011 than in any year since the financial crisis, according to a recent report from the Food Research and Action Center, a nonprofit research group. About 18.6 percent of people -- almost one out of every five -- told Gallup pollsters that they couldn't always afford to feed everyone in their family in 2011. One might assume that number got smaller wrapped up with the national unemployment rate falling for several consecutive months. In actuality, the reverse proved true: the number of people who said they couldn't afford food just kept rising and rising. The findings from FRAC highlight what many people already know: The economic recovery, in theory now more than two years old, has done little to keep millions of Americans out of poverty and deprivation. Incomes for many haven't kept pace with the cost of living, and for a large swath of the country, things today are as bad as ever, or worse. Forty-six million people lived below the poverty line as of 2010, a record number, according to the Census Bureau, and one that's not even as high as some other estimates would have it. Take a further step back and the situation appears even more dire. About 45 percent of people in the U.S. have reported not being able to cover their basic living expenses, including food, shelter and transportation,

More Than 1 in 7 Use Food Stamps in U.S. - Food-stamp use jumped in the U.S. in December with more than 1 in 7 people receiving benefits, even as a program for disaster assistance related to Hurricane Irene came to an end. Food stamp rolls increased 5.5% in 2011, the Department of Agriculture reported, though the pace of growth has slowed from the depths of the recession. The number of recipients in the food stamp program, formally known as the Supplemental Nutrition Assistance Program (SNAP), rose to 46.5 million, or 15% of the population in December. The numbers receiving benefits were boosted by disaster assistance in the late summer and autumn due to Hurricane Irene, but the those programs were largely ended by December in Connecticut, Massachusetts, New Jersey and Pennsylvania the last states still in need. Minnesota, Colorado, Hawaii, Alaska, New Jersey, Delaware and Iowa all saw year-over-year jumps in use by over 10%. Just Wyoming, Michigan, North Dakota, Utah and West Virginia posted annual drops in the number of people receiving food stamps. Mississippi reported the largest share of its population relying on food stamps, more than 21%. One in five residents in New Mexico, Oregon, Tennessee and Washington DC also were food-stamp recipients.

Why, you just want to redistribute income! - From time to time I run into a charge that I or someone supporting some seemingly non-market policy or other “just want to redistribute income (or wealth).” Something like that is often hurled as if “redistribution” were a glob of tar that soils the opponent’s entire position. Once the accusation has been leveled, the leveler then rhetorically struts around like an alpha rooster, crowing as if the argument has been won.Income or wealth redistribution should not end any argument. It should, in fact, be an integral part of the discussion among those who base their preference for markets on the fundamental theorems of welfare economics, which I will attempt to explain intuitively (though I am not confident I will succeed). Lest you think this is theoretical nonsense of no importance, crack any basic (or even advanced) text on economics and you’ll find these theorems. They are also behind the scenes in many claims of market efficiency. Many people probably believe in the efficiency of the market from this perspective, even if they do not recognize it..

Dementia behind bars makes caregivers of killers - Secel Montgomery Sr. stabbed a woman in the stomach, chest and throat so fiercely that he lost count of the wounds he inflicted. In the nearly 25 years he has been serving a life sentence, he has gotten into fights, threatened a prison official and been caught with marijuana.  Despite that, he has recently been entrusted with an extraordinary responsibility. He and other convicted killers at the California Men’s Colony help care for prisoners with Alzheimer’s disease and other types of dementia, assisting ailing inmates with the most intimate tasks: showering, shaving, applying deodorant, even changing adult diapers.  Dementia in prison is an underreported but fast-growing phenomenon, one that many prisons are desperately unprepared to handle. It is an unforeseen consequence of get-tough-on-crime policies — long sentences that have created a large population of aging prisoners. About 10 percent of the 1.6 million inmates in America’s prisons are serving life sentences; another 11 percent are serving over 20 years.

That Stuck Feeling - We all had a chuckle yesterday at the poor hedge fund marketing director whining about the difficulties of living in Brooklyn on $350,000 a year: “I feel stuck,” Schiff said. “The New York that I wanted to have is still just beyond my reach”…“I can’t imagine what I’m going to do,” Schiff said. “I’m crammed into 1,200 square feet. I don’t have a dishwasher. We do all our dishes by hand.”  If the ridiculousness wasn’t readily apparent to you, this quote from a Huffington Post story today will fix that:“I feel like I’m stuck, like I can’t breathe, like I’m in quicksand.” That’s Brooklyn Davis, a 23 year old who grew up poor and who just landed a $7.25 an hour cleaning job after a six-month search. His commute will take two hours round trip and cost $5.50 a day, a significant chunk of his earnings (and an amount he wouldn’t be able to afford before his first check without assistance). Even still it won’t cover his bills. Davis is profiled in one of the first pieces of a promising new series in The Huffington Post called “Breakdown: Americans on the Edge,” which executive editor Tim O’Brien says will be a “year-long exploration and examination of the lives of middle class and poor Americans.”

Do Liberals Disdain the Disabled? - Earlier this month, I was hanging out with my brother-in-law Vincent. He lives with developmental disabilities caused by an unwanted genetic sequence that deprives his brain of a critical protein. We were sitting in our family room when Rick Santorum — whose 3-year-old daughter has a different chromosomal disorder — appeared on the television.  “One of the things that you don’t know about ObamaCare,” Mr. Santorum said, is that it requires “free prenatal testing ... Why? Because free prenatal testing ends up in more abortions and, therefore, less care that has to be done, because we cull the ranks of the disabled in our society.” Mr. Santorum’s comment echoed Sarah Palin’s famous charge during the health care reform debate: “My parents or my baby with Down Syndrome will have to stand in front of Obama’s ‘death panel’ so his bureaucrats can decide, based on a subjective judgment of their ‘level of productivity in society,’ whether they are worthy of health care.”  Mr. Santorum and Ms. Palin are spreading a poisonous meme: that liberals disdain the disabled and look down upon parents who raise children with physical or intellectual limitations. They seek to insert the hateful rhetoric of the culture war into one of the few areas of American life that had remained relatively free of such rancor. Care for people with disabilities has quietly been one of the few causes in this country on which social liberals and conservatives could put aside their differences to get important work done.

More Americans Rejecting Marriage in 50s and Beyond - Over the past 20 years, the divorce rate among baby boomers has surged by more than 50 percent, even as divorce rates over all have stabilized nationally. At the same time, more adults are remaining single. The shift is changing the traditional portrait of older Americans: About a third of adults ages 46 through 64 were divorced, separated or had never been married in 2010, compared with 13 percent in 1970, according to an analysis of recently released census data conducted by demographers at Bowling Green State University, in Ohio.  Sociologists expect those numbers to rise sharply in coming decades as younger people, who have far lower rates of marriage than their elders, move into middle age.  The elderly, who have traditionally relied on spouses for their care, will increasingly struggle to fend for themselves. And federal and local governments will have to shoulder much of the cost of their care. Unmarried baby boomers are five times more likely to live in poverty than their married counterparts, statistics show. They are also three times as likely to receive food stamps, public assistance or disability payments.

Ayn Rand Worshippers Should Face Facts: Blue States Are the Providers, Red State Are the Parasites - Last week, the New York Times published a widely discussed article updating an argument that progressive bloggers noticed a very long time ago. It's now well-understood that blue states generally export money to the federal government; and red states generally import it.  TPM published a great map showing exactly how this redistribution works: Progressives believe in the redistribution of wealth, so we're not usually too upset by this state of affairs. That’s what it means to be one country. E pluribus unum, and all that. We’re happy to help, because we think we’ve got a stake in making sure kids in rural Alabama get educations and seniors in Arizona get healthcare. What’s good for them is good for all of us. We also like to think they’d help us out if our positions were reversed.

Is Drug War Driven Mass Incarceration the New Jim Crow? - Forbes - Once in a great while a writer at the opposite end of the political spectrum gets you to look at a familiar set of facts in a new way. Disconcerting as it is, you can feel your foundation shift as your mind struggles to reconcile this new point of view with long held beliefs. Michelle Alexander has done just that in her book, The New Jim Crow.  Her thesis pushes disparate-impact logic to an extreme, ascribing deeply racist motives to a society that has traveled a very long way since the system of legal and cultural discrimination known as Jim Crow stained the land. Yet there is no denying that if your goal were to consign African Americans to a permanent underclass—one which the rest of us would be culturally and legally permitted to discriminate against in employment, housing, voting rights, and government benefits—the war on drugs would be a great way to do it. Alexander spouts statistics with which we are all familiar. Approximately half a million people are in prison or in jail for a drug offense today, compared to around 41,000 in 1980. Four out of five drug arrests are for simple possession, 80% for marijuana. Most people in state prison for drug offenses have no history of violence.

NC Republican’s Foolproof Strategy For Winning The War On Poverty Why has no one ever thought of this before?  “We have no one in the state of North Carolina living in extreme poverty,” [Republican state Rep. George] Cleveland said. Extreme poverty is prevalent in other countries, not in the United States, he added. “Poverty is a governmental definition in this country, and through the years they keep redefining poverty to make sure we have a poverty class. Poverty is you’re out there living on a dollar and half a day. I don’t think we have anybody in North Carolina doing that.“ All you have to do is redefine poverty down to “literally no money at all,” and poof, it’s all gone.  Problem solved!  I’m sure these 9 million retirees will be very relieved to hear that they’re actually doing pretty well for themselves.  Not to mention all those Masters Of The Universe who have to scrape by on a few hundred thousand a year now.

Indiana's $2 billion unemployment mess -  Inefficient. Poorly managed. Sloppy. These strong words are being used to describe the agency that pays Indiana's unemployed. Whistleblowers came exclusively to I-Team 8 to expose this story years in the making. One of those whistleblowers is a former DWD employee who we'll call Ken. He knows the Department of Workforce Development well. He worked there as one of the people who decides whether you're eligible for unemployment. When asked whether the unemployed can be assured their cases will be decided fairly and accurately he answered, "I would not have faith, no. And I don't think a lot of people do." Ken doesn't want us to identify him for fear of state retaliation. But another former DWD worker, Andrew Gray, shared his story openly. "It's a poorly run department," said Gray. The state's unemployment rate skyrocketed from 4.7 percent in January of 2008 to a record high 10.9 percent just a year and a half later. As unemployment reached its peak, internal e-mails obtained by I-Team 8 detail how the Department of Workforce Development - drowning in claims, calls and appeals - may have resorted to questionable tactics that contributed to a $2 billion debt.

Virginia Says No to Lawless Imprisonment - Good things do come out of the Virginia state legislature.  That normally reprehensible body has just stood up to the federal outrage that has come to be known as the NDAA.  The letters stand for the National Defense Authorization Act, but at issue here is not the bulk of that bill.  Virginia’s state government has no objection to dumping our grandchildren’s unearned pay into the pockets of war profiteers while our schools lack funding.  At issue is the presidential power to lock people up without a trial, which was slipped into the latest military funding bill late last year and signed into law by President Barack Obama on New Year’s Eve.  In fact, Virginia’s legislature does not object to that abuse except in one particular circumstance, namely when the victim of it is a U.S. citizen.  But in that circumstance, Virginia says Hell No. Locally in Charlottesville, we rallied at Republican Congressman Robert Hurt’s office. We urged him to vote No, and he did so, saying: “After studying the controversial provisions and after hearing from many in the Fifth District, I concluded that the detainee provisions in the bill did not provide clear and unambiguous protection of the constitutional rights of American citizens. For this reason, I opposed the bill on final passage.”

Monday Map: Top State Marginal Income Tax Rates, as of January 1st, 2012 - Today's Monday Map shows the top marginal income tax rate for each state. Click the map to enlarge it. View previous Monday Maps here.

Reagan, Obama, Austerity - Krugman - A followup on the effects of austerity at the state and local government level, which have led to a decline in government purchases of goods and services that stands in stark contrast to earlier recoveries. I pursued this a bit more, and have a startling calculation to offer. Let’s look at the comparison between government purchases in the Reagan “Morning in America” recovery and the current recovery: At this point in the Reagan recovery government spending had risen 11.6 percent; this time around it’s actually down by 2.6 percent. So if we had followed the Reagan track, spending would be almost 15 percent higher. Since government spending on goods and services is about $3 trillion a year, spending on the Reagan track would have meant more than $340 billion more in direct government demand, or more than 2 percent of GDP. Include the multiplier effect, and we would have expected real GDP to be something like 3 percent higher — and given Okun’s Law, the unemployment rate to be 1.5 percentage points lower, or something like 7 percent. How does this compare with the Reagan recovery at a corresponding stage? Hmmm:

Water bills expected to triple in some parts of U.S.  - Many consumers could see their water bills double or even triple, as the country attempts to overhaul its aging water system over the next 25 years. A new study by the American Water Works Association found that repairing and expanding the U.S. drinking water system between 2011 and 2035 will cost at least $1 trillion, an amount that will largely be paid for by jacking up household water bills. "The amounts will vary depending on community size and geographic region, but in some communities these infrastructure costs alone could triple the size of a typical family's water bills," the report said. Currently, the average household water bill is about $335 per year, according to the non-profit, which focuses on drinking water quality and supply. Small, rural communities are likely to be hit the hardest because there are fewer people to share the expenses of infrastructure projects. Families in these areas are likely to see their bills jump between $300 and $550 per year due to infrastructure repairs and expansion costs. And that doesn't even include added costs of other big projects that may come up like replacing pipes to meet new regulations.

Brown’s Revenue Forecast Is $6.5 Billion Higher Than Budget Analyst Sees - California tax collections may be $6.5 billion less than Governor Jerry Brown estimated in his spending plan for the current and following fiscal years -- even with the benefit of about $2 billion from a Facebook Inc. stock offering, the state’s budget analyst said. California will probably collect about $177.5 billion in revenue through June 2013, instead of $184 billion Brown has estimated in his proposed budget that includes higher income and sales levies, the state’s Legislative Analyst’s Office said today. Brown and the analysts office differ on how much the state will receive from capital gains. “We can identify no strong rationale for the administration’s assumption that capital gains will grow very rapidly in 2012 and later years,” the LAO said in its report today. The largest U.S. state by population, and the most indebted, is confronting a $9.2 billion deficit. Brown, a 73- year-old Democrat, wants voters to boost sales and income taxes that would raise about $6.9 billion annually until they expire in four to five years. He built that amount into his spending plan and inserted a provision that automatically triggers $4.8 billion in cuts to schools if voters reject the higher levies.

Stockton, California may halt bond payments - The city of Stockton, California, whose finances were hammered by the housing crisis, is considering halting payments on at least a portion of $341 million in debt as it seeks to avoid becoming the biggest U.S. city to declare bankruptcy. Stockton City Manager Bob Deis said on Friday that he recommended to the city council that bond payments be suspended as part of a broad restructuring of the city's finances. The city has a debt payment due March 1. Stockton faces a budget deficit of about $20 million in its next fiscal year, Deis said. Spending has already been slashed dramatically, and Diaz said further cutbacks alone cannot bridge the gap and that mediation with creditors was essential. The city of 292,000 people, located about 85 miles east of San Francisco, has suffered from two decades of poor financial management, overly generous retirement packages for city workers, unsustainable labor contracts and too much debt,

Stockton Vote May Avoid Bankruptcy (News video) The Stockton City Council will vote today on a package of measures that would allow the city to stall debt payments and renegotiate contracts in an effort to avoid bankruptcy. City Manager Bob Deis announced last week the city will attempt to use mediation to work out debt with creditors and long-term health benefits with employees. The city is facing a $450 million, unfunded liability in long-term health benefits for past employees. Deis called the benefit a “Ponzi scheme” that never had funding and has locked the city into unaffordable payments.

What Is Everyone Waiting For? - Detroit City Council worked its normal Tuesday agenda today and as usual there was a real head scratcher to give us all a window into Detroit’s dysfunction. This time it had to do with trash truck hydraulic arms. It seems these very useful tools break down fairly regularly. The company that has traditionally repaired them for the city of Detroit [like many others] isn’t getting paid on time and has apparently refused to repair any more of the hydraulic arms in the future unless payment is quickly forthcoming.  As a result, a proposal was made to council: find a second company that would fix the arms and not require immediate payment.  Yes that’s right, rather than suggest the city of Detroit pay its bills on time so trash can get picked up, actual staff time and tax dollars went into finding a vendor willing to do the work and not get paid right away if ever.  Amazingly they did!  Council turned the request down.  It would be hilarious if it weren’t so tragic!

Detroit budget update: City still likely to run out of cash by April - The city of Detroit is still on track to run out of cash by the end of April, according to a new forecast posted on the city's website — with just $76 million cash on hand at the end of January, according to the report. The city is expected to end April with just $2.5 million in the bank and hit bottom in May, ending that month with a $9.5 million cash deficit and ending the 2012 fiscal year at the end of June $46.8 million in the hole. The forecast doesn't include the impact of tentative union agreements and layoffs, according to a note on the report. Detroit Mayor Dave Bing announced a plan last year that he said would save the city $102 million in the current fiscal year. Items listed in that plan include an increase in the corporate income tax, collection of outstanding past-due receivables from the Detroit Public Schools, a 10 percent cut to police and fire salaries, changes in medical and pension costs for active and retired employees, a change in work rules, outsourcing the management of the Detroit Department of Transportation, a 10 percent cut in payments to vendors and 1,000 layoffs. Layoffs are reportedly in progress, management of DDOT has been outsourced and vendor payments have been suspended or cut 10 percent. But police and fire unions have yet to ratify tentative union agreements, the corporate income tax hasn't been increased, and it is unclear which of the other items have been realized.

San Diego Schools Consider Pink Slips For More Than 1,100 — Last night, San Diego city school leaders saw the list of teaching, counseling and other certificated positions that will have to be eliminated next year if no other solution to the district’s more than $120 million deficit arises. School board trustees called for employee unions to come to the bargaining table to avoid drastic layoffs. City schools will have to shed about 1,600 counseling, nursing and administrative potions next year to balance their budget. Considering normal attrition and leaves of absence the district estimates that could mean about 1,100 layoffs. Much of next year’s deficit is tied to current employee contracts which include the reinstatement of five furlough days and a pay increase.

City schools face $35 million shortfall in 2013 budget - The Baltimore school system is facing a $35 million shortfall as it plans for its fiscal 2013 budget, a gap that officials said could have a serious effect on schools' spending power for the second year in a row. The system is projecting about $8.5 million more in revenue next year but has also noted a $43 million increase in expenses, primarily driven by labor costs tied to the system's pay-for-performance contracts for teachers and administrators.The school system has not presented a full budget as it waits to find out how much funding it will receive from the city and state.

Stealing From The Mouth of Public Education to Feed the Prison Industrial Complex - We are witnessing a systemic recasting of education priorities that gives official structure and permanence to a preexisting underclass comprised largely of criminalized poor black and brown people. States across the US are excising billions of dollars from their education budgets as if 22% of the population isn’t functionally illiterate.  According to the NAAL standards of the National Center for Education Statistics 68 million people are reading below basic levels. The Center on Budget and Policy Priorities found that “nearly all states are spending less money (on education) than they spent in 2008 (after inflation), even though the cost of providing services will be higher.” On top of cutting 4 billion dollars from their budget, Texas has also eliminated state funding for pre-K programs that serve around 100,000 mostly at-risk children. North Carolina has cut nearly a half billion dollars from K-12 education resulting in an 80 percent loss for textbook funds and a 5 percent cut in support positions like guidance counselors and social workers among numerous other cuts. Decisions like these leave little reason to wonder why both those states are facing 27% drop out rates.

A Brief History of the Education Culture Wars: On Santorum’s Legacy, the GOP and School Reform - Judging by the applause lines at GOP campaign stops and debates this winter, a significant segment of the Republican electorate understands public education not as a crucial civic institution, nor as a potential path from poverty to the middle class, nor even as a means of individual betterment. Instead, this coalition of religious conservatives and extreme tax-cutters prefers to vilify public schools—and actually, pretty much any traditional educational institution, including liberal arts colleges—as potential corruptors of the nation’s youth; as unwanted interlocutors in that most sacred relationship: the one between a child and her parent. It is a curious thing, because with some 90 percent of American children enrolled in public schools, there must be significant overlap between the consumers of public education and the approximately one-third of Americans who describe themselves as Tea Party–type conservatives. Never mind: It is clear that in the American political economy, there is nothing unusual about a voter hating and resenting a government program even while relying heavily upon it.

How Head Start Can Make a Difference - Head Start, the government’s program for giving preschool training to children from low-income families, has become something of a political football as both parties champion their efforts to spend government funds more efficiently. Numerous economic studies, as well as the government’s own sponsored research, have examined the immediate and long-term effects of Head Start, looking at cognitive skills, social and emotional development and health, as well as the likelihood that students attend college, earn higher incomes or avoid criminal activity. Researchers and policy makers have been troubled by studies that show that while children in Head Start show clear gains in skills like vocabulary, spelling, letter naming, color identification and other precursors of academic performance during and immediately following their enrollment in the program, those effects appear to fade over time. A new study looks at how the program affects parents’ involvement with their children both during and after the program, and finds that those effects are more long-lasting.

State Cutbacks Curb Training in Jobs Critical to Economy…As state funding has dwindled, public colleges have raised tuition and are now resorting to even more desperate measures — cutting training for jobs the economy needs most.  Technical, engineering and health care expertise are among the few skills in huge demand even in today’s lackluster job market. They are also, unfortunately, some of the most expensive subjects to teach. As a result, state colleges in Nebraska, Nevada, South Dakota, Colorado, Michigan, Florida and Texas have eliminated entire engineering and computer science departments.  At one community college in North Carolina — a state with a severe nursing shortage — nursing program applicants so outnumber available slots that there is a waiting list just to get on the waiting list.  This squeeze is one result of the states’ 25-year withdrawal from higher education. During and immediately after the last few recessions, states slashed financing for colleges. Then when the economy recovered, most states never fully restored the money that had been cut. The recent recession has amplified the problem.  “There has been a shift from the belief that we as a nation benefit from higher education, to a belief that it’s the people receiving the education who primarily benefit and so they should foot the bill,”

Why Tuition Has Skyrocketed at State Schools - I have an article today about the states’ long-term divestment from public higher education, and what that means for students. As I’m sure you know, college tuitions have been skyrocketing for decades — with growth outpacing the Consumer Price Index, gasoline and even that great bugaboo of out-of-control costs, health care. Here’s a chart showing price changes in these categories. The lines represent the price in a given year, as a percent of the price in 1985. For example, if a line reaches 200, that means prices in that year were 200 percent of those in 1985, or twice as high.  College tuition and fees today are 559 percent of their cost in 1985. In other words, they have nearly sextupled (while consumer prices have roughly doubled). There’s a lot of debate about why college costs have risen so much. Some of the rising cost has to do with other services schools have been adding over the last few decades, like mental health counselors and emergency alert systems. And certainly there are other inefficiencies that have crept into the system as higher education has become more things to more people. But at least at public colleges and universities — which enroll three out of every four American college students — the main cause of tuition growth has been huge state funding cuts.

Stop Starving Public Universities and Shrinking the Middle Class  - Robert Reich - Over just the last year 41 states have cut spending for public higher education. That’s on top of deep cuts in 2009 and 2010. Some public universities, such as the University of New Hampshire, have lost over 40 percent of their state funding; the University of Washington, 26 percent; Florida’s public university system, 25 percent. Rising tuition and fees are making up the shortfall. This year, the average hike is 8.3 percent. New York’s state university system is increasing tuition 14 percent; Arizona, 17 percent; Washington state, 16 percent. Students in California’s public universities and colleges are facing an average increase of 21 percent, the highest in the nation. The children of middle and lower-income families are hardest hit. Remember: The median wage has been dropping since 2000, adjusted for inflation. Pell Grants for students from poor families are falling further behind; they now cover only about a third of tuition and fees. (In the 1980s, they covered about half; in the 1970s, more than 70 percent.) Student debt is skyrocketing – the New York Federal Reserve Bank estimates it at $550 billion. Punitive laws enforce repayment, and it’s almost impossible to shed student loans in bankruptcy. There is no statue of limitations for non-repayment.

Why is research higher status than teaching? - It is a truth universally acknowledged: within academia, research has higher status than teaching. The question is, why? High status work is generally well paid work, and vice versa. Wages are determined by market forces, so supply and demand is the first place to look for an explanation for the high status of research.    Perhaps research is highly valued because it is in short supply. Scarcity explains the high status accorded to those with truly brilliant, original and creative minds. But scarcity cannot explain why dime-a-dozen mediocre researchers are accorded higher status than excellent teachers. Moreover, the scarcity of research is, in a sense, artificially created. There are a limited number of people publishing in 'top journals' only because the number of top journals is limited. Research would be about as scarce as blog posts in a world where people self-published their own work. Even a scarce commodity will have a low price if there is not much demand for it. Academic research is a highly differentiated product. It is typically "curiosity driven" - researchers produce what they choose to research, not what the marketing department thinks will sell well.

Student-Loan Debt, School by School - Calling student-loan debt "the next debt bomb for the U.S. economy" (as a bankruptcy attorneys group did earlier this month) may be a stretch, but debt loads can indeed be large—and vary tremendously from school to school, regardless of whether the institution is public, private, or for-profit. The percentage of students taking out loans ranges even more widely—from fewer than one in 10 at Yale University and Midland College in Texas, to 100 percent at the American Institute Of Business (and 17 other private schools). The map below draws on data from the New America Foundation's Federal Education Budget Project, and details the debt loads at more than 1,800 four-year colleges and universities.* State-level averages are color-coded by quintile in the map; click on any dot to find details for a particular school, or use the slider to filter by percentage of students taking out loans. For more details on the data used here, please see the fine print below.

Bankrupt at 21: Trapped in a Web of Student Loans - Bankruptcy lawyers have a frightening message for America: They’re seeing the tell-tale signs of a student loan debt bubble that is placing increased financial pressure on families struggling with their children’s mounting debt. According to a recent survey by the National Association of Consumer Bankruptcy Attorneys, more than 80 percent of bankruptcy lawyers have seen a substantial increase in the number of clients seeking relief from student loans in recent years.  In most cases, those clients could not meet the tough federal hardship standards that are necessary to discharge a student loan through bankruptcy proceedings. Instead, many of these unwary parents or guardians who co-signed the student loans face the prospect of losing their life savings, cars or homes to collection agencies for aggressive private lenders. William E. Brewer, Jr., president of the Consumer Bankruptcy Attorneys association, has warned, “This could very well be the next debt bomb for the U.S. economy” – something akin to the housing mortgage loan crisis that triggered the U.S. financial crisis.

How College Debt Is Crushing the American Dream - Saddled with $82,000 in college loans and no immediate full-time job prospects, Curtis had to defer payment on her loans during a prolonged job search in Washington, D.C. Finally, she landed a job with a consulting firm as an international trade analyst. But with an entry-level salary of $60,000 to $70,000 a year, she has had to stretch her paycheck to cover her rent and living expenses and the $600 monthly installment on her college loans.  Now age 30 and sharing an apartment in Northwest Washington, Curtis belongs to a generation of well-educated young people struggling to navigate one of the worst economies of modern times while shackled with student debt that seriously restricts their mobility and options.  “I have to pay for a wedding and don’t really have the funds to do that.  I’m deferring home ownership and things like that.” The combination of long-term unemployment, vanishing entry-level jobs with health insurance benefits, and the unprecedented levels of student debt have conspired  to shatter the  traditional American Dream for many young people who aspire to a middle-class lifestyle.  Last year, student debt in the U.S. surpassed $1 trillion, and for the first time exceeded the total amount of credit card debt, according to the Federal Reserve Bank of New York. At the same time, the default rate on student loans is rising: The Department of Education said last September that 8.8 percent of borrowers had defaulted in their first two years of repayment, up from 7 percent the previous year.

Student Loan Debt Hits Home for Bernanke - The most interesting anecdote to come out of Federal Reserve Chairman Ben Bernanke‘s semiannual testimony to Congress: His son, who is in medical school in New York, is likely to rack up $400,000 of student loan debt in the process of getting his degree.  The rapid growth of U.S. student loan debt, Mr. Bernanke said, required “careful oversight” from regulators. The student loan tidbit wasn’t the only piece of “regular guy” information Mr. Bernanke divulged in today’s hearing. He also said he does his own grocery shopping. As the Wall Street Journal reported in December, Mr. Bernanke has a $672,000 mortgage on the three bedroom townhouse he owns near Capitol Hill. He has refinanced that mortgage two times, most recently last September. Fortunately for him, his income-generating capacity is high, considering the book and speaking fees he has the potential to command when his term at the Fed is up in 2014.

Quinn budget plan would cut off funding for 2 retired teachers programs - Gov. Pat Quinn wants to eliminate state funding for two health insurance programs that provide coverage for retired schoolteachers and community college instructors across Illinois. The idea, part of the new spending plan the governor unveiled last week, would cut roughly $92 million from the Teachers Retirement Insurance Program and the Community College Insurance Program. About 77,000 retired educators and their dependents outside Chicago are covered under the programs. Without the state share, retirees might be required to pay higher premiums. The costs also could be passed on to local school districts, which in turn could result in property tax hikes. Asked to explain the proposed funding cut, a Quinn budget spokeswoman echoed the message from the governor's budget speech. The elimination is "due to the state's fiscal challenges created over decades of mismanagement," spokeswoman Kelly Kraft said.

California Democrats push pension plan for nongovernment workers - Senate Bill 1234, written by Sen. Kevin de León, D-Los Angeles, would require businesses with five or more employees to enroll them in a new "Personal Pension" defined benefit program or to offer an alternative employer-sponsored plan. The new system's investments would be professionally managed by CalPERS or another contracted organization. Employees would contribute about 3 percent of their wages through a payroll deduction, although they could opt out of the plan. The fund would assume much lower investment returns than the 7.75 percent that the California Public Employees' Retirement System says its investments will generate, de León said. Steinberg rejected suggestions that Democrats are pushing de León's bill to fend off pressure to enact substantial public pension changes.

To Pay New York Pension Fund, Cities Borrow From It First — When New York State officials agreed to allow local governments to use an unusual borrowing plan to put off a portion of their pension obligations, fiscal watchdogs scoffed at the arrangement, calling it irresponsible and unwise.  And now, their fears are being realized: cities throughout the state, wealthy towns such as Southampton and East Hampton, counties like Nassau and Suffolk, and other public employers like the Westchester Medical Center and the New York Public Library are all managing their rising pension bills1 by borrowing from the very same $140 billion pension fund to which they owe money.  Across New York, state and local governments are borrowing $750 million this year to finance their contributions to the state pension system, and are likely to borrow at least $1 billion more over the next year. The number of municipalities and public institutions using this new borrowing mechanism to pay off their annual pension bills has tripled in a year.

GE to 3M Pension Pain Mounts as Fed Policy Boosts Liabilities -- General Electric Co., Boeing Co. and 3M Co. will join big U.S. employers in making a record $100 billion in 2012 pension contributions, 67 percent more than two years ago, as low interest rates boost companies' liabilities. Payments may total $400 billion from 2011 through 2015 to ease underfunding at the 100 largest defined-benefit programs, according to consultant Milliman Inc., which estimated that assets in January were enough to cover less than three-fourths of projected payouts. “It's been called the wall of contributions,” said Alan Glickstein, a senior retirement consultant at Towers Watson & Co. in New York. “All of a sudden this thing jumps up and stays there for a few years. That's what it looks like -- a wall.” Companies from defense contractor Lockheed Martin Corp. to aviation-electronics maker Honeywell International Inc. are caught in a vise: the Federal Reserve Board's vow to keep rates at current levels until 2014 means pension plans' fixed-income investments are stagnating just as new rules shorten the time available to shore up funding.

Pension Reform Unintended Consequence: The Pentagon Is Broke - New standards that were set in place in 2006 as part of the Pensions Protection Act that change rules on pension fund liability calculations looks set to push The Pentagon to budget DefCon 1 as they note the costs are "way more than a book-keeping question". As Defense News reports, the rule, which takes effect this week, requires the US government to reimburse its contractors to a far greater degree for their employee pension costs. The unbudgeted line-item is estimated at billions of dollars but perhaps what is most concerning is DoD Comptroller Hale's comment that the cost to The Pentagon will depend on how the companies' pension funds fare in the stock market. If investments do well, costs will be lower, but if investments do poorly, pension funds become further underfunded and this will mean more costs to the Pentagon.

Effort to cut Medicare fraud disappoints - -- Launched last summer, a $77 million computer system to stop Medicare fraud before it happens had prevented just one suspicious payment by Christmas. That saved taxpayers exactly $7,591. Hoping for much better results, a disappointed Sen. Tom Carper, D-Del., said, "I wondered, did they leave out some zeros?" Lawmakers had expected the system to finally allow Medicare to stanch a $60-billion-a-year fraud hemorrhage. Now they're worried about its future performance.Medicare officials say it's unfair to grade the new technology on a single statistic."Suspending payments is only one way of stopping the money," says Ted Doolittle, deputy director of Medicare's anti-fraud program. "There's lots of ways of stopping the money, and we are using them all. Looking at payment suspensions only - that's an unsophisticated view that doesn't give you a full picture of our activities."

Growing Support for Drug Testing of Welfare Recipients - Conservatives who say welfare recipients should have to pass a drug test to receive government assistance have momentum on their side. The issue has come up in the Republican presidential campaign, with Mitt Romney calling it an “excellent idea.” Nearly two dozen states are considering measures that would make drug testing mandatory for welfare recipients, according to the National Conference of State Legislatures. Wyoming lawmakers advanced such a proposal last week. Driving the measures is a perception that people on public assistance are misusing the money and that cutting off their benefits would save money for tight state budgets — even as statistics have largely proved both notions untrue. “The idea from Joe Taxpayer is, ‘I don’t mind helping you out, but you need to show that you’re looking for work, or better yet that you’re employed, and that you’re drug and alcohol free,’ ” said Edward A. Buchanan, a Republican who is the speaker of the Wyoming House. Supporters are pushing the measures despite warnings that courts have struck down similar programs, ruling that the plans amount to an unconstitutional search of people who have done nothing more than seek help.

Blunt, Rubio, And The Madness of Employer-Based Health Care - In the name of religious freedom, Sens. Roy Blunt and Marco Rubio tried to give bosses and insurance companies the freedom to impose their own religious or moral beliefs on their employees by withholding coverage for contraception. Not abortion, mind you. Contraception. And not for minors (minors don't typically obtain their own health insurance) but for adults; men and women over--in most instances, well over--the age of 18. Quite a lot of these men and women are married and want to use contraception when having sex with their very own husbands and wives.What's ironic about this debate is that employers don't really pay for health insurance, or indeed any benefits, at all. As any economist will tell you, the value of any employment benefit is, over time, taken out of what would otherwise be employee wages. Employers pass through the cost of health insurance, like they pass through the cost of anything else, by paying employees a bit less. (The only reason employees have consented to this arrangement until now is that buying health insurance as an individual is much more expensive than buying it as part of a group.) So the Blunt-Rubio construct that the Catholic Church, or your Holy Roller boss, shouldn't be forced to subsidize contraception against their beliefs is based on a false assumption. Ain't nobody subsidizing your health insurance but you.

Poll: Most voters believe healthcare mandate is unconstitutional  - Nearly two years after President Obama signed his landmark healthcare package into law, three-quarters of registered voters believe the law’s requirement that every American carry health insurance is unconstitutional, according to a new survey. A USA Today/Gallup poll taken earlier this month and released Monday found that a majority of voters -- those surveyed in battleground states and nationwide generally -- agreed in their dislike of the Affordable Care Act. Voters in battleground states are more likely to want it repealed, the poll showed. Fifty-three percent of voters polled in battleground states – Colorado, Florida, Iowa, Michigan, Ohio, Pennsylvania, Nevada, New  Hampshire, New Mexico, North Carolina, Virginia and Wisconsin – said they would favor repealing the law if a Republican is elected president in November. Nationwide, 40% said they would favor repeal.

More Americans seek dental treatment at the ER; costs can be 10 times more than checkups - New research shows that more Americans are turning to the emergency room for routine dental problems. A study released Tuesday by the Pew Center on the States found that going to the ER often costs 10 times more than preventive care and offers far fewer treatment options than a dentist’s office. Shortages of dentists, including those who treat Medicaid patients, are part of the problem. The number of ER visits nationwide for dental problems increased 16 percent from 2006 to 2009. The report suggests that trend is continuing. In Florida, for example, there were more than 115,000 ER dental visits in 2010. That resulted in more than $88 million in charges

Health Care Thoughts: Research on Defensive Medicine (Part 1) A Vanderbilt research survey of orthopaedic surgeons indicate that 24% of diagnostic testing is "defensive medicine." This does not surprise me, as I have been in the room when defensive medicine protocols have be decided. I have been involved in settling about two dozen malpractice suits against orthopedists (three had some merit, one was certainly malpractice). I also have done analysis for both sides in other malpractice actions. Orthopaedists treat patients who have intense pain from serious injuries and conditions, and many of those patients have high expectations for positive outcomes. Those outcomes are not always possible, despite near miraculous results in many cases. But don't they have insurance? Yes, but the stress and costs of a malpractice suit grind on physicians, even when suits are ridiculous it is a very unpleasant experience. An orthopaedist who does surgery without an MRI study puts him/herself in real jeopardy, and to be fair some lab and cardiology tests are required by accreditation standards.

If You Feel O.K., Maybe You Are O.K. - EARLY diagnosis has become one of the most fundamental precepts of modern medicine. It goes something like this: The best way to keep people healthy is to find out if they have (pick one) heart disease, autism, glaucoma, diabetes, vascular problems, osteoporosis or, of course, cancer — early. And the way to find these conditions early is through screening.  It is a precept that resonates with the intuition of the general public: obviously it’s better to catch and deal with problems as soon as possible. Recently, however, there have been rumblings within the medical profession that suggest that the enthusiasm for early diagnosis may be waning. Most prominent are recommendations against prostate cancer screening for healthy men and for reducing the frequency of breast and cervical cancer screening. Some experts even cautioned against the recent colonoscopy results, pointing out that the study participants were probably much healthier than the general population, which would make them less likely to die of colon cancer. In addition there is a concern about too much detection and treatment of early diabetes, a growing appreciation that autism has been too broadly defined and skepticism toward new guidelines for universal cholesterol screening of children.

Money out of place? “Debt” and Incentives -The current debate about incentives in healthcare can be split in half. One half concerns the use of incentives to motivate professionals and institutions to provide better, or different, care and services to patients and clients, citizens and customers. This is a very important debate, with roots in Adam Smith’s suspicion of professions as conspiracies against the public, the public choice theorists’ suspicion of regulation by rule-making, and the management consultant’s belief that people’s behaviour at work is driven principally by the available rewards. Interesting as this debate is, and however troubling it may be to those of us who think that work, especially professional work, is about craft, vocation, public service, and other non-monetary considerations, at the end of the day, work is work and it is paid, or it is not done. Work sits within the economy, and the use of incentives to shape and frame that work surprises no one very much and upsets no one very much. Upset is caused by inequality in remuneration, exploitation in the labour market, and so on. But this doesn’t unsettle the basic idea that work and incentives go together. Who gets the incentive, how much, contingent on what, etc. is all up for argument and negotation, obviously. So is the problem of what money payment is actually paying for: in The City, does the high pay remunerate not only extraordinary hours of work, but also being subject to bullying, sexist and sexual abuse?

FDA issues new warning on Lipitor, Zocor, other statins - The Food and Drug Administration on Tuesday raised safety concerns about the popular class of cholesterol-fighting drugs called statins, warning that patients taking the drugs may face a "small increased risk" of higher blood sugar levels and of being diagnosed with diabetes.The federal safety agency said Tuesday it plans to add the diabetes-risk language to the "warnings and precautions" sections of labeling for the statin drugs. The drugs that will get the warning include top-selling brand names such as Lipitor, Lescol, Pravachol, Crestor, Mevacor, Altoprev, Livalo and Zocor. Under these and a range of generic names, the drugs have been taken for years by tens of millions of people to prevent heart attack, stroke and cardiovascular disease. The largest manufacturers of statins didn't have immediate comments on the FDA's action. In addition, the FDA said that labels for statin drugs now will contain information about patients experiencing memory loss and confusion, though this side effect was classified as an "adverse reaction" rather than being put in the more serious warnings and precautions category.

Will Price Inflation Of Meat, Corn, Food, And Farmland Continue? - Kay McDonald - Today's corn prices are triple the price they were three years ago. High corn demand and high gasoline and diesel prices are having a ripple effect throughout every component of the food and agriculture system. In 2011, we saw many grocery store food item prices rise by double digits and Midwestern farmland prices went up 25%, attributable to high corn and soybean returns for farmers. The consumer is getting squeezed at the supermarket and at the gas pump. According to the Bureau of Labor Statistics, in 2011, grocery store prices rose six percent on average, or nearly three times the rate of core price inflation excluding food and energy. The median American family spends ten percent of its after tax income on food, and 17 percent on food plus energy. The following chart exhibits food items which rose by double digits in the year 2011, according to the BLS: Prices of food and energy are closely related. Energy costs are embedded throughout our industrial agriculture and modern food system. Fertilizers, pesticides, herbicides, irrigation, drying, and diesel for tractors and truck transport account for many of today's commodity input costs. Additional energy is needed to process, package, prepare, and refrigerate the food products that we buy both for dining out and eating at home. The following chart shows the percent price increases of various agricultural commodities for 2011:

Texas Drought Eases, But It's Too Late for Some - Defying seasonal climate forecasts, this winter has been very good to Texas, which has been locked in the grips of one of the worst droughts in state history. But the unexpectedly generous winter storms have come too late for some, since water supplies are still running low. As I reported in late January, managers of the Lower Colorado River are likely to take the unprecedented step of denying water for rice growers in Southeast Texas, putting several thousand jobs at risk. Although the decision won't be made until March 1, it is unlikely that Texas will receive enough rainfall to put reservoirs above the mark set by water managers, who must balance the needs of agricultural producers with the water demands of the city of Austin, power companies, and myriad other users. The Lower Colorado River Authority "may have no choice but to cut off the farmers. The Highland Lakes, two large reservoirs near Austin, must hold a combined 850,000 acre-feet of water by next week before the growers' share can be released, under a drought emergency plan now in effect. As of Wednesday, the lakes had 830,000 acre-feet, 41 percent of capacity." The fact that the reservoirs are still so low indicates the severity of the long-term precipitation deficit that Texas is still dealing with, despite a three-month period with above average rainfall.

Dallas Has $1.5 Billion in Unfunded Flood Control Problems - Dallas has $1.5 billion in unfunded flood control problems, according to a City Council committee briefing Monday. Widespread flooding in March 2006 that made Baylor Medical Center an island and submerged several freeways is blamed in part on the problems the city had known about for years. During a City Council briefing in January, City Manager Mary Suhm said she looses sleep worrying about it. She said then that the highest priority was an expensive deep tunnel project to relieve flooding in a large part of East Dallas, including the Baylor area. The project would cost about $323 million. Monday's briefing to the Transportation and Environment Committee also names a $91 million overhaul of the Able Pump station along the Trinity River as a priority project to relieve Central Dallas freeway flooding that also occurred in March 2006.

California Rising Sea Levels Threaten Southern California Beaches - A new study finds that rising sea levels due to climate change will remove sand from some Southern California beaches and distribute it to others. The change will either shrink or eliminate some beaches altogether in Southern California, according to the study conducted by Duke and five other institutions. It could take 100 years before the erosion is complete, notes the Los Angeles Times. Over the course of a century, the sea level is expected to rise by 1 meter, which would lead to severe winter storms and high tides that could make some beaches disappear.

A Bold Plan to Reshape the Central Valley Flood Plain - In late January, five acres of this farmland in Yolo County was flooded and stocked with thousands of weeks-old Chinook salmon. It was the beginning of a three-year experiment that conservationists and government officials hope will provide scientific data to help guide a sweeping transformation of riverfront lands throughout the Central Valley, California’s prolific farming region.  An ambitious draft flood-prevention plan, published in December by the California Department of Water Resources, would re-engineer the valley’s network of rivers, canals and levees1 in an effort to prevent floods, restore wildlife habitat and protect water supplies for millions of people in the Bay Area and other parts of California. The plan, which calls for reversing the effects of 160 years of ad hoc levee building in the Central Valley, is a response to the deadly 2005 floods in New Orleans that followed Hurricane Katrina2. Experts say a collapse of the Central Valley levees could cause similar devastation in California.

Why Is North Korea Always Short On Food? - North Korea has agreed to suspend its nuclear development in return for food aid. The country suffers from chronic food shortages and periodic famine, even though neighbors China and South Korea haven’t had such problems for many years. Why are the North Koreans always going hungry? Poor growing conditions, fertilizer shortages, and general mismanagement. On the most basic level, the terrain and climate in North Korea aren’t great for farming. The country is mountainous, and the growing seasons are short. (North Korea is at approximately the same latitude as New England, but prevailing air currents make it even colder.) In defiance of nature, North Korea’s isolationist leaders decided in the 1950s that domestic farmers had to fulfill all the country’s food needs. They instituted intensive agricultural practices to maximize yield from their limited arable land, relying on heavy irrigation and copious pesticides, herbicides, and fertilizers. They scraped by for decades with only occasional famines, but the system totally collapsed in the 1980s, when the Soviet Union cut the supply of subsidized fossil fuels, from which many of the DPRK’s agricultural chemicals are derived.

Bill Gates’ support of GM crops is wrong approach for Africa - Bill Gates' support of genetically modified (GM) crops as a solution for world hunger is of concern to those of us involved in promoting sustainable, equitable and effective agricultural policies in Africa. There are two primary shortcomings to Gates' approach. First, his technocratic ideology runs counter to the best informed science. The World Bank and United Nations funded 900 scientists over three years in order to create an International Assessment of Agricultural Knowledge, Science and Technology for Development (IAASTD). Its conclusions were diametrically opposed, at both philosophical and practical levels, to those espoused by Gates and clearly state that the use of GM crops is not a meaningful solution to the complex situation of world hunger. The IAASTD suggests that rather than pursuing industrial farming models, "agro-ecological" methods provide the most viable means to enhance global food security, especially in light of climate change. These include implementing practical scientific research based on traditional seed varieties and local farming practices adapted to the local ecology over millennia. Agro-ecology has consistently proven capable of sustainably increasing productivity. Conversely, the present GM crops generally have not increased yields over the long run, despite their increased costs and dependence on agricultural chemicals, as highlighted in the 2009 Union of Concerned Scientists report, "Failure to Yield."

Bill Gates, Monsanto, and eugenics: How one of the world's wealthiest men is actively promoting a corporate takeover of global agriculture - After it was exposed that the Bill & Melinda Gates Foundation, the philanthropic brainchild of Microsoft founder Bill Gates, purchased 500,000 shares in Monsanto back in 2010 valued at more than $23 million, it became abundantly clear that this so-called benevolent charity is up to something other than eradicating disease and feeding the world's poor ( It turns out that the Gates family legacy has long been one of trying to dominate and control the world's systems, including in the areas of technology, medicine, and now agriculture. The Gates Foundation, aka the tax-exempt Gates Family Trust, is currently in the process of spending billions of dollars in the name of humanitarianism to establish a global food monopoly dominated by genetically-modified (GM) crops and seeds. And based on the Gates family's history of involvement in world affairs, it appears that one of its main goals besides simply establishing corporate control of the world's food supply is to reduce the world's population by a significant amount in the process. Bill Gates' father, William H. Gates Sr., has long been involved with the eugenics group Planned Parenthood, a rebranded organization birthed out of the American Eugenics Society. In a 2003 interview with PBS' Bill Moyers, Bill Gates admitted that his father used to be the head of Planned Parenthood, which was founded on the concept that most human beings are just "reckless breeders" and "human weeds" in need of culling

EPA Air Rules Head to Court - Republicans on the campaign trail have long bashed President Barack Obama’s environmental regulations. This week the battle moves to the courtroom, where several industries and GOP lawmakers are trying to overturn the administration’s rules for reducing greenhouse gases. Industry groups, including those representing chemical, energy, farming and mining interests, have brought several challenges to the Environmental Protection Agency’s first-ever rules limiting carbon-dioxide emissions. In the lead case, the plaintiffs are challenging the EPA’s finding that such greenhouse gases endanger public health and welfare. That finding formed the basis for agency rules that imposed greenhouse-gas-emissions standards on cars beginning with the 2012 model year and set initial rules on permits for power plants and factories.

Bad Acid Trip: USGS Study Finds Humans Are Acidifying ‘The Air, Oceans, Freshwaters And Soils’ - Call it the reverse Midas touch. Everything homo sapiens touches turns to acid. A study led by the U.S. Geological Survey finds, “Human use of Earth’s natural resources is making the air, oceans, freshwaters, and soils more acidic.”  The USGS news release explains: This comprehensive review, the first on this topic to date, found the mining and burning of coal, the mining and smelting of metal ores, and the use of nitrogen fertilizer are the major causes of chemical oxidation processes that generate acid in the Earth-surface environment. These widespread activities have increased carbon dioxide in the atmosphere, increasing the acidity of oceans; produced acid rain that has increased the acidity of freshwater bodies and soils; produced drainage from mines that has increased the acidity of freshwater streams and groundwater; and added nitrogen to crop lands that has increased the acidity of soils. Previous studies have linked increased acidity in oceans to damage to ocean food webs, while increased acidity in soils has the potential to affect their ability to sustain crop growth.

Melting sea ice could trigger colder winters - It is well established that the dramatic loss of winter sea ice in the Arctic has caused it to feel global warming more sharply than the rest of the planet. Less ice means more exposed water, which – being darker than ice – absorbs more solar energy. To compound things, with less ice to insulate the warmer ocean from the air above, more of that energy is released back into the atmosphere as heat. The net result is that Arctic air is significantly warmer than before. Some years, winter temperatures have reached 4 °C above average – an enormous difference. Things get a bit messier when figuring out how this affects the weather further south. When the Arctic winter is warmer – and there's less of a contrast between temperatures at the pole and in the tropics – the jet stream tends to creep south and lose some of its strength. This is known as a "negative Arctic oscillation". During these negative phases, the jet stream blows warm weather in over the Mediterranean and allows cold, dry Arctic air to rush in over the northern continents.

Tribal solidarity, by digby: This post by Chris Mooney about his new book called The Republican Brain: The Science of Why They Deny Scienceand Reality is an interesting insight into something that baffles all of us: I can still remember when I first realized how naïve I was in thinking—hoping—that laying out the “facts” would suffice to change politicized minds, and especially Republican ones. It was a typically wonkish, liberal revelation: One based on statistics and data. Only this time, the data were showing, rather awkwardly, that people ignore data and evidence—and often, knowledge and education only make the problem worse. Someone had sent me a 2008 Pew report documenting the intense partisan divide in the U.S. over the reality of global warming. It’s a divide that, maddeningly for scientists, has shown a paradoxical tendency to widen even as the basic facts about global warming have become more firmly established. Buried in the Pew report was a little chart showing the relationship between one’s political party affiliation, one’s acceptance that humans are causing global warming, and one’s level of education. And here’s the mind-blowing surprise: For Republicans, having a college degree didn’t appear to make one any more open to what scientists have to say. On the contrary, better-educated Republicans were more skeptical of modern climate science than their less educated brethren. Only 19 percent of college-educated Republicans agreed that the planet is warming due to human actions, versus 31 percent of non-college-educated Republicans.

One Quarter of Total U.S. Greenhouse Gas Emissions Come From Fossil Fuels Mined and Drilled on Public Lands - A new report by Stratus Consulting and commissioned by The Wilderness Society released this morning shows that 23 percent of total U.S. greenhouse gas emissions come from oil, gas, and coal extracted from federal lands and waters.  As the report states: In 2009, the most recent year for which total U.S. GHG emissions data are available, the ultimate downstream GHG emissions from fossil fuel extraction from federal lands and waters by private leaseholders could have accounted for approximately 23% of total U.S. GHG emissions and 27% of all energy-related GHG emissions. The study was commissioned because of deficiencies in the White House Council on Environmental Quality’s first-ever “Greenhouse Gas Emissions Inventory for the Federal Government” report released in April 2011.  Under Executive Order 13514, all federal agencies were required to “report and reduce greenhouse gas pollution,” which included items such as energy use, fuel consumed by government fleets, and methane generated by landfill waste. But, land management agencies like the Interior Department were not required to report emissions from activities that “are under federal agency control but are conducted by private entities,” which includes energy development on public lands.  This allowed for CEQ’s analysis to vastly underestimate the emissions coming from the federal government’s activities

Arctic's old ice vanishing rapidly, NASA study finds - The oldest and thickest Arctic ice seems to be vanishing faster than the younger, thinner ice at the edges of the Arctic Ocean's floating ice cap, a new NASA study finds. Typically the thicker, older ice survives through the summer melt season (hence, it's called multi-year ice), while the younger ice that forms over the winter melts as quickly as it formed. That's what makes this new finding worrisome; if the ice that usually sticks around is rapidly disappearing, the Arctic sea ice is more vulnerable to further disappearance during the summer, said study researcher Joey Comiso, senior scientist at NASA Goddard Space Flight Center, Greenbelt, Md. In the new study, Comiso and colleagues looked at multi-year ice that had made it through at least two summers. They wanted to see how it diminished with each passing winter over the past three decades. Results showed that the extent of multi-year ice, which includes areas of the Arctic Ocean where multi-year ice covers at least 15 percent of the water's surface, is shrinking at a rate of 15.1 percent per decade. They found more disturbing results when looking at the "area" of the multi-year ice, which includes exclusively regions of the Arctic Ocean that are completely covered by multi-year ice. This sea-ice area is always smaller than sea-ice extent. They found that multi-year ice area is shrinking even faster than multi-year ice extent, by 17.2 percent per decade. "The average thickness of the Arctic sea ice cover is declining because it is rapidly losing its thick component, the multi-year ice. At the same time, the surface temperature in the Arctic is going up, which results in a shorter ice-forming season," Comiso said in a NASA statement. "It would take a persistent cold spell for most multi-year sea ice and other ice types to grow thick enough in the winter to survive the summer melt season and reverse the trend."

Huge lead has formed in the Arctic sea ice north of Greenland, February 26, 2012 (satellite photo)

Current Rate of Ocean Acidification Worst in 300 Million Years - Yves Smith - Science has published a troubling but not entirely surprising article on the fact that the oceans are acidifying at the fastest rate in 300 million years. Actually, it could be the fastest rate over an even longer time period, but we can only go back with any degree of accuracy for 300 million years. We first wrote about this issue in early 2007, and this section, which quoted Stormy from Angry Bear, will help bring readers up to speed: ….there are side effects to our love affair with CO2 that are not often mentioned. In fact, whether the earth cools or warms is absolutely irrelevant to these effects. I repeat: Absolutely irrelevant. One of the most startling effects is the acidification of the oceans. Since 1750, the oceans have become increasingly acidic. In the oceans, CO2 forms carbonic acid, a serious threat to the base of the food chain, especially on shellfish of all sizes. Carbonic acid dissolves calcium carbonate, an essential component of any life form with an exoskeleton. In short, all life forms with an exoskeleton are threatened: shell fish, an important part of the food chain for many fish; coral reefs, the habitat of many species of fish….The formation of carbonic acid does not depend upon temperature. Whether the oceans warm or cool is irrelevant. Of concern only is the amount of CO2 that enters the oceans.

Grantham Goes Marxist! - “Capitalism threatens our existence.” That's the message today from legendary investor Jeremy Grantham, whose GMO Capital manages $97Bn and, like Buffett, puts out an annual letter to investors. Part one of the letter has some great general investing advice but part two gets very interesting as Grantham titles it "Your Grandchildren Have No Value (And Other Deficiencies of Capitalism)."  He exposes what he considers the "two or three main flaws" of Capitalism that are "potentially fatal and have gone largely unaddressed." A sustainable economic system, for instance, can’t be based on ever-increasing debt, corporations can’t be allowed to run governments and loot treasuries, and “growth at any cost” is a recipe for planetary suicide. Grantham points out that a company is now free to spend money to influence political outcomes and need tell no one, least of all its own shareholders, the technical owners.  And the issues they most influence are precisely the ones that matter most, the ones that are most important to society’s long-term wellbeing, indeed its very existence.Thus, taking huge benefits from Nature and damaging it in return is completely free and all attempts at government control are fought with costly lobbying and advertising. If scientific evidence suggests costs and limits be imposed on industry to protect  the long-term environment, then science will be opposed by clever disinformation.

Getting ready for doomsday - A recent National Geographic survey produced the statistic that 41% of Americans think it’s more important to prepare for a catastrophic event than save for retirement. Scott Hunt is co-owner of Practical Preppers, a business that specializes in helping people get ready for any number of world-changing events. Hunt says that his clients believe something big is coming: and they want to be ready. Hunt, who is part of the Nat Geo series “Doomsday Preppers,” tells Steve Fast that concerns over financial collapse, peak oil, an Electromagnetic Pulse Attack and other events have people looking out for the end of the world as we know it. Listen to the interview…

A Breakthrough? - For many months, U.S. Energy Secretary Chu, the guy with the Nobel Prize in physics, has been running around the country telling audiences that big breakthroughs were coming for electric vehicles. Well, this week the other shoe dropped when an announcement was made of an advance in battery technology that has the potential to change the motor vehicle industry as we know it. The announcement was made at the Department of Energy's Advanced Research Projects-Energy conference by a California startup called Envia that has received funding from DOE, the California Energy Commission, and General Motors among others. The gist of the announcement was that Envia has developed a technology which will allow batteries to store energy at a density of 400 watt-hours per kilogram as compared to the compared to a density of 100-150 w-h/kg in existing electric vehicles such as the Chevrolet Volt or the Nissan Leaf. The best news, however, is that the new batteries are expected to cost less than half ($125/Kwh) that of the batteries currently being used in electric cars. This development means that within a few years, cars with a 300 mile range could come on the market at a price range comparable to current internal combustion cars.

Rising Temps in Northwest May Impact Hydro, California - In Washington, Oregon, and particularly California, far less snow and rain has fallen this winter than usual and it has many people worried about water supplies further into spring and summer. Currently, river levels are forecast to be well below average throughout Northern California this spring and summer. Among other things, that doesn’t bode well for hydropower. On the other hand, rivers should be running closer to normal in Washington and Oregon this year, according to the Natural Resources Conservation Service. It’s a small blessing for Californians, who rely on their northern neighbors for electricity each summer. But in the coming decades, warmer temperatures could hamstring hydropower production in the Pacific Northwest, forcing California to look elsewhere for an electricity boost.

Location, Location, Location, 700 Million Times - Many arguments lie ahead on what kind of power-generating equipment should be built next. If the choice is nuclear, coal or some types of renewable energy, space will not be a problem, according to a new study sponsored by the Electric Power Research Institute, a nonprofit utility consortium. There are also lots of places to put plants that will store energy in the form of compressed air, researchers report. The study, carried out by the Energy Department’s Oak Ridge National Laboratory, found locations for 515 gigawatts’ worth of new nuclear plants — nearly five times what exists now — based on considerations like the availability of cooling water and relatively low population density. There is also space for 168 gigawatts of “advanced coal” plants. Should the plants be designed to sequester the carbon dioxide they produce rather than emit it, however, the study did not factor in how far the carbon would have to be piped. But potential locations for solar thermal plants, which use the sun’s heat to make steam and then electricity, are far more limited; if the plants are cooled by water, there is space for only about 18 gigawatts, the study said. If the plants are cooled by air, which reduces their efficiency, there would be space for 60 megawatts, the authors found.

Gloom, doom — and Lester Brown’s ‘Plan B’ -- Brown — whose latest book, 2011's "World on the Edge: How to Prevent Environmental and Economic Collapse," has just come out in Japanese — is president of the Washington- based Earth Policy Institute and one of the world's top environmental policy experts. Contrary to my expectation, Brown turned out to be humorous and entertaining — as well as a visionary intimately conversant with the facts and figures to support his concerns and policy suggestions. He was especially sanguine about developments in the United States, in particular the recent campaign to close its coal-fired power plants. "This may be the most important thing happening in the world of climate, because the U.S. is the world's largest economy, and if the largest economy stops using coal that's a huge step forward," said Brown. In particular he was heartened that Michael Bloomberg, billionaire mayor of New York City, has made a $50-million contribution to the Sierra Club's "Beyond Coal" campaign. The Sierra organization is one of America's oldest and most influential environmental NGOs. "When Bloomberg lays $50 million on the table and says 'Coal has got to go,' he reaches people that environmentalists can't. He's one of the most successful businessmen of his generation, so this kind of action is exciting," Brown observed.

New Folk Music Video On Impact of Mountain Top Removal -- The Ohio-based folk band Magnolia Mountain has just released a new music video documenting the environmental and human impact of mountaintop removal coal mining. The song, “The Hand of Man,” was released as part of a new 21-track album with bands from Indiana, Kentucky, Ohio and West Virginia performing songs about protecting the Appalachian Mountains and surrounding communities from destructive coal mining practices. Mountaintop removal mining is exactly what it sounds like: Explosives are used to to blow up mountains in order to access coal reserves, thus forcing rocks and soil into valleys and increasing concentrations of mercury and arsenic in water supplies. According to researchers from Washington State University and West Virginia University, communities located near mountaintop mining sites have seen double the amount of birth defects than the national rate. To date, almost 3,000 mountain ridges have been blown apart to access coal. Watch the music video:

In Historic Vote, Vermont Poised to Shut Down Lone Nuclear Reactor - Arnie Gundersen interviewed by Democracy Now about the pending vote to shut down Vermont Yankee.

Another Fukushima Casualty - Japan's Fast Breeder Reactor Program - The 11 March 2011 earthquake and tsunami that effectively destroyed Tokyo Electric Power Company’s six-reactor Fukushima Daichi complex have claimed another victim, Japan’s fast breeder reactor program. On 23 February a Japan Atomic Energy Commission panel of experts reviewing Japan's nuclear fuel cycle production policy in the wake of the Fukushima debacle, while acknowledging that a fuel cycle involving a fast-breeder reactor has some advantages, concluded that for Japan it cannot be considered as a realistic option for the next two to three decades due to technological considerations. The review is effectively a death sentence for Japan’s Monju troubled $12 billion experimental fast-breeder reactor in Tsuruga, Fukui Prefecture, intended to reprocess spent nuclear reactor fuel to produce plutonium that can subsequently be recycled and reused to generate electricity. Japan had high hopes that the fast-breeder reactor program could close the loop on its nuclear fuel cycle, allowing it to reuse, recycle and produce fresh fuel for its 54 reactors. The subcommittee’s report effectively ends Japan’s hopes of using nuclear fuel on a near-endless cycle.

Japan Weighed Evacuating Tokyo in Nuclear Crisis -  In the darkest moments of last year’s nuclear accident, Japanese leaders did not know the actual extent of damage at the plant and secretly considered the possibility of evacuating Tokyo, even as they tried to play down the risks in public, an independent investigation into the accident disclosed on Monday.  The investigation by the Rebuild Japan Initiative Foundation, a new private policy organization, offers one of the most vivid accounts yet of how Japan teetered on the edge of an even larger nuclear crisis than the one that engulfed the Fukushima Daiichi Nuclear Power Plant.   The team interviewed more than 300 people, including top nuclear regulators and government officials, as well as the prime minister during the crisis, Naoto Kan. An advance copy of the report describes how Japan’s response was hindered at times by a debilitating breakdown in trust between the major actors: Mr. Kan; the Tokyo headquarters of the plant’s operator, Tokyo Electric Power, known as Tepco; and the manager at the stricken plant. The conflicts produced confused flows of sometimes contradictory information in the early days of the crisis, the report said.

Japan's 2011 megaquake reactivated dormant faults - The megaquake that shook the east coast of Japan in March 2011 reactivated dormant faults near Fukushima's beleaguered nuclear reactors, geologists warn. "A strong quake may occur in the Futaba fault, only 5 to 6 kilometres away," says Dapeng Zhao of Tohoku University. The fault runs parallel to the coast, right past both of Fukushima's nuclear plants. Zhao's team used data from more than 6000 quakes between June 2002 and October 2011 to make a 3D map of the crust in the area that suffered the largest aftershock recorded on land after the March megaquake: a quake on 11 April in Iwaki. The images show fluid rising through the Pacific plate as it sinks under Japan. They say the March quake transferred stress to surrounding faults, causing them to adjust in aftershocks. The fluid in the Iwiki fault lubricated it, causing it to slip almost immediately in a large, magnitude 7 aftershock. Seismic readings from the Fukushima area reveal stresses and rising fluids similar to those found at Iwaki, so "the possibility of quake generation becomes much larger than before the 11 March quake", says Zhao.A magnitude 7 quake would release far less energy than the magnitude 9 megaquake, but because the Futaba fault is so close to Fukushima, it would shake both power stations more strongly.

Scientists: Far more cesium released than previously believed - A mind-boggling 40,000 trillion becquerels of radioactive cesium, or twice the amount previously thought, may have spewed from the crippled Fukushima No. 1 nuclear power plant after the March 11 disaster, scientists say. Michio Aoyama, a senior researcher at the Meteorological Research Institute, released the finding at a scientific symposium in Tsukuba, Ibaraki Prefecture, on Feb. 28. The figure, which represents about 20 percent of the discharge during the 1986 Chernobyl nuclear disaster, is twice as large as previous estimates by research institutions both in Japan and overseas. It was calculated on the basis of radioactive content of seawater sampled at 79 locations in the north Pacific and is thought to more accurately reflect reality than previous simulation results. Scientists believe that around 30 percent of the radioactive substances discharged during the crisis ended up on land, while the rest fell on the sea.

As fracking boom hits Ohio, industry deceives landowners - Ohio is the latest state hit by fracking mania. The process, which requires pushing millions of gallons of water, sand, and industrial chemicals into shale wells to fracture rock and push out oil and gas, took off after the discovery of massive natural gas deposits in the Utica shale underlying eastern Ohio last July. Gov. John Kasich (R) sent the message that Ohio was open for business, writing to energy company CEOs around the country, inviting them to partner with the state to make fracking, or hydraulic fracturing, a major component of his economic plan. Until last year, there were just a few wells operating in Ohio. There are now 40, and the governor’s spokesperson said next year there could be five times as many.Kasich says environmental protections and regulations are important to him, but the free-for-all so far has meant people and the environment have suffered. Not only has the process been linked to earthquakes and water contamination in the state, but the industry’s deceptive leasing practices are increasingly causing alarm among Ohioans.

How to Frack Responsibly – Nocera - Fracking isnt going away.  To put it another way, the technique of hydraulic fracturing, used to extract natural gas from once-impossible-to-get-at reservoirs like the Marcellus Shale that lies beneath New York and Pennsylvania, has more than proved its value. At this point, shale gas, as it’s called, makes up more than 30 percent of the country’s natural gas supply, up from 2 percent in 2001 — a figure that is sure to keep rising. Fracking’s enemies can stamp their feet all they want, but that gas is too important to leave it in the ground.  Fred Krupp, the president of the Environmental Defense Fund, understands this as well as anyone. Last summer, he was a member of a small federal advisory panel that was charged by Steven Chu, the secretary of energy, with assessing the problems associated with fracking. The group came up with a long list of environmental issues. But it also concluded that “the U.S. shale gas resource has enormous potential to provide economic and environmental benefits for the country.”  Founded by scientists, the Environmental Defense Fund believes in data, not hysteria. It promotes market incentives to change behavior and isn’t afraid to work with industry. Utterly nonpartisan, it is oriented toward practical policy solutions.

Can the problems with fracking be fixed? - In the New York Times, Joe Nocera says that natural-gas fracking is inevitable and just needs a few tweaks, like plugging methane leaks from wells. But that’s not as simple as it sounds. Recent research suggests that fracking could be disastrous, climate-wise, if those leaks aren’t fixed. On the surface, natural gas looks like a relatively clean fossil fuel — burning the stuff emits about half as much carbon dioxide as burning coal. That’s why some environmentalists have lauded it as a “bridge fuel” en route to a zero-carbon future. But there’s a catch: Using hydraulic fracturing to extract gas from shale rock is bound to cause some methane to leak out. And methane is a potent heat-trapping gas when it escapes into the air, about 21 times as powerful as carbon dioxide. Some of this methane seeps out from underground wells. Some of it gets purposefully flared off or vented by the drillers. And some of it wafts out of loosely fitted distribution pipes. If enough of this methane escapes, then natural gas could, conceivably, cause as much global warming as coal does.

Joe Nocera’s Puzzling Column on Fracking - Joe Nocera has a bizarre column today, a riposte to anti-fracking activists, really, that can be summed up in three words: “Get over it.” Fracking isn’t going away. Fracking’s enemies can stamp their feet all they want, but that gas is too important to leave it in the ground. You could make a tidy sum betting on the notion that fracking isn’t going away. But is this really Nocera’s, or anyone else’s, role in the public debate? To tell people they’re just going to have to get used to contaminated water because selling natural gas makes a lot of money? This world-weariness may sound reasoned and savvy, but for people who can light their tap water on fire, it doesn’t exactly satisfy them. And if Nocera thinks he can induce people who have no usable water source to stop “stamping their feet,” that they should bow to the “importance” of shale gas (which I guess is more important than the lives and livelihoods of the residents of Dimock, Pennsylvania, Pavillion, Wyoming, etc.), he’s, er, wrong. Nocera goes on to praise the Environmental Defense Fund, a typical enviro group, for acknowledging the economic benefits of having more natural gas. I’m sure there would be economic benefits to a Running Man-style forced manhunt, but that doesn’t actually make that practice responsible or desirable.

Romney Touts Fracking, Slams Obama’s Energy Policy - Mitt Romney, the GOP presidential field’s economic-turnaround candidate, swung by the healthiest economy in the nation Thursday to chat about energy. As the rest of the nation struggles with slow growth, North Dakota’s unemployment rate stood at 3.3% in December, the lowest of any state. Rich natural resources and fracking (a method of using fluids to extract oil and gas from shale deep underground) have inspired an economic boom in the frigid high plains state. Mr. Romney tore into President Barack Obama here, saying he has slowed the production of oil and gas that has buoyed states like North Dakota. “He instead has tried to slow the growth of oil and gas production in this country,” Mr. Romney said. “So far from taking credit, he should be hanging his head.” He added that the president is turning to the Environmental Protection Agency to increase regulations on the fracking industry. “As a matter of fact, he’s got 10 different federal agencies trying to push their way into fracking so that they can slow down the development of oil and gas in this country,” Mr. Romney said.

Carbon Efficiency vs Oil Efficiency - The above graph contrasts global oil efficiency with global carbon efficiency.  The former is measured in $2005 (PPP) per barrel of oil consumed (blue curve, left scale).  Carbon efficiency is measured as $2005 (PPP) per tonne of carbon emitted (red curve, right scale).  Prior to the mid 2000s the two were increasing at similar moderate paces.  However, since then oil efficiency has accelerated whereas overall fossil fuel efficiency has if anything slowed down. I interpret this as an illustration of the power of market forces in driving change.  Oil is in somewhat tight supply and so prices have been high and this is driving the global economy to get oil efficient faster.  However, coal and natural gas are not in particularly tight supply and so there is no corresponding pressure, and indeed in the face of high oil prices the world is tending to shift to more use of coal - particularly the Chinese miracle is being powered by enormous amounts of cheap coal.  This would be the benefit of a global carbon trading scheme.  At the moment, climate change is an unpriced externality of fossil fuel usage, and so there is not much of a market signal to drive the economy to use coal and natural gas more efficiently.

If Conservation Fails, Industry May Try Groundwater -  Last summer, near the height of the most intense drought in recorded Texas history, ConocoPhillips officials grew concerned. The company operates an oil refinery near the southeastern town of Sweeny, and its major water source, the San Bernard River, was getting drier.  So ConocoPhillips applied for a permit to tap a well on company land and pipe the water three miles to the plant. Conservation measures at the Sweeny refinery would “not make up for the diminished surface water availability” resulting from the drought, Cynthia Jordy, a ConocoPhillips official, wrote in September to the Coastal Plains Groundwater Conservation District. The district granted the permit last month.  ConocoPhillips was hardly the only industrial plant scrambling to secure more water because of the drought, which still covers more than 90 percent of Texas and has caused many plants to focus more on conservation.

TransCanada Plans to Build South Leg of Keystone XL - TransCanada Corp said on Monday it aims to build the southern leg of its $7 billion Keystone XL oil pipeline first, skirting a full-blown federal review and heightening competition to move crude out of the glutted Cushing, Oklahoma, storage hub.  TransCanada said it wants to have the southern portion of the 830,000 barrel a day pipeline, running to Texas refineries on the Gulf Coast, in service by mid- to late 2013. The approximate cost is $2.3 billion. The company had broached the idea of building the controversial Alberta-to-Texas project in stages before, most recently after President Barack Obama rejected Keystone XL in January, saying it needed further environmental reviews. One benefit to TransCanada of building the Cushing-Texas portion first would be that approval by the U.S. State Department would not be needed, as the line would not cross the Canada-U.S. border. It will require other regulatory approvals, however.

TransCanada Splits Off US-Only Portion of Keystone XL Project - TransCanada, the company trying to build the Keystone XL pipeline, has split off a domestic pipeline from the one that crosses a national border, moving to begin work on a pipeline from Cushing, Oklahoma to Port Arthur, Texas. The segment from Canada down to Cushing, however, will need a separate permit application and could take years to get approval. But the White House seems on board for the Cushing-to-Port Arthur segment, which does not require State Department approval: The move by TransCanada would alleviate the glut of oil at Cushing, a major terminal, and address one of the main reasons for building the controversial Keystone XL pipeline. Plans for the segment of pipeline crossing the U.S.-Canada border would come “in the near future” the company said [...] In a statement Monday, White House spokesman Jay Carney said Obama welcomes TransCanada’s plans for the southern pipeline segment, and he pledged that the new application for the cross-border section would receive a thorough assessment.

White House applauds decision to build part of Keystone XL pipeline  - With President Barack Obama facing fire from Republicans over the rising cost of gasoline, the White House moved quickly Monday to trumpet a Canadian company's decision to build a section of the controversial Keystone XL pipeline from Cushing, Okla., to Houston after Obama blocked a longer path last month.  Press Secretary Jay Carney hailed TransCanada's announcement and used it to counter Republican criticism that the administration has stifled oil and gas production. He said that the Oklahoma to Texas section of the pipeline would "help address the bottleneck of oil in Cushing that has resulted in large part from increased domestic oil production, currently at an eight-year high." The company's decision, Carney said, "highlights a little-known fact — certainly, you wouldn't hear it from some of our critics — that we approve, pipelines are approved and built in this country all the time."  Obama's decision last month to reject the full 1,661-mile Keystone XL pipeline from Canada's tar sands has become a focal point of Republican efforts to portray him as responsible for the recent spike in gasoline prices, and they fault him for blocking a project they say would create jobs and reduce America's dependence on oil imports from unstable foreign sources.

Keystone moving forward - In a development that should not have come as a surprise to Econbrowser readers, TransCanada announced on Monday that it would proceed with the portion of the controversial Keystone pipeline expansion that would connect Cushing, Oklahoma to the Gulf of Mexico. Because this part of the project does not cross the U.S.-Canadian border, it does not require approval from the U.S. State Department. The Wall Street Journal reports that the 435-mile segment could carry 700,000 barrels/day from Cushing down to the coast, and the company expects that segment of the pipeline to be in service by mid to late 2013. This would be in addition to the 400,000 barrels/day that Enbridge is hoping to send from Cushing to the coast through the Seaway Pipeline by the first quarter of next year, with 150,000 of that already flowing by the middle of this year. Even so, the Wall Street Journal reports: Even the Gulf Coast leg and Enbridge's project may not be enough to relieve the bottleneck at Cushing. Alex Pourbaix, president of TransCanada's oil-pipelines division, said he believes at least two million barrels a day of oil will need to flow between Cushing and the Gulf Coast over the next decade to relieve the bottleneck there.  Confirmation of that assessment comes from the observation that, despite the news, the price of a January 2014 Brent futures contract is still selling at a $7 premium to Jan 2014 West Texas Intermediate.

TransCanada, a foreign corporation, who does not even have permission to build the Keystone XL, is using eminent domain in Texas to get onto land belonging to Julia Trigg Crawford and start preparing it for the pipeline -- what is up with that!?! - As previously noted in Keystone XL pipeline attracts fresh foes, opposition has been growing in Texas against the building of a conduit for oil from Alberta's tar-sand deposits to Gulf Coast refineries at Port Arthur. The project has run into serious opposition across Canada and the United States from an ad hoc coalition whose members include indigenous tribes, Nebraska corn farmers and environmental advocacy groups. Now, while congressional Republicans seek ways to get around President Barack Obama's decision to reject the 1661-mile pipeline along its current route, and builder TransCanada keeps condemning property along that same route, an assortment of East Texas landowners are fighting to keep the 376 miles of pipeline slated to run through 18 counties of their state from ever being built A focus for the opposition now is Julia Trigg Crawford, a 53-year-old farm manager and former basketball star at Texas A&M University. She began her fight against TransCanada in 2008. Last summer, she was among 1000 pipeline protesters arrested during demonstrations at the White House Crawford has sued to keep the company from running its pipeline across 30 acres of hay meadow on her 600-acre farm. The full trial begins April 30.

Keystone Oil Pipeline Seen Raising Gas Prices in Midwest: Energy - TransCanada Corp. (TRP)’s Keystone XL oil pipeline, a project backers including Republican Presidential candidate Rick Santorum say will create cheaper U.S. gasoline, instead risks raising prices as much as 20 cents a gallon in the Midwest, Great Plains and Rocky Mountains. The line would create a new way to carry Canadian imports outside the Midwest and reduce an oil surplus that’s depressing prices in the central U.S. Spot gasoline was 55 cents cheaper in Chicago than in New York on June 1, the second-highest ever. Nationwide, retail gasoline set its highest February average at $3.55 a gallon, data compiled by Bloomberg show. The purpose of the $7.6 billion Keystone is to move 830,000 barrels of oil a day from landlocked Alberta to the Texas Gulf Coast, obtaining new customers and a higher price for heavy Canadian crude, Canadian regulators said in a 2010 report. The oil sold for $23.38 less per barrel in 2011 compared with heavy grades of Mexican crude, according to data compiled by Bloomberg. “The Canadian plan was to use their market power to raise prices in the United States (UNG) and get more money from consumers,”

Keystone Pipeline Brings Pain at Pump, Few Jobs - “I’ll get us that oil from Canada,” Mitt Romney said in his victory speech after the Michigan primary. He was referring to Keystone XL, the crude-oil pipeline that has become a top-tier campaign issue for Republicans. Problem is, the tar-sands oil in that pipeline wouldn’t be coming to “us.” It would go directly from Canada to refineries in the Gulf region en route to export markets in Latin America and Europe. The U.S. would be used as little more than a transit corridor. We’ve heard a lot about groundwater contamination near the completed portions of the pipeline -- more than a dozen spills of the highly corrosive oil, including one near Kalamazoo, Michigan, that they can’t seem to clean up. Conservative Nebraskans became greens overnight when they learned the details of the project that will go through their state. But the immediate effect of completing the Keystone pipeline (perhaps by 2015) is more surprising and counterintuitive. The project would increase domestic oil prices by more than $6 a barrel and prices at the pump in parts of the country by about 20 cents a gallon. You read that right. At a time when rising gas prices threaten President Barack Obama’s re-election, the Republicans’ most ballyhooed remedy -- a new pipeline -- would make the problem worse. Before I explain why, here’s a little background on Keystone’s other practical shortcomings beyond its broader threat to a clean energy future.

Bottom Line - Why the Keystone pipeline would boost pump prices (see map) Rising gasoline prices have helped proponents of a controversial pipeline proposal press their case that the project would help ease supply bottlenecks and lower prices for consumers. They’re half right. The proposed pipeline would relieve a glut of crude oil backing up in the Midwest and redirect those barrels to Gulf of Mexico ports. From there they could be shipped to world markets and repriced at higher global prices. But that likely would mean higher prices for drivers in the nation's midsection, who currently are enjoying an unusual discount stemming from a lack of pipeline capacity. On Monday, TransCanada Corp., the company that wants to build the pipeline, said it would start construction of a southern leg while it tries to satisfy environmental concerns raised by the Obama administration that have blocked the longer northern leg.

BP: The case of the century - The Deepwater Horizon disaster in 2010 caused the world’s largest offshore oil spill. It has also led to a mammoth legal action, as tens of thousands of plaintiffs – and the US government – fight for The federal court that has been hearing the massive case to decide civil penalties and damages for the 2010 BP oil spill in the Gulf of Mexico is in an austere modernist building, dating from the 1960s, but it is only a short walk from the historic tourist trap of the French Quarter.  At pre-trial hearings, the mood among the attorneys is convivial, even jokey at times. Some of them have been meeting at the court for a year and a half, and they know each other pretty well. At one session, the magistrate judge opens by thanking the lawyers for the plaintiffs and for BP, who are on opposing sides of the case, for throwing such a good party the previous night. At the time this magazine went to press, all sides involved were still heading for a trial, scheduled to start at 8am on Monday, February 27. Negotiations were also still on over a possible settlement to resolve some or all of the claims, but BP had made it clear that it was ready to fight the case out in court. As Bob Dudley, its chief executive and the successor to Tony Hayward, put it earlier this month: “We are prepared to settle if we can do so on fair and reasonable terms. But equally, if this is not possible, we are preparing vigorously for trial.” Even if BP does strike a deal just before or just after the trial starts – one person who knows the company said a deal could be done “on the courthouse steps” – there are likely to be people who will want to fight on.

Conclusive Evidence That BP Misrepresented Gulf Oil Spill Sent To Congress - Gulf Rescue Alliance (GRA) has just sent a briefing package to the Attorney Generals of Alabama and Louisiana which presents evidence they believe has never seen the light of day concerning the how and why of the Deepwater Horizon Disaster and subsequent release of toxic oil into the Gulf—oil that is still gushing from various seabed fractures and fissures. GRA’s special report has been forwarded to Congress in advance of BP’s upcoming trial. The evidence provided therein clearly indicates:

  • The unmentioned existence of a 3rd Macondo well (the real source of the explosion, DWH sinking and ensuing oil spill).
  • The current condition of this well being such that it can never be properly capped.
  • The compromised condition of the seabed floor being such that there are multiple unnatural sources of gushers continuing to pour into the Gulf, with Corexit dispersant still suppressing its visibility.
  • That the highly publicized capped well (Well A) never occurred as reported, and in fact was an abandoned well, hence it was never the source of the millions of gallons released into the Gulf.

Accord Reached Settling Lawsuit Over BP Oil Spill - BP and the lawyers for plaintiffs in the trial over the 2010 oil spill in the Gulf of Mexico have agreed to settle their case.  Judge Carl J. Barbier of Federal District Court in New Orleans issued an order late Friday night stating that the two sides “have reached an agreement on the terms of a proposed class settlement which will be submitted to the court,” and announcing that the first phase of the trial, scheduled to begin on Monday, is adjourned indefinitely while the next steps are worked out. BP issued a statement from the company’s chief executive, Robert Dudley, saying, “The proposed settlement represents significant progress toward resolving issues from the Deepwater Horizon accident and contributing further to economic and environmental restoration efforts along the Gulf Coast.” The company estimated that paying the claims would cost $7.8 billion — but it did not state that the estimate represented an upper limit on what it would pay. It said it had already paid out more than $8 billion to claimants, and had spent some $14 billion in responding to the spill.

Getting Arctic Drilling Right - Oil drilling off the North Slope of Alaska now seems virtually a sure thing. This month, the Interior Department gave tentative approval to Shell’s plans for responding to a potential spill in the Chukchi Sea, an important step toward approval of the company’s plan to drill six wells in the Chukchi’s frigid and forbidding waters. The company still needs a permit, and before the administration grants one it must be absolutely sure that Shell can meet the safety conditions stipulated in the approval.  The costs of a mistake could be very high. Many environmentalists have argued against any drilling in Arctic waters, given their value to wildlife — and given weather conditions that would make cleaning up a spill especially difficult. We believe this particular project is worth the effort, but only if done right. Estimates of recoverable reserves in the Chukchi and nearby Beaufort Seas range as high as 30 billion barrels of oil, about four years’ worth of consumption in the United States.  Shell must meet two main conditions. The first is to complete and test a well-capping system that can quickly contain a blowout in a harsh and unfamiliar environment. The other condition is that Shell, along with the Coast Guard and other agencies, conduct extensive spill response drills — in the open ocean, not “tabletop” exercises — to test the booms, skimmers, support vessels and all the other moving parts necessary to collect whatever oil escapes before a blowout is plugged.

Obama Seeks to End Subsidies for Oil and Gas Companies - With his re-election fate increasingly tied to the price Americans are paying at the gas pump, President Obama asked Congress on Thursday to end $4 billion in subsidies for oil and gas companies and vowed to tackle the country’s long-term energy issues while shunning “phony election-year promises about lower gas prices.” “You can either stand up for the oil companies, or you can stand up for the American people,” Mr. Obama said. “You can keep subsidizing a fossil fuel that’s been getting taxpayer dollars for a century, or you can place your bets on a clean-energy future.”  The president criticized Republicans who have called for the country to increase its own oil production, declaring that “anyone who tells you we can drill our way out of this problem doesn’t know what they’re talking about.” With the United States consuming more than 20 percent of the world’s oil while having only 2 percent of the world’s oil reserves, Mr. Obama said “we can’t rely on fossil fuels from the last century.”  Calling for renewed investment in alternative energy, he vowed to make a “serious, sustained commitment to tackle a problem that may not be solved in one year or one term or even one decade.” . The office of the House speaker, John A. Boehner, sent an e-mail to reporters citing an analysis by the Congressional Research Service last March that found that ending the subsidies could make oil and natural gas more expensive.

President Obama's Lies Regarding U.S. Dependency On Foreign Oil - The Los Angeles times notes Obama, chart in hand, presses his case on gas prices: Obama repeated his case, outlined in a speech last week, that there is "no silver bullet" to rising gas prices. He highlighted his administration's effort to reduce dependence on foreign oil and boost development of alternative energy. This week he introduced a new prop to illustrate his point. As Obama spoke, a chart popped up on television screens behind him. The graph showed U.S. dependence on foreign oil falling since 2005 -- from 60% of net imports to 45% in 2011. The Facts show that President Obama is disingenuous at best, and a blatant liar at worst. I lean towards the latter. Reader Tim Wallace provides charts to prove it.  Foreign oil imports have indeed dropped throughout his Presidency, but as the attached charts show, there is a reason for that drop - a tremendous decline in USA usage overall. This is because of a declining economy, NOT because of "alternate sources" or any of the other lies tossed our way by the government.

Politics, Pandering And Petroleum Prices The U.S. Energy Information Agency said the average price for a gallon of gasoline in the United States was around $3.65 as of Monday, an 8.8 percent increase since the start of the year. With the U.S. economy barely emerging from recession, and with the presidential campaign season in full swing, politicians on both sides of the aisle have seized the moment.  Never mind the fact that the United States is actually a net gasoline exporter because of lower domestic demand. A contributing factor in the price of oil, and subsequently gasoline prices, is speculation, so in some ways it's all a self-fulfilling prophecy. It's talk of high oil prices that causes high oil prices. There are some who fear tensions with Iran could translate to $4 or even $5 for a gallon of gasoline in the U.S. market by the summer. So guess what happens? Gasoline prices go up. Even if Republicans got there way, it's unlikely any domestic drilling would cause a sudden precipitous drop in energy prices overnight. And the reason for that is because this largely isn't an issue about oil markets, domestic energy policies or concerns about the health of the European economy. No, this is about fear and anger, two very basic human emotions.

Vital Signs: Drillers Targeting Oil - U.S. drilling companies are increasingly targeting oil over natural gas, reflecting shifting prices. The share of rigs targeting natural gas has plunged to 35.9%. New drilling techniques—including hydraulic fracturing—and a warm winter have led to a glut in natural gas supplies. Meanwhile, rising Middle East tensions have driven up the price of oil, making it more attractive to drillers.

US crude oil imports fall to 12-year low - US crude imports have fallen to their lowest level for a decade as a result of weak demand and growth in domestic production, making the economy more resilient to oil price rises. The US imported 8.91m barrels a day of crude oil last year, according to the US Energy Information Administration, the lowest amount since 1999. Imports as a share of US oil consumption dropped to 44.8 per cent, the lowest proportion since 1995, down from a peak of 60.3 per cent in 2005.Rising fuel prices, driven by tensions with Iran, have become a big political issue in the US and raised concerns that the economic recovery could be derailed. The US remains the world’s largest oil importer by far and is still exposed to the impact of rising oil prices, but the decline in imports has made it less vulnerable.

US crude imports from Canada reach record high 2.436 million b/d -- US crude imports from Canada climbed to a record high 2.436 million b/d in December, data released by the US Energy Information Administration showed Wednesday. Imports were up 75,000 b/d from November, leaving Canada as the number one exporter of crude to the US. Saudi Arabia came in second at 1.293 million b/d, while Mexico came in third at 945,000 b/d. Crude imports from Canada have been ramping up steadily since the early 1980s, from an all-time low of 121,000 b/d in June 1981, and have climbed roughly 1 million b/d over the last 11 years alone. Increased Canadian production has cut demand for imports outside of North America. US imports of Saudi Arabian crude, for instance, have fallen from nearly 1.7 million b/d in July 2008.

U.S. Was Net Oil-Product Exporter for First Time Since 1949 - The U.S. exported more gasoline, diesel and other fuels than it imported in 2011 for the first time since 1949, the Energy Department said. Shipments abroad of petroleum products exceeded imports by 439,000 barrels a day, the department said today in the Petroleum Supply Monthly report. In 2010, daily net imports averaged 269,000 barrels. U.S. refiners exported record amounts of gasoline, heating oil and diesel to meet higher global fuel demand while U.S. fuel consumption sank.  Oil demand in Latin America will climb 2.5 percent to 6.64 million barrels a day this year, while contracting 2.4 percent in Europe and 0.5 percent in North America, the Paris-based International Energy Agency said Feb. 10. Mexico’s use of U.S.- made gasoline was 44 percent higher last year than in 2010, Energy Department data show.

Oil Efficiency Improvements are Global - I posted a graph the other day showing the improvements in the oil efficiency of the US economy.  Several commenters suggested this was due to increasing concentration of financial services in the economy, but that turned out not to be very consistent with the data.  Another suggestion was that the improvement was an artifact of outsourcing the most energy intensive parts of manufacturing to other parts of the globe. To assess this I constructed a global measure of oil efficiency by taking the IMF estimates of global GDP (at purchasing power parity - adding the output of different countries as though identical goods and services were priced identically rather than using market exchange rates which can be heavily influenced by financial asset flows) and converting them to 2005 dollars using the BEA price indexes for GDP.  I then divided this by global oil production (BP) to get the same kind of ratio of GDP/barrel.  You can see that the planet as a whole has been fairly consistently 10-15% more oil efficient than the US (unsurprising given the degree of sprawl in US cities and comparatively poor fuel economy in the US vehicle fleet).  The trend in US and global efficiency are roughly comparable.  So clearly the improvements in the US cannot mainly be a matter of exporting our problems elsewhere.

Factors in the recent oil price increases -- Crude oil prices surged last spring following disruptions in oil production from Libya, and had been drifting down during the summer and fall. But since the beginning of October, the price of West Texas Intermediate and Brent crude oil have both risen by over 30%, putting them back up near where they had been last spring. What's changed in the world since the beginning of October? Although conditions in Libya may have stabilized, the possibility of military conflict in Iran has been increasingly discussed, an event which would be hugely important for oil markets. Here for example is a measure of the volume of Google searches for "Iran War". The Wall Street Journal suggested that U.S. monetary policy could also be a factor in recent price movements: Below I've graphed the price of oil along with 9 other commodities that I could find quickly on Webstract. Oil increased 22% in the last 3 months of 2011; the next biggest gainer over this period was copper, which was up less than 4%, and most were actually down over those 3 months. Since the start of this year, the metals have climbed, though their gain is still typically less than half that of oil. Most agricultural commodities are still below their levels of the start of October.

The Oil End Game - The oil markets are completely manipulated and orchestrated, and the conductors of the orchestra have the benefit of having already held a rehearsal in 2008. History never repeats itself, but it does rhyme. This time around it is not demand from the United States that is collapsing, but European Union and United Kingdom demand, as oil prices in euros and pounds sterling have never been higher. In the meantime, the US is awash in oil as domestic production quietly increases, flushed out by the high prices. As I have outlined in previous articles, the culprit for the high oil prices between 2009 and 2012 – with the exception of the speculative “spike” between March 2011 and June 2011 driven by Fukushima and Libyan price shocks – has been passive investment by risk-averse investors, which enabled producers to support oil prices at high levels. Much of this passive money underpinning the market and enabling producers to monetize inventory pulled out of the market in September 2011, and another wave pulled out in December 2011. What is now happening is the end game: an orchestrated wave of noise that is drawing in speculative money. This is enabling the producers who are actually in the know to hedge by selling production forward during what they confidently expect will be a temporary – and pre-planned – managed fall in the oil price.

What's Right With Gas Prices -  Pundits, at times like these, insist America must finally get an energy policy. But we have one. It's called the price mechanism, and unless drastically interfered with, it has always given us a price at which we can buy all the gasoline we want. Today price volatility is assumed to be an aberrant product of the world's reliance on Mideast oil, but it may not be so aberrant. When the U.S. was dominant, its politicized behavior also created chaotic pricing at times. Reserves of fossil energy are distributed widely around the world; the Mideast today plays its central role (as we once did) only because its production costs are the lowest and thus, in a rough sense, determine what everyone else's oil is worth. Instead, the important question is what can we do? Ironically, the best therapy is a higher oil price. It makes it profitable to bring into production more costly resources around the world. The rise in recent years to $100-plus a barrel is a godsend. Peak oil theorists are being refuted; so are greenies who imagined a towering oil price would usher in a carbon-free future. The opposite is seen to be true. Oil sands, shale hydrocarbons and even biofuels have been made profitable with existing technology, and of course technology can be counted on to advance. A higher price not only elicits the new supplies to satisfy Indian and Chinese motorists; it helps to distribute production more broadly around the globe and lets the world be less dependent on cheap Mideast oil.

Why do political and economic leaders deny Peak Oil and Climate Change?  - Since there’s nothing that can be done about climate change, because there’s no scalable alternative to fossil fuels, I’ve always wondered why politicians and other leaders, who clearly know better, feel compelled to deny it. I think it’s for exactly the same reasons you don’t hear them talking about preparing for Peak Oil.

  • 1) Our leaders have known since the 1970s energy crises that there’s no comparable alternative energy ready to replace fossil fuels. To extend the oil age as long as possible, the USA went the military path rather than a “Manhattan Project” of research and building up grid infrastructure, railroads, sustainable agriculture, increasing home and car fuel efficiency, and other obvious actions. Instead, we’ve spent trillions of dollars on defense and the military to keep the oil flowing, the Straits of Hormuz open, and invade oil-producing countries.
  • 2) If the public were convinced climate change were real and demanded alternative energy, it would become clear pretty quickly that we didn’t have any alternatives. Already Californians are seeing public television shows and newspaper articles about why it’s so difficult to build enough wind, solar, and so on to meet the mandated 33% renewable energy sources by 2020.

Has the 'Peak Oil' Tipping Point Arrived? - "Peak oil" is one of those ideas that used to be the province of commodity speculators and zanier environmentalists, but is now entering the mainstream of the energy policy debate. The idea is simple on its face: For one reason or another (which one does it matter), we are approaching a limit to global oil production; thereafter, it must fall. Does this magic moment/number matter? Yes, if, as many suggest, the post-peak era is bound to be one of sharply higher energy prices that disrupt the global economy or, at very least, reduce the potential for economic growth just when the globe's have-nots seem to have a chance of joining the middle-class. Like many other economists, we think the concern with peak oil is overblown. But to cut to the chase, the explanation is straightforward: Markets generally adjust to supply and demand changes in ways that facilitate adaptation. We'll concede, though, that a smooth adjustment is not guaranteed—that the revelation of peak oil could lead to price spikes that generate significant economic pain. Which brings us to the real subject of this column: a recent insightful paper in the prestigious journal Nature, in which very senior scientists James Murray and David King suggest that the day of reckoning really is approaching—that "oil's tipping point has passed."  The solution, they conclude, is to get serious fast about energy efficiency, alternatives to fossil fuels, and the containment of climate change.

Kunstler: A Fog of Mendacity - Those frightening sounds, sights, and odors on the wind this foreboding snowless winter - like emanations from some back ward of a global psychiatric hospital - are the signs of a nation going completely mad. The traumatic rise of oil prices above the $100 level is one irritant, prompting a range of people-who-oughta-know-better to gibber and fulminate as though they'd been locked in the nation's attic since Thanksgiving with nothing to do but play with a box of pencils. Meanwhile, several absurd "narratives" circulate around the mainstream media that are sure to cause this country more trouble - as any set of pernicious untruths will.   One popular new lie is that US oil production is suddenly so robust that America is about to become a leading world oil exporter again - which is completely untrue. The lie arises at the intersection of wishful thinking and the willful misuse of statistics. It was trumpeted by the appallingly credulous Tom Friedman in his Sunday New York Times column, of all places, and it shows how effective the oil and gas industry's propaganda campaign has been.   The US government is in on this propaganda offensive, especially the Department of Energy's Energy Information Agency (EIA), which routinely issues overly optimistic reports about future oil production. The political spin is a quixotic effort to promote another commonly touted lie about the future: that the US is approaching a point of "energy independence." You'll know we got there when you have to walk to your new job weeding the potato fields.  US Energy Secretary Steven Chu will go down in history as a pathetically passive quisling, who thought he was honest and patriotic by standing in the background and keeping his mouth shut.

A Dynamic Function for EROI - The post below is a reproduction of a paper published in the open access journal Sustainability by Michael Dale, Susan Krumdieck, and Pat Bodger (Vol. 3). The article is a first in creating a dynamic function where Energy Return on Energy Investment changes of an energy resource are estimated over time. In this manner it becomes possible to get an estimate of how much net energy a given fossil oil, gas, coal or renewable energy source yields during its lifetime. The created EROI function is based on theoretical considerations of energy technology development and resource depletion.  Any errors in the version below the fold relative to the original are solely the responsibility of the TOD editorial team. The original version can be found via Dale M., Krumdieck S., Bodger P. A Dynamic Function for Energy Return on Investment. Sustainability. 2011; 3(10):1972-1985.

Oil: In Perpetuity No More - Oil touches nearly every single aspect of the lives of those in the industrialised world. Most of our food, clothing, electronics, hygiene products and transportation simply would not exist without this resource. There is a reason why oil giants such as ExxonMobile, BP, Total and Royal Dutch Shell, year in and year out, generate more profit than most other companies on the planet. Our current global economy is based on continual growth, and that growth depends on cheap energy. "Fossil fuels are roughly 84 per cent of what we use, and oil is 35 per cent of the world's primary consumption energy," says David Hughes, a geoscientist who studied Canada's energy resources for nearly four decades. Given that oil plays such a critical role in the world's economy, one would deduce it would be important to know how much is left. But acquiring accurate figures on the oil reserves of many of the member states of the Organisation of the Petroleum Exporting Countries (OPEC) is currently impossible, as this remains one of their most highly guarded state secrets.

Goldman Bets on Rising Oil With Surging Supplies - The highest U.S. oil production in nine years is failing to dissuade Goldman Sachs Group Inc. (GS) from predicting that the price of the country’s most-traded crude will keep climbing. The New York-based bank says West Texas Intermediate will gain 7 percent by August to trade within $5 a barrel of North Sea Brent, even as rising output swells the nation’s inventories. Citigroup Inc. (C) takes the opposite view, forecasting that WTI’s discount to Brent may widen to $20 a barrel this year, from about $15.79 yesterday. “There’s a danger in trading the Brent-WTI spread right now with any strong fundamental conviction,” Olivier Jakob, managing director at Petromatrix GmbH, a Zug, Switzerland-based oil researcher, said in a phone interview yesterday. The outlook for WTI is being clouded by a deluge of oil to Cushing, Oklahoma, the delivery point for WTI futures, amid a production boom that has cut America’s dependence on imports to a more than-10-year low. The logjam is likely to be relieved in June, when flows through the Seaway pipeline are reversed, giving producers in Canada and North Dakota direct access to refineries on the Gulf coast, according to Goldman Sachs, which correctly forecast Brent would decline in April last year and recover the following month.

Analysis: Oil price rise raises specter of global recession(Reuters) - A jump in energy prices is jamming the slow-turning cogs of an economic recovery in the West, but that may be nothing compared to the economic shock an Israeli attack on Iran would cause. Oil rose to a 10-month high above $125 a barrel Friday, prompting responses from policymakers around the world including U.S. President Barack Obama, watching U.S. gasoline prices follow crude to push toward $4 a gallon in an election year. Europe may have more to fear as its fragile economic growth falters and Greece, Italy and Spain look for alternative sources to the crude they currently import from Iran, where an EU oil embargo, intended to make Iran abandon what the West fears are efforts to develop nuclear weapons, comes into force in June. In euro terms, Brent crude rose to an all-time high of 93.60 euros this week, topping its 2008 record. "The West's determination to prevent Iran acquiring nuclear weapons is coming at a price - a price that might include a second global recession triggered by an oil shock," said David Hufton from the oil brokerage PVM.

Analysts: Saudi oil capacity strained -The ability of Saudi Arabia to keep major economies supplied with oil amid Iranian concerns will be put to the test, energy analysts said. Saudi Arabia last year increased crude oil production to offset market disruptions from the conflict in oil-rich Libya. The Financial Times said activity at some Saudi Arabian oil terminals suggests the country is ramping up production to address a market crisis sparked by tensions with Iran. "Kuwait and the United Arab Emirates are already close to their maximum production level, so it will all be up to Saudi Arabia," Paul Tossetti, an analyst at PFC Energy, told the newspaper. The Financial Times notes energy traders are divided over the effects of an increase in Saudi oil production. Some said more Saudi crude would lower prices while others said it would cut into spare capacity. The International Energy Agency in January said Saudi Arabia was pumping more crude oil than it has in more than 30 years and domestic demand is expected to drag on spare capacity during the summer.

OPEC Exports Stable Amid ‘Tight’ Inventories, Oil Movements Says - OPEC will keep shipments little changed until the middle of this month as refiners replenishing depleted stockpiles offsets a seasonal decline in demand, according to tanker-tracker Oil Movements. The Organization of Petroleum Exporting Countries will export 23.32 million barrels a day in the four weeks to March 17, compared with 23.31 million in the period to Feb. 18, the Halifax, England-based researcher said today in an e-mailed report. The figures exclude Angola and Ecuador. “Stock-building is still going on even as refinery runs dip,” Roy Mason, the company’s founder, said by phone. “There’s quite a lot moving west over the last two or three weeks while shipments east are dipping. It means stocks aren’t high.” Exports from the Middle East, including non-OPEC members Oman and Yemen, will decrease 0.3 percent to 17.4 million barrels a day in the four-week period, according to the report.

US Says World can replace oil lost to Iran sanctions (Reuters) - Global oil producers appear to have enough spare capacity to make up for Iranian exports curtailed by tough new sanctions, U.S. Energy Secretary Steven Chu said on Thursday. Chu said it was important that sanctions be used to crimp Iranian oil sales to ensure Tehran does not develop nuclear weapons, despite the release of an Energy Information Administration report this week that showed supplies are tight. "There is spare capacity and we believe - we'll see - but I think there is sufficient spare capacity," Chu told reporters on Capitol Hill, noting that the administration will do whatever it can to help stabilize oil prices, including looking at tapping strategic reserves. "It would be very destabilizing, I think everybody would agree, if Iran developed nuclear weapons. We're trying to convince Iran in its best interests not to go in that direction," he said. The final determination on whether there is enough spare capacity is up to President Barack Obama, who will announce it to Congress by the end of the month..

Global Fuel Shortage Would Grow Without Iran’s Supply, U.S. Says - Excluding Iran from the global oil market would increase the shortfall between worldwide supply and demand sixfold, based on February production and consumption estimates, the U.S. Energy Department said.  Global fuel use averaged 3 million barrels a day more than output when Iran is excluded from the calculations and 500,000 more when Iran is included, the department’s Energy Information Administration said in a report yesterday.  The examination of oil and fuel supplies and prices with and without Iran was prepared to help guide President Barack Obama’s administration in determining the feasibility of imposing sanctions related to Iranian oil trades through its central bank. Yesterday’s report was the first assessment issued under a Dec. 31 law that requires the EIA to provide an update on oil market conditions every 60 days.  “The EIA report highlights how tight the global market is,”

Who Is Most Exposed To The Oil Price Shock? - Over the past 5 months, the only reason the US market, and this economy has outperformed the world (or "decoupled" in the case of so-called US fundamentals) is because the trillions in incremental liquidity from generous central planners have homed in on US equities like a heat seeker, in the process boosting confidence, and in a reflexive fashion, making consumers believe that things are getting better (for producers of printer cartridge maybe, everyone else just keeps getting worse off in real, not nominal, terms). Paradoxically, the trillion plus injected into the system from the ECB, ended up helping not Europe, but the US. However, as every action ultimately has an equal an opposite reaction, the recent US "renaissance" has also sown the seeds of its own destruction, because one of the side effects of a massive liquidity reflation is what has happened in the energy markets where the crude complex trades at all or near all time highs. However, as the following chart from UBS shows, it is the US which has the most exposure to that other side effect of soaring liquidity: surging prices. While the number is fluid (economist humor), every $10 increase in crude prices, cuts US GDP by 1%, and less than that in Europe and the ROW.

Is War Imminent? US and UK Step up Military Action in the Persian Gulf - David Sanger, the chief Washington correspondent for the New York Times, acknowledged that the US is manipulating the conflict in Syria in order to weaken Iran before the regime change. “The argument commonly heard inside and outside the White House these days is that if the Assad government cracks, Iran’s ability to funnel weapons to Hezbollah and Hamas will be badly damaged — and its influence will wither accordingly. Similarly, if Iran’s effort to walk up to the edge of a nuclear weapons capability can be set back with a few well-placed GBU-31 bunker-busters, the country’s hopes of challenging Israel and Saudi Arabia to be the region’s biggest power will be deferred.”

Saudi Oil Pipelines Destroyed In Explosion, Sends Crude Soaring Among the many factors responsible for the jump in WTI to just shy of $109 over the past hour, and Brent to new records in various currencies, is the following news reported so far only by Iranian PressTV: "An explosion has hit oil pipelines in the flashpoint Saudi Arabian city of Awamiyah in the kingdom’s oil-rich Eastern Province." And some more from Arabian Digest: Saudi Arabia's Eastern Revolution hits the oil sector: pipeline under fire (photo of the pipeline under fire) For the first time in decades, the Eastern Saudi Arabian volatile situation has reached the vital oil sector. A pipeline between Awamiya and Safwa has been reportedly targeted, and is under fire. Saudi Arabia's Shiite minority, mostly residing in the oil rich east, has been protesting for years against State sponsored discrimination. They are treated as second class citizens, denied public sector jobs, and vital development for their oil rich areas. Saudi Arabia's powerful Wahhabi religious establishment considers Shiites heretics, and constantly incites against them.

Iran Media Report of Saudi Pipeline Fire Drives Oil Surge - An Iranian media report of an explosion on an unknown Saudi oil pipeline helped fuel a surge of more than $5 a barrel in oil futures on Thursday, with Brent crude hitting its highest since 2008. "An explosion has hit oil pipelines in the flashpoint Saudi Arabian city of Awamiyah in the kingdom's oil-rich Eastern Province," PressTV said on its website without providing any further information or sourcing. The headline appeared to have been posted at 2:19 EST (1919 GMT). It was not possible to verify the report on Press TV, a 24-hour news channel owned by Iran's state, available via satellite around the world and on the Internet. A Saudi oil source had earlier on Thursday denied a separate report by a dissident that appeared to refer to a fire on a pipeline linking the large oil port of Ras Tanura to an oil processing facility in Abqaiq. It was not clear whether the two reports were related.

BBC: Oil price jumps to 43-month high on Saudi blast reports - Brent crude jumped $5.74 to $128.40 per barrel in New York on Thursday, the highest since July 2008. Saudi officials denied the reports, however, helping prices fall back from their highs in Asia on Friday.  A number of issues have pushed prices higher, including tensions over Iran's nuclear plans and regional unrest. The new high set on Thursday beat the level seen during the Libyan civil war last year. In early trading on Friday, Brent was trading at $126.07 per barrel, with US light sweet crude at $108.87 per barrel.

Oil Disruption is Zooming and Global Panic Awaits - Oil is up to $110 and it is on a roll. The last time oil went in this direction, it caused a slowing in the global economy that led to a global financial panic. What's causing it? Peak oil, Chinese growth and lots of potential oil disruption. Pretty much the same factors that caused it last time. The pipeline disruption is a little different this time. The headline player is Iran due to its nuclear program. But Iran isn't actually disrupting the production system, they are merely making threats. If you unwind this a bit, it's pretty clear that the countries actually sending shockwaves of fear through the markets are Israel and the US. However, of the partners in this relationship, Israel is in the drivers seat. They are calling the shots on the timing of an attack on Iran and they will take the world along for a ride. The funny thing, to set this entire disruption event in motion, the Israeli attack on Iran doesn't have to be that big. It just needs to be public and able blow something up. NOTE: IF you start seeing people with strong connections to the Israeli government buying up oil futures contracts for the "Widows and Orphans fund", start buying like crazy.

Soaring Oil Prices Will Dwarf The Greek Drama - Since last week's eurozone "grand summit", the headlines have been positive and, in the official photos anyway, the main players appear to be smiling. Creditors are being asked to swap their bonds for a combination of new short-term instruments, issued by the European Financial Stability Facility, and longer-term Greek government debt. If half of them agree to take the hit then, under "collective action clauses" approved by the Greek parliament, the deal could be forced on all bond-holders. This is a default in all but name, then, with "the powers that be" desperate to hold the single currency together while not triggering credit default swap (CDS) insurance policies that could themselves spark a whole new wave of financial panic. Despite the eurozone's overwhelming ability to set the tone in terms of global investor sentiment, other economic indicators deserve attention – not least the price of oil. Brent crude hit a nine-month high on Friday, breaking through $125 (£79) a barrel. While the black stuff remains $24 below the all-time nominal peak of July 2008, it is now above those levels in terms of both sterling and the euro. Oil prices are up 14pc since the start of the year. That's obviously bad news for the big Western energy-importers, the UK included, that are struggling to generate sustainable economic recovery.

Lofty oil new headache for debt-ridden Europe (Reuters)- No sooner are Europe's debt anxieties easing a touch than a sharp rise in oil prices threatens to impede the economy's tentative recovery from the euro's near-death experience with Greece. Brent oil has shot up about 20 percent since mid-December on concern over cuts in Iranian supply, and set an all-time high this week in euros. Oil has not reached a level that poses a grave danger to growth, economists say. In dollars, today's price around $123 is still below last April's $127 high, let alone the record peak of $147 scaled in 2008. But the risk is that consumers and companies, their confidence still fragile, will crawl back under the covers. "This comes at a difficult time for the euro area economy, which I would still characterize as being in a state of mild recession despite one or two more promising signs," said Julian Callow, an economist at Barclays Capital in London.

Asia is the world's largest petroleum consumer - interactive - U.S. Energy Information Administration (EIA): Asia surpassed North America as the largest petroleum-consuming region in 2008. Asian demand surged nearly 15 million barrels per day from 1980 to 2010, an increase of 146%. North America's petroleum consumption increased 16% between 1980 and 2010. Global petroleum consumption increased 36%, nearly 23 million barrels per day, during the period. Together, the Middle Eastern, Central & South American, and African share of total global oil demand grew from 11% in 1980 to 20% in 2010 (see chart below). European demand for petroleum decreased 5% from 1980 to 2010, while consumption in the Former Soviet Union fell 55% in the same period.

India, China plan sharp cuts to Iran oil imports as US pressure mounts -  India, China and Japan are planning cuts of at least 10 per cent in Iranian crude imports as tightening US sanctions make it difficult for the top Asian buyers to keep doing business with the OPEC producer.  The countries together buy about 45 percent of Iran's crude exports. The reductions are the first significant evidence of how much crude business Iran could lose in Asia this year as Washington tries to tighten a financial noose around Tehran.  The cuts would add to a European Union ban on Iran oil imports, which comes into effect on July 1, to restrict the flow of vital foreign exchange to Tehran under pressure over its nuclear program.

China's Jan crude oil imports from Iran down 14% month over month -  (Reuters) - China's January crude oil imports from Iran fell 14 percent from December on a daily basis, customs data showed on Tuesday, as top refiner Sinopec Corp slashed imports from Iran in a dispute over payments and prices. Sinopec is Iran's biggest oil buyer and imports nearly all the crude that the Islamic Republic ships to China.The state-run refiner cut Iranian oil imports by around 285,000 barrels per day (bpd), just over half its average daily purchases, industry sources told Reuters, as the two haggled over terms against a backdrop of rising international pressure on Tehran. Sinopec's import cuts were for cargoes due to be loaded in Iran in January, so the fall will show more prominently in February customs data when much of the January-loaded crude would have reached China. China imported 490,727 barrels of Iranian crude per day in January, down 82,000 bpd from the 572,761 bpd in December, the customs data showed. Imports fell 5 percent on the year.

India opts to befriend rather than sanction Iran - INDIA SAYS it is determined to continue importing oil from Iran despite EU and US sanctions aimed at stopping trade until Tehran stops what the West insists is a military nuclear programme. Reacting to US secretary of state Hillary Clinton’s comments that the US was engaging in “very intense and very blunt” conversations with India and others such as China and Turkey to stop oil imports from Iran, New Delhi officials indicated yesterday that they would not be coerced. India’s finance minister Pranab Mukherjee recently rejected pressure from the Obama administration to join the US-EU led sanctions against Tehran. India imports about 12 per cent of its oil and gas requirements from Iran for an estimated $12 billion (€9 billion), and maintains it will abide only by UN sanctions and not implement those imposed by individual nations or groupings such as the US and the EU.

Japan crude imports from Iran fall 22.5% in Jan  (Reuters) - Japan's crude oil imports from Iran fell 22.5 percent in January from a year earlier to 1.67 million kiloliters (339,000 barrels per day), data from the Ministry of Economy, Trade and Industry (METI) showed on Wednesday, as the world's third-biggest oil consumer seeks a waiver from U.S. sanctions. The figures show a bigger fall than customs-cleared data issued by Japan's Ministry of Finance on Tuesday. The oil industry regards the METI data as the benchmark because it tracks the actual import status of oil tankers. On a customs-cleared basis, the earlier figures from the Ministry of Finance showed crude imports from Iran fell 12.2 in January percent from a year earlier to 1.70 million kl (345,000 bpd).

China's growing strategic stake in the Middle East: (Reuters) - China's growing demand for imported oil, coupled with the development of new oil and gas supplies in North America, is set to transform the international security situation in the Middle East over the next 20 years. That is the inescapable conclusion from an arresting slide in a presentation given by Maria van der Hoeven, executive director of the International Energy Agency (IEA), at a seminar on the future of energy in Mexico City on Feb. 29. Slide 14 shows how "changing oil import needs shift concerns about oil security" based on IEA projections of net oil imports in 2035. (here) U.S. oil imports are set to almost halve between 2000 and 2035 owing to rising domestic output from both conventional and shale fields, increased ethanol blending and improvements in vehicle efficiency. By 2035, the United States will be importing just 6 million barrels of oil per day (bpd), down from almost 11 million b/d in 2000. In contrast, China's oil imports are set to surge from around 1 million bpd to more than 12 million by the end of the period. India's import needs will soar from less than 2 million bpd to around 7 million. Members of ASEAN will be importing almost 4 million bpd. China will overtake the United States as the world's largest oil importer by around 2020, according to the IEA, with other Asian customers adding to regional import needs.

China claims world’s biggest shale gas reserves - China is planning an investment blitz to unlock its vast reserves of shale gas, convinced it can match the energy revolution under way in the US and meet a significant part of its fast-growing fuel needs.  The resources ministry said on Thursday that preliminary surveys showed the country had explorable shale-gas reserves of 25.1 trillion cubic metres, in theory enough to meet China's gas needs for the next two centuries.  This is slightly lower than earlier figures but well ahead of the reduced US estimates of 13.6 trillion cubic metres, down from 23 trillion in earlier studies. The fields are mostly in Sichuan or in sparsely populated regions in the interior.  "China is rich in shale gas resources, which are suitable for scaled development," said Yu Haifeng, the resource ministry's deputy director. "But the geological conditions are complex and our exploration technology lags behind advanced countries. If the country's shale gas output exceeds 100bn cubic meters by 2020, the fuel will become an important source of China's energy supply."  A report by the US Energy Information Administration last year said China's "technically recoverable" reserves were 50pc greater than in the US. Some geologists believe total resources could be much higher, dwarfing the country's conventional gas reserves.

China's Economy Needs Major Overhaul: World Bank - China's export- and investment-driven economic model, though successful for decades, is no longer sustainable and reforms are needed to prevent a sudden slump on growth, World Bank President Robert Zoellick said Monday in Beijing. "The case for reform is compelling because China has now reached a turning point in its development path," Zoellick told a conference at which he presented a new report by the bank and China's State Council. "The country's current growth model is unsustainable. This is not the time just for muddling through -- it's time to get ahead of events and to adapt to major changes in the world and national economies," he added. According to the report, "China 2030: Building a Modern, Harmonious, and Creative High-Income Society," growth will slow to between 5 percent and 6 percent annually by 2030 and a major overhaul will be needed to sustain even that level. The report also stresses the need for reform in enterprises, land, labor and financial services as part of an effort to create a new framework for growth. To our surprise, Forbes published an op-ed by Louis Woodhill dated Feb. 22 titled "Gasoline Prices Are Not Rising, the Dollar Is Falling" blaming the surging gasoline prices on the dollar depreciation.

Can China avoid the middle-income trap? -The World Bank has just released its detailed report (below), China 2030: Building a Modern, Harmonious, and Creative High-Income Society, The World Bank believes that the export-led model that has delivered the past 30-years of growth and development in China has now run its course and that China can only succeed in becoming a modern, high income country if it implements a six-step series of reforms, namely:

  1. Market-based reforms, including redefining the role of government, reforming and restructuring state enterprises and banks, developing the private sector, promoting competition, and deepening reforms in the land, labor, and financial markets.
  2. Accelerate the pace of innovation and create an open innovation system in which competitive pressures encourage Chinese firms to engage in product and process innovation not only through their own research and development but also by participating in global research and development networks. Essentially, the World Bank recommends that China seek to move away from being an imitator to an innovator in its own right.
  3. Introduce market-based incentives, regulations, public investments, industrial policy, and institutional development that encourages China to transition to a greener economy and fosters more efficient resource use.
  4. Reducing inequality by expanding opportunities and promoting social security for all by facilitating equal access to jobs, finance, quality social services, and portable social security.
  5. Strengthen the fiscal system by mobilizing additional revenues and ensuring local governments have adequate financing to meet heavy and rising expenditure responsibilities. This reform could also reduce the need for local governments to raise tax revenues via property development and speculation.
  6. Sixth, seek mutually beneficial relations with the world by becoming a pro-active stakeholder in the global economy, actively using multilateral institutions and frameworks, and shaping the global governance agenda

Why China Will Have an Economic Crisis - I’ve been thinking about China’s economic future, and the likelihood it will face some sort of terrible collapse, for some time, but I have until now been reluctant to come out with my views so strongly. The reason is that it is very difficult to tell what’s really going on in the Chinese economy. Data is sparse or unreliable. And China is in certain ways unique in economic terms — has history ever witnessed a giant of such massive proportions ascend so quickly in the global economy? Valid precedents are hard to find. Then there is the issue of timing. It is easy to say China will have a crisis; it is almost impossible to say when that might happen. Next month? Next year? Next decade? The fact is China could continue as it is for some time to come. So, in other words, when you make the type of prediction I just have, you have a good chance of getting it just plain wrong. But the more time I spend in China, the more convinced I am that its current economic system is unsustainable. Yes, economists who specialize in China can give you all sorts of reasons why the country is supposedly different, and thus the regular rules of economics don’t necessarily apply. But one simple thing I always say about economics is that you can’t escape math. If the numbers don’t add up, it doesn’t matter much how big your economy might be or how fast it is growing or how heavy a role the state might play. And China has lots of numbers that just don’t add up.

New Push for Reform in China - An exclusive preview of an economic report on China, prepared by the World Bank and government insiders considered to have the ear of the nation's leaders, offers a surprising prescription: China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making them operate more like commercial firms. "China 2030," a report set to be released Monday by the bank and a Chinese government think tank, addresses some of China's most politically sensitive economic issues, according to a half-dozen individuals involved in preparing and reviewing it. The report warns that China's growth is in danger of decelerating rapidly and without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the "middle-income trap." A sharp slowdown could deepen problems in the Chinese banking sector and elsewhere, the report warns, and could prompt a crisis, according to those involved with the project. It recommends that state-owned firms be overseen by asset-management firms, say those involved in the report. It also urges China to overhaul local government finances and promote competition and entrepreneurship.

Time to Confront China over Tech Thievery - A new report warns the Chinese government is engaged in rampant trade law violations with the aim of becoming the global leader in every technology that will dominate the 21st century, including aerospace, biotechnology, information technology, nanotechnology and clean energy. The report charges China is seeking to become number one in those fields by following an aggressive policy of subsidizing exports, protecting its home market, and engaging in rampant intellectual property theft. It is following a path pioneered by Japan and South Korea in the second half of the 20th century with two major differences: China is ten times the size of those two countries combined, and it is taking a far more aggressive approach to winning the race to become the world’s leader in advanced technology industries.“The goal of U.S. policy should be to contain and roll back Chinese mercantilism,” said Robert Atkinson, president of the Information Technology and Innovation Foundation and author of “Enough is Enough: Confronting Chinese Innovation Mercantilism.” “The Chinese strategy is to get as much foreign technology as possible, and they’ll use any means necessary to get it.”  

World Bank Warns of Economic Crisis in China; Expect 3% Average Growth for Decade Says Michael Pettis - A World Bank report to be released next week warns of an economic crisis in China unless state-run firms are scaled back. The Wall Street Journal discusses the report in New Push for Reform in China. Peak oil, a housing bubble, bad debts and over-reliance on investments with no genuine economic feasibility guarantee China's current boom is not sustainable. China bulls are in for a ride awakening when various bubbles pop. As for recommendations, the report  proposes a sharp increase in the dividends that state companies pay their owner (the government) in order to boost revenue and pay for new social programs. Via email, Pettis says: The report is good as far as it goes, but it doesn’t go far enough. Of course increasing SOE dividends to the government for use in social programs will transfer wealth from the state sector to the household sector, but if the total profitability of the SOE sector is less than one-fifth to one-eighth of the direct and indirect subsidies transferred from the household sector, as I have argued many times, then even 100% dividends is not enough to slow the transfer significantly, and remember the transfers have to be reversed, not merely slowed. This proposal falls in the better-than-nothing category, but just.

Furor Over World Bank Report Hints at a Chinese Economic Policy Debate - - When the World Bank and a Chinese research organization called on Beijing policy makers this week to scale back the power of state-owned companies, reform-minded economists offered praise. But not everyone is pleased. The 448-page report, “China 2030,” urged China to rethink the government’s role in managing the economy and move toward a more market-oriented system. According to Tuesday’s online edition of The 21st Century Business Herald, a respected Chinese publication, the State-Owned Assets Supervision and Administration Commission sharply criticized the report even before it was released to the public on Monday. The commission, a powerful Beijing organization with oversight of some of the biggest centrally controlled state companies, sent a letter to the study’s authors arguing that reducing state involvement in the economy would be “unconstitutional” and effectively “subvert the basic economic system of socialism.” A person who answered the telephone Wednesday at the commission’s headquarters in Beijing declined to discuss the report. On Friday, the World Bank declined to comment on opposition from the commission. And a spokesman for the Development Research Center, the Chinese organization that helped produce the study, could not be reached late Friday. But one person with knowledge of how the report was produced confirmed that there was strong opposition from the commission.

China Gets A Pass from G-20 on Yuan - Beijing must have enjoyed swapping the hot seat with Berlin at the Group of 20 summit here this weekend. China’s exchange-rate policy had long been a regular source of contention at meetings of the world’s leading advanced and developing economies. But this time the yuan got a pass and, instead, Germany faced a mounted campaign for it to bulk up Europe’s bailout funds. While capital flows and currency policy are still on the table at the G-20, they’ve “lost some prominence given the focus on the euro-area crisis,” said Paulo Nogueira Batista, Brazil’s executive director at the International Monetary Fund The official statement from the G-20 finance ministers and central bankers on Sunday didn’t discuss foreign exchange issues at all. Currency taking a back seat comes at a time that China has indicated its appreciation of the yuan will likely plateau later this year and next. It also coincides with Beijing saying it’s prepared to offer to bulk up the IMF’s coffers to backstop Europe’s crisis-fighting efforts. Although officially, China’s senior finance officials say the country is not ready to talk numbers, G-20 officials said Saturday Beijing’s contribution could approach $100 billion.

China hard landing to hit bank ratings - THE nation's banks could suffer one to three-notch credit downgrades, with the four major banks surrendering their coveted AA rating, if China has a hard economic landing, Standard & Poor's says. S&P said yesterday that the nation's economic prospects were likely to be significantly affected by a sharp China slowdown, causing a hike in the unemployment rate and a big fall in real estate prices. "These elements are critical factors in our assessment of Australian banks' creditworthiness," S&P analyst Sharad Jain said. Mr Jain modelled three slowdown scenarios for China, including a base case where GDP growth fell from 9.2 per cent last year to 8 per cent this year, and a "soft downside" case (or medium landing) where growth slowed to 7 per cent. Under the third, or "hard landing", scenario, growth in China fell back to 5 per cent.

Taiwan bubble set to burst - Banks are now in the late stages of their credit cycle. After over a decade of loose lending, Taiwan faces the prospect of  a bursting housing bubble and a crisis in tech, where the companies are turning into zombies and refusing to die. Credit tightening should accelerate the seasoning process. We reiterate our SELL recommendations on all the market’s banks, especially since earnings should be front-loaded this year. For those who must be in the sector, we suggest Chinatrust for its credit-card franchise and prudent credit policy. Easy access to credit over 2000-10 led to overinvestment in commodity-tech such as Dram, panels, LED and solar. Housing now faces poor affordability and oversupply. Property prices rose 133% over the past 10 years, but vacancies increased from 13% to 19% over the same period. Though the timing of the bust is hard to predict, credit tightening should accelerate the seasoning process. It will not only trigger failures and financial restructuring in tech, but also pressure  mortgage borrowers and property developers. Tightening will lead to increasing demand for consumer-credit and home-equity loans, while trends in the unorganised money-market rate (ie, loan sharks) and dishonoured cheques suggest signs of trouble.

880,000 pensions hit by Japan investment scandal   – A growing scandal around an investment company that has lost $2.3 billion has affected pensions for up to 880,000 people, Japan’s government said Tuesday. AIJ Investment Advisors has reportedly been lying to clients for years, boasting of annual returns of up to 240 percent while in fact 185 billion yen in pension investments has melted away. The company’s operations were suspended last week and the government ordered a probe of 260 asset management firms nationwide after allegations that most of the money in its care had disappeared. The scandal has shocked Japan, where a rapidly ageing middle class population is increasingly looking to private pension funds, while the state retirement pot also struggles due to gross mismanagement of its own. The government said Tuesday that the 185 billion yen was from 84 separate pension funds, and affected 540,000 employees who were saving for retirement, as well as more than 340,000 people already drawing their pensions. Most of the 84 funds entrusted fractions of their savings to AIJ, but 13 funds had a quarter of their investments exposed to AIJ, the health ministry said. . It was not known whether the money was lost due to market turbulence or because the firm diverted it for other purposes.

Tokyo Based Hedge Fund AIJ May Have Lost/Stolen All Customer Pension Fund Money - Some of my friends in Japan are keeping an eye on this one for me, and I thank them for their help. The problem I have is finding good articles in English. The Japanese Shimbuns are also notoriously circumspect and polite, even when it comes to institutional fraud and the loss of pensioners money. While they keep talking about 'lost money' and 'hiding losses' it looks more like embezzlement on the surface for at least part of the funds. It appears that virtually all the customer money has 'vanished.' AIJ Investment Advisors Co. transferred huge sums in corporate pension assets it manages to a fund in the Cayman Islands and then moved the money to the Hong Kong account of a major European bank, sources said. The Securities and Exchange Surveillance Commission has not been able to trace where the money went after reaching Hong Kong. It will be interesting to see which European bank received the customer money once it hit Hong Kong via the Cayman Islands. It is not a good sign for customers that a European or American bank was involved. That smells more like theft than loss.

Threatened Goldman Japan Workers Unionize - The past year has been anything but business as usual for the financial industry. Faced with a frosty economic climate, financial service companies have been busy chopping dead wood. Last year, 200,000 financial service jobs ended up on the cutting block worldwide. In Japan, that meant layoffs at famous firms including Morgan Stanley, Citigroup, HSBC Holdings, Mizuho Financial Group, and the not-so-famous, such as Spanish bank Bilbao Vizcaya Argentaria. At Goldman Sachs Japan, things became so unusual that some of its staff even took the remarkable step of unionizing after the firm's attempts to force workers to voluntarily resign — and thus sidestep the notoriously tough restrictions on layoffs under Japanese labor law — apparently backfired. Instead of quitting, the company's actions spurred some employees to heed the call for workers of the world to unite, and they formed what's believed to be Goldman Sachs' first-ever employee union. Goldman, known for its close connections to governments and the most powerful corporations, has been cutting jobs worldwide. According to Bloomberg Businessweek, the financial giant eliminated 2,400 jobs in 2011 in response to a 26-percent drop in revenue. Goldman Sachs Japan representatives declined to divulge how many of its 1,300 employees have received pink slips.

Japan monetary base up 11.3% in February: BOJ -- Japan's monetary base grew 11.3 percent in February from a year earlier to 112.44 trillion yen, reflecting the Bank of Japan's increasing monetary easing conditions in the country to boost the economy, BOJ data showed Friday. The average daily balance of liquidity provided by the central bank -- consisting of cash in circulation and the balance of current account deposit held by commercial financial institutions at the bank -- expanded for the 42nd straight month. The balance of current account deposits, or the sum of funds the institutions can use freely, increased 52.8 percent to 28.05 trillion yen, with the BOJ injecting more liquidity into the banking system through its ultra-loose monetary policy, including the program to purchase financial assets from banks and other lenders.

Vital Signs: Dollar vs. Yen - Japan’s yen has fallen sharply against the U.S. dollar. On Tuesday, the value of 100 yen was $1.254, down more than five cents this month. The fall comes amid recent moves by the Bank of Japan to inject money into the country’s markets. Meanwhile, the dollar has gained ground as woes persist elsewhere in the world.

Euro and Yen: Looking for a Black Cat in a Dark Room - Never known for being easy, the euro and yen seem particularly difficult to understand presently. During such times it is often best to return to basics. Foreign exchange reflects the cost of money. So do interest rates. The relationship between the two is not always clear and stable. Recently there have been some shifts in those relationships that market participants should be aware of. Turning to the euro first, we note that yesterday the US-German 2-year differential poked through the 10 bp level. The US 2-year yield moved above Germany’s in mid-December 2011 and has remained generally above there this year except for a brief exception in early Feb. The US premium yesterday was the high for 2012 and even now at 8 bp it is about 2x the 20 day moving average. Yet the euro has trended higher. We find this to be an anomaly. On a 30-day rolling basis since early February, a wider premium for the US has been correlated with a stronger euro. This positive correlation (conducted on the level of the euro and the level of the interest rate spread) is rare. It occurred twice briefly last year and once in 2010. The correlation stands just below 0.43 today, which is the highest since Jun 2009.

India braces for general strike - A strike called by most of India's major trade unions has had a mixed response, with banks and transport services shut down in some areas. Banks in Mumbai, the financial capital, were closed, with one union official saying there had been a "complete shutdown" in the sector. Shops and offices in Calcutta were shut and roads almost empty of traffic while the capital Delhi was little affected. The strikers are demanding better conditions and anti-inflation measures. Services on India's rail network have not been disrupted, but passengers arriving at Delhi's main station had trouble finding transport to other parts of the city, AFP news agency says.

Have Labour Will Travel -  Many commentators about globalisation said that it would create an imbalance between labour and capital, for the simple reason that capital is free to move wherever it wants, and labour, except at the very top end, is not. And so it is turning out, with the middle classes of much of the developed world under extreme pressure, and shrinking. There has been some rise of a middle class in the emerging economies, but it is nowhere near enough to compensate for the loss of demand in developed markets. In many respects, the US housing and debt crisis was the last gasp for a significant slice of the middle class in America after decades of declining real wages. They borrowed to keep themselves at that level, and of course it could not last. Europe’s middle class is under extreme pressure and so is Japan’s.  What I think is less examined is the way that economic measurements influences the formulating of government policies to deal with the economic and social implications. One of the effects of globalisation is that labour is the government’s responsibility. Capital has no responsibility except to itself, and can for the most part push governments around. Put another way, labour remains a problem of the nation state whilst capital has transcended the nation state. Maintaining employment, looking after labour, is not just a key to political survival of any democratic government, it is key to attracting the blessing of the capital markets. Strong employment (and tax collection) is key to keeping government deficits under control, without which the punishment of the capital markets is usually brutal.

Free Trade Ad Nauseam - The first misconception is that exports create jobs, while imports do not – a fallacy that the great trade economist Harry Johnson traced to mercantilism, and which the US has resurrected. In fact, in a world where parts and components come from everywhere, interference with imports imperils competitiveness. The success of parcel-delivery companies, for example, depends on imports, which must be brought from the borders inland, as well as on exports. Second, the credo “Trade, not aid” has given way to the mistaken belief that trade matters less than foreign assistance. The labor constituency, ever fearful of import competition, has undermined trade policy. It has also shifted aid policy in directions that assign priority to areas where the returns to US efforts are relatively minuscule. Thus, the US State Department has ceased being an advocate of multilateral trade liberalization, despite decades of massive gains from the removal of trade barriers. Instead, its aid arm, the US Agency for International Development, has now retreated into low-yield programs conceived as randomized experiments. That technique impresses Bill Gates, and the new USAID administrator, Rajiv Shah, has experience with it. But, even if all such programs succeeded, their benefits would not add up to a fraction of the documented gains that have accrued from trade and other macro-level policies in which the US has lost interest.

Free Trade Ad Absurdam - The last thing a defender of free trade should want is to find herself on the same side as Jagdish Bhagwati.  Exactly because the arguments against laissez-faire on the international front are so strong, we need someone to remind us what is at risk when we mess with trade.  Too bad Bhagwati isn’t the guy.  His latest screed in defense of trade orthodoxy comes on with the force of a handful of packing peanuts flung angrily into space.  Let’s look at his arguments. “The first misconception is that exports create jobs, while imports do not....” His rebuttal is that exporters often use imported parts, and shippers create jobs when they ship imports.  But what is the counterfactual here?  If he is opposing the idea that we should simply stop imports at the border and suffer without them, then he has a point.  His argument says nothing, however, against policies designed to replace imports with domestically produced products.  Moreover, it is absolutely the case that an import constitutes a leakage from a national macroeconomy, while an export constitutes an injection.  That’s not mercantilism, it’s basic accounting.

The Case for a Managed Float under Inflation Targeting - iMFdirect - The global financial crisis has reminded emerging market economies, if they needed reminding, that capital flows can be highly volatile and that crises need not be home grown. Emerging markets have been affected in a variety of ways, not least by the sharp ups and downs in exchange rates that volatile capital flows engender. These ups and downs may be less benign in emerging markets than they might be in advanced economies for a number of reasons.

  • First, emerging markets may have more fragile balance sheets—essentially they are less well hedged against currency risk—so depreciations may engender financial distress and even bankruptcies and adverse effects on economic activity.
  • Second, they may be less flexible, so that when the exchange rate strengthens and the traded goods sector loses competitiveness, this may have permanent effects on the economy even if the exchange rate later reverts to its initial level.

These factors mean that emerging markets are likely to care a lot about exchange rate volatility. They also care about macroeconomic stability and maintaining low inflation. This is one reason a number of them have adopted inflation targeting frameworks in recent years to guide their monetary policy. But is inflation targeting compatible with concern about the exchange rate?

Larry Summers For World Bank: So Much Wrong, So Little Time - What exactly does Larry Summers have to do to stop being offered important jobs? Hold up a liquor store? Kill a guy? That is the question many are asking, or at least should be asking, about Summers' reported candidacy to be the next president of the World Bank.  There are lots of reasons to hope President Obama does not pick Summers for the job, but let's start with the latest, one that hasn't gotten a lot of widespread attention yet: The revelation from Noam Scheiber of The New Republic, in his new book about Obama's economic team called The Escape Artists, that in December 2008, Summers blocked from President Obama's view a suggestion by former economic adviser Christina Romer that his first economic stimulus package should ideally be $1.8 trillion.  The final stimulus package passed by Congress was less than half that size, at an estimated $787 billion. Scheiber's smoking gun is an early draft of a 57-page memo that Larry Summers sent to Obama in December 2008 -- the same memo made famous in Ryan Lizza's recent New Yorker story -- about Obama's shift from idealism to pragmatism. The early draft that Scheiber got his hands on includes a section written by Romer that suggests a stimulus package of $1.8 trillion would raise economic growth and bring down unemployment more quickly than a smaller one.  When Summers sent his final memo to Obama, Romer's suggestion of a $1.8 trillion stimulus bill was gone. In fact, of the four possible package sizes Summers offered the president, the biggest was $890 billion.

World’s Extreme Poverty Cut in Half Since 1990 -- The share of people living in extreme poverty around the world continued to decline in recent years despite financial crises and surging food prices, the World Bank said today. The bank said preliminary estimates for 2010 showed that the world’s extreme poverty rate — people living below $1.25 a day — had fallen to less than half of its 1990 value. That meets the first Millennium Development Goal of halving extreme poverty from its 1990 level, before its 2015 deadline, the Washington-based development institution said. For 2008, the latest year with full global data available, about 1.29 billion — roughly 22% of the developing world’s population — lived below $1.25 a day. In 1981, 1.94 billion people lived in extreme poverty. The bank’s latest figures are based on more than 850 household surveys in about 130 countries. The region with the highest extreme poverty rate was Sub-Saharan Africa, where about 47% lived below $1.25 a day. The $1.25 marker for extreme poverty is the average for the poorest 10 to 20 nations of the world. The median poverty line for developing countries — $2 a day — showed less progress, the bank said. The number of people living below $2 per day fell to 2.47 billion in 2008 from 2.59 billion in 1981, though it has fallen more sharply since 1999.

Global Manufacturing Sees Uneven Recovery - Manufacturing in the U.S. expanded in February at a slower pace than forecast as orders cooled. The Institute for Supply Management’s factory index dropped to 52.4 from 54.1 in January, the Tempe, Arizona-based group’s report showed today. Readings above 50 signal growth. The median forecast of economists surveyed by Bloomberg News called for a gain to 54.5. Another report today showed claims for unemployment benefits matched a four-year low last week. The manufacturing figure is at odds with regional data for the month showing the factory expansion accelerated. While gains in auto sales and increased exports are contributing to growth in the industry, higher fuel costs and less inventory expansion may be limiting orders. Elsewhere, euro-area manufacturing shrank for a seventh month. A factory gauge based on a survey of purchasing managers in the 17-nation region increased to 49 in February from 48.8 a month earlier, below the 50 line that divides expansion from contraction, London-based Markit Economics said today. The European manufacturing survey contrasts with reports in China, India and the U.K. showing continued expansion in factory output.

The global zombie shuffles on - My theory for global growth this year is that it will slow from last year and any acceleration will be difficult and halting. That’s because Europe has set course for perpetual recession via austerity and a credit crunch, the US looks headed for a slowdown on lousy income growth and China is going to have it’s version of a balance sheet shakeout as it suppresses house prices. As such I’ve been looking for signs of weak rebounds in the PMIs. And I’ve found them. We know of China’s and Japan’s manufacturing zombies, as well as the slowdown in growth in last night’s US ISM. Now today we can add the export bell weathers of South Korea and Taiwan. First to the ROK: Business conditions in the South Korean manufacturing sector improved for the first time since July 2011 during February. This was highlighted by the HSBC South Korea Manufacturing PMI® posting 50.7, up from January’s reading of 49.2. Nonetheless, the latest figure pointed to only a marginal rate of growth. So, a fairly subdued bounce. Meanwhile, in Taiwan the news was similar with a bit more upside:

Canadian envoy to Iceland sparks loonie controversy - Iceland’s newfound love for the loonie is sparking a wave of controversy, from Reykjavik to Ottawa.  For 150 years, the rest of the world has shown scant interest in the Canadian dollar – the poor cousin to the coveted U.S. greenback.  But now tiny Iceland, still reeling from the aftershocks of the devastating collapse of its banks in 2008, is looking longingly to the loonie as the salvation from wild economic gyrations and suffocating capital controls.Canadian ambassador to Iceland Alan Bones had planned to deliver remarks to a conference on the future of the Icelandic Krona, making it clear that if Iceland decided to adopt the Canadian dollar, with all its inherent risks, Canada was ready to talk.  But his speech, slated for Saturday, was abruptly cancelled when news of the remarks was reported in Iceland and Canada, led by The Globe and Mail.  “Once we got wind of [the speech] and it went through the approval channels, we decided it was not an appropriate venue,” said Joseph Lavoie, Foreign Minister John Baird’s press secretary.

Fed’s Fisher: Mexico Besting U.S. in Many Areas - U.S. economic policy makers have something to learn from the successes Mexican leaders have had over recent years, a Federal Reserve official said Wednesday. “Not only is Mexico doing better, macroeconomically speaking, than the false stereotypes would have us think, Mexico is actually doing better than the United States in many macroeconomic areas,” Federal Reserve Bank of Dallas President Richard Fisher said. “From a macroeconomic standpoint, Mexico’s future is bright; its prospects keep improving. Sadly, one cannot say the same about the present macroeconomic trajectory of El Norte,” the official said, in a reference to the U.S. “This may come as a shock to those Americans who tend to look at Mexico solely through the lens of immigration or drug trafficking, or whose most benign perception of Mexico is gleaned from lying on a beautiful beach sipping a margarita in Punta Mita,” Fisher said.

U.S. and Euro-Area Monetary Policy by Regions - FRBSF - Even in areas that have a common currency, economic conditions can vary greatly from one region to another. So a single uniform monetary policy may not be appropriate. For example, a simple monetary policy rule at times recommends different interest rates for different regions of the United States. Among euro-area countries, such a rule typically recommends an even greater divergence in interest rates, partly due to lower labor mobility, and less use of fiscal transfers to help smooth shocks.

The Usual Suspect, by J. Bradford DeLong - One legacy of Western Europe’s experience in the 1980’s is a rule of thumb: each year that lower labor-force attachment and reduced capital stock as a result of declining investment depresses production $100 billion below normal implies that productive potential at full employment in future years will be $10 billion below what would otherwise have been forecast. The fiscal implications of this are striking. Suppose that the United States or the Western European core economies boost their government purchases for next year by $100 billion. Suppose further that their central banks, while unwilling to extend themselves further in unconventional monetary policy, are also unwilling to stymie elected governments’ policies by offsetting their efforts to stimulate their economies. In that case, a simple constant-monetary-conditions multiplier indicates that we can expect roughly $150 billion of extra GDP. That boost, in turn, generates $50 billion of extra tax revenue, implying a net addition to the national debt of only $50 billion.What is the real (inflation-adjusted) interest rate that the US or Western European core economies will have to pay on that extra $50 billion of debt? If it is 1%, boosting demand and production by $150 billion next year means that $500 million must be raised each year in the future to keep the debt from growing in real terms.  If it is 5%, the government will need an additional $2.5 billion per year.

G20 moves to line up huge rescue deal for April - The world's leading economies worked on Sunday to line up a deal in April on a second global rescue package worth nearly $2 trillion to stop the euro-zone sovereign debt crisis from spreading and putting at risk the tentative recovery. Germany said it would make a decision sometime in March on strengthening Europe's bailout fund, a move other Group of 20 countries say is essential to clear the way for throwing extra funds into the International Monetary Fund. The twin proposals would build up massive international resources by the end of April - when the G20 group next meets - and convince financial markets they can stem the euro-zone's deep problems. It would mark their boldest effort since 2008, when the G20 mustered $1 trillion to help rescue the world economy. British finance minister George Osborne said there would be no additional resources committed to the IMF until euro zone countries bolstered their own efforts to stop contagion. "We are prepared to consider IMF resources but only once we see the color of the euro zone money and we have not seen the color of the euro zone money," "I think that quid pro quo will be clearly established here in Mexico City."

Geithner Spars With Schaeuble as G-20 Hits Impasse on Boosting IMF Funding - The U.S. and Germany sparred about how to tackle Europe’s sovereign debt crisis as a meeting of officials from the world’s biggest economies struggled to break an impasse over outside help for the region.  U.S. Treasury Secretary Timothy F. Geithner used a speech in Mexico City yesterday to urge Europe to step up its actions and render its crisis-fighting commitments “credible.” German Finance Wolfgang Schaeuble rebuffed those calls two hours later, saying a deal struck Feb. 21 for a second Greek bailout and debt writedown shows that “Europe has done its homework.”  The spat overshadowed the first of two days of Group of 20 talks as Japan, Russia and the U.K. joined the U.S. and Canada in prodding the euro-area to boost its crisis defenses before looking for more backing from the International Monetary Fund. That puts the spotlight on Germany, Europe’s biggest economy, to agree to raise the region’s anti-crisis firewall to a potential 750 billion euros ($1 trillion) at a March 1-2 European summit.

Lagarde: “World Economy Not Out of Danger Zone” - Although a derailing of the global recovery has been avoided, the world economy is still not out of the danger zone, IMF Managing Director Christine Lagarde said after the conclusion of the Group of 20 Finance Ministers and Central Bank Governors meeting in Mexico City. “Over the last two days, we discussed the challenges facing the world economy and continued our deliberations over next steps and actions,” she said in a February 26 press statement. “Derailment of the global recovery, which was a clear and distinct danger a few months ago, has been avoided for now thanks to strong policy measures–in particular those of the European Central Bank–and strengthened governance in the euro area, and reforms and adjustment in countries such as Italy, Spain, and Greece. High frequency indicators also now suggest an uptick in activity, mostly in the United States.” But she warned that “the world economy is still not out of the danger zone, and the G-20 countries must now  strengthen resilience to further shocks that could result from still fragile financial systems, high  public and private debt, and higher world oil prices. Of equal concern is unemployment, which is still too high in many countries.

Europe Left to Dig Deeper After G-20 Rebuffs Call for Help (Bloomberg) -- European leaders shift their focus this week to bolstering the euro region’s debt-crisis firewall after the Group of 20 nations rebuffed their call for help. The decision by G-20 finance ministers to fend off pleas for assistance pending an increase in the euro-area backstop puts the onus on Germany, the biggest national contributor to bailouts, to overcome its resistance to doing more. With a parliamentary vote on a second Greek aid package looming in Berlin today, German Chancellor Angela Merkel’s government must now decide whether to back plans at a March 1-2 European Union summit to combine rescue funds and produce a potential firewall of 750 billion euros ($1 trillion). Europe “doesn’t really need any outside money,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in an e-mail. “It needs their own policy makers, especially Germany, to show leadership.”

What Ails Europe?, by Paul Krugman - Things are terrible here, as unemployment soars past 13 percent. Things are even worse in Greece, Ireland, and arguably in Spain, and Europe as a whole appears to be sliding back into recession.  Why has Europe become the sick man of the world economy? Everyone knows the answer. Unfortunately, most of what people know isn’t true.  The Republican story — it’s one of the central themes of Mitt Romney’s campaign — is that Europe is in trouble because it has done too much to help the poor and unlucky, that we’re watching the death throes of the welfare state.  Look at the 15 European nations currently using the euro (leaving Malta and Cyprus aside), and rank them by the percentage of G.D.P. they spent on social programs before the crisis. Do the troubled GIPSI nations (Greece, Ireland, Portugal, Spain, Italy) stand out for having unusually large welfare states? No, they don’t; only Italy was in the top five, and even so its welfare state was smaller than Germany’s.  So excessively large welfare states didn’t cause the troubles.  Next up, the German story, which is that it’s all about fiscal irresponsibility. This story seems to fit Greece, but nobody else. Portugal’s deficits were significantly smaller, while Spain and Ireland actually ran surpluses.  Japan, which is far more deeply in debt than any country in Europe, Greece included, pays only 1 percent.

This is What Ails Europe - Paul Krugman argues that the primary problem facing Europe is a monetary one (my bold): So what does ail Europe? The truth is that the story is mostly monetary. By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects of the gold standard — defects that played a major role in causing and perpetuating the Great Depression.  [...]  If the peripheral nations still had their own currencies, they could and would use devaluation to quickly restore competitiveness. But they don’t, which means that they are in for a long period of mass unemployment and slow, grinding deflation. Their debt crises are mainly a byproduct of this sad prospect, because depressed economies lead to budget deficits and deflation magnifies the burden of debt. I agree that the Eurozone was a flawed currency union from the start.  So yes, what ails Europe is a structural monetary problem. But the monetary problem goes deeper than that.  There is also a cyclical monetary problem that is alluded to in the bold passage above.  This cyclical dimension can be seen in the figure below:

Europe’s Empty Fiscal Compact - The driving force of Europe’s economic policy is the “European project” of political integration. That goal is reflected in the European Union’s current focus on creating a “fiscal compact,” which would constitutionalize member states’ commitment to supposedly inviolable deficit ceilings. Unfortunately, the compact is likely to be another example of Europe’s subordination of economic reality to politicians’ desire for bragging rights about progress toward “ever closer union.” The plans for a fiscal compact have evolved rapidly in recent months, shifting from a politically unpopular “transfer union” to a dangerous plan for fiscal austerity and, finally, to a modified version of the defunct Stability and Growth Pact of 1997. In the end, the agreement that will emerge later this year will do little, if anything, to change economic conditions in Europe. German Chancellor Angela Merkel initially proposed the “transfer union,” in which Germany and other strong eurozone economies would transfer funds year after year to Greece and other needy countries, in exchange for the authority to regulate and supervise the recipient countries’ budgets and tax collections. The next step was the fiscal plan that was agreed in Brussels at the end of last year, which completely abandoned the idea of a transfer union in favor of an agreement that each eurozone country would balance its budget. Under this scheme, a financial penalty would “automatically” be imposed on any country that violated that obligation. With balanced budgets everywhere, there would be no need for fiscal transfers.

The austerity recovery - Both Europe and the US have witnessed so far very weak recoveries from the past recession. There are many reasons why the recovery has been unusually slow: a weak real estate market, debt overhang, the fear of sovereign crisis. Some of these arguments are hard to quantify but there is one factor that is much easier to measure: the role of fiscal austerity. Although it is easy to measure, the facts seemed to have escaped the public debate for months. For a while it was common to hear the perception that government spending was constantly increasing due to successive stimulus packages approved by governments. More recently there is growing concern with the potential role of austerity in slowing down the recovery but so far it has not triggered any clear action. Here are three charts summarizing some key facts for the US economy. I compare below the last two recoveries: the one that started in the fourth quarter of 2001 with the one that started in the second quarter of 2009. Just to be clear, the 2001 recovery was also a slow one from a historical point of view, but it still can be an interesting benchmark. What you see below are levels relative to the quarter when the recovery started (variables are in nominal terms).

Greek Rescue Opposed by German Majority, Bild am Sonntag Says -  Sixty-two percent of Germans want lawmakers to reject renewed aid for Greece in a parliamentary vote scheduled for tomorrow in Berlin, Bild am Sonntag said, citing a poll.  Thirty-three percent said parliament should approve German participation in Greece’s second bailout, the newspaper said in an e-mailed advance version of an article appearing today.  Bild didn’t give a margin of error for the Feb. 23 Emnid poll of 500 people.

Greece, “The Bottomless Barrel,” As Germans Say - In Greece, three-quarters of the independent doctors, lawyers, and engineers declare taxable income below the existential minimum. Tax fraud amounts to €20 billion per year (8.5% of GDP). And tax dodgers owe €63 billion in unpaid taxes (27% of GDP). The country is bankrupt and has been kept afloat by the Troika (EU, ECB, and IMF), of which Germany is by far the largest contributor. And the numbers are staggering: the first bailout package of €110 billion, the current bailout package of €130 billion, and the debt swap of €107 billion, in total €347 billion, amount to a mindboggling 150% of Greece’s GDP! And even that won’t be enough, apparently, according to a crescendo of German politicians, among them Finance Minister Wolfgang Schäuble who inserted these devastating words into his letter to the members of the Bundestag:  “I cannot give any guarantees that the path taken will lead to success.” And: It’s possibly “not the last time that the German Bundestag will have to deal with financial aid for Greece.” Thus, he put a third bailout package on the table.

German cabinet minister calls for Greek euro exit - Germany’s interior minister called for Greece to leave the eurozone on Saturday as hopes that the world’s richest countries would stump up more cash to help the International Monetary Fund (IMF) fight Europe’s debt crisis faded. Becoming the first member of Germany’s cabinet to openly call for a Greek exit, Hans-Peter Friedrich told Der Spiegel magazine that Greece’s chances of restoring its financial health would be greater outside the euro. “I’m not saying that Greece should be thrown out but rather to create incentives that it can’t say ‘no’ to,” he added. His comments came as eurozone leaders faced calls to increase their own efforts before any more money is made available from the IMF. Fresh from agreeing a second €130bn (£110bn) bail-out for Greece, there were hopes that this weekend’s gathering of G20 finance ministers in Mexico City would achieve a deal on how to ramp up the IMF’s own European war chest by as much as $600bn (£378bn).

Greece Must Quit Euro to Resolve Debt, Roubini Tells Kathimerini -Greece is likely to leave the euro and adopt its own currency next year to improve competitiveness and foreign trade, as it must achieve economic growth to resolve its sovereign debt burden, Kathimerini cited New York University Professor Nouriel Roubini as saying in an interview. The only way to restore growth is through devaluation, which requires the return to a national currency, and there’s a “strong chance” this will happen in Greece by 2013, the Athens-based newspaper cited Roubini as saying in a preview of the interview to be published in tomorrow’s edition.

Greece should exit eurozone - With German Chancellor Angela Merkel facing a parliamentary vote Monday on a second Greek bailout, her interior minister, Hans-Peter Friedrich came out over the weekend in favour of Greece leaving the eurozone. Friedrich told the news magazine Der Spiegel, “I do not mean that Greece should be kicked out of” the 17-nation eurozone, but he said the bloc should “create incentives for an exit that they cannot turn down.” Merkel is opposed to Greece leaving the eurozone, and agreed in January with French President Nicolas Sarkozy that Greece should be kept in the monetary union, as long as its government imposes strict budgetary reforms. She expects the Bundestag to approve the second bailout package in a vote Monday. Friedrich, of the CSU, the Bavarian sister party to Merkel’s Christian Democrats, is the first member of the federal government to have spoken out suggesting a radical change of course in euro crisis policy.

Given Greek Deal, Investors May Reconsider Sovereign Debt — As Greece starts sending out a formal debt restructuring offer to its private sector bondholders in the coming days, the hard-line approach Athens has taken, requiring steep losses for creditors, has prompted fears that other weak countries in Europe might do the same.  By passing a law this week that gives the government the right to impose a loss of as much as 75 percent on all investors who own bonds governed by Greek law, which covers 92 percent of bonds outstanding, Greece has, with one stroke, sharply increased its chances of erasing 107 billion euros ($144 billion) from its total debt burden of 373 billion euros ($496 billion).  The debt restructuring, if successful, would be the largest in recent history, and the losses by banks, hedge funds and other private investors would be among the most painful ever. In this regard Greece trails only Iraq, which imposed an 89 percent loss on its bondholders in 2006, and Argentina, with a 76.8 percent loss in 2005.  Greece has also raised the odds that, as the pain of austerity increases in countries like Portugal and Ireland — to say nothing of Spain and Italy further down the road — the temptation for other countries to turn a similar legal trick will grow stronger.

Greece sets March 8 deadline for investors in bond swap - Greece has set a March 8 deadline for investors to participate in its unprecedented bond swap aimed at sharply reducing its debt burden, according to a document outlining the offer. Greece formally launched the bond swap offer to private holders of its bonds on Friday, setting in motion the largest-ever sovereign debt restructuring in the hope of getting its finances back on track. In the document, Greece said the March 8 deadline could be extended if needed. Athens in the past has said it wants to conclude the transaction by March 12.

Under Zeus' gaze, austerity-hit Greeks queue for potatoes --Struggling to cope with austerity, hundreds of Greeks in the town of Katerini at the foot of Mount Olympus have turned to a cheap way to do groceries: ordering potatoes on the Internet and picking them up in a parking lot. As dawn broke on a cloudless Saturday, buyers patiently gathered to buy directly from growers at less than half the supermarket shelf price - the unemployed who struggle to make ends meet, the retirees whose pensions have been cut by the cost-saving measures and even well-heeled lawyers and women in fur. The idea to cut out profiteering middlemen, started by a local activist group in Katerini, northern Greece, has led several other towns to seek advice on emulating the action.

Greeks “fell trees for warmth” amid economic chill - Rising oil prices and chilly economic times are prompting increasing numbers of Greeks to chop down trees for winter warmth, a group of forest engineers warned Tuesday. Nikos Bokaris, a spokesman for the Panhellenic Union of Forest Engineers, said the debt-wracked nation's forest ecosystems were not yet under threat, but urged the government to act quickly to prevent broader damage. "You have to remember what happened in Albania," Bokaris said, describing how that country's population felled trees en masse after the collapse of communism. "Even the trees lining the roads were chopped down." Greek foresters filed 1,500 criminal complaints last year, twice as many as in 2010. About 70 percent of Greece's forests are public, with most of the rest belonging to various religious institutions.

Default still stalks Greece, bonds burden its banks: Moody's - The agency also warned that the terms of the debt swap could result in a severe further weakening of the capital base of the Greek banking system. Moody's Investors Service said that "the 21 February announcement on support for Greece is an important step forward, but the risk of a default even after this distressed exchange (of bonds) is completed remains high." The agency's senior analyst Sarah Carlson said in Moody's weekly review of worldwide events affecting credit markets that "Greece's debt burden will remain large for many years, and the country is unlikely to be able to access the private market after the second assistance package runs out." She continued: "The outcome of elections, expected in April, also constitutes a source of political and implementation risk."

Greek banks continue to hemorrhage deposits: ECB data - Firms and consumers continued to pull their money out of Greek banks at a rapid rate in January, European Central Bank data showed on Monday, underscoring the ongoing lack of trust the country's banking system faces. Private sector deposits in Greek banks fell by almost 3 percent in January after a slight increase in December, with the total falling to 174.9 billion euros, the lowest level since November 2006.They are now about 28 percent below their peak in December 2009. Private-sector deposits in Portugal and other countries in the middle of the debt crisis fared much better, however. In Portugal, they increased fractionally, to 233.2 billion. Deposits fell slightly in Italy, Ireland and Spain. With the exception of Portugal, there has been a steady decline in the amount of money parked in banks in all peripheral countries in the last year.

OECD: the average Greek works more hours than any other European country - The eurozone crisis has sown divisions in the European family, and Greece in particular has often been singled out for criticism. Has Greece been living beyond its means? Are Greeks lazy? On this second point, the statistics tell a surprising story. This week Greece is facing more spending cuts after agreeing to a deal of 130bn euros (£110bn, $175bn) to help it avoid bankruptcy.  But the statistics suggest the country has not lost its way due to laziness. If you look at the average annual hours worked by each worker, the Greeks seem very hard-working. Figures from the Organisation for Economic Co-operation and Development (OECD) show that the average Greek worker toils away for 2,017 hours per year which is more than any other European country. Out of the 34 members of the OECD, that is just two places behind the board leaders, South Korea. On the other hand, the average German worker - normally thought of as the very epitome of industriousness - only manages 1,408 hours a year. Germany is 33rd out of 34 on the OECD list (or 24th out of 25 looking at the European countries alone).

Germany offers to send tax men to Greece - The German government is prepared to send 160 financial experts to Greece to help the country overhaul its tax collection, the business weekly WirtschaftsWoche reported Saturday. Hans Bernhard Beus, deputy finance minister, told the magazine that the tax officials are ready to jump in to help the ailing country. They would need to at least speak English, but about a dozen of the volunteers speak Greek, he said. A large number of the volunteers would come from western German state of North Rhine-Westphalia, where state Finance Minister Norbert Walter-Borjans of the centre-left Social Democrats (SPD) told WirtschaftsWoche: “Greece is facing the problems that former East Germany faced in 1990.”  The central German state of Hesse is also prepared to send in volunteers, the state’s Finance Minister Thomas Schäfer of the conservative Christian Democrats (CDU) said. “In helping Greece, we should also entertain the idea of bringing in retired tax collectors, because considerable practical experience could be used here,” he told WirtschaftsWoche.

Belgium struggling to find two billion euros: report - Belgium must find about two billion euros if it is to make good on a pledge to the EU executive to bring down its budget deficit to 2.8 percent of GDP this year, press reports said Saturday. A report, drawn up by the body tasked with outlining budget targets that is to be submitted to the cabinet on Sunday, found 1.5 billion euros extra were needed because of the sluggish economy. Another 500 million should be kept in hand should the growth rate decline further, the press reports said. Belgium expects near-zero economic growth in 2012, with a rise of GDP of 0.1 percent, against 0.8 percent initially anticipated, the advisors to the Belgian government said. Belgium, a bellwether economy within the 17-nation eurozone, entered recession in late 2011, preliminary figures released earlier this month by the national central bank showed. Gross domestic product declined by 0.2 percent in the fourth quarter, following a contraction of 0.1 percent in the three months from July through September, according to the bank's data.

Nothing to see in Portugal, please keep moving - THE troika wishes to convey that Portugal will be just fine, thank you, provided they keep at it: The programme is on track, but challenges remain. Policies are generally being implemented as planned, and economic adjustment is underway. In particular, the large fiscal correction in 2011 and the strong 2012 budget have bolstered the credibility of Portugal’s front-loaded fiscal consolidation strategy. Financial sector reforms and deleveraging efforts are advancing, while steps are taken to ensure that credit needs of companies with sound growth prospects are met. Reforms to increase competitiveness, growth, and jobs have also progressed, although many reforms still await full implementation. The broad political and social consensus that is underpinning the programme is a key asset.Looking ahead, the Portuguese economy will continue to face headwinds. In 2012, trading partner import growth is expected to weaken further, while domestic demand adjusts, and unemployment and bankruptcies are rising. As a result, GDP in 2012 is expected to decline by 3¼ percent, following a fall of 1½ percent in 2011. In 2013, a slow recovery should take hold, mainly supported by private investment and exports. Here's a graphic representation of the establishment of fiscal credibility:

Spanish 2011 deficit 8.51%, way over target: minister - Missing the 2011 target will make it harder for Spain to meet its public deficit goal for this year of 4.4 percent of Gross Domestic Product as it seeks to get nearer to the EU ceiling of 3.0 percent. The public deficit -- the broad shortfall between spending and revenues -- was 9.3 percent in 2010. Prime Minister Mariano Rajoy's conservative government said shortly after it came to power in December that the 2011 public deficit would be around 8.0 percent, far above the 6.0-percent agreed with Brussels by Spain's previous socialist government. It has announced spending cuts of 8.9 billion euros ($11.5 billion), frozen public sector wages and hiked taxes on income, savings and property to bring in 6.3 billion euros as part of efforts to rein in the deficit. The government is racing to bring the deficit down and make sure the country does not get dragged into the debt crisis mire that has already forced Greece, Ireland and Portugal to seek financial bailouts.

Half Of Young Adults In Spain Have No Job And Bleak Prospects - Lorente is stuck among Spain's "Lost Generation" of 20-somethings, with no work and no real prospects in sight: Roughly half of all Spaniards between 16 and 24 are jobless, the highest level among the 17 nations that use the euro. It's a devastating picture of blighted youth that threatens to distort Spain's social fabric for years to come, dooming dreams, straining family structures and eroding the well-being of a rapidly aging population. The staggering jobless figures — 48.6 percent for Spaniards between 16 and 24; 39 percent for those ages 20-29 — hold dire consequences for a country that grew accustomed to prosperity on the back of a property boom that collapsed in 2008. The 1.6 million unemployed teens and young adults in the nation of 47 million risk never having a decent start to a career. They probably won't accumulate assets like their own homes or savings until they are in their 40s. And they then will likely face much higher taxes to maintain Spain's costly social welfare system. What's more, they're expected to put off having children or have fewer than their parents, slashing a birth rate that's already declining just as Spain's large baby boom generation begins to retire. That means fewer people to absorb the costs of caring for the swelling ranks of pensioners.

Spain barter economy wins followers in grip of recession - It's 10.30 on a chilly winter's morning in central Madrid and retailer Emanuela Scena is opening up for business. Her shop is one of several offering second-hand goods that have sprung up in Spain's capital during the economic crisis1 and is packed to the rafters with clothes, books, CDs and electrical equipment. But unlike the others, it doesn't take cash. It's part of a barter economy2 in goods and services that is gaining ground as the country tips into recession3 and already sky-high unemployment rates4 inch up. Finding different ways of generating business has also inspired stores in two towns to start accepting the peseta again, encouraging customers more than a hour's drive away to root through cupboards and drawers for a currency they thought they'd surrendered for good in 2002. "When we started (in December 2010), Spain was already in crisis. At first people didn't like the fact that everything we were exchanging was second-hand, but now they understand," Scena said.

EU Commission Pressures Spain for Explanations - Spain must explain soon to the European Commission why its 2011 budget deficit was substantially higher than expected and deliver clear future budget plans, the Commission said on Tuesday. Spain's 2011 budget deficit came to 8.51 percent of GDP, the finance minister said on Monday, up from early estimates of 8.2 percent and far above forecasts from the Commission for something nearer 6.5 percent. "We need to understand the causes of this significant slippage," Commission spokesman Olivier Bailly told a regular briefing in Brussels. Spain will have to come up with more than 40 billion euros in savings to meet that target, implying spending cuts that most economists see as impossible given that the economy is already slipping into recession and the jobless rate is the highest in the European Union at 23 percent. Bailly said Spain also needed to deliver its 2012 budget estimates in the coming weeks, not at the end of March, saying the task in hand was so great it could not be delayed.

Sharpen the mower. Spain's deficit exceeds 90 billion euros - Specifically, Spain's budget deficit is 91.3 billion euros, 8.51% of GDP. So it should not take a wizard to realize the simple mathematical fact that team Rajoy has not yet begun with budget cuts and tax increases, if by 2012 Spain is to meet the 4.4% of GDP deficit target set by creditors.  The measures announced in December were only an appetizer. Instead of sharpening the blades, I think a good lawn mower would be more practical. The announced cuts and tax increases of last December (income tax, capital gains), are expected to generate about 14,900 million.  To meet the objective of a 4.4% deficit, in 2012 the government deficit should not exceed 46,500 million euros. To do so requires a nearly 30 billion euros hole to be filled, with the aggravating circumstance that it's now March and those 30 billion euros need to come in the next 9 months. This figure is double the cuts and tax increases approved last December. So Rajoy has quite imagination if he expects this to happen.

EU Commission pressures Spain on budget - Spain must explain soon to the European Commission why its 2011 budget deficit was substantially higher than expected and deliver clear future budget plans, the Commission said on Tuesday. Spain's 2011 budget deficit came to 8.51 percent of GDP, the finance minister said on Monday, up from early estimates of 8.2 percent and far above forecasts from the Commission for something nearer 6.5 percent. "We need to understand the causes of this significant slippage," Commission spokesman Olivier Bailly told a regular briefing in Brussels. "We need to have this analysis before coming to a conclusion. We need this to help the Spanish authorities prepare their budget and we need these elements to help Eurostat in April to finalize and validate these figures." Spain, which has enacted austerity measures and economic reforms to avoid being sucked into the euro zone debt crisis, presents on Friday its 2012 spending ceiling, a key element in the budget for the year. A government official said Madrid could soon agree on a new deficit target that it can take into account before completing the new budget, which it plans to present on March 30.

Spanish PM says deficit situation 'difficult' - Even as students protested nationwide over crisis cuts, the conservative Popular Party leader warned of a tough task ahead for the country, which missed its deficit-cutting targets last year by a wide margin. The scale of Spain's deficit and the prospect of a recession this year have prompted speculation that Madrid will have to ask the European Union to relax the deficit targets for this year. "We will lower the deficit as much as we can," Rajoy told reporters on the eve of a two-day EU summit in Brussels where leaders are to sign a long-crafted treaty to rein in deficits and debt. "The situation is difficult," he said. Spain reported Monday that the public deficit -- the shortfall between state spending and revenue -- amounted to 8.51 percent of economic output in 2011, way above the 6.0-percent target. The result placed in deep peril this year's target, agreed with Brussels, of keeping the deficit to within 4.4 percent of gross domestic product. The European Commission warned on Tuesday that it will hold Spain to its targets.

Capital Flight From Italy, Greece, Portugal Accelerates; Two Trillion Fantasy; Merkel Weaker Every Week; Crude and Geopolitical Risks - Via Email, here is a nice summary of European events from Steen Jakobsen at Saxo Bank in Denmark. Topics include the G20 Summit, Extend-and-Pretend Dogma, Capital Flight , and Geopolitical Risks. Steen Writes ...This week-end's G-20 came and went without any real new information. Yes, the policy makers wants us to believe ultimately IMF will have 2 trillion US dollars at its disposal. No, the US, UK and rest of non-Europe is not really interested before we all get more clarification on how Europe will ring fence the debt crisis. This is more and more Wall Street vs. Main Street: Underfunded banks buys underfunded government bonds and underfunded governments guarantees underfunded banks.  The real loser being the unemployed - Edward Heath put it more elegantly: Unemployment is of vital importance, particularly to the unemployed.  Meanwhile the real economy and unemployment is exploding higher adding further burdens to already stretched government deficits. The new EU forecast for GDP growth in 2012 of minus .3% from this past Friday down from plus .05% is great example of how EU and the debt crisis non-solutions continues to lack behind fundamentals. Soon the rising disconnect will hit the politicians games of buying time.

German Lawmakers Endorse Greek Bailout - German lawmakers approved a second Greek bailout package by a wide margin on Monday, but the vote in the Reichstag took a twist when the final tally showed that Chancellor Angela Merkel didn't receive full backing from her own coalition for the rescue. Ms. Merkel's failure to win a so-called chancellor's majority robbed the German leader of a symbolic victory, underscoring the growing unease in her center-right coalition over the rising costs of supporting Greece.  Of 591 valid votes cast in the Bundestag, or lower house of Parliament, 496 lawmakers were in favor of the bailout, while 90 were against. Five lawmakers abstained.  Chancellor Angela Merkel now has a mandate from Parliament to give her approval of the €130 billion ($174.8 bililon) aid package at a meeting of European Union leaders in Brussels this week.

Ireland calls vote on European treaty - Dublin will hold a referendum on the eurozone fiscal treaty, plunging Europe into months of uncertainty and potentially placing a question mark over Ireland’s future membership of the euro. Enda Kenny, Ireland’s prime minister, said on Tuesday that the government had decided to hold a referendum following advice supplied by the attorney-general that “on balance” the Irish constitution required the treaty to be put to a vote. He said he would sign the treaty at a European Union summit on Friday and within a matter of weeks the government would organise a referendum commission – an independent body appointed to explain the subject matter of a referendum to the public.  An opinion poll last month found 73 per cent of the public felt a vote should be held on the treaty, which would tighten budget rules for the 17 countries sharing the euro. Some 40 per cent of the 1,000 people questioned in the Sunday Business Post/Red C poll said they would support the treaty, 36 per cent were opposed and 24 per cent were undecided. The government’s decision to hold a referendum follows a threat by the Sinn Féin party to challenge in the Supreme Court any decision not to give the public a say. Irish officials have privately acknowledged it would be more difficult to win a referendum if the government was seen to have been forced to hold a vote by the Irish courts.

Vote or Die! – The Coming Irish Election Blackmail - The Irish Taoiseach Enda Kenny has announced that a referendum will be called so that the Irish people can vote on the new and oh-so-suicidal fiscal compact. If it is voted for Ireland will be subject to years of harsh austerity. Nothing new there. But, perhaps worst of all, if the vote goes through this austerity will crush the Irish economy into ruin wearing the mask of democratic consent. Last week we reported murmurings coming from within the opposition party calling for a referendum. The senior opposition party adviser that I spoke to indicated that he might try to push for a referendum, calling the fiscal compact “madness”. Fair enough, we’re all agreed there. But this was probably a political manoeuvre plain and simple. The opposition thought that they could have a few swipes at the government by questioning the democratic legitimacy of their decisions. But apparently the government have called their bluff and agreed to hold a referendum. My reading is that the government are perfectly confident that they can push the vote through. The Irish people are against austerity, but they have a vague inclination that ‘There Is No Alternative’. The government are confident that they can play on this fear in order to push the public into voting the way they want them to.

Ireland Mentions "R" Word, EUR Plunges - Just as we scripted, the temptation to migrate from the status quo in Europe was just too high for the other peripherals and Ireland just gained first/next mover advantage after Greece by daring top mention the "R" word. We would imagine that Barroso and his pals are scrambling now that another 'Referendum' is on the cards (and we are checking what 'referendum' is in Portuguese) and while fascism in perpetuity has been priced into Euro, the possibility that democracy rears its ugly head has just sent the EURUSD tumbling.  As a reminder, "Irish voters have twice rejected European referendums before eventually passing them once concessions were offered, most recently in 2010 when in return for passing the Lisbon Treaty Dublin got assurances on its military neutrality and its ability to decide its own tax rates." A little birdie tells us the "concession" this time will be that Irish debt gets the same treatment as Greek. Or else the people will actually really say what is on their minds.

Don’t panic (much) about the Irish referendum: The announcement of an Irish referendum on the European Stability Treaty put the euro cross-rate into a brief tizz on Tuesday. The reason, as the FT explains: A no vote would mean Ireland was not eligible for funds from the European Stability Mechanism, the eurozone’s new bail-out fund. The pact can enter force with the support of 12 of the 17 countries that use the euro, effectively removing any single nation’s veto over the accord. RBS says the referendum’s significance is all in the wording. Specifically, say analysts Nick Matthews and Silvio Peruzzo, whether it refers to adopting the treaty, or actually leaving the monetary union. RBS expects a narrow ‘yes’ vote, either way. And, on parsing Enda Kenny’s statement, they think it will be the more specific and therefore less risky question: According to our interpretation of the statement, the question will be directly related to the ratification of the treaty. The statement already gives a hint as to how the debate is likely to be structured, with PM Kenny emphasising on a number of occasions that the treaty is about a “credible commitment to responsible budgeting” to protect Ireland in the future.

Did You Know That the PIGS Are Paying Pharma Companies in Scrip? - The following is a footnote in the Pfizer 10-K (annual report) which was filed today.  We continue to monitor developments regarding government and government agency receivables in several European markets, where economic conditions remain uncertain. Historically, payments from a number of European governments and government agencies extend beyond the contractual terms of sale and the trend is worsening. In Greece, certain of our accounts receivable have been restructured into bonds with maturities that further lengthened the repayment timeline. As of December 31, 2011, we had about $1.5 billion in aggregate gross accounts receivable from governments and/or government agencies in Spain, Italy, Greece, Portugal and Ireland, where economic conditions remain uncertain. Such receivables in excess of one year from the invoice date were as follows: $290 million in Spain; $139 million in Italy; $81 million in Greece; and $10 million in Portugal.

Hi, I’m from the IMF. I’m here to help. - As I mentioned yesterday, the results of the third EU-IMF mission to Lisbon to assess Portugal’s implementation of its €78bn bailout were to be release today. Amongst mounting speculation that the country is struggling to meet the specified targets, remembering it only met the 2011 targets by using one-off pension transfers from banks to the state , the report appears relatively positive. The issue is, however, that just like Greece, the 2013 target for a return to growth appears highly optimistic given recent data. While core Europe is scheduled to have a ‘mild’ recession, the latest figures from the OECD show Portugal’s economy shrank by 2.6% YoY in the fourth-quarter 2011.  On top of that, the attempt by the government sector to reduce spending and raise taxes at a time when the private sector is also attempting to deleverage in an environment where the external sector does not provide a surplus is leading to the same outcomes we have seen in Greece:

Sarkozy refuses to agree to referendum on EU fiscal treaty - Mr Sarkozy, who is trailing the socialist François Hollande in opinion polls seven weeks before the presidential election, came under pressure to promise a referendum on the pact after he pledged to consult the people directly on significant issues if re-elected. “No,” he replied when asked on French radio yesterday if he would put the treaty to a public ballot. “If you’re dealing with a treaty with 200 articles, 250 articles, I can’t see how you’d formulate a clear question.” The French electoral calendar means the treaty cannot be passed by parliament until after the election. Mr Hollande has said he will seek to renegotiate parts of the deal if he wins, a move that has been criticised by Mr Sarkozy and German Chancellor Angela Merkel. Arnaud Montebourg, a prominent party figure who came third in the presidential primary last autumn and has been campaigning for Mr Hollande, went further than the candidate by predicting the treaty “will never be ratified”.

The lesson for the Europeans is that the US fiscal stimulus worked - Today, I was reading the latest report from the US Congressional Budget Office – CBO’s Estimates of ARRA’s Economic Impact – which shows that the American Recovery and Reinvestment Act of 2009 (ARRA) has been successful in increasing real GDP growth in the US and reducing the rise in the unemployment rate. Some simple calculations reveal that in the absence of the ARRA US economy would still be in recession. That is, taking a European trajectory. There is also evidence that the Obama administration were presented with analysis that showed that a much larger stimulus than was chosen was necessary, yet this information was suppressed in final documents that were the basis of the fiscal intervention. It seems that the neo-liberal ideologues within the Obama camp deliberately undermined the fiscal intervention and so its impact, while positive, was far less than was required. I also read an interview with the ECB president, Mario Draghi today. The ECB is now pushing fiscal austerity as the only way out of the Euro crisis. In juxtaposition to the US experience, the Europeans remain fixed to the view that saving the flawed institutional structure (that is, the EMU) is a higher priority than insuring that people prosper. The lesson for the Europeans is that the US fiscal stimulus continues to work.

Michael Hudson: 2,181 Italians Pack a Sports Arena to Learn Modern Monetary Theory – The Economy Doesn’t Need to Suffer Neoliberal Austerity - I have just returned from Rimini, Italy, where I experienced one of the most amazing spectacles of my academic life. Four of us associated with the University of Missouri at Kansas City (UMKC) were invited to lecture for three days on Modern Monetary Theory (MMT) and explain why Europe is in such monetary trouble today – and to show that there is an alternative, that the enforced austerity for the 99% and vast wealth grab by the 1% is not a force of nature. Stephanie Kelton (incoming UMKC Economics Dept. chair and editor of its economic blog, New Economic Perspectives), criminologist and law professor Bill Black, investment banker Marshall Auerback and me (along with a French economist, Alain Parquez) stepped into the basketball auditorium on Friday night. We walked down, and down, and further down the central aisle, past a packed audience reported as over 2,100. It was like entering the Oscars as People called out our first names. Some told us they had read all of our economics blogs. Stephanie joked that now she knew how The Beatles felt. There was prolonged applause – all for an intellectual rather than a physical sporting event.  With one difference, of course: Our adversaries were not there. There was much press, but the prevailing Euro-technocrats (the bank lobbyists who determine European economic policy) hoped that the less discussion of possible alternatives to austerity, the easier it would be to force their brutal financial grab through.

Government debt in Europe: some good and bad news -  The good news is that in amongst the various directives/regulations/treaties that have recently been agreed by the European Union, there are clauses that encourage the formation of fiscal councils, together with the need for independent fiscal forecasting. (In some countries, like the UK, the fiscal council (OBR) is all about independent forecasting, while in others, like Sweden, forecasting was already reasonably independent before the council was formed.) This is a case of better late than never. Some EU countries have recently established fiscal councils through their own initiative as a response to the debt crisis (such as Ireland, Portugal and Slovakia), so this EU initiative is playing catch-up in their case.   The bad news is that the rest of the EU’s response to the debt crisis makes life difficult for these new fiscal councils, and may in effect hinder the formation of new ones. In essence this is because the broad thrust of the EU’s crisis management has been to take away national autonomy in making fiscal decisions. I complained about this in the context of the new treaty here. What I had not fully appreciated until recently is that you now almost need a fiscal council just to try and work out what the huge number of sometimes conflicting EU directives actually mean in terms of what a country is allowed and not allowed to do.

Greece cuts minimum wage as austerity drive begins (Reuters) - Greece approved bitter new austerity measures on Tuesday, slashing the minimum wage and chopping pensions as Athens began implementing measures demanded by international lenders in return for a 130 billion euro (111 billion pound) rescue package. With creditors pressing for swift action, the cabinet approved the cuts to the minimum wage as part of a package of measures signed off hours before parliament passed a separate set of spending and pension cuts on Tuesday night. "Today's legislation and the one to come tomorrow are actions that implement the programme already voted to rescue the country," Finance Minister Evangelos Venizelos told lawmakers. "We must steer the ship to the safe harbour of debt restructuring. It requires national unity and for us to send a message of credibility," he said. In a move that will not require any further parliamentary approval, ministers imposed a 22-percent cut on the standard minimum monthly wage of 751 euros. For those under the age of 25, the cut will be even more brutal, a 32-percent reduction.

Note from Athens: Feeling on the Ground Has Palpably Changed - On my most recent trip to Athens in mid-February, the feeling on the ground had palpably changed in a number of ways that have supported my view that Greece will eventually default and exit the eurozone, but probably not before late 2013. There has been a pronounced shift on the ground in Athens in terms of the sorrow and bitterness that Greeks express. Without exception each of the Greeks with whom I spoke—whether government officials or simply engaged citizens—expressed significant concern about the generations above and below them. Every person has a story either about a pensioner who is forced to pay ever higher property taxes while his pensions are rapidly shrinking and prices continue to rise, or of a younger friend or sibling with multiple master’s degrees who has had to work in call centres or café’s because there are no job openings commensurate with his experience. Greece has a very strong family structure, with parents typically subsidizing their children and with siblings helping to support one another financially. With pensions suffering a death by a thousand cuts and youth unemployment above 40%, families are having an extremely tough time making ends meet. Increasingly, those Greeks who are able to move abroad are considering doing so.

S&P downgrades Greece to selective default  Standard & Poor's said late Monday it downgraded the sovereign credit ratings of Greece to selective default, or SD, because collective action clauses recently put into certain debt agreements. S&P had previously had a CC long-term rating and a C short-term rating on Greece. "The effect of a CAC is to bind all bondholders of a particular series to amended bond payment terms in the event that a predefined quorum of creditors has agreed to do so," S&P said in a statement. "In our opinion, Greece's retroactive insertion of CACs materially changes the original terms of the affected debt and constitutes the launch of what we consider to be a distressed debt restructuring." In a response, the Greek finance ministry said the SD rating was expected and will have no impact on the country's banking sector.

Credit Swaps Panel Asked If Greek Parliament Triggered Payouts - A committee of banks and investors that governs credit-default swaps was asked to rule whether Greece’s parliament triggered payouts on contracts that protect against losses on the country’s debt. The International Swaps and Derivatives Association’s determinations committee was asked whether a so-called restructuring credit event was caused by publication today of legislation that the Greek parliament passed as part of its agreement to exchange bonds for new securities, the trade group said on its website. The restructuring, in which bondholders take a 53.5 percent reduction in the value of their investments, uses collective action clauses to discourage holdouts. The use of such clauses would trigger swap contracts, according to ISDA rules. The committee is being asked whether the contracts have already been triggered because the deal gives the European Central bank and national central banks “a change in the ranking in priority of payment” by allowing them to exchange out of their eligible debt prior to the collective-action clauses taking effect, according to the ISDA website. The committee will decide whether to accept the question by Feb. 29, ISDA said in a statement today.

Focus Turns Now to Greek CDS Payouts - An unidentified market participant has asked a committee of the International Swaps and Derivatives Association to rule on whether the passage of legislation approving collective-action clauses for Greek debt should trigger payouts on credit-default swaps tied to Greek sovereign bonds. The move comes after Standard & Poor's cut Greece's long-term credit rating to selective default from double-C, making Greece the first euro-zone member officially to be rated in default, 13 years after the euro was adopted to strengthen the European Union.

ECB Suspends Greek Debt as Collateral After S&P Downgrade - The European Central Bank said Greek debt will temporarily be ineligible as collateral for loans after Standard & Poor’s yesterday cut Greece’s credit rating to “selective default.” The ECB “has decided to temporarily suspend the eligibility of marketable debt instruments issued or fully guaranteed by the Hellenic Republic for use as collateral in Eurosystem monetary policy operations,” the Frankfurt-based ECB said in a statement today. “This decision takes into account the rating of the Hellenic Republic as a result of the launch of the private sector involvement offer.” While the ECB’s risk management rules prevent it from accepting collateral deemed to be in default, the central bank will resume taking Greek debt once a 35 billion-euro ($47 billion) guarantee scheme agreed by European governments comes into force in mid-March. A reduction in Greece’s credit rating was anticipated after the country agreed a debt write-down with private sector investors, seeking to reduce national debt to 120 percent of gross domestic product by 2020 from 160 percent last year. “After the downgrade it was clear this was going to happen,”

Greece’s default gets messier - Back on February 17, the European Central Bank sprinkled its magical pixie dust on its Greek sovereign bonds, with the effect that they effectively ended up exempt from the restructuring and haircut being inflicted on everybody else. I wasn’t very excited about this development at the time: On a conceptual level, it makes sense that the Troika — of which the ECB is a third — might be granted immunity from haircuts, in return for providing new money to Greece. On a legal and practical level, however, this is ugly — and you can be quite sure that it’s only going to get uglier from here on in. Today, we’re beginning to get a hint of the messiness that this decision caused. First, there’s a formal question which has been put to ISDA’s Determinations Committee, asking whether the ECB magical pixie dust, combined with the passage of the Greek law to allow the haircut, doesn’t in itself constitute a credit event under ISDA rules. The question takes the form of a single 179-word sentence, which some lawyer somewhere probably thinks is very clever. But here’s the idea: the two events together have effectively cleaved the stock of Greek bonds into two parts, with one part (the bonds owned by the ECB) being effectively senior to the other part (the bonds owned by everybody else). This is known as Subordination, and Subordination is a credit event under ISDA rules.

How Greece’s default could kill the sovereign CDS market - Alea today posts the timeline for physical settlement of credit default swaps, once a credit event has been declared. It’s likely to take a couple of months between (a) the credit event being declared in Greece, and (b) the final settlement of all credit default swaps on Greece. And that, in turn, reveals a significant weakness in the architecture of CDS documentation. It may or may not be a big deal, this time round. But market participants have already been spooked by the possibility that Greece might be able to default without triggering its CDS at all. Now they can add to that another worry: that Greece might be able to default in such a manner as to leave the ultimate value of the CDS largely a matter of luck. The way that CDS auctions work, you start with a credit event. Then, using an auction mechanism, the market works out what the cheapest bond of the defaulting issuer is worth. If it’s worth, say, 25 cents on the dollar, then people who wrote credit protection end up paying 75 cents to the people who bought protection: that’s equivalent to the people who bought protection getting 100 cents on the dollar, and handing their bonds over in return. With Greece, however, the bond exchange is going to complicate things — a lot. Remember that it has a natural deadline: March 20, when a €14 billion principal payment comes due. If Greece’s old bonds haven’t been exchanged for new bonds by that point, then things will get even uglier, and even more chaotic, than anybody’s expecting right now.

Greek debt swap does not trigger CDS payments, says ISDA -The Greek debt rescue involving losses for private creditors is not a "credit event" justifying credit default swap (CDS) insurance payments, a global body for such contracts said on Thursday. The London-based International Swaps and Derivatives Association said its EMEA Determinations Committee "unanimously determined that a Restructuring Credit Event has not occurred." That meant private creditors who have contracted CDS as insurance against a Greek default cannot file for claims totalling up to 3.25 billion euros (US$4.3 billion). Markets had waited to hear how the ISDA would respond to a request from an unidentified private creditor, following Greece's deal to cut privately held debt by 107 billion euros. The amount by which Greece seeks to cut its private debt has never been considered before, and it is not known how many of the country's private creditors will be willing to take heavy losses on their investments.

Greece CDS: trigger sad - Shhhh! Be very, very quiet. The Isda Determinations Committee has been meeting to decide whether there’s been a restructuring Credit Event that would trigger payouts on CDS referencing Greece and we don’t want to spook them. Or as the WSJ put it: Hushed Up: Secret Panel Holds Fate of Greek CDS Actually the result of the secret panel is publicly available. The “NO” votes have it: This was concerning whether the effective subordination of Greek bonds to the bonds held by the ECB constituted a credit event. The above means no credit event on this basis, so the $3.25bn of Greece CDS will remain outstanding and untriggered for now. As FT Alphaville reported earlier today, there was another potential restructuring credit event question put to the DC that pointed to the threat to use collective action clauses — as recently inserted into the bonds by new legislation — to encourage participation in the Greek bond swap. We were not so sure that one would hold water either and indeed it didn’t, the DC also voted it down. Interestingly, it looks like they went, “hey, well, seeing as we’re all here, wanna just get this one out of the way to so that we can go and enjoy the weekend?”

Fears for CDS market after Greek decision - It might be a non-event, not a credit event. But Thursday’s decision that insurance-like instruments should not pay out on Greek bonds has potentially huge repercussions for the eurozone debt markets. Investors and traders fear the decision by the International Swaps and Derivatives Association not to trigger a credit event in Greek credit default swaps will undermine the entire multitrillion-dollar CDS market. It is yet another twist in the long-running saga over Greece and sovereign CDS – relatively new instruments that are used by banks and investors to hedge risk or bet on the creditworthiness of countries. The crux of the matter is the timing of a decision over whether a pay-out will be made. Crucially, Thursday’s “no vote” by the determination committee of Isda, the trade body that represents the derivatives industry, means investors holding CDS may be paid less than they had hoped.  This could, therefore, deter bankers and investors from buying the instruments, jeopardising the future of the product, say traders. It could also prompt some funds and banks to sell peripheral eurozone bonds as they can no longer be sure of the instruments used to hedge the risk of holding the debt.

No Insurance Pay-Out On Greek Debt - Billions of dollars in credit default insurance on Greek sovereign bonds will not yet be paid out despite next week’s restructuring of €186bn of the country’s debt, an industry body has ruled in a move that raised complaints from some investors. The International Swaps and Derivatives Association decided that the bonds had not suffered a so-called credit event, industry jargon for a default on debt or a signficant negative change in its terms. Under Greece’s planned restructuring, some £186bn of bonds will next week be swapped for new, longer-maturing debt with lower coupon payments. A further €20bn is expected to be swapped next month as part of a second round of restructuring. The body’s determinations committee rejected two requests to declare a credit event. One was based on grounds that the European Central Bank was being given de facto seniority in a controversial debt swap and the other cited the introduction by Greece of legislation that would require any recalcitrant bondholders to take part in the swap should support for the deal pass a certain level.  Bill Gross, who runs the world’s biggest private bond fund at Pimco, said on CNBC television that the decision not declare a credit event on the writedown of Greek sovereign debt set a dangerous precedent.  He said Isda’s decision should be seen as a disappointment to buyers of CDS. However, Pimco is one of the voting members of the Isda determinations committee that decided against a pay-out.

ISDA: Suckers Wanted  - “The International Swaps and Derivatives Association said on Thursday that based on current evidence the Greek bailout would not prompt payments on the credit default swaps.” Here is a question for the crowd: Exactly how brain damaged, foolish and stupid must a trader be to ever buy one of these embarrassingly laughable instruments called derivatives? The claim that Greece has not defaulted — despite refusing to make good on their obligations in full or on time — is utterly laughable. In order to get paid on a default, you need a committee to evaluate whether or not failing to make payments is a — WTF?!? — default?  Even more ridiculous, the committee is composed of biased, interested parties with positions in the aforementioned securities? ISDA: After this shitshow, why on earth would anyone EVER want to own an asset class that requires you to determine payout? Indeed, why should ANYONE ever buy a derivative again?

A default that isn’t a default and a sale that isn’t a sale - One of the biggest frauds of the past few years took place yesterday. The International Swaps and Derivatives Association (ISDA) confirmed that no “event of default” has occurred with the Greek debt restructuring, therefore no payouts on any outstanding Greek Credit Default Swaps (CDS) contracts are due.   The following are just a few of the links this morning on those who disagree with the ISDA:  FTAlphaville , Barry Ritholz , WaPo, WSJ, Zero Hedge; I particularly liked Barry Ritholz’s comment, "Bullshit". I wonder if the ISDA decision was not intended to end CDS contracts as a tool used in global finance. That certainly will be the consequence. Who in their right mind would buy an insurance policy on their sovereign bond exposure, knowing that the outcome is rigged and no payout can ever be expected?  I’ll go on record with this one. In less than one year, the bankers and political leaders in Europe will come to hate the ISDA decision. By destroying the private market for sovereign risk insurance, they have made it certain that Spain, Portugal and Italy will be locked out of the global bond market. Global investors were already shunning these countries. The ISDA decision on Greece will just make it worse for other countries that are considered potential default candidates.

Default Events, Legal Contracts, Derivatives, and Greece - Barry Ritholtz, who generally knows better, blew a gasket at ISDA for yesterday's ruling that Greek bonds are not yet in default. Specifically, Here is a question for the crowd: Exactly how brain damaged, foolish and stupid must a trader be to ever buy one of these embarrassingly laughable instruments called derivatives? The claim that Greece has not defaulted — despite refusing to make good on their obligations in full or on time — is utterly laughable. Let's sidebar the reality—that there is no true "market" for CDS in general, let alone Sovereign Debt CDS; Donald R. van Deventer of Kamakura Corporation has been all over this, both on his blog and especially on Twitter—and just note that ISDA made the correct decision. Greece has not, to borrow Barry's phrase, "refus[ed] to make good on their obligations in full or on time." ISDA did not declare a Default Event yesterday because there has not yet been a Default Event. Default Event is a very specific term. The sample in Janet Tavakoli's Credit Derivatives and Synthetic Structures (a book to which I have referred before and undoubtedly will again) runs pretty much three full pages (pp. 88-91). But the general concept is straightforward: there is a minimum threshold (say, 10% of an issue), the principal or interest due of which the entity explicitly refuses to pay or fails to pay that then materially impacts the buyer of Credit Protection (CDS).Greece has not yet refused to pay anything.*

European Investment Bank Said to Share ECB Exemption From Greek Writedowns - The European Investment Bank’s bonds rallied after the development lender for the 27-member bloc was said to be getting a similar exemption from Greek debt writedowns to the euro area’s central bank. The European Central Bank negotiated a deal to avoid the 53.5 percent loss on principal that’s costing private investors as much as 106 billion euros ($142 billion). The EIB, which unlike its Frankfurt-based counterpart represents the entire European Union, also owns Greece’s debt and is sidestepping the so-called haircut in the same way, according to two regional officials familiar with the matter.

Schaeuble says would regret but accept any eurozone exit - Finance Minister Wolfgang Schaeuble pointed out that the 17-member eurozone and 27-strong European Union were based on various principles, which included freedom, a constitutional state and non-discrimination. "If a country were to decide to leave them, it's something we would regret but which it would be necessary to accept in accordance with these principles," he told reporters. The minister was questioned in particular about debt-stricken Greece. German lawmakers on Monday widely endorsed a second, 130-billion-euro ($175-billion) rescue package from the eurozone and International Monetary Fund for Athens. His comments follow those by German Interior Minister Hans-Peter Friedrich in Der Spiegel news weekly that Greece would stand a better chance of becoming competitive outside the eurozone

Huge private debts spell trouble in Europe - Away from the markets' fixation with the debts of Greece and other governments, concern is growing at the painfully slow progress Europe is making in tackling a much bigger mountain of corporate and household debt. With austerity pointing to weak growth if not outright recession, the risk is that the burden of servicing the debt can only increase, causing a rise in bad loans. The spotlight then would fall on the capacity of banks to take losses and whether they might have to turn to their governments for help. And overindebtedness is not con-fined to the periphery of the bloc. Denmark, Sweden and the Netherlands all have private-sector debt that far exceeds the safety threshold of 160 per cent of GDP set by the European Commission as part of a new exercise to detect and correct risky macroeconomic imbalances.

Deep Trouble at the Core of the Eurozone - In France, new vehicle registrations have been plunging. Already down 17.8% in December and 20.7% in January compared to prior year, they sank 20.2% in February. Year to date, the results were even worse than they appear. With 43 selling days in 2012, against 41 in 2011, sales per selling day were down 24.2%. French automakers suffered the most. In February, PSA Peugeot Citroën was down 29.2% and Renault 28.5%. Last year, the prime à la casse—the cash-for-clunkers à la Française—was doping sales through March 31, 2011. The CCFA (Comité des Constructeurs Français d’Automobile) expects the nosedive to accelerate next month. It also estimates that sales for the entire year will decline by 7-10%, which may be a tad optimistic, given the headwinds France faces. Layoffs and plant closings will be tough to undertake during the election, as they become highly politicized. Labor Minister Xavier Bertrand issued a stern warning to Philippe Varin, CEO of PSA; layoffs as part of its alliance with GM would be out of the question. Already in November, Varin was summoned by President Nicolas Sarkozy and told to reconsider laying off 6,800 workers. And layoffs might even be tougher to undertake after the election if socialist François Hollande wins.

Euro zone unemployment hits new high - Euro zone joblessness rose to a new euro-era high while inflation was largely steady at the start of 2012, data showed on Thursday, leaving the EuropeanCentralBank1 to juggle the demands of a slowing economy and only mild pressure on prices. A cold snap in Europe and rising oilprices2 were probably behind the slight rise in February consumer prices that took inflation for the euro zone to 2.7 per cent, compared to 2.6 per cent in January, figures from the EU’s statistics office Eurostat showed. The euro zone’s economic slump has helped bring the prices of goods, fuel and food down from last year’s peak of 3 per cent, but oil prices hit record highs in euro terms this month and undermined inflation’s downward trend. That suggests the ECB is likely to put off any quick decision to take interest rates to below 1 per cent for the first time and economists see the bank in “wait-and-see” mode.

Unemployment Rate Jumps In Europe - Mass unemployment in Greece and Spain combined to push the jobless rate across the 17-country eurozone up to its highest rate since the euro was established in 1999, official figures showed Thursday The rise in the eurozone unemployment rate to 10.7 percent, reported by Eurostat, the European Union's statistics office, was unexpected and is likely to trigger renewed concerns over the outlook for the wider economy. If unemployment and the accompanying fear of unemployment is rising, consumers may rein in their spending. This could further dent an already-contracting eurozone economy. Consumers' appetite to open their wallets will likely be further constrained by the accompanying news that inflation in the eurozone unexpectedly also rose in February to 2.7 percent from the previous month's 2.6 percent. The markets had been pricing in no change from January, and the increase takes inflation further above the European Central Bank's target of keeping price rises at just below 2 percent. Inflation has been above target for 15 months now. "This is particularly bad news for consumers as they are not only facing high and rising unemployment, but also still squeezed purchasing power,"

Euro unemployment hits 10.7 percent in January, new high since euro established in 1999 - Mass unemployment in Greece and Spain, where nearly half of those under 25 are out of work, sent the jobless rate across the 17-nation eurozone on Thursday to its highest level since the euro was established in 1999. Eurozone unemployment rose to 10.7 percent from an upwardly revised 10.6 percent the previous month, according to Eurostat, the European Union’s statistics office. The change was unexpected and is likely to trigger renewed concerns over the outlook for the wider economy. If unemployment — and the accompanying fear of unemployment — is rising, consumers may rein in their spending. This could further dent an already-contracting eurozone economy that’s reeling from widespread national austerity measures in response to too much government debt.

Unemployment and Inflation Rise in Euro Zone -Unemployment in the euro zone has risen to its highest level since the introduction of the common currency even as inflation climbed, economic reports showed Thursday, underscoring the challenge facing European finance officials as they met in Brussels.  The jobless rate in the 17 euro nations rose in January to 10.7 percent from 10.6 percent in December reaching the highest level since the introduction of the euro in 1999, Eurostat, the statistical agency of the European Union, reported from Luxembourg. Flagging economies like Italy and Greece were responsible for much of the increase.  For all 27 European Union countries, the jobless rate ticked up to 10.1 percent in January from 10.0 percent in December, Eurostat said, with a total of 24.3 million men and women out of work.  Eurostat also reported that euro zone inflation edged up in February to 2.7 percent, from 2.6 percent in January. The European Central Bank tries to hold increases in the general level of prices to just under 2 percent; it has not met that target for 15 consecutive months.

Eurozone unemployment hits record high of 10.7pc - Data from Eurostat showed that the region lost 185,000 jobs in one month, with the vast gap between North and South growing ever wider. The figures for the previous four months were also revised upwards sharply. There are now more than 450,000 more people without jobs than assumed a month ago. . "Economic slowdown and fiscal austerity has hit the labour market much harder than previously thought." Eurozone inflation nudged up to 2.7pc, while the latest PMI data for February confirmed that Euroland's manufacturing is still contracting, though the index rose slighty to 49. The "misery mix" of rising unemployment and inflation is a nasty headache for policymakers, threatening incipient stagflation. Spain's jobless rate continued its relentless climb to 23.2pc, rising to 49.9pc for youths. The jobless toll rose to 14.8pc in both Ireland and Portugal, though the latter began its austerity drive later. Eurostat's 19.9pc rate for Greece is already out of date. The Hellenic Statistical Authority said the country lost 126,000 jobs in November alone, pushing the rate to 20.9pc.

Italian unemployment hits record - The unemployment rate in the eurozone continued to rise in January, hitting another record high. There are now 16.9 million people out of work in the bloc, Eurostat said. In Italy, the unemployment rate rose to 9.2% in January, the highest since monthly records began, the national statistics agency Istat said. Italian unemployment had stood at 8.9% in December, but it is now at the highest rate since the first quarter of 2001, as the country finds itself in a second recession in four years. Meanwhile, separate data from Eurostat showed that inflation in the euro area rose to 2.7% in February, rising slightly from 2.6% in January. It marks the 15th month in a row that inflation has been above the ECB’s target of just below 2%.

Spanish jobless level hits 4.7 million in February - Unemployment in Spain reached 4.7 million in February, an increase of 112,269 from the prior month, according to government data released Friday. The government said from February of 2011, the number of jobless has increased by 412,835. Data released from Eurostat earlier this week showed euro-area unemployment at 10.7% for January, with Spain maintaining the highest level in the 27-nation euro zone, at 23.3% for the month.

Spain announces deficit target of 5.8% for 2012 -- Spanish Prime Minister Mariano Rajoy on Friday announced a new deficit to gross domestic product target for the country of 5.8% in 2012, against a prior target of 4.4%, according to media reports. Rajoy made the comments in Brussels. Spanish media has been reporting for days that the government would raise its target. Rajoy also reportedly said the 5.8% deficit would not prevent the country from meeting its 3% target for 2013. A spokesman for the government couldn't immediately be reached for comment. In secondary markets, 10-year Spanish bond yields rose 3 basis points to 4.88%, while 10-year Italian bond yields rose 7 basis points to 4.96%. The dollar rose against major rivals and European stocks and U.S. stock futures fell as the news was announced

Chart of the Day: EU youth unemployment -- This is a shocking chart, it came up on Twitter last night, so I had to share it: It’s from Scotty Barber at Reuters, showing youth unemployment (under 25 year olds) from before, during and “after” the GFC. What immediately springs to mind – apart from the near 50% rates in Spain and Greece, is doesn’t this look eerily similar to the 10 year government bond yield chart over the same countries?  asked Scotty last night and he sent me this, which tracks adult unemployment against bond yields:

German Unemployment Obfuscation - One of the hardest things to get in this world is a truthful, or at least a somewhat realistic, or at the very least a not totally fabricated unemployment number, but every country has its own bureaucratic madness in pursuing obfuscation. And Germany is no exception. Official unemployment—3,081,706 unemployed and an unemployment rate of 7.3%—dropped to a two-decade low in January, but a recreational dive into the Federal Labor Agency’s monthly report (Monatsbericht) reveals another story. The numbers were touted by politicians in the governing coalition, from Chancellor Angela Merkel on down, amid media hyperventilation about Germany's superior economic model, though dark clouds have already appeared. Read.... “German Success Recipe” or Blip? Even French President Nicolas Sarkozy, who is struggling to hang on to his job for another five years, is obsessed with Germany’s mysterious success in bringing down its unemployment rate and can’t help but mentioning it every time he speaks about fixing the French economy. But the Federal Labor Agency’s monthly report reveals many pages into it—surprise, surprise—that the headline numbers issued with unrounded Teutonic precision have only a tenuous relationship with reality.

German Retail Sales Unexpectedly Fall - German retail sales unexpectedly declined in January as rising oil prices fueled inflation. Sales, adjusted for inflation and seasonal swings, fell 1.6 percent from December, when they increased 0.1 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a gain of 0.5 percent, the median of 22 estimates in a Bloomberg News survey showed. Europe’s debt crisis is curbing growth across the euro area, Germany’s largest export market, and higher energy costs pushed inflation to 2.5 percent last month. Still, unemployment is running at a two-decade low and recent data suggest the country may avoid a recession. Consumer confidence will increase to a 12-month high in March, [consumer research group] GfK SE (GFK) predicted this week.  German companies may create as many as 250,000 new jobs this year, the DIHK national industry and trade chambers said on Feb. 17, citing a survey.

The World from Berlin: 'We Can't Sacrifice Democracy to Save the Euro' - A ruling by the country's highest court has given the German parliament more authority in handling the euro crisis -- but the decision is potentially a blow to Chancellor Angela Merkel's ability to tackle the continent's debt problems. On Tuesday, the Federal Constitutional Court ruled that a secret nine-member committee meant to fast-track approval for euro zone bailout funds was, "in large part," unconstitutional. The special committee was formed last year to allow for a quick approval of aid in urgent situations when a vote by the full 620-seat parliament, the Bundestag, would be too cumbersome. But the panel was suspended by the high court in October, following a complaint by two members of the opposition center-left Social Democrats (SPD), who argued that parliament's powers were being weakened. The court was concerned that the parliament's right to maintain oversight of the country's budget was being sidestepped, since large disbursements of money have been necessary for the bailout of stricken euro-zone countries. Under the ruling, the committee could still approve the purchase of debt on the secondary market by the European Financial Stability Facility (EFSF), but may not extend loans or preventative credit lines to other troubled states, or approve the recapitalization of banks.

Eurozone Manufacturing Contracts for a Seventh Consecutive Month – The euro zone’s manufacturing sector contracted for the seventh straight month in February, with factories in the bloc’s struggling indebted states facing some of the toughest conditions on record, a business survey showed on Thursday. It looks increasingly possible that the 17-member euro zone is stuck in a mild recession, as new orders continued to fall and backlogs of work dry up, even in the region’s most healthy economy Germany. Markit’s Eurozone Manufacturing Purchasing Managers’ Index (PMI) rose to 49.0 last month from January’s 48.8, in line with a flash reading but has now been below the 50 mark that divides growth from contraction since July. “Whether the euro zone will sink back into recession in the first quarter remains highly uncertain. The periphery remains the major concern,” said Chris Williamson, chief economist at data provider Markit. The data comes a day after the European Central Bank’s latest half-trillion euro cash injection into the euro zone’s banks.

Greece Approves Welfare Cuts for Second Bailout - Lawmakers voted 213-58 in favor of the law, Acting Parliament Speaker Grigoris Niotis said early today in remarks on state-run Vouli TV. Approval in parliament allows Prime Minister Lucas Papademos to meet with euro-area partners this week having met most of the conditions demanded by the European Union and International Monetary Fund for Greece to get a lifeline of 130 billion euros. Finance ministers from the region will discuss the second Greek rescue program in Brussels today. “This government will do its utmost to implement fully and effectively both the program and the complementary actions,” Papademos said in the Belgian capital yesterday. There is an “urgent need” for the reforms to be twinned with concrete measures, he said. European governments moved toward a second rescue of Greece on Feb. 21, calculating that the cost of a fresh bailout, which includes a writedown of about 100 billion euros of Greek debt, is a price worth paying to prevent a financial collapse that could shatter the euro area.

Austerity Measures Only Lead to More Bailouts.... So Who's Going to Bailout the ECB When It Goes Bust? - Don’t let the title fool you here. I am in no way condoning the profligate spending and absurd debt levels that comprise the welfare economies of Europe (and most of the developed world for that matter). However, the idea that somehow imposing austerity measures will work on the PIIGS, which are already watching their economies go down the tubes, is outright insane. These countries are broke. Trimming spending here and there doesn’t do anything when you’re sporting Debt to GDP levels over 160% (over 300% when you include unfunded liabilities). In the case of Greece in particular, one has to wonder if the austerity measures (especially those coming out of Germany) are in fact just a means of forcing Greece out of the Euro without explicitly demanding it. Let’s consider Greece’s economy from the perspective of age demographics. Southern European Money Migrating North to Safety - The case had dominated the headlines in Greece for a week. A Greek parliamentarian was thought to have moved €1 million ($1.34 million) out of the country and into a foreign account last May. Even if the move was legal, many citizens saw it as a betrayal at a time when they were already reeling from deep austerity measures. Other politicians called for the culprit among them to step forward or even down. But no one did.  More and more people in southern euro-zone countries are moving their money north amid fears of losing their savings in the crisis. The capital flight makes things difficult for banks back home, but experts say there are no legal measures to stop it. Any steps would probably come too late, they say, and might even endanger the European project.

EU summit: All but two leaders sign fiscal treaty - All but two of the EU's 27 leaders have signed a new treaty to enforce budget discipline within the bloc. The "fiscal compact" aims to prevent the 17 eurozone states running up huge debts like those which sparked the Greek, Irish and Portuguese bailouts. To take effect, the pact must be ratified by 12 eurozone states. UK Prime Minister David Cameron, who with the Czechs refused to sign, said the summit had accepted his ideas for cutting red tape and boosting growth. On Thursday he had complained that his ideas, contained in a joint letter signed by 12 EU leaders, were being ignored. But after the talks he said "our letter really did become the agenda for this meeting... We now have a plan that we must stick to in the months ahead". The newly reappointed President of the European Council, Herman Van Rompuy, said the British proposals were being taken seriously and he had sought to redraft the summit's conclusions accordingly.

Tracking the euro-zone economy in real time - THE short-term outlook for the world economy seems to hinge on whether a resolution to Europe's debt crisis can be found. A resolution, in turn, will be difficult to come by if the euro zone falls back into recession. If output is shrinking and unemployment rising, then austerity measures are likely to make economic conditions worse while raising very little new revenue. The euro zone may fall ever deeper into a hole. That's an unnerving possibility given the outlook for the euro-zone economy. The latest figures from the euro zone indicate that its economy shrank in the fourth quarter, at an annual rate of about 0.8%. Contraction has probably continued, according to an analysis of recent data points by Now-Casting, which publishes "real-time" economic forecasts. You can see the information that goes into their forecast in the interactive chart below. The odds of a negative first quarter dropped sharply after the European Central Bank's intervention, late last year, to avert a financial crisis by lending cheaply to banks. Yet recent news has been grim. Data on retail sales, manufacturing activity, and employment all point toward continued recession in the first three months of the year. Worse, the outlook for the second quarter has deteriorated as well. If conditions don't improve soon, this new downturn may stretch on longer than initially expected.

ECB to launch second wave of euro 'quantitative easing' - The European Central Bank will on Wednesday step up its campaign to stabilise the euro, forestall a new credit crunch and shore up troubled banks by flooding the markets with hundreds of billions' worth of easy money for the second time in two months. The offer of three-year loans to banks at the cheap interest rate of 1% represents a boon for the banking sector in the troubled eurozone periphery, and is broadly seen as a masterstroke by ECB president Mario Draghi of Italy (pictured), who launched the policy in December in one of his first moves as president. Analysts speculate that the take-up of what amounts to a eurozone policy of quantitative easing could reach €1tn (£850bn) when the funds are made available, the expectation is that the borrowing will roughly equal the first round of lending in December when more than 500 EU banks netted €489bn. Draghi's decision took the heat off the ECB, which has been heavily criticised for declining to take a more interventionist role in the euro crisis. There have been calls for its rulebook to be rewritten to become the eurozone's lender of last resort, and for it to go on a bond-buying spree.

ECB’s Second Three-Year Loan May Be Last - The European Central Bank may decide all good things must come to an end after today’s allocation of long-term loans. The ECB’s three-year lending may approach a total of 1 trillion euros ($1.35 trillion) when the second Long Term Refinancing Operation is allocated at 11:15 a.m. in Frankfurt. Banks will ask for 470 billion euros, according to the median of 28 forecasts in a Bloomberg News survey, after taking 489 billion euros at the first tender in December. While the flood of three-year cash has been credited with fueling a rally on Europe’s crisis-roiled bond markets and safeguarding the region’s banks, the ECB will be reluctant to issue a third tranche, according to Deutsche Bank AG and UBS AG. Doing so would fan tensions among ECB policy makers and reduce pressure on governments and banks to fortify balance sheets themselves, the analysts said.

ECB releases 530 bn as LTRO, will this be the last round? - Banks took 530 billion euros at the European Central Bank’s second offering of three-year funds on Wednesday, slightly above forecasts, fuelling hopes that more credit will flow to businesses and government borrowing costs will ease further. A total of 800 banks borrowed money at the tender, with demand exceeding the 500 billion euros expected by traders polled by Reuters and well above the 489 billion euros allotted in the first such operation in late December. The euro rose briefly before easing versus the dollar while stocks were little changed after the marginally better-than-expected take-up. The 3-year loans are the ECB’s latest attempt to fight the euro zone crisis. The central bank’s president, Mario Draghi, said after first operation that “a major, major credit crunch” had been averted. The ECB hopes the limit-free, ultra-cheap and ultra-long funding will have a range of beneficial effects, including bolstering trust in banks, easing the threat of a credit crunch and tempting banks to buy Italian and Spanish sovereign debt.

Draghi strikes back II - Over the past few weeks the markets have been obsessing over just how much liquidity banks would tap from the European Central Bank (ECB) in the second of its extraordinary three-year LTROs (long-term refinancing operations). The answer came on February 29th from the Frankfurt-based central bank of the 17-country euro area. The ECB announced that it had lent €530 billion ($710 billion), a bit more than traders had expected. The funding also exceeded the previous LTRO, in late December, which had already provided a massive €489 billion. The number of banks dipping into the honeypot reached 800, well above the 523 that borrowed in the first operation. Just as sequels rarely match the success of blockbuster movies, so with the ECB’s second funding operation. For one thing, since the amount was only a bit higher than expectations, it should broadly be priced into the markets (though such rationality should never be taken for granted). For another, more of the take-up is likely to have come from banks outside the euro area.

Banks Flock to ECB for Record Amount of Three-Year Cash -- The number of financial institutions flocking to the European Central Bank's three-year loans soared to 800 and borrowing rose to a record in an operation that may boost the euro-area economy. The Frankfurt-based ECB said it will lend banks 529.5 billion euros ($712.2 billion) for 1,092 days, topping the 489 billion euros handed out to 523 institutions in the first three- year operation in December. Economists predicted an allotment of 470 billion euros in today's tender, according to the median of 28 estimates in a Bloomberg News survey. "The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy," "So the impact may be bigger than with the first one." Bond and equity markets have rallied since the ECB's first three-year loan, suggesting banks are investing at least some of the money in higher yielding assets. That's helped ease concern about a credit crunch and won governments time to agree on measures to contain the sovereign debt crisis. The risk is that banks become too reliant on ECB money and fail to take the steps needed to strengthen their balance sheets.

Europe Banks Hungry For Second Helpings - It has been likened to a sugar rush for markets, especially for government bonds issued by heavily indebted eurozone nations. But will the European Central Bank’s second offer of cheap three-year loans to banks on Wednesday inject new life into the rally? The answer to one of the most important questions for markets is expected by analysts shortly after 10am London time on Wednesday. The reaction will be closely watched. Mario Draghi’s ECB has been credited with the improved sentiment this year, not just in eurozone sovereign debt but in other risky assets too. “The success of the ECB’s loans has taken a lot of people by surprise,”  “Second time round it is unlikely to have such a dramatic effect, but it is likely to keep stabilising yields in the eurozone debt markets.” Analysts expect banks will borrow about €500bn in the second so-called longer-term refinancing operation (LTRO), a similar amount to the first scheme in December that saw €489bn lent out by the ECB. The first LTRO mainly benefited eurozone sovereign bonds and helped shore up bank balance sheets as banks primarily used the money to pre-fund maturing debt or park it in government debt

Banks gorge on 530 billion euros of ECB funds - (Reuters) - Banks grabbed 530 billion euros at the European Central Bank's second offering of cheap three-year funds on Wednesday, fuelling expectations that credit will flow to businesses and borrowing costs will ease for governments hit by the euro zone crisis. In the space of two months, the ECB has now injected more than a trillion euros into the financial system, banishing the threat of a credit crunch. A total of 800 banks borrowed money at the tender, with demand exceeding the 500 billion euros expected by traders polled by Reuters and the 489 billion allotted in the first such operation in December. The ECB unveiled the funding operations, known as LTROs, late last year to counter frozen interbank lending and dampen tensions on euro zone bond markets that threatened to tear the bloc apart. Positive investor reaction to the second round suggested the ploy should continue to buoy markets although central bank sources have told Reuters the ECB is not inclined to offer a third dose.

LTRO 2 Bring Down: €529.5 Billion Gross, €311 Billion Net; Discount Window Stigma Resurfacing - Just like the first time around, the net gain from the LTRO when taking into account rolling off instruments, will be lower than the Gross amount. How much? According to SocGen, the final number by which the ECB's deposit account will increase will be about €210 billion less than the overhead number. From SocGen's Lauren Rosborough: "The LTRO outcome: €529.53bio was allocated to 800 institutions (compared with €489.19bio allocated to 523 institutions in Dec). The net increase, according to our economists, is €311bio (adjusted for yesterday’s MRO reduction, 3m LTRO allotment this morning, and the roll-off of the 3m and 6m LTROs tomorrow). The allocation was above our and at the upper end of the market range of expectations. After a brief and limited positive risk move (AUD/USD spiked to 1.0857), currencies are broadly unchanged and the EUR/USD is lower, possibly reflecting positioning unwinds. The LTRO outcome opens the way for further positive risk moves (high-beta, non-Japan Asia, lower DXY) but recent price action suggests to us that the rally is fatigued." Net: this means that following settlement, European banks will park not €500 billion but up to €810 billion with the ECB, on which they will collect 25 bps (while paying 1%, aka inverse carry as described here first). It also means that in three years Europe's bank will have to not only pay the ECB €1 trillion in case (assuming there is no perpetual rollover of the LTRO, which there will be), but also delever by another €2.5 billion, for net asset drop of €3.5 trillion.

What are Europe’s banks doing with their ECB loans? - The European Central Bank has now doled out more than €1-trillion in cheap, long-term loans to the region's commercial banks with what one strategist dubbed a "Goldilocks" second round today. As in, not too hot, not too cold.  Some 800 banks gobbled up €529.5-billion in three-year money at 1 per cent under the ECB's longer-term refinancing operation, or LTRO, according to numbers released today. That followed the first round in December, when more than 500 banks took up almost €490-billion.  When you factor in shorter-term ECB loans that came due this week, the net amount is just shy of €379-billion from today's round, but the program has been credited with calming market angst amid the euro zone's raging debt crisis and easing concerns over the stability of its banks.  "Of course the LTRO doesn’t solve any long-term problems but then no one expected it to,"  "Our rates strategists argue this should keep periphery spreads in check and we see no reason to turn euro-negative on this."

ECB Says Overnight Deposits Surge to Record - The European Central Bank said overnight deposits soared to a record after its second allocation of three-year loans. Financial institutions parked 776.9 billion euros ($1.03 trillion) with the Frankfurt-based ECB. That’s the most since the euro was founded in 1999 and up from 475.2 billion euros a day earlier. Banks get 0.25 percent on the deposits. The ECB this week lent banks 529.5 billion euros for three years in the biggest single refinancing operation in its history, taking total long-term lending above 1 trillion euros. Banks received the funds yesterday and pay the average of the ECB’s benchmark rate -- currently 1 percent -- over the period of the loans. The ECB said 800 financial institutions, more than a third of the 2,267 registered to borrow from it, took part in the operation.

Disquiet within ECB laid bare after cash injection -  Some European Central Bank policymakers are alarmed that a dramatic loosening of lending policy stemming from a 1-trillion-euro wave of cash unleashed into the financial system will fuel imbalances in the euro zone and stoke inflationary pressures. Led by Bundesbank chief Jens Weidmann, who was previously a top advisor to German Chancellor Angela Merkel, they are pushing for the central bank to think about an exit strategy after it fed banks 530 billion euros on Wednesday in the second of two cheap, ultra-long funding operations. The signs of internal division add weight to what sources have already told Reuters: that the central bank does not intend to offer any more cheap three-year cash. The chances of interest rates dropping below their record low one percent also appear to be diminishing. The huge take-up at Wednesday's so-called LTRO meant that in the space of two months the ECB has injected over a trillion euros into the financial system.

Euro Zone Clears Way for EU Decision on Greek Deal - Euro-zone finance ministers said Thursday they were ready to give Greece money from a new bailout—provided a bond swap that will cut the debt Greece owes its private creditors by more than €100 billion goes according to plan in the coming week. European Union leaders at a summit Thursday evening said they would focus on policies aimed at battling the headwinds to economic growth created by government austerity programs across the 27-nation bloc. Meanwhile, signs emerged that Germany was yielding to international pressure to boost the euro zone's bailout funds.

Eurozone delays Athens rescue funds  -- Eurozone members have delayed approval of more than half of the €130bn bail-out for Greece after deeming that Athens has yet to meet all the terms set as the price of a second rescue. However, finance ministers from the 17-country currency bloc meeting in Brussels signed off on funds to underpin a €206bn debt swap to cut the value of the Greek bonds held by private investors.  The debt swap is due to be completed by the middle of the month in order to stave off a default that would send fresh tremors through the eurozone. Jean-Claude Juncker, the Luxembourg prime minister who chairs the eurogroup, said Greece’s official creditors would “finalise in the next few days” an assessment of Greece’s steps to enshrine the bail-out conditions into law. But he added that the full bail-out would only be completed on a successful completion of the debt swap with private bondholders. The ministers decided that Athens had yet to meet all the conditions to secure the €71.5bn portion of the bail-out destined for the Greek government. The balance of the rescue funds – which, when combined with other incentives and instruments to be used in the debt swap comes to some €93bn – was agreed.

Greek 1 Year Bond 80% Away From 1000% - Today for the first time ever Greek 10 year bonds slide to below 20% of par (5.9% of 2022 dropped to 19.145 cents) as expected some time ago, as increasingly the revulsion to post reorg bonds gets greater and greater courtesy of that now meaningless cash coupon of 2% through 2015. When considering that the country will redefault within a year, it explains why nobody has any interest in holding Greek paper even assuming there is an EFSF bill sweetener. Also, today's ISDA decision did not help. What is most amusing is that as of this morning, the country's 1 Year bonds hit an all time high yield of 920.2%. Well, if Greek bonds crossing 100% just 5 months ago was not quite attractive, perhaps 1000% will. At this rate we expect said threshold to cross some time today.

Is Greece a Failed State? - Two years ago, Greece's Prime Minister George Papandreou compared his country's travails to "a new Odyssey." Since then, about half a million Greeks have lost their jobs, tens of thousands of businesses have closed, the economy has shrunk by more than a tenth, Athens has witnessed several riots, and Papandreou's government has collapsed. If Greece is truly following the course of the mythical adventurer, then it's in danger of being eaten by the monster Scylla or sunk by its partner Charybdis.  Papandreou's successor, technocrat Lucas Papademos, is attempting to steer the country to calmer waters. European Union leaders are expected to give the final approval at the end of this week for a new 130-billion-euro loan package Papademos brokered to prevent the disorderly bankruptcy of Greece, which is also seeking to slash its huge debt by more than 100 billion euros through a bond swap involving private investors. Though it's the biggest sovereign bailout ever, it doesn't disguise the fact that some of its eurozone partners have accepted Greece is a lost cause, a failed state that should be cast adrift. German Finance Minister Wolfgang Schaeuble recently referred to Greece as a "bottomless pit." His Dutch counterpart, Jan Kees De Jager, expressed grave skepticism about Greece's ability to live up to expectations.

A Primer on the Euro Breakup  - In this piece Variant Perception looks at the mechanics of a currency breakup and how it would happen. This piece is longer than most of their pieces and is a slightly more wonkish piece than usual, but the first two pages provide a summary of the entire piece. We look at previous currency breakups, how they happened, and what the consequences are and what the likely outcome is economically for any periphery country that exits the euro. View the report in fullscreen (easier to read).

UK: House buyers return in record numbers - The number of buyers registering with estate agents grew by 18pc in February, the highest figure since a 23pc rise in February 2007, Hometrack said. But much of this was an "artificial boost", brought about by first-time buyers trying to beat a stamp duty holiday, the study said. Despite the "seasonal pick-up", house prices remained flat for the second month in a row, with Greater London the only region to record any increase, a 0.1pc rise. Estate agents and lenders have reported increased interest from first-time buyers as they rush to complete deals before the two-year stamp duty holiday for this sector of the market ends in March.

The price of diesel hits record high of £1.50 a litre - Yesterday the price of diesel hit a record high of £1.50 a litre, as Chancellor George Osborne made the announcement that in next month’s Budget he couldn’t afford fuel duty cuts. The expensive Shell garage was spotted on the M6 near Coventry, with the average prices now standing at 143.61p for diesel and 135.39p for petrol. Since the fuel protests in 2000, the cost of filling up has doubled and experts have predicted the price will continue to rise, due to the instability in the Middle East. Fair Fuel UK has revealed plans to take action against Parliament to combat the ‘absolute crisis’, which is hitting families and businesses hard. However Mr Osborne said he wouldn’t be able to continue the fuel-duty freezes or cuts, after spending billions on keeping fuel duty 6p lower than what it should have been.

Yorkshire Water fibreglass covers to stop metal theft - Yorkshire Water said it was reporting an average of £20,000 in metal thefts a month from its network. In 2011, the company spent £410,000 replacing stolen metal parts, including 7km (4.3 miles) of earthing cable.  CCTV cameras and motion sensors are also being installed at sites and a special grease is being coated on machinery and equipment. Peter Ramsay, security and emergency planning manager at Yorkshire Water, said: "The problem ranges from the opportunist theft of one of our sewer or hydrant covers, to the organised theft of hundreds of metres of cable or copper pipe, and even larger appliances such as lifting equipment and generators."

Britain becomes a nation of debt slaves as regulation and inflation deter - Now that interest on debts absorbs nearly a quarter of British households’ net income, according to the Consumer Credit Counselling Service (CCCS), many families are discovering how cruel a taskmaster compound interest can be. If you think conventional savings products – like pensions and managed funds – provide poor value, then just wait till you see how bad the ‘returns’ on borrowing are. While instant gratification has come to be regarded almost as a ‘yuman right’ in the credit-fuelled consumer societies of the developed world, the costs of that delusion will mount over the decades ahead. Worse still, the Government is actively encouraging young people to take on massive debts before they have any means of repaying them. Even at today’s low rates of interest, debt that is allowed to accumulate on debt will often roll up faster than the debtor’s ability to repay it. For example, anyone who borrows £10,000 at a typical mortgage rate of 3.5 per cent will repay a total of very nearly £15,000 over the standard 25-year term.

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