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

Saturday, April 21, 2012

week ending Apr 21

Fed's Balance Sheet Expands In Latest Week The Fed's asset holdings in the week ended April 18 were $2.878 trillion, compared with $2.870 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities fell to $1.672 trillion, down from $1.681 trillion a week earlier. The central bank's holdings of mortgage-backed securities climbed to $855.36 billion from $836.79 billion. Thursday's report showed total borrowing from the Fed's discount lending window was $6.95 billion on Wednesday, compared with $7.02 billion a week earlier. Commercial banks borrowed $2 million from the discount window, compared with $10 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.484 trillion, down from $ 3.486 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts was $2.764 trillion, compared with $2.757 trillion a week earlier. Holdings of federal agency securities fell to $720.14 billion, compared with $728.93 billion the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances -- April 19, 2012

Too Big to Succeed? Central Bank Balance Sheets Continue to Balloon - Since 2006 the balance sheets of the eight largest central banks around the globe have nearly tripled--now totaling almost $15 trillion. Much of this explosion, seen in the chart below from, can be attributed to asset purchases by the Fed, ECB, and BOJ, each of whom has sought new means of monetary easing with their benchmark rates near zero. A perspective on the sheer size of these balance sheets can be obtained by comparing their sum to the entire market capitalization of global equity markets. The $15 trillion held by major central banks is approximately 33% of the global equity market capitalization. In 2007 it was a mere 10%.  As seen in the e21 chart above, China, the United States, Europe, and Japan have by far the largest balance sheets in the world after expansion in recent years. However, the size of these balance sheets may continue to grow rather than shrink. The Federal Reserve is still weighing options around QE3. The ECB added to its balance sheets with its recent LTRO actions and sovereign debt purchases. The central bank may decide to undertake similar actions as the fiscal outlooks for Spain, Greece, and Portugal continue to deteriorate. The Bank of Japan has debated further expansion of its balance sheet in recent meetings and China’s slowing economy may give the People’s Bank of China reason to expand its holdings.

Markets Put Off Expected Date of First Fed Rate Increases - Speculation continues to fade among fed-funds futures traders that the Federal Reserve will start raising rates in early 2014. Monthly data show housing starts decline and stagnant industrial production were the latest numbers weighing on expectations of earlier Fed action. They come on the heels of a weaker-than-expected March employment report, which came out April 6.  Volume recently picked up for a longer-dated contract, which prices in only 24% chance for committee to lift funds rate to 0.5% at its meeting in late January 2014. That’s down from 30% chance at Monday’s settlement. Thinly-traded contract sees 80% chance for 0.5% rate by mid-2014, down from 86% chance Monday. The Fed has said it expects to keep rates at extremely low levels through late 2014.

Is There Monetary Policy at the Zero Lower Bound - Scott Sumner writes What interests me most is that [Pianalto] talks as if the Fed is still steering the nominal economy, despite near zero interest rates.  Other people may not see it that way, but swing voters at the FOMC certainly talk like they are still “doing monetary policy.”   In one sense that’s reassuring—we’d hate to see those at the controls claiming that the steering mechanism for the economy was stuck.  On the other hand it’s also a bit dismaying, as the marginal crew member of USS Nominal GDP seems happy with the ship’s course; even as Obama, Romney, Bernanke, 14 million unemployed, and the US stock market think it’s obvious that aggregate demand is too low. I’d like to encourage a shifting of the conversation. I think virtually all nominalists agree that there is monetary policy at the zero lower bound. What we disagree about is whether the Fed’s reaction function changes significantly in the presence of the zero lower bound. This could take on several forms. One, as I suggest is that the reaction function could become asymmetric, so that the Fed attaches a very high loss weight what we might call “non-Keynesian easing” but “attaches a low loss weight to “Keynesian easing.” In this case normalizing interest rates though expansionary fiscal policy in effect serves to soften the stance of monetary policy.

It’s the silly season - Matt O’Brien sent me a CNBC article showing that the Fed also has some rather strange employees: Federal Reserve Bank of Dallas President Richard Fisher initially provided the only “No” vote on a motion before the Federal Open Market Committee at the height of the financial crisis—only to reverse his vote after an unrecorded lunch break, according to a heavily redacted transcript of Fed documents released Monday afternoon. The next day, however, the Fed announced a target range for the federal funds rate of 0 to 0.25 percent. Immediately following the mystery vote, Federal Reserve Chairman Ben Bernanke requested a break for lunch. Upon returning from lunch, Bernanke announced that Fisher had changed his mind. That’s funny, I never knew Ben Bernanke was skilled at waterboarding.  Seriously, regional bank presidents should never, ever, be allowed on the FOMC. Marcus Nunes found this gem in the WSJ: “An entrenched upturn in growth, albeit anemic relative to history, is entering a sweet spot,” said Allen Sinai of Decision Economics. He noted that with the economy expanding at an adequate pace, the Fed should remain on the sidelines.  We have an “anemic recovery.”  But we don’t need monetary stimulus.  And why not?  Because we have an “adequate recovery.”  That seems to pretty much sum up macroeconomics circa 2012.

What about all those excess reserves at the Fed? -Under present institutional arrangements, the Fed Funds rate is dependent on the Fed’s supplying the required amount of reserves at any given reserve ratio to keep the interest rate at its target or within its target band.  The Fed can’t target a rate unless it supplies banks with all the reserves that the banks need to make loans at that rate. This means that central banks must be committed to supplying as many reserves as banks want/need in accordance with the lending that they do subject to their capital constraints. Failure to supply the reserves means failure to hit the interest rate target. So in practice, if a banking system as a whole is at the reserve limit, central banks always increase the level of reserves desired by the system in order to maintain the interest rate. Not doing so means at once that the Fed cannot hit its target or that transactions fail as the payments system breaks down. In sum: In a nonconvertible, floating exchange rate system, the amount of credit in the system is determined by the risk-reward calculations of banks in granting loans and the demand for those loans. Banks are not reserve constrained. They are capital constrained. Financial institutions grant credit based on the capital they have to deal with losses associated with that activity.

Federal Reserve Officials Leave For Wall Street With Privileged Info - The Huffington Post and MSNBC's "Dylan Ratigan Show" filed Freedom of Information Act requests in January to obtain the minutes of Federal Open Market Committee meetings from 2007 to 2010. That month, the Fed had released the 2006 minutes of the confidential committee, which essentially sets national monetary policy. In response, the bank provided 513 pages of mostly blacked-out paper and cited policy to justify withholding the information. "[T]he Committee has a long-standing policy of routinely releasing full transcripts on a five-year schedule. Each year's transcripts will be made public in their entirety according to that schedule," the bank offered by way of explanation. One of the few things not redacted in the Fed's FOIA response is the list of officials who attended each confidential meeting. Many of those people have since left the central bank and gone to work in the financial industry, taking with them privileged information about the Fed's thinking that is still closed to the public.

Plutocrats and Printing Presses - Krugman - These past few years have been lean times in many respects — but they’ve been boom years for agonizingly dumb, pound-your-head-on-the-table economic fallacies. The latest fad — illustrated by this piece in today’s WSJ — is that expansionary monetary policy is a giveaway to banks and plutocrats generally. Indeed, that WSJ screed actually claims that the whole 1 versus 99 thing should really be about reining in or maybe abolishing the Fed. And unfortunately, some good people, like Daron Agemoglu and Simon Johnson, have bought into at least some version of this story. What’s wrong with the idea that running the printing presses is a giveaway to plutocrats? Let me count the ways. First, as Joe Wiesenthal and Mike Konczal both point out, the actual politics is utterly the reverse of what’s being claimed. Quantitative easing isn’t being imposed on an unwitting populace by financiers and rentiers; it’s being undertaken, to the extent that it is, over howls of protest from the financial industry. I mean, where are the editorials in the WSJ demanding that the Fed raise its inflation target? Beyond that, let’s talk about the economics. The naive (or deliberately misleading) version of Fed policy is the claim that Ben Bernanke is “giving money” to the banks. What it actually does, of course, is buy stuff, usually short-term government debt but nowadays sometimes other stuff. It’s not a gift.

Paul Krugman is Very, Very Wrong - I'm sure I'm missing something here, because Paul Krugman is so often extremely perceptive, but I think here he is very, very wrong. He writes: The naive (or deliberately misleading) version of Fed policy is the claim that Ben Bernanke is “giving money” to the banks. What it actually does, of course, is buy stuff, usually short-term government debt but nowadays sometimes other stuff. It’s not a gift.To claim that it’s effectively a gift you have to claim that the prices the Fed is paying are artificially high, or equivalently that interest rates are being pushed artificially low. And you do in fact see assertions to that effect all the time. But if you think about it for even a minute, that claim is truly bizarre. Um, I dunno. Perhaps on specific day to day operations Ben B. is not giving money to the banks, but things look very different with a 30,000 foot view. (I suspect "the banks" most people mean if they say there are giveaways going on are not all banks but rather a small subset of basket cases.) Remember the toxic asset purchase? When the Fed spends over a trillion bucks paying the face value for securities whose real worth has declined to a fraction of that face value, to me that is both an expansion of the money supply and a give-away to those from whom one "purchases" those assets. There have been any number of similar, er, programs the Fed has run in the last few years which have had the same purpose:

The Curious Case Of Liquidity Traps And Missing Collateral – Part 1 - The debate is on! Are we in a liquidity trap and if so what should we do? Why is the financial system depleted of collateral and what does this mean? Should policy makers and central banks be even more "irresponsible" [1] and conduct more monetised deficit spending? What does a lack of triple A rated/safe haven securities mean and is it real?  All these questions and more have recently gotten a fascinating treatment in the economics debate courtesy, mainly, of this piece by Credit SuisseFT Alphaville has been given the question extensive and brilliant coverage and now even the IMF has pitched in. I think the issues raised are not only important, but likely to form a substantial part of the framework for the next decade’s research on macroeconomics, monetary policy and financial markets. So yes my dear reader. This is no time to shy back. Dig in, and dig in hard! In this first post of a series of 3-5 posts, I try to present the building blocks of the argument as I see them and answer the question of why the traditional view on the liquidity trap does not apply in the current situation.

The buck shrinks here - PRIOR to the Great Recession (or, to be perfectly accurate, prior to the Japanese doldrums of the 1990s) there was wide agreement that central banks can, should, and would do all the demand-side macroeconomic stabilisation an economy might need. But as Japan demonstrated in the late 1990s and as much of the rest of the rich world is learning today, problems can erupt in this system. When the central bank's target interest rate approaches zero, its tried and true policy tool is removed from the arsenal. Central banks appear to be less able to stabilise an economy at the zero bound, a dynamic which generates deep recessions and shallow recoveries. Matt Yglesias argues that the central bank failure that we observe is primarily technical in nature, and therefore amenable to technological innovation: Stop for a moment and ask yourself why the interest rate can’t be reduced much below 1 percent. The trouble is cash.  But what if you couldn’t withdraw cash? What if all transactions were electronic, so the only way to avoid keeping money in a negative-rate account was to go out and buy something with the money? Lower interest rates below zero, Americans will start spending and investing again, the economic will grow, and unemployment will go back down to its “natural rate.”

Zero matters because rules matter – Yglesias -I read Evan Soltas' brilliant post on Y2K as a natural experiment in monetary policy. To summarize, there were a lot of hazy worries about a Y2K computer bug that might temporarily compromise the world financial system. Consequently, there was a surge in demand for cash. The Fed responding by printing a lot of money and increasing the monetary base in the leadup to Y2K. But everyone understood exactly what we were waiting for and understood exactly what the Fed was doing. When Y2K turned out to be a non-issue, the extra money was withdrawn. And—and here comes Soltas' point—if you try to find evidence of any of this in price or interest rate data, you don't see anything. You don't see anything because expectations were anchored. People knew what they were worried about (Y2K) and knew what the policy responses were going to be.  This, I think, is why zero matters. It is true that there are lots of different ways the Fed can do. But during the Great Moderation the thing the Fed did do was stabilize the macroeconomy by cutting interest rates. Everyone anticipated the Fed's behavior to follow a Taylor-type rule in which inflation and unemployment data determined interest rates. You would read paradoxical-sounding stories about the stock market jumping on disappointing jobs data, precisely because everyone felt they understood how everything worked. The problem with the zero lower bound then becomes that as rates got closer and closer to zero nobody knew what was going to happen. In other words, it was the reverse of Y2K. We knew something would happen but nobody knew what. So when rates did hit zero, expectations became unmoored.

Does Expansionary Monetary Policy Primarily Benefit Finance and Rentiers? - Joe Weisenthal calls it the Biggest Myth in Monetary Policy Today, and recently there’s been a wave of posts about it.  Would another round of expansionary monetary policy at this point - in either a QE3, a conditional higher inflation target or NGDP targeting – primarily benefit the financial sector, rentiers and the wealthy? Here are Daron Acemoglu and Simon Johnson at Economix, making the case in Who Captured the Fed?: Thus was born the idea of independent central bankers, steering the monetary ship purely on the basis of disinterested, objective and scientific analysis. When inflation is too high, they are supposed to raise interest rates. When unemployment is too high, they should make it cheaper and easier to borrow, all the while working to make sure that inflation expectations remain under control. Increasingly, however, it seems that technocratic policy-making is just a myth. We have come full circle, and the Wall Street banks are calling the shots again… Any central banker raising interest rates is reducing stock market values and thus eroding the bonuses of top bankers and other chief executives…. First off, it isn’t just the financial sector calling for low rates (if they are, in fact, calling for it, as we’ll see in a second).  A generic Taylor Rule, as Paul Krugman recently pointed out, calls for low rates until 2015.  Mess with the rule and the data a bit to adjust that date at the margins, but generic macroeconomic stabilization rules still see low rates for quite some time as necessary.

Living in a demand-side world - Nick Rowe - I know what it's like to live in a demand-side world, because I used to live in one.  I wasn't stupid. I knew that potential output wasn't infinite, so there had to be a supply curve out there somewhere, but we never seemed to be on it. Firms almost always wanted to sell more output, and there were always some unemployed workers who wanted jobs if the firms needed more labour to produce more output. There might be occasional shortages and bottlenecks in particular sectors, but generally speaking output and employment were demand-determined. Supply was almost always bigger than demand. Sometimes there would be inflation, but inflation could not have been caused by excess demand, because I could see with my own eyes that there was almost always excess supply. Inflation must have been caused by something else. Maybe there would sometimes be inflation in particular sectors due to bottlenecks in that sector, and that inflation might push up costs and prices in other sectors too. Or maybe inflation was due to monopoly power, in labour markets and output markets, that caused wages and prices to rise long before the economy got to full employment potential output and excess demand. Or maybe inflation was caused by conflicting claims over the distribution of income, where the sum of the groups' claims on output added up to 110%, so we got 10% inflation as each group tried to raise its price and nominal income relative to other groups. Whatever the cause of inflation, it wasn't caused by generalised excess demand, and it didn't seem sensible to reduce aggregate demand to cure it. Even if the cure worked, which wasn't at all obvious since the cure didn't attack the underlying cause, the cure seemed worse than the disease.

Wray on Crowding Out: “Just Say No” - In response to the Chairman of the Federal Reserve suggesting that US budget deficits threaten to “crowd out” private investment by pushing up interest rates, Randall Wray insists that this is not an inevitable result of market pressures, but a policy choice: The base interest rate is set by a vote of the FOMC. Period. It is not set by markets. It is not determined by the government’s “borrowing requirement.” Sovereign currency-issuing government budget deficits place no upward pressure on interest rates. Ever. Indeed, he should understand that as government spends by crediting bank reserves, the pressure is downward on the overnight rate—as banks offer excess reserves in the overnight market. That is relieved by the Fed—if it wants to—to hit its target. The deficit cannot raise interest rates unless Bernanke & Co. decide to vote to raise rates. They can always “just say no”: no rate hikes in response to budget deficits. Now, we do know that if budget deficits eventually spur the economy to recover, the FOMC will vote to raise interest rates. This is not due to market pressures that result from budget deficits. It is due to the double superstition held by the Fed that a) a growing economy tends to cause inflation and b) rate hikes reduce inflationary pressures. Now, I think both of these superstitions are false. But the bigger point is that rate hikes occur due to a vote of the FOMC—not to “market reactions” to deficits.

Fed Watch: On Labels - I generally follow the convention of referring to monetary policymakers as "hawks" or "doves." But what really do these terms mean? Are they appropriate or meaningful distinctions? On this topic, Cleveland Federal Reserve President Sandra Pinalto says: I’ve been part of the Federal Reserve for a long time, more than 28 years. Those labels actually came into play when there wasn’t agreement around an inflation objective. There were some members of the Committee who felt a higher rate of inflation was appropriate. Those individuals were dubbed doves. And there were some that felt that we needed a lower rate of inflation.  We now have agreement and a statement by the Committee that 2 percent is the appropriate level of inflation. So I don’t think the titles of hawks and doves are useful when the Committee has stated that we have a 2 percent inflation goal. Pinalto's point is that now that the FOMC has settled in on a 2% inflation target, there is no distinction between hawks and doves. Is this true? I see her point, but would offer some caveats. First is that perhaps we could consider the entire FOMC as hawks relative to a more dovish policy such as a 4% inflation target. Second is that Chicago Federal Reserve President Charles Evans has supported aggressive policy even if inflation rose as high as 3%. this would seem to be a contradiction to Pianlto's claim that there are no hawks or doves; Evans certainly appears to be a dove relative to the 2% inflation target.

Imagine there’s no hawks or doves - --Tim Duy recently linked to this interesting speech by Cleveland Federal Reserve President Sandra Pinalto: . There were some members of the Committee who felt a higher rate of inflation was appropriate. Those individuals were dubbed doves. And there were some that felt that we needed a lower rate of inflation. In fact, one of my predecessors, Lee Hoskins, was focused on achieving zero inflation. And he was considered a hawk. We now have agreement and a statement by the Committee that 2 percent is the appropriate level of inflation. So I don’t think the titles of hawks and doves are useful when the Committee has stated that we have a 2 percent inflation goal. If there are titles that people want to use, I would like to be labeled someone who is open-minded. Or someone who is pragmatic… Of course a 2% inflation target should eliminate inflation hawks and doves at the Fed, and of course it won’t.  That’s because even with the Fed target of 2%, policy is neither accountable nor transparent.  The Fed has a dual mandate (not just inflation targeting), and the Fed doesn’t do level targeting.  This allows lots of wiggle room for ideological bias. With level targeting, Fed officials would be forced to lay their cards on the table.  If a hawk wanted less inflation now, he’d know it came at the expense of more inflation later.  And if a dove wanted more inflation now, she’d know that it came at the expense of less inflation later. 

Taking a deeper dive into the definition of inflation - Atlanta Fed's macroblog - Sometimes our familiarity with a topic gets in the way of our understanding of it. I often think that about inflation. It's widely known that inflation is a condition of rising prices, or what my favorite macroeconomics text defines more precisely in this way: "Inflation is an increase in the overall level of prices in the economy." And while this idea is serviceable for some purposes, it's pretty inadequate if you try to think about how a central bank goes about the business of controlling inflation. Here's an example. Friday's retail price report for March revealed that prices rose 3.5 percent from February and averaged 3.7 percent (annualized) over the first three months of the year. I think it's pretty clear we have seen an "increase in the overall level of prices in the economy" this year. But how should the Federal Reserve respond to this rise?  I'm not going to offer an answer that question. I'm a policy adviser, not a policy maker. But we need to dig a little deeper into the textbook to get a better understanding of the inflationary process and how a central bank contributes to that process before we offer up an opinion on the matter.

Get Ready for 'Hot' Inflation - Ideological deflationists and inflationists alike find themselves both facing the same problem. The former still carry the torch for a vicious deflationary juggernaut sure to overpower the actions of the mightiest central banks on the planet. The latter keep expecting not merely a strong inflation but a breakout of hyperinflation. Neither has occurred, and the question is, why not?  The answer is a 'cold' inflation, marked by a steady loss of purchasing power that has progressed through Western economies, not merely over the past few years but over the past decade. Moreover, perhaps it’s also the case that complacency in the face of empirical data (heavily-manipulated, many would argue), support has grown up around ongoing “benign” inflation. If so, Western economies face an unpriced risk now, not from spiraling deflation, nor hyperinflation, but rather from the breakout of a (merely) strong inflation. Surely, this is an outcome that sovereign bond markets and stock markets are completely unprepared for. Indeed, by continually framing the inflation vs. deflation debate in extreme terms, market participants have created a blind spot: the risk of a conventional, but 'hot,' inflation.

The Slow Recovery: It’s Not Just Housing - SF Fed Economic Letter: States that were hit hard by the housing bust performed worse economically during the recession of 2007-09. However, the close relationship between the fall in home prices and state economic activity has largely disappeared during the recovery. High unemployment, restrained demand, and idle production capacity are national in scope. These are just the sorts of problems monetary policy can address. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco. I’ll start with a look at the national economy, focusing on why the recent recession was so severe and why the recovery has been relatively anemic. I’ll then talk about prospects for growth, employment, and inflation. Finally, I’ll discuss what the Federal Reserve is doing to bolster the recovery. Let me begin by saying that I’m encouraged by recent signs of a stronger, self-sustaining recovery. I’m especially glad to see that the economy is adding jobs at a pretty decent clip. Still, we have a long way to go. The Fed’s mandate from Congress is to promote maximum employment and stable prices (Williams 2012b). Inflation generally has been subdued over the past few years. But, more than four years after the recession began, the unemployment rate is still 8.3%, leaving us far short of our employment goal. The Fed has acted vigorously to boost the economy. It’s critical that we keep doing so in order to achieve our statutory mandate.

Economic Miss Trifecta Not Bad Enough For "THE NEW QE" Rumors -- Continuing today's disappointing data releases, we now get the Philly Fed, Existing home sales (aka the NAR's monthly advertising update), and Eurozone confidence. Sure enough, all missed, since we are now in NEW QE prep mode.

  • Philly Fed: 8.5, missed expectations of 12.0, and lower than the previous print of 12.5 (source)
    • New Orders down from 3.3, to 2.7
    • Prices Paid spike from 18.7 to 22.5,
  • Existing home sales, reported by the inherently conflicted NAR, missed, dropping from 4.61MM to 4.48MM, a data set which we caution readers is about 0.0% accurate and valid.
    • Total housing inventory at the end of February rose 4.3 percent to 2.43 million existing homes available for sale, which represents a 6.4-month
    • The national median existing-home price for all housing types was $156,600 in February, up 0.3 percent from February 2011.
    • All-cash sales rose to 33 percent of transactions in February from 31 percent in January; they were 33 percent in February 2011
  • Finally, Eurozone consumer confidence also missed sliding to -19.8, on expectation of an improvement to -19.0 from -19.1

WSJ Economists' GDP Forecasts: 2.2% in Q1, Rising to 2.4% in Q2 - On Friday of next week (April 27th) we'll get the Advance Estimate for Q1 GDP from the Bureau of Economic Analysis. Meanwhile, the Wall Street Journal's April Survey of economists is now available. Let's see what their crystal ball is telling them about Q1 GDP (download the WSJ Excel File). First, some context: The BEA's Final Estimate for Q4 GDP came in at 3.0 percent, unchanged from the 3.0 percent Second Estimate, which was a downward revision from the Preliminary Estimate of 2.8 percent. The average GDP since the inception of quarterly GDP reporting in the late 1940s is 3.3 percent, which is nearly double the 1.7 percent 10-year moving average of GDP through the end of 2011 (illustrated here). The April WSJ survey consensus, both the median (middle) and mean (average), is for a Q1 GDP of 2.2 percent. The mode (the most frequent forecast) was a slightly less optimistic 2.0 percent.  What about Q2 2012 GDP? The median and mean are slightly higher at 2.3 and 2.4, respectively. But the mode is unchanged at 2.0 percent.

US Leading Economic Indicator Increases  - The Conference Board Leading Economic Index (LEI) for the U.S. increased 0.3 percent in March to 95.7 (2004 = 100), following a 0.7 percent increase in February, and a 0.2 percent increase in January. Says Ataman Ozyildirim, economist at The Conference Board: “The LEI increased for the sixth consecutive month, pointing to a more positive outlook despite subdued consumer expectations and weakness in manufacturing new orders. Moreover, the six-month growth rate of the LEI continues to improve. The CEI, a measure of current economic conditions, has also increased in five of the last six months, with broad based gains in all components.”

Index of Leading Economic Indicators in the U.S. Climbed 0.3% - The Conference Board’s gauge of the outlook for the next three to six months climbed 0.3 percent after a 0.7 percent gain in February that was the biggest in 11 months, the New York- based group said today. The median forecast of economists surveyed by Bloomberg News called for a rise of 0.2 percent in March.  An improving job market is helping Americans overcome higher fuel expenses and boosting the spending that accounts for about 70 percent of the economy. Strengthening consumer demand will help sustain the more than two-year expansion and make the economy more resilient to a slowdown in Europe.   “Job creation and income growth are positives for economic growth.”  Estimates of 51 economists in the Bloomberg survey ranged from a decline of 0.2 percent to a gain of 0.5 percent.  Seven of the 10 indicators in the leading index contributed to the increase, led by interest rate spreads, building permits and stock prices.

U.S. Leading Indicator Gain Moderates - The Leading Economic Indicator index from the Conference Board rose 0.3% last month after an unrevised 0.7% gain during February. A 0.2% increase had been expected. Last month a robust 70% of the series' components rose. That compares favorably to last September's low of 25%. A steeper interest rate yield curve, more building permits and higher stock prices had the largest effects raising the overall leading index. The separate Leading Credit Index slipped for the third straight month and indicated tighter conditions versus the easy state of last summer and fall.  The index of coincident indicators again rose 0.2%. Higher manufacturing & trade sales, increased payroll employment and improved personal income made positive contributions to the index change last month. Industrial production was unchanged for the second consecutive month. The index of lagging indicators, designed to measure economic slack, rose 0.3% after a 0.1% February uptick.

Fears Rise That Economic Recovery May Falter in the Spring - Some of the same spoilers that interrupted the recovery in 2010 and 2011 have emerged again, raising fears that the winter’s economic strength might dissipate in the spring.In recent weeks, European bond yields have started climbing. In the United States and elsewhere, high oil prices have sapped spending power. American employers remain skittish about hiring new workers, and new claims for unemployment insurance have risen. And stocks have declined. There is a “light recovery blowing in a spring wind” with “dark clouds on the horizon,” Christine Lagarde, managing director of the International Monetary Fund, said Thursday, at the start of meetings here that will focus on Europe’s troubles and global growth. Ms. Lagarde implored world leaders not to become complacent. Forecasters have said that the trends point to a moderation of economic growth in the United States, but they still expect the recovery to continue this year. The slowdown in part reflects an unusually warm winter, which pulled forward economic activity, making January and February seem artificially good and perhaps making recent weeks look worse than they truly were. Still, the breadth of the recent weakening of activity shows that the economy remains fragile, as is typical in the years following a financial crisis.

Economic Reports Spark Recovery Doubts - Rising layoffs, falling home sales and slowing manufacturing activity are sparking fears that the economic recovery is headed for a springtime stall for the third year in a row. New data Thursday provided fresh evidence that the job market is losing the momentum it built earlier this year, which could pressure fragile housing markets that have been showing signs of life. Separate reports this week suggested that the factory sector, a source of strength in the recovery, now is being hurt by weak growth overseas. However, recent signals have been mixed, with worrisome indicators following positive ones—such as consumer confidence and auto sales—that suggest the recovery remains on track. Economists generally believe total economic output in the first three months of the year grew at a rate a bit above 2%—slower than at the end of 2011 but significantly stronger than the same period a year ago. "It's been the weakest recovery in the post-World War II period, and that hasn't changed,"  Economists cautioned that a range of factors, from a historically warm winter to an early Easter, have muddied the weekly figures and made it difficult to identify clear trends.  Nonetheless, the recent figures, combined with an unexpectedly weak March jobs report, suggest the job market is cooling. "It adds to concern about backsliding in job creation after faster employment gains earlier in the year," .

Gary Shilling: Bearish on the US economy; calling for a crash - Gary Shilling recently wrote a five-part series for Bloomberg News on the economy. His view is that GDP growth comes primarily from consumers spending from either higher income or from reduced savings and debt accumulation. In his view, the US economy exhibits the latter pattern and he therefore expects another recession. He is therefore calling for stocks to drop 43% in 2012. Wow! Shilling is also long treasuries as a result. Below is the Bloomberg Television video and links to his articles.

Bias in Government Forecasts - Why do so many countries so often wander far off the path of fiscal responsibility? Concern about budget deficits has become a burning political issue in the United States, has helped persuade the United Kingdom to enact stringent cuts despite a weak economy, and is the proximate cause of the Greek sovereign-debt crisis, which has grown to engulf the entire eurozone. Indeed, among industrialized countries, hardly a one is immune from fiscal woes. Clearly, part of the blame lies with voters who don’t want to hear that budget discipline means cutting programs that matter to them, and with politicians who tell voters only what they want to hear. But another factor has attracted insufficient notice: systematically over-optimistic official forecasts. Such forecasts underlie governments’ failure to take advantage of boom periods to strengthen their finances, including running budget surpluses. During the expansion of 2001-2007, for example, the US government made optimistic budget forecasts at each stage.  These forecasts supported enacting big long-term tax cuts and accelerating growth in spending (both military and domestic).  European countries behaved similarly, running up ever-higher debts.  Predictably, when global recession hit in 2008, most countries had little or no “fiscal space” to implement countercyclical policy.

On How Decisions are Really Made, Versus How Economists Say They Should Make Decisions, and Why the Folks in the Real World Often Have it Right - video - Yves Smith: This is a bit of a sleeper of a presentation from the recent INET conference. It was from a session titled “What Can Economists Know?” which might cause willies among non-economists as being too much about epistemology and not enough about issues that might give insight, say, into why the overwhelming majority of economists in early 2007 thought a global financial crisis was impossible. This talk by Gerd Gigerenzer is about heuristics, and why they are often superior to the more formal methods of analysis and decision-making fetishized by economists. He argues that one of the big things that economists miss is how to approach decision-making under conditions of risk (when probabilities of outcomes can be estimated with some accuracy) versus uncertainty (when you can’t estimate the odds of outcomes and/or may face unknown unknowns).

Tax Cuts, Transfers and Balance Sheet Recessions - Felix Salmon writes In this kind of a recession, monetary policy — reducing rates to zero — doesn’t work. And tax cuts don’t work either: they just increase household savings. You need government spending, at least until the economy has warmed up to the point at which companies and individuals start borrowing again. And the good news is that in a balance sheet recession, government spending is pretty much cost-free, since interest rates are at zero. Except that rapid increases in household savings will cure the balance sheet recession. With all due respect to Felix I think this is part of the ideological blinders than lead to bad policy on all sides. One can make an easy case that direct government spending would generate more immediate stimulus in general and especially during a balance sheet recession.  However, folks are weary of direct government spending. Rather than wasting a lot of time and energy arguing over that its better to simply choose policies that everyone can agree on and then go really huge on those polices. My original suggestion from early 2008 was a complete suspension of the payroll tax combined with open ended loans to State and Local Governments. I still think that would have given us a much quicker repair than we saw.

Debt: The Politics and Economics of Restructuring - In the video below, Michael Hudson discusses how damaging "austerity" really is. It wastes labor and production, and leads to economic shrinkage. In the last 30 years, there's been a persistent widening of wealth disparity, an enormous redistribution of wealth between creditors and debtors. In the U.S., the top 1% have doubled their share of returns of wealth (interest, dividends, rent and capital gains).    The winners will push economies into Depressions rather than give up their gains. They will continue "business as usual." The creditors will not write down debt. Instead, they embrace the notion of "austerity."  But austerity makes debts harder to pay. A shrinking economy has less tax revenue, and this exacerbates the budget deficit and leads to calls to cut back spending. Cutting back spending drains money from the economy, adding a tax drain to the debt drain. If you repay debt, the money doesn't get used to buy goods and services, markets shrink, and a declining spiral results. Without writing down the debt, the debt overhead and imposed austerity will shrink economies and polarize nations even further between debtors and creditors. The choice:  Write down debts or suffer a chronic, severe recession. There's no way to recover while the debt overhead remains in place.  That all debts can be repaid is an illusion.

Why "We're on the Right Track" Isn't Enough, and What Obama's Plan Should Be For Boosting the Economy - Robert Reich -The Obama White House should face it: “We’re on the right track” isn’t sufficient. The President has to offer the nation a clear, bold strategy for boosting the economy. It should be the economic mandate for his second term. It should consist of four points: First, Obama should demand that the nation’s banks modify mortgages of homeowners still struggling in the wake of Wall Street’s housing bubble — threatening that if the banks fail to do so he’ll fight to resurrect the Glass-Steagall Act and break up Wall Street’s biggest banks (as the Dallas Fed recently recommended). Second, he should condemn oil speculators for keeping gas prices high — demanding that the oil companies allow the Commodity Futures Trading Corporation to set limits on such speculation and instructing the Justice Department to investigate and prosecute oil price manipulation. Third, he should stand ready to make further job-creating investments in the nation’s crumbling infrastructure, and renew his call for an infastructure bank. And while he understands the need to reduce the nation’s long-term budget deficit, he won’t allow austerity economics to take precedence over job creation. He’ll veto budget cuts until unemployment is down to 5 percent. Finally, he should make clear the underlying problem is widening inequality. With so much of the nation’s disposable income and wealth going to the top, the vast middle class doesn’t have the purchasing power it needs to fire up the economy. That’s why the Buffett rule, setting a minimum tax rate for millionaires, is just a first step for ensuring that the gains from growth are widely shared.

Economists: Congress won't fix economy - Economists have lots of ideas about what can be done to help jumpstart the still weak economy, but they don't expect Congress to enact any of them any time soon. A survey of economists by CNNMoney found most don't expect Congress to pass any kind of economic assistance anytime in the foreseeable future. Only about a third of the 16 who responded to the survey expect some kind of action early in 2013, after the election. Just one expects action in a lame-duck session after the election but before the end of the year. None of them expect action before the election.

Depression is a choice - We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives. Usually, economists are admirably catholic about the preferences of the objects they study. They infer desire by observing behavior, listening to what people do more than to what they say. But with respect to national polities, macroeconomists presume the existence of an overwhelming preference for GDP growth and full employment that simply does not exist. They act as though any other set of preferences would be unreasonable, unthinkable. But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation. The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational.

The Income Gap: A New Look at an Age-Old Problem  - In media appearances, speeches and articles lambasting the policy failures of the Bush and Obama administrations and the Federal Reserve, James K. Galbraith has argued that the 2007-08 financial collapse that preceded the Great Recession could have been avoided. He has publicly chided President Obama and Treasury Secretary Timothy Geithner for failing to pursue adequate stimulus policies, which he says makes recovery impossible. He was prescient in warning that austerity in Europe would trigger renewed recession there and could undermine the global economy. Now he has published a new book, Inequality and Instability: A Study of the World Economy Just Before the Great Crisis. Its controversial thesis – that income inequality and financial crises are inextricably linked – may end up on the placards of the Occupy Wall Street movement this summer. It’s doubtful it will be explored during one of next fall’s presidential debates. But it’s definitely worth talking about. The Fiscal Times engaged in an email exchange with Galbraith to explore his latest thinking:

TIC Update, by Tim Duy: The US Treasury released the February TIC data. It is worth pointing out the methodolgical change in the data construction in recent months. Previously, the Treasury used an annual survey of custodians, brokers, etc. to estimate foreign holdings of Treasuries and built on these estimates with monthly transactions data. This led to persistent "transactions bias" errors over the year, particularly a buildup of Treasury securities in the UK that were really attributable to other nations, notably China. Treasury initiated more frequent surveys last year in September and December (in addition to the regular June survey), and now the surveys are monthly. We are no longer seeing the steady growth in UK holdings as a result: We see the usual drop ($211 billion in June 2011) in the new series with the June revision and an increase in August that is subsequently reversed. One offset to the downward UK revision is the upward China revision ($142 billion): China, however, was not the only upward revision. Interesting upward revisions are also observe in Continental Europe money centers:

IMF tells US to sort out debt, quickly - The International Monetary Fund issued a clarion call to bickering US politicians Tuesday, urging them to solve the country's debt problems before a still-vulnerable economy is tipped over the brink. In a hallmark semi-annual report, the Washington-based fund warned policymakers on the other side of the US capital that, while the world's largest economy is improving, they invite trouble by not addressing a looming debt crisis. "The first priority for US authorities is to agree on and commit to a credible fiscal policy agenda that places debt on a sustainable track over the medium term," the IMF said. So far the United States has avoided the type of debt crisis that has ravaged Europe -- with the dollar's safe-haven status and moderate growth providing a sizable safety net even as agencies have downgraded the country's credit rating. But with Washington hurtling toward November presidential polls, and with the country's politicians gripped by a culture of permanent campaigning, time may be running out to find a solution. US debt is expected to balloon to 90 percent of total economic output by 2020, "an uncomfortably high burden," according to the IMF.

Geithner: U.S. Faces ‘Big Test’ on Taxes, Budget - The government will face a major test on whether it has the capacity to govern when it faces big tax and budget decisions at the end of the year, U.S. Treasury Secretary Timothy Geithner said on Wednesday. Before 2013, the country will be forced to deal with the expiration of tax cuts that affect nearly all taxpayers, automatic budget cuts, as well as another debate over raising the country's debt limit. "It will be a big test in Washington, a big test of the country to govern itself in how Washington deals with those challenges," Geithner said ahead of a meeting on Friday of finance ministers from the Group of 20, representing the world's leading industrialized and emerging market economies. A protracted fight over how to rein in the country's trillion dollar plus deficits and raise the debt limit in 2011 forced the government to the brink of several shutdowns and stripped the country of its top credit rating.The Treasury expects the country to hit the debt ceiling or the legal limit it is allowed to borrow before the end of the year and individual tax cuts enacted under former President George W. Bush - known as the Bush tax cuts - will expire December 31.

The Federal Budget in One Picture - The Congressional Budget Office has assembled a great collection of infographics on the budget situation. Here’s an overview of the entire budget:

CBO looks at the president's budget - The CBO reports: CBO estimates that the President’s budgetary proposals would boost overall output initially but reduce it in later years. For the 2013–2017 period, under most of the estimates CBO produced using alternative models and assumptions, the President’s proposals would increase real (inflation-adjusted) output (relative to that under current law) primarily because taxes would be lower than those under current law, and, therefore, people’s disposable income and their demand for goods and services would be greater. Over time, however, the proposals would reduce real output (relative to that under current law) because the deficits would exceed those projected under current law, and the effects of increasing government debt would more than offset the favorable effects of lower marginal tax rates on labor income. When the net impact of those two types of effects would shift from an increase in real output to a decrease would depend on various factors, including the impact of increased aggregate demand on output and the effect of deficits on investment. By CBO’s estimate, under the President’s proposals, the nation’s real output during the 2013–2017 period would be, on average, between 0.2 percent lower than the amount under current law and 1.4 percent higher than under current law. For the 2018–2022 period, CBO estimates that the President’s proposals would reduce real output, on average, by between 0.5 percent and 2.2 percent compared with what would occur under current law.

How Pete Peterson is driving the fiscal consensus - Trudy Lieberman has a good post at CJR on the “surprisingly broad consensus” around the need to reduce the fiscal deficit in general, and to take aim at Social Security in particular. “Social Security,” she writes, “is the one issue on which the electorate is not divided” — but that hasn’t stopped a bipartisan group of Washington grandees from preaching doom whenever it is brought up. More generally, the idea of “fiscal responsibility” seems to have become as American as motherhood and apple pie — both parties preach it, and say the other guys are the profligate ones. The group of people saying “hey, we print our own money, interest rates are at zero, inflation is not an issue, the corporate sector isn’t borrowing, there are a thousand more important things to worry about right now, why on earth is everybody worried about the deficit all of a sudden” is in a decided minority. The obsession about fiscal prudence is a new phenomenon, and can be dated, pretty much, to 2008, when Blackstone went public and Pete Peterson took his billion dollars in proceeds and decided to use it to found the Peter G Peterson Foundation. Wherever fiscal prudence is preached, Peterson’s money can nearly always be found.

Why government, family budgets aren't the same - The Romney campaign today pushes a line we've all heard countless times: "Your family has to operate on a budget, so why doesn't the federal government have to do the same?" Team Romney even put together this "infographic," which presumably helps prove a point the campaign considers important. Given how common this sentiment is, it's worth taking a moment from time to time to occasionally reemphasize why this analogy is so very wrong. At first blush, I can appreciate its appeal -- the argument has a certain down-home, common-sense sort of quality to it. If American families and American businesses can't run massive deficits and borrow billions from China, the argument goes, why does the American government? The point that generally gets lost is the detail that matters: families and businesses borrow money and run deficits all the time. This is a positive, not a negative, development.

The B-S Cult Is Alive! Isn't Judd Gregg Supposed To Be Politically Astute? - Several weeks ago I posted for the first time about the Bowles-Simpson cult, the supposedly smart, sincere people who keep trying to resurrect the B-S plan as if it were a budget deity even though it has never proven to have any significant support. It's now clear that former Senator Judd Gregg (R-NH) is a member member of the B-S cult. Gregg has an op-ed in The Hill today extolling the virtues of the Bowles-Simpson commission that makes so little sense you have to wonder what, if anything he was thinking when it was submitted for publication. According to Gregg, compared to the chaos that is likely in the lame duck, "What is needed is a more orderly and thoughtful course that produces the long-term savings without the draconian (sic) and ham-handed actions currently proposed." But then Gregg says "The only viable, bipartisan vehicle that has been put forward to produce such an orderly reduction in our debt is the plan offered by former Sen. Alan Simpson (R-Wyo.) and former White House Chief of Staff Erskine Bowles" and proposes that the B-S commission be reconstituted.

There Was No Bowles-Simpson Commission Report  - Dean Baker - Today Ezra Klein is guilty of that standard Washington insider mistake of referring a Bowles-Simpson commission report. In his column, he contrasts the tax increases proposed by the commission (along with increases advocated by others), with the pledges by Romney to raise taxes on no one and the pledge by President Obama to not raise taxes on anyone other than the top 2 percent. Of course there was no Bowles-Simpson commission report. The by-laws clearly state: "The Commission shall vote on the approval of a final report containing a set of recommendations to achieve the objectives set forth in the Charter no later than December 1, 2010. The issuance of a final report of the Commission shall require the approval of not less than 14 of the 18 members of the Commission." There was no vote taken on anything by December 1. (In fact there was never a formal vote.) And the report touted as being the commission report never had the support of more than 11 of the 18 members of the commission report. Hence this report is accurately described as the report of the co-chairs, Morgan Stanley director Erskine Bowles and former Senator Alan Simpson. In other words, the "Moment of Truth" is a lie.

Bowles-Simpson Returns in Senate Budget Committee - Kent Conrad, the retiring Chairman of the Senate Budget Committee, just announced that the markup for the FY 2013 budget will commence tomorrow. And instead of creating model legislation, he will simply take the recommendations proposed by the Chairmen of the Bowles-Simpson deficit commission, popularly known as the “catfood commission,” as the baseline. Tomorrow I will begin a Budget Committee markup of a long-term budget for the nation. As my Chairman’s Mark, I will lay down the bipartisan Fiscal Commission plan, also known as the Bowles-Simpson plan. It is a plan which I believe represents the best blueprint from which to build a bipartisan deficit reduction agreement that can ultimately be adopted. What I am proposing is not partisan. I am trying to break from the ‘business as usual’ practice that has gone on for too long. I am hoping that my Senate colleagues will stand with me to do what is right for the country. The Bowles-Simpson Chairmen’s recommendations (which were never adopted by the commission) came out before Republicans took over the House. In reaction to that event, future long-term budget plans moved ever further to the right, including the deficit reduction blueprint from President Obama. So this has led many to say that Bowles-Simpson recommendations stand to the left of what has been proposed in Washington, because they raise far more revenue.

It’s not a markup if you don’t vote - The Congressional Budget Act requires the House and Senate to pass a budget resolution by April 15th. Under Democratic control the Senate has not done so since 2009. Last year Senate Budget Committee Chairman Kent Conrad (D-ND) committed to his ranking member, Senator Jeff Sessions (R-AL), that the committee would mark up a budget resolution this year.  By itself that’s only a first step but it’s a lot more than the Senate has done in the past three years. Senate Majority Leader Reid (D-NV) has repeatedly said that he will not bring a budget resolution to the floor this year.  If Leader Reid were to carry out such a threat he would be violating the Budget Act requirement, but until now the issue has been moot. As long as the committee has not reported, the responsibility to act and blame for legislative inaction falls on Chairman Conrad.  If the committee reports a budget resolution then the responsibility for action and blame for inaction shift to Leader Reid. Today Chairman Conrad announced that:

  • Tomorrow he “will begin a Budget Committee markup of a long-term budget plan.”  (Begin, not complete.)
  • He will propose the Bowles-Simpson recommendations as his Chairman’s mark.
  • He “recognize[s] that adjustments will have to be made to this plan before it can be adopted,” including that “it needs to be further updated to account for changes that have occurred since it was drafted in 2010.”

Why resurrect budget dinosaurs and bad economic policy? - On Tuesday, Senate Budget Committee Chairman Kent Conrad (D-N.D.) marked up, but didn’t vote on, a budget modeled off of the report by National Commission on Fiscal Responsibility and Reform co-chairs Erskine Bowles and Alan Simpson (often called the “Bowles-Simpson” report), which failed to garner the requisite support of a super majority of the Fiscal Commission’s members in Dec. 2010. A budget alternative based on (albeit significantly to the right of) the Bowles-Simpson report recently went down in flames in the House of Representatives—by a crushing vote of 382-38. Stan Collender recently published an excellent piece on the cult-like efforts and failed politics of resurrecting the Bowles-Simpson report since its demise. Essentially, politicians and pundits cling to the Bowles-Simpson report as a talisman to signal their “seriousness” about reducing budget deficits. But it’s worth looking at the dismal economic fundamentals behind the Bowles-Simpson grandstanding, because the report’s recommendations were and remain terrible economic policy. It’s just one more reminder that “popular among Washington pundits” rarely correlates with “good economic policy.”

Conrad’s Bowles-Simpson Rollout Has a Misstep - Let’s just say that Kent Conrad’s mark-up of the Bowles-Simpson plan yesterday in the Senate Budget Committee didn’t go according to the script. The “markup” didn’t include any votes, first of all. This was by design, but it turned the proceedings into something of a farce. Some Republicans argued that Conrad should have allowed votes to see what parts of Bowles-Simpson could have survived. At the markup, Sen. Mike Crapo (R-Idaho), who voted for Bowles-Simpson as a member of the commission, implored Conrad to bring the plan up for a vote. He argued that even if it is picked apart, at least some elements could be advanced. Some of the amendments sought by the Republicans included such magnanimous ideas as repealing the health care law, something to do with the GSA Vegas junket scandal, and a provision that would allow the House budget, with its spending under the targets from the debt limit deal, to go forward. The White House already escalated that fight today, by saying they would not sign any appropriations bills with the lower numbers. Conrad’s plan was to go behind closed doors with Bowles-Simpson and create an off-the-shelf solution when one is needed in the lame duck session to avoid the fiscal cliff. But the negative reaction on practically all sides to his maneuver yesterday makes it more difficult. Establishment media publications paint Conrad as a truth-teller, but nobody’s buying what he’s selling.

2013 Budget Debate May Be Setting The Standard For Crazy - If you weren't convinced that anything related to the federal budget on Capital Hill is completely nuts this year, just think about these three things, all of which are happening this week:

1. The House is putting together a FY13 reconciliation package based on the GOP/Ryan plan it passed earlier this year even though (1) reconciliation is required to be based on the budget resolution conference agreement between the House and the Senate, (2) there will be no budget resolution conference report agreement this year and, therefore, there will be no reconciliation, and (3) nothing the House considers for its own private reconciliation has any chance of actually (or perhaps ever) being enacted.
2. The Senate Budget Committee is trying to mark up a FY 13 budget resolution that Senate Majority Leader Harry Reid (D-NV) has already said will not be considered by the full Senate.
3. The budget resolution that will be offered in the Senate Budget Committee is based on the plan proposed by the two chairs of the Bowles-Simpson commission that is thoroughly discredited after (1) the commission itself failed to approve it and (2) the House resoundingly rejected a similar plan just weeks ago.
Note: This would be worthy of a skit on The Daily Show or Weekend Update on Saturday Night Live if it weren't so incredibly sad.

Mitt Romney’s economics: Work in progress - The Economist - WHEN Paul Ryan released his proposed federal budget a year ago, Mitt Romney greeted it coolly. He congratulated the House Budget Committee chairman for “setting the right tone”, but pointedly declined to endorse any of its details. The coolness was understandable. Mr Ryan’s budget was political dynamite. It proposed to slash income-tax rates, especially for the rich and businesses, and replace traditional Medicare with vouchers for the elderly to buy health insurance. Conservatives loved it, but voters, once they saw the details, recoiled, as did some Republicans. Newt Gingrich, vying with Mr Romney for the party’s presidential nomination, called it “right-wing social engineering”. When Mr Romney released his own 160-page economic platform last September, it promised much more limited tax cuts. On Medicare, all he promised was a plan that would “differ” from Mr Ryan’s while sharing its objectives. Over the next few months, though, Mr Romney steadily warmed to Mr Ryan’s plan as he faced a series of rivals from his political right.  February he released a new tax plan of his own that slashed all personal tax rates by 20%. And when Mr Ryan produced a new, very similar, version of his budget on March 20th for next fiscal year, Mr Romney was effusive. “It`s a bold and exciting effort,” It would be “marvellous”, he said, if the Senate passed it.

Washington elites push for a consensus that ignores reality… “Why can’t we all get along?” The iconic question has become the fixation of much of Washington’s chattering class. David Brooks and Thomas Friedman censure President Obama for blowing the “Grand Bargain” or not embracing the recommendations of Alan Simpson and Erskine Bowles, co-chairs of the deficit reduction commission. Self-proclaimed bipartisan efforts — No Labels, Americans Elect — call for putting aside partisan squabbles and electing moderates who can get things done. All this chatter leaves out one thing — any sense of reality. The old bipartisanship, such as it was, was built on the postwar economy that worked for everyone. Top-end taxes were at 90 percent, providing the resources to invest in essential programs such as the interstate highways, the Marshall Plan that rebuilt Europe, the G.I. bill and housing subsidies that educated a generation and built the suburbs. In those days, U.S. companies exported goods rather than jobs, and a decent argument could be made that what was good for General Motors was in fact good for America. It wasn’t perfect. The “other America” lived lives of quiet desperation. Segregation still was brutally enforced. But the bipartisan consensus reflected an economy that was working for many, not just the few.

GOP to cut food stamps in deficit-reduction drive: Republicans controlling the House are eying big cuts to food stamps and would make it more difficult for illegal immigrants to claim child tax credits as they piece together legislation to cut $261 billion in the coming decade. It's the first step in a GOP exercise aimed at cutting domestic programs to forestall big Pentagon budget cuts next year. The cuts to food stamps would reduce the monthly benefit for a family of four by almost $60 and would force up to 3 million people off the program altogether by tightening eligibility. The measure would also eliminate a grant program to states for social services like day care. Six House panels are producing legislation this week as the first step in implementing the GOP's budget plan.

House Looks to Cut Food Stamps to Offset Defense Trigger - The House will “deem” their FY2013 budget passed today, a tactic that didn’t work when they tried it last year. The “deeming resolution” won’t even come up in the context of a budget bill, but a separate measure on gun rights. The House leadership claims that this is necessary because of the failure of the Senate to pass a budget. But spending levels are locked in from the Budget Control Act, last year’s debt limit deal, and the House could simply use those targets for their appropriations process. The only reason they will deem and pass today is because they changed those targets, with lower spending than the Budget Control Act envisioned. But the bigger budget news came yesterday. The House has been trying to find offsets to replace the trigger cuts to defense spending that will hit at the end of the year. Previously, their only substitute cuts came at the expense of the federal workforce. But those were not enough to offset the defense trigger. So now they have a new target: food stamps: From food stamps to child tax credits and Social Service block grants, House Republicans began rolling out a new wave of domestic budget cuts Monday but less for debt reduction — and more to sustain future Pentagon spending without relying on new taxes. At one level, the pro-Pentagon, anti-tax stance fits traditional Republican doctrine. And the whole goal is to come up with enough savings to forestall automatic spending cuts that will fall most heavily on the Defense Department in January.

Cutting public investments to protect “the children” — or, when the cure is much worse than the malady - Policymakers in D.C. have a long history of focusing on the wrong problem (how many screamed about the housing bubble and buildup of private debt in the mid-2000s, for example?). This history continues today – you can’t follow economic debates taking place inside the Beltway for long without inevitably hearing somebody thunder about the “burdens we’re placing on our children and grandchildren” with current budget deficits. This formulation has become so common that almost nobody bothers questioning it anymore. But in fact, policies aimed at cutting today’s budget deficits are actually more threatening to our kids’ economic futures than these deficits themselves. The responses to why these arguments do not apply to the current situation have been made many times before. The price of borrowing has not risen, and that’s not an unsustainable fluke. Instead, it’s precisely because the economy is depressed. So, no private capital formation is being crowded-out (and in fact, lots is probably being crowded-in as government deficits support spending and demand, and this spending and demand is actually the biggest near-term driver of private investment) – in fact, private-sector capital formation, after a horrendous fall during the teeth of the Great Recession, is one of the few real sources of strength in the latest recovery.

Obama Won’t Sign Republican Spending Bills, Official Says - President Barack Obama won’t sign spending bills being written by House Republicans, the administration warned, escalating a budget fight that raises the possibility of a government shutdown later this year. Acting White House Budget Office Director Jeffrey Zients said yesterday that the administration won’t accept any of the dozen spending bills House Republicans are working on unless they agree to abide by a budget deal reached last year. Democrats have maintained that Republicans are reneging on the budget agreement by announcing that they will cut total spending on the bills to fund government agencies by $19 billion. Republicans say the limit set last year was meant to be the maximum spending allowed, not the precise amount to be spent. “These funding levels will mean deep and painful cuts in investments that America needs to succeed,” Zients wrote in a letter to lawmakers. “Until the House of Representatives indicates that it will abide by last summer’s agreement, the president will not be able to sign any appropriations bills.”

Administration: We Won’t Sign Any Appropriations Bills That Break Debt Limit Deal - This really ups the ante on a fight that has been simmering ever since the House GOP made the decision to renege on the debt limit deal: In a major escalation of a slowly building fight over funding the government, the White House has warned House Republicans, in no uncertain terms, that the government will shut down in September if the GOP does not adhere to an agreement they cut with Democrats in August during the standoff over raising the nation’s debt limit. “Until the House of Representatives indicates that it will abide by last summer’s agreement, the President will not be able to sign any appropriations bills,” Not many letters from the Office of Management and Budget are breathtaking, but this one is. First, a little backstory. Last August, Congress passed the Budget Control Act, which set spending caps for discretionary funding going out ten years. For Fiscal Year 2013, this means a discretionary budget of $1.047 trillion, and it even sets a defined split between defense and non-defense programs. But conservatives considered that cap too high, and reasoned that the legislation set a ceiling but not a floor. So in the House budget that was “deemed” passed this week, they dropped $19 billion below the target for discretionary spending in the BCA, with all of it coming out of non-defense programs

White House threatens to veto bill on Keystone -  The White House on Tuesday said Obama would veto legislation before the U.S. House of Representatives that sought to force approval of the stalled Keystone XL oil pipeline as part of a new 90-day extension of federal transportation funding. President Barack Obama earlier this year put a hold on TransCanada's $7 billion project, designed to bring crude oil from Canada and North Dakota to Texas refineries, because he said it needed further environmental review in Nebraska. Last month Obama threw his support behind building the southern leg of the pipeline that would run from the Cushing, Oklahoma storage hub to Texas. Republicans have argued the full Keystone XL project would create jobs and bring more oil to the United States at a time of surging gasoline prices, and have criticized Obama's decision leading up to the November presidential elections. The House is expected to vote on the transportation funding bill as early as Wednesday. The Senate would have to agree to the funding extension and the Keystone plan before the measure could reach Obama's desk.

House Budget Committee Chairman Paul Ryan Is A Coward - One of the most interesting aspects of the fiscal 2013 budget debate is how the GOP is extolling the virtues of House Budget Committee Chairman Paul Ryan (R-WI) but, while taking credit for it passing the House is only talking about his budget plan in the most general terms. Republicans talk about how "courageous" Ryan is for taking the lead on reducing the deficit while it stays as far away as possible from any discussion of the specifics spending reductions and tax cuts. It wasn't at all courageous for Ryan to propose tax cuts and deep spending reductions that only House Republicans would approve. That's the federal budget equivalent of throwing raw meet to piranhas and then saying that you deserve credit for feeding them what they want to eat. The courageous move would have been to propose a budget plan that challenged the GOP majority and attracted Democratic votes, that is, that was a compromise in the midst of hyper partisanship. That would have been far more difficult both substantively and politically -- like trying to feed raw vegetables to piranhas by hand while your in the water with them -- and would indeed have qualified as daring and leadership.

Coming - ‘Taxmageddon’ - ON Jan. 1 of next year, the federal tax bill for a typical middle-class household — making in the neighborhood of $50,000 — is scheduled to rise by about $1,750. This increase, which would come from the expiration of both the Bush tax cuts and the Obama stimulus, would follow a decade of little to no income growth for many people. As a result, inflation-adjusted, after-tax income for the median household could fall next year to its 1998 level, in spite of the continuing economic recovery.  The middle-class tax increase is just the beginning of budget changes set to take effect at the start of 2013. Poor families would see their taxes rise somewhat, too. Total federal taxes for top-earning families would rise by tens or even hundreds of thousands of dollars a year. Spending cuts would also take effect, squeezing domestic programs — education, transportation, scientific research — and the military.  All in all, the end of 2012 will be unlike any other time in memory for the federal government.  The tax increases and spending cuts are the result of Washington’s having previously kicked the can down the road, to use a phrase that is popular here. Rather than pass a plan to cut the deficit, policy makers have put off tough decisions. With the Bush tax cuts, lawmakers deliberately made them temporary, to avoid running afoul of budget rules intended to hold down the deficit.  Not surprisingly, leaders of both parties now say they are opposed to letting the changes happen on Jan. 1. Congressional aides, quoted in The Washington Post, call it “taxmageddon.”

The Fiscal Cliff and Kicking Cans Down Roads - David Leonhardt has a good piece up at the NYT on, among other things, the contractionary impact of the fiscal time bomb set by the expiration of all the Bush tax cuts, the activation of the sequester cuts, the AMT biting a lot more taxpayers, and the end, yet again, of the payroll tax break and the UI extension. Alan Blinder takes you through the math and politics here—both are ugly.  Everyone uses the “kick the can down the road” analogy both re what got us here and what’s likely to happen next.  I agree, but I’d add an ‘s.’  That is, what’s happening now is the accumulation of numerous canS that have all been kicked down various roads all coming together at the crossroads on December 31st of this year.  We could “fall down on our knees” like Robert Johnson, but we’d still be looking at a recessionary contraction of 3.5% of GDP, according to Blinder, and the unemployment rate, according to CBO, would reverse course and grow to above 9% next year (see last figure here). Most of the speculation I’ve seen is that the cans get another kick, always the safe bet with this Congress.  But it’s also important to think about what should happen.  Oftentimes, plan beats no plan.

Letting the Bush/Obama Tax Cuts Expire Would Raise Average Taxes by $3,000 - It has sometimes been said, even by me, that the easiest way for Congress and the White House to fix the deficit is to do… nothing. Allow the 2001/2003/2010 tax cuts to expire as scheduled in eight months, let the automatic spending cuts enacted in 2011 kick in as planned and, voila, the short-term fiscal problem is pretty much resolved. There, however, one small problem: Such policy by paralysis would likely wreck a still-fragile economy. A new analysis by my Tax Policy Center colleague Dan Baneman finds that letting the Bush/Obama tax cuts (including the payroll tax cut) fall off the cliff would increase taxes on an average American household by $3,000 in 2013 alone. That’s a steep 5 percent cut in after-tax incomes. Eighty-three percent would see their taxes rise, and among those making about $60,000 or more, just about everyone would face a tax hike. Those making between $50,000 and $75,000 would pay about $2,200 more, while those making more than $1 million would pay $175,000 more. The top 0.1 percent, whose income averages nearly $7 million, would pay a whopping $480,000 more. On top of massive spending cuts, this year-end train wreck would result in a deeply austere budget.  Taxes would increase by 2.5 percent of Gross Domestic Product in a single year, the Congressional Budget Office estimates.

Tax fairness: an interactive infographic - Explore the Federal Income Tax and its effects – adjust tax brackets and deductions and vote on new proposals. We’ll send the most popular plans to Congress! Drag the brackets to get started. Learn more »

'Skin in the game', by Steve Benen: If there's one unshakable, unwavering rule in American politics in the 21st century, it's this: Republicans oppose any tax increases on anyone by any amount for any reason, no matter the consequences. Full stop. There is, however, a pesky little asterisk tied to this rule that often goes overlooked: a whole lot of Republicans support tax hikes on the poor. Indeed, the House Republican budget plan, as written by Rep. Paul Ryan (R-Wis.), actually increases the tax burden on those at the very bottom of the income scale. ThinkProgress' Scott Keyes asked Rep. Pat Tiberi (R-Ohio), a member of the powerful House Ways and Means Committee, about this yesterday. Tiberi stressed the need for low-income families, many of whom have no federal income tax burden at all, to have some "skin in the game." ... Mitt Romney told voters in Florida last year, "I think it's a real problem when you have half of Americans, almost half of Americans, that are not paying [federal] income tax."  When Democrats want millionaires to pay a little more, it's socialism. When Republicans want the poor to pay a little more, it's just helping these low-income Americans have some "skin in the game."

The Conventional Wisdom of Tax Reform - In the Times this weekend, David Leonhardt has a generally good overview of the tax policy showdown that is scheduled for later this year, as the Bush tax cuts approach expiration on January 1. He outlines several of the central issues we face: “hypothetical solutions are a lot more popular than actual ones”; everyone says she wants tax reform, but the tax expenditures that would have to be eliminated are very popular; and any significant deficit solution will directly affect vast numbers of Americans. I have a few differences with Leonhardt, however. First, after his colleagues David Brooks and James Stewart, he seems to have fallen briefly under the spell of Paul Ryan: “Mr. Ryan’s plan would cut the top rate to 25 percent, from 35 percent, and still leave overall tax collection roughly where it has been, by eliminating tax breaks.” Paul Ryan has no tax reform plan. His bizarrely much-heralded “plan” is to cut tax rates to specific levels (25%, at the top end) and “broaden the tax base to keep revenue as a share of the economy at levels sufficient to fund critical missions that rightly belong in the domain of the federal government.” Nowhere does he say how he would broaden the tax base. This is a statement of an objective, not a plan.

Mitt Romney's Tax Plan is Still A Mathematical Failure - The last time we checked in on Mitt Romney's tax plan, the numbers didn't add up. Actually, there weren't any numbers to add up. Instead, there was a not very plausible promise to make the numbers add up at a later date. At stake was that Romney only spelled out the taxes and not the tax deductions that he wanted to cut. Basically, he told us what was for dessert, but not for dinner. Because he promised that his plan would be "revenue neutral," these numbers had to offset each other. But if Romney's recent hot mic moment is any indication, they don't. Not even close. Let's start with a quick four-step recap of Romney's tax plan. First, he extends all of the Bush tax cuts. Second, he cuts income tax rates an additional 20 percent. Third, he undoes the tax hikes and credits from Obamacare and the stimulus. Finally, he eliminates the capital gains tax for all but the richest households. The first three parts of this plan shower high-earners with most of the money. The last part is a bit of a fig leaf for the rest of us. After all, the top 0.1% of households earn half of all capital gains. Exempting middle-class households from this tax certainly helps them, but there's just not that much money there.

Taking from the 19%, giving to the 1%: Mitt's maths - As Mitt Romney tightens his lock on the nomination, his economic proposals are getting more scrutiny. This week’s print edition analyzes his economic platform and how his fiscal positions have converged with Paul Ryan's; an accompanying editorial urges him to flipflop away from his current positions on China and taxes. Mr Romney himself drew more attention to his platform this week when he was overheard telling a group of wealthy donors that he might eliminate the tax deduction on mortgage interest for second homes, and on state and local taxes. This was notable because he had studiously avoided saying what tax expenditures (as deductions, exemptions and credits are known) he would eliminate to pay for his rate cuts. Matt O’Brien at The Atlantic and Deborah Solomon at Bloomberg View leapt on him for the pathetically small amount of money this would yield relative to the humungous cost of Mr Romney’s corporate and personal tax cuts. I think this is a bit of a sideshow. Mr Romney has repeatedly said his tax plan would be revenue neutral, and knows he will have to cut more than just those two items. It’s cowardly of him not to say what those other things are now, but no more cowardly than the typical candidate for office. The odds of eliminating any tax break go down the more a candidate has to discuss it before an election.

The Buffett Rule Is A Good Idea - Simon Johnson - Some high income Americans pay a lot of tax; others do not.  If you have right tax advice and if most of your income can be structured as some form of “capital gains”, your marginal rate – what you pay on the your last dollar of income – may be very low.  The highest marginal income tax rate currently is 35 percent, while long-term (over a year) capital gains are taxed at 15 percent at most. The Buffett Rule is a proposal is establish a minimum tax rate for “millionaires” – people earning more than $1 million per year – and the Senate is likely to vote on a version this week.  The exact amount of revenue that this would bring in depends on the details, but there is no question that it is small relative to the country’s need to control the federal budget.  (The Joint Committee on Taxation scored one version of this proposal as generating about $30 billion over ten years; the annual budget deficit will remain over $1 trillion in the near term even under the most optimistic projections.) The biggest sticking point for any reasonable strategy to control the US federal budget is that one side – the Republicans – steadfastly refuse to raise taxes, at all and on anyone. The Buffett Rule is a tiny tax, of little consequence to the people who would pay it or to the country as a whole.  The idea that $30 billion of additional revenue would tip the balance in any way is simply ludicrous. But this is precisely what gives the Buffett Rule its powerful symbolism.

The Buffett Rule: The Right Thing To Do - Treasury blog video - Yesterday morning, Treasury Secretary Tim Geithner was on CBS' Face the Nation, ABC's This Week and NBC's Meet the Press to discuss the state of the U.S. economy, the Administration's proposal for the Buffett Rule -- a principle of fairness that ensures that millionaires and billionaires do not pay less in taxes as a share of their income than middle class families pay -- and the broader budget and tax reform debates. As he put it, the Buffett Rule is the right thing to do:

The Missing Facts in the Buffett Tax Debate - Today, the Senate will vote on the "Buffett Tax" that would require taxpayers with $1 million or more in income to pay at least 30 percent of their income in federal income taxes. While the rhetoric of making the rich "pay their fair share" has always trumped the facts during this debate, I thought it would still be useful to post actual IRS data on how much of the income tax burden is paid by each income group and what their average (or effective) tax rate really is. In 2009, the most recent year for which such detail is available, millionaires earned 10 percent of all income, but paid 20 percent of all income taxes. Although there were only about 237,000 millionaires in 2009, they paid a greater share of the income tax burden than everyone earning under $75,000 combined - a total of 109 million taxpayers. Moreover, after accounting for credits and deductions, millionaires paid an average tax rate of 25 percent - more than three times the average tax rate for a family earning between $50,000 and $75,000.  

For Economists Saez and Piketty, the Buffett Rule Is Just a Start - High earners who are worried that this year’s Tax Day will be the last one before their rates rise have more than just the White House and Washington to blame. They can also look to two academically revered, if publicly obscure, left-leaning French economists whose work is the subtext for the battle over tax fairness.  Emmanuel Saez and Thomas Piketty have spent the last decade tracking the incomes of the poor, the middle class and the rich in countries across the world. More than anything else, their work shows that the top earners in the United States have taken a bigger and bigger share of overall income over the last three decades, with inequality nearly as acute as it was before the Great Depression.  Known in Washington and the economics profession by the of-course-you-know shorthand “Piketty-Saez,” the two have been denounced on the editorial page of The Wall Street Journal and won mention in White House budget documents.  But both also express bewilderment over the current conversation about whether the wealthy, who have taken most of America’s income gains over the last 30 years, should be paying higher taxes.  “The United States is getting accustomed to a completely crazy level of inequality,” Mr. Piketty said, with a degree of wonder. “People say that reducing inequality is radical. I think that tolerating the level of inequality the United States tolerates is radical.”

Chamber of Commerce: ‘Buffett Rule’ an attempt to instigate ‘class warfare’ debate - The U.S. Chamber of Commerce on Monday urged senators in Washington, D.C. to vote against the Paying a Fair Share Act of 2012, claiming it would hurt economic growth. “With more than eight million Americans unemployed, Congress should reject attempts to instigate a debate on class warfare and focus on real initiatives that can get the American economy further down the road to recovery,” R. Bruce Josten, the Chamber’s executive vice president for Government Affairs, wrote in an open letter. The Paying a Fair Share Act would enact the so-called “Buffett Rule,” requiring those who earn more than $1 million a year to pay at least a 30 percent effective tax rate on their income. The rule is named after billionaire investor Warren Buffett, who lamented the fact that he paid a lower tax rate than his secretary.Although the wealthy are taxed at a higher rate than most Americans, some can drastically reduce their effective tax rate through tax loopholes, particularly when their primary source of income is from long-term capital gains. Approximately 94,500 millionaires pay a lower effective tax rate than millions of families earning less than $100,000, according to the Congressional Research Service (PDF).

The Obama Rule - Forget Warren Buffett, or whatever other political prop the White House wants to use for its tax agenda. This week the Administration officially endorsed what in essence is the Obama Rule: Taxes must be high simply to spread the wealth, never mind the impact on the economy or government revenue. It's all about "fairness," baby. This was long apparent to those fated to closely watch the 2008 campaign, but some voters might have missed the point amid the gauzy rhetoric about hope and change. Now we know without any doubt. White House aides made it official Tuesday in their on-the-record briefing on the new federal minimum tax that travels under the political alias known as the "Buffett rule." The policy goal is to impose an effective minimum tax of 30% on the income of anyone who makes more than $1 million a year. When President Obama first proposed this new minimum tax he declared that the rule "could raise enough money" so that we "stabilize our debt and deficits for the next decade." Then he added: "This is not politics; this is math." Well, remedial math maybe. The Obama Treasury's own numbers confirm that the tax would raise at most $5 billion a year—or less than 0.5% of the $1.2 trillion fiscal 2012 budget deficit and over the next decade a mere 0.1% of the $45.43 trillion the federal government will spend. Okay. So what is the point?

Senate Republicans block ‘Buffett Rule’ bill - Republicans in the Senate on Monday blocked legislation that would require those making more than $1 million per year to pay at least 30 percent in federal income taxes. Democrats fell nine votes short of the 60 votes needed to advance the Paying a Fair Share Act of 2012, which would have enacted the so-called “Buffett Rule” into law.  Senate Minority Leader Mitch McConnell (R-KY) described the legislation, which had been touted by President Obama for the past several months, as nothing more than a “political gimmick.”

Buffett Rule Fails to Advance in the Senate - To the surprise of absolutely no one, Senate Republicans blocked consideration of the Buffett rule last night with a filibuster. The bill would have set a millionaire’s minimum effective tax rate at 30%, with a phase-in between $1 million and $2 million and an exemption for charitable donations. But Senate Republicans wouldn’t let it get onto the floor for debate. Here’s the roll call. Yesterday on a conference call, Chuck Schumer said this would not be the end for the Buffett rule, and that Senate Democrats would pursue it all year long. And I believe him, because it has become bound up with the Presidential election. Here’s President Obama’s statement on the vote: Tonight, Senate Republicans voted to block the Buffett Rule, choosing once again to protect tax breaks for the wealthiest few Americans at the expense of the middle class. At a time when we have significant deficits to close and serious investments to make to strengthen our economy, we simply cannot afford to keep spending money on tax cuts that the wealthiest Americans don’t need and didn’t ask for. But it’s also about basic fairness – it’s just plain wrong that millions of middle-class Americans pay a higher share of their income in taxes than some millionaires and billionaires. America prospers when we’re all in it together and everyone has the opportunity to succeed.

Senate rejects consideration of 'Buffett rule' tax increase for millionaires - The Senate rejected consideration Monday of the “Buffett rule ,” a key election-year Democratic initiative that would impose a minimum tax rate on those making more than $1 million per year, as a philosophical debate over taxes that will define this year’s elections occurred on Capitol Hill. Democrats were unable to get the 60 votes necessary to break a filibuster and proceed to a full consideration of the measure, with the Senate voting 51 to 45 to move ahead. The vote was largely along party lines, although Republican Sen. Susan Collins (Maine) voted with Democrats to allow the measure to proceed and Democratic Sen. Mark Pryor (Ark.) voted to block it.  The outcome was the first phase of a week-long congressional discussion about taxes, timed by both parties to coincide with Tuesday’s deadline for submitting federal tax returns. On Thursday, the GOP-led House is scheduled to vote on a counterproposal championed by House Majority Leader Eric Cantor (Va.) that would cut taxes by 20 percent for businesses with 500 or fewer employees.

Salon: Does anyone realize what the GOP just did? - Senate Republicans used a filibuster to kill the Buffett Rule last night. There was no surprise in this. Without substantial GOP defections, there was no way Democrats would have the 60 votes needed to force an up/down vote. They ended up with 51, with one Republican (Maine’s Susan Collins) crossing over to side with them, and one of their own (Arkansas’ Mark Pryor) joining the GOP blockade. On paper, Republicans have fallen into a very dangerous trap here. A CNN poll released earlier in the day found that 72 percent of voters said they favor “a proposal to change the federal income tax rates so that people who make more than one million dollars a year will pay at least 30 percent of their income in taxes.” So popular is the Buffett Rule in the abstract that 53 percent of Republicans and 40 percent of Tea Party supporters say they favor it as well.

Cantor considers tax hikes on the poor -  We talked yesterday about Rep. Pat Tiberi (R-Ohio), who likes the idea of raising federal income taxes on those who currently pay nothing, to ensure that low-income families have some "skin in the game." It turns out, House Majority Leader Eric Cantor (R-Va.) is thinking along the same lines. For those who can't watch clips online, a transcript of the relevant portion: "We also know that over 45 percent of the people in this country don't pay income taxes at all, and we have to question whether that's fair.... I'm saying that, just in a macro way of looking at it, you've got to discuss that issue.... I've never believed that you go raise taxes on those that have been successful that are paying in, taking away from them, so that you just hand out and give to someone else." Remember, millions of Americans may be exempt from income taxes, but they still pay sales taxes, state taxes, local taxes, Social Security taxes, Medicare/Medicaid taxes, and in many instances, property taxes. It's not as if these folks are getting away with something -- the existing tax structure leaves them out of the income tax system because they don't make enough money to qualify. Indeed, many are retirees who can't earn an income because they're no longer in the workforce.

Romney Talks of Ending Some Tax Deductions for Wealthy - Mr. Romney’s comments were overheard by reporters standing outside the event on a sidewalk and first reported by The Wall Street Journal and NBC News. During the event, Mr. Romney also told the donors that he might eliminate the Department of Housing and Urban Development and reduce the size of the Education Department. Mr. Romney told the donors that the housing agency “might not be around later” and said the Education Department would be “a heck of a lot smaller” even if it wasn’t eliminated altogether, The Journal reported. Officials with the Republican campaign said Mr. Romney was just tossing out ideas at the fund-raiser, not unveiling new policies. They accused Democrats of using the incident to try to distract attention from the economic situation under President Obama. “While President Obama is interested only in offering excuses and blaming others for his failures, Governor Romney is discussing some of the ideas he has to tackle the big issues facing America,” said Andrea Saul, a spokeswoman for Mr. Romney. “Governor Romney has also laid out a bold set of policy proposals that will grow our economy, cut spending and get our massive debt under control.”

Romney's Plan to Close Loopholes - If you remember only one thing about tax reform, it should be this: it’s hard. As I mentioned in an article on Sunday, the most expensive tax breaks tend to be popular. The three largest are those for employer-provided health insurance, mortgage interest and 401(k) saving. The largest corporate tax breaks include some popular ones as well, like the tax benefit for research and development. Over the weekend, Mitt Romney waded into the tax-reform debate, inadvertently, when reporters overheard him telling Republican donors which tax breaks he would consider eliminating as president. The three he named were the deduction for mortgage interest on vacation homes and the deductions for state and local taxes. Although his remarks were a bit vague, he seemed to suggest that he would eliminate them only for high-income households. How much revenue would those steps produce? Maybe about $40 billion a year, using generous assumptions. That is hardly nothing; $40 billion is more than half the annual cost of the Bush tax cuts on income above $200,000 a year, for instance.

About That State and Local Tax Deduction - A couple of days ago I criticized Mitt Romney for thinking that eliminating the deductions for mortgages on second homes and for state and local taxes would pay for his 20 percent rate cuts. But there’s a more important general point to be made. The deduction for state and local taxes is a subsidy from the federal government to state and local governments. This is how it works: If you’re in the 35 percent tax bracket, for every $100 of taxes you pay to state and local governments, the federal government gives you $35. In other words, for every $100 of taxes levied, you pay $65 and Barack Obama pays $35. That’s called a subsidy. Without it, the state and local governments would only get $65—or they would have to raise taxes by over 50 percent, which would make you mad. So eliminating this deduction basically transfers money back from states and municipalities to the federal government. The federal budget deficit goes down, but state and local budget gaps go up—meaning either higher taxes or lower services. (And these are the levels of government that pay for teachers, police, firefighters, etc.) So this is one of those solutions that helps the federal budget balance by hurting ordinary people.

Who Are the Rich, and Why Should They Pay Higher Taxes? -  Last week I participated in a “Tax Day” event at the Tax Policy Center called “Should the Rich Pay Higher Taxes?” as one of the “four Ds” panel which also included TPC’s director Donald Marron, former CBO director and former McCain adviser Doug Holtz-Eakin (now president of American Action Forum), and economist rich guy (and a member of the “Responsible Wealth” coalition) David Levine.  The TPC has our handouts and a video of the event posted here.  (The video is also embedded above.) TPC’s Howard Gleckman moderated the event (and blogged about it afterward, here) and at one point asked each of us “who is rich?”  I at first didn’t know how to answer that; “rich” is a relative concept that depends on one’s personal “baseline,” of course!  But then I circled back to the focus of the event–what the tax burdens of “the rich” should be–and I realized that in that context, all federal income taxpayers should be considered “rich,” in that we are all, all combined at least, paying too little in taxes.  Revenues as a share of GDP are far lower right now than the 18 percent historical average over the past several decades, which is too little anyway to produce economically sustainable budget deficits now and going forward (let alone enough to cover spending fully).  And although a lot of that currently-below-average level is because of the short-term but stubbornly persistent weakness in the economy (a cyclical phenomenon), projections show that even when the economy gets back to “full employment” and even when revenues/GDP recover back to and above the historical average (even under the policy-extended baseline, by the way), revenues are still not going to be enough to keep up with the growth in government spending–even if health reform (already in place and to come) successfully reduces the growth in Medicare spending.

Is Buffett Rule a First Step Towards Tax Reform? - When the president first announced his Buffett Rule–that millionaires should pay at least 30 percent of their income in tax–in the State of the Union address in January, I had a strong sense of déjà vu.  It is another alternative minimum tax, and its provenance is very similar.  Congress created a minimum tax back in 1969 when people were up in arms about 155 high-income people who hadn’t paid tax a few years earlier.  The logical response would have been to close the loopholes that let rich people avoid tax, but that would have been politically costly, so instead we got the thing that evolved into the AMT. The new AMT, called the Fair Share Tax, is anathema to tax reform (and I opined on that in Tuesday’s New York Times). It will be one more complication for people who are affected.  For example, if you’re on the cusp of paying FST, you won’t know whether your capital gains will be taxes at 15 or 30 percent. And it will generate enormous marriage penalties. And it’s unnecessary.  If Congress is not willing to fix the underlying defects in the tax code, they don’t need a new AMT. One is really enough.  If capital gains and dividends were fully taxed under the AMT, as they used to be before the Tax Reform Act of 1986, the Buffett Rule would be satisfied without a new levy.

Why a Fair Economy is Not Incompatible with Growth but Essential to It - Robert Reich - One of the most pernicious falsehoods you’ll hear during the next seven months of political campaigning is there’s a necessary tradeoff between fairness and economic growth. By this view, if we raise taxes on the wealthy the economy can’t grow as fast. Wrong. Taxes were far higher on top incomes in the three decades after World War II than they’ve been since. And the distribution of income was far more equal. Yet the American economy grew faster in those years than it’s grown since tax rates on the top were slashed in 1981. You see, higher taxes on the wealthy can finance more investments in infrastructure, education, and health care – which are vital to a productive workforce and to the economic prospects of the middle class.  Higher taxes on the wealthy also allow for lower taxes on the middle – potentially restoring enough middle-class purchasing power to keep the economy growing. As we’ve seen in recent years, when disposable income is concentrated at the top, the middle class doesn’t have enough money to boost the economy.Finally, concentrated wealth can lead to speculative bubbles as the rich in the same limited class of assets – whether gold, dotcoms, or real estate. And when these bubbles pop the entire economy suffers.

American Enterprise Institute Economists Redux - The other day I wrote a post about economists at the American Enterprise Institute (AEI), a prominent conservative think-tank. The post began with this paragraph from a story in the NY Times Politicians sometimes say that lower tax rates lead to higher economic growth, which in turn leads to higher overall tax revenue. This may have been true in the early 1960s, when the top tax rate was 91 percent, but the top tax rate today is 35 percent. For decades, lower tax rates have led to lower government revenues, says Alan Viard, an economist at the American Enterprise Institute, a conservative policy group. "The Reagan tax cuts, on the whole, reduced revenue," he explains. "The Bush tax cuts clearly reduced revenue. There is no dispute among economists about that."  I noted that while Viard is right about tax cuts reducing federal revenue, he is wrong about "There is no dispute among economists about that." As evidence, I pointed to a piece by his sometime co-author, Kevin Hassett and another by Glenn Hubbard, the first Chair of the Council of Economic Advisors under GW Bush. Both, I might add, are with the AEI (Hubbard as a visiting scholar). It wouldn't take long to point to other quotes by other AEI economists disputing what Viard said is not disputable (and which, not incidentally, shouldn't be disputable given the data.) At the AEI's blog, James Pethokoukis responded to my post. There is no polite way to say this, so I'll just state it as it is: his post is riddled with errors. Let me cover several of them.

Greg Mankiw Hides the Role of Government in Redistributing Income Upward – Dean Baker - The fact that Greg Mankiw works for Governor Romney is very clear when he tells readers: "Whether competition among governments is good or bad comes down to the philosophical questions of what you want government to do and how much you fear government power. If the government’s job is merely to provide services, like roads, schools and courts, competition among governmental producers may be as good a discipline as competition among private producers. But if government’s job is also to remedy many of life’s inequities, you may want a stronger centralized government, unchecked by competition. These are two fundamentally different visions. The next election, and to some degree every election, is about which one voters find more compelling." This is no doubt how Mitt Romney and other wealthy people would like the public to see the debate. However the reality is that the government has implemented a wide range of policies that have led to a massive upward redistribution of before tax income over the last three decades. These policies have affected every corner of the market economy.

Why The Left Misunderstands Income Inequality…There is a widely-held notion on the political left that the key economic problem that our civilisation faces is income inequality. I mostly agree that income inequality is a huge problem, although I believe that it is a symptom of a wider malaise. But income inequality is an important symptom of that wider malaise. However it is just as important, perhaps more important to identify the causes of the income inequality. I have my own pet theory: The growth in income inequality seems to be largely an outgrowth of giving banks a monopoly over credit creation. In 1971, Richard Nixon severed the link between the dollar and gold, expanding the monopoly on credit creation to a carte blanche to print huge new quantities of dollars and give them to their friends. Unsurprisingly, this led to a huge growth in the American and global money supplies. This new money was not exactly distributed evenly. Who owns the government? Political donors — they finance the political system. Before one vote is cast candidates tailor their platforms to meet the criteria of donors. Who are political donors? Well, they are people with spare capital to expend in the name of getting politicians elected. Here’s a side-by-side comparison of the presumptive 2012 Presidential nominees: So who are the biggest donors? Banks & large corporations: the very people who have benefited most from the post-1971 tidal wave of fiat credit creation.

The coming boom in inherited wealth - As everyone who has been paying attention knows, the news on inequality is nearly all bad. Not only has inequality increased dramatically in the US, but intergenerational economic mobility is declining[1]. And, where the US leads, the rest of the world looks likely to follow. The top 1 per cent lost more than most during the crisis of 2008-09 but, as Stephen Rattner reports here (drawing on work by Piketty and Saez), that was just a blip. A stunning 93 percent of the additional income created in the US in 2010, compared to 2009, went to the top 1 per cent, and there’s no reason to think things were much better in 2011 – average real earnings have fallen yet again, and employment growth, though positive, was still modest. Wealth inequality is also high, though it has not increased as much as income inequality. The one bright spot mentioned by Rattner is that ” those at the top were more likely to earn than inherit their riches”. Since I’m already noticing that point popping up in the places you might expect to see it (can’t find a link right now), let me point out that Rattner’s explanation, that “the rapid growth of new American industries — from technology to financial services — has increased the need for highly educated and skilled workers” is wrong, and that there is every reason to expect a boom in inherited wealth.

Tax Day CalPIRG Sproul Plaza Steps Event -  A generation or so ago, we had a federal tax system which was roughly one-third social insurance taxes on wages, one third taxes on businesses, and one-third progressive taxes on individual incomes. Over the past generation we have shifted to a system in which (a) taxes on corporations have become much smaller--less than half as large--and riddled with loopholes, and (b) taxes on income have become much less progressive. This is not good for America. This is not good for America for two reasons. First, the market has handed us in this generation a much more unequal distribution of income that it did a generation ago. Therefore it is now extremely good policy to have not a less but a more progressive tax now than we did then--and taxes on businesses are by and large progressive. Second, over the past generation our our economy has shifted in directions--toward education and toward healthcare--where the private competitive market is much less effective. As a result, a good society now would have a significantly larger role for government than a good society then. And it is thus bad policy to drop any of our sources of revenue to fund government.

That Old Tax Magic - Simon Johnson - Tax time in the United States – the dreaded mid-April deadline for filing annual income-tax forms – has come and gone. At such a sensitive time, it is no surprise to hear politicians pitching the idea of “tax reform” – suggesting that they can simplify the system, close loopholes, and use the proceeds to reduce tax rates. The allure of such appeals is that a crackdown on others’ tax avoidance will mean that you personally will pay less in taxes. The problem with this vision of tax reform is that it is magical – an attractive illusion with no basis in reality. Consider the recent pronouncements of Mitt Romney – now the presumptive Republican candidate to challenge President Barack Obama in November. Romney wants to cut tax rates, mainly benefiting those at the upper end of the income distribution. He also wants to close loopholes, but none of the details that he has offered add up to much. His boldest proposal – eliminating deductions for interest paid on mortgages on second homes – is trivial in terms of generating revenue.  Obama is only slightly better. While he talks less about “tax reform,” he is currently communicating the message that merely raising taxes on rich people – the infamous 1% – will bring the budget and national debt under control. That, too, is a pipedream.

Why Is Tax Code Spending Popular on the Right? -   Justin Wolfers and Betsy Stevenson have a Bloomberg editorial on tax expenditures that, beyond being a smart column on the topic, notes the distributional impact of these expenditures: The rich get such big subsidies for three reasons. First, they spend more on the things the tax system favors, such as homes and health care. Second, they are subject to higher tax rates, so they get more benefit from each dollar of deductions. Finally, they’re rich enough to take full advantage of their deductions. The poor typically have too little income to itemize, while many families in the upper middle class find themselves siphoned off into a separate tax system known as the alternative minimum tax, which allows fewer deductions. They note that Grover Norquist and other conservatives tend to support tax expenditures.  Why is this?  One reason they give are various psychological biases - "It’s a tribute to our psychological biases that getting a subsidy through the tax system is treated so differently from receiving a government check or copping a fine." Will Wilkinson at Democracy in America adds some additional reasons.  He argues that many on the right might think the following: "Tax deductions and credits are best understood as selective restraint, as selective acknowledgement of what is ours, on the part of a generally kleptomaniacal government." 

Has The Tide Turned On Taxes? - Tax Day 2009 was a very steamy affair. As you may recall, tempers got so hot at several anti-tax Tea Party protests in Texas that the Lone Star governor who was riling up the crowds, one Rick Perry, declared that he might just be open to his great state seceding from the union. Just three years later, Tax Day 2012 has now passed in decidedly quieter fashion. Oh, there was the predictable flurry of partisan press releases, and the Wall Street Journal set aside half of its op-ed page for Grover Norquist. But it’s worth stepping back for a moment at the day’s close for a quick assessment of the state of the tax debate. Because it certainly seems like things have shifted pretty substantially since those secessionary days of 2009. Not that the policy context has shifted—that’s been the sad joke all along, how untethered the rhetoric was from what has happening, or even what was being threatened. The anti-tax cries in 2009 came at a time of historically low tax rates, when the new liberal Democratic president was vowing to...not raise taxes one jot for families earning less than $250,000, and was in fact presiding over a stimulus package that was returning families up to $800 in the form of a payroll tax credit. And lo and behold, three years later, taxes have not budged—and people are still getting a payroll tax credit. Oh, sure, there’s been the stuff at the margins—the excise tax on very high-priced health plans (which won’t kick in until late this decade), the increase in the Medicare payroll tax for wealthy taxpayers...but it hasn’t left the doomsayers much to work with.

Margaret Atwood And Tax Reform - Writing recently in The Financial Times, the renowned novelist Margaret Atwood nailed the lasting effects of the recent – and some would say continuing – global financial crisis. “Those at the top were irresponsible and greedy,” she wrote; consequently and with good reason, very few people now trust our banking elite or the system they operate.  Even Cam Fine, president of Independent Community Bankers of America, is now calling for the country’s largest banks to be broken up. But the distrust goes deeper and further, just as Ms. Atwood implies. Many people understand perfectly well that the government let the bankers take excessive risk. There was a high degree of group think among prominent officials in the United States and top banking executives in the run-up to the crisis of 2008. As chief economist at the International Monetary Fund from March 2007 through August 2008, I observed some of this first hand. And politicians are also tarnished. They appointed the officials who failed to regulate effectively. And in 2007-8 the politicians decided to save the big banks – and most of their managers, boards of directors and shareholders – both under President George W. Bush and under President Obama. Now attention turns toward the federal government’s fiscal problems, including the complicated mess that is our tax system. Politicians say they want “tax reform,” but can you trust them to do this in a responsible manner, without falling captive to particular special interests or to otherwise undermine the general social interest?

Talking Tax Reform on the PBS Newshour - Here’s an interview that Alice Rivlin and I recently did with Jeffrey Brown on the PBS Newshour. Spoiler: Both Alice and I think the tax code needs to be fixed.  Most TV interviews involve starting into a camera and listening to a voice in your ear. So this was a fun change with Alice, Jeff, and me together.

The Charitable Deduction as a Tax Expenditure: What it Buys and What to Do About It (Part 1) - In size, the tax deduction for charitable contributions ranks sixth on the dirty-dozen list of tax loopholes, far behind deductions for employer-paid health care or home mortgage interest. In popularity, though, it probably ranks first. Perhaps that is because so many people think it really is what it purports to be: a reduction in taxes that encourages charitable giving. Since people like both tax cuts and charity, it is not surprising that they like the charitable deduction. Before we accept that reasoning, however, we need to look more closely at what the charitable deduction really is and what it gives us  .What does the charitable deduction really buy? The Giving USA Foundation provides an annual tally of tax-qualified giving. Using IRS data, the foundation estimated 2010 giving at $291 billion. This chart shows a breakdown by category of recipient: The next question is, What percentage of tax-qualified giving  can we reasonably call “charitable,” using the ordinary meaning of the term? Clearly not all of it. Let’s begin with the largest category, religious giving. Many people think of support for churches as the essence of charity, and spokespeople for the sector do their best to reinforce that view. If we look past the rhetoric at the actual numbers, though, we get a different picture. The next chart shows some useful data from a survey of church budget priorities provided by Christianity Today. What we see is that churches spend the most of their budgets on staff and facilities that have worship as their main purpose. Worship is all well and good, but it is not charity.

Budget-battered IRS sinks under workload - At 12:30 p.m. Monday, about 50 people waited for help at the IRS center in Fort Myers, Fla. Another dozen who couldn't find seats stood in a line that stretched out the office suite door and into a lobby. The long waits are the result of the IRS' expanded workload and diminished workforce, says IRS Taxpayer Advocate Nina Olson, whose 2011 annual report identified inadequate resources as the most serious problem facing taxpayers. In 1995, the IRS had a staff of 114,018 to process 205 million tax returns. In 2010, it had 90,907 people to process nearly 236 million tax returns. For this tax filing season, the IRS has 5,000 fewer employees than it did a year ago. Increasing the IRS' budget has never been politically expedient, and the Republican Party's anti-tax message has made the agency even more unpopular, says Bruce Bartlett, an economist who worked in the Reagan and George H.W. Bush administrations. "Beating up on the IRS is never going to hurt you politically, regardless of which party you're in, and we're paying the price for this kind of attitude."

The Turbo Tax Paradox - Like many of you, I just finished my 2011 tax return. Counting worksheets, it was 59 pages long. It occurs to me that our current insanely complex tax rules are made possible by technology. Yes, computer software makes filing easier (both for professionals and civilians). But that may be the problem. The relative ease of filing, made possible by programs such as Intuit’s Turbo Tax, also makes it easier for Congress to write incomprehensible tax law. Have you ever read, for example, Form 6251, the paperwork millions of middle-class households must complete just to figure out whether or not they owe the dreaded Alternative Minimum Tax? The IRS instructions for the form are 12 pages long. Here, in part, are the instructions for Line 11:

Corruption Is Why You Can’t Do Your Taxes in Five Minutes - In some countries, the equivalent of their IRS sends citizens a form listing what they owe.  In California, the state has a program called ReadyReturn that lets you do this for California state taxes.  You sign it and send it back, and it takes a few minutes. But for most of us, this isn’t how it works.  We gather our tax forms and various banking information, and spend the weekend facing a difficult bureaucratic set of forms, hoping we did it all correctly.  Or we use a costly tax filing service or software. Candidate Barack Obama promised to end this nightmare.  He said he would “dramatically simplify tax filings so that millions of Americans will be able to do their taxes in less than five minutes.”  The IRS would use information it “already gets from banks and employers to give taxpayers the option of pre-filled tax forms to verify, sign and return.”  You can file this under yet another broken campaign promise.  And why?  Who doesn’t like an idea that is so simple and convenient and just generally helpful?  Well, the large software makers, for one.  Intuit in fact lobbied incredibly hard to kill the California program Ready Return (complete with attacks from right-wing tax groups).  Intuit wasn’t completely successful, but under their pressure, California budgeted only $10,000 to get the word out to residents about the program.

Corporate Tax Rates: Lobbying Helps Big Business Pay Less To Federal Government, Says Study - As many American procrastinators scrutinize their forms one last time to make sure they've itemized every possible deduction, a new study shows that corporations have their own ways to keep their cash away from Uncle Sam's coffers. The Sunlight foundation released a report on Monday showing that big companies that spent more on lobbying saved more on federal taxes. Big corporations, in other words, have effectively bought themselves more favorable tax policies. "On average, companies we examined reported paying a slightly lower overall tax rate in 2010 than in 2007... But the eight companies that spent the most on federal lobbying between 2007 and 2009 all decreased their overall tax rate between 2007 and 2010. Six of the Big Eight enjoyed a decrease of at least seven percentage points," said the report.

Romney’s Lead Economist Urges Policies that will Cause the Next Financial Crisis - Bill Black - Presidential nominees of either U.S. party can secure economic advice from any economist in the world. This makes it all the more amazing and sad that they choose economists with track records of disastrous policy advice.  Bill Clinton chose Robert Rubin, George W. Bush chose Gregory Mankiw, Obama chose Lawrence Summers, and Mitt Romney chose Mankiw.  Rubin and Summers led the Clinton administration’s efforts to gut financial regulation.  Mankiw led the efforts under Bush.  Collectively, these efforts created the criminogenic environment that produced endemic financial fraud (“green slime”).  I have often emphasized the importance of Akerlof and Romer’s article (“Looting: the Economic Underworld of Bankruptcy for Profit”) to understand the economics of why we suffer epidemics of accounting control fraud and recurrent, intensifying financial crises.  Mankiw was the “discussant” when they formally presented their paper.  I was also present at their invitation.  Mankiw was unconcerned about looting.  It was my first introduction to Mankiw morality:  “it would be irrational for savings and loans [CEOs] not to loot.”  I was appalled, but my outrage at Mankiw paled when I observed that the members of the audience, professional economists, were not even made visibly uncomfortable by such a depraved response to elite fraud.  CEOs owe fiduciary duties to the shareholders.  Mankiw’s response to the findings that CEOs were looting their shareholders was to praise the rationality of the fraudulent CEOs (if you don’t loot you aren’t moral – you’re insane).  One cannot compete with theoclassical economists’ unintentional self-parody.

Why CEOs shouldn’t run the world - Mitt Romney’s campaign for president rests on the “CEO fallacy”. As Romney says, “Other people in this race have debated about the economy … but I’ve actually been in it.” However, the CEO fallacy is a fallacy. To quote Larry Summers, former adviser to Barack Obama, now professor at Harvard’s Kennedy School: “The idea that you can extrapolate from the one-business level to the national economy seems to me a profound confusion.” The CEO fallacy goes like this: successful business people ran tight ships and made money. We, the country, want to run a tight ship and make money. Business types know how, and so they should rule. That’s why early admirers of George W. Bush’s administration called it “the CEO presidency”. The UK’s government wouldn’t have let a professor of medieval literature review the oil sector, but it got John Browne, former head of BP, to review British higher education.  In the CEO fallacy, the CEO typically presents a selective biography in which he pulled himself up by the bootstraps in a perfectly free market, something that more people could do if only “government would get out of the way”. The biography rarely includes context: the fact, say, that the CEO’s father ran the American Motors Corporation, or that government enforced his contracts, built roads and schooled his employees.

Banks Seen Dangerous Defying Obama’s Too-Big-to-Fail Move - Two years after President Barack Obama vowed to eliminate the danger of financial institutions becoming “too big to fail,” the nation’s largest banks are bigger than they were before the nation’s credit markets seized up and required unprecedented bailouts by the government. Five banks -- JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. -- held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to central bankers at the Federal Reserve.Five years earlier, before the financial crisis, the largest banks’ assets amounted to 43 percent of U.S. output. The Big Five today are about twice as large as they were a decade ago relative to the economy, sparking concern that trouble at a major bank would rock the financial system and force the government to step in as it did in 2008 with the Fed-assisted rescue of Bear Stearns Cos. by JPMorgan and with Citigroup and Bank of America after the Lehman Brothers bankruptcy, the largest in U.S. history. “Market participants believe that nothing has changed, that too-big-to-fail is fully intact,”

Giant Banks Now 30% Bigger than When Dodd-Frank Financial “Reform” Law Was Passed - For years, many high-level economists and financial experts have said that – unless we break up the giant banks – our economy will never recover, real reform will be blocked, and democracy and the rule of law will be corrupted. So how did the government respond to the financial crisis which started in 2007? Let the giant banks get even bigger. As Bloomberg notes, the five banks that held assets equal to 43% of the US economy in 2007 before the financial crisis and the bank bailout now control assets that equal 56% of the US economy:

The Flaws in the New Liquidation Authority - How would one of the large American financial institutions fare in the new Dodd-Frank Orderly Liquidation Authority? That’s the question that motivates a new paper I wrote for a symposium at the University of Cincinnati, and it seems to have already hit a nerve. In the paper I look at a hypothetical liquidation authority proceeding of Bank of America. The choice of that bank is not really specific — rather I just wanted to use one of the big, integrated financial institutions. The subject could have just as well been JPMorgan Chase or Citigroup. The basic exercise is not unlike the Federal Deposit Insurance Corporation‘s hypothetical liquidation of Lehman Brothers, although Lehman, while the largest Chapter 11 case ever, was only about a third the size of Bank of America. And for reasons I have described earlier, I think we have to assume that the F.D.I.C.’s Lehman exercise represents what might be charitably called an optimistic view of the authority.  In the paper I try to be fair but also realistic, explaining that “I assume that the F.D.I.C. is somewhat prepared, well-intentioned, but not omnipotent.”

Banks urge Fed retreat on credit exposure - Wall Street banks are resisting a Federal Reserve plan to limit their exposure to individual companies and governments, warning it will cut a combined $1.2tn from credit commitments at Goldman Sachs, JPMorgan Chase, Morgan Stanley, Bank of America and Citigroup. David Viniar, chief financial officer of Goldman, Ruth Porat, chief financial officer of Morgan Stanley and their counterparts at six other banks argued that the plan would harm liquidity at a meeting three weeks ago with Daniel Tarullo, Fed governor, according to people familiar with the talks.  The banks warned the proposed measures would also send ripples through international markets because their government bond holdings could be snared by the caps. The single counterparty limit was part of the Dodd-Frank Act reforms which are being implemented by regulators including the Fed, and is due to come into force next year. In an effort to prevent dangerous domino collapses, the law restricts the amount of exposure banks can have to a single counterparty to 25 per cent of their regulatory capital. The Fed is proposing to go further, adding a 10 per cent limit to the amount of exposure that financial groups with more than $500bn in assets can have to each other.

Fed: Banks get 2 years to comply with Volcker Rule  - The Federal Reserve says banks will have two years to comply with a rule that would ban them from trading for their own profit. The so-called Volcker rule is expected to take effect this summer. But the Fed clarified Thursday that it won't enforce it until July 2014. Congress directed regulators to craft the rule as part of an extensive regulatory overhaul passed after the 2008 financial crisis. Regulators hope it will limit the kind of risky trading that hastened the financial crisis and forced taxpayers to bail out the banks. The Fed said it issued the statement to clear up confusion. Some banks had worried that they might have to start complying with the new restrictions sooner.

Mark Gongloff: Yet Another Regulatory Retreat - Corporate America, with help from the Obama administration, has struck yet another blow against the scary financial regulations it claims will hurt the economy. On Wednesday they undercut new regulations on derivatives, which the detail-obsessed among us might point out didn't just hurt the economy but nearly destroyed it. Just a few years ago.  It's just the latest in a growing string of defeats and surrenders by regulators to the same financial industry that helped nearly destroy the economy, and needed massive bailouts as a result. Just a few years ago.  Under heavy pressure from the energy industry and other corporate interests, the Commodity Futures Trading Commission and the Securities and Exchange Commission are retreating from a plan to regulate many reaches of the U.S. trade in financial derivatives known as swaps, including the credit derivatives that nearly brought down the financial system. Originally these regulators wanted to say that anybody who handled less than $100 million in swaps per year was not a dealer and thus would be exempt from regulatory oversight. This arbitrary number was far, far too low, cried energy companies and other players in the swaps market. After careful consideration, they thought another arbitrary number, say $3 billion, or maybe $8 billion, would be more reasonable.  To subject their trades to the scrutiny of regulators would impose terrible costs that could very well hurt the economic recovery, for goodness' sake.

Econ Crisis 4 - Shadow Banks - YouTube - instructional, includes transcript

JPMorgan Said to Transform Treasury to Prop Trading - JPMorgan Chase Chief Executive Officer Jamie Dimon has transformed the bank’s chief investment office in the past five years, increasing the size and risk of its speculative bets, according to five former executives with direct knowledge of the changes.  Achilles Macris, hired in 2006 as the CIO’s top executive in London, led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York- based bank, three of the former employees said. Dimon, 56, closely supervised the shift from the CIO’s previous focus on protecting JPMorgan from risks inherent in its banking business, such as interest-rate and currency movements, they said.  Some of Macris’s bets are now so large that JPMorgan probably can’t unwind them without losing money or roiling financial markets, the former executives said, based on knowledge gleaned from people inside the bank and dealers at other firms. Bruno Iksil, a London-based trader in Macris’s group, gained attention last week after moving markets with his trades, drawing a comparison to Federal Reserve Chairman Ben S. Bernanke’s power in the government-bond market.  “What Bernanke is to the Treasury market, Iksil is to the derivatives market,” 

Whale of a Problem: Regulators Subvert Will of Congress - The path to gaming the Volcker Rule has always been clear: Banks will shut down anything with the word "proprietary" on the door and simply move the activities down the hall.  To look like they were ready to comply with the Volcker Rule, the part of the Dodd-Frank Act that aims to prevent banks from gambling on their own account with money that taxpayers insure, financial firms quickly spun off or shut down their hedge funds, private equity firms and proprietary trading desks.  But the suspicious-minded among us wonder whether it was all that simple. This is the specter raised by the news that a JPMorgan Chase trader in London, made instantaneously notorious thanks to his colorful nicknames was amassing such huge positions in indexes related to corporate defaults that he was distorting the market. Bloomberg followed up with a powerful article [1] about how Jamie Dimon, the chief executive of JPMorgan, has transformed the sleepy chief investment office, which takes care of the bank's treasury operation, into a unit that hires former hedge fund portfolio managers and slings around giant sums of money in what walks and quacks like prop trading. The chief investment office seems not to just be risk-mitigating, but profit-maximizing.

Representative Bachus, FDIC and Voting Down Dodd-Frank's Resolution Authority - So the House Republicans on the Financial Services Committee just voted to repeal "resolution authority."  What does this mean, and how can we compare it to previous actions by House Republicans? A useful way of understanding both the financial crisis of 2008 and Dodd-Frank's response to it is through the idea of a "shadow banking system."  We have a set of regulatory rules, laws, practices and institutions from the New Deal that does well with the regular banking sector.  Over the past thirty years, a set of institutions started acting like banks without calling themselves banks, and thus did not have the same set of rules, laws and practices in place to regulate them as such.  Dodd-Frank's goal was to extend this regulatory framework to all "systemically risky financial institutions," or shadow banking institutions. One of the main pillars of this is "resolution authority," which allows FDIC to takeover and wind-down a failing shadow bank.  Since the New Deal the FDIC can wind down a failing commercial bank without the system collapsing.  We found that putting commercial banks through bankruptcy was a disaster, so we created FDIC to allow a firm to fail and allocate losses in a way that mitigated panics and contagion.  Now the FDIC can use those powers on firms acting like banks but that are not hanging a "bank" sign on their window.  These powers include the ability to force big financial firms to write "living wills" to help with taking them down.

The Dodd-Frank cuts that don’t matter, and the ones that do…On Wednesday, Republicans on the House Financial Services Committee passed a budget that would cut $35 billion from the deficit by disarming key parts of Dodd-Frank.  The bill would eliminate the government’s ability to wind down failing financial giants through “orderly liquidation”—short-term, temporary support meant to prevent systemic problems and collapse. It would also force the new Consumer Financial Protection Bureau—currently funded by the Federal Reserve—to the appropriations process, which would allow future Congresses to restrain the agency through budget cuts.  Democrats argued the GOP’s proposed savings weren’t real and that this was an effort to repeal the financial regulation law under the guise of deficit reduction. While the proposal has kicked off a big partisan fight, the biggest changes under the bill have essentially no chance of passing the Democrat-controlled Senate. Instead, the more immediate threat to Dodd-Frank has emerged further under the radar through a series of highly technical bills that Republicans have quietly been pushing through, with some Democratic support. In March, they passed two bills loosening derivatives rules with major Democratic support, and they’ve since moved onto more aggressive, but highly wonky, legislation rolling back the law. Such measures are unlikely to stir up the same kind of political firefight as a big budget battle, but they could ultimately prove to be more effective in changing Dodd-Frank, at least until the next changing of the guard in Washington.

Revealed Preferences: Evidence Points to Banks Owning the Place - Steve Randy Waldman had a much remarked-upon piece about how policymakers choose to have recessions and depressions, because they have been captured by an elite rentier class. It becomes much easier to understand the decisions made in government with this perspective. We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation. The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational.

Encouraging Deadly Financial Viruses - Randall Wray highlights two great insights that arose at the annual Minsky conference last week in NYC.. First Joseph Stiglitz: Recall that part of the reason for the creation and explosion of derivatives was to spread risk. For example, mortgage-backed securities were supposed to make the global financial system safer by spreading US real estate risks all over the world. He then compared that to, say, a deadly flu virus. Would you want to spread the virus all over the world, or quarantine it? Remember Warren Buffet’s statement that all these new financial products are “weapons of mass destruction”–like the 1914 flu virus.  Next, Frank Partnoy: He said that these innovations mostly exploit information asymmetries in order to:

    • a) dupe customers (think Goldman Sachs and John Paulson constructing synthetic CDOs sure to blow up, and betting against Goldman’s customers who bought them); and
    • b) engage in regulatory arbitrage (evade rules, laws, supervisors, etc; ie, move trash into SIVs to evade capital requirements).

But the financial industry and its Republican toadies would have you believe that regulating our outlawing these derivatives will destroy American “innovation.” Yeah: and we should also encourage innovation in suicide-vest technology.

Andrew Haldane on the Arms Race in Banking - - Yves Smith - Regular NC readers have seen us repeatedly invoke the work of Andrew Haldane, the executive director of stability of the Bank of England. His thoughtful and original work on the risks and costs of our financial system have provided serious ammunition for reform advocates.  At the recent INET conference in Berlin, Haldane recapped some of his recent observations under the rubric of an arms race, in which efforts of individual players to improve their own position wind up leaving everyone worse off. I have one quibble with his presentation. Haldane depicts the increase in returns to global banks post 1990 as due to leverage. That isn’t entirely true. The early 1990s saw the rise of the over-the-counter derivatives business, and big banks had an advantage over securities firms, since it took a big balance sheet and a decent position in the related cash market to be successful. The rise of derivatives gave the behemoth banks a new business they could enter on the ground floor. And while derivatives are leveraged, the real attraction to banks was the opacity, in that dealers could load a lot of margin into the various risk attributes without the customers being able to see what a bad deal they were getting. The exceptional profitability of OTC derivatives provide a big boost to bank bottom lines, and attributing all the increase to leverage misses an important shift in the mix of business at these players. (video)

The Rule of Capital - In the movie Margin Call, which is broadly about the financial crisis and the insidiousness of the financial sector, one of the characters laments about how he used to be an engineer who did useful things like build bridges (he calculates that one he built saved people thousands of years of travel time). But of course the money was better in finance. An angst about people who do useful things and financial people who just feed off everyone else, runs through the whole film. It is a neat reflection of a serious problem at the heart of the post-industrial, globalised system we are creating, which is causing serious imbalances between capital and labour and weakening middle classes in the developed world. A recent article in The Economist noted that past four years have been bad for workers and savers but good for the corporate sector. Profit margins in America are higher than at any time in the past 65 years, which it said partly explains why the equity market has rebounded so strongly despite a lacklustre economy. The question is why aren’t cashed up corporations investing, especially in putting on workers? The answer, or at least one answer, is that an implicit compact between capital and labour has been broken in developed economies; a compact that said we have to pay our workers a decent wage so that they buy our stuff. The globalisation of labour means that firms can choose not to pay middle class wages at least for some parts of their operations — so of course that is what they choose to do.

Capitalism is Dead, Credit New King - The world needs to clue in to changes to its economic system, including the death of capitalism, according to noted financial author Richard Duncan, who warns that attempts to turn back the clock on our credit-driven economies could be cataclysmic. Recognizing that the world operates on a different set of rules from the laissez-faire capitalism of the 19th century is among the key arguments in Duncan’s 2012 book, “The New Depression: The Breakdown of the Paper Money Economy.” Duncan sees the global economy as having undergone a fundamental transformation during the past 43 years. Since changes in 1968 that freed the Federal Reserve from holding physical gold in reserve against dollars in circulation, total global credit has expanded 50 times, or from about $1 trillion to $50 trillion in 2007. Over that period, credit creation and consumption, or what Duncan calls “creditism,” took hold as the growth dynamic behind the global economy, displacing capitalism, which he says relied upon sound money, hard work and capital accumulation. Attempts to break the global economy’s reliance on credit creation as a driver and reboot back to earlier ways won’t work, said Duncan, who sees “sound money” policy recommendations as a recipe for disaster.

Regulators to Ease a Rule on Derivatives Dealers - As federal regulators put the finishing touches on an overhaul of the $700 trillion derivatives market, a major provision has been tempered in the face of industry pressure. On Wednesday, the Securities and Exchange Commission and the Commodity Futures Trading Commission are expected to approve a rule that would exempt broad swaths of energy companies, hedge funds and banks from oversight. Firms would not face scrutiny if they annually arrange less than $8 billion worth of swaps, the derivative contracts tied to interest rates and commodities like oil and gas. The threshold is a not-insignificant sum. By one limited set of regulatory data, 85 percent of companies would not be subject to oversight. After five years, the threshold would reset to $3 billion; it is the same amount suggested by a group of energy companies in a February 2011 letter, according to regulatory records.When regulators first proposed the rules in late 2010, they set the exemption at $100 million. At that level, only 30 percent of the players would have been excused from the oversight, which was mandated by the Dodd-Frank financial overhaul law. It is unclear whether that data tells the full story.

The Mother Of All Infographics: Visualizing America's Derivatives Universe - A month ago we presented the latest derivatives update from the OCC, according to which the Top 5 US banks held 95.7%, or $221 trillion of the entire US derivative universe (which in turn is just a modest portion of the entire $707 trillion in global derivatives as of June 30, 2011). And while the numbers of all this credit money, because that's what it is, and the variation margin associated with all these trillions in bets is all too real, appeared impressive on paper, they did not do this story enough service. So to present, visually this time, the US derivatives problem, we go to our friends from Demonocracy, who put the $229 trillion derivative 'issue' in its proper context. For those curious what a paper equivalent of bailing out the US derivatives market would look like, now you know.

Iceland's President Explains Why The World Needs To Rethink Its Addiction To Finance - Here's the full transcript of our interview with Ólafur Ragnar Grímsson, who has been President of Iceland since 1996, and announced last month he would be running for a fifth term. Keep reading to hear his thoughts on Iceland's recovery, and how a large financial sector can ruin a nation.

Dirk Bezemer: Creating a Socially Useful Financial System - video - Here’s more material from this iNet “Paradigm Lost” conference in Berlin (from which Yves has just returned). Here’s the introduction:The first thing we need to say to each other is what do we mean by socially useful… Now the first thing to notice about this is that conventional cutting-edge macro monetary theory here is of no help at all in determing what is a socially useful credit sector, and that’s for the simple reason that there is no credit sector in the cutting edge macro models today.  OK, this goes back a long way: Frank Hahn in the 1960s wrote a paper on problems of proving the existence of money in the multi-market equilibrium economy, so money itself is not supposed to exist even. This has been laid out and explained in many publications since. And my point is not to bash macroeconomics as it is today, but my point is that we really need to look for other models and other ways of thinking if we want to get to an assessment of what is a socially useful credit system. Supporting these you might say science fiction models [ouch], financially speaking, because there is no finance in them, the models that central bankers use have no banks — just let that sink in — is fictional history….

The “Likelihood of a Criminal Prosecution” in MF Global Case Has Grown - Federal law enforcement authorities investigating the implosion of MF Global say the likelihood of a criminal prosecution in the case has grown in recent weeks, as investigators actively discuss providing immunity to a key witness who could provide details about who was responsible for transfer of money out of customer accounts during the firm’s final frantic days, the FOX Business Network has learned. People with direct knowledge of the investigation say that in recent days federal law enforcement authorities have held high-level discussions about granting immunity from prosecution to former MF Global assistant treasurer Edith O’Brien in exchange for her cooperating in the probe. Granting immunity from prosecution is rare in criminal cases primarily because prosecutors are wary of giving possible targets free reign to discuss their alleged crimes without fear of facing charges. In fact until recently, federal prosecutors have brushed off offers of a so-called “proffer” agreement by O’Brien’s attorneys in which she would gain immunity in exchange for her cooperation in the ongoing criminal probe, these people say.

Obama Prepares for Financial Crisis Prosecutions - An Obama administration task force established to investigate misconduct that fueled the financial crisis is turning to a little-used statute that may make such cases easier to bring, according to people familiar with the matter. The federal statute, FIRREA, was passed in the wake of the savings-and-loan scandals in the 1980s. It requires a lower burden of proof than criminal charges, has a longer statute of limitations than other financial laws and potentially could bring big fines. But it has appeared in only a few dozen cases since it was enacted in 1989. The task force, which is in the Justice Department, used FIRREA earlier this year when it issued more than a dozen civil subpoenas to top financial institutions, including Citigroup, the people familiar with the matter said. The subpoenas ask for documents related to mortgage-backed securities offerings between 2006 and 2008. President Barack Obama announced the task force during his State of the Union address in January and hailed it as a way to hold accountable those who broke the law and contributed to the housing crisis. The Securities and Exchange Commission has brought a handful of high-profile cases related to the 2007-2009 financial crisis, including against former Countrywide Financial Chief Executive Angelo Mozilo and Wall Street giant Goldman Sachs. But the Justice Department has struggled to bring criminal charges.

TARP worked, but it’s not the end of financial reform - The Troubled Assets Relief Program (TARP) worked a lot better, and at a much lower cost, than is commonly recognized. TARP and related interventions by the Federal Reserve helped reactivate credit markets long before they would have recovered on their own, helped to stabilize the housing market, helped save the U.S. auto industry and helped prevent recession from morphing into something worse. And they did so for far less than early estimates and prior rescues had suggested were possible.  Saying that TARP worked — and that it might even ultimately turn a profit for the taxpayer — is not to say that stabilizing the financial system prevented the pain of the Great Recession. Millions of Americans continue to pay the price in long-term unemployment. Millions more have lost or will lose homes to foreclosure, and trillions of dollars in housing wealth have evaporated. The U.S. gross domestic product remains about $900 billion below its potential level. Unemployment remains stubbornly high. The government’s financial-market interventions made that pain less deep, but they did not prevent it, and any potential gains from these programs pale next to the damage done by the high-finance-inflated bubble that caused the sharp downturn from which we’re still recovering.

Eurozone credit contagion, in 8 easy steps -- As well as warning that eastern Europe has the most exposure to a eurozone credit freeze, the IMF has given us a handy, visual guide to eurozone contagion (click to enlarge):  Quoth the Fund: A negative feedback loop could start with a widening of European sovereign yields owing to an increase in sovereign risk. European banks holding European government debt suffer mark-to-market losses, and the deterioration of their balance sheet increases their default risk (Figure 2.4.1, link A), leading to higher funding costs (link F). If the European bank has entered into derivatives contracts with a U.S. bank, it would be forced to post higher collateral (link E). Because derivatives markets are opaque, counterparties to the U.S. bank may have difficulties assessing its real exposure to the European bank. Thus, the U.S. bank could face higher funding costs and experience a widening of its CDS spreads on the market perception that its default risk has increased due to its exposure to the European bank (link H). The U.S. bank may reduce its exposure by assigning the derivatives contract to a different derivatives dealer in exchange for a fee—that is, by novating the contract (link E). Novation could concentrate risk among fewer dealers and thereby increase systemic risk in the derivatives market.. The rest is here.

GSA inspector general is investigating possible bribes, kickbacks - The inspector general for the General Services Administration said Monday that he is investigating possible bribery and kickbacks in the agency, as lawmakers accused the former GSA administrator of allowing a Las Vegas spending scandal to erode taxpayers’ trust in government. Inspector General Brian Miller told a congressional committee scrutinizing an $823,000 Las Vegas conference that his office has asked the Justice Department to investigate “all sorts of improprieties” surrounding the 2010 event, “including bribes, including possible kickbacks.” He did not provide details.

EXCLUSIVE: Barney Frank, Brad Miller Launch Sneak Attack on OCC, Federal Reserve - Today, to approximately no one’s surprise, the Republicans in the House Financial Services Committee are going after the Consumer Financial Protection Bureau.The Republicans in the Financial Services Committee have recommended that the budget for the CFPB be cut to $200M total for 2012 and 2013 (see Section 331).  This is a substantial and unwarranted reduction in resources for an agency that is tasked with enforcing Federal consumer protection laws against financial misbehavior.  Much more significantly, the Republicans are going to stipulate that the budget for the Consumer Financial Protection Bureau be appropriated every year by Congress.   Congressman Barney Frank and Brad Miller, though, have introduced something pretty interesting into the mix.  They have struck back by using the same attacks the Republicans are making against the CFPB on the bank-friendly regulators at the Office of the Comptroller of the Currency and the Federal Reserve.  Specifically, Frank and Miller have proposed to make the OCC and the Federal Reserve, the most important bank regulators, subject to Congressional appropriations.  Right now, those two agencies fund themselves through money printing (the Fed) or assessments on the banks (OCC).  What Frank and Miller are doing would be a major step forward for democratic accountability over our bank regulators.

Frank, Miller Try to Open Up Accountability for Fed, OCC -  Barney Frank and Brad Miller tried to shake up a House Financial Services Committee hearing yesterday. As per usual, Republicans wanted to go after the CFPB’s funding and subject it to the appropriations process. As it stands, CFPB derives its funding from a portion of the funding of the Federal Reserve, which comes from sources independent of Congress. The argument goes, why should CFPB be exempt from Congressional oversight in terms of its funding? The real agenda is that Republicans would then squeeze funding for CFPB to render them ineffective, or attach strings to the funding, either explicitly or implicitly. Very well then, said Frank and Miller. They offered up amendments saying that, if CFPB funding must come from the hands of Congress, then so should money from other banking regulators, like the OCC and the Fed. Interestingly, the CFPB isn’t the only Federal banking regulator that has its own dedicated revenue stream free from Congressional pressure. In fact, they all do. The Office of the Comptroller of the Currency, for instance, is funded via assessments on banks, or “clients”, as OCC Chief Counsel Julie Williams calls them (or so I’m told). Williams is the key villain behind most bank-friendly regulatory decisions over the past two decades, but her general anti-consumer and predatory behavior is baked into the DNA of the regulator [...]

In Conversation: Barney Frank interview - Dodd-Frank gets kicked around a lot by both liberals and conservatives. ... No legislation can be perfect, but is there an ideal version of the bill that exists in your head? The biggest thing I would have changed was how you paid for it­—that $20 billion that’s now on the taxpayers, not the banks. But we needed those Republican votes. I would also have toughened up the derivatives stuff a little bit. ... Remember, I was in the minority from 1995 to 2006. They were in charge. ... Now, in 2005, I tried to work with Mike Oxley to get some reform. It became an internal Republican fight. Oxley said the problem was that George Bush gave him the one-finger salute, and that’s what killed it. I became chairman of the committee in 2007. The first thing we did was pass tough legislation restricting Fannie and Freddie. It’s as a result of that legislation that they were put into a conservatorship and haven’t lost any money [on new business] since 2008. Now, the Republicans have been in power in the House since January of 2011. They have not even moved a bill to a full committee decision. They talk about Fannie and Freddie when they’re out of power. When they’re in power, they do nothing.

An Idea to Limit Body Attachments - As many Credit Slips readers will know, so-called "body attachments" allow a creditor to haul a judgment debtor into state court if the debtor fails to respond to court summonses to answer questions about the debtor's financial affairs. It is a highly coercive tactic and was originally intended as a last resort against a recalcitrant debtor. Today, it is an overused tactic that intimidates debtors who often understand only that they have been arrested because they have an unpaid debt.  An AP article ran yesterday around Illinois about abuses in this state. The story recounts how a teaching assistant paid $600 after being arrested over a hospital bill she had been told was issued in error. Two weeks ago, I blogged about widespread errors and problems in the debt collection industry, so it is not difficult to imagine the story recounted in the article is an isolated one. Coercing ill-informed and poorly resourced debtors into paying debts they may not even owe is outrageous. Even readers who may not be particularly sympathetic to the plight of these debtors should question the use of taxpayer financed courts and law-enforcement systems to engage in expensive collection practices on small debts for the benefit of private creditors. These practices are not just a problem in Illinois but across the country.

CFPB Scrutinizing Bank Overdraft Fees -- Yves Smith - An open question has been whether the Consumer Financial Protection Bureau would live up to its promise. It appeared, like so many Obama Administration efforts, that the formation of the agency was a cynical move, to create the appearance of Doing Something without roughing up the banks in a serious way (of course, you’d never know that give the way they carry on at any minor trimming of what they see as their imperial right to profits).  One of the Administration’s cagiest-looking moves was enlisting Elizabeth Warren to set up the agency. This was clearly an intention to neutralize her as a critic while ultimately deep sixing her. But Warren may have given the Administration more than it bargained for. One of the things she said in her numerous hazing sessions before Congress was that the role of the director was not as important as it seemed, that she had set up the agency with a strong culture and staff in each of its divisions, and she had also gone to some lengths to put mechanisms in place to foster communication and coordination across divisions. It’s too early to reach a definitive judgment, but this Bloomberg story on bank overdraft fees is an encouraging sign that the CFPB may well prove to be a competent, forceful regulator. Admittedly, at this stage the CFPB is only reviewing the practices of nine major banks in the checking account overdraft arena, but they are looking well beyond the fee structures and probing whether the banks engaged in deceptive practices. New regulations required banks to require banks to have consumers opt in to overdraft protection programs and to stop the abusive practice of ordering debits from accounts in a way designed to maximize income. Note that for any customer with a credit line, an overdraft service is superfluous and more costly, so the banks are motivated to steer customers to this service.

Gas Stations Are Hosing Debit Card Users at the Pump - Feel like you're getting gouged at the gas pump amid rising prices? You actually are if you're using a debit card. Despite the passage of the Durbin Amendment to the Dodd-Frank legislation last year, gas stations have yet to pass along more than $1 billion in debit card transaction fee savings to consumers, according to a survey released Monday by the Electronic Payments Coalition.  When the Durbin Amendment was under consideration, retailers stressed the need to cap debit card transaction fees to a flat rate of approximately $0.24, rather than allow it to be based on 1.15% of the total transaction, says Trish Wexler, a spokeswoman for the coalition.  "Consumers were used in Washington to get this legislation passed," Wexler said. "There's no evidence they've passed on these savings to consumers. They haven't been able to show they are lowering prices or offering discounts to people who use debit cards."

Obama to Urge Congress for More Regulation of Oil Markets - President Barack Obama urged Congress to bolster federal supervision of oil markets, including bigger penalties for market manipulation and greater power for regulators to increase the amount of money traders must put up to back their energy bets.  Obama asked Congress to fund a six-fold increase for surveillance and enforcement staff at the Commodity Futures Trading Commission to put “more cops on the beat” overseeing oil markets.He also is seeking to give the CFTC new authority to raise margin requirements for traders’ oil positions and stiffen civil and criminal penalties for businesses that are guilty of market manipulation to $10 million from $1 million. The plan would cost $52 million.  “We can’t afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick,” Obama said in remarks in the White House Rose Garden today.

Obama to announce crackdown on oil market manipulation  (Reuters) - U.S. President Barack Obama, whose political fortunes are threatened by rising gasoline prices, proposed new measures on Tuesday to reduce oil market manipulation that are unlikely to get support from a divided Congress. Obama called on lawmakers to raise civil and criminal penalties on individuals and companies involved in manipulative practices. He also pressed for more money to fund the agency charged with policing the markets to hire "more cops" for oversight and upgrade old technology. Republicans, who blame Obama's energy policies for high gasoline prices, called the effort a political gimmick. "We can't afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage, and driving prices higher, only to flip the oil for a quick profit," Obama said in the White House Rose Garden. "We should strengthen protections for American consumers, not gut them," he said. Republicans said the new measures would not help Americans struggling with high gasoline prices.

Obama proposes steps to curb oil market manipulation - Facing heat for high gasoline prices, President Obama tried to shift the focus to Congress, Republicans and energy traders, calling for legislation that he said would "put more cops on the beat" to crack down on potential manipulation of the oil market. Obama called on Congress to provide more money for regulators and increase penalties for market manipulators. The president, flanked by Treasury Secretary Timothy F. Geithnerand Atty. Gen. Eric H. Holder Jr., suggested that traders and speculators are affecting the price of oil and digging into Americans' pocketbooks. "We can't afford a situation where some speculators can reap millions while millions of American families get the short end of the stick," Obama said in brief remarks in the Rose Garden on Tuesday. "That's not the way the market should work."

A ban on oil speculation? - Joseph P. Kennedy II, former Congressional Representative from Massachusetts, and founder, chairman, and president of Citizens Energy Corporation, has a proposal to make energy affordable for all. All we have to do, Kennedy claims, is "bar pure oil speculators entirely from commodity exchanges in the United States." Writing in the New York Times last week, Joseph Kennedy (D-MA) explained why he believes that speculators are responsible for the high price that we currently have to pay for oil: Today, speculators dominate the trading of oil futures. According to Congressional testimony by the commodities specialist Michael W. Masters in 2009, the oil futures markets routinely trade more than one billion barrels of oil per day. Given that the entire world produces only around 85 million actual “wet” barrels a day, this means that more than 90 percent of trading involves speculators' exchanging "paper" barrels with one another.  It's true that most buyers of futures contracts don't actually want to take physical delivery of oil. If I buy the contract at some date, I usually plan on selling the contract back to somebody else at a later date, so that I leave the market with a cash profit or loss but no physical oil. But remember that for every buyer of a futures contract, there is a seller. The person who sold the initial contract to me also likely wants to buy out of the contract at some later date. I buy and he sells at the initial contract date, he buys and I sell at a later date. One of us leaves the market with a cash profit, the other with a cash loss, and neither of us ever obtains any physical oil.

A Study On Speculation in the Oil Market For Those Economists Who Have Apparently Not Seen It - Here is a study from the St. Louis Fed on Speculation in the Oil Market that indicates that speculation contributed about fifteen percent to the increase in prices in the oil market during a recent price increase. Anyone who trades these markets and follows the real economy does not require such a study to tell them what is plainly visible to their own eyes, especially when the studies always seem to come out five years after the fact, in the manner of regulatory actions against market manipulation. The markets have become deregulated to the point where hot money from big hands can push prices around at will, especially using large positional advantage and High Frequency Trading.    And even if traders are caught blatantly rigging the markets and painting the tape bringing in hundreds of millions in profits, they will only be chastised, make a hollow promise to do better, and endure a wristslap fine that is a very modest cost of doing business. Granted, the larger markets cannot be moved for long against the primary trend, and the trend in oil has been higher for any number of long term fundamental reasons.    But traders feed on volatility, both up and down. And they introduce faux inefficiencies to take profits for themselves, adding no value, as a tax on the real economy.

Don’t blame speculators for market moves - (MarketWatch) — With crude oil nearing the highs it reached in the 2007-08 commodity boom, there is the usual spate of editorials blaming “speculators” for the prices.  It never seems to register on the authors that for every buyer there is a seller, so there’s no reason for transactions to push the price systematically up or down. No one thinks that if you bet me $20 the Yankees will win the World Series it makes any difference to the baseball season, and if Yankee manager Joe Girardi blamed his team’s defeat on my bet he would be properly laughed out of baseball. But somehow it’s OK to write that if you bet me $20 that oil prices will go up, you’re responsible for people paying $4 a gallon for gasoline.

Target on Manipulation, but It’s Tough to Hit - President Barack Obama's announcement on Tuesday that he would pursue tougher penalties for oil manipulators shined a spotlight on commodities regulators, who have won relatively few cases in the murky world of energy trading. Two days later, the Commodity Futures Trading Commission announced a $14 million penalty—its largest ever in an oil manipulation case and its first in five years—against Dutch company Optiver Holding BV, its U.S. subsidiary and three officers. The CFTC says Optiver was responsible for manipulating the market for crude oil, heating oil and gasoline. "The CFTC will not tolerate traders who try to gain an unlawful advantage," said David Meister, director of the CFTC's Division of Enforcement.  The court-approved settlement was announced late Thursday, though Optiver agreed to the conditions in March. And while the settlement is the largest ever and Optiver agreed to bans on trading, the company and its employees didn't admit or deny wrongdoing.  The case, announced in 2008, alleged Optiver and the traders engaged in a scheme known as "banging the close," the practice of taking big positions ahead of the close of futures trading in order to influence the day's settlement price.

Why Obama's Crackdown on Oil Speculators Won't Work - Those pesky oil speculators. If only we could rein them in by making it more expensive to bet on oil prices. If only regulators had the firepower to track down market manipulators and impose tougher penalties on those they caught. The price of oil would surely drop, right? If only it were that easy. One thing about the oil market: It is not prone to simple solutions. On Tuesday, President Obama announced he wants Congress to increase the amount of collateral that traders have to post to buy a futures contract. (It’s typically around 10 percent of the value of the total contract.) Obama also wants to give the CFTC an extra $52 million to pay closer attention to the oil market and dole out stiffer penalties to those who manipulate it: $10 million instead of the current $1 million. A lot of Beltway scorekeepers think Obama’s announcement is smart, simply because it produced headlines such as, “Obama moves to curb oil speculators.” That may be, but it’s not clear the plan would actually lower the price of oil, because the demand to invest in it would remain. And as a blunt tool applied to a complex problem, it would almost certainly have unintended consequences. For all their shortcomings, speculators help markets process information sooner rather than later.

Too few cops on the beat - "His plan will make those contemplating push'n 'round our energy markets think again." This folksy show of support for Barack Obama's latest plan to tackle "manipulation" in oil markets comes from Bart Chilton, a commissioner at America's Commodity Futures Trading Commission (CFTC). For good measure, Mr Chilton also cites Wall Street lobbying against new restrictions as a "major problemo". The Dodd-Frank Act of 2010 relies heavily on the CFTC to write reams of new rules to regulate derivatives markets, a task it struggling to complete in the face of industry opposition and political gridlock. The act also gives the agency oversight of the swaps market, which is eight times larger than the futures market it was created to oversee. At a recent Congressional hearing, CFTC chairman Gary Gensler noted that the agency's enforcement division, with 170 staff, is only marginally larger than it was ten years ago (154). Monitoring eight times as many football games with the same number of referees makes for a lax application of the rules, he said. "The CFTC needs more referees." Mr Obama obliged, asking for a mid-year addition of $52m to the CFTC’s $205m budget to put "more cops on the beat". This will fund a six-fold increase in surveillance and enforcement staff focused on oil futures, according to the White House. It is also more or less pure politics, with no hope of passing Congress.

The bailout could turn a profit, but that’s not entirely a good thing - The Washington Post: At a press briefing on Friday, senior Treasury officials had some good news to trumpet: The government’s bailout of the financial system during the crisis has cost less than expected.  Two years after it launched, one TARP program, the Hardest Hit Fund, has only distributed 3 percent of available funds to help homeowners in areas that the housing crisis hit particularly hard. TARP’s other housing programs -- known as HAMP and HARP -- have failed to reach as many homeowners as the administration had originally projected. That’s lowered their cost to taxpayers, but at the expense of helping struggling homeowners.  The same is true with Fannie Mae and Freddie Mac. The agency tasked with overseeing the housing giants has struggled to reconcile two missions: saving taxpayer money and helping to stabilize the economy by swallowing some losses.  The administration, however, has been under increasing pressure to use all available tools to help underwater homeowners -- even if it means that more money is spent upfront on TARP and through Fannie Mae and Freddie Mac. That could change the final price tag for the bailout, but it could also mean a faster, stronger housing recovery.

Your Bank of America  Dear Fellow American, Welcome to your Bank of America. Today, it's time to acknowledge that our Bank isn't working anymore—not just for the market, but for people, our real customers. We've paid $8.58 billion in relief to borrowers and $3.24 billion in fines. We face lawsuits and claims from citizens, companies, and state and local governments. There is even a petition with the Federal Reserve to break up our bank, adding yet more uncertainty to our position. Finally, we've found ourselves front-and-center in the national foreclosure crisis, and deep in unpopular investments like coal, at a time when climate change is a growing societal concern. Our Bank may, in fact, soon need help keeping afloat—and much as in 2008, you, the American taxpayer, will be asked to provide that assistance. And when the day comes that you, the American taxpayer, own this Bank, you will be ready to make it a Bank for America—one that brings benefits not to the privileged only, but to all of our customers, and to all of our stakeholders too. Welcome to your Bank of America.

CEO Compensation Rose Almost 40 Percent in 2010 and 2011 - Everyone knows economic growth has been sluggish lately, with unemployment high and wages barely keeping up with inflation. But there is at least one class of worker—the chief executive—who's doing quite well. This morning I attended a briefing at AFL-CIO headquarters, where Richard Trumka unveiled the latest version of the union movement's incredibly useful CEO paywatch database. There's lots of stuff in there, but the headline facts are just amazing. Among S&P 500 firms, CEO pay grew 22.8 percent on average in 2010 and then grew 13.9 percent in 2011. That's a total nominal increase of 40 percent when you aggregate it. Obviously nothing else in wages, incomes, economic growth, stock market performance, or anything else has been nearly that robust:

Citigroup's Chief Rebuffed on Pay by Shareholders - In a stinging rebuke, Citigroup shareholders rebuffed on Tuesday the bank’s $15 million pay package for its chief executive, Vikram S. Pandit, marking the first time that stock owners have united in opposition to outsized compensation at a financial giant. The shareholder vote, which comes amid a rising national debate over income inequality, suggests that anger over pay for chief executives has spread from Occupy Wall Street to wealthy institutional investors like pension fund and mutual fund managers. About 55 percent of the shareholders voting were against the plan, which laid out compensation for the bank’s five top executives, including Mr. Pandit. “C.E.O.’s deserve good pay but there’s good pay and there’s obscene pay,” said Brian Wenzinger, a principal at Aronson Johnson Ortiz, a Philadelphia money management company that voted against the pay package. Mr. Wenzinger’s firm owns more than 5 million shares of Citigroup.

Citigroup Investors Vote Down CEO’s Lavish Pay Package - Citigroup has become the first Wall Street bank to get a thumbs-down from shareholders over outsized executive pay. At its annual meeting Tuesday, 55 percent of the bank’s shareholders voted against the pay packages that have been granted to Citigroup’s top executives, including CEO Vikram Pandit’s $15 million for last year and $10 million retention pay. The vote is advisory and won’t force the bank to change its pay practices, but it did send a powerful message of discontent to Citi’s leadership. Wall Street’s massive compensation packages have raised the ire of shareholders for years, especially when they appear to have little relation to the performance of specific executives. Bonuses became a flashpoint of public outrage after the 2008 financial meltdown, which was caused in large part by those same Wall Street firms. Nonetheless, compensation on Wall Street has remained high, even after a taxpayer-funded bailout of the industry and the Great Recession that followed and left one in 10 Americans unemployed.

Shareholders lose patience on bankers’ pay - Vikram Pandit, Citigroup’s chief executive, turned around this week to find that the crowd of supporters he thought he had at his back had melted away. Without an overt campaign or agitation from a leading activist, shareholders simply refused to approve his $15m pay package.  He was not the only one to be shocked when over half of the votes cast on pay at the bank’s annual meeting were against or withheld. The vote made Citi the first big, financial company in the US to have suffered such a defeat. Patrick McGurn, general counsel at shareholder voting agency ISS, says the rebellion came out of the blue. “We hadn’t heard any drum beat about pay.”  Many companies thought they had filed the rough edges off controversial pay schemes, he says, and pay had fallen down the agenda. But days later, on the other side of the Atlantic, Barclays bowed to investor protest at a package for chief executive Bob Diamond that included a “tax equalisation” payout of £5.75m.  Boards looking at their own pay scales are now faced with the question of whether such shareholder unrest is an aberration, confined to the banks, or if it signifies a more assertive stance from investors that is here to stay.

The Significance of Citigroup’s Shareholder Revolt, by Robert Reich: The shareholders of Wall Street giant Citigroup said no to the exorbitant $15 million pay package of Citi’s CEO Vikram Pandit, as well as to the giant pay packages of Citi’s four other top executives. The vote, at Citigroup’s annual meeting in Dallas Tuesday, isn’t binding on Citigroup. But it’s a warning shot across the bow of every corporate boardroom in America. Shareholders aren’t happy about executive pay.And why should they be? CEO pay at large publicly-held corporations is now typically 300 times the pay of the average American worker. It was 40 times average worker pay in the 1960s and has steadily crept upward since then as corporations have morphed into “winner-take-all” contraptions that reward their top executives with boundless beneficence and perks while slicing the jobs, wages, and benefits of almost everyone else. Meanwhile, too many of these same corporations have failed to deliver for their shareholders. The real news here is new-found activism among institutional investors – especially the managers of pension funds and mutual funds.  Institutional investors are catching on to a truth they should have understood years ago: When executive pay goes through the roof, there’s less money left for everyone else who owns shares of the company.

Giving Shareholders a Voice - Staggered boards have long been a key mechanism for insulating boards of publicly traded firms from shareholders. This year, several institutional investors and a program working on their behalf have used shareholder proposals to move a large number of publicly traded firms away from such structures. Despite strong and expected criticism from the usual suspects, shareholders should welcome and support this work.  The Shareholder Rights Project, a clinical program that I run at Harvard Law School, assists public pension funds and charitable organizations in improving corporate governance at publicly traded companies. During this proxy season, we represented and advised five such clients – the Illinois State Board of Investment, the Los Angeles County Employees Retirement Association, the Nathan Cummings Foundation, the North Carolina State Treasurer, and the Ohio Public Employees Retirement System – in connection with their submission of proposals for a vote at the annual meetings of more than 80 companies on the Standard & Poor’s 500-stock index.  The proposals urge companies with a staggered board, which allow shareholders to replace only a few directors each year, to place all board members up for election every year. Such a move to annual elections is viewed by investors as a best practice of corporate governance. By enabling shareholders to register their views on all directors each year, annual elections make boards more accountable to shareholders.

The Nation moves money, again -The Nation was out with an email blast this morning touting its branded affinity VISA card issued by UMB Bank in Kansas City. The magazine’s associate publisher, Peggy Randall, helpfully identifies UMB as “a small, regional bank recommended by the Move Your Money project, a project we  support,” and therefore in accordance with the goals of the Occupy movement. So who is UMB Bank, really? It’s yet another iteration of the classic Money Mover’s institution: flush with more money than it can invest locally, it loads up on securities.According to its latest annual report, 46% of UMB’s money is invested in securities, and another 6% is on deposit with other banks—which comes to over half. They don’t provide details on the securities, but they’re almost certainly a mix of Treasury bonds, mortgage bonds, and corporate bonds—utterly conventional financial market stuff. Just 37% is out in loans—and 0.8% in small-business loans, beloved of the small bank fanclub. They are big regional players in mutual funds, wealth management, and private banking, all moderately to seriously upscale stuff. And, like the big guys, they’re looking to make more money out of fees, rather than traditional deposit-taking and loan-making. But that’s not all. UMB is big in the Health Savings Account (HSA) racket. HSAs, a snake-oil favorite of right-wingers, are tax-sheltered savings schemes that typically come with high-deductible health insurance policies attached.

Unofficial Problem Bank list declines to 944 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for April 13, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  We thought there was a chance for the OCC to release its actions through mid-March but we will have to wait until next week for that press release. As a result, it was quiet week for the Unofficial Problem Bank List with no failures, three removals, and one addition. These changes leave the list at 944 institutions with assets of $375.3 billion. A year-ago, the list held 978 institutions with assets of $429.4 billion

Large Banks Begin to Recognize Reality of Second Liens - On Monday, Citigroup announced first quarter earnings that beat consensus expectations thanks to cost cutting and better credit performance. Citigroup’s $1.2 billion net release of credit reserves during the quarter boosted earnings, as a decline in reserves translates to a dollar-for-dollar increase in the accounting value of the loans the bank owns. Despite the overall good news on credit conditions, Citi did report a large increase in nonperforming second lien loans – such as a home equity loan or home equity line of credit (HELOC). According to the earnings release, Citi classified $800 million in second liens as nonperforming, including $700 million that were actually current but subordinate to a first mortgage that was seriously delinquent. The graph below compares the nonperforming rate on first lien and second line closed-end mortgages (mortgages with a fixed principal balance). These data (from the FDIC), show that borrowers are 2.75-times more likely to go delinquent on their first mortgage than on their home equity loan, as delinquencies on the first liens are 9.61% relative to 3.49% for second liens. The share of HELOCs that are nonperforming is even lower, at 1.83% of all loans, according to the FDIC. This is anomalous because the second liens are subordinate to the first mortgage and should therefore be riskier and have a higher default rate. Instead, many households continue paying their home equity loans even as they stop making payments on their mortgage.

Bank of America Faces Bad Home-Equity Loans: Mortgages  -- Bank of America Corp., whose home- equity mortgage portfolio exceeds its stock market value, probably will say about $2 billion of junior loans are bad assets tomorrow even as some borrowers are still paying on time. That’s what Barclays Capital estimates the bank will report in its first-quarter results, following decisions by JPMorgan Chase & Co., Wells Fargo & Co. (WFC) and Citigroup Inc. (C) to reclassify $4.1 billion of junior liens as nonperforming. Regulators are pressing for the change on concern that falling home prices have wiped out collateral on many second mortgages, leaving them as unsecured debt. About 20 percent of the nation’s $845 billion of home-equity loans exceed the value of the properties when combined with primary mortgages, according to CoreLogic Inc., and about 36 percent of Bank of America’s were at least partly “underwater” at the end of last year, according to regulatory filings.

Bank Of America Sues Itself In Unusual Foreclosure Case: Bank of America is suing itself for foreclosure.  "It's crazy," housing data analyst Michael Olenick told HuffPost. "They shouldn't be suing themselves." Over the past two years, the nation's largest banks and the Obama administration have repeatedly vowed to clean up the foreclosure fraud mess. In February, banks agreed to pay $25 billion and overhaul their foreclosure processes as part of a 50-state investigation into bank wrongdoing, resulting from practices that included robo-signing.But in Florida's Palm Beach County alone, Bank of America has sued itself for foreclosure 11 times since late March, according to foreclosure fraud activist Lynn Szymoniak, who forwarded one such foreclosure filing, dated March 29, 2012, to The Huffington Post. (A white-collar crime expert, Szymoniak was recently awarded $18 million for her work helping the government recover $95 million as a result of bank foreclosure problems in North Carolina.) In the March 29 filing, Bank of America is seeking to foreclose on a condominium and names the condo owner and Bank of America as defendants in the suit. The company is literally seeking damages from itself in order to foreclose on the condo owner.

Judge bites banks - New York’s top judge is not done smacking around foreclosure mills for their bad behavior. Chief Judge Jonathan Lippman, faced with thousands of stalled foreclosure cases clogging his courts, is expected to soon start a pilot program that will force these foreclosure mills and their bank clients to the bargaining table in an attempt to modify the muddled mortgages. Homeowners across the state — including as many as 5,000 in Brooklyn and Queens alone — have been victimized by these mills, which file lawsuits and then, fearful of swearing to the truthfulness of the claims in the suit, let them lie dormant in the courts. Meanwhile, the homeowners are forced to live in a legal limbo — unable to work out a modification because of the missing paperwork but still on the hook for a boatload of fees. In June, Lippman will start a pilot program in Brooklyn that will force banks to the bargaining table. A judge will oversee the meeting with the aim of keeping the families in their homes. “Losing your home is probably one of the greatest traumatic events a family or a person could have and they are in our courts, and we have to ensure that their cases are handled appropriately and expeditiously,” Lippman told The Post.

Mortgage Settlement Enforcement Monitor Claims Bank Leaders Are Lying to Him - I was listening to Bloomberg surveillance this morning and they were discussing the problem of skyrocketing rents mixed with tight credit for mortgages and increasing foreclosures.  One of the hosts said that “everyone was waiting for the 49 state mortgage settlement” as a go signal to start foreclosures again.  That’s what the mortgage settlement really is, a cultural, legal, and political signal of “all clear”.  How exactly a new wave of foreclosures is supposed to help the housing market is still something of a puzzle, but it does show that the administration and most settlement pushers really do believe that the market needs to clear via foreclosures before it can reset. Meanwhile, here’s more evidence that the settlement is really just meant to kick off a new round of injury to homeowners.  The monitor of the settlement, court-appointed North Carolina official Joe Smith, clearly doesn’t know how to do his job. The Federal Reserve and the Office of the Comptroller of the Currency could have built a best-of-breed project team inside their agencies to conduct the foreclosure reviews mandated by consent orders last April against twelve mortgage servicers. Instead, they delegated that job to each bank. As a result, the banks chose friendly firms and some of those choices are less than arm’s-length away from the problems and abuses they’re reviewing…“I don’t have a quick and easy answer to that right now,” Smith said when I asked him how he’s going to avoid the same conflicts of interest we’re seeing in the foreclosure reviews when he hires his own “primary professional firm.” Finding the “appropriate balance between independence and capacity,” as Smith describes it, is not easy when sufficient independence may mean too little experience and sufficient experience may mean conflicts of interest. Conflicts of interest tempt consultants to bend the rules on behalf of current and future bank clients.

Report: Securitization Fraud Working Group Has “No Phones, No Staff” - It started with just progressive groups challenging the RMBS working group, the task force at the Justice Department (with NY Attorney General Eric Schneiderman as a co-chair) that’s supposed to be investigating the banks on mortgage securitization fraud. The Justice Department could at least say that the critiques were confined to “websites.” But now the New York Daily News has weighed in with a much deeper critique. Obama said, “This new unit will hold accountable those who broke the law, speed assistance to homeowners and help turn the page on an era of recklessness that hurt so many Americans.”Whether or not the President, attorney general and others intend to get around to this task someday, “speed” was a terrible word to choose. Because 85 days after that speech, there is no sign of any activity [...] On March 9 — 45 days after the speech and 30 days after the announcement — we met with Schneiderman in New York City and asked him for an update. He had just returned from Washington, where he had been personally looking for office space. As of that date, he had no office, no phones, no staff and no executive director. None of the 55 staff members promised by Holder had materialized. On April 2, we bumped into Schneiderman on a train leaving Washington for New York and learned that the situation was the same.

Yet Another Obama Big Lie: Mortgage Fraud Investigation Not Even Staffed - Yves Smith - Remember the widely ballyhooed mortgage fraud investigation, announced at the State of the Union address? This was the shiny toy that succeeded in getting New York attorney general Eric Schneiderman to abandon his opposition to the mortgage settlement. Schneiderman had been the defacto leader of the dissenters by virtue both of being the first to stand against the effort and by having the Martin Act. Suborning Schneiderman put the objecting state attorneys general in disarray and enabled the Administration to push this toxic deal over the finish line. The Administration started undercutting Schneiderman almost immediately. He announced that the task force would have “hundreds” of investigators. Breuer said it would have only 55, a simply pathetic number (the far less costly savings & loan crisis had over 1000 FBI agents assigned to it). And they taunted him publicly by exposing that he hadn’t gotten a tougher release as he has claimed to justify his sabotage. We had assumed that the Administration would engage in a Potemkin version of an investigation, bringing a few cases close to the election to generate deceptive and useful “tough on crime” headlines.  This update comes from the New York Daily News:  On March 9 — 45 days after the speech and 30 days after the announcement — we met with Schneiderman in New York City and asked him for an update…As of that date, he had no office, no phones, no staff and no executive director. None of the 55 staff members promised by Holder had materialized. On April 2, we bumped into Schneiderman on a train leaving Washington for New York and learned that the situation was the same. Tuesday, calls to the Justice Department’s switchboard requesting to be connected with the working group produced the answer, “I really don’t know where to send you.” After being transferred to the attorney general’s office and asking for a phone number for the working group, the answer was, “I’m not aware of one.”…

Schneiderman Propagandist Confirms Report of Lack of Staffing for Mortgage Fraud Task Force -- Yves Smith - There’s nothing like watching someone who is already in a hole dig deeper. Yesterday, the New York Daily News ran an article that chronicled how the much ballyhooed mortgage fraud task force was going nowhere fast. It quoted task force co-chairman Eric Schneiderman as saying that the effort had no staff and no executive director and the Justice Department confirming that the effort had no office.  The DoJ provided this bureaucratic confection in response to Dave Dayen’s inquiry on the task force’s status: The new Residential Mortgage-Backed Securities Working Group is marshaling parallel efforts on the state and federal levels to collaborate on current and future investigations, pooling resources and streamlining processes to investigate those responsible for misconduct contributing to the financial crisis in a comprehensive way. Significant efforts continue to move forward and if they uncover evidence of fraud or other illegal conduct, we will pursue such conduct aggressively. Notice how wonderfully abstract this statement is? The key bit, if you read closely, is that the ONLY activity described is that of coordinating existing efforts. An anonymous DoJ source maintained that there were at least 50 DoJ staffers working on the effort. Dayen raised the question of whether they were working on the investigation or working on getting the effort staffed.  Since the other co-chair, Lanny Breuer, had said the initiative would have only 55 people working on it, if 50 really were already up and running, there’d be no reason for the official response to be so labored. You’d get something more along the lines of: “We are at over 90% of our targeted manpower level.”

Building a Better Bailout: Can Fannie and Freddie Help American Homeowners? - Since the financial crisis, American taxpayers have collectively made all sorts of investments that would have been unthinkable ten years ago. We bought stakes in the auto and insurance industries and, perhaps most significantly, the residential housing market. Fannie Mae and Freddie Mac, the Government Sponsored Entities (GSEs) that the American government has taken under conservatorship, own or guarantee 60% of the outstanding mortgages in America. That’s right, we are financially exposed to over 48 million mortgages. If a given home owner pays back his loan, plus interest, we’ll make a nice return on the investment. But if that homeowner defaults, we’re all on the hook for the loss. Ed DeMarco, the man in charge of these two GSEs, therefore has a lot riding on his shoulders. When Congress passed the law allowing the federal government to take over Fannie and Freddie at the height of the financial crisis, it gave DeMarco’s Federal Housing Finance Agency (FHFA) two mandates: to prevent further loses on mortgages that the taxpayers now owned, and to continue to promote the stability of and liquidity in the U.S. housing market. DeMarco spoke last week at the Brookings Institute about this problem, and made clear that he believes the best strategy going forward is something called “principal forbearance,” under which Fannie and Freddie will temporarily reduce the amount owed on a mortgage until the mortgage matures or the homeowner sells his house.

New Short Sale timelines and HARP Updates -This might speed up the short sale approval process, from Freddie Mac: Communication Time Lines for Short Sales The new requirements introduce specific response time frames for certain activities in the short sale process ... Effective for new evaluations conducted on or after June 15, 2012, Servicers must comply with the following minimum communication time frames for all short sales. If feasible, Servicers are encouraged to implement these changes prior to the effective date of June 15, 2012. Here is a key section:  Within five days of an evaluation decision, but no later than 30 days following receipt of a complete BRP [Borrower Response Package], the Servicer must provide to the Borrower an evaluation decision and send the appropriate Borrower Evaluation Notice in accordance with Section 64.6(d)(5)...There may be some situations in which a Servicer will be unable to provide a decision within 30 days following receipt of a complete BRP (e.g., extended negotiations with the MI). In such cases, the Servicer must notify the Borrower within the 30 day time limit that the BRP is still under review and each week thereafter provide the Borrower a status update indicating the reason(s) why a decision is pending.  Fannie Mae is also implementing new timelines.

Freddie Mac to ease refinancing program's guidelines for borrowers  - Freddie Mac early this week will ease its mortgage underwriting formulas to boost the number of homeowners who qualify for the government's home loan refinancing program. Changes made last year to the government-backed mortgage refinancing program and fully implemented in mid-March were supposed to make it easier for homeowners who are current on their mortgages to refinance and secure a lower interest rate, even if they owed more on their mortgages than their homes were worth. The reformatted program, commonly known as HARP 2.0, opened eligibility to homeowners who owe more than 25 percent more on their mortgage than the value of their homes. Other changes were designed to spur competition for these homeowners among lenders, making it easier for consumers to shop for the best mortgage interest rate.  Early results show the program still may do little to help borrowers who are so far underwater on their mortgages that they think the only option is to walk away, a measure that has come to be known as a strategic default. In response to complaints from lenders, Freddie Mac this week will undertake a "fine-tuning" of its underwriting process, according to Freddie Mac spokesman Brad German. Specifics of how the automated underwriting models will be altered aren't being disclosed, even to lenders, but some homeowners who have been turned down for the program may now qualify, he said. . "It will help increase the number of borrowers who can refinance under HARP and take advantage of today's rates."

More Evidence of HARP 2.0 Ripoffs - The Mortgage Bankers Association reports a decrease in mortgage purchase activity last week, but an increase in refinancing activity, led by the new version of HARP, which is now in full swing. “The refinance share of mortgage activity increased to 75.2 percent of total applications from 70.5 percent the previous week,” the MBA writes, and about 32 percent of the refis came from HARP loans. This is thoroughly unsurprising once you realize that banks have figured out a way to legally steal from their customers using HARP. With profit margins on HARP 2.0 refinancings sky high, Wells Fargo & Co., is putting caps on the loan-to-value ratio it will accept from third-party lenders, National Mortgage News has learned [...]A new report from Amherst Securities found that some megabanks are making 3.5 to 7 points of profit on HARP 2.0 loans, in part because they are charging higher than market rates for the loans.One industry advisor close to the issue, and who spoke under the condition his name not be used, said on a $200,000 loan (for example) some lenders have the ability to earn $10,000 in profit per loan. “They can earn up to 10 points,” he said, but that profit margin only applies to loans that are already in their servicing portfolio. The advisor noted that Wells is not doing anything wrong – but simply sees a huge market opportunity to earn a ton of money.

The Largest Marginal Tax Rate Ever? -  The HAMP program, and its predecessor at the Federal Deposit Insurance Corporation, usually modified the mortgage payments by adjusting the loan interest rate over the subsequent five to seven years. Thus, assuming a five-year modification time frame, each $100 earned at the time of the modification would add $155 to the borrower’s total mortgage payments, or about $130 in present value. It is done this way with the intention of creating a monthly payment that is “affordable” (defined as 31 percent of income). But there’s a flip side to the argument: the disadvantage of higher earnings in calculating the resulting payment. To an economist looking at it that way, it’s the equivalent of a 130 percent marginal tax rate: a $130 payment differential solely as a consequence of earning an extra $100. This year the Treasury decided to encourage changes in this procedure. In particular, it will now subsidize lenders for modifying mortgage principal balances rather than interest payments. Because the principal balance determines payments for the life of the loan, in effect Treasury is asking lenders to modify payments for the life of the loan and not just five to seven years. Take a 30-year mortgage originated in 2006: it has 24 years left. Under the new rules, an extra $100 earned by the borrower at the time of modification costs her $31 a year for 24 years, which amounts to a total of about $390 in present value. That’s a 390 percent marginal tax rate that applies to borrowers who are having, or expect to have, their mortgage modified.

Looming Expiration of Tax Exemption for Mortgage Relief Haunts Foreclosure Mitigation Efforts - This story about FHFA trying to boost short sales was sent my way: This doesn’t say anything about the servicer having to approve a short sale. Mortgage industry observers tell me that short sales often get nixed by servicers for inscrutable reasons. The outcome for homeowners if a short sale gets rejected is pretty bleak. However, short sales have been increasing over the last six months or so. And this move by FHFA would at least get clarity for the borrower quickly. However, all of this runs into a brick wall if the Mortgage Forgiveness Debt Relief Act expires on schedule. I’ve written about this before, but it’s so crucial that it deserves to be brought up again and again, especially in the context of short sales and mortgage relief generally. Say you get a $50,000 principal reduction as part of the settlement. Without an extension of the Mortgage Forgiveness Debt Relief Act, you would have a tax bill in 2013 of as much as 35% on that $50,000 in “income.” It will probably put you in a higher tax bracket. And because of the fact that, if you had that kind of money to throw around, you wouldn’t be a struggling borrower in the first place, you’re in no position to pay that tax bill. Even the insulting $2,000 given under the settlement to those foreclosed upon would get taxes, if the Mortgage Forgiveness Debt Relief Act expires. And the same goes for a short sale; the difference between the sale price of the house and the “true value” would be considered income, and taxed accordingly.

The Bankers’ Subversion of the Rule of Law, Notary and Land Records edition - First, let’s recap the role of notaries in the foreclosure fraud crisis: Notaries are the people who verify that someone actually is who they say they are when that person signs a document. Because banks and their agents industrialized “Document Execution” as part of their foreclosure business model, notaries did not do their jobs. Notaries’ failure to verify identities has been so complete that many people will sign as one person, say, “Linda Green.” Notaries have also been told to sign documents using one name, and then notarize their own “surrogate” signature. “Well, what’s the big deal?” bank defenders say. Beyond the fact that there’s no “business convenience” exception to following the rule of law, considerBernal v. Fainter, Secretary of State of Texas.

The zombie files: Nearly 7,000 stagnating foreclosure cases lie dormant in Palm Beach County’s courts: Nearly 7,000 stagnating foreclosure cases lie dormant in Palm Beach County's courts, creating a payment-free limbo for some homeowners but a stain of vacant and abandoned homes in deteriorating neighborhoods. These sleeper files, which have remained inactive for a year or longer, date as far back as 1997, according to documents provided to The Palm Beach Post by the clerk of courts. But most are from the early years of the housing crash when lenders feverishly sought to repossess homes, unaware that the frenetic pace would cause a second crisis based on faulty documents and unlawful corner-cutting. While an unknown number of dormant files are mistakes, such as one party forgetting to request a dismissal after an agreement is reached, others remain open but unmoving because of homeowner bankruptcy, loan modification negotiations or bank neglect.  "Right now, we're just waiting to see who is going to make the next move." The 6,927 zombie files make up about 17 percent of Palm Beach County's 39,252 foreclosure cases.

Death By Foreclosure Killings and Staff Sgt. Roger Bales - This past Thursday, a Modesto, California, man whose house was in foreclosure shot and killed the Sheriff’s deputy and the locksmith who came to evict him from his condominium unit. Modesto authorities responded by sending 100 police and SWAT snipers to counter-attack, and it ended Waco-style, with the fourplex structure burning to the ground with the shooter inside. It’s not surprising that this should happen in Modesto: Last year the Central California city’s foreclosure rate was the third worst in the country, with one in every 19 properties filing for foreclosure.  The entire region is ravaged by unemployment, budget cuts, and blight — the only handouts that Modesto is seeing are the surplus military equipment stocks being dumped into the Modesto police department’s growing arsenal. The shooter who died was 45 years old and he appears to have lost his condominium over a $15,000 home equity loan he took out almost a decade ago, owed to Bank of America. The condo was sold at an auction for just $12,988 to a shady firm, R&T Financial, that doesn’t even have a listed contact number. Too much for the former security guard, who barricaded himself in the condo which had been in the family for decades. He refused to walk out alive. These “death by foreclosure” killings have been going on, quietly, around the country ever since the housing swindle first unraveled. Like the story of the 64-year-old Phoenix man whose daughter and grandson were preparing to move in with him after losing their home to foreclosure — only to get a knock on his door surprising him with an eviction notice on the house he’d owned for over 30 years. Bank of America foreclosed on him despite his attempts to work out a fair plan.

The Son of the Housing Bubble: First-Time Homebuyers Tax Credit - Dean Baker - The first-time homebuyers tax credit was added to President Obama's original 2009 stimulus package. The bill gave a tax credit equal to 10 percent of a home's purchase price, up to $8,000, to first time buyers or people who had not owned a home for more than three years. To qualify for the credit, buyers had to close on their purchase by the end of November, 2009,  The ostensible intention of the bill was to stabilize the housing market. At least initially it had this effect. There was a spike in home purchases that showed up clearly in the data by June of 2009. House prices, which had been falling at a rate of close to 2.0 percent a month stabilized and actually began to rise by the late summer of 2009, as buyers tried to close on a house before the deadline for the initial credit.  However once the credit ended, prices resumed their fall. By the end of 2011 they were 8.4 percent below the tax credit induced peak in the spring of 2010.  This meant that the price decline that was in process in 2007-2009 was just delayed for a bit more than a year by the tax credit.  This delay allowed lenders to get back more money on loans that might have otherwise ended with short sales or even defaults. The losers were the people who paid too much for homes, persuaded to get into the market by the tax credit.  This was the same story as the in the original bubble, but then the pushers were the subprime peddlers. In this case the pusher was Congress with its first-time buyer credit.

Inside the foreclosure factory, they're working overtime - In a quiet office in downtown Charlotte, N.C., dozens of Wells Fargo’s foreclosure foot soldiers sit in cubicles cranking out documents the bank relies on to seize its share of the thousands of homes lost to foreclosure every week. They stare at computer screens and prepare sworn affidavits that are used by lenders in courts across the country to seize homes. Paid $30,700 to start, these legal process specialists, the title that goes with the job, swear an oath under penalty of perjury that they're corporate vice presidents. They're peppered with e-mails from managers to meet daily quotas of at least 10 or 11 files day.  Pressured to meet daily production quotas, they are likely making mistakes that inadvertently could toss a family out of its home and onto the street, according to these workers. State and federal prosecutors, in a recent settlement with five banks that included Wells Fargo, agreed. The joint state and federal settlement spelled out how the document procedures at the five banks resulted in “loss of homes due to improper, unlawful or undocumented foreclosures,” according to the complaint.Like many mortgage servicers, Wells Fargo relies on a company called Lender Processing Services to assemble some of the information used to foreclose on properties.With each file they prepare, the bank’s document processors must swear “personal knowledge” the information in each affidavit was properly collected and is accurate and complete. But they have no way of making good on that promise because they are not able to check whether LPS properly collected and processed the data, according to the document processor.

Foreclosure ripple effect: 8.3 million children in jeopardy - When we think of foreclosure, we tend to think of the tremendous financial toll it takes on adults. But a new report sheds light on the millions of children who are having their lives thrown into disarray by the crisis as well. The analysis of foreclosure data, prepared for the children’s advocacy group First Focus, finds that as many as 2.3 million children have lost their homes to foreclosure. In addition, the report finds, another 3 million are at risk being displaced from their homes due to foreclosure. The researchers also say that an additional 3 million kids could be affected by foreclosure because they live in a rental home that is either in foreclosure or at risk of being foreclosed upon. That means more than 8 million children are either affected or at risk. When a school-age kid has to move unexpectedly, it often means that they must switch schools mid-year. Isaacs said other research has shown that kids who switch schools have lower levels of math and reading achievement, even after controlling for other factors such as poverty.

Bank of America Forecloses On Homeowner With Disabled Daughter After Offering Her A Modification - A California woman is facing foreclosure from Bank of America after taking out a loan to make her home more accessible for her disabled daughter, shining light on yet another improper foreclosure practice perpetuated by America’s largest banks.  Dirma Rodriguez fell behind on her original loan after spending thousands of dollars installing tile floors and a wheelchair ramp to make it easier for Ingrid Ortiz, her daughter who has cerebral palsy, to move around the house. When Rodriguez fell behind on her original loan, Bank of America offered her a trial modification. Even though Rodriguez kept up with those payments for more than a year, the bank sold her home at auction, and the new owner is pursuing eviction, the Los Angeles Times reports: After she fell behind on her payments, the Bank of America lowered her monthly obligation, but then sold the house at a foreclosure auction last September. The new owner, a house flipper from El Segundo called West Ridge Rentals, moved to evict the family. [...] She made her payments faithfully for 13 months and was awaiting a permanent modification package when the bank sold her home out from under her, she says. Rodriguez’s story, unfortunately, is not unique. Thanks to the process known as dual-tracking, banks have thrown thousands of homeowners into foreclosure even while offering those same homeowners loan modifications. As a result, homeowners who were willing to make new, lower payments to stay in their homes are often evicted anyway.

Some thoughts on housing and foreclosures - One of the "givens" for 2012 is that the number of foreclosures will increase following the mortgage servicer settlement agreement. But I've been wondering just how big that increase will be...  A key recent development is the decline in distressed sales; distressed sales are a combination of short sales and lender real estate owned (REO) sales. I've been tracking this for a couple of years, at first just using data for Sacramento, and more recently data for several other cities too (compiled by Tom Lawler). This data shows two important trends: 1) overall distressed sales have been declining, and 2) there has been a shift from REO sales to short sales.Of course the percent of overall distressed sales could, and probably will, increase soon now that the mortgage settlement agreement has been signed off. But the increase might be less than many people expect. Here are a few reasons:  According to LPS, there are currently about 2 million properties in the foreclosure process and another 1.7 million loans 90+ delinquent. However many of these loans are in judicial states, and even with the mortgage settlement, it will take some time to work through the courts. So it is hard to imagine a huge wave of foreclosures, if anything it will be more like a sustained high tide in certain judicial foreclosure areas.

Short Sales Surpass Foreclosures as Banks Agree to Deals -  The number of U.S. home short sales surpassed foreclosure deals for the first time as banks became more agreeable to selling houses for less than the amount owed on their mortgages, according to Lender Processing Services Inc. (LPS)  Short sales accounted for 23.9 percent of home purchases in January, the most recent month available, compared with 19.7 percent for sales of foreclosed homes, data compiled by the Jacksonville, Florida-based company show. A year earlier, 16.3 percent of transactions were short sales and 24.9 percent involved foreclosures.  “It’s a fairly recent phenomenon that short sales have been increasing,” Jonathon Weiner, a vice president in the applied analytics division of Lender Processing Services, said in a telephone interview. “Short sales should be the dominant way of disposing of assets” in distress, he said. Lenders are catching up to short sales after being slow to provide the staffing and incentives necessary to complete the deals, Weiner said. The transactions typically fetch a higher price for banks than sales of homes that have gone through foreclosure. In January, foreclosed homes sold for an average of 29 percent less than comparable non-distressed properties, compared with a 23 percent discount for short sales, according to Lender Processing Services. The gap has narrowed as short sales become more common, Weiner said.

Report: Sellers’ Asking Prices Rose in March - Here’s a sign that sellers are feeling more optimistic about their prospects this spring: median asking prices in March jumped by 5.6% from a year ago, and were up 1% from February, according to a report released Tuesday.The jump in median asking prices comes amid a sharp drop in the number of homes listed for sale from one year ago. While listing inventories in March rose by 1.5% from February, they were still 21.5% below last year’s levels. Inventories of homes listed for sale tend to go up in the spring, and the 1.8 million listings in March represented the second straight increase for the year. Over the past 27 years, the average increase in for-sale listings in March has been 1.8% from February, according to research firm Zelman & Associates. The figures include sale listings from more than 900 multiple-listing services across the country. They don’t cover all homes for sale, including those that are “for sale by owner” and newly constructed homes that aren’t always listed by the services. Compared with February, inventories declined in roughly less than half of the top 30 metros tracked by during March, with the biggest declines in Phoenix (-6.4%), Seattle (-4.8%) and Orlando, Fla. (-4.2%). Northeastern cities showed the largest inventory gains — a finding that shouldn’t surprise given that sellers are more likely to list their homes when the weather improves. Washington, D.C., saw a 9.5% gain, followed by Philadelphia (8.1%) and Boston (7.4%).

Lawler: Evaluation of Gross Vacancy Rates From the 2010 Census Versus Current Surveys - This is an important topic on trying to understand the number of excess vacant housing units in the US. Unfortunately the various surveys do not match up with the decennial Census data. It appears the vacancy rates in the HVS survey are way too high - yet this is the data most analysts use to estimate the excess number of vacant housing units! In other words, most reported estimates are way too high. The good news is the Census Bureau is trying to understand why ... From economist Tom Lawler (Lawler identified this issue and pushed for this review): The Census Bureau posted the following paper presented at the January 2012 meeting of the Federal Committee on Statistical Methodology, and folks interested in the topic should read it.  "Evaluation of Gross Vacancy Rates From the 2010 Census Versus Current Surveys: Early Findings from Comparisons with the 2010 Census and the 2010 ACS 1-Year Estimates" by Arthur R Cresce, Ph. D., Assistant Division Chief for Housing Characteristics, Social, Economic and Housing Statistics Division,  U.S. Census Bureau, SEHSD Working Paper Number 2012-07

US Existing Home Sales Fell in March -  Sales of previously owned U.S. homes in March unexpectedly fell for the third time in the last four months, showing an uneven recovery in the housing market.  Purchases dropped 2.6 percent to a 4.48 million annual rate from 4.6 million in February, the National Association of Realtors reported today in Washington. The median forecast of economists in a Bloomberg News survey called for an increase to 4.61 million. In January, sales at a 4.63 million rate were the strongest since May 2010.  Residential real estate remains the economy’s soft spot, challenged by stricter lending standards, lower home values and the threat of more foreclosures. An improved labor market and mortgage rates near historic lows have yet to stoke bigger gains in demand.  “Despite declines in three of the past four months, home resales appear to be on a modest rising trend over the past nine months,”

Existing Home Sales in March: 4.48 million SAAR, 6.3 months of supply - The NAR reports: Existing-Home Sales Decline in March but Inventory Down, Prices Stabilizing: Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 2.6 percent to a seasonally adjusted annual rate of 4.48 million in March from an upwardly revised 4.60 million in February, but are 5.2 percent above the 4.26 million-unit pace in March 2011...Total housing inventory at the end of March declined 1.3 percent to 2.37 million existing homes available for sale, which represents a 6.3-month supply at the current sales pace, the same as in February. Listed inventory is 21.8 percent below a year ago and well below the record of 4.04 million in July 2007. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in March 2012 (4.48 million SAAR) were 2.6% lower than last month, and were 5.2% above the March 2011 rate.  The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 2.37 million in March from 2.40 million in February. Inventory is not seasonally adjusted, and usually inventory increases from the seasonal lows in December and January to the seasonal high in mid-summer. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Home Sales Down As Market Remains Weak  - Americans bought fewer previously owned homes in March, a reminder that the housing market remains weak. The National Association of Realtors said Thursday that home sales fell 2.6 percent last month to a seasonally adjusted annual rate of 4.48 million. That followed a revised 4.6 million sold in February. A mild winter may have encouraged more people to buy earlier, essentially stealing sales from March. More purchases in January and February made this the best winter for sales in five years. The increase offered some encouragement ahead of the spring-buying season. Even with the gains, sales remain far below the 6 million per year that economists equate with healthy markets. And the weaker March figures suggest any momentum from the winter has stalled, said Dan Greenhaus, chief global strategist at BTIG in New York. "We are most certainly not set to declare that the housing recovery is over but a strong start to the spring selling season is simply not in the data,"

Existing Home Sales: Inventory and NSA Sales Graph - The NAR reported inventory decreased to 2.37 million in March, down from 2.40 million in February. This is down 21.8% from March 2011, and up 3% from the inventory level in March 2005 (mid-2005 was when inventory started increasing sharply). Inventory was down slightly from March 2004. This decline in inventory has been a significant story over the last year. This year (dark red for 2012) inventory is at the lowest level for a March since 2005, and actually slightly below the level in 2004 (not counting contingent sales). Inventory is still elevated - especially with the much lower sales rate. The following graph shows existing home sales Not Seasonally Adjusted (NSA). Sales NSA (red column) are above the sales for the 2008, 2009 and 2011 (2010 was higher because of the tax credit). Sales are well below the bubble years of 2005 and 2006. It is also important to note that distressed sales were down in March. From the NAR:  Distressed homes – foreclosures and short sales .. – accounted for 29 percent of March sales (18 percent were foreclosures and 11 percent were short sales), compared with 34 percent in February and 40 percent in March 2011. A decline in existing home sales due to fewer distressed sales is a positive for the housing market. Of course distressed sales will probably increase again following the mortgage servicer settlement.

Charting the Housing Market: I asked frequent contributor  Chartist Friend from Pittsburgh to apply his technical insights to the housing market. His charts and observations are illuminating: I've looked at the charts a little further, and the pattern that emerges is this: fatal collapse - attempt at resuscitation - imminent reading of the last rites. In technical terms that would translate to "a" wave breakdown (in most cases to new lows), "b" wave correction/pullback to previous support neckline, then "c" wave to lower lows. It saddens me to have to report that, even with mortgage rates at historic lows, the American housing market is dead. Let's start with the backbone of affordability, the mortgage rate. The Federal Reserve has pursued two strategies of resuscitation: lower interest rates so mortgage rates have fallen to historic lows, and purchase impaired mortgages to clear the system. In this chart depicting the mortgage debt change from the previous year, we see that the year-over-year change in mortgage debt skyrocketed in the bubble and plummeted in the post-bubble collapse. Despite the Fed's $1 trillion purchase of mortgages and super-low mortgage rates, mortgage debt has barely budged.

Zillow's forecast for Case-Shiller House Price index in February - Zillow Forecast: February Case-Shiller Composite-20 Expected to Show 3.4% Decline from One Year Ago On Tuesday, April 24th, the Case-Shiller Composite Home Price Indices for February will be released. Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) will decline by 3.4 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will decline by 3.5 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from January to February will be -0.1 percent and -0.2 percent for the 20 and 10-City Composite Home Price Index (SA), respectively.Zillow's forecasts for Case-Shiller have been pretty close, and I expect Case-Shiller will report house prices at a new post-bubble low in February. One of the keys this year will be to watch the year-over-year change in the various house price indexes. The composite 10 and 20 indexes declined 3.9% and 3.8% respectively in January, after declining 4.1% in December. Zillow is forecasting a smaller year-over-year decline in February.

ROBERT SHILLER: Housing Is Not An Investment - Interesting comments here by Robert Shiller on the myth of the last few decades that housing is now an investment asset: There’s no guarantee that home prices are going to go up. I think we’ve gotten into an illusion about that. We got into an illusion and it created this spectacular bubble. We have to reflect now that we had a kind of crazy mind-set in the last couple of decades, and we have to get back to thinking like people used to think. Housing is a depreciating asset, goes out of style; it’s going to end up in the wrong place. People will want to live somewhere else, so it’s not any automatic capital gain. How did we get this idea that home prices only go up? There are a number of elements of it. I don’t know where to start. One of them is that we had a lot of inflation. I’m talking psychology now. You’re asking how we got into a wrong view. In the 70s and 80s, we had a lot of inflation and then Paul Volcker came in and stopped it. So inflation has been declining now for 30 years, and we’ve lived our lives in that environment. But we still encounter examples when someone says, “My Grandma sold their house for $300,000, and do you know what she paid for it in 1952? It was only $30,000 or something like that. So it went up ten-fold. Now those stories are in all of our repertory, but when you really look at it, what was just consumer price inflation over that period? It was something like that. She really didn’t make any money off of it. And she was putting money into it year after year and maintaining it. So we forget that. It’s that kind of bias.

Housing Starts decline in March - From the Census Bureau: Permits, Starts and Completions Housing Starts: Privately-owned housing starts in March were at a seasonally adjusted annual rate of 654,000. This is 5.8 percent (±15.6%)* below the revised February estimate of 694,000, but is 10.3 percent (±14.6%)* above the March 2011 rate of 593,000. Privately-owned housing units authorized by building permits in March were at a seasonally adjusted annual rate of 747,000. This is 4.5 percent (±1.1%) above the revised February rate of 715,000 and is 30.1 percent (±1.6%) above the March 2011 estimate of 574,000. Total housing starts were at 654 thousand (SAAR) in March, down 5.8% from the revised February rate of 694 thousand (SAAR). Note that February was revised down from 698 thousand.  Single-family starts declined 0.2% to 462 thousand in March. February was revised up to 463 thousand from 457 thousand. The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that total housing starts have been increasing lately after sideways for about two years and a half years.  Total starts are up 37% from the bottom, and single family starts are up 31% from the low. This was well below expectations of 700 thousand starts in March, but mostly because of multi-family starts.

U.S. Housing Starts Slow, But Permit Requests Rise — U.S. builders started work on fewer homes in March after they sharply cut back on apartment construction. But builders requested the most permits for future projects in 3 ½ years, suggesting many anticipate the housing market could improve over the next year. The Commerce Department said Tuesday that builders broke ground at a seasonally adjusted annual pace of 654,000 homes last month. That’s down 5.8 percent from February. Apartment construction, which can fluctuate sharply from month to month, fell nearly 20 percent. Single-family homebuilding was mostly unchanged. Building permits, a gauge of future construction, rose 4.5 percent to a seasonally adjusted annual rate of 747,000. That’s the highest level since September 2008.

Housing Starts Retreat As New Housing Permits Rise Sharply - New construction on residential housing slowed sharply last month, the Census Bureau reports, while newly issued permits in March rose to the highest level since September 2008. In other words, there’s mixed news on the housing front, although the ongoing climb in new permits suggests that construction activity will soon be turning higher. The retreat for housing starts surprised many economists, but it’s important to put the latest numbers in context. It’s fair to say that the modest recovery in housing remains intact. Although housing starts last month totaled 654,000 (seasonally adjusted annual rate), or down from February’s 694,000, the year-over-year change is still comfortably in positive territory (10%-plus as of last month), as it has been since last September. The fact that new permits are growing at a much faster rate implies that housing construction will continue to expand, if only modestly. In turn, that's a hint that construction payrolls, and all the related spending that flows from housing activity, will improve, if only slightly.

U.S. Housing Starts Unexpectedly Drop to Five-Month Low -  Builders began work on fewer homes than forecast in March, signaling a sustained industry recovery will take time to get underway.  Housing starts dropped 5.8 percent to a 654,000 annual rate, less than the lowest estimate of economists surveyed by Bloomberg News and the least since October, Commerce Department figures showed today in Washington. The slump was led by the volatile multifamily category, which at the same time showed a jump in permits, a proxy for future construction.  While warmer weather may have spurred home construction at the beginning of 2012, a competing supply of cheap existing properties may be steering potential buyers away from purchasing a new home. That means home construction may not help boost the economy in 2012.  “Housing continues to bump along the bottom,” . “The best we can hope from housing over the next couple years is that it won’t subtract from growth. The numbers in the past few months were decidedly impacted by a much milder winter, so a significant portion of construction was pulled forward.”

Housing Starts Slide In Latest "Housing Recovery" Disappointment; Permits Rise On Expectations Of Rental Surge  - Today's housing starts number is merely the latest datapoint confirms the housing bottom callers will be once again early. In March, housing starts, expected to print at 705K (which is crawling along the bottom as is, so it is all mostly noise anyway, but the algos care), came at a disappointing 654K, the lowest since October 2011, and a third consecutive decline since January. Want proof that the record warm Q1 pulled demand forward? This is it. As the chart below shows, the all important single-unit housing starts have not budged at all since June 2009. So was there any good news in today's data? Well, housing permits, which means not even $1 dollar has been invested in actually 'building' a home soared to 747K, from 715K in February, and well above expectations of 710K - the highest since September 2008. That a permit is largley meaningless if unaccompanied by a start, not to mention an actual completion goes without saying. However, what is notable is that even the permit dat was skewed: single unit structures came at 462K, lower than February's 479K. Where the ramp was in 5 units or more, aka multi-apartment units, aka straight to rental. It appears that now everyone is piggybacking on the administartion's REO-to-rent plan, and instead of buying "home to buy", all future constrcution will be apartments to rent.

The Slow Rise of Multi-Family Housing - Part of my general thesis behind a robustly recovering US economy was that we would see a marked increase in the construction of multi-family housing units.  The press continues to note the general strength of this segment but relative to my view of the economy it has continued to disappoint. Here are Multi-Family starts over the last two years. That might look impressive until you compare it to what a real boom looks like The “hopeful” argument is that while the absolute increase is much smaller this time around the pace is actually a bit faster, a four-fold increase rather than a 3-fold increase. However, given the current conditions in housing I was looking for an even stronger snap back. This alone will not be enough to push the economy into a boom. We need a series step-up in the rate of growth.  What’s worse from a long run perspective is that the failure of multifamily to bounce back potentially sets up single family for a new bubble. With rents tight and likely to get tighter, buying becomes a better and better deal.

Residential Investment and the Housing Industry Recovery - Earlier this week I wrote: "There is no question that housing starts and residential investment have bottomed. And it appears new home sales have also bottomed.  For the housing industry, the recovery has started. The debate is about the strength of the recovery, not whether there is a recovery (I think housing will remain sluggish for some time, and I expect 2012 to be another weak year, but better than 2011)." I've received several questions about this. We could look at several measures: construction employment is up about 100 thousand payroll jobs from the bottom, housing starts are up 36% from the bottom (thanks to multi-family), and residential investment has been adding to GDP for three consecutive quarters (probably four consecutive quarters once Q1 2012 GDP is released next week). What is residential investment? (RI) is mostly investment in new single family structures, multifamily structures, home improvement and commissions on existing home sales. Here is a graph of the contribution of RI to the percent change in GDP since 2004:  Note that RI made a large negative contribution in every quarter in 2006, 2007 and 2008. In in Q2 2011, RI started making a small positive contribution to the change in GDP. I expect RI to make further positive contributions to GDP growth in 2012, and not just from multi-family and home improvement. I also expect single family investment to increase from the very low rate in 2011.

NAHB Builder Confidence declines in April - The National Association of Home Builders (NAHB) reports the housing market index (HMI) declined 3 points in April to 25. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Slips Three Notches in April Builder confidence in the market for newly built, single-family homes declined for the first time in seven months this April, sliding three notches to 25 on the National Association of Home Builders/Wells Fargo Housing Market Index, released today. The decline brings the index back to where it was in January, which was the highest level since 2007.  "Although builders in many markets are noting increased interest among potential buyers, consumers are still very hesitant to go forward with a purchase, and our members are realigning their expectations somewhat until they see more actual signed sales contracts,” . Each of the index’s components registered declines in April. The component gauging current sales conditions and the component gauging sales expectations in the next six months each fell three points, to 26 and 32, respectively, while the component gauging traffic of prospective buyers fell four points to 18. This graph compares the NAHB HMI (left scale) with single family housing starts (right scale).

Residential Remodeling Index increases 3% in February - From BuildFaxResidential remodels authorized by building permits in the United States in February were at a seasonally-adjusted annual rate of 2,894,000. This is 3 percent above the revised January rate of 2,811,000 and is 23 percent above the February 2011 estimate of 2,362,000. This graph shows the Remodeling Index since January 2000 on a seasonally adjusted basis.  Remodeling is below the peak levels of the housing boom - with all the equity extraction - but up 25% from the bottom in May 2009. Note: Permits are not adjusted by value, so this doesn't mean there is more money being spent, just more permit activity. Also some smaller remodeling projects are done without permits and the index will miss that activity. The second graph shows the regional indexes. From BuildFax:  Seasonally-adjusted annual rates of remodeling across the country in February 2012 are estimated as follows: Northeast, 627,000 (up 24% from January and up 33% from February 2011); South, 1,194,000 (up 3% from January and up 25% from February 2011); Midwest, 516,000 (up 4% from January and up 22% from February 2011); West, 830,000 (up 9% from January and up 21% from February 2011). Some of the increase in February could be weather related (the index is seasonally adjusted, and the weather in February was warmer than normal). This might especially be true in the Northeast.

AIA: Architecture Billings Index indicates expansion in March - From AIA: Positive Conditions Persist for Architecture Billings Index The commercial sector continues to lead the Architecture Billings Index (ABI) which has remained in positive territory for the fifth consecutive month. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the March ABI score was 50.4, following a mark of 51.0 in February. This score reflects a slight increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 56.6, down from mark of 63.4 the previous month.  This graph shows the Architecture Billings Index since 1996. The index was at 50.4 in March (slight expansion). Anything above 50 indicates expansion in demand for architects' services. Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.   So this suggests further declines in CRE investment in early 2012, but perhaps stabilizing mid-year.

Homeowner Financial Obligation Ratio near normal, Mortgage obligations still high - From Floyd Norris at the NY Times: Debt Burden Lifting, Consumers Open Wallets a Crack - The latest figures, for the final quarter of 2011, show that required debt service payments now make up just 10.9 percent of disposable income, the lowest proportion since 1994. A broader measure — which adds in such obligations as property tax and insurance premiums for homeowners, and rent for those who do not own their homes — has fallen to the lowest level since 1984.  Norris is referring to the Debt Service Ratio (DSR) from the Federal Reserve. I also like to look at the Financial Obligation Ratio (FOR) for homeowners. This series is useful to look for changes over time, but there are limitations. From the Fed:  The limitations of current sources of data make the calculation of the ratio especially difficult. The ideal data set for such a calculation would have the required payments on every loan held by every household in the United States. Such a data set is not available, and thus the calculated series is only a rough approximation of the current debt service ratio faced by households.  This graph shows the Total, Mortgage and Consumer financial obligation ratios for homeowners.With some decline in debt, and much lower interest rates, the total homeowner financial obligations ratio is back to normal levels. However the mortgage ratio - even with record low mortgage rates - is still somewhat high.

Subprime Lending Returns as Lenders Deal Credit to Risky Clients - “Even I wouldn’t make a loan to me.” That kind of admission from a borrower ought to be a tip-off that banks shouldn’t be showering him or her with car financing and credit card offers, but lenders hungry to raise revenue are turning again to the business practices many contend turned “too big to fail” and “bailout” into household terms. The number of subprime borrowers — people with credit scores of 660 or lower — issued new credit cards shot up by roughly 12% over the past year, the New York Times reports, citing data from credit bureau Equifax. The article tells the stories of people who have gone through bankruptcy, had cars repossessed and even were sued by debt collectors — who are getting a slew of direct-mail offers for credit. Other companies that track the lending industry report similar findings: Credit bureau Experian said the number of subprime auto loans has climbed by six percentage points since the end of the recession and now makes up nearly a quarter of new auto loans. The amount lenders are giving subprime borrowers is still less than a third of the nearly $42 billion they lent in 2007, but they’re making up lost ground at warp speed. Subprime credit card debt shot up by around 55% in just a year, a rate of increase that has “red flag” written all over it.

Retail Sales increased 0.8% in March - On a monthly basis, retail sales were up 0.8% from February to March (seasonally adjusted), and sales were up 6.5% from March 2011. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for March, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $411.1 billion, an increase of 0.8 percent (±0.5%) from the previous month and 6.5 percent (±0.7%) above March 2011. ... The January to February 2012 percent change was revised from 1.1 percent (±0.5) to 1.0 percent(±0.2%). Ex-autos, retail sales increased 0.8% in March.  Sales for February were revised down from a 1.1% increase to a 1.0% increase. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 23.6% from the bottom, and now 8.6% above the pre-recession peak (not inflation adjusted) The second graph shows the same data since 2006 (to show the recent changes). Excluding gasoline, retail sales are up 19.6% from the bottom, and now 7.7% above the pre-recession peak (not inflation adjusted). The third graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 6.3% on a YoY basis (6.6% for all retail sales). Retail sales ex-gasoline increased 0.7% in March.

Retail Sales: Up 0.8% in March - The Retail Sales Report released this morning shows that retail sales in March were up 0.8% month-over-month from a downwardly revised 1.0% in February (from 1.1%). Today's number is above the consensus forecast of 0.3% but and's own pessimistic call for 0.0%. The year-over-year change is 6.5%. "Retail Sales Come in Strong" exclaims the financial press, and futures edged higher. But let's dig a bit deeper into the "real" data against the backdrop of our growing population. The first chart shows the complete series from 1992, when the U.S. Census Bureau began tracking the data. I've highlighted recessions and the approximate range of two major economic episodes.  Here is the same chart with two trendlines added. These are linear regressions computed with the Excel Growth function. How much insight into the US economy does the nominal retail sales report offer? The next chart gives us a perspective on the extent to which this indicator is skewed by inflation and population growth. The nominal sales number shows a cumulative growth of 150.2% since the beginning of this series. Adjust for population growth and the cumulative number drops to 103.7%. And when we adjust for both population growth and inflation, retail sales are up only 22.7% over the past two decades.

Another Strong Month For Retail Sales In March - If you’re not impressed by the ongoing strength in retail sales, you should be. Or maybe you're just perplexed. In any case, consumption rose a strong 0.8% in March on a seasonally adjusted basis, the Census Bureau reports. Although that’s down a bit from February’s 1.0% jump, there’s nary a sign in the latest numbers that the consumer is stressed or poised to give up shopping any time soon.  In fact, retail sales for the first three months of this year have delivered a strong run, given what we know about the continued deceleration in disposable personal income (DPI). Either DPI is misleading us about the future or consumption is. Only time will tell, although based on today’s news it’s clear that consumption has yet to give way this year to the darker side of expectations. Is the story materially different if we ignore the short-term data? Nope, not at all. Looking at retail sales on a year-over-year basis also shows that consumption’s pace is holding steady at roughly 6.5% a year. That's down a bit from the highest levels in recent years, but no one will confuse it with sluggish growth. If the business cycle is poised to bite, the message has yet to reach Joe Sixpack.

US Retail Sales Rose 0.8 pct., Helped by Job Gains — A healthier job market and warmer weather encouraged more Americans to shop in March. U.S. retail sales rose 0.8 percent last month, the Commerce Department said Monday. That’s below February’s 1 percent increase but above January’s pace. Some of the increase went to pay higher gas prices. Still, steeper gas hasn’t deterred Americans from spending more on other goods. Consumers spent more on building materials, autos, electronics, furniture and clothing. Excluding car and gasoline sales, retail sales increased 0.7 percent. And excluding autos, gas, and home supplies, so-called “core” sales rose 0.5 percent in March, matching February’s gain. A separate Commerce report showed that U.S. companies restocked at a steady pace in February. That suggests businesses expect consumers to continue this spring.

Debt Burden Lifting, Consumers Open Wallets a Crack - The bursting of the real estate bubble and the ensuing credit crisis forced American consumers to do something that they had little experience in trying: reduce their debt. It has been a painful process both for borrowers, who have faced foreclosures and bankruptcies, and for lenders, whose have had to take losses vastly in excess of what they thought possible. One measure of the financial health of householders is the level of financial obligations, like required mortgage and credit card payments, to disposable income. By the fall of 2007, those obligations took up 14 percent of disposable income, more than at any time since the Federal Reserve began calculating the statistic in 1980.  But now the situation has turned around. The latest figures, for the final quarter of 2011, show that required debt service payments now make up just 10.9 percent of disposable income, the lowest proportion since 1994. A broader measure — which adds in such obligations as property tax and insurance premiums for homeowners, and rent for those who do not own their homes — has fallen to the lowest level since 1984.  There is little mystery in how that happened. First, debt levels have fallen. Over all, households owe about $13.2 trillion, nearly $600 billion less than in late 2008. Second, low interest rates mean that servicing that debt costs less. The Commerce Department says that mortgage interest payments, in dollars, are lower than at any time since 2005.

TrimTabs Blasts Retail Sales Report, Proposes Firing All Government Economists and Disbanding the BLS, BEA and Census Bureau - Yesterday the US Census Bureau reported retail sales rose 0.8% in March. Is that what happened?  Charles Biderman, President & CEO TrimTabs Investment Research, has no faith in the number. Here is a video explaining why.

Ignorance is Bliss Regarding Economic Data - Ignorance is bliss, particularly when it comes to US government economic data. The latest bad joke occurred this morning when the US Census Bureau said retail sales rose 0.8% in March. And the financial press reported that 0.8% sales increase as gospel showing once again how totally ignorant the media is when it comes to reporting economic numbers put out by the US government. The AP headline was that US retail sales in March rose 0.8%, helped by job gains. The Wall Street Journal online site reported not only that U.S. retail sales rose 0.8% in March, but also that Americans spent more on autos.  Really? This is garbage reporting of the worst sort. Why? Well first let us look at the actual Census Bureau press release, which is entitled Advanced Monthly Sales for Retail and Food Services March 2012. Lower down the press release explains that the advance estimates are based on a subsample of the Census Bureau’s full retail and food services sample.  What is a subsample? Would you believe in this broadband world that what is reported as a hard fact by the financial media morons, is based upon a mailed, snail mail, survey to 5,000 retailers and the mailed back response?

Ignorance Is BLS - In one of the most coherent take-downs of the government's data gatherers, economists, reporters, and the general investing public that soak up the propaganda spewed forth by the former, TrimTab's CEO Charles Biderman destroys today's 'Advance' retail sales, and crushes the Census Bureau's process. Needing little additional comment, we can only hope that the 'ignorance is bliss' approach of the mainstream media and self-serving talking heads is at least questioned by the broad investing public when they hear the sense that Biderman speaks with regard to the antiquated methodologies used to gather data and the factual destruction of Wall Street Journal "I am the law" headlines straight off the government's press releases. The simple fact is that while anyone suggesting the government's data may not be accurate is dismissed as a tin-foil-hat-wearing conspiracy theorist when faced with the facts - the unadulterated numbers - it is hard to argue with tough reality; leaving only the shrug, 'money-on-the-sidelines', 'trend-is-your-friend', 'retail not participating yet', self-fulfilling mutual masturbation that is now become our virtuous circle of reporting, government data, and sell-side economists.

Weekly Gasoline Update: Prices Down Two Cents - 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, rounded to the penny, declined two cents. The first real decline since mid-December. Regular is up 69 cents and premium 68 cents from their interim weekly lows in the December 19th EIA report. As I write this, shows eight states plus DC with the average price of gasoline above $4 (unchanged from last week) and another 12 states with the price above $3.90 (down from 13 last week). Hawaii, not surprisingly, has to highest prices, averaging around $4.63 a gallon, up two cents from last week. How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's the answer.  The next chart is an overlay of WTIC, Brent Crude and unleaded gasoline (GASO). Brent Crude as been consolidating at a resistance level since late February, and the WTIC end-of-day spot price is 6.0% off its 2012 high set on February 24th. Gasoline now also appears to be retreating fractionally. 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).

Gasoline Price Trends According to Futures - From the WSJ yesterday: After a sizzling start to the year, gasoline futures prices are sliding, easing pressures on drivers and the U.S. economy and raising the prospect that prices at the pump could be headed lower still.  Gasoline futures, a key yardstick for wholesale prices, are down 6.3% from their high for the year reached on March 26, as the price of crude oil that gets refined into gasoline has dropped a similar amount amid easing tension over Iran, the world's fourth-largest oil producer. ...  Joanne Shore, a senior analyst of the EIA, says retail prices typically lag behind those of gasoline futures by a few weeks. About half of the change in futures gets passed through within a week, and the rest tends to show up over the next several weeks, according to Ms. Shore. who follows gasoline prices.  Figure 1 depicts the relationship between RBOB futures for the front month, and the price of gasoline (in logs) over the 2005M10-2012M04 period (that’s the period I could get the futures data).

$4 gas reinforces trend toward lower U.S. fuel consumption - Are American motorists finally changing their gas-guzzling ways? As prices have neared and in some cases topped $4 a gallon, drivers have cut their consumption of gasoline to its lowest levels in a decade, driving less and buying cars that are more fuel-efficient. The adjustment has slowed the climb in gasoline prices, which until last week had risen for 10 consecutive weeks, and could preserve some money for Americans to spend on other items as the economy struggles to recover more convincingly.  “Over the last four weeks, motor gasoline product supplied has averaged 8.6 million barrels per day, down by 4.0 percent from the same period last year,” the Energy Information Administration (EIA) said last week. In the Washington area, there has been an increase in applications for carpooling under the Commuter Connections program, which links people seeking to share rides. Applications rose 20 percent last year and 10 percent in January and February, in each case closely tracking the increase in gasoline prices,

U.S. gasoline demand down 6.8 pct yr/yr -MasterCard (Reuters) - U.S. gasoline demand in the latest week dropped 6.8 percent from a year ago as high prices and rising fuel efficiency pressured consumption, MasterCard said in its weekly Spending Pulse report on Tue sday. Demand for the week to April 13 dipped 1.3 percent compared with the previous week, according to the report. Consumption was down 5 percent on a four-week moving average basis, the 56th straight weekly decline. The average U.S. retail price of gasoline dipped 2 cents from a week earlier to $3.92 a gallon on the week, which was up 2.9 percent from a year ago. Prices on the West Coast continued to outpace other regions, averaging $4.19 a gallon last week, a decline of 3 cents for the week. New England and Central Atlantic prices were the next-highest, averaging $4.00 a gallon, an increase of 4 cents for New England and 2 cents for the Central Atlantic region.

Gas prices help push hybrid, electric cars - Americans are buying record numbers of hybrid and electric cars as gas prices climb and new models arrive in showrooms, giving the vehicles their greatest share yet of the U.S. auto market.  Consumers bought a record 52,000 gas-electric hybrids and all-electric cars in March, up from 34,000 during the same month last year.  The two categories combined made up 3.64 percent of U.S. sales, their highest monthly market share ever, according to Ward’s AutoInfoBank. The previous high was 3.56 percent in July 2009, when the Cash for Clunkers program encouraged people to trade in old gas guzzlers for more fuel-efficient cars.And while their share of the market remains small, it’s a big leap from the start of the year, when hybrids and electrics made up 2.38 percent of new car sales

Food, Energy and Cars and Driver-less Cars - A few weeks ago I showed energy consumption as a share of nominal personal consumption expenditures (PCE ) and though it would be interesting to follow up with food and energy as a share of PCE. From 1959 to 1999 food and energy fell from about 33% of PCE to 17.5%. This almost 50% drop in food and energy as a share of spending reflected several things. But overall it probably reflect rising standards of living as the fall allowed consumers to spend their income on other things. But note that since 1999 food and energy have been absorbing a rising share of total consumption. Something similar happened in the 1970s when the real price of food and energy also rose. One way consumers adjust to higher energy prices or a lower standard of living is to delay purchasing a new car. This is such a strong tendency that energy and autos combined account for almost a constant share of PCE.. Looked at another way, the number of cars and light trucks on the road per household has stagnated since about 1999. The number of cars and light trucks per driver has followed a similar pattern.  The bulge in the number of drivers in the 1960s-70s is the baby-boomers starting to drive. But in about another 15 years or so they will be reaching the age where they are going to have to turn in their drivers licenses and quit driving. Is this the source of demand that Google is targeting with its current experiments with driver-less cars?

Vehicle Miles Driven And the Economic Contraction - The Depart of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through February. Travel on all roads and streets changed by 1.8% (3.9 billion vehicle miles) for February 2012 as compared with February 2011. The 12-month moving average increased by 0.14%. This is the third month of increase after nine consecutive months of decline (PDF report). Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1987. My start date is 1971 because I'm incorporating all the available data from the DOT spreadsheets.Total Miles Driven, however, is one of those metrics that must be adjusted for population growth to provide the most revealing analysis, especially if we're trying to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. I use the Bureau of Labor Statistics' Civilian Noninstitutional Population Age 16 and Over (FRED series CNP16OV). The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971.

Transportation and the New Generation: Why Young People Are Driving Less- From World War II until just a few years ago, the number of miles driven annually on America’s roads steadily increased. Then, at the turn of the century, something changed: Americans began driving less. By 2011, the average American was driving 6 percent fewer miles per year than in 2004. The trend away from driving has been led by young people. From 2001 and 2009, the average annual number of vehicle-miles traveled by young people (16 to 34-year-olds) decreased from 10,300 miles to 7,900 miles per capita – a drop of 23 percent. The trend away from steady growth in driving is likely to be long-lasting – even once the economy recovers. Young people are driving less for a host of reasons – higher gas prices, new licensing laws, improvements in technology that support alternative transportation, and changes in Generation Y’s values and preferences – all factors that are likely to have an impact for years to come.

  • According to the National Household Travel Survey, from 2001 to 2009, the annual number of vehicle-miles traveled by young people (16 to 34-year-olds) decreased from 10,300 miles to 7,900 miles per capita – a drop of 23 percent.
  • In 2009, 16 to 34-year-olds as a whole took 24 percent more bike trips than they took in 2001, despite the age group actually shrinking in size by 2 percent.
  • In 2009, 16 to 34-year-olds walked to destinations 16 percent more frequently than did 16 to 34-year-olds living in 2001.
  • From 2001 to 2009, the number of passenger-miles traveled by 16 to 34-year-olds on public transit increased by 40 percent.
  • According to Federal Highway Administration, from 2000 to 2010, the share of 14 to 34-year-olds without a driver’s license increased from 21 percent to 26 percent.

Let's hear it for higher gasoline prices - Gas prices are on the rise again, which means the “man on the street” will complain to local news reporters about greedy oil companies and foreign cartels, and energy-illiterate pundits and politicians will cry for domestic drilling with wild abandon. But is gasoline, now approaching $4 per gallon in Ohio, really expensive? Consider that a barrel of West Texas Intermediate crude oil, trading for around $100 per barrel in March 2012, is equivalent to 10,000 hours of human labor. The work of one person over their lifetime (about 45 years of manual labor) can be done by just four barrels of oil, which costs $400 today. That’s not a bad deal compared to the annual salary, healthcare costs and pension that an employee would receive over 45 years. Gasoline—and all our fossil energy—has been absurdly cheap over the last two centuries. Even today, fossil fuels are relatively inexpensive for the power they deliver to consumers, companies and governments. Oil’s cheapness has given us economic growth, industrialization and consumerism. And it’s also given us overpopulation, overconsumption, toxic pollution, the depletion of soil, water and rare earth metals, and habitat destruction and its corollary, species extinction.

LA area Port Traffic increases in March, Exports hit new record - The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for March. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.  On a rolling 12 month basis, inbound traffic is up 0.9% from February, and outbound traffic is up 0.2%.  The rolling 12 months of imports started declining last year - and exports seemed to stall. But it now appears both imports and exports are increasing again (slightly). The 2nd graph is the monthly data (with a strong seasonal pattern for imports).  For the month of March, loaded outbound traffic was up 2.6% compared to March 2011, and loaded inbound traffic was up 12.8% compared to March 2011. This is a new record for exports (just above the pre-recession peak).

Industrial Production In March Is Flat... Again - The view that the economy's recent strength was boosted by a warm winter looks a bit more convincing after reviewing this morning's March report on industrial production. After strong gains in December and January, March delivered the second straight month of no change in the Fed's industrial production index. The annual trend in industrial production is still comfortably positive, with March activity higher by 3.8% vs. the year-earlier level. That's a sign that the economy's still growing, although the annual pace is down more than slightly from February's 4.6% rate. Is that merely a technical adjustment that reflects the warm winter factor, which is now fading as we move into spring? Or is there something deeper going on that threatens to bite the cycle down the road?  In the wake of two back-to-back months of flat-lining in the monthly data, the modest retreat in the annual rate looks a bit troubling. But it's hard to say if there's something more than short-term noise here and so it's premature to assume that there's something darker in the works. Indeed, even a 3.8% annual rise in industrial production, assuming we hug this rate for the foreseeable future, is a healthy pace.

Industrial Production unchanged in March, Capacity Utilization declines - From the Fed: Industrial production and Capacity Utilization Industrial production was unchanged in March for a second month but rose at an annual rate of 5.4 percent in the first quarter of 2012. Manufacturing output declined 0.2 percent in March but jumped 10.4 percent at an annual rate in the first quarter. The gain in manufacturing output in the first quarter was broadly based: Even excluding motor vehicles and parts, which jumped at an annual rate of nearly 40 percent, manufacturing output moved up at an annual rate of 8.3 percent and output for all but a few major industries increased 5 percent or more. In March, production at mines rose 0.2 percent and the output of utilities gained 1.5 percent.  The rate of capacity utilization for total industry edged down to 78.6 percent, a rate 2.1 percentage points above its level from a year earlier but 1.7 percentage points below its long-run (1972--2011) average. This graph shows Capacity Utilization. This series is up 11.8 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 78.6% is still 1.7 percentage points below its average from 1972 to 2010 and below the pre-recession levels of 81.3% in December 2007.  The second graph shows industrial production since 1967.

NY Fed: Manufacturing Activity "improved modestly" in April - This was released earlier from the NY Fed: April's Empire State Manufacturing Survey indicates manufacturing activity in New York State improved modestly April’s Empire State Manufacturing Survey indicates that manufacturing activity in New York State improved modestly. Although the general business conditions index fell fourteen points, it remained positive at 6.6. The new orders and shipments indexes also remained positive, but showed only a small increase in orders and shipments. The prices paid index inched downward but remained high, and the prices received index climbed six points to 19.3. The index for number of employees rose to its highest level in nearly a year, indicating a significant increase in employment levels, while the average workweek index fell to a level that indicated only a small increase in hours worked. Future indexes remained quite positive, suggesting a strong and persistent degree of optimism about the six month outlook.The general business index was down sharply to 6.56 from 20.21 in March, and was significantly below the consensus forecast of 18.

Philly Fed: "Regional manufacturing activity expanded modestly" in April Survey - Earlier from the Philly Fed: April 2012 Business Outlook Survey The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged down from a reading of 12.5 in March to 8.5. Indexes for new orders and shipments remained positive but were slightly weaker than their March readings. The indexes for new orders and shipments, which decreased about 1 point, remain at relatively low readings. Firms’ responses suggested a notable pickup in levels of employment this  month. The current employment index, which has been positive for eight consecutive months, increased 11 points, to its highest reading in 11 months. ... The average workweek was near steady this month, with 75 percent of the firms surveyed reporting no change in average hours. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through April. The ISM and total Fed surveys are through March. The average of the Empire State and Philly Fed surveys declined in April, and is at the lowest level this year. Both the NY and Philly Fed surveys indicated expansion in April, at a slower pace than in March, and both were below the consensus forecast.

Facing winds of change: New manufacturing method wipes out factory jobs at Harley - For a look at what's to come for Harley-Davidson, the best place to start is the company's largest motorcycle factory, where change has been described as "leaning into a hurricane." Where 41 buildings once stood on 232 acres, there's now an enormous vacant lot. Gone are about half of the 2,300 jobs that, for decades, supported families in this blue-collar town. The old buildings, some of them dating to World War II, were demolished as Harley-Davidson wiped the slate clean and developed a new manufacturing system that's the template for changes coming to Harley plants in Wisconsin and Kansas City, Mo. York's new factory, housed in one building, is much smaller than the old sprawling campus patched together over decades. But this year it will assemble more bikes than were built in the old system two years ago. One motorcycle rolls off the assembly line here every 89 seconds.

Romney Visits Empty Factory to Mock Obama -  Mitt Romney, shadowing President Barack Obama on the campaign trail, went to the battleground state of Ohio to appear at a shuttered industrial warehouse to dramatize his complaints about the incumbent’s economic policies.“It underscores the failure of this president’s policies with regard to getting the economy moving,’’ Mr. Romney said standing in a cavernous, empty warehouse festooned with a banner that read `Obama Isn’t Working.’ “If you want to know where his vision leads open your eyes.’’ The setting, however,  sent a mixed if not misleading message: The National Gypsum Co.’s warehouse closed not on Mr. Obama’s watch but during the presidency of George W. Bush, in June 2008, during the depths of the recession.

When Factories Close, the Pain Lasts for Decades - The Federal Reserve Bank of Chicago has updated research that carries a sobering message for cities with big manufacturing legacies. Basically, the more factories a place used to have, the less growth it enjoys — even decades later. Bill Testa, director of regional research in the Chicago Fed’s economic research department, looked at 83 metro areas in the Midwest and found that — even when differing levels of educational attainment are taken into account — the more heavily oriented a city was on manufacturing in the past, the more depressed its subsequent growth. “For example, we correlated MSA [metropolitan statistical area] manufacturing concentration in 1969 with subsequent growth during 1990 to 2009 and found that the manufacturing legacy was a significant drag on economic growth and development for the much later period,” Mr. Testa wrote. Mr. Testa’s examination drew on research led by Harvard University economist Edward Glaeser in 1995, which found a similar pattern in cities nationwide.

Small firms avoiding loans, citing slow recovery -  Small firms are faring better, but they aren't seeing enough fortune ahead to justify taking on debt to grow.The slow pace of the economic recovery is to blame, because while consumer demand keeps growing, it just hasn't been strong enough for most firms to rationalize investing in themselves.. "I just don't want to run the risk of owing to the bank. They're much more ruthless. Vendors can work with me." His reluctance is shared by many, according to small business bankers at several major financial institutions. They point to Federal Reserve figures that show the slow and weak rise banks have seen in small business loan demand. Additionally, those bankers have been fighting off accusations that big banks haven't met a clamoring demand for small business loans. They note that the vast majority of small companies have held back from tapping their existing lines of credit. Firms have spent more resources drawing down the debt instead, they say.

U.S. Postal Service closings make small businesses nervous -- The potential of 250 U.S. postal offices and distribution centers closing next month is spreading jitters among the nation's small business hubs. On May 15, unless Congress steps in, the Postal Service will proceed on its plans to make these cuts in a bid to consolidate and save money. Owners of small companies in cities like Tulsa, Okla., fear that their businesses will suffer if their local mail-processing and distribution centers are shut down. Some areas have already faced closures in the past year, and small firms there are going through a difficult adjustment. In Huntsville, Ala., small business owners are nervous about their local USPS mail-processing and distribution center shutting down completely next month. USPS had already decided last year to phase out operations at that facility, separate from the 250 currently under evaluation, as part of its ongoing effort to shrink costs. As a result, all outgoing mail generated in Huntsville for delivery to local zip codes is already going more than 100 miles away to a mail-processing center in Birmingham and then returning to Huntsville,

Mail Carriers Try Own Rescue - The nation's largest mail-carriers union wants the U.S. Postal Service to raise stamp prices and expand mail delivery. In a report to be released Tuesday, it sharply criticizes the agency's own rescue plan and argues the Postal Service will become profitable only if it restructures itself like a business. The National Association of Letter Carriers also indicated it would be willing to ask its nearly 300,000 members for more "tough sacrifices" to get the Postal Service out of the red. It didn't specify what concessions it would seek from members. The Postal Service's proposal to close thousands of post offices and cut back on the number of days that mail is delivered "won't work" and would accelerate the agency's decline, according to the six-page report by Ron Bloom, President Barack Obama's former auto czar, and investment bank Lazard Ltd

Do Small Businesses Create Jobs? - The Small Business Administration recently refined its definition of a “small business” for the purposes of qualifying for federal aid and contract set-asides. Depending on the industry, a small business may be defined by the number of employees, receipts, assets or other factors. The new definitions are industry-specific. About 8,350 companies are believed to be newly eligible for the small-business designation, according to a Bloomberg Government article published in The Washington Post. Among those affected, 958 engineering and technical services contractors that were previously considered large businesses will now be considered small. In 2011, $220 million in federal contracts for engineering and technical services were reserved for small businesses. Census Bureau data show that 78 percent of businesses have no employees. Among those with employees, three-fifths have one to four employees, and 98 percent have fewer than 100. However, half of all workers are employed by large companies (those with more than 500 employees), and a third work for very large companies (those with more than 5,000 employees).

U.S. Unemployment Provides Mixed Picture in Mid-April - U.S. unemployment, as measured by Gallup on a preliminary basis without seasonal adjustment, declined to 8.2% in mid-April from 8.4% in March. However, the government's likely seasonal adjustment of 0.3 percentage points leads to a Gallup seasonally adjusted U.S. unemployment rate of 8.5% in mid-April, up from 8.1% last month. Applying the government's seasonal correction factor from April 2011 (+0.3 points) to the current mid-April data yields a seasonally adjusted estimate of 8.5% unemployment, up from March. This is much higher than the 7.9% seasonally adjusted monthly low for Gallup's U.S. unemployment rate, seen in January of this year. If it holds, it could also indicate a significant reversal in the recent downward trend of the government's seasonally adjusted unemployment rate. Regardless, Gallup data show that unemployment is far below year-ago levels. April's preliminary unadjusted unemployment rate is down 1.2 points from April 2011 and the adjusted unemployment rate is down 1.3 points year-over-year. Overall, it doesn't seem as if the downward trend in the seasonally adjusted unemployment rate is continuing to gain momentum, at least as of mid-April.

Economist Sees a Dark Side to Falling Unemployment - Ian Shepherdson is concerned that the U.S. unemployment rate might continue to fall faster than the Federal Reserve is projecting. Shepherdson thinks Fed Chairman Ben Bernanke and Vice Chairman Janet Yellen are too dovish—that is, they’re underestimating the strength of job growth. He fears the Fed’s rate-setting committee will keep interest rates too low for too long, causing inflation to jump. The Fed has said it anticipates keeping rates “exceptionally low” through the end of 2014. I wrote about the Fed’s take on this on April 5. Shepherdson may not be right about this, but a lot of people feel the same way, so it’s worth considering the argument. He operates from a London base as chief U.S. economist for High Frequency Economics in Valhalla, N.Y. His claim: While job creation is great, it’s not healthy for unemployment to be falling so rapidly when the economy is expanding at such a modest pace. It means productivity growth is low. It was just 0.9 percent annualized in the last quarter of 2011. Crucially, Shepherdson thinks it will stay low.

U.S. Unemployment Aid Applications Decline Slightly - The number of people seeking U.S. unemployment benefits dipped last week but remained higher than it’s been in recent weeks. The rise in applications in the past two weeks could signal that the job market is slowing. The Labor Department said Thursday that weekly applications declined 2,000 to a seasonally adjusted 386,000. The previous week’s data was revised up 8,000 to 388,000. The four-week average, a less volatile measure, rose 5,500 to 374,750. That’s the highest level in three months. But it still 9 percent lower than the level from September.  Applications have started to level off in recent weeks after months of steady declines. When applications fall below 375,000, it generally suggests hiring will be strong enough to lower the unemployment rate.

Weekly Unemployment Claims: The Second Week of Unexpectedly Higher Claims - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 386,000 new claims is a decrease of 2,000, but that was from an upward revision of 8,000 for the previous week. The less volatile and closely watched four-week moving average came in at 374,750, a rise of 5,500. Today's jump in the four-week MA is the second largest since April 30th of last year -- the largest being last week's 6,250 increase. Here is the official statement from the Department of Labor:  In the week ending April 14, the advance figure for seasonally adjusted initial claims was 386,000, a decrease of 2,000 from the previous week's revised figure of 388,000. The 4-week moving average was 374,750, an increase of 5,500 from the previous week's revised average of 369,250.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending April 7, unchanged from the prior week's unrevised rate of 2.6 percent.  The advance number for seasonally adjusted insured unemployment during the week ending April 7 was 3,297,000, an increase of 26,000 from the preceding week's revised level of 3,271,000. The 4-week moving average was 3,317,750, a decrease of 21,500 from the preceding week's revised average of 3,339,250.  As we can see, there's a good bit of volatility in this indicator, which is why the 4-week moving average (shown in the callouts) is a more useful number than the weekly data.

Initial Claims Up - Time to Worry?, by Tim Duy: From Bloomberg: Jobless claims fell by 2,000 to 386,000 in the week ended April 14 from a revised 388,000 the prior period that was higher than initially estimated, Labor Department figures showed today in Washington. The median forecast of 47 economists surveyed by Bloomberg News called for a drop to 370,000. Revisions to previous data have been larger than normal and the government is trying to determine the cause, a Labor Department spokesman said as the figures were released to the press. Recent softness is pulling the 4-week moving average higher: Cause for concern? Given the history of this series, I have trouble see the recent increase as anything but consistent with the normal behavior of claims: While I would like to see a steady, consistent decline to something closer to 300k, that was never really in the cards. I would become more concerned if claims backed up as they did in the beginning of last year, but that is not yet the case. That said, arguably we are seeing further evidence that job growth will continue to fall short of what many would like to see, which I think is something closer to 300k/per month rather than the 210k average of the last three months. Indeed, we could be seeing the impact of slowing productivity growth - absent a more rapid pace of final demand growth to boost sales and profits, firms are turning to labor to save costs.

Is The Recent Rise In Jobless Claims Warning Of Another Spring Slowdown? - A week ago I wondered if the rise in jobless claims in the first week of the month was due to a seasonal factors, and the inquiry still stands. But as you’ll see, today’s update raises more questions than it answers, although the short list of potential culprits starts with the seasonal influence of Easter. As for the straight numbers, new filings for unemployment benefits last week fell slightly by 2,000 to a seasonally adjusted 386,000. Historical context is always crucial for evaluating the number du jour, and more so than usual with today’s news.  The latest drop doesn't mean much, however, given the revision to the previous report. With the fresh data in hand, it's clear that there's been a modest change in the trend--a change that may or may not be temporary. As the chart below reminds, jobless climbs jumped by an unusually large amount—unusual, that is, relative to history over the last 11 months. The revised data released today shows that new claims rose during the week through April 7—Easter week—by a seasonally adjusted 26,000. We haven’t seen a weekly increase of that magnitude since April 2011. That’s not an encouraging comparison. The surge in jobless claims a year ago foreshadowed a rough patch for the economy. The turbulence passed, but the question now is whether we’re headed for a new bout of trouble?

Trends in Nonfarm Employment, Civilian Employment, Weekly Unemployment Claims - Initial unemployment claims have generally been trending lower, but in a very choppy manner. One way to smooth out the weekly claims reports is to use seasonal adjustments. Another way is to use 4-week moving averages. However, both methods are subject to fluctuations around floating holidays such as Thanksgiving and Easter. Adding a couple of extra weeks to the moving averages and comparing not-seasonally-adjusted numbers to the same six weeks in prior years helps even more. Here are a couple of charts to consider. "Unemployment Claims 6-Week Moving Average vs. Same 6 Weeks in Prior Years" Certainly the number of initial claims has fallen dramatically but claims are still above levels from 2004 through 2008. The above chart shows 6-week moving averages of employees with a job and with benefits, compared to the same 6 weeks in prior years. Self-employed are not eligible for unemployment benefits.

How The Economy Churns - I’ve been playing with the JOLTS data and I don’t have anything too too solid to report but I did want to reinforce some of my earlier points about how different the US economy as a whole is from the economy we have in our minds. We usually think of a worker as a breadwinning head household in a career job. He or she has a steady life that may be rocked by recession. However, one of our most job heavy sectors is Leisure and Hospitality. Look at its basic dynamics Its quite large at nearly 10% of all jobs. Its fast growing generally. Was one of the few sectors to show increased employment from when the recession ended and it recent months may be growing faster than at any time during the last recover. In addition look how dominate it is in terms of overall job growth. Here are the 12 month moving averages.  Currently the 12 month moving average of all job growth is around 150K, suggesting that nearly 1/5 net new jobs is Leisure and Hospitality.  Generally speaking this is a trend I would expect to continue as the End of Retail is combined with increasing income inequality. We should expect low skilled workers to become increasingly concentrated in direct service jobs like hot food and drinks.

U.S. Standard of Living Has Fallen More Than 50% --  On several occasions, I have glibly referred to how it now takes two spouses working to equal the wages of a one-income family of 40 years ago. Unfortunately, that is now an understatement. In fact, Western wages have plummeted so low that a two-income family is now (on average) 15% poorer than a one-income family of 40 years ago.Regular readers will recognize the chart below on U.S. average wages. Using the year 2000 as the numerical base from which to "zero" all of the numbers, real wages peaked in 1970 at around $20/hour. Today the average worker makes $8.50/hour -- more than 57% less than in 1970. And since the average wage directly determines the standard of living of our society, we can see that the average standard of living in the U.S. has plummeted by over 57% over a span of 40 years. There are no "tricks" here. Indeed, all of the tricks are used by our governments. The green line shows average wages, discounted by inflation calculated with the same methodology for all 40 years. Obviously that is the only way in which we can compare any data over time: through applying identical parameters to it each year. Then we have the blue line: showing wage data discounted with our "official" inflation rate. The problem? The methodology used by our governments to calculate inflation in 1975 was different from the method they used in 1985, which was different than the method they used in 1995, which was different than the method they used in 2005.

Obama Administration to Kick-Off New Unemployment Program - The Obama administration on Thursday will kick-off a program that allows people to experiment with a new job while still receiving unemployment benefits as part of an effort to help some 5.3 million Americans who have been out of work for six months or longer. Ten states will be able to apply to participate in the program, and the Labor Department will announce the application process Thursday, according to a White House official. Lawmakers and some economists have expressed fears that the current benefits system for the unemployed doesn’t do enough to encourage them to find job training, and may prolong unemployment. President Barack Obama and lawmakers have said they want to revamp the unemployment system.  The program the Obama administration is kicking-off Thursday was part of a deal President Obama struck with lawmakers. It’s modeled after an unemployment program in Georgia. Under that program, workers continue to collect unemployment benefits, plus a small stipend to cover transportation and other expenses–at no cost to the employer. After eight weeks of training, the company may hire the person, or not. It can amount to a free tryout.

'Bridge To Work' Will Let States Experiment With Unemployment Insurance: -- The Obama administration on Thursday invited states to try out new unemployment insurance schemes that would allow businesses to take on new workers with states paying their wages. Lawmakers tucked several reforms to the unemployment system into a February deal to reauthorize an expiring Social Security payroll tax cut and federal unemployment insurance, including one to let states drug test the jobless and another to give 10 states waivers to experiment with "demonstration projects." The projects are designed to connect jobless workers with employers, at least for a short time. The scheme is inspired by a Georgia program called Georgia Works, which allowed Georgia businesses to train unemployed Georgians who receive unemployment insurance for eight weeks without having to pay them. The program, a version of which the administration first proposed last fall, has long been popular with Republicans.  "This is a type of a program that allows more Americans under the unemployment insurance system to have greater opportunities to connect to work."

"Your EBT Card Has Been Denied": 700,000 Are About To Lose Their Extended Jobless Claims Benefits - While virtually everyone has opined on the topic of the massive fiscal "cliff" set to take place on January 1, 2013, which could crush US GDP unless American politicians manage to find a way to end their acrimonious ways, most forget that a far more tangible cliff is set to take place much sooner, specifically over the next several months, as those currently collecting handouts from the government in the form of extended unemployment benefits (i.e., those who have been out of a job for a year) are about to get as angry as Germants pre-funding TARGET3, once the free money stops. Goldman explains why: "First, more than 150,000 workers per month exhaust their allowed benefits. Second, recently legislated thresholds will reduce benefit eligibility in many states with below-average unemployment rates beginning in June. Third, apart from legislative changes, labor market improvement in some states has taken the state-level unemployment rate below eligibility thresholds, with many states looking at likely expiration of one or more tiers of benefits around mid-year."  The net result: by June some 700,000 people who are currently collecting benefits will lose everything.

The War on Public-Sector Workers: Politicians across the country are using heaping doses of the politics of envy to try to arouse the anger of workers. However, their targets are not the corporate CEOs pulling down tens of millions of dollars a year in pay and bonuses. Nor is it the Wall Street crew that got incredibly rich inflating the housing bubble and then took government handouts to stay alive through the bust. The targets of these politicians' wrath are school teachers, firefighters, and other public-sector workers. They are outraged that many of these workers still earn enough to support a middle-class family. Even more outrageous, many of these workers have traditional defined-benefit pensions that assure them a modicum of comfort in retirement. Having managed to ensure that most workers in the private sector did not benefit much from economic growth over the last three decades, the same upward redistributionist crew is turning their guns on public-sector workers. There are two major deceptions in their story. First, after working to eliminate traditional pensions in the private sector, they now tell us that getting a pension in the form of a guaranteed benefit is hugely more valuable than having the same money placed in a 401(k)-type defined contribution account. Second, after shoving stock down everyone's throat in the bubble years, they now tell us we cannot expect a very good return from investing pension funds in the market.

America: A workforce on the wane - Ms Brady worked at the Fleetwood caravan plant too, for 40 years – 148 staff remained in the final days before operations ceased in January 2011. Ms Wilson was in management at Gilmour, a Somerset maker of garden hoses and sprinklers that closed its doors in 2009 with the loss of 330 jobs. It is nothing new when an out-of-town owner closes down a small slice of Americana. Gilmour is part of Robert Bosch, the German industrial group; Fleetwood was owned by Blackstreet Capital, a Maryland private equity firm that townsfolk say behaved disgracefully, giving no notice of the closure. Blackstreet did not immediately respond to a request for comment. But as a small and relatively isolated labour market that suffered a painful shock during the recession that followed the financial crisis, Somerset may help to answer a crucial question about the US economy: why have people dropped out of the labour force and are they returning? There are about 5m more unemployed Americans today than at the start of 2008. They count as part of a workforce in which the unemployment rate stands at 8.2 per cent. But in that time labour force participation has also declined by two percentage points of the civilian adult population, equivalent to another 5m Americans who are not working, and not looking for work, but are doing something else. “Had the labour force participation rate not declined from around 66 per cent in mid-2008 to under 64 per cent in February, the unemployment rate would still be over 10 per cent,”

U.S. Companies, Hiring Abroad - American-owned multinational companies grew in 2010, but they mostly grew abroad. A new Bureau of Economic Analysis report shows that in 2010, the worldwide work force employed by United States-based multinationals grew 0.5 percent, to 34 million workers. Within these companies, their foreign payrolls grew 1.5 percent, to 11 million overseas workers. Their domestic payrolls, on the other hand, grew about 0.1 percent, to 23 million workers. That meager growth at home was still welcome news, though, considering that in the same year total private sector employment in the United States fell by 0.6 percent. The United States economy was still reeling from the financial crisis, and a lot of that job growth at home was likely enabled by sales growth abroad.  Over time, fast growth overseas coupled with stagnant growth or even losses at home mean that these international conglomerates are shifting a larger share of their talent base abroad. As you can see from the chart above, in 1989, 79 percent of the labor force working for American multinational corporations was working in the United States. As of 2010, that share had fallen to 67.7 percent.

Asian Call Center Workers Trained With U.S. Tax Dollars -  Despite President Obama's recent call for companies to "insource" jobs sent overseas, it turns out that the federal government itself is spending millions of dollars to train foreign students for employment in some booming career fields--including working in offshore call centers that serve U.S. businesses.  The program is called JEEP, which stands for Job Enabling English Proficiency. It's available to college students in the Philippines through USAID. That's the same agency that until a couple of years ago was spending millions of dollars in U.S. taxpayer money to train offshore IT workers in Sri Lanka--until I reported that inconvenient truth in this story. The ensuing uproar led to the Sri Lanka initiative's termination.  A JEEP document published by USAID notes that the program "is classroom based, and focuses on the specialized English skills required by employers in areas such as: nursing and allied healthcare; maritime services; travel and tourism services; business process outsourcing (BPO), and other areas of international employment." Students--there are about 23,000 in the Philippines currently enrolled--commit to undertake 400 hours of training during two years of study.

NAFTA and Free Trade Do Not Belong in the Same Sentence - Dean Baker - Megan MaCardle turned over her blog to Adam Ozimek to spread some misinformation about NAFTA and trade policy. Ozimek headlines the piece, "4 politically controversial issues where all economists agree." While I'm pretty comfortable with three of the four, the claim that all economists agree that, "the benefits of free trade and NAFTA far outweigh the costs" is highly misleading. First, NAFTA was not about free trade. First and foremost if was about reducing barriers that made U.S, companies reluctant to invest in Mexico. This meant prohibiting Mexico from expropriating factories and outlawing any restrictions on the repatriation of profits to the United States. The agreement did little to loosen the obstacles facing highly-educated professionals in Mexico, like doctors and lawyers, from working in the United States. If the agreement had freed up trade in this area, it could have led to gains to consumers in the tens of billions of dollars a year. In other areas, like patents and copyrights, NAFTA increased protection by extending the length and scope of these government granted monopolies. Mexico was forced to develop a U.S. type patent system for prescription drugs which led to considerably higher drug prices.  The winners are the businesses that are in a position to take advantage of access to cheap labor in Mexico. The losers are the manufacturing workers in the United States who will now have to accept lower wages or lose their job.

The immigration-averse USA - Ann Lee’s op-ed on the EB-5 visa program, which is designed to give visas to people who invest at least $500,000 in the country and create at least ten jobs, is worth reading in conjunction with the WSJ excerpt from Kip Hawley’s new book, explaining why and how TSA airport security is so broken. As Reuters showed in an excellent report as long ago as December 2010, the EB-5 program is horribly broken, with the brunt of the pain being borne by people who have really done nothing wrong at all — immigrants who invested a lot of money in US businesses, and who created jobs, but who were then rejected by Customs when they applied for their green card. In our 2010 report, Reuters worked out that of 13,719 immigrant investors who tried to take part in the EB-5 program since 1990, just 3,127 ended up with green cards.Anybody who’s ever applied for a US visa or green card will not be surprised, but at the same time it’s easy to see how the EB-5 program is never going to generate all that much investment in the US so long as stories like this continue.

The Real Face of Stay-At-Home Mothers: Those Who Have No Other Financial Option - A study in 2010 conducted by the Census, looking at its own data on stay-at-home mothers, showed that as compared to the make-up in 1979, today’s moms in the home are younger, less educated, and much more likely to be Hispanic – and in particular, foreign born. The report states, “on average stay-at-home mothers do not have higher levels of educational attainment compared with their counterparts.” In fact, 18 percent lack a high school degree, compared to just 7 percent of women in the workforce. They are also younger: women under 35 are more likely to be stay-at-home mothers now than they were in 1969. The statistics on race paint a clear picture that the face of stay-at-home motherhood is more and more likely to be Hispanic. In 1969, 94 percent of stay-at-home mothers were white. That figure dropped nine percentage points between then and 2009. Meanwhile, the number of Hispanic stay-at-home mothers shot up. In 1979, a mere seven percent of stay-at-home mothers were Hispanic, but that increased to 27 percent in 2009. That’s a difference of about 11 percent between stay-at-home mothers and other mothers. These women also tend to be foreign born: 23 percent of stay-at-home mothers are from another country, as compared to 11 percent of other mothers. One of the major factors, the Census study says, may be that with less education and potentially more limited job skills, it may be a practical consideration.

The Games Politicans Play With Employment Statistics - Today our statistic is from Mitt Romney. Team Romney claims women have lost 92.3% of the jobs since Obama took office. U.S. Treasury Secretary Geithner, acting as political pundit, calls Romney's new favorite statistic ridiculous. First off Romney is right. Since Obama took office in January 2009, the below graph shows the total job losses by women as a percentage of the total job losses. As of March 2012, it is 92.3%.  Yet if one goes back to December 2007, the official start of the great recession, the percentage of total jobs lost by sex become more even, implying men got it first and women got it later. Women have lost -1.840 million jobs, or 2.73%. By the same date, men are down -3.321 million jobs, or 4.7%. Overall payrolls are down -5.161 million jobs. Below is the graph of women employees to payrolls as presented by the BLS.  Taking the less accurate, current population survey and using January 2009 as the base number of employed, women are still down -304,000 while men have gained a meager 151,000 to their employed ranks.  The explanation on why women from 2009 onward are the majority of job losses isn't quite up to snuff. Some are referring to manufacturing and construction which took heavy losses in 2008 and their better job growth numbers.  Somehow these various fields are not supposed to be for one sex, anyone remember this? Therefore claims these statistics are misleading and ridiculous doesn't quite cut it. Below is a graph of women (dark red) versus men (blue green) payrolls. While it's clear early in the recession we had a mancession, or 75.4% of the job losses were men, it also appears there was a womcession after early 2008, or a recession delayed.

State and Local Government Payroll Employment Stabilizing? - A few months ago I wrote: It is looking like there will be less drag from state and local governments in 2012, and that most of the drag will be over by the end of Q2 (end of FY 2012). This doesn't mean state and local government will add to GDP in the 2nd half of 2012, just that the drag on GDP and employment will probably end. Just getting rid of the drag will help.It is time for an update - it is early in the year, but it is possible the employment drag from state and local governments has already ended. In fact, state and local government have added 14 thousand jobs since December. This graph shows total state and government payroll employment since January 2007. Note: Some of the stimulus spending from the American Recovery and Reinvestment Act probably kept state and local employment from declining faster in 2009. Of course the Federal government is still losing workers (53,000 over the last year), but it looks like state and local government employment is stabilizing.

State Unemployment Rates decline in 30 states in March - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were little changed in March. Thirty states recorded unemployment rate decreases, 8 states posted rate increases, and 12 states and the District of Columbia had no change, the U.S. Bureau of Labor Statistics reported today. Forty-nine states and the District of Columbia registered unemployment rate decreases from a year earlier, while New York experienced an increase.  Nevada continued to record the highest unemployment rate among the states, 12.0 percent in March. Rhode Island and California posted the next highest rates, 11.1 and 11.0 percent, respectively. North Dakota again registered the lowest jobless rate, 3.0 percent, followed by Nebraska, 4.0 percent. This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). Every state has some blue - indicating no state is currently at the maximum during the recession. The states are ranked by the highest current unemployment rate. Only three states still have double digit unemployment rates: Nevada, Rhode Island, and California. This is the fewest since January 2009. In early 2010, 18 states and D.C. had double digit unemployment rates.

Republican Whipping-Boy Illinois Beats Wisconsin on Jobs - Scott Walker, the Republican governor facing a recall vote in Wisconsin, traveled over the Illinois line to argue that the tax increase backed by his Democratic counterpart Pat Quinn is killing jobs even as the Midwest rebounds from recession. “Is it any wonder because of choices that were made right here in the state’s capital?” Walker, 44, said in an April 17 speech in Springfield. “When you raise taxes on businesses, that wealth and opportunity and those jobs more often than not go somewhere else.”  A broader snapshot tells a different tale. Illinois ranked third while Wisconsin placed 42nd in the most recent Bloomberg Economic Evaluation of States index, which includes personal income, tax revenue and employment. Illinois gained 32,000 jobs in the 12 months ending in February, the U.S. Bureau of Labor Statistics found. Wisconsin, where Walker promised to create 250,000 jobs with the help of business-tax breaks, lost 16,900.

Structural Recession and the States - One reason to think that this recession is not structural, at least in the way that some people have argued is to look at state-by-state performance. That why you pick up not only the big industry effects but the multiplier effects from that industry. Here is private sector employment in Michigan over the last 20 years or so. The thing to note is that what happened to Michigan happened in the late 1990s and has been trending ever since. If anything this recovery is a reversal of that. This is important because Michigan is an obvious manufacturing and “old” economy state. You could actually make an argument that some of the structural problem is that the economy was realigning so that people were moving from Michigan to Nevada and then whoops Michigan recovered and so now who wants to live in Nevada. Thus Nevada is stuck in rut monetary policy can’t fix. Though I think that is not the strongest of stories. Ohio shows a similar pattern:

Workers' Pay Divide Persists - The gap between America's highest- and lowest-paid workers is widening. Labor Department figures released Tuesday show that between the end of the recession in mid-2009 and the first quarter of 2012, earnings of Americans at the top—meaning those who earned more than 90% of all workers—rose 7%, before adjusting for inflation. During the same period, wages of those at the bottom—meaning those who earned less than 90% of all workers—rose 2.5%. That pay difference predates the global financial crisis: Between 2003 and 2007, wages grew 12.9% for high earners, compared with 8.4% for the lowest-paid 10% of workers. Wages at the top have been growing more rapidly than those at the bottom for decades. Among the explanations offered by academic economists are globalization and the rise of technology. Globalization has shifted many of America's low-skilled, high-paid manufacturing jobs overseas, while technology has made U.S. firms more productive but rendered some jobs obsolete. The result: America's labor market increasingly looks divided between jobs that require high education and those that don't. "One of the most important factors is the rising value of a college or post-college degree," said David Autor of the Massachusetts Institute of Technology. "People who have four-year degrees—and even more so, those with graduate degrees—have done well in the last 30 years."

Two-paycheck couples, working because they must - Instead of fighting a phony mommy war over what Hilary Rosen said about Ann Romney, we should face the fact that most families these days cannot afford to have one parent stay home with the kids. This is not about “lifestyle” or “values.” . The public debate seems premised on the idea that all two-parent families have a choice as to whether one or both work. That’s still true for the better-off. But this choice is denied to most American families. They have had to send two people into the workforce whether they wanted to or not. Thus the importance of a study released this week by the Center for American Progress that deserves wide attention. The report demonstrates conclusively that the ruckus over Ann Romney’s decisions is 30 years out of date. Its core conclusion: “Most children today are growing up in families without a full-time, stay-at-home caregiver.” “In 2010, among families with children,” the study notes, “nearly half (44.8 percent) were headed by two working parents and another one in four (26.1 percent) were headed by a single parent. As a result, fewer than one in three (28.7 percent) children now have a stay-at-home parent, compared to more than half (52.6 percent) in 1975, only a generation ago.”

Two steps to increase the size of the middle class - So how do we re-create the American middle class? Making our loopy tax code more equitable appears to be off the agenda, what with Senate Republicans’ refusal Monday to allow a vote on a tax hike for millionaires. With the Southern wage for manufacturing — roughly $14 an hour — becoming the national norm, and with hiring more prevalent for low-wage restaurant and retail jobs than for positions in higher-paid industries, the incomes of most Americans will continue to stagnate, if not decline.  Recently, though, two proposals have emerged that could boost Americans’ incomes. One — part of an omnibus stimulus measure from Sen. Tom Harkin (D-Iowa) — would raise the minimum wage and index it to the cost of living. The second, laid out in the new book “Why Labor Organizing Should Be a Civil Right,” by Richard Kahlenberg and Moshe Marvit, would extend the employment protections of the Civil Rights Act — which forbids firing workers for reasons of race, gender, age and disability — to workers seeking to join a union.Today, the federal hourly minimum wage is $7.25, which annualizes to a munificent $15,080. Had the minimum wage increased in line with productivity since 1968, when the wage reached its highest level as a percentage of the median wage, it would be $21.72, by the calculations of John Schmitt of the Center for Economic and Policy Research. But since the 1970s, all additional income from productivity increases has gone to the nation’s wealthiest 10 percent, according to economists Robert Gordon and Ian Dew-Becker.

That’s An Idea! Raise the Minimum Wage - In 2007, Democrats passed an increase in the minimum wage, and got George W. Bush to sign it by making it the scraps exchanged for more war funding. In the 2008 campaign, most of the Democratic candidates, including the eventual winner, expressed support for indexing the minimum wage to inflation, so it maintained its value in real dollars. But this never became a part of top-level Democratic legislating when they held both houses of Congress, and certainly not now, with Republicans in control of the House. Meanwhile, in this election season, Mitt Romney actually endorsed indexing the minimum wage to inflation, at least until his primary got a little dicey and he had to pull back. So we have two parallel conversations: one in the context of election campaigns, where virtually everyone supports increasing the minimum wage, and one in the context of actual legislation, where the subject almost never comes up. That’s why this editorial from the Editors at Bloomberg, of all thinks, is a useful corrective. First of all, the increases to the minimum wage in 2007, which were fully phased in by 2009, didn’t even rise to the level in real dollars of the minimum wage in 1968. A full-time minimum wage salary would still find you in poverty. Tom Harkin has legislation to increase the minimum wage to $9.80 an hour by 2014, along with indexing to inflation, and the Bloomberg editors support it (doubly interesting, considering how their namesake, Michael Bloomberg, compared a New York City with a living wage to a Soviet dystopia):

How Is Inflation a Highly Regressive tax on Wages? - Dean Baker - No one expects great economic analysis from the Post, especially on its opinion page, but the conclusion of David M. Smirk's piece on the euro crisis must have left millions scratching their heads. The column told readers: "Inflation, of course, is a highly regressive 'tax' on already stagnating wages and salaries. No wonder European governments are dropping like flies." Actually, most wages follow in step with inflation, although some workers do see declines in real wages when inflation rises. However, the biggest losers are creditors who are almost by definition wealthy, since people owe them money. If a creditor has lent out $100 million at 2 percent interest (e.g. buying a 10-year U.S. or German government bond) and the inflation rate rises from 2 percent to 4 percent, this creditor has lost an amount equal to 100 percent of his expected income or 2 percent of his wealth. This is a far larger loss than any worker could experience as a result of this increase in the inflation rate. Also, most workers are debtors to some extent. They are likely to have mortgage debt, credit care debt, student loan debt and or car debt. A higher rate of inflation means that they can repay this debt in money that is worth less than the money they borrowed.

Inequality and Keynesian Economics - Paul Krugman and Robin Wells have an interesting article in the Occupy Handbook edited by Janet Byrne that has just come out that has just been reprinted at (Actually, it turns out we also have a paper in the volume, see this post). Krugman and Wells articulate and expand on a thesis that they have suggested previously. They start by arguing that the huge increase in income inequality has also had major political consequences. So far so good. This is in line with our perspective in Why Nations Fail, and it’s something we have argued elsewhere, for example here. Next comes the original part of Krugman and Wells’s argument: the main corrosive effect of this inequality is in preventing Keynesian policies to combat the recession 2007-2008 and the sharp increase in unemployment that resulted. The idea here is that the “right” (the GOP) opposes any government intervention, and Keynesian fiscal policies and work programs that would have increased employment and combatted the recession are opposed by the right because, with increased inequality, they have become more beholden to the very wealthy. Though intriguing, this idea is not backed up with direct evidence by Krugman and Wells. It may well be true, but it is also a curious thesis. Here are some of the things we find less than fully clear about this thesis.

Jamie Galbraith on Inequality and Instability - (3 videos) Real News Network interviewed Jamie Galbraith on his new book, Inequality and Instability, in which he argues the two phenomena are linked. This extract will give you a flavor of the discussion. Per Galbraith: There has been a prevailing doctrine, a dogma in Europe, which holds that Europe, which has suffered from relatively high unemployment since the early 1970s compared to the United States, was suffering that unemployment because it was holding on to strongly egalitarian policies, strongly social democratic or even socialist economic institutions. And what we found was that in fact when you do that, European inequality, taking into account the differences that exist between, let’s say, Germany and Poland or between Norway and Portugal, is actually larger in wages than it is in the United States. And that was a very interesting, striking finding, which then basically said that the data between the United States and Europe further support the argument, the basic argument that I would make, the basic argument that we would come to, which is that the more egalitarian system measured at the right level will tend to have lower unemployment.

It’s all downhill for US equality - FT - Never mind the wave of protests that has occurred in the “Occupy Wall Street” camps, where the “99 per cent” are railing against the richest 1 per cent. What is really sparking polarisation now is a call by President Obama and other Democrats to tax the rich more heavily. Republicans claim that this is tantamount to “class war”. But in spite of all this emotion – or rather, because of it – what is happening in Aspen is thought-provoking. In recent years there has been growing evidence that income inequality is rising in America. Economists calculate, for example, that 23 per cent of all national income is now going to the top 1 per cent of Americans, double the rate seen 25 years ago. That top 1 per cent also hold around 40 per cent of all wealth. But although such statistics have caused hand-wringing, what is less clear is what has actually caused this trend, who precisely is receiving this cash – or, for that matter, what might change the pattern in the years ahead. The work of James K. Galbraith, an economics professor at the University of Texas, offers food for thought. During the past few years, Galbraith and a team of economists have created a centre dedicated to understanding modern patterns of inequality, and they are now releasing this analysis via a new book, Inequality and Instability. Now, as texts go, this is not easy for non-academics to read. But it makes some fascinating points.

Should We Care About Inequality - Its not immediately clear to me that we should care at all about inequality per se. Some folks have argued that income inequality leads to political inequality. Of course, that is not something I am likely to care about either. What I am concerned with is the conditions that poor people face. An argument that does have currency with me is that if we can successfully take access to resources from richer people and given them to poorer people then this is a good idea. Not because it reduces inequality, but because it simply increases the opportunity sets of poorer folks which I think is generally better than increasing the opportunity sets of richer folks. However, ideally I would want this to have as little destruction of total opportunity sets as possible which might mean tolerating very high or increasing levels of inequality in general. More concretely it could mean creating an economy where the rich got even richer but we could redistribute some of that wealth to poorer folks. Some might argue that if the rich become super rich they will resist this. Maybe, but its not clear to me that this happens in practice.

Culture or jobs?, by Daniel Little: Stephen Steinberg contributed a provocative but important piece to Boston Review a year ago on current academic thinking about race and poverty. The piece is titled Poor Reason: Culture Still Doesn't Explain Poverty, and it is now available as a short Kindle publication. The topic Steinberg focuses on is deeply important -- fundamentally, how to explain and remediate the persistent fact of poverty in the African American population in the United States. And anyone who is paying attention to urban America knows that the economic and social situation of much of the African-American population of the United States is bad, and in many respects barely improved over the past 40 years. Putting the point most bluntly: is the primary explanation of persistent urban African American poverty the cumulative workings of a set of racially discriminatory economic and social structures? Or is it some set of factors that have been internalized within African American culture and values, persisting long after discrimination has disappeared?

Wells Fargo Now A Major Shareholder In For-Profit Prisons - Even though crime rates in American have either stabilized or gone down, the incarceration rate (especially for people who are in this country illegally) has gone up - way up. (As this video points out, more people are being incarcerated on civil charges, not criminal.) Naturally, as with most changes in this country, this has more to do with profit than anything else - and now we find that Wells Fargo is a major shareholder in for-profit prisons. Hmm. So this is what's taken the place of mortgages as the banking cash cow? From Salon: As Wells Fargo has grown over the years, using its bailout funds to gobble up rival Wachovia and expand to the East Coast, so has the U.S. prison population. By 2008, one in 100 American adults were either in jail or in prison – and one in nine black men between the ages of 20 and 34, many simply for non-violent offenses, justice not so much blind as bigoted. Overall, more than 2.3 million people are currently behind bars, up 50 percent in the last 15 years, the land of the free now accounting for a full quarter of the world’s prisoners. These developments are not unrelated. A driving force behind the push for ever-tougher sentences is the for-profit prison industry, in which Wells Fargo is a major investor. Flush with billions in bailout money and an economic system designed to siphon wealth from the working class to the idle rich, Wells Fargo has been busy expanding its stake in the GEO Group, the second largest private jailer in America.

Food Stamp Rolls to Grow Through 2014, CBO Says - The Congressional Budget Office said Thursday that 45 million people in 2011 received Supplemental Nutrition Assistance Program benefits, a 70% increase from 2007. It  said the number of people receiving the benefits, commonly known as food stamps, would continue growing until 2014. Spending for the program, not including administrative costs, rose to $72 billion in 2011, up from $30 billion four years earlier. The CBO projected that one in seven U.S. residents received food stamps last year. In a report, the CBO said roughly two-thirds of jump in spending was tied to an increase in the number of people participating in the program, which provides access to food for the poor, elderly, and disabled. It said another 20% “of the growth in spending can be attributed to temporarily higher benefit amounts enacted in the” 2009 stimulus law. CBO said the number of people receiving benefits is expected to fall after 2014 because the economy will be improving.

Study: 21 percent of New Yorkers are living in poverty - The number of New Yorkers classified as poor in 2010 increased by nearly 100,000 from the year before, raising the poverty rate by 1.3 percentage points to 21 percent — the highest level and the largest year-to-year increase since the city adopted a more detailed definition of poverty in 2005.  The recession and the sluggish recovery have taken a particularly harsh toll on children, with more than one in four under 18 living in poverty, according to an analysis by the city’s Center for Economic Opportunity that will be released on Tuesday. Families with children were also vulnerable. They had a poverty rate of 23 percent, and a significant number of households were struggling to remain above the poverty line. Even families with two full-time earners were more likely to be considered poor in 2010; their ranks swelled by 1.3 percentage points to 5 percent compared with 2009.  By the city measure, more than 1.7 million residents were poor in 2010, the last year for which an analysis could be calculated.

Will Pennsylvania Rip Another Hole in the Safety Net? If you’ve never heard of state-funded General Assistance (GA) programs, you’re hardly alone. A “safety net of last resort” for very poor people—often childless adults—who don’t qualify for other forms of public assistance, there aren’t too many of them still in existence. Not too long ago most states offered them, but in recent decades they have been eliminated or severely restricted. Now, only thirty states maintain GA programs, and the benefit level for most falls below one-quarter of the poverty line, or less than $2,750 per year. In a recent report Liz Schott and Clare Cho call this trend “especially troubling” since “a growing number of jobless and elderly” are exhausting their unemployment benefits and continue to be unable to find work. One state that still maintains a GA program is Pennsylvania where 68,000 people—or just about one in every 200 residents—receive about $205 per month (five counties offer a little more, twenty-eight counties a little less). But when Republican Governor Tom Corbett released his budget in February he proposed eliminating the program entirely as of July 1. A final budget must be passed and signed by that date, and with Republican majorities in the House and Senate, legal aid lawyer Michael Froehlich of Community Legal Services in Philadelphia says, “It’s not looking good.”

Antipoverty Tax Program Offers Relief, Though Often Temporary - It is tax time, the season when the country’s largest antipoverty program, the earned income tax credit, plows billions of dollars into mailboxes and bank accounts of low-income working Americans like Ms. Spain. It is the most important financial moment of the year for many people in the bottom half of the wage bracket, a time to pay off old bills, make car repairs, buy children clothes and maybe make a big purchase like a refrigerator or a TV.  As incomes among the country’s lowest wage earners continue to stagnate, the credit has played a critical role in smoothing the hard edges of an unforgiving labor market for the country’s most vulnerable workers and helping stem the tide of income inequality that has been rising among Americans in recent decades.  Nearly one in five filers now receive the credit — about 28 million returns in the 2010 tax year, the most recent year figures are available — representing the highest percentage since the program began in the 1970s, according to the Brookings Institution.  The effect has been significant. The Center on Budget and Policy Priorities, a research group based in Washington, estimates the credit lifted about six million Americans out of poverty last year.

Monday Map: State Tax Collections Per Capita - Today's Monday Map shows state tax collections per capita. Collections figures differ from the burdens numbers used to calculate Tax Freedom Day by state in that they reflect the amount collected by each state government from everyone, instead of (as with state by state Tax Freedom day figures) the amount paid by each state's residents to all state governments. For example, Alaska has a low tax burden but high tax collections, because a lot of its revenue comes from the state's taxes on gas and fuels, paid mostly by nonresidents.

Migration Myth Strikes Again, by Jon Shure, CBPP: Proponents of the migration myth are at it again, trying to sell the idea that if states with lower taxes gain more population than states with higher taxes, taxes must be the reason. To prove that people migrate from state to state in search of lower taxes, the latest edition of the American Legislative Exchange Council’s (ALEC) “Rich States, Poor States” report notes that, over the past two decades, Hawaii (which has an income tax with a relatively high top rate) has lost twice as many residents to other states as Alaska (which has no income tax). Wait, you might ask. What about differences in the job market? Oil prices? Housing costs? Shouldn’t we take these and other potential factors into account? Indeed we should. As we discussed in a major report last year,... Studies by economists and demographers that take into account the wide range of other factors show consistently that taxes have little if any impact on migration.The ALEC report ignores the growing body of research that debunks the tax-flight myth, instead citing statistical tidbits that might seem compelling at first glance but wilt under scrutiny.

Do voters really flee high-tax states? - In his most recent New York Times column, Greg Mankiw argued that competition among states helps keep taxes low: “If people feel that their taxes exceed the value of their public services, they can go elsewhere. They can, as economists put it, vote with their feet.” This led economist Mark Thoma to wonder how often this actually happens. He digs up an 2011 report from the Center on Budget and Policy Priorities compiling evidence that the vast majority of Americans don’t seem to vote with their feet and flee their state because of high taxes. Among other things, most Americans don’t ever leave their state, period. Just 1.7 percent of the population moves in any given year, on average. And only 30 percent of the U.S. population will ever change their state of residence in their lifetimes. Okay, so what about the small number of people who do switch states? The CBPP study argues that taxes are often much less significant than housing costs. For example, between 2004 and 2007, Arizona was the most popular destination for outgoing Californians. But it’s not clear that this was due to taxes. Indeed, many middle-income and upper-middle-income families actually faced higher local taxes in Arizona. More likely, many of them moved because of housing. Now, as Mankiw suggests in his column, maybe we should just restrict our focus on a small subset of the population — the wealthiest, and most mobile, residents. But even here, the CBPP analysis found that the effect of progressive taxation on migration appears to be quite modest.

If Voters Flee High-Tax Jurisdictions, Why Are They So Expensive To Live In? - When nobody wants to live someplace, it's cheap to buy a house there. That's why it's cheap to buy a house in Detroit. By contrast, you'll find that buying a house in Manhattan or San Francisco is extremely expensive. This seems to me to be the overwhelming reason to doubt Greg Mankiw's contention that high-tax states are bleeding high-income residents.  Mark Thoma has some empirical information on this, but I think the housing price data is really the most important thing to consider. The point is that without denying that if San Francisco somehow achieved a more optimal tax/service mix that would increase demand for San Francisco living, it takes a very outmoded view of the American landscape to say this would lead to more people living in San Francisco. What it would lead to is continuation of the trend whereby high income people displace low-income and middle-class residents. Now Mankiw's overall argument is that because of population migration we ought to favor decentralization, because decentralization will make it impossible for the government to raise the living standards of the least-fortune people. That strikes me as a morally perverse perspective, so I'm not really sure how a clearer understanding of land use issues would change his thinking. But I think it's fairly clear that population migration is driven by job availability and housing costs much more than by tax policy changes.

Freeways no longer? Interstates might get more tolls — The federal interstate highway system is showing its age, and, faced with the cost of repairing all those bumps and cracks, some states want to ask motorists to pay tolls on roads that used to be free.  That’s the last thing a public that’s paying $4 for a gallon of gasoline wants to hear, and elected officials, from members of Congress to President Barack Obama, aren’t likely in an election year to propose that motorists pay higher gasoline taxes or tolls. But many transportation experts and officials agree that if Americans want to drive on good roads, they’re going to have to pay more for them, or do without.  Most of the 46,000-mile interstate system has been toll-free for its 56-year history. But pavement and bridges on the system’s oldest sections are reaching the ends of their life spans and need to be replaced. A 2009 report by the American Association of State Highway and Transportation Officials recommended an annual investment in U.S. highways and bridges of $166 billion.  "Highways are not designed to last forever,"  "There is a major need over the next two decades or so to rebuild and modernize the entire interstate system."

Taxed by the boss - Across the United States more than 2,700 companies are collecting state income taxes from hundreds of thousands of workers – and are keeping the money with the states’ approval, says an eye-opening report published on Thursday. The report from Good Jobs First, a nonprofit taxpayer watchdog organization funded by Ford, Surdna and other major foundations, identifies 16 states that let companies divert some or all of the state income taxes deducted from workers’ paychecks. None of the states requires notifying the workers, whose withholdings are treated as taxes they paid. General Electric, Goldman Sachs, Procter & Gamble, Chrysler, Ford, General Motors and AMC Theatres enjoy deals to keep state taxes deducted from their workers’ paychecks, the report shows. Foreign companies also enjoy such arrangements, including Electrolux, Nissan, Toyota and a host of Canadian, Japanese and European banks, Good Jobs First says. Why do state governments do this? Public records show that large companies often pay little or no state income tax in states where they have large operations, as this column has documented. Some companies get discounts on property, sales and other taxes. So how to provide even more subsidies without writing a check? Simple. Let corporations keep the state income taxes deducted from their workers’ paychecks for up to 25 years.

Pew Study Finds Many States Lack Fundamental Oversight of Tax Incentives - The Pew Center on the States has a new report examining state economic development tax incentives. The study did not evaluate the efficacy of the incentives themselves, but rather critically examined each state's evaluations of its own incentives. The study focused on the extent to which state tax incentive evaluations: (a) inform policy choices, (b) include all major tax incentives, (c) measure economic impact, and (d) draw clear conclusions. While some states are doing better than others, the report found that 26 states do not adequately meet any of the above criteria.  Measuring economic impact is one of the biggest problem areas that the Tax Foundation has identified for state tax incentive policy. The Pew study highlights many of the important factors that states must consider when evaluating the costs and benefits of their incentive programs

Mad Money: In January 2011, the advocacy group Utah Sound Money released a 30-second ad designed to stir up support for a new bill in the state legislature. “The almighty dollar’s not looking so almighty these days,” the announcer intones as storm clouds fill the screen. “The feds have us tap-dancing at the edge of financial ruin.” A small map of the U.S. totters along a rising red graph of debt. Suddenly, blue skies open as a giant gold coin floats down, using the Constitution as a parachute. “Restoring an inflation-proof, sound-money option offers a time-tested option,” the announcer concludes over the laughter of children at play. Viewers are then urged to support the Utah Sound Money Act. Sponsored by Representative Brad Galvez, a Republican, the bill would make gold and silver coins from the U.S. Mint legal tender in the state. Galvez says he was motivated by a fear that the nation’s mounting debt could lead to a loss of faith in the dollar, resulting in hyperinflation and possibly a currency collapse. He wanted to protect Utah, he says, from this calamity by creating an alternative to “fiat” currency, under which the dollar is backed by the “faith and credit” of the U.S.—not, as it once was, by gold reserves.

Cities where unemployment is twice national rate - When the U.S. labor market is discussed, the national figures naturally take center stage. But the employment picture across the country can be very different -- not just between states, but from city to city, too. The recent jobs figures for February show a great variation among the country’s largest metropolitan areas. While some are doing extremely well, others are plagued with astronomical unemployment rates that are getting even worse. The five worst-off metropolitan regions had unemployment rates of 17.6 percent or more in February -- more than double the national unemployment rate of 8.7 percent. Meanwhile, the five best regions had unemployment rates of 4.2 percent or less -- less than half the national average. 24/7 Wall St. reviewed the jobs market conditions in the five best and five worst-off cities.  Between February 2011 and February 2012, according to the Bureau of Labor Statistics, the non-seasonally-adjusted unemployment rate nationwide fell from 9.5 percent to 8.7 percent. In most of the nation’s largest metropolitan regions, the jobless rate followed a similar pattern. However, in 19 cities -- the majority of which are in New York State -- the jobless rate worsened rather than improved.

Stockton Can Suspend Police Accrued Vacation Payouts - Stockton, the central California city trying to avert bankruptcy, can continue suspending accrued vacation and sick time payouts for its retiring and departing police officers, a state judge ruled. San Joaquin County Superior Court Judge Lesley D. Holland yesterday rejected the Stockton Police Officers’ Association’s request for an order reinstating the pay. David E. Mastagni, a lawyer representing the association, said some officers have spent 30 years accruing the compensation.  “I’m proceeding on the assumption that bankruptcy, if not a certainty, is a highly probable outcome,” Holland said. The city is trying to remain solvent and win concessions from creditors through negotiations under a state law designed to discourage municipal bankruptcies, the judge said.

More U.S. cities set to enter default danger zone (Reuters) - America's swelling ranks of fallen municipal borrowers have been blamed in the past year on 'what-were-they-thinking' causes, be it a Taj Mahal sewer system in Alabama or an overpriced trash incinerator in Pennsylvania's capital city of Harrisburg. But the next series of major cities and counties in danger of defaulting on their debt can hardly point to one single decision for their malaise. Whether it be Detroit, Miami or Providence, Rhode Island, their problems have a lot more to do with financial policies that put them on course to live well beyond their means. Municipal defaults have shot up since 2007 and are on pace for another high year in 2012, according to Richard Lehmann, publisher of the Distressed Securities Newsletter. Many failures will be due to local politicians' willingness to give unionized local government workers lucrative pensions and health care benefits when times were good. For others, the housing bust was enough to destroy their real estate tax base. They almost all share the failure to prepare for a rainy day. Now, belt tightening by state and federal governments is adding to the pain - as contributions to governments at city and county levels get squeezed. Many of the places in the worst condition are in the Northeast, Midwest, California and Florida.

Harrisburg School District faces $15.8 million budget shortfall, could cut kindergarten, art and music programs next - Harrisburg School District administrators have shaved more than $23 million from the district’s budget during the past two years and say there is no fat left to cut. But the district still faces a $15.8 million budget shortfall, they say. Kindergarten, art and music programs likely will be cut, and the school district will have to look at instituting a pay-to-play system for athletics to cover next year’s budget hole, said Superintendent Sybil Knight-Burney. There are no plans to close Sci-Tech High or move it to Harrisburg High School, however, Knight-Burney said. “We recognize [the district] has to be more financially responsible to the community, but at what point does that bottom out?” she said Monday during an Editorial Board meeting with The Patriot-News. The district has laid off 288 teachers, 57 administrative staffers and 163 support staff over the past two years to cover two consecutive $10 million-plus budget deficits.

Cleveland: Teachers bracing for layoffs -- Cleveland teachers are once again bracing for layoffs for next school year. The district is facing a $65 million deficit, so as many as 600 teachers may be laid off. Also, because of cuts in arts, music and gym the school day in K-8 schools will be shortened possibly as much as 50 minutes. The Boys and Girls Clubs of Cleveland say they may change their after school hours to help during these school cuts.

The Republicans Who Want Ignorance to Get Equal Time in Schools - Not content with merely waging war on women, Republicans are targeting another enemy of conservatism: education. New Hampshire state Republican Jerry Bergevin recently railed against science and the atheist eggheads who call themselves teachers: "I want the full portrait of evolution and the people who came up with the ideas to be presented. It's a world view and it's godless." While New Hampshire didn't end up passing Bergevin's anti-evolution law, Tennessee did. Its new statute allows – even encourages – teachers to express scepticism toward, as the bill says, "scientific subjects, including, but not limited to, biological evolution, the chemical origins of life, and global warming". The American Institute of Biological Sciences, the National Earth Science Teachers Association, the National Centre for Science Education and all eight of Tennessee's members of the National Academy of Sciences oppose the new law, calling it "miseducation". But what do these no 'count heathen elitist PhD Darwinites know? The government of Tennessee wants you to know they ain't kin to no monkey.

Homeless Children Living On The Highway To Disney World - Melissa was always on the move, wandering in and out of people's rooms, going from pool to basketball court and back to pool, climbing up the big trees by the parking lot. Even before she came to the hotel her life was a blur of movement -- six houses in four years and never more than a year at the same school. . Melissa is 12.  When she got mad, which happened more and more often these days now that her mom was trying to be part of the family again, she disappeared into the woods for hours at a time, scrambling over the vines and branches like an explorer. She'd make her way down a narrow path along the swamp, past the clearing where the hobos tossed their empty bottles, to a secret spot where she'd hide out until she felt calm enough to venture back into Room 413. According to the U.S. Department of Education, at least 2,000 children live in the hotels of Central Florida, and that's not counting the untold numbers who are too young to go to school, or who have dropped out, or who have otherwise escaped notice, as many undoubtedly have. Families make up the fast-growing segment of America's homeless population. Thousands live in hotels. The Department of Education has identified 47,000 hotel kids in schools around the country, and says that the number of homeless kids in public schools has increased by 38 percent since 2007. In Central Florida, it isn't uncommon to hear of 19 or 20 hotel kids in a class of 22 at the local schools.

10 Disgusting Examples Of Very Young School Children Being Arrested, Handcuffed And Brutalized By Police  - When did we decide that it was okay to treat very young school children as if they were terror suspects?  When I was growing up, I don’t remember a single time that the police ever came to my school and arrested anyone.  But now police are being called out to public schools at the drop of a hat.  All over America, very young school children are being arrested and marched out of their schools in handcuffs in front of all their friends.  For example, down in Georgia the other day police were called out because a 6-year-old girl was throwing a tantrum.  The police subdued her, slapped handcuffs on her and hauled her off to the police station.  Instead of apologizing for this outrageous incident, the police are defending the actions of the officer involved.  But this is not an isolated incident.  All over the country young kids are being handcuffed and mistreated by police. The following are 10 more disgusting examples of very young school children being arrested, handcuffed and brutalized by police all over America….

The Trouble with Money - ChrisMartenson  - Recently I was asked by a high school teacher if I had any ideas about why students today seem so apathetic when it comes to engaging with the world around them. I waggishly responded, "Probably because they're smart." In my opinion, we're asking our young adults to step into a story that doesn't make any sense. Sure, we can grow the earth's population to 9 billion (and probably will), and sure, we can extract our natural gas and oil resources as fast as possible, and sure, we can continue to pile on official debts at a staggering pace -- but why are we doing all this? Even more troubling, what do we say to our youth when they ask what role they should play in this story -- a story with a plot line they didn't get to write? So far, the narrative we're asking them to step into sounds a lot like this: Study hard, go to college, maybe graduate school. And when you get out, not only will you be indebted to your education loans and your mortgage, but you'll be asked to help pay back trillions and trillions of debt to cover the decisions of those who came before you. All while operating within a crumbling, substandard infrastructure. Oh, and by the way, the government and corporate sector appear to have no real interest in your long-term future; you're on your own there.

Econ for Pirates – Rescuing Art from the Clutches of the Megacorporations - Daily, megacorporations shovel crap into our eyes and ears. There is no worse indictment for the so-called ‘free market’ – which is really just a few giant bureaucratic institutions – than the suppression of creativity in favour of the commoditised effluent of the corporate culture industry. In truth the commoditised crap churned out by the great corporate machine is wholly reliant on creativity that emerges from the ground up. Today’s mainstream music scene relies on the hip hop and rap movements that emerged between the 1970s and the early 1990s in black communities in California and New York – needless to say that it is completely out of date but such is the stale nature of these institutions. Contemporary ‘alternative’ music feeds on the punk and post-punk scenes that emerged in Britain and the US in the late-70s and 80s – again, hopelessly out of date. The great corporate machine simply sanitises and repackages culture in order to feed the masses through their tele-visual tubing. Fine. But it cannot truly create new flavours to inject into the tubes – and anyone who has an instinct to chase the new and the interesting will be quickly turned off. Put simply: corporate capitalism produces many things well – from clothing to furniture (although the question of style once again arises when we examine these in any serious way) – but it cannot produce true art. An alternative mechanism is needed.

The Demise of Higher Education in the United States Tax reduction had an important effect on education. Growing budget deficits would ramp up pressure to privatize what had been previously public responsibilities. By largely defunding education, universities became increasingly dependent on corporate money. Administrators became cautious about allowing expression of ideas that might seem upsetting to business. These factors took an enormous toll on higher education. Tuition began a rapid ascent. Student debt accumulated. University funds were concentrated on programs that cater to business needs, such as biotechnology and engineering, and, naturally, business schools. Visiting Berkeley, I am always struck by the lavish libraries for biotechnology and business, while the other disciplinary libraries were unchanged. The one exception that stood out was public health, which was torn down to make way for a new biotech building and then moved to the basement of an old administrative building. The educational assembly-line that Mario Savio described during the Free Speech Movement at Berkeley has changed, but not for the better. At the same time, leaders in business and politics insist that education is an essential element to a successful economy. Nonetheless, education becomes increasingly unaffordable, at the same time that the quality [is declining]...

‘Explosion in Student Debt’ Drags Down Housing: Chart of the Day - - As the cost of attending U.S. colleges and universities surges, student-loan debt is turning into “a significant drag on the housing market,” according to Pierre Lapointe, a Brockhouse & Cooper Inc. strategist. The CHART OF THE DAY shows tuition expense has risen about three times as fast as wages since 2001 before accounting for inflation, according to data from the Labor Department. The chart uses average weekly earnings to gauge workers’ pay. Tuition climbed 57 percent on an inflation-adjusted basis during the period, Lapointe and two colleagues wrote yesterday in a report. At the same time, the average wage for American workers between the ages of 25 and 34 dropped 7 percent. Borrowing to pay for college exceeded $1 trillion within the past few months, according to Rohit Chopra, the Consumer Financial Protection Bureau’s student-loan ombudsman. Chopra made that estimate in March. Many former students won’t be able to obtain mortgages at affordable rates because of their debt burdens, the report said. Lapointe estimated that interest payments on student debt amount to $1,165 a year, based on an average balance of $23,300 in last year’s third quarter and a 5 percent interest rate.

Some Thoughts on the Student Loan Debt Problem - The student loan issue is increasingly coming the front-burner, both domestically and abroad. I haven't blogged about it before (and it's worth noting how little scholarship there is on student loans compared with say mortgages or credit cards). So here are some initial thoughts by way of encouraging a less muddled conversation on student loan debt. 

  • 1.  Student Loan Debt vs. Cost of Education. We need to distinguish between the problem of student loan debt and the cost of higher education.  There's no question that education costs have and continue to grow faster than inflation. Why is more complicated. Before we prescribe austerity in higher education as the solution, however, let's recall that US higher education is the envy of the rest of the world.
  • 2.  U.S. student loan debt is often structured differently from other consumer debt.  It's important to recognize that student loan debt is quite different than other types of consumer debt. A lot of student loan debt can be deferred for substantial periods and can be repaid over extended terms. 
  • 3. Student loan debt isn't especially expensive.  That's a first impression from eyeballing some loans, and it doesn't apply to for-profit lenders.  But as far as I can tell, the bulk of student loan debt isn't crazily expensive in terms of interest rates. It's large dollar debt, rather than high rate debt, and of course it doesn't go away easily.

The Burgeoning Student Debt Problem -- Yves Smith - Even though other consumer debt-bombs have done more damage, student debt is producing significant social and economic distortions. One is so useful to the authority structure that it seems certain that they will keep this type of bondage in place. Heavy debt loads pressure young people into making conservative choices. If you carry a lot in the way of student loans, you have to worry about employability. That doesn’t simply push graduates into bigger ticket (hence more conventional) career choices; more important, it makes them far less likely to step out of line. In particular, an arrest record, which is often a by product of protesting, is an automatic out with a lot of employers. But the level of student debt, now estimated at over $1 trillion outstanding, is having an impact on spending. First time home buying is running below the level expected given new household formation, and a big culprit is student debt loads, since many young people are too leveraged to take on a decent-sized mortgage on top of their existing obligations. In addition, the 25 to 39 year old cohort is the top target of advertisers, but the more debt service they have, the less they can buy in the way of goodies. Adam Levitin has taken his first serious look at student debt. Aside from grumbling at the dearth of academic research, he offers some useful observations. The big one is that the problem is the level of debt: student debt rates are generally pretty favorable, and the loans also offer a lot in the way of payment flexibility.

Obama, GOP square off on student loans - At a time when American employers are complaining they can't find enough highly-skilled and well-educated workers, a political battle is shaping up over the looming rise in the cost of student loans. The Obama administration Friday kicked off a push to delay a scheduled increase in the interest rate charged on so-called Stafford loans for college. But the program is just one of many that face pressure from Republicans who say they are too costly for taxpayers. "At a time when Americans owe more on student loans than [on] credit cards, President Obama believes we must reward hard work and responsibility by keeping interest rates on student loans low so more Americans get a fair shot at an affordable college education, the skills they need to find a good job and a clear path to middle class," the White House said. Republicans argue that extending the lower rate on Stafford loans would add to the deficit and add to students' uncertainty about the future cost of borrowing to go to college. “Bad policy based on lofty campaign promises has put us in an untenable situation,"" We must now choose between allowing interest rates to rise or piling billions of dollars on the backs of taxpayers."

Illinois Is Pension Basket Case You Forgot About - This month, the Teachers’ Retirement System of the State of Illinois made a dire announcement to its members. TRS, which covers most public-school teachers in Illinois outside Chicago and has more than 360,000 members, said the following: “If the General Assembly does not continue to provide all of the funding called for in state law, calculations done by TRS actuaries show that the System could become insolvent as soon as 2030. Preventing insolvency may include significant changes for TRS -- new revenues must be generated and if they are not benefits may have to be reduced.”  The teachers’ fund is one of the country’s worst-financed statewide pension systems, reporting that it is only 47 percent funded. And that’s if you buy the system’s rosy accounting assumptions, including that it will achieve 8.5 percent annual returns on its assets. This level is tied for the most aggressive investment assumption among state pension funds in the country, and the fund has had to get creative in an effort to meet it. Pensions & Investments magazine says it has the fourth-riskiest pension investment portfolio in the U.S., with less than 17 percent of its investments in fixed income and cash.

Lawmakers consider changing tax breaks on retirement savings - The painful trade-offs of tax reform came into sharper focus Tuesday as lawmakers for the first time began considering specific tax breaks to reduce or otherwise change, starting with laws that allow millions of Americans to avoid taxes while saving for retirement. Tax incentives for employer pensions, 401(k) plans, individual retirement accounts and other savings programs rank among the largest breaks in the tax code, costing Washington more than $200 billion a year in lost revenue.  All told, the U.S. Treasury loses about $1.1 trillion annually to more than 200 credits, deductions and other tax breaks. Politicians in both parties — including President Obama and Mitt Romney, the Republican who is likely to challenge his reelection bid — have called for recapturing some of that cash and using it to finance lower tax rates or to reduce federal budget deficits. Until recently, both sides have been reluctant to hint at which of the many popular perks might get the ax. That is starting to change, however, as lawmakers and policy analysts begin preparing for the prospect of overhauling the tax code as soon as next year.  On Tuesday, House Ways and Means Committee Chairman Dave Camp (R-Mich.) scheduled a hearing on “tax-favored retirement accounts” that he said was intended to begin “framing the debate” in preparation for tax reform.

Income of the Elderly - Krugman - In response to this post, some readers asked for data on the income of the elderly. Here’s the Social Security Administration source. If you look at Table 9B6 you’ll see (left column) that 55 percent of the elderly get more than half their income from Social Security; 33 percent get more than 80 percent of their income from that source. And if you look at Table 10.5 you see that the elderly in the middle of the income distribution get 66 percent of their income from Social Security, versus 9 percent from private pensions and just 5 percent from assets. If that’s not the way the elderly people you know live, that’s because they’re not representative.

Innovation Isn’t Easy When it Comes to Medicaid - It’s almost impossible to find a politician these days who isn’t very concerned about the deficit. And it has become clear that the deficit problem is largely a health care spending problem. Given the political difficulty of reducing Medicare spending in the short-term (politicians want to win, after all), the focus inevitably turns to Medicaid. That’s not surprising. Medicaid composes a significant portion of health care spending, costing about $400 billion in fiscal-year 2011. The fiscal-year 2013 budget recently passed by the House of Representatives would reduce federal Medicaid spending by $750 billion over the next decade, even if the Affordable Care Act (ACA) is repealed or struck down. It would do so by changing the program from an open-ended program for eligible individuals using matching funds from both the federal and state governments to a block grant of a fixed sum given to states, and the states decide how to allocate the money. The idea is that states can “innovate” at a local level to find ways to deliver needed benefits at reduced cost. The question is, though, can they? To significantly reduce spending, there are 3 major changes that a state could make to the program. The state could (1) reduce the number of beneficiaries, (2) reduce the benefits those beneficiaries receive, or (3) reduce how much it pays for those benefits.

About That Hammock - Krugman - Recently I linked to Harold Pollack’s outrage over remarks by Paul Ryan, in which Ryan suggested that our safety-net programs are “a hammock that lulls able-bodied people to lives of dependency and complacency”. Further to that point, Aaron Carroll tells us who actually receives Medicaid, which Ryan and Romney want to cut sharply. Carroll’s point is that it’s nonsense to claim that vast savings can be achieved through “innovation”; but his chart also tells you about who we’re talking about. In order of expense, these are the key Medicaid groups:

  • – the blind or disabled
    – the elderly
    – children

And many of the adults who account for the rest are pregnant mothers or parents of young children. So, look at all those able-bodied people living lives of complacency thanks to Medicaid.

Healthcare prices still baffle consumers in California - Californians are still struggling to get straight answers about the cost of common medical procedures despite state efforts aimed at lifting the veil on medical pricing. As consumers shoulder a larger share of their healthcare costs, the ability to comparison shop is key to keeping that care affordable. Medical costs borne by U.S. employees have more than doubled since 2002 to more than $8,000 a year, while the median household income has dropped 4%. Under a state law that took effect in 2006, hospitals must publish their average charges for the most common procedures on a state website. But relatively few take the extra step of listing prices on their own websites, where people are more likely to be looking for pricing information, according to healthcare experts.

Study: One in Four Americans Without Health Insurance Coverage A quarter of the adult population ages 19 to 64 experienced a gap in health insurance in 2011, and 69% of those were without coverage for year or more, according to study released Thursday by the nonprofit Commonwealth Fund.“For people who lose employer-sponsored coverage, the individual market is often the only alternative, but it is a confusing and largely unaffordable option,” said Commonwealth Fund Vice President Sara Collins, lead author of the report. “As a result, people are going a year, two years, or more without health care coverage, and as a result going without needed care.”The report concludes that "eliminating gaps in coverage is essential to ensuring that Americans can gain timely access to health services that are necessary to maintain good health over time." It points to the Affordable Care Act as a way to close some of those gaps.

Facing up to the Ethical Dilemmas in the Healthcare Debate - Politicians talk as though relatively painless solutions can be found. But in reality there is no magical escape from difficult choices – they can only be dealt with by facing up to them squarely. The chief cause of these problems is demographic. People age 65 and older accounted for 10% of the U.S. population in 1970, are more than 13% today, and will be around 20% by 2050, according to projections by the Population Reference Bureau. That will result in a massive rise in healthcare spending, because medical costs for someone over 65 are more than triple those for younger people. Moreover, advances in technology are further pushing up costs for the most effective treatments. As a result, overall healthcare spending is projected to rise from 17% of GDP today to 25% within 25 years, according to the Department of Health and Human Services. Some of this will fall on elderly individuals themselves. Between 2010 and 2040, the median share of household income spent on health care by Americans age 65 and older will likely increase from 10% to 19%, according to the Urban Institute. The median out-of-pocket costs for individuals age 65 and older will more than double in constant 2008 dollars, from about $2,600 a year to about $6,200.

Barney Frank: Obamacare Was a ‘Mistake’ - Rep. Barney Frank (D., Mass.), who is retiring from the House this year, now says that President Obama made a “mistake” in pushing for his signature health law. “I think we paid a terrible price for health care,” he told Jason Zengerle of New York magazine. “I would not have pushed it as hard.. I would have started with financial reform but certainly not health care.” But Frank’s reasoning carries pitfalls for conservative reformers as well as liberal ones. Frank explains that it’s difficult to enact reforms that threaten to disrupt the arrangements of those who already have health insurance and are happy with the care they get. “Obama made the same mistake Clinton made,” says Frank. “When you try to extend health care to people who don’t have it, people who have it and are on the whole satisfied with it get nervous.”  Obama, says Frank, overinterpreted his mandate from the 2008 election. “The problem with health care is this: Health care is enormously important to people. When you tell them that you’re going to extend health care to people who don’t now have it, they don’t see how you can do that without hurting them. So I think he underestimated, as did Clinton, the sensitivity of people to what they see as an effort to make them share the health care with poor people.”

Double-counting Doubletalk - Krugman - Some readers have asked me for a reaction to Steve Rattner’s piece on Medicare and the Affordable Care Act. The short answer is that it’s a classic piece of concern trolling – the practice, all too common among a certain class of commentators, of professing sympathy with progressive policy goals, then, invariably, finding a way to support right-wing talking points. The way to cut through the whole double-counting nonsense is to ask the following: did the ACA improve or worsen the fiscal outlook compared with what it would have been without the legislation? The answer is that it improved the outlook – the additional revenues plus cost savings outweigh the cost of the subsidies. End of story. Don’t take my word for it — that’s what Robert Reischauer, the good trustee, says. So what about the alleged double-counting? That exists only in the minds of the trolls. The Obama administration has never claimed that a dollar of savings somehow counts twice.

Yes, the Health Law Worsens the Deficit - Last week the Mercatus Center published my study showing that the health care law of 2010 (the ACA) will add at least $340 billion to federal deficits over the next ten years, and more than $1.15 trillion to net federal spending. The study has received a great deal of attention. The resulting debate has highlighted the need for wider public understanding of federal budget procedures. In this article I will explain some of those budget rules while further substantiating that my basic conclusion is correct.

CBO Confirms It: ObamaCare Creates an Unstable Disequilibrium in Insurance Subsidies - In March, the Congressional Budget Office (CBO) released a new study on employee migration out of job-based plans and into ObamaCare’s state exchanges. The effect of ObamaCare on employer-based insurance has been a hotly debated topic ever since the law was enacted in March 2010. Several independent analysts predict that “dumping” into the exchanges will occur at a much higher rate than CBO assumed in its original estimates of ObamaCare and have argued that the result would be much higher federal costs than CBO estimated. Perhaps not surprisingly, CBO used the release of its most recent assessment of the law’s impact on insurance arrangements to defend its original cost estimates and again argue that the law will, on a net basis, reduce future budget deficits. CBO’s latest estimates indicate that 3 to 5 million fewer workers will be in job-based insurance plans in 2019 to 2022 due to Obamacare’s incentives — a relatively small number compared to the nearly 160 million Americans who are expected to get their coverage from their place of work in the coming years. Moreover, CBO suggests that, even if migration out of employer plans is higher than what the agency is currently projecting, it won’t add much to the federal budget deficit because taxes would rise almost enough to fully offset any spending increase. Most news accounts dutifully reported these finding from CBO as the primary takeaways of the study. But there’s actually a whole lot more to this story than that.

Life, Liberty and the Pursuit of Insurance - Health-care reform, the impossible dream that seemed to become a reality in 2010, is now in mortal danger. Republicans want to repeal it even though the federal law is patterned after a Massachusetts law that their apparent presidential nominee signed in 2006. They can't do that, of course, unless they sweep the next election. So the clear and present danger comes from the Supreme Court, where a majority of justices seemed to snarl at the law in open session last month. Health-care reform is clearly in legal peril. This is no small matter. Over one-sixth of our economy is at stake. Beyond the economics, our country was founded on the idea that the rights to life, liberty and the pursuit of happiness are inalienable. Access to affordable health care is surely essential to two of these three rights, maybe to all three. Rights are nice, but someone has to pay the bills. Looking around the world reveals a wide range of health-care payment systems. On a spectrum ranging from 100% payment by the state to 100% payment by private parties, many advanced countries cluster near the 100%-government pole. None is near the 100%-private pole. The United States probably comes closest, with about half the bills paid privately. Though we Americans spend a much larger share of our GDP than any other nation on health care, we are not healthier. We are also the only rich country that fails to insure all its citizens. The Patient Protection and Affordable Care Act of 2010 seeks to end that. It would be a shame—and I mean that literally—if Republicans repealed the law or if the Supreme Court voided it.

A Deft Health Care Move The refusal of New York’s Republican-led State Senate to establish a health insurance exchange, as required by the federal health reform law, has left the state in a pickle. Gov. Andrew Cuomo was wise to step in with an executive order that will accomplish much the same purpose.  The health insurance exchanges are online marketplaces where individuals and small businesses can buy coverage starting in 2014. Competition among insurers in the exchange is expected to hold down premiums, and federal subsidies would help low- and moderate-income families buy coverage. Under the health reform law, if a state does not create its own exchange, the federal government would do so, but a federally created entity might not mesh as well with local needs and health programs.  Senate Republicans opposed the measure because some said that would amount to endorsing “Obamacare.” Mr. Cuomo’s order issued Thursday sets up the exchange within the State Health Department, instead of through a new independent authority, which would have had greater flexibility, for example, to hire staff — an approach that most health care experts supported.  New York has already received almost $88 million in federal funds — the highest of any state — to lay the groundwork for an exchange. The governor’s executive order, which was praised by health care advocates, qualifies the state for substantial additional funds to complete the job.

Estimated returns from the MLR (administrative costs to medical costs) - Bruce Webb on Angry Bear was among the first of bloggers to point out that this aspect of the Medical Loss Ratio begins in 2009 and  here and points again to the MLR as it comes into play.  A non-profit group estimates if the Affordable Care Act provisions had been effect in 2010, U.S consumers would have received $2 billion in rebates.  Sara Collins, vice president of the Commonwealth Fund, a foundation supporting independent research on health policy, said the medical-loss ratio rules that went into effect in 2011 were designed to control private insurance administrative costs for consumers and government. The rules require a minimum percentage of premium dollars to be spent on medical care and healthcare quality improvement -- not administrative costs and corporate profits. Insurers must meet a minimum medical loss ratio of 80 percent in the individual and small-group markets, and 85 percent in the large group market -- and issue rebates if they do not, Collins said. Read more: here and here.

Single-Payer Health Care: $570 Billion Cheaper - Economist Gerald Friedman has what looks to be the silver bullet against the claim that single-payer health care is infeasible on economic grounds, showing how “Medicare for all” could save billions of dollars while improving millions of lives. Study his easy-to-grasp charts and figures explaining how to fund the plan and how much it would save in the two-page document linked below. —ARK  The Expanded & Improved Medicare for all act” (HR 676) would establish a single authority responsible for paying for health care for all Americans. Providing universal coverage with a “single-payer” system would change many aspects of American health care. While it would raise some costs by providing access to care for those currently uninsured or under-insured, it would save much larger sums by eliminating insurance middlemen and radically simplifying payment to doctors and hospitals. While providing superior health care, a single-payer system would save as much as $570 billion now wasted on administrative overhead and monopoly profits. A single-payer system would also make health-care financing dramatically more progressive by replacing fixed, income-invariant health-care expenditures with progressive taxes. This series of charts and graphs shows why we need a single-payer system and how it could be funded.

Toward a 21st-Century FDA? - In a WSJ op-ed, Andrew von Eschenbach, FDA commissioner from 2005 to 2009, is surprisingly candid about how the FDA is killing people. When I was commissioner of the Food and Drug Administration (FDA) from 2005 to 2009, I saw firsthand how regenerative medicine offered a cure for kidney and heart failure and other chronic conditions like diabetes. Researchers used stem cells to grow cells and tissues to replace failing organs, eliminating the need for expensive supportive treatments like dialysis and organ transplants. But the beneficiaries were laboratory animals. Breakthroughs for humans were and still are a long way off. They have been stalled by regulatory uncertainty, because the FDA doesn’t have the scientific tools and resources to review complex innovations more expeditiously and pioneer regulatory pathways for state-of-the-art therapies that defy current agency conventions. Ultimately, however, von Eschenbach blames not the FDA but Congress: Congress has starved the agency of critical funding, limiting its scientists’ ability to keep up with peers in private industry and academia. The result is an agency in which science-based regulation often lags far behind scientific discovery.

Maggots increasingly used to clean wounds - Maggots are increasingly used to clean wounds that are not healing or healing only very slowly. The maggots eat away the dead (necrotic) tissue while ignoring healthy tissue that is forming during the healing process. The alternative, which has been used for centuries, is to physically scrape out the dead tissue, which can be painful for the patient and may not remove all of the dead tissue. Some researchers also think the use of maggots has an antibacterial effect and promotes healing because of chemicals released by the insects. Although the use of maggots has many advocates, there have been few clinical trials of their efficacy and those trials that have been performed have mixed results. Nonetheless, the U.S. Food and Drug Administration approved use of the technique in2004.

Supreme Court ruling supports generic drug makers - The US Supreme Court ruled that generic drug makers can challenge big-name pharmaceutical firms in court to stop them from broadening the scope of their patent descriptions. The measure overturns a 2010 appeals court ruling and confirms an earlier decision by a federal judge that ordered the US subsidiary of Danish laboratory Novo Nordisk to narrow the description of its patent on repaglinide, an anti-diabetes drug sold under the name Prandin. Caraco Pharmaceutical Laboratories, the US subsidiary of the Indian firm Sun Pharmaceutical Industries, is seeking to produce a generic version of Prandin. However Novo Nordisk amended the wording of his patent to extend it, and block the Caraco’s request to the US Food and Drug Administration (FDA) to produce a generic version of the drug. The FDA cannot approve the sale of a drug that breaks patent protection laws. In a unanimous decision by the nine Supreme Court justices on Tuesday, Justice Elena Kagan wrote that “a generic company can employ the counterclaim to challenge a brand’s overbrand use code.”

Here’s some waste we can cut - Abbott Labs had a drug (fenofibrate, or Tricor-1) which they licensed from Fournier Labs in 1998. Much of its exclusivity time had been used up by the time Abbott acquired the license. So in early 2000, another company filed its intention to make a generic version of the drug. Abbott fought back by filing a patent infringement suit. When this happened, the FDA basically told the generic company that they couldn’t make the drug until the lawsuit was resolved, which usually took about 30 months. During that time, Abbott got to keep exclusivity. In the interim, Abbott sought and obtained FDA approval for Tricor-2. That drug was nothing more than a branded reformulation of Tricor-1. Tricor-1 came in 67-mg, 134-mg, and 200-mg capsules; Tricor-2 came in 54-mg and 160-mg tablets. No new trials involving Tricor-2 were submitted to the FDA. But Tricor-2 came out while the generic company was still waiting to make Tricor-1, and thus Tricor-2 began selling with no direct competition. Six months later, Tricor-2 evidently accounted for 97% of all fenofibrate prescriptions. By the time the generic copies of Tricor-1 came out, no one was taking it anymore, and they couldn’t penetrate the market. Wash, rinse, repeat. The generic companies petitioned to make generic Tricor-2. Abbott filed a patent infringement suit buying them a 30 month delay. They got to work on Tricor-3. That tablet came in 48-mg and 145-mg doses. No new studies. They got approval. Evidently, 70 days after Tricor-3 was introduced, 70% of users were switched to the new branded drug. By the time the other companies got generic Tricor-2 out, Tricor-3 had 96% of the market. I swear I’m not making this up. Wash, rinse repeat.

Are Drugs Behind Dementia Epidemic? -Since the introduction of major tranquilizers like Thorazine and Haldol, “minor” tranquilizers like Miltown, Librium and Valium and the dozens of so-called “antidepressants” like Prozac, Zoloft and Paxil, tens of millions of unsuspecting Americans have become mired deeply, to the point of permanent disability, in the American mental “health” system. Many of these innocents have actually been made “crazy” and often disabled by the use of  – or the withdrawal from – these commonly prescribed, brain-altering and, for many, brain-damaging psychiatric drugs that have been, for many decades, cavalierly handed out like candy – often in untested and therefore unapproved combinations of two or more. Trusting and unaware patients have been treated with potentially dangerous drugs by equally unaware but well-intentioned physicians who have been likewise trusting of the slick and obscenely profitable psychopharmaceutical drug companies aka, BigPharma, not to mention the Food and Drug Administration, an agency that is all-too-often in bed with the drug industry that they are supposed to be monitoring and regulating. The foxes of BigPharma have a close ally inside the henhouse.

America’s Prescription Drug Addiction Suggests a Sick Nation - The growing taste for prescription opioids in the US is a concern. What is it about our way of life that necessitates such relief? We Americans really like to pop pills. The Associated Press has just reported that we're increasingly strung out on prescription opioids, with sales ballooning from 2000 to 2010. In some parts of the US, receipts for oxycodone-based products – such as OxyContin, Percoset, and Percodan – surged sixteenfold; hydrocodone-based products such as Vicodin continue to gain solid ground in Appalachia and Middle AmericaIndeed, insatiable demand for "hillbilly heroin" – sometimes doled out by doctors who want to legitimately treat pain, sometimes by physicians who want simply to shut up their patients – has prompted pharmacy robberies, and much worse. In fact, so many people have died from medication overdoses of late that they come to exceed car crashes as the US's top cause of accidental death – a first since the government started tabulating such data in 1979, according to the LA Times. This equates to "more deaths than heroin and cocaine combined". Meanwhile, scripts for benzodiazepines – the class of anti-anxiety drugs including Xanax, Valium, Ativan, and Klonopin – have gone up 17% since 2006 to 94m annually, New York magazine notes. Generic Xanax, which goes by the name alprazolam, has become 23% more popular in that same timeframe "making it the most prescribed psycho-pharmaceutical drug and the 11th-most prescribed overall, with 46m prescriptions written in 2010".

If Food Is In Plastic, What's In The Food? - The findings seemed to confirm what many experts suspected: Plastic food packaging is a major source of these potentially harmful chemicals, which most Americans harbor in their bodies. Other studies have shown phthalates (pronounced THAL-ates) passing into food from processing equipment and food-prep gloves, gaskets and seals on non-plastic containers, inks used on labels – which can permeate packaging – and even the plastic film used in agriculture. The government has long known that tiny amounts of chemicals used to make plastics can sometimes migrate into food. The Food and Drug Administration regulates these migrants as “indirect food additives” and has approved more than 3,000 such chemicals for use in food-contact applications since 1958. It judges safety based on models that estimate how much of a given substance might end up on someone’s dinner plate. If the concentration is low enough (and when these substances occur in food, it is almost always in trace amounts), further safety testing isn’t required. How common are these chemicals? Researchers have found traces of styrene, a likely carcinogen, in instant noodles sold in polystyrene cups. They’ve detected nonylphenol – an estrogen-mimicking chemical produced by the breakdown of antioxidants used in plastics – in apple juice and baby formula. They’ve found traces of other hormone-disrupting chemicals in various foods: fire retardants in butter, Teflon components in microwave popcorn, and dibutyltin – a heat stabilizer for polyvinyl chloride – in beer, margarine, mayonnaise, processed cheese and wine. They’ve found unidentified estrogenic substances leaching from plastic water bottles.

Our Chemical Cocktail Evaluated in New Report - When it comes to the chemicals used in food packaging, there is much we still don’t know. After a recent U.S. Food & Drug Administration (FDA) decision last month to not put further restrictions on bisphenol-A (BPA), a new report today in the Washington Post takes a closer look at studies that reveal that such endocrine-distrupting chemicals are not only ubiquitous, they might also be harmful at much lower doses than previously thought.  The FDA allows around 3,000 chemicals, including BPA and phthalates–a family of chemicals used in lubricants and solvents and to make polyvinyl chloride pliable–at low doses, long considering them additives though they migrate from the packaging instead of being purposefully added by the food manufacturer. But these chemicals are notoriously hard to trace, and have not been studied for their cumulative effects. “Finding out which chemicals might have seeped into your groceries is nearly impossible, given the limited information collected and disclosed by regulators, the scientific challenges of this research and the secrecy of the food and packaging industries, which view their components as proprietary information,”

Farmers must spend more on herbicides as effectiveness fades – ‘We’re going backward 15 years’  - A much-used herbicide, which for years has helped farmers throughout the United States increase profits, is losing its effectiveness and forcing producers to spend more and use more chemicals to control the weeds that threaten yields. "I've gone from budgeting $45 an acre just two years ago to spending more than $100 an acre now to control weeds," said Mississippi farmer John McKee, who grows corn, cotton and soybeans on his 3,300-acre farm in the Delta. The problem is Roundup, a herbicide introduced in the 1970s, and its partner, Roundup Ready crop seeds, genetically modified to withstand Roundup's active ingredient, glyphosate. In 1996, Monsanto introduced Roundup Ready soybean, soon touted as a game changer.  "It was an extremely valuable and useful tool for the past 15 years," said Bob Scott, extension weed scientist with the University of Arkansas.  But now, weeds that Roundup once controlled are becoming resistant to glyphosate, Scott said.

Blamed for Bee Collapse, Monsanto Buys Leading Bee Research Firm - Monsanto, the massive biotechnology company being blamed for contributing to the dwindling bee population, has bought up one of the leading bee collapse research organizations. Recently banned from Poland with one of the primary reasons being that the company’s genetically modified corn may be devastating the dying bee population, it is evident that Monsanto is under serious fire for their role in the downfall of the vital insects. It is therefore quite apparent why Monsanto bought one of the largest bee research firms on the planet. It can be found in public company reports hosted on mainstream media that Monsanto scooped up the Beeologics firm back in September 2011. During this time the correlation between Monsanto’s GM crops and the bee decline was not explored in the mainstream, and in fact it was hardly touched upon until Polish officials addressed the serious concern amid the monumental ban. Owning a major organization that focuses heavily on the bee collapse and is recognized by the USDA for their mission statement of “restoring bee health and protecting the future of insect pollination” could be very advantageous for Monsanto. Steve Censky, chief executive officer of the American Soybean Association, states it quite plainly. It was a move to help Monsanto and other biotechnology giants squash competition and make profits. After all, who cares about public health?

Food miles a bit of a myth: TWO brands of olive oil, one from Australia, the other shipped 16,000 kilometres from Italy, sit on a supermarket shelf. Most eco-friendly shoppers would reach for the Australian oil. But despite burning less fossil fuel to get here, it may not be better for the planet. Contrary to popular belief, ''food miles'', or the distance food has travelled before we buy it, is a poor indicator of our food's total greenhouse gas emissions, or ''carbon footprint''. More important is the way our food is farmed and produced, and how far we drive to buy it. CSIRO studies are expected to show how emissions from farming and food production eclipse those from food freight. ''Local food can often have a higher carbon footprint than food from afar,'' says principal researcher Brad Ridoutt.He says even home-grown vegetables, with ''zero food miles'', do not necessarily have a smaller carbon footprint than those bought in the supermarket.

The Myth of Sustainable Meat - THE industrial production of animal products is nasty business. From mad cow, E. coli and salmonella to soil erosion, manure runoff and pink slime, factory farming is the epitome of a broken food system.  There have been various responses to these horrors, including some recent attempts to improve the industrial system, like the announcement this week that farmers will have to seek prescriptions for sick animals instead of regularly feeding antibiotics to all stock. Indeed, the last decade has seen an exciting surge in grass-fed, free-range, cage-free and pastured options. These alternatives appeal to consumers not only because they reject the industrial model, but because they appear to be more in tune with natural processes.  For all the strengths of these alternatives, however, they’re ultimately a poor substitute for industrial production. Although these smaller systems appear to be environmentally sustainable, considerable evidence suggests otherwise. Grass-grazing cows emit considerably more methane than grain-fed cows. Pastured organic chickens have a 20 percent greater impact on global warming. It requires 2 to 20 acres to raise a cow on grass. If we raised all the cows in the United States on grass (all 100 million of them), cattle would require (using the figure of 10 acres per cow) almost half the country’s land (and this figure excludes space needed for pastured chicken and pigs). A tract of land just larger than France has been carved out of the Brazilian rain forest and turned over to grazing cattle. Nothing about this is sustainable.

Schmallenberg Virus: Scientists Say Spread Is “A Warning To Europe” - The outbreak of a new livestock disease in western Europe last year, particularly harmful to offspring, could move further into areas surrounding the worst affected countries in the next cycle of new births, scientists say. Schmallenberg virus - named after the German town where it was first detected in November - infected sheep and cows on at least 2,600 farms in eight EU countries last year, most likely between August and October. Thought to have been spread for hundreds of miles across Europe by biting midges and warm late summer winds, the virus has since been confirmed in Belgium, the Netherlands, Luxembourg, France, Italy, Spain and Britain. It is particularly harmful to the offspring of animals infected during early pregnancy, resulting in stillbirths and malformations such as brain deformities, twisted spines and locked joints. The impact on EU livestock production has been limited, and all the evidence so far shows that the virus poses no risk to humans. But scientists and officials say the rapid emergence and spread of Schmallenberg should be a cause for concern.

Welch’s: 95 Percent Of Grapes In Southwest Michigan Destroyed - Here is another reminder that climate change doesn't mean just warming, but a greater frequency of weather EXTREMES. It was just a month ago when Michigan was basking in unprecedented late-winter 80 degree weather. And then came the reversal, as reported by a local Michigan television station: For Welch’s grape growers, it was the most devastating frost in Michigan’s history. That’s according to the National Grape Cooperation, better known as Welch’s Foods. Cold temperatures wiped out 95 percent of all the juice grapes in Berrien, Cass and Van Buren County. "You know it’s a complete wipeout,” said John Jasper, a surveyor for Welch’s Foods. Jasper said more than 10,000 acres of juice grapes were destroyed Thursday morning across Southwest Michigan. Jasper had a difficult job Friday. He and two other Welch’s surveyors tried to figure out how many grapes the company could expect this year at harvest. “I went through hundreds of acres before I found a spot that had a live bud,” he said. “I’ve probably been to 100 farms in the last two days,” said Jasper. “The majority (are destroyed) 95 percent.”

Water Wars: Ownership of a Natural Resource - Americans have enjoyed centuries of abundant natural resources, but when it comes to fresh water that may no longer be the case. Recent droughts in the southern and western United States have exposed a mismanagement of nature's most valuable resource. Now the fight for clean water is heating up. States have always fought over rivers and lakes, but lawsuits don't yield more water. Early laws and agreements were based on the assumption there would always be enough water to go around, but Americans are quickly learning that's not the case. Many reservoirs were built to control flooding, and help farmers irrigate their crops. But those reservoirs became popular places to live and recreate, increasing the demand for water to stay locally to sustain the booming economies. There may never be a definitive resolution to this conflict, but one thing is clear. Americans will soon be forced to decide how to allocate our most valuable resource, and adapt to the ensuing culture shift. In the following pages, we break down some of the country's fiercest Water Wars. 

AFP: Climate change 'impacts Europe's mountain plants': The acceleration of climate change is stressing mountain plants in Europe and driving them to migrate to higher altitudes, according to a study released by US researchers.The plant migration is also decreasing species diversity, the study's authors said in the April 20 edition of the journal Science.The study was based on an inventory of flora on 66 mountains between northern Europe and the Mediterranean.An increasing number of plant species was found only on mountains in northern and central Europe, the researchers reported, while in nearly all mountainous regions of the Mediterranean, the number of plant species was either stagnant or declining.The researchers, who were coordinated by the Austrian Academy of Sciences and the University of Vienna, produced a map of plant species on each of the sites studied in 2001 and 2008. "Our results showing a decline at the Mediterranean sites is worrying because these are the mountains with a very unique flora and a large proportion of their species occur only there and nowhere else on Earth,"

Wildlife and Ag Disaster Looms as UK Drought Deepens - As the US has seen one of the strangest springs ever, the UK sinks into one of the driest seasons in memory.  The continuing whipsaw from one extreme to  another will be the subject of my two new videos, to be released later today. Telegraph: Though most of the South and East is in desperate need of rain, with hosepipe bans in place, if the deluge comes at once it could be more of a danger than a blessing. April showers are expected to continue over the next few weeks. The real risk is at the end of summer when the ground is likely to be baked hard. At the end of the last major water shortage in 1976, the minister of drought, Denis Howell, became minister of floods within days of his appointment as the heavens opened. The floods in the summer of 2007 also came after two years of dry weather made the ground hard. At the moment most of the east of the country, from the Humber to Kent, is in drought. Four months of sustained rainfall will be required to refill reservoirs and rivers that are lower than they were in 1976.

Drought may last until Christmas - Official drought zones have been declared in a further 17 English counties, as a warning came that water shortages could last until Christmas.  The Environment Agency said dry weather over the past few months had left some rivers in England exceptionally low. It has now extended its "drought map" into the Midlands and the South West. Officials say public water supplies are unlikely to be affected by the continuing drought, but are reiterating calls for water to be used wisely. England's South West and the Midlands have moved into official drought status after two dry winters "left rivers and ground waters depleted", the agency said.

Public Linking Severe Weather to Climate Change - A poll due for release on Wednesday shows that a large majority of Americans believe that this year’s unusually warm winter, last year’s blistering summer and some other weather disasters were probably made worse by global warming. And by a 2-to-1 margin, the public says the weather has been getting worse, rather than better, in recent years.The survey, the most detailed to date on the public response to weather extremes, comes atop other polling showing a recent uptick in concern about climate change. Read together, the polls suggest that direct experience of erratic weather may be convincing some people that the problem is no longer just a vague and distant threat.

Activist: New climate poll shows ‘reality will trump big dollar denial efforts’   Following the publication of a George Mason University poll on Wednesday that shows 69 percent of Americans believe the weather is getting worse due to climate change, author and environmental activist Bill McKibbon hailed the findings as proof that “reality will trump big dollar denial efforts” by the pollution-causing industries. The report, “Extreme Weather, Climate & Preparedness in the American Mind,” (PDF) shows a growing number of Americans have been impacted by severe weather as the number of unusual events has grown in recent years. A full 69 percent of poll respondents said climate change was a driving factor behind the increased instances of tornadoes, hail, flooding, wildfires and droughts. That’s a dramatic improvement over just 42 percent of Americans who told Angus-Reid pollsters in 2010 (PDF) that they believe climate change is real and driven by emissions from human industry. Unfortunately for McKibbon and other climate activists, they will largely be operating in a vacuum. Even though a vast majority of Americans believe climate change is leading to more severe weather, a Gallup poll in 2011 found that just 51 percent are “worried” about it, which actually represents a decrease from 2001, when that statistic reached a high of 63 percent.

Obama may blow off the Earth Summit - When the leaders of more than 100 countries meet this June to discuss the small matter of the Future of Life on Earth, President Obama might be there. Then again, maybe he’s got a golf match scheduled that day. He’s not saying. Yes, it’s true, the guy who just picked up an early endorsement from Big Green groups like the Sierra Club and the League of Conservation Voters, the man who announced in his last State of the Union Address that “America remains the one indispensable nation in world affairs,” may be a no-show at the 2012 Earth Summit in Rio de Janeiro, Brazil. When asked about the president’s plans on Tuesday, U.S. Special Envoy on Climate Change Todd Stern told The Washington Post, “I don’t have any understanding that the president has any intention of going.” A White House spokesperson was noncommittal: “I don’t have any scheduling announcements at this time.”

Image of the Day: Satellite View of Receding Dead Sea, 1972, 1989, and 2011

‘Huge’ water resource in Africa - Scientists say the notoriously dry continent of Africa is sitting on a vast reservoir of groundwater.  They argue that the total volume of water in aquifers underground is 100 times the amount found on the surface. The team have produced the most detailed map yet of the scale and potential of this hidden resource.  Writing in the journal Environmental Research Letters, they stress that large scale drilling might not be the best way of increasing water supplies.Across Africa more than 300 million people are said not to have access to safe drinking water. Demand for water is set to grow markedly in coming decades due to population growth and the need for irrigation to grow crops.Freshwater rivers and lakes are subject to seasonal floods and droughts that can limit their availability for people and for agriculture. At present only 5% of arable land is irrigated.Now scientists have for the first time been able to carry out a continent-wide analysis of the water that is hidden under the surface in aquifers. Researchers from the British Geological Survey and University College London (UCL) have mapped in detail the amount and potential yield of this groundwater resource across the continent.

Sea-level rise fastest in Pacific: report: Sea levels in the southwest Pacific started rising drastically in the 1880s, with a notable peak in the 1990s thought to be linked to human-induced climate change, according to a study. The research, which examined sediment core samples taken from salt marshes in southern Australia's Tasmania island, used geochemistry to establish a chronology of sea level changes over the past 200 years. Patrick Moss, from the University of Queensland, said major environmental events which affected the ocean such as the introduction of unleaded gasoline and nuclear tests, showed up in the samples and were used for dating. The chronology revealed a major jump in sea levels around 1880 after 6,000 years of relative stability, Moss said, with peaks in the 1910s and 1990s - the latter of which appeared to be linked to human activity. "Overall, over the past 200 years or so, sea levels have increased by about 20 centimetres," Moss said. 

Study: Historic Rise to Sea Levels in Pacific Ocean Linked to Climate Change - A rapid rise in sea levels in Southwest Pacific Ocean has ocurred, according to a new study, and researchers say human-made climate change is likely the cause for significant rises in the 20th century. Scientists from the University of Queensland in Australia, partnered with other British universities, measured sea levels going back 6,000 years and spotted significant increases in the 19th and 20th centuries. Of note is that a major spike in the late 20th century, starting around 1990, is likely linked to human-created climate change, researchers said. "The 1990s peak is most likely indicative of human-induced climate change," said Patrick Moss, a scientist from the University of Queensland. "Any drastic changes from the norm, which persist for several decades and over a wide area, represent important climate signals."

Jellyfish population on the rise, perhaps due to global warming and pollution - Global warming, pollution and human activity in marine habitats are not generally regarded as good things — unless you're a jellyfish. Then — according to a study of the jellyfish population by University of B.C. researchers — they have an upside. Jellyfish, which give many swimmers the creeps, are increasing in the majority of the world's coastal ecosystems, UBC researchers have found in what is being billed as the first global study of the abundance of jellyfish. The results of the study are published in this month's edition of the journal Hydrobiologia.

Arctic Ice Melt – How Much Faster Than Predicted? - A popular bonehead meme often heard from climate deniers is, “climate models don’t work and are inaccurate.” Sadly, in the case of Arctic sea ice melt, that’s true – but not in the way we would wish. In the graph above, dotted lines are IPCC models for arctic sea ice melt. Red line is actual observations. Dot is from NSIDC graph of September 7, 2011. Stroeve et al. (2007), Geophysical Research Letters: From 1953 to 2006, Arctic sea ice extent at the end of the melt season in September has declined sharply. All models participating in the Intergovernmental Panel on Climate Change Fourth Assessment Report (IPCC AR4) show declining Arctic ice cover over this period. However, depending on the time window for analysis, none or very few individual model simulations show trends comparable to observations.

The glaciers are still shrinking – and rapidly - Glaciers are one of the natural environments most often used to illustrate the impacts of climate change. It is fairly indisputable that in a warming world, glaciers melt faster. Yet two recent studies published in top scientific journals (more here and here) suggest that in the Himalayas the rate of mass loss has been small and overestimated, and that further west, in the Karakoram range, the glaciers are actually slightly gaining mass. Is there a conflict between these studies and the wider body of research indicating that, worldwide, glaciers have been receding for several decades? To answer this question, we need to look a little more carefully at what the studies show, and to place them in the context of global changes to land and sea ice. Both studies cover a relatively short period of time: eight to nine years, over roughly the last decade. The Himalayas experience large variations in snowfall from year to year depending on the strength of the monsoon. But in atmospheric sciences, trends in climate are generally determined from records that span at least 30.

U.S. greenhouse gases back up after decline - US emissions of greenhouse gases blamed for climate change rose in 2010, ending a brief downward turn as the world’s largest economy gradually recovers from recession, official data showed Monday. In a submission to the UN climate organization, the United States said that its greenhouse gas emissions grew by 3.2 percent in 2010 compared with the previous year after two consecutive year-on-year falls. The data also showed that the United States — the world’s second largest emitter of greenhouse gases after China — would need to move aggressively if it seeks to reach President Barack Obama’s targets for tackling climate change.The Environmental Protection Agency said in the annual report that the rise in emissions was “primarily due to an increase in economic output resulting in an increase in energy consumption across all sectors.” In what could be considered a chicken-and-egg dilemma in holding back rising temperatures, the agency said Americans burned more coal and gas in 2010 partly because an unusually warm summer raised demand for air conditioning.

Lead by Example, Clinton Tells Sustainability Forum - “Chill out – sometimes this stuff takes years.” That was Bill Clinton’s wry observation on Thursday as he addressed a sustainability conference in New York City, expressing frustration over how long it is taking for the country to move forward on clean energy and energy efficiency. Appearing before a crowd of around 250 at the annual Sustainable Operations Summit at the Hilton New York in Midtown Manhattan, the former president said there had been some progress but that the upfront costs of adopting better technology — especially in shaky economic times — and a cultural resistance to change remained significant obstacles. “We are too wedded to the way we’ve done things,” Mr. Clinton said, waving his reading glasses for emphasis as he spoke. “It’s psychological as well as financial. We have to liberate ourselves from that.” Mr. Clinton, who sees upgrades as a way to create jobs and boost the economy, has made a cause of retrofitting buildings to conserve energy through his Clinton Climate Initiative and President Obama’s Better Building Challenge, which promotes public and private investment in energy efficiency projects. He encouraged his audience of business and environmental executives to lead “by argument and example” to convince people that sustainable growth is the only kind of growth that makes sense in the long run.

Clean Energy Investments Reduce Prices, Increase Policy Initiatives - Global rankings place the United States in the top spot for investment in clean energy in 2011, with over $48 billion in energy sector investments, including solar, biofuels and wind energy, up from $34 billion the year before. The US now has a total installed renewable energy capacity of 93 GW, which includes the addition of 6.7 gigawatts (GW) of wind and more than 1 GW of solar energy – the equivalent necessary to power over 800,000 homes.  China, which was bumped to second place, saw investment in clean energy increase by $0.5 billion since 2010, for a total of $45.5 billion in 2011, according to the Who is Winning the Clean Energy Race report.  From a global perspective, total investments in the clean energy sector reached $263 billion, a 6.5% increase from 2010. Over half of that investment, $137 billion, went to solar energy, with investment in wind energy at $75 billion. The report also applauds the fact that the installation of clean energy generation capacity has now outstripped nuclear capacity installation by 47%.

Farmers Foil Utilities Using Cell Phones to Access Solar - From the poorest parts of Africa and Asia to the most- developed regions in the U.S. and Europe, solar units such as Anand’s and small-scale wind and biomass generators promise to extend access to power to more people than ever before. In the developing world, they’re slashing costs in the process.  Across India and Africa, startups and mobile phone companies are developing so-called microgrids, in which stand- alone generators power clusters of homes and businesses in places where electric utilities have never operated.  In Europe, cooperatives are building their own generators and selling power back to the national or regional grid while information technology developers and phone companies are helping consumers reduce their power consumption and pay less for the electricity they do use.

The Future Will Not Be Like The Past »  We imagine that energy decline and economic collapse will eradicate all high tech, and reduce the whole planet to a preindustrial lifestyle, because it's easy to imagine. It's harder to imagine a collapse that's unevenly distributed. Historically, economic collapses do not reduce everyone to poverty, but increase the gap between rich and poor. I think the same thing is going to happen with technology: while overall resource consumption decreases, the proportion spent at the leading edge of technology will increase. Less energy will be spent moving physical stuff, and more will be spent moving information. Not only will there be a wider gap between the places with the highest and lowest technology, there will also be a wider gap between the highest and lowest technology used by an average person. Already there are African villagers with cell phones. In 20 years you may be living with a group of friends in an abandoned suburb, burning scrap wood for heat, growing open-source genetically modified sweet potatoes, and selling brain time to the dataswarm to gain credits for surgery to install a neuro-optical interface so you can swap out custom eyeballs.

U.S. coal exports to China may double in 2012: Xcoal - U.S. coal exports to China could more than double to over 12 million tonnes in 2012 thanks to depressed freight rates and a fall in domestic demand in the United States, the chief of top U.S. coal exporter Xcoal Energy & Resources said. The expected increase in coal shipments could further push down coal prices in Asia where a supply glut following a deluge from the United States and Colombia has forced prices to slump recently.Australian Newcastle-grade coal has dropped $10 a tonne since end-February, the Indonesian coal reference price is down to its lowest in 16 months and South African coal has shed $5. "Exports to China could reach over 12 million tonnes this year based on the annualized numbers," Chief Executive Ernie Thrasher told Reuters in an interview on Wednesday. "We only have data for January and February now, but all anecdotal evidence so far suggests that there are no signs of that diminishing as the year goes on," he said. "I think there is enough demand in Asia to absorb enough U.S. cargoes to stem a decline in prices."

Fukushima governor rips restart of Oi nuclear reactors - The governor of Fukushima Prefecture has lashed out at the central government's handling of the proposed restart of the Oi nuclear reactors in Fukui Prefecture. “As the governor of a disaster-stricken prefecture, I think the central government’s discussion of the restart of a nuclear power plant based on political considerations is unacceptable,” Yuhei Sato said on April 12. Fukushima Prefecture hosts the crippled Fukushima No. 1 nuclear power plant. “I wonder if they really understand the severity and the reality of a nuclear power plant accident,” Sato said.

New photos show damaged fuel storage pool at Fukushima plant - Tokyo Electric Power Co. on April 13 released photos showing extensive damage at the spent fuel storage pool of the No. 3 reactor at the crippled Fukushima No. 1 nuclear power plant. Part of the refueling structure, including a crane that weighs 35 tons and is used to lift and move fuel rods, and a fuel storage rack appeared in the photos taken earlier in the day. The refueling machine is believed to have fallen underwater after a hydrogen explosion in March last year. This is the second time TEPCO has released underwater images from inside the reactor building. On May 10 last year, TEPCO released a video showing the interior of the spent fuel storage pool in the No. 3 reactor. Like in the video clip shot on May 8 last year, the latest photos showed twisted steel frames and other rubble in the water. Within the next three years, TEPCO plans to begin removing the spent fuel rods from the storage pool. Removing the rubble that has piled up around the fuel rods is expected to present a major challenge.

Fukushima damage leaves spent fuel at risk-U.S. lawmaker - - Japan, with assistance from the U.S. government, needs to do more to move spent fuel rods out of harm's way at the tsunami-stricken Fukushima Daiichi nuclear plant, said U.S. Senator Ron Wyden on Monday.  Wyden, a senior Democratic senator on the Senate Energy committee, toured the ruined Fukushima plant on April 6, and said the damage was far worse than he expected.  "Seeing the extent of the disaster first-hand during my visit conveyed the magnitude of this tragedy and the continuing risks and challenges in a way that news accounts cannot," said Wyden in a letter to Ichiro Fujisaki, Japan's ambassador to the United States.  Wyden said he was most worried about spent fuel rods stored in damaged pools adjacent to the ocean, and urged the Japanese government to accept international help to prevent further release of the radioactive material if another earthquake should happen.  In a statement on his website, Wyden said the only protection for the pools from another tsunami appeared to be "a small, makeshift sea wall erected out of bags of rock."

Stop the nuclear industry welfare programme--  Bernie Sanders and Ryan Alexander - After 60 years, the taxpayer should not continue to subsidise multibillion-dollar corporations in the nuclear energy sector.  The US is facing a $15 trillion national debt, and there is no shortage of opinions about how to move toward deficit reduction in the federal budget. One topic you will not hear discussed very often on Capitol Hill is the idea of ending one of the oldest American welfare programmes – the extraordinary amount of corporate welfare going to the nuclear energy industry. Many in Congress talk of getting "big government off the back of private industry". Here's an industry we'd like to get off the backs of the taxpayers.As, respectively, a senator who is the longest-serving independent in Congress and the president of an independent and non-partisan budget watchdog organisation, we do not necessarily agree on everything when it comes to energy and budget policy in the US. But one thing we strongly agree on is the need to end wasteful subsidies that prop up the nuclear industry. After 60 years, this industry should not require continued and massive corporate welfare. It is time for the nuclear power industry to stand on its own two feet.

What will it take to get sustained benefits from natural gas? - An enhanced method for assessing climate impacts from natural gas development and use is offered in Greater focus needed on methane leakage from natural gas infrastructure, a scientific paper in Proceedings of the National Academy of Sciences. The paper illustrates the importance of accounting for methane leakage across the value chain of natural gas (i.e. production, processing and delivery) when considering fuel-switching scenarios from gasoline, diesel fuel and coal to natural gas.  Key findings of the PNAS paper, based on the best available estimates on methane emissions from the EPA, include:

  • Assuming the Environmental Protection Agency’s (EPA) 2009 leakage rate of 2.4% (from well to city), new natural gas combined cycle power plants reduce climate impacts compared to new coal plants; this case is true as long as leakage remains under 3.2%.
  • Assuming EPA’s estimates for leak rates, compressed natural gas (CNG)-fueled vehicles are not a viable mitigation strategy for climate change because of methane leakage from natural gas production, delivery infrastructure and from the vehicles themselves. For light-duty CNG cars to become a viable short-term climate strategy, methane leakage would need to be kept below 1.6% of total natural gas produced (approximately half the current amount for well to wheels – note difference from well to city).
  • Methane emissions would need to be cut by more than two-thirds to immediately produce climate benefits in heavy duty natural gas-powered trucks.

Frackers Outbid Farmers For Water in Colorado Drought - Colorado is facing drought not seen since 2002, following the fourth-warmest and third-least-snowy winter in US history. Colorado State University scientists report that 98 percent of the state is facing these drought conditions. The drought comes after a record-breaking warm winter that left very low “snowpack levels” in water basins. “Even though the reservoir levels are still strong and northeast Colorado soil moisture is still pretty good, we just don’t usually start out quite this warm and dry at this time — so this is very concerning,”   Colorado’s hydrofracking boom — a technology that heavily relies on water — only adds additional strain as farmers and drillers bid for a scarce resource: At Colorado’s premier auction for unallocated water this spring, companies that provide water for hydraulic fracturing at well sites were top bidders on supplies once claimed exclusively by farmers. [...] State officials charged with promoting and regulating the energy industry estimated that fracking required about 13,900 acre-feet in 2010. That’s a small share of the total water consumed in Colorado, about 0.08 percent. However, this fast-growing share already exceeds the amount that the ski industry draws from mountain rivers for making artificial snow. Each oil or gas well drilled requires 500,000 to 5 million gallons of water.

Fracking concerns raised over N.C. homes sold without underground rights - Garrido’s neighbors in the Legends Oaks subdivision are signing home purchase contracts that give up their rights for drilling natural gas to the company that built the homes. Texas-based D.R. Horton, the nation’s largest homebuilder, is then transferring those exploration rights en masse to its subsidiary, DRH Energy. The homebuilder’s deed restriction potentially plays out across dozens of subdivisions and hundreds of homes built by D.R. Horton throughout the state. The terms give DRH Energy, also based in Texas, “the perpetual right to drill, mine, explore … and remove any of the subsurface resources on or from the property by any means whatsoever,” according to property deeds filed in Chatham, Wake and Durham counties.  Now Garrido is surrounded by neighbors who will have no say about natural gas drilling under their homes. “If we ever want to sell our house, it’s going to hurt us,” said Garrido. “It’s just the perception, even if they never exercise those rights.” It’s not clear why D.R. Horton is selling homes stripped of mineral rights, or whether the company hopes to profit from a natural gas bonanza in the Triangle and elsewhere. Company representatives did not return repeated calls and emails to its division office in Morrisville.

US oil boom fuels earthquake rise – but fracking not to blame, scientists say  - America's oil and natural gas boom has led to a "remarkable" rise in earthquakes in the middle of the country, the US Geological Survey said on Wednesday. But scientists said the man-made quakes were not directly caused by hydraulic fracturing, or fracking, which involves pumping chemicals and water deep into underground rock formations. "We don't find any evidence that fracking is related to any of these magnitude 3 earthquakes that we have been studying," Bill Ellsworth, the USGS seismologist leading the study of man-made quakes, told a conference call with reporters. "We simply don't see any evidence that fracking is related to earthquakes that are of concern to people." However, he said there were a few instances when waste water wells, in which chemicals used in fracking are injected deep underground, had triggered seismic activity. The study found a sixfold increase in man-made quakes in an area including Arkansas, Colorado, Oklahoma, New Mexico, and Texas against the 20th century average, the increase taking place over a 10-year period starting in 2001. The quakes were small, a magnitude just over 3.0, but there were even more of them after 2009, which corresponded with a sharp rise in natural gas drilling around the country. "A remarkable increase in the rate of (magnitude 3) and greater earthquakes is currently in progress,"

More on the Link Between Earthquakes and Fracking - Scientists from the United States Geological Survey have cautiously weighed in on a subject that has sparked public concern in some parts of the country: spates of small earthquakes in oil- and gas-producing areas. In a report to be presented next week at a meeting of seismologists in San Diego, the scientists say that increases in the number of quakes in Arkansas and Oklahoma in the last few years are “almost certainly” related to oil and gas production. But in a summary of the report, they say they do not know if seismic activity is increasing because companies are taking more oil and gas from underground or because of “changes in extraction methodologies.” One “extraction methodology” that has become increasingly popular, especially for natural gas production, is hydraulic fracturing, or fracking, in which water and chemicals are injected into wells under pressure to create fissures in the rock and unlock the gas. A report by a state seismologist in Oklahoma suggested that two minor quakes in January, about 50 miles south of Oklahoma City, may have been directly caused by a fracking operation. But in central Arkansas, a series of hundreds of small quakes — and a few bigger ones — since 2010 was linked not to fracking itself but to disposal of waste liquids produced by the process. The waste was injected into deeper disposal wells. Scientists concluded that the liquids had migrated to a previously unknown fault, causing the quakes. (A similar conclusion was reached by officials in Ohio this year after a series of quakes near a disposal well.)

As air pollution from fracking rises, EPA to set rules — The rush to capture natural gas from hydraulic fracturing has led to giant compressor stations alongside backyard swing sets, drilling rigs in sight of front porches, and huge flares at gas wells alongside country roads. Air pollution from fracking includes the fumes breathed in by people nearby, as well as smog spread over a wide region and emissions of the greenhouse gas methane. On Tuesday, the Environmental Protection Agency is expected to announce the first national rules to reduce air pollution at hydraulically fractured — fracked — wells and some other oil and gas industry operations. The agency estimated that the plan it proposed in July would reduce smog-forming, cancer-causing and climate-altering pollutants from the natural gas industry by about one-fourth. The White House in recent weeks has been reviewing the EPA plan to consider possible changes, the normal procedure for regulations. Industry groups have lobbied for exemptions that would reduce the impact of the rule, saying the original requirements are too costly. Environmental and health advocates have been talking to White House officials as well, opposing the industry’s proposed changes. 

EPA to Release Fracking Rule Today - The EPA will announce the first federal rules against fracking. Curiously, however, the rules have nothing to do with the Clean Water Act, but seek to reduce the air pollution around fracking sites. This is also a problem, but most of the attention around the corrosive side effects of fracking has revolved around water contamination. Air pollution from fracking includes the fumes breathed in by people nearby, as well as smog spread over a wide region and emissions of the greenhouse gas methane. On Tuesday, the Environmental Protection Agency is expected to announce the first national rules to reduce air pollution at hydraulically fractured — fracked — wells and some other oil and gas industry operations. The agency estimated that the plan it proposed in July would reduce smog-forming, cancer-causing and climate-altering pollutants from the natural gas industry by about one-fourth. So there’s a setup for at least some disappointment here. The larger issue is that I think most fracking critics would say that air pollution, while important, pales as a concern to contamination of the groundwater. That doesn’t take away from the need to reduce fumes arising from fracking. Clearly the families with the misfortune of living near fracking sites are living through a nightmare, made worse by the fact that their sites were fairly desolate a few years ago

Obama Issues Pollution Rules for Gas Wells, Offers Phase-In - The U.S. Environmental Protection Agency issued the first rules to combat air pollution from natural-gas drilling, while giving companies until 2015 to meet the most stringent requirements opposed by the energy industry.  The regulations will primarily affect the estimated 13,000 wells a year drilled using hydraulic fracturing, or fracking, to free underground gas in shale formations. The EPA rejected a bid by the American Petroleum Institute to exempt a number of wells from the requirements altogether. “The president has been clear that he wants to continue to expand production of important domestic resources like natural gas, and today’s standard supports that goal while making sure these fuels are produced without threatening the health of the American people,” EPA Administrator Lisa Jackson, appointed by President Barack Obama, said today in a statement.  An EPA draft of the rule would have put the requirements into effect in about 60 days. The final regulation delays until Jan. 1, 2015, a requirement that drillers capture gases when first tapping a well. Operators must burn off that gas during the phase-in period, the EPA said.

Fracking rules let drillers flare till 2015 (Reuters) - U.S. environment regulators said Wednesday they will give natural gas and oil drillers more than two years of extra time to invest in equipment that slashes unhealthy air emissions from fracking wells, citing a lack of clean technology. Drillers that use fracturing, or fracking, to extract natural gas and oil will not be required to use the equipment until January 2015, the Environmental Protection Agency said as it finalized long-delayed rules on the smog-forming emissions. The new rule comes as the Obama administration tries to balance its support for a booming industry that could help the United States become a major exporter of natural gas, while still addressing concerns about its safety. In a draft rule in July the EPA had proposed drillers would have to invest in equipment to capture the waste gasses soon after the standard was finalized. Now, drillers will have until 2015 to invest in equipment that capture the emissions, a process known as 'green completion'. Until then they can burn off, or flare, the gas.

Exclusive: UK has vast shale gas reserves, geologists say (Reuters) - Britain may have enough offshore shale gas to catapult it into the top ranks of global producers, energy experts now believe, and while production costs are still very high, new U.S. technology should eventually make reserves commercially viable. UK offshore reserves of shale gas could exceed one thousand trillion cubic feet (tcf), compared to current rates of UK gas consumption of 3.5 tcf a year, or five times the latest estimate of onshore shale gas of 200 trillion cubic feet. Reserves of 200 tcf would put the UK in the top 20 countries with the highest shale reserves, alongside Brazil, and 1,000 tcf would put Britain in the same league as estimates for China, the United States and Argentina, top dogs in global shale potential. There are still no reliable figures available for the UK, and some experts doubt preliminary onshore reserve figures by private companies. Also only around 10 to 20 percent of total reserves are currently deemed recoverable. But experts say that whatever the final recoverable reserve figure is, it is likely to be big enough to make Britain energy self-sufficient.

UK ‘could become one of world’s biggest shale gas producers’ - Britain may have enough offshore shale gas to catapult it into the top ranks of global producers, energy experts now believe, and while production costs are still very high, technology should eventually make reserves commercially viable.  UK offshore reserves of shale gas could exceed one thousand trillion cubic feet (tcf), compared to current rates of UK gas consumption of 3.5 tcf a year, or five times the latest estimate of onshore shale gas of 200 trillion cubic feet.  Reserves of 200 tcf would put the UK in the top 20 countries with the highest shale reserves, alongside Brazil, and 1,000 tcf would put Britain in the same league as estimates for China, the United States and Argentina, top dogs in global shale potential.  Although there are still no reliable figures available for the UK, and only around 10-20pc of total reserves are currently deemed recoverable, experts say that whatever the final recoverable reserve figure is, it is likely to be big enough to make Britain energy self-sufficient.  "There will be a lot more offshore shale gas and oil resources than onshore," Nigel Smith, subsurface geologist and geophysicist at the British Geological Survey (BGS) said. UK offshore reserves could be five to 10 times as high as onshore, said.

6 Scary Extreme Energy Sources Being Tapped to Fuel the Post Peak Oil Economy - In a few short years the term “fracking” went from obscurity, mostly mistaken for an obscenity, to a household word, now often associated with flammable tap water. The technology is not new, but the market conditions that make such reckless forays deep into the earth’s crust profitable, are new. Welcome to the post peak oil energy economy. What’s online to follow fracking is even scarier. The problem is we’re addicted to oil, and like most addicts, we can’t take that first step and admit our addiction. For over a century, we mostly glided, enjoying the high that cheap oil gave our economy and consumptive lifestyles, while not facing many consequences—at least none that we could yet recognize. But, like the meth-head whose body was rotting from the inside out, our addiction was poisoning our atmosphere, our oceans and in places, our land and fresh water. Now we’re seeing the results of that five generation-long binge. We’re also coming into a period that energy economists call “peak oil.”

Charts: Dirty Energy’s Election Ad Spending Spree - Hey there, swing state resident: Does this ad look familiar? The video, which got 1.3 million views in the last two weeks, is sponsored by the American Energy Alliance. AEA, as it turns out, is one of several pro-oil and gas interest groups spending oodles of cash on campaign advertisements in 2012, according to a new analysis by Think Progress. (MoJo's Alyssa Battistoni gets into the weeds with—and righteously fact-checks—these ads here.) Taken together, the AEA (which is partially funded by the Koch brothers) and others have spent at least $16.75 million in advertisements. By contrast, the Obama campaign and his super PAC have spent a fraction of that defending his energy policies. Here's how the money stacks up: No wonder, then, that five out of seven general election commercials airing in key swing states are about energy, according to a LA Times report citing data from the Kantar Media/Campaign Media Analysis Group. But perhaps this doesn't surprise you. Haven't outside interest groups always played a role in political races, after all? But consider how much they are spending this year compared with 2008:

TransCanada Submits Keystone Pipeline Reroute Plan - TransCanada Corp. submitted a reroute of its Keystone XL oil pipeline to the Nebraska state government Wednesday, moving a step closer to reviving the project after it was rejected by the U.S. government earlier this year. The reroute will avoid an environmentally sensitive area in the U.S. Midwest state, and comes a day after Nebraska Gov. Dave Heineman signed a bill allowing the state's review of the pipeline to continue. Nebraska was a hot spot for protest against Keystone XL last year because of its path across the Sand Hills and the Ogallala aquifer. Getting the reroute approved by Nebraska will help ensure that TransCanada can move ahead with reapplication to the U.S. federal government. A TransCanada spokesman said the company is waiting for the "right time" to reapply for a federal permit from the U.S. State Department, which rejected its initial application in January. The reroute will add a 100-mile eastern detour around the Sand Hills to the 1,700-mile pipeline from Alberta to the Texas coast of the Gulf of Mexico. If approved, the $7.6 billion pipeline would send up to 830,000 barrels of crude a day from Canada and the western U.S. to refineries on the Gulf Coast. TransCanada has said the pipeline could begin flowing by 2015, about a year later than it had planned before the rejection of the first application.

U.S. renews veto threat over Canada-to-Texas Keystone pipeline (Reuters) - The White House on Tuesday renewed its threat to veto legislation to fund U.S. transportation projects responsible for millions of jobs if it includes the politically charged Canada-to-Texas Keystone XL oil pipeline. Republicans in the House of Representatives have included the pipeline in a bill that proposes a 90-day extension of funding for highway, bridge, and transit construction. The House is expected to vote on the legislation on Wednesday. In a statement on the proposal, presidential advisers said the legislation would circumvent “longstanding and proven process” for determining whether pipelines are in the national interest. It said mandating the pipeline before a new route was “submitted and assessed” would prompt a recommendation that President Barack Obama veto the long-delayed transportation legislation, said to be crucial for the economy. Obama earlier this year put a hold on TransCanada’s $7 billion project, designed to bring crude oil from Canada and North Dakota to Texas refineries, because he said it needed further environmental review in Nebraska. Obama does, however, support development of the southern leg of the pipeline that would run from the Cushing, Oklahoma, storage hub to Texas.

New Bakken Shale Pipeline to Cushing, OK in the Works - On April 11, Wyoming’s Casper Star-Tribune reported “A natural gas company wants to build a 1,300-mile pipeline to carry crude oil from North Dakota through easternmost Wyoming on its way to the nation’s biggest storage terminal in central Oklahoma (Cushing).” The deal will cost somewhere between $1.5-1.8 billion, according to the Associated Press. The company and name of the pipeline? Oneok Partners LP‘s Bakken Crude Express Pipeline. The pipeline essentially performs the same function TransCanada’s proposed but not yet approved portion of the TransCanada Keystone XL pipeline, known in the business world as the Bakken Marketlink Project. Oneok hopes the pipeline is in place and pumping out 200,000 barrels of oil per day “from the heart of North Dakota’s rich oil patch to the hub in Cushing, Okla” by 2015. The Bakken Crude Express isn’t the only one in play in this deal. Oneock’s Bakken Pipeline, as well as Williams Company’s and Oneock’s Overland Pass Pipeline — which both co-own on a 50-50 joint venture basis — are also part of this deal and are all key pieces of the oil and gas industry’s big-picture pipeline infrastructure puzzle. The Bakken Pipeline will pump the oil and gas fracked from the Bakken and carry it southward to the meeting point of the Bakken Pipeline and the Overland Pass Pipeline. Some of that oil will continue moving southward toward Cushing, while some of it will divert westward to the city of Opal, Wyoming, another key pipeline fork in the road. Oil and gas piped further southward toward Cushing will now be part of Oneock’s Bakken Crude Express. Oil and gas being piped westward toward Opal will connect with the Ruby Pipeline, which carries gas fracked in the Niobrara Shale westward to Malin, Oregon. From Malin, the oil and gas will continue its westward voyage to the city of Coos Bay, Oregon, via the Pacific Connector Pipeline, where it will end up at the Jordan Cove LNG export terminal and placed on the Asian gas export market

U.S. Energy Independence in 15 Years? - Today the Obama administration tightened oil and gas industry regulations, forcing drillers to capture air pollutants released during well construction—including during hydraulic fracturing (fracking)—in new wells. The Environmental Protection Agency immediately reassured the industry, declaring the new rules would not come into full effect until 2015. Is this an example of excessive, heavy-handed regulation of a booming, strategic industry? Or is this the sort of remedial measure that will lessen the industry’s environmental impact and reassure the public enough to help smooth the way forward to increased energy independence? Which raises another question: Just how elusive is the goal of energy independence for the U.S.? According to a recent Forbes Insights survey of more than 100 energy executives, “2012 U.S. Energy Sector Outlook,”, fully 70% of energy executives believe that, given a true national commitment, the U.S. could achieve a high degree of energy independence within 15 years. That “true national commitment” is clearly the sticking point here, and energy executives are under no illusions that reaching political consensus on the steps required would be easy, or likely. Only 21% believe that the goal of energy independence is somewhat feasible, and just 6% think it’s very feasible

Stung by the Keystone XL Debacle, Canada Looks Eastwards - So, what’s on the drawing boards to replace Keystone XL? First, the $5.54 billion, 731-mile Northern Gateway pipeline, proposed by Enridge Inc., which would carry 525,000 barrels a day (bpd) of Alberta's oil sands to a supertanker port in Kitimat, British Columbia. But opposition to the pipeline has swiftly mounted, led by Canada’s Indian community. The proposed pipeline route crosses land owned and claimed by Indian tribes and nations who worry that the pipeline will leak and foul rivers that are important salmon spawning grounds, while Indian groups in British Colombia argue that the coastline is too rugged for supertankers and that an oil spill is inevitable. The solution? Enbridge company is offering the Indian tribes about $1 billion dollars for "community building" and a 10 percent share in the project if they drop their opposition, Nor is Northern Gateway the only energy transit project in the works, as on 10 April the British Colombia Environmental Assessment Office approved increasing the carrying capacity by 36 percent of the proposed $1 billion Pacific Trails natural gas pipeline. Pacific Trails is designed to transport natural gas from northeast British Colombia to Kitimat for export overseas. The pipeline project is owned by a consortium of EOG Resources, Apache and Encana, which also owns the $4.5 billion liquefied natural gas plant proposed for Kitimat.

BP settles $7.8bn of Gulf oil spill claims - BP has reached definitive agreements with more than 100,000 private plaintiffs to resolve claims for economic, property and medical damages resulting from the 2010 Gulf of Mexico oil spill.  The oil major said it still believes the cost of the settlement will be $7.8bn (£4.9bn), to be paid from a $20bn trust it had previously set aside.  BP also asked a US judge for a lengthy delay before holding a trial over remaining claims which have not been settled.  The oil company is seeking the delay because BP and the plaintiffs' lawyers have "markedly different opinions" regarding the strength of their cases, and neither confidently expects "a complete victory". Llitigation could easily last 10 years, they said in papers filed on Wednesday with the federal court in New Orleans.

Gulf fisheries in decline after oil disaster (video)

Gulf seafood "horribly deformed" - Eyeless shrimp. Fish afflicted by sores. Crabs without claws or hard shells. Bizarre deformities are becoming common in seafood from the Gulf, according to Louisiana State University's Department of Oceanography and Coastal Sciences, and pollution caused by the 2010 BP oil spill is the likely cause.  The [oil] dispersants are known to be mutagenic, a disturbing fact that could be evidenced in the seafood deformities. Shrimp, for example, have a life-cycle short enough that two to three generations have existed since BP's disaster began, giving the chemicals time to enter the genome. Pathways of exposure to the dispersants are inhalation, ingestion, skin, and eye contact. Health impacts can include headaches, vomiting, diarrhea, abdominal pains, chest pains, respiratory system damage, skin sensitisation, hypertension, central nervous system depression, neurotoxic effects, cardiac arrhythmia and cardiovascular damage. They are also teratogenic - able to disturb the growth and development of an embryo or fetus - and carcinogenic.

Legacy Of BP Oil Spill: Eyeless Shrimp And Fish With Lesions - The Deepwater Horizon oil rig exploded nearly two years ago to the day, beginning an oil spill that lasted three months and released some two hundred million gallons of oil into the Gulf of Mexico. BP may have declared their mission accomplished, but the results of the spill are still trickling out. The latest? Shrimp with no eyes, fish with lesions, and clawless crabs. Scientists believe that shrimp, fish, and crabs in the gulf have been deformed by the chemical released to disperse oil during the spill. Fishers in the area say that they’ve been noticing deformities on their catches since. Al Jazeera reports: “At the height of the last white shrimp season, in September, one of our friends caught 400 pounds of these,” [Louisiana commercial fisher Tracy] Kuhns told Al Jazeera while showing a sample of the eyeless shrimp. According to Kuhns, at least 50 per cent of the shrimp caught in that period in Barataria Bay, a popular shrimping area that was heavily impacted by BP’s oil and dispersants, were eyeless. Kuhns added: “They are also catching them in Alabama and Mississippi. We are also finding eyeless crabs, crabs with their shells soft instead of hard, full grown crabs that are one-fifth their normal size, clawless crabs, and crabs with shells that don’t have their usual spikes … they look like they’ve been burned off by chemicals.” [...]

Panel Faults Congress for Inaction on Drilling - Members of the presidential panel that investigated the 2010 BP oil rig explosion and spill sharply criticized Congress on Tuesday for refusing to act on any of its recommendations and gave the Obama administration and the oil industry mixed marks.  Their report said that federal regulators and major oil companies had generally improved the safety and oversight of drilling operations since the spill in the Gulf of Mexico, the worst in the nation’s history. But the group said that Congress, hostile to new regulation and mired in partisan gridlock, had utterly failed.  “Two years have passed since the explosion on the Deepwater Horizon killed 11 workers, and Congress has yet to enact one piece of legislation to make drilling safer.”  The group said that the Interior Department had imposed new standards for rig safety, well design, blowout preventers and spill response, but that the new systems had not been adequately tested and the regulatory changes had not been written into law. And while the commission recommended highly detailed and specific environmental impact studies, the report said, those remain inadequate.

Experts: Another BP-style Gulf blowout all too possible — Much more needs to be done to lower the risks of another offshore oil disaster like the BP blowout two years ago in the Gulf of Mexico, the presidential commission that investigated the disaster reported Tuesday in its first progress update.  The presidential oil spill commission disbanded after it finished its main report last year, but its seven members recently got together again to look back on whether their recommendations had been carried out. Many steps to prevent or sop up another oil blowout haven’t been taken. “The risks will only increase as drilling moves into deeper waters with harsher, less familiar environmental conditions,” the report says. “Delays in taking the necessary precautions threaten new disasters, and their occurrence could, in turn, seriously threaten the nation’s energy security.”

A Stain That Won’t Wash Away - TWO years after a series of gambles and ill-advised decisions on a BP drilling project led to the largest accidental oil spill in United States history and the death of 11 workers on the Deepwater Horizon oil rig, no one has been held accountable. Sure, there have been about $8 billion in payouts and, in early March, the outlines of a civil agreement that will cost BP, the company ultimately responsible, an additional $7.8 billion in restitution to businesses and residents along the Gulf of Mexico. It’s also true that the company has paid at least $14 billion more in cleanup and other costs since the accident began on April 20, 2010, bringing the expense of this fiasco to about $30 billion for BP. These are huge numbers. But this is a huge and profitable corporation.  What is missing is the accountability that comes from real consequences: a criminal prosecution that holds responsible the individuals who gambled with the lives of BP’s contractors and the ecosystem of the Gulf of Mexico. Only such an outcome can rebuild trust in an oil industry that asks for the public’s faith so that it can drill more along the nation’s coastlines. And perhaps only such an outcome can keep BP in line and can keep an accident like the Deepwater Horizon disaster from happening again.

Oil companies announce effort to clean up urine-filled jugs, other trash tossed on roads in ND - A group representing companies working in North Dakota's booming oil patch announced an effort Tuesday to clean up the human waste, old tires and other trash littering the state's highways. The Associated Press reported last month that oil patch communities are struggling to combat the growing trash problem that includes urine-filled jugs tossed by truckers along roadsides. A spokeswoman said the oil industry planned to address the problem but the international publicity "speeded us up a little bit." The North Dakota Petroleum Council's so-called Pick up the Patch campaign will begin Wednesday along a stretch of highway near Dickinson, said Alexis Brinkman, government relations manager for the group that represents about 350 companies working in the oil patch. North Dakota's oil boom has brought prosperity and population growth but also problems, including inordinate amounts of garbage piling up on the prairie and along roadsides.

Scotland ‘faces bill of £30bn’ after North Sea oil runs out - TAXPAYERS in an independent Scotland would have to pay the £30 billion cost of decommissioning North Sea rigs, the country’s leading oil economist warned earlier today. Professor Alex Kemp, of Aberdeen University, told a Westminster committee looking into the impact of independence on the UK’s energy market that the cost of the clean-up operation would take place primarily in Scottish waters, particularly around Shetland. “The bulk of that is in what would be Scottish waters because the most expensive platforms are in the East of Shetland basin and they most certainly will be in Scottish waters,” he said. “There’s no doubt about it, this will be an extra cost. “If there was separation, the costs would be tax deductable against income from tax revenues coming from Scottish waters.” His comments, to the energy select committee, were rejected by Scottish energy minister Fergus Ewing, who insisted that the rest of the UK had a “moral obligation” to contribute towards decommissioning costs.

EIA: We Just Revised Two Decades Of Global Oil Data - With the most recent release of international oil production data, EIA Washington has revised figures back to 1985. This is one of the most comprehensive revisions I have seen in several years. Generally, the totals were revised slightly lower, and this was especially true for the past decade. Data for the full year of 2011 has now completed. | see: Global Average Annual Crude Oil Production mbpd 2001 – 2011. Since 2005, despite a phase transition in prices, global oil production has been trapped below a ceiling of 74 mbpd (million barrels per day). New production from new fields and new discoveries comes on line, but, it has not been at a rate fast enough to overcome declines from existing fields. Overall, global decline has been estimated at a minimum of 4% per year and as high as 6+% a year. Given that new oil resources are developed and flow at much slower rates, the existing declines present a formidable challenge to the task of increasing supply. I see no set of factors, in combination, that would take global production of crude oil higher in 2012, or next year, or thereafter.

What the new 2011 EIA oil supply data shows  -The US Energy Information Administration (EIA) recently released full-year 2011 world oil production data. In this post, I would like show some graphs of recent data, and provide some views as to where this leads with respect to future productionThe fitted line in Figure 1 suggests a “normal” growth in oil supplies (including substitutes) of 1.6% a year, based on the 1983 to 2005 pattern, or total growth of 10.2% between 2005 and 20011. Instead of 10.2%, actual growth between 2005 and 2010 amounted to only 3.0% including crude oil and substitutes. The shortfall in oil production relative to what would have been expected based on the 1983-2005 growth pattern amounted to 4.7 million barrels in 2011. This is far more than any country claims as spare capacity. This is no doubt one of the reasons why oil prices are as high they are now. These high oil prices tend to interfere with economic growth of oil importing nations. The shortfall in growth especially occurred in crude oil. Figure 2, below, shows crude oil production separately from substitutes.

Brazil Oil Chief Expects Oil At $119 A Barrel For 2012 - The CEO of the biggest oil company in one of the world's fastest-rising economies thinks high oil prices are here to stay. Maria das Gracas Foster, who heads Petrobras, Brazil's state-owned oil company and the largest oil company in Latin America, said on Tuesday that she does not expect global oil prices to fall below $119 throughout the rest of the 2012, Reuters reported.According to Foster, global geopolitical tensions will keep oil prices high. Tensions in the Persian Gulf have been one the leading drivers for high oil prices. Governments throughout the world have been trying to combat high energy prices. On Tuesday, President Barack Obama called on congress to pass laws that would help keep energy prices down by curbing market speculation. In London, Brent crude -- the global benchmark for crude oil prices -- traded at $118.79, roughly $14 more than its U.S. counterpart on the New York Mercantile Exchange.

ExxonMobil and Rosneft to Develop Arctic Oil in $500 Billion Deal - On Monday, at the suburban residence of Russian Prime Minister Vladimir Putin, the chief executives of the US and Russian oil giants, ExxonMobil and Rosneft, signed a deal to collaborate in the development of oil and natural gas fields in Russia and North America. The agreement was officially announced on Wednesday and holds the potential for $500 billion to be invested in the exploration and production of oil in the Arctic and the Black Sea. The joint venture will grant Exxon access to some of the world’s richest sources of crude oil and other hydrocarbons in the Russian Arctic and the Black Sea. Recoverable hydrocarbons in the Arctic fields around the Kara Sea, north of Siberia, are estimated to be in the region of 85 billion barrels of oil equivalent, with the first few exploratory wells to be drilled in 2014. In turn Rosneft will take a minority stake in two of Exxon’s projects in the US and Canada, with an option of a further stake in a project in the Gulf of Mexico.

Are Oil Embargoes Hurting Iran or the US? Obama Blames Oil Manipulators; Who are the Real Manipulators? - The US and European embargo of Iranian oil is one of the factors behind the stubbornly high price of crude, trumping the huge slump in petroleum demand in the US. Although Iranian oil exports are down 33%, Iran is on a course for its third largest oil-related earnings ever. Thus, the primary beneficiary of high oil prices is Iran.  Rather than blame himself for the absurdity of the situation, president Obama blames oil speculators.  The Financial Times reports High Oil Prices Shield Iran From Sanctions. The Centre for Global Energy Studies (CGES), a London-based think-tank, estimates that Iran will earn $56bn selling its crude this year – its third-highest earnings ever – even after factoring in the loss of roughly a third of its export volume due to sanctions.  The western allies are trying to achieve a difficult balance: hurt Iran enough to force it to negotiate over its nuclear programme, but keep enough oil flowing to avoid a price spike that damages the fragile economic recovery. “The sanctions are not working,”  “They are definitely hurting Iran as it limits its [crude oil] exports, but they are also hurting the rest of the world, given that the western powers have not managed to control prices.”

March Iranian and Saudi Oil Production - The above graph shows average Saudi oil production (left scale) and Iranian oil production (right scale).  Neither side is zero-scaled but they are on the same sized scale (to better show and compare absolute changes).  The data point in March is based solely on the secondary sources for the OPEC MOMR but appears to show a continuation of the recent trend of slowly falling Iranian production and roughly compensating rises in Saudi production.The individual data sources for Iran look like this: Note the rather wide spread of opinions - this increases the uncertainty about what is really going on. The individual data sources for Saudi Arabia look as follows: It's worth noting that the rig count seems to have notched down in the last couple of months.  This weakens the argument of those of us who saw the rising rig count as possible evidence that Saudi Arabia was again near capacity constraints.  However, it's perhaps too soon to draw firm conclusions.

Why Washington’s Iran policy could lead to global disaster - It’s a policy fierce enough to cause great suffering among Iranians -- and possibly in the long run among Americans, too.  It might, in the end, even deeply harm the global economy and yet, history tells us, it will fail on its own.  Economic war led by Washington (and encouraged by Israel) will not take down the Iranian government or bring it to the bargaining table on its knees ready to surrender its nuclear program.  It might, however, lead to actual armed conflict with incalculable consequences. The United States is already effectively embroiled in an economic war against Iran.  The Obama administration has subjected the Islamic Republic to the most crippling economic sanctions applied to any country since Iraq was reduced to fourth-world status in the 1990s.  And worse is on the horizon.  A financial blockade is being imposed that seeks to prevent Tehran from selling petroleum, its most valuable commodity, as a way of dissuading the regime from pursuing its nuclear enrichment program.  Historical memory has never been an American strong point and so few today remember that a global embargo on Iranian petroleum is hardly a new tactic in Western geopolitics; nor do many recall that the last time it was applied with such stringency, in the 1950s, it led to the overthrow of the government with disastrous long-term blowback on the United States.  The tactic is just as dangerous today.

Extracting the Attic Oil From Abqaiq - Current figures suggest that world liquid fuels production is running at around 90 mbd, of which roughly 74 mbd is crude. A reasonable estimate of the annual decline in existing well production lies at around 5%, so that each year new sources of oil must be brought on line to generate 5% of 74 mbd (3.7 mbd) to cover these declines. In addition to that need, if world oil markets continue to grow as expected, then an additional roughly 1 mbd of new production will have to be added this year to meet the growth in demand. (China imported 5.95 mbd in February, and though this dropped to 5.55 mbd in March, this is still up 8.7% on March last year.) This state of affairs does not include the fall-out from political actions, such as the embargo on Iranian oil, which imposes additional demands on the rest of the global suppliers of crude by taking that production out of the market. As Econbrowser has just noted, the countries that are potentially capable of upping production to meet the size of the total additional demand likely foreseeable this year seem singularly limited to a kingdom whose initials are KSA. There is no doubt that Saudi Arabia has considerable oil assets, though I have noted in the past that they tend to use the total discovered oil volume as their reserve, without discounting the amount that they have already produced. Rather, the question that will increasingly arise in the future is whether the country can continue to produce at the same rate, or – if they are to meet the claimed 12.5 mbd of achievable production - to be able to achieve a rate that is 25% higher than current levels. Not that the amount available from some older fields is not of some concern.

Manifa Oil: Malodorous, But Really Not That Bad - The development of the Manifa oil field in Saudi Arabia has been accelerated recently. This is the last neo-virgin field that Saudi Aramco has in its coffers with which it can increase production capacity (by 900,000 bpd in this case) - or just remain even in the fight vs. depletion of its existing fields. Although it was produced in a limited way 30 years ago and has been shut in since, there has been noise about its resurrection sporadically over the past decade. Much of the chatter has been about the supposed low quality of its oil. Phrases such as "virtually unusable" have been used or, more charitably, it has been described as being so heavy, so high in sulfur, and so vanadium contaminated that there are no refineries which can process it. If true, this would make the Saudi decision to spend the most money ever on this single project even more mysterious, given that there are other strikes against it as well. In reality, the myth of unusable Manifa oil is just that. There is no evidence that it is as bad as has often been reported. In this post, I will briefly discuss what makes for low quality oil and show how Manifa actually compares to other crudes being sold by Saudi Arabia and elsewhere.

Are We Prepared if Saudi Oil Production Collapses? - Iranian threats to block oil shipping in the Strait of Hormuz, if acted upon, could disrupt the global energy supply and cause oil prices to spike. However, as this report suggests, this scenario is relatively short term. It leaves the oil-producing infrastructure intact, and prices would stabilize if military action, led by the United States, and a coordinated international response successfully restore security to the sea-lanes. However, policymakers need to consider a more dangerous scenario: the collapse of Saudi Arabia’s oil production caused by a massive social upheaval like those that have toppled regimes in Tunisia, Egypt, and Libya. In 2006, 2008, and 2010, simulations were conducted to assess the strategic and economic impact of a major disruption of energy supply caused by Iranian military action in the Strait of Hormuz or by coordinated terrorist attacks on key nodes in the global energy infrastructure. This report uses the methodology developed in these previous reports and builds on their findings and models. It examines a situation in which an “Arab Spring” uprising disrupts Saudi oil production, causing a total cessation of oil production for one year—a drop of 8.4 million barrels per day (mbd)—followed by a two-year recovery. Given the recent events in the Middle East, U.S. and international policymakers should examine such a radical scenario, albeit considered unthinkable by some.

World Without Oil Scenario - Oil is currently the most important commodity. It is vital to transport (air, sea, road and rail) and also the production of goods like tar and plastic. Without oil, society and the economy would look quite different. The big issue is how smooth was the transition to a post-oil world. Given known oil reserves, we aren’t going to suddenly wake up one day and find oil is no longer available. There will be a gradual increase in price, encouraging the development and production of alternatives. Therefore, in theory, a world without oil may not be so bad because we have developed alternative forms of transport and energy. In theory, the world could already survive without oil.

Cheer up: the world has plenty of oil: It's widely believed nowadays that global oil production is running up against its limits. "The days of easy oil are over", we are told and we should brace ourselves for an age of relative oil scarcity. The reality, however, is very different. As more and more people within the oil industry have come to realize in recent years, the world has plenty of oil that can be produced at competitive prices for a long, long time to come. This means the world does not face inevitable "energy poverty" and there is no reason to be afraid of unavoidable "energy wars". Four years ago, I wrote in my book The Myth of the Oil Crisis that: "To believe in imminent peak oil requires an unlikely concatenation of overstated reserves, the funnel of major projects drying up, the end of significant reserves growth, very disappointing exploration results, in both well-established and frontier basins, and a failure, despite ideal circumstances, of unconventional oil to deliver what has already been shown to be achievable."

World's armies circle as Arctic warms to reveal untapped supplies of oil and gas -- To the world's military leaders, the debate over climate change is long over. They are preparing for a new kind of Cold War in the Arctic, anticipating that rising temperatures there will open up a treasure trove of resources, long-dreamed-of sea lanes and a slew of potential conflicts.   By Arctic standards, the region is already buzzing with military activity, and experts believe that will increase significantly in the years ahead. Last month, Norway wrapped up one of the largest Arctic maneuvers ever — Exercise Cold Response — with 16,300 troops from 14 countries training on the ice for everything from high intensity warfare to terror threats. Attesting to the harsh conditions, five Norwegian troops were killed when their C-130 Hercules aircraft crashed near the summit of Kebnekaise, Sweden's highest mountain.  The U.S., Canada and Denmark held major exercises two months ago, and in an unprecedented move, the military chiefs of the seven main Arctic powers — Canada, the U.S., Russia, Iceland, Denmark, Sweden and Finland — are to gather at a Canadian military base in May to specifically discuss regional security issues.

Iran employs off-radar oil shipping tactics to counter Western sanctions: Iran is concealing the destination of its oil sales by disabling tracking systems aboard its tanker fleet, making it difficult to assess how much crude Tehran is exporting as it seeks to counter Western sanctions aimed at cutting its oil revenues. Most of Iran’s 39-strong fleet of tankers is now “off-radar” after Tehran ordered captains in the National Iranian Tanker Co. to switch off the black box transponders that are used in the shipping industry to monitor vessel movements, oil industry, trading and shipping sources said. “Iran, helped by its customers, is trying to obfuscate as much as possible,” said a senior executive at a national oil firm that has done business with Iran. And Iran may have countered a reported reduction in its oil sales in March by offering big discounts in the form of free freight, finance and insurance and generous credit terms, the sources said. Europe’s July 1 oil embargo, and U.S. and European financial sanctions against Iran’s nuclear program have seen Tehran’s oil sales drop to most Western destinations and drawn promises from some Asian buyers that they would cut purchases.

Inter-Regional Trade Movements of Petroleum to and from Europe: Part 6 - In Part 1, I introduced my abbreviations, data bases and analysis methods, Part 2 presented the global trends, Part 3 presented the inter-regional trade movements to and from North America and Part 4 presented inter-regional trade movements to and from South America, and Part 5 presented the same for Africa. So, with exports of petroleum from Africa to Europe declining, besides South America, has Europe been able to pick up the difference from anywhere else? Da. Europe’s petroleum production has been in a strong decline since 2002, and presently, only equals about 30% of Europe’s petroleum consumption. Despite fairly steep declines in production, Europe’s consumption of petroleum has changed little in the last decade. Consequently, Europe has to import 70% of the petroleum that it consumes, which is relatively more than what North America imports. With continuing declines in petroleum production, Europe will have to import ever increasing amounts of petroleum. The startling trend (shown in Figures 9 and 11) is that Europe has looked increasingly to the former Soviet Union countries as its primary source of imports. Indeed, in 2010, roughly 50% of Europe’s inter-regional imports came from the former Soviet Union countries, up from 30% in 2000. If the last decade’s trend continues, then we might expect 77% of Europe’s petroleum to come from former Soviet Union countries alone by 2021.

Argentina to Seize Control of Oil Company - Argentina’s president, Cristina Fernández de Kirchner, announced on Monday that the government would seize a majority stake in YPF, the nation’s largest oil company. The expropriation would reassert state control over an important pillar of Argentina’s economy, but it has already increased diplomatic tensions with Spain and the European Union. Mrs. Kirchner quickly ousted Sebastián Eskenazi as YPF’s chief executive, naming two top aides, Julio de Vido and Axel Kicillof, to run the company. Under Mrs. Kirchner’s plan, which she announced on national television, Argentina’s government would take a 51 percent controlling stake in YPF, which is now majority-owned by a Spanish energy company, Repsol YPF. Of that new stake, Argentina’s central government would get 51 percent and the country’s provinces 49 percent. The plan is part of a bill submitted to Argentina’s Congress that is widely expected to be approved. The Spanish government repeated its earlier pledge to retaliate, though it did not specify how. Following an emergency cabinet meeting in Madrid on Monday evening, José Manuel García Margallo, the Spanish foreign minister, said that Madrid “condemned with the utmost energy” Argentina’s move, adding that it “broke the climate of cordiality and friendship that presided over relations between Spain and Argentina.” The European Union also criticized the plan.

Argentinian president moves to nationalise Spanish-owned oil assets - Argentina sent shock waves through the oil industry by announcing plans to nationalise local oil assets controlled by a Spanish company, in a controversial move that threatens to sour the already troubled relationship between the two countries. The move to seize 51% of Repsol's YPF business in Argentina sent the company's shares spinning down 18% on Wall Street and will worry other big foreign investors such as BP. Cristina Fernández de Kirchner, Argentina's president, introduced the new measure to Congress in a bid to recover sovereignty over its national hydrocarbon resources. Kirchner accused Repsol of failing to produce enough oil through YPF to meet Argentina's energy requirements. Repsol's alleged failure threatened to "practically turn us into an unviable country," Kirchner said. Economic and political interest in the country's hydrocarbons has rocketed since the end of last year when YPF announced it had discovered a shale oil site that could potentially yield 1bn barrels. Politicians have accused Repsol of failing to invest enough in future production at a time when the high cost of oil is undermining the country's economy.

Argentina's Oil Grab Draws Fire - Madrid threatened to retaliate as soon as this week in response to Argentina's proposed seizure of a prized unit of Spain's flagship oil company, as Argentina's nationalization drive drew international rebuke and threatened to drive the relationship between Spain and its former colony to its lowest level in decades. Spain will take "clear and forceful measures," said Spanish Foreign Minister José Manuel García-Margallo. These could affect commercial, energy and industrial relations between the two countries, senior officials said, and could be announced during Friday's weekly cabinet meeting. "This is bad news for Spain, but terrible news for Argentina," Mr. García-Margallo said.

Expropriating its way to poverty - ONE couldn't ask for a better illustration of the thesis of Daron Acemoglu and James Robinson's new book "Why Nations Fail" than the decision taken by Argentina's president, Cristina Fernández, to seize a majority share in the country's largest oil company, YPF. Our America's view blog provides analysis: Taking over YPF offers Ms Fernández both financial and political benefits. She can now use it to conduct the government’s money-losing energy imports and have its minority shareholders suffer 49% of the losses. At a time of high oil prices, she could also use the company’s profits to finance public spending, since Argentina cannot borrow money because it faces punitively high interest rates and legal threats from holders of its defaulted debt. Politically, after failing to convince the rest of the countries at the Summit of the Americas last weekend to support Argentina’s claim to the British-controlled Falkland Islands, the decision provides her a new foreign scapegoat to distract attention from a slowing economy. The medium-term economic costs of the decision could be grim. It eliminates any possibility of securing private investment to develop Argentina’s shale fields, which are extremely expensive to exploit. And it will probably lead to an exodus of experts in the oil industry, accelerating the decline in domestic production.

Spain threatens 'decisive' action as Argentina moves to nationalize oil firm - Spain threatened economic retaliation against Argentina Tuesday after Buenos Aires took control of an oil company said to be worth $18 billion. Argentina's President Cristina Fernandez de Kirchner replaced the chief executive officer of oil firm YPF -- the country's biggest firm -- and said she would send a bill to congress to take a 51 percent stake in the company, the Bloomberg news agency reported.. Spanish oil firm Repsol is the major shareholder in YPF and it said it would seek compensation on the bases that YPF was worth $18 billion. However, its shares dropped by more than eight percent Tuesday, Reuters said. Advertise | AdChoices"With this attitude, this hostility from the Argentine authorities, there will be consequences that we'll see over the next few days. They will be in the diplomatic field, the industrial field, and on energy," Spanish industry minister Jose Manuel Soria said, according to Reuters. He added that the government would take "clear and decisive" measures, according to Bloomberg.

Greece: Oil Smuggling Helps Define the 'Parliamentary Mafiocracy': Oil smuggling is embedded into the social, political and economic fabric of Greece, with annual revenues generated from illegal fuel smuggling reaching €3 billion euros as of 2008, and some sources say that although Greece imports up to 99 percent of its fuel needs, it still manages to export more than it imports.  Greece thrives on its shipping industry and one of its main contraband markets is petroleum. Greek regulations have shipping oil priced at one-third the price of automotive and home heating oil. In response, smugglers transform low-cost “shipping oil” into higher-priced home and automotive oil, generating huge profits. The practice requires a vast criminal infrastructure including illegal depots near ports and major cities for the storage of the shipping oil, which is adulterated and resold as home and automotive oil. An estimated 20 percent of fuel oil sold in the Greek market comes from illegal trade. Gas stations in Greece are said to offer fuel that is a more lucrative blend of legally purchased fuel and black market fuel, allowing retailers to realize higher profits and avoid excise duties. Though Greece shows a mathematically impossible volume of petroleum exports to neighboring countries, the bills of laden do not add up, with oil tankers departing for their expressed destinations but then turning around and rerouting the ships back home for illegal sale on the domestic market.

Shortage of gas may hit power producers - ELECTRICITY generators have revealed they are having trouble finding long-term gas supplies at any price, adding to doubts about the government's ambitions to use gas as a "transitional fuel" to a low-carbon economy. The National Generators Forum fears resource owners could be trying to "warehouse" their reserves for lucrative future export markets instead of offering gas to the domestic market, saying some of its members have been unable to lock in long-term supply contracts. .

Aluminum Warehouse Orders, Premiums Signal Scarcity of Metal - Rising orders to draw aluminum from warehouses and higher premiums for the lightweight metal signal a tightening market even as London Metal Exchange stockpiles remain near February’s record high.  Thirty-three percent of aluminum inventories monitored by the LME are awaiting delivery from warehouses, daily exchange figures show. The orders rose to a record 33.5 percent of stocks on March 9. Premiums are up 27 percent this year in Europe (MBALFMEP) and 19 percent in the U.S. (MBALAL01) LME inventories come to 5.05 million metric tons, less than 2 percent below the record.  Almost 75 percent of LME aluminum stocks are locked into so-called financing transactions and unavailable to consumers, according to Deutsche Bank AG. Shipping backlogs in LME warehouses have left consumers struggling for supplies, Citigroup Inc. said today. Alcoa Inc. (AA) (AA) this month stuck to its forecast for world aluminum demand to climb 7 percent in 2012.  “The aluminum price may remain relatively well supported because of the tightness in the physical market,” The U.S. Midwest premium for aluminum, added to the price of immediate-delivery metal, rose to a 26-year high of 9.15 cents a pound, according to researcher Platts. Widmer favors aluminum, used in products from beverage cans to aircraft, over copper because of the market’s tightness.

Global race for 'rare earths' - Global tension over rare earth metals — often identified as rare earths — has intensified as the United States, European Union and Japan recently teamed up and took it up a notch in pressuring China over persistent trade disputes. Last month, the trading power players filed a complaint at the World Trade Organization challenging the world’s largest rare earths supplier to remove its export restrictions on the scarce elements used in high-tech goods. As China continues to tighten its export policy, Korea, a resource-poor country with strong demand for rare earth metals for its high-tech manufacturing, is attempting to stay the course with its biggest trading partner while at the same time, catching up with other nations in the search for alternative reserves. China, a supplier of 97 percent of global rare earths, has systematically curbed its export quotas, which jacked up prices, since 2005. For example, in 2011 the price of Europium oxide, the main component of liquid crystal display screens and fluorescent lighting, shot up 180 percent; dysprosium oxide, included in nuclear reactors, hybrid cars, lasers and sonar systems, jumped by 137 percent; and neodymium oxide, used in cell phones, hard drives and wind turbines grew by 74 percent, according to a report by Deloitte.

China March FDI Falls 6.1% To $11.76 Billion - Foreign Direct Investment drawn in by China decreased in March subsequent to cuts in spending by investors as Europe is looming in debt crisis along with diminishing national economic growth and restricted likelihood for yuan to gain. According to data released by the Commerce Ministry Tuesday, the country drew in $11.76 billion as FDI in March, which is 6.1 percent lower than the year-earlier period. For the first quarter, China received $29.5 billion as FDI, which is 2.8 percent down from a year ago. The investment in China from Europe has decreased by a third in the first two months of the year according to ministry data, which could be as a result of the growing concern that the debt crisis in eurozone is going to worsen. The International Monetary Fund has warned that escalation of eurozone debt problems could slash China's gross domestic product growth for 2012 in half.  The decreasing growth rate in China has become a major concern for investors with country's GDP growth slowed to 8.1 percent in the first quarter, the lowest rate in three years, due to soft global demand and reduced real estate investment in the world's second-biggest economy.

China Gives Currency More Freedom - China took a milestone step in turning the yuan into a global currency on Saturday by doubling the size of its trading band against the dollar, pushing through a crucial reform that further liberalizes its nascent financial markets. The People's Bank of China said it would allow the yuan to rise or fall 1 percent from a mid-point every day, effective Monday, compared with its previous 0.5 percent limit. The timing of the move underlines Beijing's belief that the yuan is near its equilibrium level, and that China's economy, although cooling, is sturdy enough to handle important, long-promised, structural reforms, analysts said. The move would help China deflect criticism of its controversial currency policy ahead of the annual spring meeting of the International Monetary Fund in Washington next week. A slowing world economy that has pared investor expectations of a steadily rising yuan likely also gave Beijing the confidence to proceed, knowing that a larger band would not necessarily lead to a stronger currency. "The central bank chose a good time window to enlarge the trading band. The market's expectation for a stronger yuan is weakening,"

China Doubling Yuan Band Signals Drive for Convertibility - China’s decision to widen the yuan’s trading band against the dollar for the first time since 2007 signals a drive toward a convertible currency that also saw overseas investors get bigger investment quotas this month. The band’s increase to 1 percent from 0.5 percent takes effect tomorrow, the People’s Bank of China said on its website yesterday. This month, regulators raised quotas for foreigners buying onshore stocks and bonds to $80 billion from $30 billion and increased the amount of yuan held offshore that can be invested locally. Chinese officials pledged in a five-year plan running through 2015 to keep loosening controls on currency flows as Premier Wen Jiabao targets higher domestic consumption and an enlarged global role for the yuan that would curb the dollar’s dominance. Mizuho Securities Asia Ltd. said yesterday that moves including the increased investment quotas indicate that the government is stepping up the pace of its efforts. “Greater two-way exchange rate risk makes possible capital account opening, which would be a logical next step,”

China Widening Yuan Band Shows Confidence in Strength of Economy - China’s doubling of the yuan trading band signals official confidence in the strength of the economy’s expansion and suggests policymaking is unimpeded by the ouster of Bo Xilai from the Communist Party leadership. The change that takes effect today “adds to my confidence in a soft landing,” said Jim O’Neill, who is chairman of Goldman Sachs Asset Management in London and coined the acronym BRIC for Brazil, Russia, India and China. A more flexible yuan may help central bank Governor Zhou Xiaochuan control inflation and support an economy that the World Bank sees growing 8.2 percent this year. The timing of the move may be intended to mute criticism of Chinese currency policies at International Monetary Fund and Group of 20 meetings and indicates that the scandal engulfing former Chongqing chief Bo, 62, will fail to stall the nation’s economic opening up. “The government is confident that China will avoid a hard landing, otherwise why would they introduce the possibility of greater foreign-exchange volatility?” said Stephen Roach, former non-executive chairman for Morgan Stanley in Asia.

China's renminbi move welcomed - China’s decision to loosen some of its currency controls, permitting more volatility in daily trade from Monday, has been welcomed as an important step towards allowing the renminbi to float freely. From this week, the renminbi will be allowed to rise or fall 1 per cent each day from the daily official rate against the US dollar, double its previous trading range of 0.5 per cent. Analysts expect the central bank to keep the exchange rate broadly stable as a buffer against global economic uncertainty but the band widening lays the groundwork for a future in which market forces, not the government, shape its value. Beijing hopes one day to transform the renminbi into a currency that will vie for a place alongside the dollar and the euro on the global stage. Widening the band brings it closer to that goal, although further, and riskier, reforms to open its capital account are needed first. This was an “important step by the People’s Bank of China to increase the flexibility of their currency”, said Christine Lagarde, managing director of the International Monetary Fund.

12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin? - Michael Pettis at China Financial Markets has Two Bets with the Economist.

  1. Pettis bets growth in China will average less than 3.5% for the rest of the decade
  2. Pettis bets the Chinese economy will not overtake the US by 2018 
    I side with Pettis and said so in The Dating Game: Michael Pettis Challenges The Economist to a Bet on China - I came up with 2030 and with peak oil considerations I would not count on that. Now Pettis is back at it with 12 predictions. Via email ...

Russia and China boost arms spending, US cuts back - Global spending on weapons now totals more than US$1.7 trillion, and Russia has overtaken Britain and France to take third place in the world league table, according to research figures released yesterday. While military expenditure fell last year in most Western countries, including the US, which is facing serious budget deficits, Russia and China have continued to increase their spending on weapons — by more than 9 percent and 6 percent respectively last year, according to the Stockholm International Peace Research Institute (SIPRI). The US remains by far the biggest military spender, with a defense budget of US$711 billion last year, followed by China, which spent an estimated US$143 billion on its armed forces last year. China has increased its military spending by 170 percent in real terms since 2002, the leading research body says. Russia spent nearly US$72 billion on arms last year, overtaking Britain (US$62.7 billion) and France (US$62.5 billion) according to the institute. It says Russia is planning further increases, with draft budgets showing a 53 percent rise in real terms up to 2014.

Kim named World Bank president  -- American Jim Yong Kim was tapped Monday to be the next president of the World Bank, besting Nigerian finance minister Ngozi Okonjo-Iweala following the first-ever challenge to the U.S. nominee in the institution's history. The bank's board of directors said the multiple candidacies "enriched the discussion of the role of the President and of the World Bank Group's future direction."  Kim's victory was widely expected, given the voting structure of the bank. Throughout its more-than-60-year history, the bank has been led by an American, part of a tacit agreement between the United States and its Western European allies. Europe, in turn, has maintained control of the International Monetary Fund. The United States and Europe together have roughly 50% of voting shares, which are based on money paid into the bank.

Christine Lagarde: Emerging Market Nations Will Get More Power in the IMF - Christine Lagarde, managing director of the International Monetary Fund (IMF), sees no alternative to the strict austerity policies being imposed on many peripheral European countries, says the double dip recessions in Italy and Ireland just announced come as no surprise, and notes that IMF reforms will shift 6% of current quotas to dynamic emerging and developing countries. Lagarde’s comments came in an exclusive interview with Knowledge@Wharton and media partner ParisTech Review late last week, as BRIC countries demanded more voting power in return for the larger financial contributions being requested by the IMF. “Clearly, the BRICs will be among the recipients of these additional quotas,” which cover voting power and financial contributions, Lagarde says. Additionally, the IMF will release a new model for assessing the world’s exchange rates later this year, and she confirmed that the fund will probably raise U.S. GDP growth estimates for 2012 “a little bit,” up from the current 1.8%, at the IMF World Bank spring meeting starting April 16. An edited transcript of the interview appears below.

Who wants to tax and spend? The IMF, that’s who - I noted at the turn of the year that the IMF, since Christine Lagarde took over, had made it more and more obvious that it thought a number of countries including the US, Germany and (by implication) the UK, were tightening fiscal policy too fast.  Today the Fund has released the full WEO.  It makes it still more obvious that the Fund thinks that, in the short-term, the problem is above all a lack of demand, and that excessive austerity is, as Paul Krugman and Brad DeLong have argued, self-defeating: “Given still-large output gaps in many advanced economies, the best course for fi­scal policy is to adopt measures that do the least short-term harm to demand and preclude unsustainable long-term paths”  In other words, the Fund wants us, for standard Keynesian reasons, to spend more on infrastructure (and housing) and increase welfare benefits for poor people (who will spend them), and pay with it by taxing the rich (those with a lower “marginal propensity to consume”. This would raise demand in the short term, without worsening the fiscal position. For those who see the Fund as being both anti-Keynesian on macroeconomic policy, and classically “liberal” on microeconomic policy, this will come as something as a shock. ...

Drive for IMF Funds Caught in Global Power Shift - Tensions among some of the world's leading economies have boiled up over a plan to raise new resources for the International Monetary Fund to contain the euro zone debt crisis, and a quest by emerging economies to win more say in the global lender. World financial leaders gathering in Washington next week will focus on proposals for countries to contribute more money to the IMF so it is better prepared in case of fallout from any further escalation of Europe's debt problems. Emerging market countries like China, Brazil and Russia are willing to provide more money for the IMF, but they want something in return: greater voting power. It has become a hot issue given negotiations formally began this week on the next phase of IMF voting reforms to be completed in 2013. The emerging-market push means Europe's voting share will likely be further diluted. In January, the IMF said it would need $600 billion in new resources to help "innocent bystanders" who might be affected by economic and financial spillovers from Europe.

I.M.F. Independence Matters - The International Monetary Fund has been at the center of global financial stability since its creation after World War II. In the last year it has played a central role in reducing the risk of a European financial meltdown. At the fund’s spring meetings this week, the question of whether to bolster I.M.F. resources will dominate the agenda. Yet in reality the I.M.F. faces a much greater challenge that could render additional financing a sideshow: an erosion of market belief in I.M.F. financial analysis. Such a loss of credibility threatens the fund, the nations it seeks to support, and the global financial system.  Paradoxically, the I.M.F.’s predicament arises directly from its recent success in responding to the crisis in Europe. As it continues to work with the European Commission and the European Central Bank (its partners in the “troika”), the I.M.F. risks creating the perception that it is ignoring financial realities in the face of political pressures — a perception that makes private creditors leery of investing into I.M.F.-supported countries and potentially dooms I.M.F. programs to failure.

Japan vows $60 billion to boost IMF firepower - Japan said on Tuesday it will provide $60 billion in loans to the International Monetary Fund, becoming the first non-European nation to commit money to boost the fund's financial firepower to contain the euro zone debt crisis. Finance Minister Jun Azumi said Japan hoped Tokyo's contribution, which will be formally announced at a Group of 20 financial leaders' meeting later this week, will encourage other countries to follow suit. Indeed, IMF Managing Director Christine Lagarde was quoted as saying she hoped to secure government agreements this week to raise the IMF's funds by more than $400 billion, about two-thirds of the amount the Fund had said in January it would need. "I really hope this week we'll reach the critical mass of more than $400 billion. We are determined to do all we can," she was quoted as telling Italy's main financial newspaper Il Sole 24 Ore, though she also said finally sealing the funds might take a bit longer. Japan's announcement comes ahead of the IMF and World Bank Spring Meeting and a G20 finance leaders' gathering in Washington, which run from Friday to Sunday. 

Japan posts record deficit in year since disasters - Japan on Thursday posted a record trade deficit for fiscal 2011 as the quake-tsunami disaster and ensuing nuclear crisis sent car and electronics exports tumbling and energy imports soaring. The country's trade shortfall hit 4.410 trillion yen ($54.2 billion) in the 12 months to March, the finance ministry said, amid continuing worries about the recovery in the world's third-largest economy. For decades, Japan enjoyed huge trade surpluses owing to its competitive cars, electronics and other exports. But demand for fossil fuels has surged in the resource-poor nation after last year's natural disasters sparked the worst nuclear accident in a generation, leading the government to take most atomic reactors offline. At the same time demand from Europe suffered as the eurozone's debt crisis rippled across the continent, one of Japan's biggest export markets. Over the year Japanese exports fell 3.7 percent to 65.282 trillion yen while imports soared 11.6 percent to 69.692 trillion yen, as worries mount that the country will face energy shortages this summer. All but one of its nuclear reactors were shuttered after the Fukushima reactor disaster.

BOJ Ready to Take Additional Steps - The Bank of Japan stands ready to take additional steps as needed to achieve its price goal, a deputy governor of the central bank said Wednesday, amid strong expectations it will act at its policy-board meeting next week. "The bank is committed to implementing additional easing measures if deemed necessary," Kiyohiko Nishimura told business executives in a speech in Okayama, western Japan. "We will pursue powerful easing through a virtually zero interest-rate policy and asset buying until the 1% goal comes into view," he told business leaders. Market participants took Mr. Nishimura's comments as confirmation the bank will act at its meeting next week, which will follow close on the meeting of the U.S. Federal Reserve's Federal Open Market Committee on April 24 and 25. "The BOJ will ease its policy even without the Fed's action. That's the market's understanding. Nishimura's comments today confirmed that,"

A shrill debate in ‘the land of consensus’ - A few days ago, a man named Koizumi stood up in the Japanese parliament to vote against a bill. The man in question was not Junichiro Koizumi, the most charismatic and long-lasting prime minister of recent times. Rather it was Shinjuro, his 31-year-old son, who was voting against a bill to water down his father’s landmark postal privatisation.  The centrepiece of Koizumi the Elder’s term, postal privatisation aimed to rid the government of one of the world’s biggest financial institutions. The idea was to release some Y350,000bn in postal funds from the state’s grasp in the hope that the private sector would figure out something better to do with it. A large slice of post office funds is recycled into government bonds, making it easier to plug the chronic deficit, or to boost spending. The idea was to rip this financial drip-feed from the state’s arm The funny thing about Koizumi the Elder is that although he was wildly popular, the policies he advocated were not. As soon as he left office, in 2006, public support for privatisation, austerity and the market-oriented ideas he had advocated drained away. It became commonplace to blame him for exacerbating the wealth gap.  The rejection of Koizuminomics would lead you to believe that Japan is simply drifting back to the status quo ante. There is some truth to that. If Koizumi was trying to sell the idea of a capitalism redder in tooth and sharper in claw, then the public discourse has largely turned away from that notion.

Murder, Inequality, Corporate Profits, and Free Trade Go Together - Here’s the President on Sunday on a new trade deal with Colombia. Obama says US trade deal with Colombia has strong protections for workers and the environment…. “It’s not a race to the bottom, but rather it says each country is abiding by everything from strong rules around labor and the environment to intellectual property protection. And so I have confidence that as we implement this plan, what we’re going to see is extraordinary opportunities for both U.S. and Colombian businesses.” Here’s the AFL-CIO President Rich Trumka’s mild and private (subsequently leaked) objection to the trade agreement. Mr. Trumka noted that many Colombian employers continued to subcontract work in what he said was an illegal strategy to block unionization. He wrote that after municipal workers in the city of Jamundí began a unionization effort in January, the city fired 43 workers, two union leaders received threats, and one activist, Miguel Mallama, “was gunned down in the streets on March 25.” And here’s the reality, as seen by leaders on the ground. “The United States was talking about how our situation has gotten better,”  “But that’s not true. Our situation continues to be bad, and it’s getting worse.” Colombia remains by far the world’s most dangerous country for union leaders and members. Nearly 3,000 activists have been murdered there in the last 25 years, with convictions resulting in a paltry 6 percent of the cases.

Rousseff Warns of Tsunami of Money at Sixth Summit of the Americas - Brazilian President, Dilma Rousseff, used her opening speech at the Sixth Summit of the Americas, to reiterate her criticism of Western monetary policy, which she said was damaging Latin American industry. The summit, which was held last weekend in Cartagena, Colombia, brought together 33 heads of states from across the Americas, including the U.S. President Barack Obama. Rousseff called for Latin American nations to defend themselves against the “tsunami of money” that she said was hitting emerging market economies as a result of Eurozone expansionary monetary actions (massive State-backed cash injections) designed to maintain international liquidity in the face of the European sovereign debt crisis. This money has lead, she said, to rocketing levels of foreign investment into Latin America, resulting in an overvaluation of the region’s currencies and subsequently damaging exports. “Of course we must take action to defend ourselves. To defend is different from to protect. It means not letting our manufacturing sector be cannibalized,” Rousseff said in the speech.

Swimming naked in Brazil’s bubbly waters - The Latin Tiger may have overtaken France, Italy, and Britain to become the world’s fifth largest economy on some measures but it has also been relegated to 126th place by the World Bank for 'ease of doing business', behind much of Africa. Cyclical warning signs are flashing amber across the board.  It is far from clear whether this 195m-strong cub of the BRICs quartet has broken out of the "middle income trap" after half a century of tantalizing efforts, each dashed by events.  Has Brazil’s profile been flattered once again by a resource boom, this time juiced by exports of iron-ore and soya to China, and a property bubble of Irish proportions?  The jury is out, even if we all accept that Luiz Inacio 'Lula' da Silva - ex-Fiat car worker turned apostle of orthodoxy - did slay inflation and establish the Banco Central do Brasil as the Bundesbank of the Americas, and if we accept that the deep-water fields of the Campos Basin will eventually turn Brazil into the world’s fourth largest oil producer.

India overtakes Japan to become third-largest economy in purchasing power parity -- Its economy may be in the grips of a slowdown, its polity paralysed and markets morose, but all this hasn't prevented India from overtaking Japan to become the world's third-largest economy in purchasing power terms. Data just released by the International Monetary Fund (IMF) shows that India's gross domestic product in purchasing power parity (PPP) terms stood at $4.46 trillion in 2011, marginally higher than Japan's $4.44 trillion, making it the third-biggest economy after the United States and China. India's share in world GDP in terms of PPP, a measure of relative consumer prices across countries, stood at 5.65% in 2011 against Japan's 5.63%, with the gap expected to widen significantly by 2017. In five years, the IMF estimates the share of India's GDP in PPP terms would grow to 8.09% compared with 4.8% for Japan. Economists said India's move up the league table was a reminder of the boundless potential the country offered, despite the prevailing mood of pessimism.

IMF lowers India's growth projection to 6.9% - The International Monetary Fund (IMF) has marginally lowered India's economic growth forecast to 6.9 per cent in 2012, from 7 per cent projected earlier, on weak global and domestic demand. In its World Economic Outlook (WEO), released ahead of the IMF-World Bank Spring Meetings here, the IMF said that world economic growth rate would slump to 3.5 per cent from 3.9 per cent in 2011. As regards India, the WEO lowered India's growth forecast for 2012 to 6.9 per cent, from earlier projection of 7 per cent made in January. It has pegged India's growth during the 2013 calendar year at 7.3 per cent and for 2011 it was 7.2 per cent. "In emerging Asia, including India, strengthening domestic demand will require improving the conditions for private investment, including by addressing infrastructure bottlenecks and enhancing governance and public service delivery," WEO said.

Indonesia Knocks at BRICS' Door - Indonesia’s keen interest in becoming the newest member of BRICS – a bloc of emerging-market nations comprised of Brazil, Russia, India, China and South Africa – has sparked off a round of debate on the future and efficacy of South-South groupings.  Indonesia’s development statistics make the country a shoe-in for membership: it is the largest economy in southeast Asia and is a demographic giant with a population of 248 million people, making it the fourth most populous country in the world, ahead of even Brazil and Russia.  It also has an active labour force of 117 million people, as of 2011.  Indonesia has long been recognised as a leading actor in the developing world, most notably for its active role within the Non-Aligned Movement (NAM) ever since it hosted the Bandung Conference in 1955.  Furthermore, given the country’s "pragmatic foreign policy practices and long-term cooperation with countries of the region and beyond, Indonesia could strengthen the common voice of emerging economies via BRICS. With the potential entrance of Indonesia, BRICS would then need to redefine, or rather refine its status as (possibly) one of the most important inter-regional groupings of countries of the global South," he added.

World economy still on life support -- The world economy "remains on life support" from central banks and has deteriorated since last autumn, the latest Brookings Institution-Financial Times tracking index shows, despite some recent signs of stabilisation. Economic weakness extends across the Group of 20 leading economies, according to the TIGER (Tracking Indices for the Global Economic Recovery) index, but advanced economies have deteriorated more than developing countries. The index provides support for the message Christine Lagarde, managing director of the International Monetary Fund, sent last week that although there has been some improvement since the turn of the year, "the risks remain high, the situation fragile".Although financial markets recovered significantly in the first quarter of the year as investors welcomed the European Central Bank's massive injection of liquidity into the eurozone's banks, the outlook for growth and jobs has become more precarious almost everywhere except in the US. Professor Eswar Prasad of the Brookings Institution said: "The global economic recovery is still sputtering due to a lack of robust demand, policy tools that are stretched to their limits and unable to muster much traction, and enormous risks posed by weak financial systems and political uncertainty."

IMF Raises Global Forecast for First Time Since Early 2011 - The International Monetary Fund raised its global growth forecast for the first time in more than a year, with the U.S. boosting the outlook while recent improvements remain “very fragile.” The world economy will expand 3.5 percent this year, compared with a January projection of 3.3 percent, the Washington-based IMF said today in its World Economic Outlook. It sees growth of 4.1 percent in 2013, up from 4.0 percent. It raised its forecasts for the U.S. to gains of 2.1 percent this year and 2.4 percent in 2013. The report reflects the IMF’s view that the euro area, while still facing an economic downturn and the “hard to quantify” potential risk of a country’s default, has stabilized since last year. The euro area economy is projected to decline by 0.3 percent in 2012, an improvement from the 0.5 percent in the IMF’s previous forecast. China is projected to grow 8.2 percent and Japan 2 percent this year.

Mediocre Growth, High Risks, and The Long Road Ahead - Olivier Blanchard - For the past six months, the world economy has been on what is best described as a roller coaster. Last autumn, a simmering European crisis became acute, threatening another Lehman-size event, and the end of the recovery.  Strong policy measures were taken, new governments came to power in Italy and Spain, the European Union adopted a tough fiscal pact, and the European central bank injected badly needed liquidity.   Things have quieted down since, but an uneasy calm remains.  At any moment, it seems, things could get bad again. This shapes our forecasts.  Our baseline forecast, released by the IMF on April 17,  is for low growth in advanced countries, especially in Europe.  But downside risks are very much present. This baseline is constructed on the assumption that another European flare-up will be avoided, but that uncertainty will linger on.   It recognizes that, even in this case, there are still strong brakes to growth in advanced countries:  Fiscal consolidation is needed and is proceeding, but is weighing on growth.  Bank deleveraging is also needed, but is leading, especially in Europe, to tight credit.  In many countries, in particular in the United States, some households are burdened with high debt, leading to lower consumption. Foreclosures are weighing on housing prices, and on housing investment

G20 pledges more than $430 billion for IMF (Reuters) - The Group of 20 nations on Friday pledged more than $430 billion to better than double the International Monetary Fund's lending capacity and protect the global economy from the euro zone's debt crisis.The commitments seek to ensure the IMF's resources are not overwhelmed should the crisis spread. Greece, Ireland and Portugal have already received bailouts, and investors are worried about Italy and Spain, whose economies are the third and fourth biggest in the euro zone. Although the global lender would be able to use its increased firepower to help any country or region in need, Europe's crisis was the driving force behind the push for more funding. "There are firm commitments to increase resources made available to the IMF by over $430 billion," the G20 nations of developed and emerging economies said in a communique. Worries about the euro zone's debt crisis have dominated talks among finance officials in Washington this week for the semiannual meetings of the IMF and World Bank. The IMF has warned the crisis presents the gravest risk to the global economic expansion.

Down with Debt Weight – Nearly four years after the start of the global financial crisis, many are wondering why economic recovery is taking so long. Indeed, its sluggishness has confounded even the experts. According to the International Monetary Fund, the world economy should have grown by 4.4% in 2011, and should grow by 4.5% in 2012. In fact, the latest figures from the World Bank indicate that growth reached just 2.7% in 2011, and will slow this year to 2.5% – a figure that may well need to be revised downwards.  There are two possible reasons for the discrepancy between forecast and outcome. Either the damage caused by the financial crisis was more serious than people realized, or the economic medicine prescribed was less efficacious than policymakers believed. In fact, the gravity of the banking crisis was quickly grasped. Huge stimulus packages were implemented in 2008-9, led by the United States and China, coordinated by Britain, and with the reluctant support of Germany. Interest rates were slashed, insolvent banks were bailed out, the printing presses were turned on, taxes were cut, and public spending was boosted. Some countries devalued their currencies. As a result, the slide was halted, and the rebound was faster than forecasters expected. But the stimulus measures transformed a banking crisis into a fiscal and sovereign-debt crisis. From 2010 onwards, governments started to raise taxes and cut spending in response to growing fears of sovereign default. At that point, the recovery went into reverse.

Joe Stiglitz's Presentation On Why The Entire Global Economic System Is Doomed To Fail -- At the Institute for New Economic Thinking conference in Berlin, economist Joe Stiglitz delivered a presentation titled Is Mercantilism Doomed to Fail? China, Germany, and Japan and the Exhaustion of Debtor Countries.  The basic idea is: A few powerhouses like China, Germany, and Japan, plus some commodity based economies, have thrived in a system where they do all the exporting, and a few countries like the US run massive trade deficits. But that system is coming to an end, as countries realize that their trade deficits are unsustainable, and seek to become trade surplus countries at the same time. Of course, not everyone can run surpluses, so this becomes a game of hot potato, with everyone pushing the deficit to someone else, via currency devaluation and other aggressive trade moves. In this presentation, Stiglitz explains why the system is heading towards collapse.  Click here to see the presentation >

A transatlantic tale of paralysis - Europe is in a fair mess. Travelling to the US reminds me that this is a shared affliction. Political paralysis rules. The maddening thing is that everyone – maybe that should be almost everyone – says they know what must be done. They just won’t do it. Americans are appalled by the cack-handed response of European leaders to the euro crisis. You cannot blame them. This has been going on for more than two years and the eurozone still sits on the edge of catastrophe. Much of the European banking system is on life support. Only this week the International Monetary Fund warned that sovereign default could yet mean the break-up of the single currency. That would send the world economy tumbling into depression.  Yet talk to European policy makers, whether from the creditor north or the debtor south, and, strange though it may seem, they pretty much agree on the essential elements of a serious rescue plan. Peripheral nations such as Italy, Spain and Portugal will have to reform radically the supply side of their economies. Restored competitiveness must be accompanied by a credible effort to pay down public deficits and debts.  The austerity, however, cannot all be front-loaded. Europe is sliding back into recession. In the short term, the periphery needs open-ended financial support and economic growth to avoid a classic debt trap. Longer term, the eurozone will have to add economic to monetary union.

Michael Hudson: Debt: The Politics and Economics of Restructuring - (video) I imagine there will be more material to come on this year’s iNet “Paradigm Lost” conference in Berlin, but for now, here’s a teaser in the form of a video of Michael Hudson’s talk.  And how good it is to see somebody from UMKC doing some of that “new economic thinking” this year.  I made a transcript of part of Hudson’s presentation:

Sarkozy struggles in polls as French economy sputters - President Nicolas Sarkozy's drive to persuade voters he is the best man to lead France to economic recovery suffered a blow on Tuesday, with a survey indicating growth has ground to a halt as he struggles to make headway over his Socialist election rival. Two weeks before the presidential elections begin, the conservative's lead over Francois Hollande is becalmed or shrinking for the first round on April 22 and he is still trailing in the runoff next month, three opinion polls showed on Tuesday. With unemployment claims at over a 12-year high, people's purchasing power dwindling and France stripped of its prized AAA status with one credit rating agency, the Bank of France offered Sarkozy's economic record little respite. In his manifesto, Sarkozy promised to achieve a budget surplus for the first time since 1974 and cut France's swelling debt if re-elected, warning that Hollande would lead the country towards the fate of Greece or Spain. However, his policy of cutting the budget deficit is helping to slow the economy and hurting his election chances.

Sarkozy's comeback hopes crumble, polls show - Four polls published in less than 24 hours showed Hollande extending his lead, with the conservative incumbent's modest gains of the past month starting to evaporate ahead of a two-round contest taking place on April 22 and May 6. A CSA poll showed Hollande winning the May 6 run-off with 57 percent of the vote. Three other polls also indicated that his chances of becoming France's first left-wing president since Francois Mitterrand were improving. Hollande has raised eyebrows in Berlin and other capitals by criticizing a European Union accord on debt and deficit control - the fiscal compact agreed in an effort to counter the euro zone debt crisis - and by saying he would open talks if elected to amend it with a pro-growth commitment. "Germany understands that it cannot remain an island of prosperity in an ocean of recession," he told Les Echos daily. "The changeover in France will pave the way for a change of direction in Europe."

Sarkozy breaks silence over ECB role  - Nicolas Sarkozy, president of France, on Sunday broke a months-long pact with Angela Merkel, German chancellor, not to discuss the role of the European Central Bank in public, calling for the ECB to adopt policies to support growth. At a rally in Paris’s Place de la Concorde a week before the first round of voting in the presidential election, Mr Sarkozy declared: “We cannot have taboo subjects. We cannot have banned debates.” In effect ripping up a deal to shelve public differences over the ECB reached in November at the height of the eurozone crisis with Ms Merkel and Mario Monti, the Italian prime minister, Mr Sarkozy said the matter of ECB support for growth was “a question we cannot avoid”. The unexpected move came as François Hollande, the Socialist candidate, urged his supporters at a rival event in a park in the east of the capital to “resist euphoria” despite his healthy lead over Mr Sarkozy in the opinion polls – and to “get out and vote”. Posing as the candidate to unite the country, he accused Mr Sarkozy of “setting one half of France against the other”. Mr Sarkozy’s move on the ECB was the latest step he has taken during the campaign to toughen his line on European issues that have put distance between himself and Ms Merkel, despite the close partnership they had built up.

Growing an Economy by Growing Weed - Investors rocked world markets this week by selling Spanish bonds  because of doubts about the country’s ability to put in place an austerity program. As prices plummeted, one small Catalonian village tried to think global and act local. It voted for a novel agricultural measure to work its way out of a €1.3 million debt hole and provide a few jobs. A referendum that endorsed the growing of cannabis as a means to bolster finances of Rasquera, a municipality of  about 900 less than 100 miles from Barcelona, received a solid majority. The final tally: 308 yays in counterpoint to 239 against. The plan stipulates that a pro-cannabis group, the Barcelona Personal Use Cannabis Association, would rent 17 acres of public land in exchange for a sum equivalent to the debt load.  Holding  small amounts of marijuana for your own consumption is legal in Spain. The prospects for a new cash crop alongside the olives and grapes in the area still remains a bit muddy. Mayor Bernat Pellisa had threatened to resign and scrap the project  if the vote was less than 75 percent. It was 56. But afterward Pellisa equivocated. Officials of the national government are not happy with the whole situation and may move to block any attempt to set up a local pot industry

Insane in Spain - Krugman - So, the euro crisis is risk on again. And this time it’s centered on Spain — which in a way is a good thing, because now the essential craziness of the orthodox German-inspired diagnosis of the crisis is on full display. For this is really, really not about fiscal irresponsibility. Just as a reminder, on the eve of the crisis Spain seemed to be a fiscal paragon: What happened to Spain was a housing bubble — fueled, to an important degree, by lending from German banks — that burst, taking the economy down with it. Now the country has 23.6 percent unemployment, 50.5 percent among the young. And the policy response is supposed to be even more austerity, with the European Central Bank, natch, obsessing over inflation — and officials claiming that the incredibly foolish rate hike last year was actually something to be proud of. I’m really starting to think that we’re heading for a crackup of the whole system.

In Barcelona, Austerity With an Iron Fist -- Criminalizing public meetings, expanding police powers and weaponry, and applying anti-terrorist measures to street protests: it sounds like Spain in the Franco years, but all of these measures have been proposed in Spain in just the last couple of weeks. Far from being a throwback to the years of dictatorship, these repressive developments go hand in hand with the current economic crisis. Considering the connection between the 15M plaza occupation movement and the subsequent Occupy movement that spread to several countries around the globe, between the March 29th general strike in Spain and the upcoming May 1st general strike called in the United States, between the brutal austerity measures implemented already a year or two ago by the government in Madrid and the increasing signs of shakiness from more stable EU countries such as France, Spain is, if anything, ahead of the curve..

Increasingly in Europe, suicides by "economic crisis" - The economic downturn that has shaken Europe for the last three years has also swept away the foundations of once-sturdy lives, leading to an alarming spike in suicide rates. Especially in the most fragile nations like Greece, Ireland and Italy, small-business owners and entrepreneurs are increasingly taking their own lives in a phenomenon some European newspapers have started calling “suicide by economic crisis.”  Many, like Mr. Tamiozzo and Mr. Schiavon, have died in obscurity. Others, like the desperate 77-year-old retiree who shot himself outside the Greek Parliament on April 4, have turned their personal despair into dramatic public expressions of anger at the leaders who have failed to soften the blows of the crisis.  A complete picture of the phenomenon across Europe is elusive, as some countries lag in reporting statistics and coroners are loath to classify deaths as suicides, to protect surviving family members. But it is clear that countries on the front line of the economic crisis are suffering the worst, and that suicides among men have increased the most.

In Spain and Italy, Signs of a Lingering Crisis for Europe— Is the euro crisis back with a vengeance, or do investors have a needless case of anxiety? Until very recently, the gloom over the Continent had seemed to be lifting, with the conclusion of Greece’s second bailout and the calming effect on the financial sector of cheap loans from the European Central Bank. But last week’s jump in borrowing costs for Spain and Italy provided a clear signal that the euro’s problems are far from solved. “Financial strains in Europe have eased somewhat since December,” Christine Lagarde, director of the International Monetary Fund, said in a speech in Washington on Thursday. “However, events of the past week remind us that markets remain volatile and that turning the corner is never easy.” The turn looks tightest in Spain, which is still under intense pressure from the European Union to narrow a gaping budget deficit and clean up its banking system after a housing bubble burst, even as the country slides back into recession, with roughly one in four workers unemployed. Yields on Spanish 10-year bonds hit a worrisome level of 6 percent Wednesday for the first time in four months and closed the week nearly that high. At the same time, investors seeking safety drove the 10-year German bond, or bund, to a near-record low of 1.6 percent.

The case for European inflation - I’ve argued on several occasions (see here and here) that what Europe really needs or what the core nations within the euro zone should allow for is greater inflation, not only as a means of escaping expectations traps at the zero lower bound but primarily to assist the periphery nations in their competitive revaluation. That is, where as core nations are currently prescribing deflationary policies as the cure for the periphery’s lack of relative competitiveness, what they should be doing is increasing their own inflation targets so that nominal input prices in the periphery need not decrease by as much in absolute terms so as to achieve the required internal devaluation. In fact some prominent voices including Barry Eichengreen and Martin Wolf have recently talked about this need themselves. To demonstrate why this would be a far better policy I thought I’d make a quick data based comparison between Germany – the periphery’s main export competitor and barometer of competitiveness - and Spain -  by far and away the greatest danger to the future of the euro zone. In doing so I’ll focus on the labour market between the two countries and their relative competitiveness.

Yanis Varoufakis on Ringfencing Europe - - Yves Smith - Video - Yanis Varoufakis gave an energetic, pointed, and insightful talk at the INET conference in Berlin. His message was that the efforts by European authorities were misguided, in that they were seeking to ringfence individual countries, when it was the Eurozone as a whole that needs to be shored up. And he contends this can be done now without special approvals. This talk is the antithesis of airy-fairy. For instance, consider these observations at around 5:30: First, we have to accept that the ECB will not be allowed to monetize the debt, whether we would like it to do so or not, that there will be no EBC guarantees of debt issues of member states. There will not be any ECB purchases of government bonds in the primary market. And there will be no leveraging of the European financial instability mechanism, ah, stability I should have said. The second major assumption that I wish to make is that again, whether we like it or not, surplus countries will not consent to the issue of jointly and severally guaranteed Eurobonds. For good reason, in many ways. Since the yields, the interest rates that these bonds will fetch will be the weighted average of that which Germany and the Holland on the one hand and Greece and Portugal on the other will achieve, these Eurobonds will have interest rates that will be too high for the surplus countries and and not low enough for the deficit countries.  Thirdly, federation is not the solution. It may be a long-term objective for some of us, but we’re not ready yet, and it should not be an attempt to fix the Euro crisis.

Why the Eurozone Crisis Is Getting Worse - Roubini - Interest-rate spreads for Italy and Spain are widening again, while borrowing costs for Portugal and Greece remained high all along. And, inevitably, the recession on the eurozone’s periphery is deepening and moving to the core, namely France and Germany. Indeed, the recession will worsen throughout this year, for many reasons.  First, front-loaded fiscal austerity—however necessary—is accelerating the contraction, as higher taxes and lower government spending and transfer payments reduce disposable income and aggregate demand. Moreover, as the recession deepens, resulting in even wider fiscal deficits, another round of austerity will be needed. And now, thanks to the fiscal compact, even the eurozone’s core will be forced into front-loaded recessionary austerity. Moreover, while über-competitive Germany can withstand a euro at—or even stronger than—$1.30, for the eurozone’s periphery, where unit labor costs rose 30 percent to 40 percent during the last decade, the value of the exchange rate would have to fall to parity with the U.S. dollar to restore competitiveness and external balance. After all, with painful deleveraging—spending less and saving more to reduce debts—depressing domestic private and public demand, the only hope of restoring growth is an improvement in the trade balance, which requires a much weaker euro.

Europe’s Economic Suicide, by Paul Krugman - Just a few months ago I was feeling some hope about Europe. You may recall that late last fall Europe appeared to be on the verge of financial meltdown; but the European Central Bank, Europe’s counterpart to the Fed, came to the Continent’s rescue. ... The question then was whether this brave and effective action would be the start of a broader rethink, whether European leaders would ... reconsider the policies that brought matters to a head in the first place. But they didn’t. Instead, they doubled down on their failed policies and ideas. And it’s getting harder and harder to believe that anything will get them to change course. Consider the state of affairs in Spain, which is now the epicenter of the crisis. Never mind talk of recession; Spain is in full-on depression, with the overall unemployment rate at 23.6 percent, comparable to America at the depths of the Great Depression, and the youth unemployment rate over 50 percent. This can’t go on — and the realization that it can’t go on is what is sending Spanish borrowing costs ever higher.   Spain wasn’t fiscally profligate — on the eve of the crisis it had low debt and a budget surplus. Unfortunately, it also had an enormous housing bubble, a bubble made possible in large part by huge loans from German banks to their Spanish counterparts. When the bubble burst, the Spanish economy was left high and dry; Spain’s fiscal problems are a consequence of its depression, not its cause.

European Official Seeks Beefed-Up Anticrisis Fund —Top European Central Bank official Jörg Asmussen called on the rest of the world to pledge more money to the International Monetary Fund's crisis war chest—a view expected to put Europe at odds with other regions at talks in Washington later this week. Europe "has done its part" to help protect the global economy against financial turbulence, Mr. Asmussen said in an interview, pointing to European leaders' pledges to boost the euro zone's bailout resources to around $1 trillion and to contribute an extra $200 billion to the IMF.

Euro Zone: Drive for IMF Funds Caught in Global Power Shift  - Tensions among some of the world's leading economies have boiled up over a plan to raise new resources for the International Monetary Fund to contain the euro zone debt crisis, and a quest by emerging economies to win more say in the global lender. World financial leaders gathering in Washington next week will focus on proposals for countries to contribute more money to the IMF so it is better prepared in case of fallout from any further escalation of Europe's debt problems. Emerging market countries like China, Brazil and Russia are willing to provide more money for the IMF, but they want something in return: greater voting power. It has become a hot issue given negotiations formally began this week on the next phase of IMF voting reforms to be completed in 2013. The emerging-market push means Europe's voting share will likely be further diluted. In January, the IMF said it would need $600 billion in new resources to help "innocent bystanders" who might be affected by economic and financial spillovers from Europe.

ECB Wants Its Pensions Adjusted For Inflation - Courtesy of Google translate, please consider Little faith ECB officialsThe personal representative of the central bank is now demanding that the employees pensions would be protected against inflation. It requires that an insurance against their own failure."Unfortunately, the pensions of the ECB's employees are not protected against inflation," said Carlos Bowles, a spokesman for the staff representatives, the FAS was the retirement of the ECB's staff organized a kind of pension funds. "We do not understand why the leadership of the ECB refuses to protect our pensions against inflation," complains the Staff Committee. Even a case before the European Court was pending in this matter: A pensioner has complained with the support of the Staff Committee and the central bankers' union IPSO.

Stephan Ewald: What Hypocrites Are Working at the ECB? -  Since the start of the Eurosystem our brave inflation warriors at the ECB regularly praise themselves what a heck of the job they are doing about their primary objective the maintenance of price stability. But yesterday the German Daily Frankfurter Allgemeine Zeitung (FAZ) published an article (German), that our guardians of price stability fight another good fight. The employees of the ECB want their own pensions to be inflation protected. So the same folks who lecture member states of the Eurozone about the danger of private sector labor and pension contracts being inflation-indexed because of moral hazard want their own pension contracts inflation-indexed. For this fight to be successful ECB employees deploy a very evil institution: the central banker union IPSO. According to the FAZ article a former employee sued the ECB with the help of IPSO at European Court of Justice. Which begs the question: what hypocritical morons are working at the European Central Bank?

Be like Germany, sort of - THE latest piece by Matthew O'Brien in the Atlantic is an interesting read, and I share his basic recommendations: Germany should promise stimulus for southern Europe, conditional on those governments carrying out fiscal and structural reforms...It could mean letting the ECB be much more aggressive... One aspect, however, is worth delving into: The Germans have latched onto a misdiagnosis of the crisis. They think it's a morality tale about profligate governments finally having to live within their means. It's not. If it were, Spain wouldn't be in trouble now. They actually ran budget surpluses during the boom years. (Germany was the one that broke the Maastricht Treaty's deficit limits). Paul Krugman makes similar arguments in his latest post on Spain. It is true that many German policymakers and some members of the public (“the Germans”?) have misdiagnosed the crisis, as it is not (exclusively) about fiscal policy. It is much more about the complex macroeconomics of a suboptimal currency union, and about how Europe as a whole has failed to recognise this challenge in the euro’s first decade. However, fiscal policy does have to take the macroeconomics of a currency union into account as well. This means that surpluses need to be very high in a boom period because we know that in a currency union a boom feeds on itself, and a recession is usually deeper. The reason is that the main stabilisation tool, monetary policy, is unavailable in booms and recessions alike. Did Ireland and Spain run high enough surpluses? Almost certainly not.

Why Richard Koo’s idea won’t save the Eurozone - A lot of people were looking forward to Richard Koo deliver his paper at INET last week; it comes with associated slides, here. Koo is the intellectual father of the idea of the balance-sheet recession — an idea which was born in Japan, has increasingly been adopted in the US and the UK, and which is now gaining traction in the Eurozone. Koo’s diagnosis that Europe is in a balance-sheet recession, which he defines as a post-bubble-bursting state of affairs where individuals and companies choose to pay down their debts rather than borrow money, even when interest rates are at zero. That certainly seems to be the problem in Spain; Koo’s charts can be hard to read, but what you’re seeing here is a massive borrowing binge by the Spanish corporate sector — the dark-blue line — suddenly turning into net savings after the crisis hits. And to make matters worse, Spanish households — the red line — did exactly the same thing. As a result, the government had to run a massive deficit after the crisis; the four lines always have to sum to zero.  In this kind of a recession, monetary policy — reducing rates to zero — doesn’t work. And tax cuts don’t work either: they just increase household savings. You need government spending, at least until the economy has warmed up to the point at which companies and individuals start borrowing again. And the good news is that in a balance sheet recession, government spending is pretty much cost-free, since interest rates are at zero.

Spanish Default Risk Soars to Record on Bets Bailout Is Looming - Spanish debt risk climbed to a record for a second day and signalled a 37 percent chance the nation will default as its borrowing costs surged to levels that prompted its neighbors to seek bailouts. Credit-default swaps tied to Spain’s bonds jumped 19 basis points to 521, according to CMA prices at 11 a.m. in London. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments rose three basis points to 283, while swaps on Italy climbed eight basis points to a three-month high of 443. Spain is due to sell new debt tomorrow before European officials travel to Washington later this week to seek a bigger war chest to battle the financial crisis. The nation’s 10-year bond yield soared to 6.15 percent, the highest since Dec. 1 and approaching the 7 percent level that foresaw the international rescues of Greece, Ireland and Portugal.

Spain Bond Yields Climb Above 6% - Spain's ten-year borrowing costs increased above 6 percent on Monday ahead of a key debt auction tomorrow, adding to worries over the contagion risk of the sovereign debt crisis and the health of the economy. The 10-year yield went above the crucial 6 percent level for the first time in four months. The yield rose to 6.15 percent, the highest level since December 2011. Borrowing costs near 7 percent are seen unsustainable, and in the past, countries were forced to seek a bailout. The cost of insuring Spain's debt hit a record high with the five-year credit default swaps reportedly rising above 510 basis points. The Spanish Treasury is set to auction 12- and 18-month bills tomorrow, and 2- and 10-year bonds on April 19. Italian bond yield also moved higher on Monday driven by the concerns over Spain. Meanwhile, the yield on the German 10-year bund hit a record low 1.628 percent as investors flocked to safe-haven debt. The increase in Spanish borrowing costs led to expectations for some kind of a bailout for the embattled euro area nation as analysts fear the government may not be able to overcome its problems on its own. The government has introduced several tough austerity measures.

Madrid threatens to intervene in regions - Madrid has threatened to seize budgetary control of wayward Spanish regions as early as May if they flout deficit limits, officials said – as investors took fright at the fragility of some eurozone economies. Concerns about overspending by Spain’s 17 autonomous regions and fears that its banks will need to be recapitalised with emergency European Union funds undermined confidence in the country’s sovereign bonds, forcing down prices and pushing yields up above 6 per cent on Monday – towards levels considered unsustainable. The cost of insuring the country’s debt also rose, with Spanish credit default swaps jumping to a record 510 basis points, according to Markit, the data provider. One possible candidate for intervention is Andalucia in the south, Spain’s most populous region, which has attacked Mr Rajoy’s austerity measures. Mr Rajoy’s Popular party had hoped to win a regional election last month and oust the leftwingers who have run Andalucia for 30 years but the PP did not get enough votes and the left remains in control.

Spain Government May Take Over Some Regions' Finances - Spain's government Monday warned it could take control of finances in some of its autonomous regions to slash one of Europe's largest budget deficits and shore up investor confidence.  A top government official, who asked not to be named, told journalists there will soon be new tools to control regional spending. Parliament is expected to pass legislation by the end of this month allowing Madrid to force spending cuts, impose fines and take over financial management in regions breaching budget targets or falling into deep difficulties.The official said Madrid may move take over at least one of the country's cash-strapped regions this year, as lack of access to financial markets and plummeting tax revenue are undermining their capacity to fund themselves."The way things are going, the regions themselves will request the intervention," the official said. "There are regions with no access to funding, no way to pay bills. That's why we are going to have to intervene."  The official added Madrid should have more information by May on the state of regional finances, and on which might need to be taken over. The government has set up a new credit line to regions so they can pay off large debts to their suppliers.

Too Big To Fail And Too Big To Save - I fully intended to ignore Spain this week. Really, truly I did. I had my letter all planned, but then a few notes drew my attention, and the more I reflected on them, the more I realized that the inflection point that I thought the European Central Bank had pushed down the road for at least a year with their recent €1 trillion LTRO is now rushing toward us much faster than ECB President Mario Draghi had in mind when he launched his massive funding operation. So, we simply must pay attention to what Spain has done this week – which, to my surprise, seems to have escaped the attention of the major media. What we will find may be considered a tipping point when the crisis is analyzed by some future historian. And then we'll get back to some additional details on the US employment situation, starting with a few rather shocking data points. What we'll see is that for most people in the US the employment level has not risen, even as overall employment is up by 2 million jobs since the end of the recession in 2009. And there are a few other interesting items. Are we really going to see 2 billion jobs disappear in the next 30 years?

Why Isn’t The EUR Lower; Central Bank Agreement? - The question most asked by clients is why, with all that is going on in Europe, is the currency not much lower as nearly every analysts has a target of between parity and 1.2000? It is a very good question but way back at the start of 2011 I suggested that I felt some accord had been reached by the G20 to hold the EUR stable and this I still believe. The issue is that the EU leadership and indeed all those that trade with the zone, realize that equity markets would be held up by QE and that bond yields could be kept down (wrong) using the same method but the whole house of cards could be brought down if there was a run on the currency and a general loss of confidence in the currency. It would simply be a disaster and to me it is central bank manipulation that is keeping the EUR so ridiculously strong so selling breaks to the downside has seen many karted out on a stretcher and sent to the asylum.  The point is that what will it take for a substantial fall in the EUR? Again we have seen some staggeringly bad news in the zone and some are suggesting if the EUR does finally start sliding fast it could be the biggest sign of a break-up so I guess the central banks will do what they can to hold it.

"Pied Piper Always Gets Paid And Hamelin Still Rests On German Soil" - As our day gets underway we find the credit-default swaps for Spain hitting another new record at 521, out 19 bps, as their 10 year yielded 6.15% in London while the CDS for Italy also gapped out to 443. Everyone will be watching the Spanish auctions tomorrow as the positive effects from the LTRO are wearing thin just four months after their inception. What might come to pass is anyone’s guess but it can be said with certainty that there is no Quantitative Easing or Monetary Easing now taking place at the Fed or the ECB and the largesse of the last four years has stopped. Each day then that passes, as the cash river runs dry, will change the dynamics of the investment world. Treasuries will trade in one fashion as the harbinger of safety while risk assets, credit assets, will begin a widening that will be most unpleasant for many portfolios. The equity markets, in my opinion, will deteriorate as bond yields rise and as the problems in Europe frighten people out of the lowest rung of the capital structure.

The Big Rift Between Germany and France - Perhaps 100,000 people swarmed over the Place de la Concorde in Paris on Sunday, one week before the first round of elections, to hear French President Nicolas Sarkozy beg for his job, and politicians were listening warily ... in Germany. He’d already shocked them on March 11 when he’d declared that he wanted to renegotiate the Schengen Treaty—the foundation of the 26-country area where internal border controls have been abolished. Defending himself against attacks from the right, he’d wanted to show that he’d tamp down on the flow of immigrants. But the Schengen treaty has been a boon for export powerhouse Germany. And his declaration elicited gasps. “We will also open the debate over the role of the Central Bank in support of growth," he said, thus picking up one of the planks in socialist François Hollande’s platform. The limits that the Maastricht Treaty imposes on the ECB—its single mandate being price stability—were “a major problem for the future of Europe,” he said. “If it chooses deflation, Europe will disappear; you have to remember the 1930s.” . The Germans are already worried. The ECB opened the spigot far and wide through bond purchases and two Long Term Refinancing Operations (LTRO) by which it lent banks €1 trillion at low interest rates so that they could buy sovereign bonds of troubled Eurozone countries. What else would Sarkozy push the ECB to do? Fund government deficits directly?

Moody's Weighing Ratings Cuts to 114 Institutions in 16 European Countries = European banks are bracing for a wave of ratings downgrades in coming weeks that could intensify pressure on the fragile industry and further undercut recent efforts to defuse the Continent's long-running financial crisis. Under pressure from banks, Moody's Investors Service said Friday that it is delaying until early May its highly anticipated decision on whether to downgrade the credit ratings of 114 banks in 16 European countries. Moody's announced the review in February, saying it was needed in light of the banks' weak conditions and the tough environment in which they're operating. It had planned to start unveiling the decisions this week. Moody's said in a statement it is "taking an appropriately deliberate approach during this review process and will conclude when it is confident that all relevant information has been received and processed."

Plan to Set Up European Rating Agency Under Threat - The reputation of credit rating agencies has plummeted in recent years. First, market leaders Moody's, Standard & Poor's and Fitch assigned top grades to scores of securities that ended up plunging the world into its worst financial crisis in decades. Then, during the ensuing debt crisis, the agencies worsened the plight of ailing euro member states with downgrades that in the eyes of many politicians were unwarranted.  Their fury at the rating agencies prompted politicians to devise plans to set up a European rating agency to challenge the dominance of the US firms. German corporate consulting firm Roland Berger developed a plan and the European Internal Markets Commissioner, Michel Barnier, came up with a corresponding draft law. But the efforts appear to have been in vain. According to a report in Financial Times Deutschland on Monday, the project may be abandoned.

Deny the facts when they contradict the theory → I was reading a working paper from the Bank of International Settlements the other day – The “Austerity Myth”: Gain Without Pain? (published November 2011) and written by Roberto Perotti. The author can hardly be described as non-mainstream and has collaborated with leading mainstream authors in the past. His work with Harvard’s Alberto Alesina in the 1990s has been used by conservatives to justify imposing fiscal austerity under the guise that it would provide the basis for growth. In this current paper, Roberto Perotti tells a different story – one that has been ignored by the commentators who still wheel out his earlier work with Alesina as being the end statement on matters pertaining to fiscal austerity. In his current work, we learn that the conditions that allowed some individual nations in isolation to grow are not present now and that his current research casts “doubt on … the “expansionary fiscal consolidations” hypothesis, and on its applicability to many countries in the present circumstances”. Why don’t the conservatives quote from that paper?

IMF still won't admit truth about the euro - It is often said that travel broadens the mind. Not so for finance ministers gathering in Washington DC this week for the spring meeting of the International Monetary Fund and G20. For them, the agenda will seem wearily familiar.  Like a bad penny, the eurozone debt crisis keeps returning, seemingly deliberately to coincide with these international summits. Spain's rapidly deteriorating economic and financial position provides the flash point du jour.  With yields on Spanish government debt again above 6pc, and a couple of crucial bond auctions looming, matters are once more coming to a head. Crushed by repeated austerity programmes, the big southern European economies are sinking back into recession, raising new doubts about their ability to meet fiscal targets.  Discussion will therefore once again focus on the creation of a firewall big enough to provide for more, and even bigger, eurozone bailouts, including Spain and possibly Italy, too. This is proving both difficult to achieve, and misses the point, for it presupposes that the crisis is at heart just a confidence issue that can be solved simply by creating a backstop large enough to convince markets they cannot break the euro.

Debate Grows as Europe Fears Return of a Crisis — The European financial crisis has shown signs of reigniting in recent days, sharpening the debate between the champions of austerity and a growing chorus urging more expansionary policies to promote growth. Even the traditionally hard-line International Monetary Fund called on Tuesday for stronger European nations to ease the fiscal brakes by stretching out budget cuts over a longer period. But if that message was intended foremost for Germany, it seemed destined to fall on deaf ears: with two state elections coming up next month, Chancellor Angela Merkel is unlikely to shift her position, popular with voters, against additional help for the economies of struggling European partners.  “We don’t see the need that perhaps other countries see to boost growth through additional increases in expenditures,” said a senior official in the German Finance Ministry, speaking on the condition of anonymity.  “Instead, we see quite clearly, and will remind our partners about their responsibilities from Toronto,” the official said, referring to commitments made at the Group of 20 summit meeting in June 2010, “to cut their deficits in half and stabilize their debt levels.” At the same time, the official said that Germany hoped other countries would join in increasing the International Monetary Fund’s resources to help it combat the crisis.

Crisis to Suicide: How Many Have to Die Before We Kill the False Religion of Austerity? - If suicide is a measure of a society’s health, the Eurozone is getting sicker by the minute. The rate of people taking their own lives is soaring in Europe at such a clip that the trend has given birth to a new media term: "Suicide by economic crisis." How has it come to pass that people would rather die than be subjected to the pain imposed by global elites? Before the 2007 global financial meltdown, suicides in European Union countries had fallen sharply among people under age 65. Now, thanks to misguided economic programs and the sheer greed of financiers, that trend has abruptly reversed. The new wave of suicides tracks closely with rising unemployment. In Ireland, churches offer seminars on themes like "Suicide in Recessionary Times." Ever more draconian austerity measures that strip income and social aid act as a toxin, leaving the population so stricken that for some, dying seems the only relief. In Greece, taking one’s own life is so deeply stigmatized by the Greek Orthodox Church that bodies are rejected for burial. Not surprisingly, suicide rates in the country have been historically low. Yet in 2011, when the joblessness rate rose from 13.9 percent to 20.9 percent, calls to a major suicide hotline more than doubled, with 5,500 people talking of ending their lives. Hotline workers report a variety of underlying issues cited by callers, but job losses and deep cuts in salary are prominent. Callers who often reveal no previous history of mental illness testify to life changes too devastating to cope with. A Greek Ministry of Health study found that the suicide rate in the first half of 2011 was 40 percent higher than the year before.

European Car Sales Fall to 14-Year Low as Economy Stalls -  European car sales fell to a 14- year low last month, with Fiat SpA (F), Renault SA (RNO) and PSA Peugeot Citroen (UG) posting the biggest drops, as the region’s sovereign- debt crisis caused economic growth to stall. Registrations in the 27-member European Union plus Switzerland, Norway and Iceland fell 6.6 percent from a year earlier to 1.5 million vehicles, the lowest figure for March since 1998, the Brussels-based European Automobile Manufacturers’ Association said today in a statement. First- quarter sales dropped 7.3 percent to 3.43 million vehicles. France and Italy, Europe’s second- and third-biggest auto markets, shrank by more than 20 percent. The regional drop was alleviated by growth at German carmakers, such as Volkswagen AG. (VOW) Paris-based Peugeot is among auto manufacturers forecasting an industrywide contraction of 5 percent in Europe this year. “The extent of the beat for Germans is a bit surprising, as well as the extent of the downturn for the French,” French car sales plummeted 23 percent to 197,774 vehicles, while Italian registrations dropped 27 percent to 138,137, according to the association, or ACEA.

Spain, Italy slide further into euro zone crisis (Reuters) - Spain and Italy faced growing market pressure on Monday, stoking fears of a new phase in the euro zone debt crisis as Madrid's budget problems threatened to drag in other southern European economies. Yields on Spanish 10-year bonds have climbed over 6.1 percent, nearing levels that caused general market panic when Italy was in the same position late last year. Italian 10-year yields stood at almost 5.6 percent, while the yield on safe-haven German Bunds was just over 1.6 percent, the lowest since the height of the financial turmoil in 2008. "We are back in full crisis mode," said Rabobank strategist Lyn Graham-Taylor. Spain, the euro zone's fourth-largest economy, is at the centre of the crisis as concerns grow about some of its banks and the impact of the austerity policies of Prime Minister Mariano Rajoy's conservative government on a struggling economy. As the psychological boost from huge injections of cheap cash by the European Central Bank earlier this year has faded and the sustainability of Spanish public finances is questioned, the euro zone has been thrust back on to the agenda of International Monetary Fund meetings this week. 

Spanish-Bailout Chatter Rising - The war of nerves revolving around Spain continues, with the yield on the 10-year breaking back above the 6% mark. That’s more of a psychological mark than a specific problem. But rising yields are putting more pressure on Spain at a time when it’s squeezing its economy through harsh austerity, and that is a specific problem. Broadly speaking, these are the main issues, for Spain specifically and the Continent as a whole: How bad is Spain’s economy? Will the country need a bailout? How will the ECB/IMF/rest of the world respond? There was a report today that euro-zone exports were higher than expected, providing some relief  (and very likely what helped equities, except in Spain). But even as the eurocrats offer assurances that the Spanish Armada isn’t sinking, the market is signaling its doubt, as Matt Phillips pointed out. The economy is bad. It’s so bad, the Rajoy administration just threw out the initial deficit targets. They negotiated a new target with the EU, but meeting it will mean more pain for the Spanish people, via austerity measures.

Bank of Spain: Country is back in recession -- Spain's economy is back in recession after a mild recovery in early and mid-2011, and faces an "exceptional" situation that may led to further increases in unemployment, Bank of Spain Governor Miguel Angel Fernandez Ordonez said Tuesday. The euro zone's fourth-largest economy is also conducting what Fernandez Ordonez called an "unprecedented" fiscal adjustment--seeking to lower its budget deficit from 8.5% of gross domestic product last year to 5.3% of GDP this year--in an address to a parliamentary committee. Fernandez Ordonez also defended the European Central Bank's move to provide ample bank liquidity via auctions conducted in December and February. He added that, despite the misgivings of critics, the fresh liquidity inflow hasn't slowed down the progress of Spain's reform drive.

Bank of Spain Questions Budget Forecasts, Calls for Prudence  -- Spain's central bank chief said the country risks missing deficit estimates unveiled last month just hours after a successful bill sale dissipated some concerns that the government may have to seek a bailout. "The projected course of total revenues in the budget is subject to downside risks," Bank of Spain Governor Miguel Angel Fernandez Ordonez told a parliamentary committee today in Madrid. The comments may undermine the optimism sparked by Spain's successful bill auction just two hours previously. While 10-year bonds rose today, the yield is still close to 6 percent amid concern that Prime Minister Mariano Rajoy's government will struggle to rein in the budget deficit and shore up a banking industry facing additional charges of 50 billion euros ($66 billion.) Ordonez said revenue estimates should be "prudent" as he confirmed the economy is now suffering its second recession since 2009. The economy will shrink 1.8 percent this year, the International Monetary Fund forecast today.

Spain Slides Further into Crisis - Spain is once again experiencing tremendous pressure from the financial markets. With the economy sliding and Spanish banks no longer able to finance themselves independently, doubts are growing among investors that the country can service its debts without outside help. Some are already speculating that Spain will have to request aid from the European Union's euro rescue fund. On Monday, the interest rate on 10-year government loans rose for the first time this year to over the 6-percent mark, increasing by 0.13 points to 6.12 percent. Investors are demanding increasingly higher risk premiums in order to buy Spanish bonds. The cost for credit loss insurance also rose to a record high. For securities with a five-year term and a face value of $10 million, insurers are demanding an annual premium of $520,000.

'Full crisis mode' returns to Spain - The conservative Spanish government of Mariano Rajoy expects to take direct financial control of at least one of the country's ailing regional governments by May, according to sources in Madrid. With some regional debt already downgraded to junk, senior officials said it would be the regional governments themselves that came to Madrid to beg for help to get through the year. "It wouldn't be surprising if this happened in May," said a high-ranking official. "Some are paying interest rates that are impossible." International lenders are expected to welcome the plans after a series of warnings about the deteriorating state of the Spanish economy.

Italy Puts Back Balanced Budget Goal by a Year - Italy will delay by a year its plan to balance the budget in 2013 due to a weakening economic outlook, according to a draft document due to be approved by the cabinet of Prime Minister Mario Monti on Wednesday. The draft Economic and Financial document (DEF), which has been obtained by Reuters, raises the budget deficit forecasts for 2012-2014 and slashes this year's economic growth outlook. Italy's budget deficit is already one of the lowest in the euro zone as a proportion of output and many economists say its chronically weak growth is more of a concern than fiscal slippage. Under former Prime Minister Silvio Berlusconi Italy promised its European partners last summer that it would balance its budget in 2013, bringing forward the previous 2014 target to try to reassure markets as Italian bond yields surged. Now Monti's technocrat government is poised to revert to the old 2014 target as the economy contracts sharply, weighed down by a series of austerity measures approved to accelerate deficit reduction. Monti was hailed as a saviour when he replaced Berlusconi in November as Italy appeared to be heading towards a Greek-style debt crisis, but his popularity is declining and his reforms are drawing rising criticism and resistance.

Italy to delay balanced budget by a year: report -- The Italian government will delay its plan to reach a balanced budget in 2013 by a year due to a weaker economic outlook, Reuters reported Wednesday, citing a draft document expected to be approved by Prime Minister Mario Monti's cabinet later in the day. The plan raises Italy's 2012 deficit target to 1.7% of gross domestic product from 1.6%, the report said, while the 2013 goal is raised to 0.5% from 0.1%. The plan calls for a nearly balanced budget, with a deficit of 0.1% of GDP, in 2014. Italy has one of the smallest deficits in the euro zone but is struggling to convince investors it can rein in the size of its overall debt pile, which at around 120% of GDP is second only to Greece in the euro zone.

IMF says Italy to miss deficit targets in 2012, 2013 (Reuters) - Italy will miss its budget deficit targets in 2012 and 2013 and its public debt will rise in both years despite the government's austerity measures, the International Monetary Fund forecast on Tuesday. The IMF said in its Fiscal Monitor report that Italy's deficit would fall this year to 2.4 percent of output, well above Rome's 1.6 percent target, and would decline to 1.5 percent in 2013, when Italy is aiming to balance its budget. The forecasts are a blow to Prime Minister Mario Monti, whose popularity is sliding and whose reform efforts are meeting rising criticism and resistance as the country's borrowing costs rise. Italy's huge public debt, the second highest in the euro zone after Greece's as a proportion of GDP, will jump to 123.4 percent of gross domestic product this year, from 120.1 percent in 2011, and edge up to 123.8 percent in 2013, the IMF said. Earlier on Thursday the IMF forecast the Italian economy would shrink by 1.9 percent this year and contract by 0.3 percent in 2013. The Fund's forecast that Rome will significantly overshoot its balanced budget target next year will put pressure on Monti to adopt additional corrective measures, though the IMF itself has urged against this due to the weak economy.

German public debt rises to record 2.09 trillion euros - The public debt of Germany, which has campaigned for more austerity in the eurozone, grew last year to a record 2.09 trillion euros, a rise of 32 billion euros, according to figures Tuesday from the Bundesbank. But the ratio of debt to gross domestic product (GDP) at the end of the year declined to 81.2 per cent, the central bank said. The drop by 1.8 percentage points was because of a sharp rise in nominal GDP that outweighed the slight rise in debt. That debt ratio is still well above the permitted level of 60 per cent permitted by European Union stability rules. Germany has led a drive for all eurozone members to set constitutional ceilings on their net borrowing. The Bundesbank regularly reports on Germany‘s compliance with the Maastricht treaties, which laid down terms to join the eurozone. General government debt includes borrowing by central, state and local government and social security funds.

Paulson goes short on German Bunds - John Paulson, the billionaire hedge fund manager who foresaw the collapse of the US housing market, is shorting German government bonds in a wager that the eurozone debt crisis will significantly deepen in the coming months. Mr Paulson told investors in a call on Monday that he was betting against the creditworthiness of Germany, regarded in markets as among the safest sovereign borrowers, because he saw the problems affecting the eurozone deteriorating severely, said a person familiar with Mr Paulson’s strategy.

Sarkozy Re-election Bid in Trouble - Mr. Sarkozy is in deep trouble and is looking, for now, as if he could be the first one-term French president since 1981. He appears to be running neck and neck with his main challenger, the Socialist candidate François Hollande, in the first round of voting on Sunday, when 10 candidates are competing. But all the opinion polls show Mr. Sarkozy losing to Mr. Hollande in a face-off two weeks later.  His possible defeat carries implications that would radiate far beyond Paris. Mr. Sarkozy has had contentious but valuable relationships with Chancellor Angela Merkel of Germany, a fellow conservative, on European and euro zone issues; with the British on defense issues, including the Libyan war; and with President Obama on issues involving Iran and Israel, NATO and Russia.  A victory by even a centrist Socialist like Mr. Hollande, who has advocated higher taxes on the rich and a greater emphasis on growth over austerity, would create immediate strains with Germany and rattle financial markets that are already nervous about the size of France’s debt. Mr. Hollande has also said that he wants to pull French troops out of Afghanistan sooner than NATO has agreed to do. Still, he says that his first visit abroad would be to Berlin, no matter how chilly the reception.

What a Hollande Victory Would Mean for Merkel - As Europe continues to integrate both economically and politically, the outcomes of national elections have grown in importance to reach beyond their own borders. German Chancellor Angela Merkel knows that, and it's why she will travel on Sunday to Paris, where voters will be heading to the polls in the first round of the French presidential elections. Conservative French President Nicolas Sarkozy is fighting for a second term, but he has a strong opponent. The Socialist candidate, François Hollande, has a good chance of moving into the Élysée Palace. The latest polls show Hollande leading in the first round of voting, as well as in the possible run-off vote on May 6.  For Merkel, this is an election like no other, and one that is even more important to her than many German state elections. Whoever wins in France will help drive European policy by her side. If the victor proves to be Hollande, who differs with Merkel's closely allied partner Sarkozy on many issues, not the least of which involve rescuing of the euro, things could become uncomfortable for her, both in Brussels and at home in Berlin

Soros warns euro crisis could destroy the EU (Reuters) - Billionaire George Soros warned on Monday that the euro crisis is growing deeper, tearing at the fabric of European Union cohesion, because policymakers are prescribing the wrong remedies. "I'm afraid that the euro crisis is getting worse. It's not over yet, and it is going in the wrong direction," Soros said in discussion with Denmark's economics minister hosted by the daily newspaper Politiken. "The euro is undermining the political cohesion of the European Union, and if it continues like that could even destroy the European Union," Soros said. "That is due to a misunderstanding of what the problem is." Soros, the Hungarian born U.S. investor, said that the creators of the single European currency believed that imbalances were created in the public sector without understanding that markets themselves can create imbalances. He said the euro crisis is being dealt with by policymakers as a fiscal crisis though the crisis began as a collapse of the banking system in the United States and was compounded by a divergence of competitiveness among European countries. He said that failure to deal with the crisis was creating tremendous tensions because people, who see that policy is failing, are driven into anti-European positions and dissent is growing within and between the countries of Europe. "It could be reversed at any time if only the authorities understood that the box is broken and you need to find some out-of-the-box invention to bring it back inside the box and then put it right, change the rules of cohesion," he said.

Why the eurozone may yet survive - What, then, can we say of the forces at work on the eurozone? The centrifugal economic forces are all too painfully clear. First, since the eurozone is a monetary union, without fiscal backups, the pressure of adjustment falls on notoriously inflexible labour markets. Since the agreed objective is low inflation, that means downward pressure on nominal wages. That entails soaring unemployment, collapsing economies and debt deflation (see charts). Second, the birth of the euro coincided with a global credit boom. The convergence of interest rates consequent upon its creation was reinforced by the disappearance of risk spreads. The result was a surge in cross-border lending to both private and public sectors, reduced pressure for fiscal consolidation in high-debt countries (such as Italy), and the emergence of huge payments imbalances and divergences in competitiveness. Then came the financial shocks, which brought “sudden stops” in lending, a collapse in private borrowing and spending, and a wave of fiscal crises. Third, in such a crisis, the eurozone had no effective way to sustain banking systems, finance countries in trouble or secure adjustment by creditor and debtor economies. We see improvisation instead: the eurozone’s aircraft is being redesigned while crashing.

The EuroZone as One Country - The Eurozone is undertaking more austerity than either the US or the UK (see here), yet its overall budgetary position is much more favourable than either of these two countries. Can this be right, at a time when the Eurozone is in recession? If we thought about the Eurozone as a single country, then clearly it is not. Everything that is wrong with current UK policy would be even more wrong in the Eurozone. The question I ask here is whether the fact that it is not one country changes this assessment.      The Eurozone is like one country in having a single central bank. The ECB’s nominal interest rate is stuck at their equivalent of the zero lower bound. One possibility would be for the ECB to effectively raise the inflation target, and hope that this in turn raised inflation expectations and thereby stimulated demand: NGDP targets and all that. However it almost certainly will not do this. Furthermore, its inflation target is 2% or less, and it appears to be thinking about significantly less than 2% at the moment (see the quote from Draghi reported here). So given this constraint on conventional monetary policy, what should fiscal policy do?

LTRO, bond purchases or both, which is it to be? - With yields on Spanish bonds climbing ever higher in recent weeks, last week ECB Executive Board member Benoit Coeure insisted that the ECB’s bond buying facility remains to be an option. To see how the scaling up of the facility’s use could be beneficial we need to see how the program would differ and also in what ways it is similar to the LTRO. The obvious manner in which the two differ is that the LTRO pledges unlimited 3-year loans at ultra-low interest rates to euro zone banks in return for adequate collateral (pretty much Bunds) whilst the bond purchase facility entails the ECB simply buying the sovereign bonds of euro zone nations. But let’s not fool ourselves in thinking the LTRO was a policy designed to inject liquidity into the system, or if it was, it certainly didn’t achieve those objectives as banks simply played the carry trade whereby the cheap funds obtained through the LTRO were then used to purchase sovereign bonds enabling the banks to profit the difference between the yield on bonds and the interest payable to the ECB on the LTRO loans.

How best to share the sacrifice - IT'S difficult to keep track of all the economic problems afflicting the euro zone at the moment—too-tight monetary policy, too-tight fiscal policy in countries that aren't under pressure to rapidly and immediately cut budgets, the absence of a sovereign lender of last resort, insufficient integration of the area's financial system, a raft of supply-side problems too numerous to mention—but given the scarcity of political will in the euro area, it's important to tackle the most critical crisis causal factors first. One of the most pernicious is the "diabolical loop" between sovereign and banking-sector credit-worthiness. As markets get nervous about a sovereign's solvency, its banks come under pressure. And as a country's banks come under pressure, fears growth that the government will need to step in to rescue them, lowering confidence in the sovereign's solvency. On the brink of catastrophe late last year, the European Central Bank stepped in to address this link, but in a temporary and half-hearted way. The upshot of the ECB's €1 trillion in long-term bank lending is that sovereign premiums were temporarily national banks that purchased sovereign debt to post it as collateral at the ECB. It's helpful that the banks were yanked back from the brink of a liquidity meltdown, but the dangerous link between national and bank solvency has been solidified in the process. A more durable solution is necessary. As this week's Free exchange column explains, that's where eurobonds come in

Spanish banks' bad-loan ratio hits 18-year high -The ratio of bad loans at Spanish banks shot to an 18-year high in February, official figures showed Wednesday, as the banks struggled with a mass of deteriorating property-related loans. Spanish banks are a key concern on financial markets because of the declining value of the huge loans they allowed to build up during a property bubble that collapsed in 2008.Doubtful loans in February amounted to 143.8 billion euros ($188 billion), rising to 8.15 percent of total credits - the highest ratio since 1994 - from 7.91 percent in January, the Bank of Spain said. A loan is categorised as doubtful when the borrower has not made a payment for at least three months. Prime Minister Mariano Rajoy's conservative government has made cleaning up the banks a priority and is requiring them to set aside more than 50 billion euros to boost their balance sheets

Spain banks' bad loans highest since Oct '94 - Spanish banks' bad loans rose to their highest level since Oct. 1994 in February, to 8.2 percent of their credit portfolios, Bank of Spain data showed on Wednesday, as the sector continues to battle sliding house prices and a looming recession. Banks are facing a new wave of loan defaults as an economic crisis deepens and analysts say some may not survive as the government implements sweeping budget cuts that will only add to Spanish households' problems with repaying debt. Non-performing loans increased by 3.8 billion euros ($4.99 billion) to 143.8 billion euros in February from the previous month. They totalled 7.9 percent of total debt portfolios in January. That picture - driven by the collapse of a housing boom in the global financial turmoil of 2008 - is at the heart of problems for Spanish banks that have seen other institutions refuse to lend to them and forced some to rely on the European Central Bank for funding.

Spain’s Surging Bad Loans Cast New Doubts on Bank Cleanup - Spain’s surging bad loans are spurring doubt on whether the government can persuade investors that it can clean up the country’s banks without further damaging public finances. Non-performing loans as a proportion of total lending jumped to 8.16 percent in February, the highest level since 1994, from less than 1 percent in 2007, according to Bank of Spain data published today. The ratio rose from 7.91 percent in January as 3.8 billion euros of loans soured in February, a 110 percent increase from the same month a year ago. That takes the total credit in the economy that the regulator lists as “doubtful” to 143.8 billion euros. Defaults are rising and credit is shrinking at a record pace as 24 percent unemployment corrodes the quality of loans built up in the country’s credit boom and saps the appetite of banks to make new ones. Doubts about the extent of Spain’s non- performing loans problem is hurting bank stocks and driving up the government’s borrowing costs on investor concern that the expense of propping up ailing lenders may add to the debt burden.

Spanish banks face more property risk - consultant (Reuters) - Spanish banks may need to set aside more money to cover exposure to a bust property market because they still have to recognise billions of euros in loans to non-viable companies, said a report by Spanish property consultancy RR de Acuna. Spain has ordered its battered banking sector to reinforce balance sheets as a correction in the housing market continues and the central bank forecasts lenders will need some 53.8 billion euros ($70.7 billion) to cushion against bad debt. But Thursday's report said that may not be enough. "Banks are not recognising all of their risk. Many of their debtors are property companies with negative equity who can't even pay the interest on their debt," Fernando R. Rodriguez de Acuna, chairman of the consultancy, told Reuters by telephone. There are at least 21,000 "zombie companies" in Spain that owe banks 126 billion euros, Rodriguez said, basing his estimates on recent data from Spanish mercantile records.

Spanish Banks Gorging on Sovereign Bonds Shifts Risk to Taxpayer-- Spanish, Italian and Portuguese banks are loading up on bonds issued by their own governments, a move that shifts more of the risk of sovereign default to European taxpayers from private creditors. Holdings of Spanish government debt by lenders based in the country jumped 26 percent in two months, to 220 billion euros ($289 billion) at the end of January, data from Spain's treasury show. Italian banks increased ownership of their nation's sovereign bonds by 31 percent to 267 billion euros in the three months ended in February, according to Bank of Italy data. German and French banks, meanwhile, have cut holdings of those countries' bonds, as well as Irish and Greek debt, by as much as 50 percent since 2010 in some cases. That leaves domestic firms on the hook for a restructuring such as Greece's last month and their main financier, the European Central Bank, facing losses. Like Greece, governments would have to rescue their lenders with funds borrowed from the European Union.

Not ECB's Job to Tackle Spain's Problems. Spain should take a rise in its bond yields as a spur to tackle the root causes of its debt woes, not look to the European Central Bank to help by buying its bonds, European Central Bank policymaker Jens Weidmann told Reuters. In a wide-ranging interview, Weidmann, who turns 44 on Friday, also said he saw no reason to discuss a third LTRO, the funding instrument with which the ECB has pumped over 1 trillion euros into financial markets since late last year. "I don't think you will find any colleague (on the ECB Council) who is of the view that the Eurosystem (of euro zone central banks) is there to ensure a particular interest rate level for a particular country." Some investors are betting that the rise in Spanish borrowing costs will force the ECB to dust off its bond-buying programme, but Weidmann suggested countries should not be looking to the central bank for such help. "It is not our job to provide financial aid in order to extend necessary adjustments over time," Weidmann said. "That is exactly what the bailout fund is for."

Bank Credit Worst to Companies Since Crisis Peak - The debt of banks is trading at the biggest discount to the broader corporate bond market since the depths of the funding squeeze in November as Europe’s sovereign crisis again threatens to rattle global financial markets.  From Spain’s Banco Santander SA (SAN) to Morgan Stanley in New York, the cost of credit-default swaps on a basket of the largest banks in Europe and the U.S. is 266 basis points, compared with 137 for the Markit iTraxx Europe Index of 125 companies with investment-grade ratings. The 129 basis-point spread is the most since it reached 133 on Nov. 30. The International Monetary Fund is seeking to boost its lending capacity from about $380 billion to shield the economy against Europe’s turmoil as 10-year bond yields in Spain, which has more than $900 billion of debt, rise above 6 percent. Bank securities, a barometer of the health of the financial system, have given up the gains generated by the unprecedented injections of public cash in Europe since late last year.

I.M.F. Warns Credit Squeeze Could Slow European Growth - The International Monetary Fund warned Wednesday that European banks are under pressure to preserve capital and could slash lending in the next two years, slowing growth in the region.  The predicted credit squeeze is a big reason Europe is expected to have a mild economic recession this year and barely grow in 2013, the I.M.F, said in a report on the global financial system.  The economies of the 17 nations that use the euro will shrink by 0.3 percent this year, and expand by only 0.9 percent in 2013, the fund has forecast.  But the slowdown could be worse if European governments break pledges to cut deficits and build their bailout fund, said the I.M.F., a lending organization.  Large banks based in the European Union may reduce their balance sheets, which include outstanding loans and securities, by $2.6 trillion through 2013, the fund said. That is about 7 percent of their total assets.  About a quarter of that reduction will come from reduced lending and could shrink the amount available for credit by 1.7 percent.  Some reduction in credit, or deleveraging, is necessary, the fund said. Banks cannot borrow as freely as in the past, and governments are requiring them to hold more capital.

IMF’s report warns of massive deleveraging by European banks - Italy has revised its numbers. GDP this year has been reduced to -1.2% (+0.5%, from +0.3% previously in 2013), from -0.5% previously, the budget deficit raised to +1.7% (-0.5%, from -0.1% previously in 2013), from +1.6%. The IMF suggests that the budget deficit will be -2.4% this year, and that GDP will decline by -1.9% for comparison purposes. Mr Monti essentially is having a tougher time and over optimistic views as to his achievements will have to be tempered. Italy looks as if it is followed Spain in ignoring the German inspired “fiscal compact”. Well what a surprise – I think not. In coming months, the German prescription is going to be ignored – once again no surprise, it was lunacy in the 1st place and totally unachievable anyway; The only EZ country that has met its targets is Ireland. The Irish finance minister reported that the country would meet it’s budget deficit target this year. He admitted that growth was “a little disappointing” YTD, though expects a pick up in the 2nd half of the year. Apparently, the authorities are E400mn ahead in terms of revenue collection; The IMF suggests that 58 European banks will have to sell some US$3.8tr of assets in the worse case scenario. The baseline forecast suggests asset sales of US$2.6tr over the next 18 months. The relevant banks disposed of US$580bn of assets in the 4th Q 2011 and the IMF warned that European banks may dump 7.0% of their assets by the end of next year.

IMF sees banks deleveraging by $2.6tn: A drastic contraction of European bank balance sheets during the next 18 months could jeopardise financial stability and economic growth in Europe and beyond, according to forecasts from the International Monetary Fund. In its Global Financial Stability Report, published on Wednesday, the fund warned that European banks looked set to shrink their balance sheets by $2.6tn (€2tn) over that period. Unless officials improved their policy response, the IMF said, European banks would dump almost 7 per cent of their assets by the end of next year. After examining the efforts of the continent’s 58 largest banks to boost their capital ratios, shed unprofitable businesses and cut their reliance on wholesale funding, the fund’s analysts predicted the deleveraging process would be more severe than previously anticipated.

IMF Says European Banks May Have to Sell $3.8 Trillion in Assets - European banks could be forced to sell as much as $3.8 trillion in assets through 2013 and curb lending if governments fall short of their pledges to stem the sovereign debt crisis or face a shock their firewall can’t contain, the International Monetary Fund said. In a study of 58 banks including BNP Paribas SA (BNP) and Deutsche Bank AG (DBK), the IMF forecast that under such circumstances, gross domestic product in the 17-country euro region would be 1.4 percent lower than now expected after two years. Even under its baseline scenario, the IMF sees banks’ combined balance sheets possibly shrinking by as much as $2.6 trillion. “So far, deleveraging has occurred predominantly through buttressing capital positions and reducing non-core activities, leaving the impact on the rest of the world manageable,” the IMF said in its Global Financial Stability Report released today. “It is essential to continue to avoid a synchronized, large-scale, and aggressive trimming of balance sheets that could do serious damage to asset prices, credit supply, and economic activity in Europe and beyond.”

Fitch doubts Dutch AAA as property slump reaches ‘coma’ - Fitch Ratings has issued the clearest warning to date that Holland faces losing its AAA rating if it fails to deliver austerity cuts or lets political conflict intrude on economic management.  "The Dutch are on the edge of a negative rating action," said Chris Pryce, Fitch’s expert on the Netherlands. The first move is likely to be a switch from stable to negative outlook rather than a full downgrade.  "We will hold a rating committee meeting in June. They run risks if they keep letting debt rise: a cautious approach would be advisable," he told the Telegraph.  The warning comes as Dutch property tips into deeper slump, with the inventory of unsold homes nearing South European levels. Household debt is the eurozone’s highest at 249pc of income, compared with 202pc in Ireland, 149pc in the UK, 124pc in Spain, 90pc in Germany, 78pc in France and 66pc in Italy - according to Eurostat data from 2010.  The Netherlands is caught in a "negative feedback-loop" as recession and house price falls feed on each other. Building permits have dropped 9pc from a year ago, the lowest since 1953. "The housing market is in a coma," said the Volkskrant newspaper.

The New Hungarian Secret Police - When Brad Pitt was in Budapest last October shooting World War Z, an upcoming zombie-thriller, TEK agents seized 100 machine guns, automatic pistols and sniper rifles that had been flown to Hungary for use as props in the movie. The weapons were disabled and came with no ammunition. But the Hungarian counter-terrorism police determined that they constituted a serious threat. The dead-pan seizure of movie props made TEK the laughing stock of the world. As David Itzkoff joked in the pages of the New York Times, “If Hungary ever finds itself the target of an undead invasion, its police force should now be well supplied to defend the nation.” Few have taken TEK seriously. But that is a big mistake. In fact, TEK seems to be turning into Prime Minister Viktor Orbán’s own secret police. In less than two years, TEK has amassed truly Orwellian powers, including virtually unlimited powers of secret surveillance and secret data collection. The creation of this “Parlia-military” gives Hungary the dubious distinction of having the only Parliament in Europe with its own armed guard that has the power to search and “act in” private homes.

Portugal May Need a Bailout by September, Morgan Stanley Says - Portugal may need to ask for a second bailout by September as the nation is hamstrung by weak economic growth and lack of access to bond markets at affordable rates, according to Morgan Stanley. The nation agreed to a 78 billion-euro ($102 billion) aid plan from the European Union and the International Monetary Fund last year. Yields on the country’s 10-year bonds are at an unsustainable 11.85 percent and credit-default swaps signal a 61 percent probability of default. “We expect a deeper recession than official projections and consensus estimates,’ Morgan Stanley analysts including London-based Daniele Antonucci said in a report. ‘‘Our base case is a second bailout package by September 2012; however, we see risks of possible derailment in the medium term.’’ Gross domestic product will fall 3.4 percent this year after declining 1.6 percent in 2011, the Bank of Portugal said March 29. Portuguese Prime Minister Pedro Passos Coelho, who plans to resume bond sales next year, has said a failure to regain market access would trigger additional ‘‘support’’ from EU peers. ‘‘The current determination in Europe to avoid another debt restructuring may be challenged further down the road, if the fundamentals deteriorate,’’

Spanish 10 year bond yields near 6% - From Dow Jones: Italian, Spanish Bonds Suffer As Crisis Fears Mount Italian and Spanish government bond prices continued to fall early Friday after Thursday's Spanish bond auction failed to inspire renewed confidence in peripheral markets, while French bonds also suffered ahead of Sunday's presidential election. ... Italian 10-year bond yields climbed 10 basis points to 5.68%, while Spanish yields were up 10 basis points at 5.97%, according to Tradeweb. German 10-year bund yields were at 1.61%, having briefly hit a record low of just below 1.6%, while French 10-year yields climbed four basis points to 3.11%. Here are the Spanish and Italian 10-year yields from Bloomberg. Both are still well below the highs of last November. Both the election in France, and the election in Greece scheduled for May 6th, are making investors uneasy. Sarkozy will probably lose in a runoff, and the smaller parties in Greece will probably do very well. At some point current policies will not survive at the ballot box.

Spanish yields top 6 pct as nerves jangle (Reuters) - Spanish 10-year yields topped 6 percent on Friday before retreating after upbeat German economic data but a break higher was seen likely as investors worried about Madrid's ability to deal with its fiscal problems. Pressure on Spanish debt grew after a debt auction on Thursday fell short of market expectations, lifting Spain's default insurance costs close to record levels. Ten-year yields were last at 5.97 percent, up 4 basis points on the day. A sustained break of 6 percent in 10-year yields could see borrowing costs accelerate to unaffordable levels which drove Greece, Ireland and Portugal to seek international bailouts. "Spain remains the main worry and if it breaks decisively 6 percent...that will get markets even more worried because after that there's 7 percent where you get all the memories about Greece and Portugal coming back," Lloyds strategist Achilleas Georgolopoulos said.

In Spain, Euro Rescue Fund May Face Its Biggest Test -  The euro zone’s rescue fund has already helped mount full-scale bailouts of three of Europe’s smaller economies. But concern over the health of Spain’s financial institutions — laid low by a festering home-mortgage crisis — has fueled speculation that, for the first time, the bailout fund might be needed to help recapitalize the banks of a big country.  “I don’t foresee the need for Spain to come, but there is a lot of money available,” Klaus P. Regling, chief executive of the euro zone’s current bailout fund, said here Tuesday at his staff headquarters. He added that there were “lots of positive elements in Spain that are ignored at the moment but that, no doubt, over time will become clearer to everybody.”  Mr. Regling heads the European Financial Stability Facility, the emergency bailout fund that still has about €248 billion, or $325 billion, of its original €440 billion of lending power. In July, that fund is to be superceded by a permanent strongbox, the European Stability Mechanism, which will have a firepower of about €500 billion — beyond the €192 billion already committed to Ireland, Portugal and Greece.  But while Mr. Regling says he does not expect Spain to need help bailing out its banks, other analysts do not necessarily share his optimism.

ECB's Knot denounces loose collateral rules - paper (Reuters) - The European Central Bank should not have relaxed collateral rules to give money to banks because of higher default risks, ECB Governing Council member Klaas Knot was quoted as saying on Friday, warning cheap ECB money could create "zombie banks". Knot, who is also Dutch central bank president, told a Dutch newspaper he agreed with his German counterpart Jens Weidmann, who warned ECB President Mario Draghi in February of the risks of accepting a broader range of collateral. "I had rather wished we hadn't done this at all," Knot was quoted as saying in Dutch daily newspaper De Volkskrant. Knot and Weidmann were not the only ones who had doubts about lowering collateral demands to give credit to banks, Knot told the paper. The ECB's decision to give cheap low-interest three-year loans, known as LTROs, to banks in December and February was a unanimous decision but came with the risk of supporting bad banks, Knot said.

Europe Pressed as G-20 Warns of More Stress -- Europe’s governments were told the onus for fixing their debt woes lies with them as the Group of 20 warned the two-year crisis still threatens global growth. With finance chiefs from the G-20 meeting today in Washington, those from Canada and Australia joined the IMF and U.S. in pressing Europe to intensify efforts to quell the turmoil as it spreads to Spain. The G-20 cited “the situation in Europe” first in a list of drags on the world economy, according to a draft statement obtained by Bloomberg News. As she welcomed pledges of about $320 billion for the IMF’s crisis-fighting coffers, IMF Managing Director Christine Lagarde said the lender serves as an emergency backstop and that Europe must protect itself, boost economic growth and cut debt. Italian and Spanish bonds fell yesterday on speculation the crisis is worsening.  “Countries have to take measures,” Lagarde told Bloomberg. “I am in charge of improving the stability and I need to have the umbrella in case the clouds break into a nasty rain.”

Worst Yet to Come as Crisis Rescue Cash Ebbs, Deutsche Bank Says - The worst may be yet to come in the global financial crisis as the central bank spending that kept defaults low runs out, according to Deutsche Bank AG. Credit-default swap prices imply that four or more European nations may suffer so-called credit events such as having to restructure their debt, strategists led by Jim Reid and Nick Burns said in a note. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments including Spain and Italy jumped 26 percent in the past month as the region's crisis flared up. "If these implied defaults come vaguely close to being realised then the next five years of corporate and financial defaults could easily be worse than the last five relatively calm years," the analysts in London said. "Much may eventually depend on how much money-printing can be tolerated as we are very close to being maxed out fiscally."

No Exit in EU -  Peter Praet, Chief Economist of the European Central Bank, defended the ECB’s policies at Levy Institute’s annual Minsky meeting at the Ford Foundation this past week in New York. In his remarks, he retreaded the EU’s wheels with the same rhetoric of inflation fighting and fiscal tightening that drove the EU off the road and into the ditch to begin with. The effect of his pronouncements of EU intentions was to only further reveal the growing gap between reality and ECB ideology over their inability to successfully address the euro crisis. Europe risks becoming a real lived version of Jean Paul Sartre’s No Exit in which its constituent countries are locked into a dysfunctional currency union for an eternity. Euro entry has been a Faustian bargain. There is presently no exit clause once joining, except exiting the European Union itself. Entry promised membership into a rich club of nations in which Europe’s southern periphery and former Soviet bloc areas to the east would converge with Europe’s richest nations. The devil of membership, however, is in the details. Euro rules preclude a wholesale list of policies historically demonstrated to develop nations.

Monetary policy and Financial Stability -  Here are some initial thoughts reading Michael Woodford’s new NBER paper. The paper addresses the following question. Should our current monetary policy framework, which involves ‘flexible inflation targeting’ (more on what this means below), be modified in an attempt to avoid a financial crisis of the type experienced in 2008? We can put the same question in a more specific way – should the Fed or Bank of England have raised interest rates by more in the years before the crisis in an effort to avoid the build up of excess leverage, even if movements in output and inflation indicated otherwise? The paper suggests the answer to both questions is yes. Although the paper contains plenty of maths, it is reasonably reader friendly, so I hope reading this will encourage you to read it.     First, what is flexible inflation targeting? Both inflation and the output gap influence welfare, so policy is always about getting the right balance between them. In a simple set-up, when a ‘cost push’ shock (like an increase in VAT) raises inflation for a given output gap, then creating a negative output gap so as to moderate the rise in inflation is sensible. The optimal policy can be expressed as a relationship (a ‘target criterion’) between deviations in the price level from some target value (the ‘price gap’) and the output gap. In the case of the cost-push shock, policy ensures that the output gap gradually narrows as the price level gradually convergences back to its original level.

Sordid footnote offers lesson for megabanks - Hard as it is to believe, Gordon Brown has proven to be something of a trendsetter in global finance. In October 2008 I stood next to a weeping Icelander in Reykjavik, watching on television as the then British prime minister bullied his crisis-stricken neighbour to the north.  It was a squalid little piece of theatre. Mr Brown, trailing in the polls, said he was “freezing the assets of Icelandic companies in the United Kingdom” to protect UK depositors in collapsing Icelandic banks. He went as far as using antiterrorism laws to seize Icelandic assets in London in what seemed at the time like just one sordid footnote to the crisis. But now it’s clear that years of globalisation are going into reverse. The sort of beggar-thy-neighbour approach from Mr Brown is being replicated across the world. “Subsidiarisation” – organising global banks into separate national operations – is the ugly watchword of modern banking.As Citigroup says in a disclosure buried in its annual report: “[We] could be required to create new subsidiaries instead of branches in foreign jurisdictions … which would, among other things, increase Citi’s legal, regulatory and managerial costs, negatively impact Citi’s global capital and liquidity management and potentially impede its global strategy.”

BOE Can Loosen Policy Amid Weak U.K. Growth Outlook, IMF Says - The Bank of England can loosen policy further to boost an economy that will struggle to grow this year, the International Monetary Fund said. British economic growth “will be weak in early 2012, before recovering,” the Washington-based IMF said in its World Economic Outlook today. “With inflation expected to fall below the 2 percent target amid weaker growth and commodity prices, the Bank of England can further ease its monetary policy stance.” The U.K. central bank maintained the size of its bond- purchase program at 325 billion pounds ($517 billion) this month and has predicted that the inflation rate will drop below its goal this year. Still, divisions among policy makers have emerged as a jump in energy costs threatens to underpin prices and data show services and manufacturing picking up after the economy contracted 0.3 percent in the fourth quarter. U.K. gross domestic product will increase 0.8 percent this year, the IMF said today, raising a previous projection for 0.6 growth published in January. It maintained a forecast for 2 percent expansion in 2013.

One million jobs for young people lost since 2007 as Labour is accused of hiding scale of unemployment on its watch - Almost a million jobs have been lost since 2007 in sectors which traditionally appeal to young people, a new study has revealed. Jobs which account for over half of youth employment - including manufacturing, retail, hotels and restaurants - have suffered the biggest losses over the past five years. Research by the TUC found that finance and business services were the only areas with bigger workforces than before the recession. Employment in manufacturing fell by 14 per cent over the four years to end of 2011, a cut of over 400,000 posts, said the union. Over 280,000 construction jobs were lost as well as 220,000 in retail, hotels and restaurants. In contrast, employment in finance and business services, grew by almost 100,000. TUC general secretary Brendan Barber said: 'The manufacturing sector experienced heavy job losses during the recession and has failed to recover during the UK’s admittedly weak recovery.

Staggering rise of the British food bank: One opens every week after rise in families unable to afford to eat - Shocking figures have revealed that every week a new food bank opens in Britain as more people find themselves struggling to make ends meet. And the number of people needing emergency aid is expected to rise with many food banks operators worried that the full impact of the recent budget will not kick in until 2013. There are now over 190 food banks nationwide, 88 of which were launched in 2011 alone. Food bank recipients are not usually the homeless - they are low-income working families who hit crisis, people who have been made redundant or people experiencing benefits delays.

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