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

Saturday, April 28, 2012

week ending Apr 28

Fed balance sheet shrinks in latest week (Reuters) - The Federal Reserve's balance sheet contracted for first time in three weeks, prompted by a moderate decline in its bond holdings, Fed data released on Thursday showed. The Fed's balance sheet  stood at $2.849 trillion on April 25, down from $2.858 trillion on April 18. The Fed's holdings of Treasuries totaled $2.610 trillion as of Wednesday, versus $2.623 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $8 million a day during the week, more than the $6 million a day average rate the prior week. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) was $847.8 billion, down from $855.36 the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $94.57 billion, down from $95.20 billion the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--April 26 2012

Aiming for Clarity, Fed Falls Short in Some Eyes - The Federal Reserve chairman, Ben S. Bernanke, has tried to speak more clearly and more frequently than his predecessors. He has lectured college students, met with members of the military and, since last April, held quarterly news conferences. But as Mr. Bernanke prepares to meet the press for the fifth time Wednesday afternoon, after a scheduled meeting of the Fed’s policy-making committee on Tuesday and Wednesday, there are reasons to doubt that the efforts are increasing public understanding of monetary policy. Experts and investors have continued to disagree about the plain meaning of the Fed’s recent policy statements. Some say the increased volume of communication is creating cacophony rather than clarity. Political criticism of the Fed has continued unabated. And the economists and analysts who are paid to predict and translate the Fed’s actions and pronouncements for investors say that demand for their services has only increased.

FOMC Statement: Economy "expanding moderately" -- FOMC Statement: Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately. Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated. Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed. Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

Redacted Version of the April 2012 FOMC Statement - March 2012 vs April 2012 - Comments

FOMC Forecasts and Bernanke Press Conference - Here are the updated projections from the April meeting. Below are the update projections starting with when participants project the initial increase in the target federal funds rate should occur, and the participants view of the appropriate path of the federal funds rate. I've included the chart from the January meeting to show the change. The four tables shows the FOMC April meeting projections, and the previous two projections (November and January) to show the change. "The shaded bars represent the number of FOMC participants who project that the initial increase in the target federal funds rate (from its current range of 0 to ¼ percent) would appropriately occur in the specified calendar year." Here is the January chart for comparison. There was a slight shift to 2014 Probably two participants moved from 2015 to 2014, and both participants who viewed 2016 as appropriate have moved to 2015. A key is the same number of participants think the FOMC should raise rates before 2014. "The dots represent individual policymakers’ projections of the appropriate federal funds rate target at the end of each of the next several years and in the longer run. Each dot in that chart represents one policymaker’s projection." Most participants still think the Fed Funds rate will be in the current range into 2014.

Earth to Ben Bernanke - Chairman Bernanke Should Listen to Professor Bernanke - Paul Krugman - Bernanke was and is a fine economist. More than that, before joining the Fed, he wrote extensively, in academic studies of both the Great Depression and modern Japan, about the exact problems he would confront at the end of 2008. He argued forcefully for an aggressive response, castigating the Bank of Japan, the Fed’s counterpart, for its passivity. Presumably, the Fed under his leadership would be different.  Instead, while the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers. The U.S. economy remains deeply depressed, with long-term unemployment in particular still disastrously high, a point Bernanke himself has recently emphasized. Yet the Fed isn’t taking strong action to rectify the situation. The Bernanke Conundrum — the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done — can be reconciled in a few possible ways. Maybe Professor Bernanke was wrong, and there’s nothing more a policy maker in this situation can do. Maybe politics are the impediment, and Chairman Bernanke has been forced to hide his inner professor. Or maybe the onetime academic has been assimilated by the Fed Borg and turned into a conventional central banker. Whichever account you prefer, however, the fact is that the Fed isn’t doing the job many economists expected it to do, and a result is mass suffering for American workers.

The Bernanke Conundrum and Level Targeting - Bernanke the academic who argued the Bank of Japan in the 1990s was not trying hard enough to restore aggregate demand to Ben Bernanke the central banker who now seems to be making the same mistakes for which he criticized the the Japanese.  This has created numerous discussions over the past few years and now Paul Krugman has a new article on it where nicely coins this phenomenon as the Bernanke Conundrum: . Maybe politics are the impediment, and Chairman Bernanke has been forced to hide his inner professor. Or maybe the onetime academic has been assimilated by the Fed Borg and turned into a conventional central banker. Whichever account you prefer, however, the fact is that the Fed isn’t doing the job many economists expected it to do, and a result is mass suffering for American workers. Whatever the mix of these motives, the result is clear: faced with an economy still in desperate need of help, the Fed is unwilling to provide that help. And that, unfortunately, makes the Fed part of a broader problem. One of the key reasons for political intimidation is an inordinate fear of inflation.  What these inflation critics miss is that the Fed could actually raise the level of aggregate nominal spending by a meaningful amount without jeopardizing long-run inflation expectations.  This is possible if one uses a price level or a NGDP level target that provides a credible nominal anchor.  Since the inflation critics seem to miss this point let me again explain it using my preferred approach, a NGDP level target.

Daniel Alpert: Earth to Paul Krugman -This past Sunday, Paul Krugman penned a screed in the New York Times Magazine (entitled, somewhat unflatteringly in my opinion, “Earth to Ben Bernanke”) that expanded on the content of an ongoing debate in the economics blogosphere over the contents of the mind of Federal Reserve Board Chairman Ben Bernanke. Professor Krugman has posited for months now that Bernanke has come up short in failing to follow his own prescription for post-bubble, debt-deflationary economies (namely, that of Japan, which the Chairman wrote about as an academic a dozen years ago). In essence, Professor Bernanke’s view was to push both monetary and fiscal stimulus to the point at which it would generate above-natural rates of inflation for a period of time sufficient for such economies to reflate and discount the indebtedness accumulated during credit bubbles. In the course of Krugman’s commentary he has pushed the notion that Bernanke is either politically intimidated by the right, fearful of uncontrolled inflation, or possessed of a shy personality that is vulnerable to peer pressure within the FOMC (Paul…seriously?). Ben Bernanke is neither overly “shy” or out of touch with the world, as Professor Krugman would have us believe. To the contrary, I believe the Chairman has correctly assessed the limitations of extraordinary monetary intervention at the zero-bound (short term interest rates at or near zero) and comprehends a present inability of the U.S. economy to generate the sustainable inflation that the professor correctly notes would help us out of our debt-deflationary slump.

Bernanke Responds - Krugman - Ben Bernanke responds to my magazine piece; as I see it, in effect he declared that he has been assimilated by the Fed Borg:I guess the, uh, the question is, um, does it make sense to actively seek a higher inflation rate in order to, uh, achieve a slightly increased pace of reduction in the unemployment rate? The view of the committee is that that would be very, uh, uh, reckless. We have, uh, we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable, in that we’ve been able to take strong accommodative actions in the last four or five years to support the economy without leading to a, [indiscernible] expectations or destabilization of inflation. To risk that asset, for, what I think would be quite tentative and, uh, perhaps doubtful gains, on the real side would be an unwise thing to do. Notice the framing — “a slightly increased pace of reduction in the unemployment rate”. It’s basically an assertion that we’re doing all right, maybe could do a bit better, but not worth endangering the Fed’s reputation — oh, and as long as we don’t have actual deflation, no problem. Disappointing stuff.

Pavlina Tcherneva: No, Mr. Krugman, Bernanke’s Conundrum is Completely Different - Our mainstream colleagues keep banging their heads against the wall. “Why, oh why wouldn’t Chairman Bernanke do more to rescue the economy?” Today Paul Krugman took on this question again, arguing that Chairman Bernanke should listen to Professor Bernanke who had far more sensible ideas about rescuing an economy from a deflationary environment, as seen in his research on Japan during the 90s. Krugman revisits a 2000 paper by then professor Bernanke, which many of us have scrutinized before, titled “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” Krugman faults Bernanke for not following his own advice arguing that what he should do instead is 1) change expectations about the future by declaring and sticking to an explicit inflation target and 2) intervene even more aggressively in financial markets through alternative open market operations to deal with the nation’s massive unemployment problem. In 2010, I wrote a paper Bernanke’s Paradox (JPKE version, April 2011) which examines his monetary policy prescriptions for Japan in detail. I have been asking myself the same question: why isn’t Bernanke following his own advice? But the answer I give is that it’s because he cannot, literally. Whatever policy options he believes to be genuinely effective actually depend on Congress and not on him. The difference is that, unlike Paul Krugman, I actually read Bernanke’s paper from start to finish. See, what Krugman is missing is that Bernanke did not prescribe two policy options to deal with deflations (1. stick to an inflation target and 2. engage in alternative OMOs), but four. I have discussed these in the paper above and in shorter blogs here and here. Here are the four options Bernanke recommends:

Bernanke Takes On Krugman’s Criticism Ignoring Own Advice - Federal Reserve Chairman Ben S. Bernanke took on Nobel prize-winning economist Paul Krugman yesterday and called his advice to reduce unemployment by boosting inflation “reckless.” “The question is, does it make sense to actively seek a higher inflation rate in order to achieve” a slightly faster reduction in the unemployment rate, Bernanke said yesterday to reporters after a Federal Open Market Committee meeting. “The view of the committee is that that would be very reckless.”  Krugman, whom Bernanke hired at Princeton University in 2000 when he was chairman of the economics department, said in a New York Times Magazine article that the Fed should raise its 2 percent inflation target to cut unemployment. Such a policy shift would align with Bernanke’s comment in 2000 that the Bank of Japan (8301) should pursue faster inflation to escape deflation, he said. Japan’s consumer prices fell 0.2 percent that year. “While the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers,” Krugman wrote. “Higher expected inflation would aid an economy” because it would persuade investors and businesses “that sitting on cash is a bad idea,” Krugman said.  The chairman spoke in response to a reporter’s question referring to Krugman’s story, titled “Earth to Ben Bernanke,” published April 24. The article cited “the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done.”

Lonesome Dove - FOR the blogosphere, the most entertaining part of the Federal Reserve's meeting today was Ben Bernanke's defence during the press conference against Paul Krugman’s charge  that he has betrayed his academic past in failing to ease more aggressively and aim for higher inflation.That is a pity because while it was great theater, it obscured a more important revelation. Not only is Mr Bernanke still a dove, he is increasingly an isolated dove, and that isolation has significant consequences for monetary policy, the economy and the markets. The statement released by the FOMC was largely as expected and a non-event for markets: “economic growth [will] remain moderate over coming quarters and then … pick up gradually,” inflation will fall from its temporarily elevated levels to 2% or lower, and the Fed expects to keep interest rates “at exceptionally low levels … at least through late 2014.” The projections released along with the statement were far more interesting. FOMC members reduced their forecasts for the unemployment rate, and nudged up the outlook for inflation. That hawkish combination was made doubly so by the fact that just four of the 17 FOMC members think the Fed should start tightening after 2014, down from six in January.

Bernanke on What the Fed Can Do -  It’s worth reading the entirety of this response from the Federal Reserve chairman, Ben S. Bernanke, to a question I raised at a news conference on Wednesday. It’s a very clear statement of his views on what is probably the most important current question of economic policy: Why won’t the Fed do everything in its power to reduce unemployment?It also addresses a version of that question raised most recently and forcefully by Paul Krugman: Hasn’t Mr. Bernanke himself advocated stronger measures? Yeah, let me — let me tackle that second part first. So there’s this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies. That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time. I made two points at that time to the Bank of Japan. The first was that I believe that a determined central bank could and should work to eliminate deflation, that is, falling prices. The second point that I made was that when short-term interest rates hit zero, the tools of a central bank are no longer — are not exhausted. There are still other things that — that the central bank can do to create additional accommodation. Now, looking at the current situation in the United States, we are not in deflation. When deflation became a significant risk in late 2010, or at least a modest risk in late 2010, we used additional balance sheet tools to help return inflation close to the 2 percent target. So the — the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that Japan was in deflation.

Ben Bernanke vs. Paul Krugman - I spent my first year at The Washington Post sitting about 10 feet away from Binyamin Appelbaum. It was a great learning experience. Appelbaum, who is now at the New York Times, doesn’t ask questions so much as he springs traps. And he sprung one on Federal Reserve Chairman Ben Bernanke at a press conference on Wednesday. Unemployment is too high, and you said you expect it to remain too high for years to come. Inflation is under control, and you say that you expect it to remain under control. You say that you have additional tools available for you to use, but you’re not using them right now. Under these circumstances, it’s really hard for a lot of people to understand why you are not using those tools right now. Could you address that? And specifically, could you address whether your current views are inconsistent with the views on that subject that you held as an academic? That last line was a reference to a New York Times Magazine article by Paul Krugman exploring “The Bernanke Conundrum — the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done.” Bernanke’s response to Appelbaum was perhaps his clearest statement on why Bernanke, and the Federal Reserve, aren’t doing more. It’s worth quoting at length:

The Fed’s rate forecast mess - There’s probably nothing that would annoy Ben Bernanke more than being caught in a logical inconsistency over some aspect of monetary policy. At the Fed’s press conference today, he vigorously defended himself against Paul Krugman’s charge that the Fed’s recent actions are inconsistent with his academic views on Japan fifteen years ago. The Fed’s interest rate forecasts, however, are getting the bank into a real bind: Consider:

  • (1) Only four FOMC participants now think rates should remain at current levels of 0-0.25 per cent through to the end of 2014. There are ten voting members on the FOMC so the median voter must think end-2014 rates should be at least 0.5 per cent. (The median participant is at 1 per cent.)
  • (2) We know that at least two non-voting members – Charles Evans of Chicago and Eric Rosengren of Boston – have a dovish outlook and the odds must be high that they are among the four who do not think rates should rise until 2015. If that is the case, then the median voter must be at 0.5 -1 per cent.
  • (3) Mr Bernanke made clear that in his view “exceptionally low” means “close to where we are now”, i.e. 0 – 0.25 per cent. He left a little wiggle room by saying that others may think something different.

Targets, ceilings, mandates - MY COLLEAGUE makes some very good points in his post on yesterday's Federal Reserve press conference. He's quite right in noting that Ben Bernanke is among those on the committee most willing to acknowledge that there is, indeed, an employment side of the mandate. He's right that Mr Bernanke may not be there after 2014 and that his replacement might well be considerably more "German" in his or her approach to policy. And he's right to point out that in Mr Bernanke's Q&A comments, the chairman did signal that the Fed has not ruled out additional action to support the economy and that the bar for action might not even be all that high. I don't think that the above points render Paul Krugman's criticisms immaterial. On the contrary, they're quite important, and I hope the rather antagonistic questioning of the chairman yesterday signaled to him—and the committee as a whole—how frustrated people have become with the inconsistencies in the Fed's communications, and between the Fed's actions and its mandates. The argument Mr Krugman and many others—including other prominent economists on the right and the left—have made is that a little additional inflation is likely to have a meaningful, positive effect on the labour market. This is especially relevant given that the Fed's target interest rate is up against the zero lower bound; the only way to reduce real rates into negative territory is to raise inflation. And yet the Fed appears to be strikingly inflation averse, despite the dual nature of its mandate (stable prices, full employment).

Parsing The Finer Points Of "Reckless" Behavior For Monetary Policy - The word "reckless" is defined as acts that are irresponsible, wild, thoughtless, and the byproduct of someone who is utterly unconcerned about the consequences of some action. And for the record, Fed chairman Ben Bernanke wants you to know that he will tolerate none of those personal failings as a steward of the nation's monetary policy.  When asked yesterday, at the Fed's news conference, about whether he would lead the central bank to use all of its monetary levers to revive the economy, including raising the inflation target, the chairman dismissed the idea:  I guess the — the question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased reduction — a slightly increased pace of reduction in the unemployment rate? The view of the committee is that that would be very reckless. We have — we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four, five years to support the economy without leading to an unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do. His answer is said to be a response to Paul Krugman's new critique of Bernanke. Krugman's complaint is that the Fed isn't doing enough to address the economic weakness, the high unemployment rate in particular. Given Bernanke's previous views about Japan's economic malaise, the chairman's latest commentary sounds misplaced,

Bernanke: "Read My Lips, Not My Japan Papers!" - Fed Chairman Ben Bernanke was asked yesterday in the post-FOMC press conference  whether the Fed's response to the current economic crisis is consistent with his views as an academic.  The context for this question was Paul Krugman's recent article where he noted that Bernanke was not following his own advice in the late 1990s where he argued that Japanese monetary authorities should be doing more to restore aggregate demand.  Here is how Bernanke answered the question: My views and our policies today are completely consistent with the views that I held at that time.  I made two points at that time to the Bank of Japan. The first was that I believe that a determined central bank could and should work to eliminate deflation, that is, falling prices. The second point that I made was that when short-term interest rates hit zero, the tools of a central bank are no longer — are not exhausted. There are still other things that — that the central bank can do to create additional accommodation.  So Bernanke responds that he is being consistent because in Japan there was deflation whereas currently there is none. But as Ryan Avent notes, his research on Japan was about more than deflation--it was about a shortage of aggregate demand. This point can be easily seen by looking at his 1999 paper where he discusses Japan's economic problems. 

Bernanke’s Totem - Paul Krugman thinks Bernanke has been assimilated Ben Bernanke responds to my magazine piece; as I see it, in effect he declared that he has been assimilated by the Fed Borg: But, I think it’s a bit different. He’s in a dream inside of dream, suffering from Monetary Inception. I mean this only half-jokingly. The Fed’s policies will have effects on the real world. However, the Fed can never see the real world. It can’t see the past and it certainly can’t see the present. It only has a vague a haze about what reality might be. In that situation, the constructed reality presented by the Fed staff is powerful. Its grounded. There is some sense that you know what you are doing. And, not only does this constructed reality shape what you think the situation is today, it shapes what you think the response to your actions has been. It shapes your interpretation of the causal nature of the world itself. What Bernanke needs is a totem. An object to tell him that he is in a dream. That this isn’t real and on the outside there are real people. This is what screaming into the economic blogosphere and economic journalism world does. Its an echo that they can faintly hear inside the Eccles Building. Tyler Cowen and perhaps Greg Ip think we are being too hard on the Chairman, but when he is in a dream inside of a dream you have to scream loudly in hopes that he’ll hear a whisper.

Fed Watch: Bernanke's Shift - There has been a fierce counterattack to Federal Reserve Chairman Ben Bernanke's assertion that he is indeed the same Professor Bernanke that advised the Bank of Japan a decade ago. See, for example, Brad DeLong, David Beckworth, and Ryan Avent. DeLong identifies this 1999 Bernanke quote: [Si]nce 1991 inflation has exceeded 1% only twice... the slow or even negative rate of price increase points strongly to a diagnosis of aggregate demand deficiency…. [C]ountries that currently target inflation… have tended to set their goals for inflation in the 2-3% range, with the floor of the range as important a constraint as the ceiling…. and concludes that Bernanke previously believed the inflation target should be between 2 and 3 percent, with 2 percent being a floor. One could infer, then, that Bernake at one point believed in a symmetric objective around 2.5 percent, with a hard floor and ceiling on 50bp of either side of that objective. Now the Fed has sanctified a 2 percent target. This shift is important and evident in the path of inflation, and was my point in this post. Prior to the recession, headline PCE inflation was running about 2.4 percent a year. Now the trend is a smidgen above 2 percent: DeLong, in another post, does a similar picture using core-CPI. I have tended to shift to headline number number because that is the Fed's stated target and there is widespread misunderstanding about the relevance of core-inflation in the policymaking process. Indeed, the belief that policymakers are somehow misleading the public about the true path of inflation runs deep in the Fed itself.

What We Talk About When We Talk About QE -  Krugman - Karl Smith is bemused; in two posts he asks what Wall Street thinks quantitative easing does, and apparently is getting a lot of vehemence but no coherence. (I liked this comment: “Zero hedge commentary suggests the fed manipulates our very life blood, as ordered by the lizard men, in order to create infinite debt and establish a soviet central planning regime.”) I can’t help him here. It might, however, be helpful to have a picture of what we’re talking about here. The Cleveland Fed has a nice, continually updated chart on the Fed’s balance sheet. Here’s the story up to now: There was a period when the Fed was lending a lot of money to banks under the TALF and all that — which is probably where the thing about giving the banks money comes from — but most of that has been repaid. These days, QE is basically purchases of long-term federal debt and bonds issued by Fannie and Freddie, which is effectively also federal debt. And these purchases have vast effects on the economy because … well, I share Karl Smith’s bemusement.

What Is QE? And Why Are Those Who Claim QE Is the Brainchild of Alien Lizard-Men Public Benefactors? - There are three channels through which quantitative easing--QE--could boost the economy right now:

  1. By taking duration risk onto its own balance sheet and thus onto the taxpayers' books, the Federal Reserve takes duration risk off of the private investor community's books. The private investor community's required rate of return on marginal risky securities thus falls, interest rate spreads fall, real interest rates charged to businesses fall, and aggregate demand increases.
  2. By expanding the money supply now, the Federal Reserve raises rational expectations of future money supplies because it would be in some way embarrassing or costly for the Federal Reserve to fully undo its QE transactions in the future. A higher money supply in the future means a higher price level in the future, and so means higher expected inflation. With interest rates at the ZLB, higher expected inflation means lower real interest rates, and higher aggregate demand.
  3. By engaging in quantitative easing, the Federal Reserve induces low-information investors to fear future inflation even though the Federal Reserve fully intends to undo its QE transactions in the future before the economy exits from the ZLB and thus does not intend to raise the path of the price level. These low-information investors then seek some form of protection against inflation. This raises aggregate demand.

Why Paul Krugman is Full of Shit - Late last week Princeton University economist and New York Times columnist Paul Krugman wrote a piece on his NY Times blog that history will view as the best evidence to appear in at least several decades of the utter irrelevance of mainstream economics. The piece purported to respond to a Wall Street Journal editorial by Mark Spitznagel in which Mr. Spitznagel argued broadly the Austrian economists’ line that all government spending favors one group over another and more specifically that the Fed’s Quantitative Easing (QE) programs of recent years favor banks and the rich. Mr. Krugman could have argued his New Keynesian shtick that government investment can prevent deflationary spirals in economic downturns and all would be as it was. Instead, he chose to argue (Plutocrats and Printing Presses –, an astonishing amount of evidence to the contrary, that Fed QE policies have not disproportionately benefited banks and the very rich and were in fact enacted against their wishes and interests.

QE Or Not QE, That Is The Question - Paul Krugman - OK, some readers have asked me to react to this critique by Mike Kimel. Brief response: Kimel apparently misses the distinction between ordinary monetary policy and quantitative easing, and also misunderstands what the Fed is buying. Ordinary monetary policy involves cutting short-term rates to fight a slump; it’s not what we’re talking about here, since it’s hard up against the zero lower bound. But the large-scale conventional expansion the Fed engaged in by getting to the zero bound has, of course, widened the spread between short and long term rates, since markets expect short rates to rise above zero eventually. So looking at the raw data on the short-long spread tells you nothing. QE is an attempt to get traction despite those zero short-term rates by buying long-term debt, hopefully narrowing the spread and thereby boosting the economy. I don’t think it’s had a large effect, but that’s the goal. And as for the other thing: Kimel apparently thinks the Fed is buying privately issued MBS, aka toxic waste; actually it’s only buying agency debt, which already has an implicit federal guarantee and is functionally not much different from long-term Treasuries.

What is the Question? Responding to Paul Krugman - Mike Kimel - Paul Krugman has been kind enough to respond to my post which in turn was commenting on an earlier post he had written. Prof. Krugman's response comes in four paragraphs. The first is merely an introduction. In the second paragraph, Prof. Krugman states:  Ordinary monetary policy involves cutting short-term rates to fight a slump; it’s not what we’re talking about here, since it’s hard up against the zero lower bound. But the large-scale conventional expansion the Fed engaged in by getting to the zero bound has, of course, widened the spread between short and long term rates, since markets expect short rates to rise above zero eventually. So looking at the raw data on the short-long spread tells you nothing. Now note this from Krugman’s earlier piece:  Furthermore, Fed efforts to do this probably tend on average to hurt, not help, bankers. Banks are largely in the business of borrowing short and lending long; anything that compresses the spread between short rates and long rates is likely to be bad for their profits. And the things the Fed is trying to do are in fact largely about compressing that spread, either by persuading investors that it will keep short rates at zero for a longer time or by going out and buying long-term assets. These are actions you would expect to make bankers angry, not happy — and that’s what has actually happened. Notice… in Prof Krugman’s second post, the spread widened. In his first, post, the one to which I objected (and in response to which I showed a graph of the spread), the spread compressed. As I understand it, on that issue to which I objected, we are now on the same page – we both agree the spread widened. But then what Krugman wrote in his first post about banks being made worse off is not correct, all else being equal. 

They Also Serve Who Only Stand and Graph: A Graphical Response to Paul Krugman on the Effect QE1 and QE2 - Mike Kimel - I've taken a lot of flak for critiquing two posts by Paul Krugman in two posts of my own (the second one is here).  To summarize the point where people keep telling me I'm wrong, it has to do with quotes from Prof. Krugman's pieces, and whether or not I'm misinterpreting those quotes. So I'm going to try this again... I'm going to put up the quotes and tell you how I've been told I should be interpreting those quotes. Then I'm going to put up a graph.  Before I get started, I want to be clear: Prof. Krugman is often the only voice of reason, particularly on issues like austerity and taxes, among those allowed up onto the platform to speak. What follows is not a polemic against Prof. Krugman. All of us are wrong sometimes. But I'm focusing on this issue precisely because it seems to be one of the factors leading one of the few voices of reason out there astray on an important issue

Fed Watch: Distributional Impacts of Monetary Policy - Dean Baker, responding to this Wall Street Journal article, sees an opportunity to make us aware on the distributional impacts of monetary choices. Specifically, Baker responds to the claim that inflation erodes earnings: Actually, most wages follow in step with inflation, although some workers do see declines in real wages when inflation rises. People seem to forget the connection between inflation and wages. A sustained increase in inflation needs to be accompanied by a matching increase in wages, otherwise higher inflation would simply undermine real purchasing power, leading to slower growth and a subsequent decline in the inflation rate. To be sure, as Baker notes, while on average higher inflation is matched with higher nominal wages, it does not affect all workers equally - workers with less bargaining power could see their real wages decline even if average real wages hold constant. Baker identifies this basic chart (I replaced CPI with PCE inflation) to support his argument (click on figures for larger versions): Notice that Baker correctly shifts from real wages to the broader measure of real compensation. He says: These series give the basic story, although they are not perfect for reasons that you do not want to hear about. If you can see a negative relationship (i.e. higher inflation leads to lower real wage growth) you have better eyesight than me. What is more evident, and causally related, is the link between productivity and real compensation:

NGDP Targeting: Some Questions -- Let me start by saying that the idea of a NGDP target does not sound outlandish to me. But I feel the same way about price-level and inflation targeting. The first order of business for a central bank is, in my view, is to provide a credible nominal anchor. Probably not  much disagreement about this out there.Proponents of NGDP targeting, however, like Scott Sumner and David Beckworth, for example, seem to believe very strongly in the vast superiority of a NGDP target--not just as a policy that would mitigate the effects of future business cycles--but also as a policy that should be adopted right now by the Fed to cure (what they and many others perceive to be) an ongoing "aggregate demand deficiency."   I respect both of these writers a lot, so naturally I am led to ask myself how they came to hold such a strong belief in the matter. What is the theoretical underpinning for NGDP targeting? And what is the empirical evidence that leads them to believe that an NGDP target right now is a cure for whatever ails us right now?  One way to seek answers to these questions is to spend hours perusing their past blog posts. I'm sure they must have answered these questions somewhere. But I figure it will be more efficient for me to just state my questions and have them (or somebody else) point me in the right direction for answers.

Sterilisation, money market funds, and anti-stimulus - We’ve written extensively about the problems facing US money market funds, the motives behind the Fed’s adding them to its list of reverse repo counterparties, and how sterilisation of further QE was an idea likely floated with MMFs in mind.We won’t do a full recap here, but the idea is that with rates low and their margins incredibly thin, money market funds have been competing for a limited amount of collateral against which to lend in repo markets. This comes at a time of profound uncertainty for these funds as some investors opt for insured deposit accounts and future regulations remain uncertain.Now that many of them have been added to the central bank’s counterparty list, if the Fed were to begin its reverse repos then the added collateral would raise repo rates and give these funds a badly-needed additional revenue source.But the rates team at RBC, in its FOMC meeting preview, adds an interesting idea we hadn’t considered previously — that although sterilisation would be good for money market funds (whose investors are getting antsy and which would benefit from the higher rates), their gain would be a loss for other parts of the economy.Here’s how the analysts explain it, and we’ll add our thoughts after:

Watch out! Is the Fed pushing us into another bubble? - Sheila Bair - In a recent series of college lectures, Ben Bernanke sounded a positive note, extolling the Fed's low-interest-rate policy and predicting sustainable economic growth. I want to believe him, but his words echo the confidence exuded by the Fed in late 2006 when it missed the housing bubble. Is it missing the bond bubble now? The Fed has maintained interest rates at or near zero for four years running, even though the financial system has been relatively stable since 2009. The Fed's actions have kept Treasury bond prices high (while keeping the government's interest costs low), but the fundamentals do not support the high valuations, given the fiscal mess we are in. Sooner or later, the bond bubble will burst. History has shown that a structurally weak economy combined with a fiscally irresponsible government propped up by accommodative central-bank lending always ends badly. Absent a change in policies, a toxic brew of volatile interest rates and uncontrollable inflation could define our future. As we saw in the years leading up to the subprime crisis, yield-hungry investors are taking on more and more risk. Pension managers are investing in hedge funds, and gullible investors are buying up junk bonds. Meanwhile, low-yielding assets pile up on the balance sheets of more risk-averse banks. If interest rates suddenly spike, bankers may find that the paltry returns on their loans are insufficient to cover interest on their deposits. (Does anybody remember the S&L crisis?) Most important, retirees and others who want to keep their savings in supersafe liquid investments are earning returns of 1% to 2% (if they are lucky), while inflation creeps higher, now hovering around 3%.

Former FDIC Chairman Bair Warns Fed Fueling Bubble - Former Federal Deposit Insurance Corp. chairman Sheila Bair took aim at the Federal Reserve‘s monetary-policy strategy in an op-ed published Monday on Fortune magazine’s website. Bair, who locked horns at times with top Fed and Treasury officials during the financial crisis, warned Monday that the central bank runs the risk of helping drive Treasury bond prices up too high, potentially creating an asset bubble in bonds. The Fed has kept short-term interest rates near zero since 2008, a policy that has hurt savers and kept government borrowing rates low, enabling politicians to avoid grappling with tough budget decisions, Bair charged in Monday’s op-ed. “The biggest beneficiaries of loose money, are our profligate elected officials who refuse to come to grips with budget deficits and an exemption-laden tax code,” Bair wrote. “As long as Treasury can borrow cheaply to paper over the real problems, politicians can demagogue about overspending (GOP) or undertaxing (Democrats) while dodging their responsibility to work together to fix our problems.” That’s a danger Fed officials have themselves acknowledged. Federal Reserve Bank of New York President William Dudley cautioned in a February speech that the current low borrowing costs enjoyed by the government won’t last forever, while Federal Reserve Chairman Ben Bernanke has repeatedly warned congressional lawmakers that reducing the federal budget deficit should be among their top priorities.

The Urge To Tighten - Krugman - Do we need this? Sheila Bair has joined the crew urging the Fed to stop trying to promote economic recovery, on the grounds that it’s feeding a bond bubble. Sigh. First of all, Bair simply assumes that we’re on the road to recovery. That’s very uncertain, and in any case it’s a very long road. My favorite current indicator: Yes, a bit of progress toward the end — but hardly enough to declare victory. Second, there is no good reason to believe that there is a bond bubble. The question you should ask is, do long-term rates make sense given the likely future path of short-term rates? And if you consider the outlook for unemployment (high) and inflation (low), short rates should stay low for a long time. Here’s my estimate based on CBO projections of U and inflation:  Given this prospect, a long-term rate well below 2 is indicated. So where is this coming from? I suspect that Bair is talking to financial types, who do tend to insist that there’s something unnatural about low rates. But the economics is not on their side — and whether they know it or not, they’re talking their book.

Is the Fed fueling a bond bubble? - Sheila Bair isn’t one to hold her tongue. As chair of the FDIC, she warned Bush that the housing bubble was about the burst and Obama that his recovery efforts wouldn’t be enough to mop up the mess afterward. Now the former banking regulator believes that there’s another bubble on the horizon — one that the government itself is fueling. In a new column for Fortune, Bair warns that the Federal Reserve’s policy of keeping interest rates at historic lows has inflated Treasury bond prices, creating a bubble that will eventually burst. The Fed has kept interest rates low in order to stimulate lending and refinancing in the midst of the economic slump. As a result, investors have been piling into the Treasury market. Even as worries have grown about the United States’ ability to deal with its short- or long-term economic problems, the U.S. bond market has continued to be a safe haven for investors fleeing the euro zone crisis. Bair argues the Fed’s low rates have fueled irrational exuberance in the bond market:Yield-hungry investors are taking on more and more risk. Pension managers are investing in hedge funds, and gullible investors are buying up junk bonds. Meanwhile, low-yielding assets pile up on the balance sheets of more risk-averse banks. If interest rates suddenly spike, bankers may find that the paltry returns on their loans are insufficient to cover interest on their deposits.

Fear of inflation keeps Fed from doing its job -  More than four years after the first wave of panic swept through global financial markets, fear is still the biggest obstacle to full recovery.  In 2008, it was investors who panicked. But now they are calmly benefiting from implicit and explicit bailouts and guarantees. Right now, it’s the policy makers in central banks and legislatures who are letting their emotions rule their heads, who are letting irrational fears get the better of them.  What are they so afraid of? Inflation, and public debt.  I’m well aware that too much inflation and too much public debt can ruin an economy. But I also know that not enough inflation and not enough public debt can do the same thing.  Right now, neither Europe nor the United States has enough. Our economies are barely growing, yet our leaders have adopted anti-growth policies. The urgency is to put the people back to work and get our economies growing again, not to fret about nonexistent hyper-inflation or about budget choices that we’ll have to make in 20, 40 or 75 years.

Dollar undermined by Fed's vigilance on stimulus - The dollar lost ground against the euro and yen on Wednesday after Federal Reserve chief Ben Bernanke said he was prepared to use the U.S. central bank's balance sheet to spur growth if necessary. An improved economic outlook from the Fed, issued in a policy statement on Wednesday after the close of its two-day meeting, had initially driven up the dollar on market expectations that interest rates could rise sooner than has been expected. But Bernanke's comments, made later at a news conference, reversed sentiment. The Fed has previously engaged in two rounds of assets purchases totalling $2.3 trillion, known as quantitative easing, to drive down interest rates and stimulate the economy. The Fed reiterated its expectation that interest rates will not rise until at least late 2014. Bernanke told the news conference that it was premature to declare victory, despite a modestly brighter assessment of the economy's strength. "The market was initially focused on the FOMC participants' expectations for the timing of the first increase in the target fed funds rate, but the impact of the more hawkish shift faded once the press conference began," . "The relatively tight ranges across asset markets reflects the absence of new information."

Fed struggles to spur slowest recovery in memory - They’ve tried dumping $2 trillion in cash into the financial system, slashed overnight interest rates to zero and made an unprecedented promise to keep rates low for at least another two years. But as Federal Reserve Chairman Ben Bernanke and his central bank colleagues meet this week to ponder their next move, they’re still struggling to quicken the pace of the slowest economic recovery in generations. Until recently, it appeared the Fed’s medicine was finally having the desired impact. Economic growth, as measured by gross domestic product, picked up to a healthy 3 percent annual rate in the last three months of 2011. Manufacturing, driven by a healthy pickup in new car sales, shifted into higher gear over the winter. The unemployment rate, stuck at 9.1 percent last summer, fell by a half percentage point. But that growth may have been something of an illusion.

Open Letter to the Chief Confidence Officer of the United States of America -  My nephew is a bad kid. He's into drugs, engages in high-risk sex, and has a steady stream of brushes with the law. Recently he got into trouble. He was involved in some illegal gambling and had resorted to the Martingale strategy - right up until he ran out of money. Just as he lost that last hand, the hall was raided and he was arrested. I had, in the past, told him that if he ever needed help, he should call. But this time was tough for me. I knew that I could throw money at the situation and the problem would disappear; the gamblers would go away, the police would go away, and there would be no court case. From the public's point of view, the answer was obvious; society would be better off if I let him take his lumps. He might be scared straight. And a criminal record would constitute a public record - a warning to anyone who took the time to find out about his proclivities. I had to side with my posse, Dr. Bernanke. I bailed out my nephew. I paid off his gambling debt. And I found a lawyer who knows the DA - and the whole problem disappeared. It cost me a few dollars - but my brother is forever grateful. And my mother remains happy and ignorant. The cost to society, on the other hand, is going to be higher; this kid now thinks he's untouchable. Watch out, world.

Obama Needs His FDR Moment The FDR moment occurred in 1933 when FDR took the reigns of monetary policy from an ineffective Fed and sparked a robust recovery in aggregate demand.   The Fed had allowed aggregate demand to collapse for three years when FDR responded.  He signaled that he wanted the price level to return to its pre-crisis level (i.e. increased expectations of higher nominal spending) and acted upon it by having the Treasury Department devalue the gold content of the dollar.  This dramatically increased the monetary base and spurred a sharp increase in aggregate demand.  So how could President Obama have his FDR moment?  Like FDR, he should signal his intentions for higher level of nominal spending and follow through on it by having the Treasury Department take take the reigns of monetary policy from the Fed.  President Obama could do this by announcing a NGDP level target that would be implemented by the Treasury Department creating large-denomination platinum coins that would be deposited at the Fed and used to fund checks to the public.  The Treasury Department would keep making these coins until the the NGDP level target was hit.  If NGDP went above the target the Treasury Department would issue bonds to withdraw the excess money.

Matt Yglesias’ Plan to Seize Your Savings for the Good of the Economy - “Oh no! This is going to get silly!” That’s what I thought when I read the first few lines of Matthew Yglesias’ post on how, in a cashless economy central banks would be able to ‘cure’ recessions. Actually, Yglesias first published this epiphany back in December of last year. Yglesias claims that in a cashless economy central banks could easily cure recessions. How? Well, they’d simply threaten to debit bank accounts if the Great Unwashed refused to spend or invest their savings. And because people couldn’t take out cash and stash it under the mattress they’d have no choice but to go out and do something with their money before disappears. This all comes back to the idea of a negative rate of interest that Paul Krugman and other ISLM adherents have been pushing as a way for Ben Bernanke to get his central bank mojo back. If interest rates fall to zero and the economy still doesn’t recover, these people claim, the central bank should try to stoke inflation so that, with their bank balances threatened with erosion, people would spend and invest. Basically, this is a way for ISLM adherents to save face after saying for years that interest rate policies actually work in a really effective way. Yeah, that’s a bit of a howler. When recessions occur in a modern economy fiscal stimulus opens up automatically because as unemployment rises and production falls transfer payments increase and tax revenues fall. So, there’s no real evidence that Yglesias’ assertion is in any way true.

This way up - I WOULD like the Fed to do more to secure the American recovery. I'm nervous about a few recent blips in the data, like today's initial jobless claims number, which continued a jarring trend toward 400,000. If I'm less worried about the fragility of the American economy than I used to be however, housing has a lot to do with it. Consider just a few recent data points (helpfully aggregated at Calculated Risk): The apartment market strengthened for the fifth consecutive quarter during the first three months of 2012. March pending home sales beat expectations. Home prices rose from February to March, according to Zillow. Home prices rose in February, according to the FHFA. Delinquencies declined in March. New home inventory is at record low levels. From January to February, seasonally-adjusted home prices rose, according to Case-Shiller. The outlook for spring sales is promising. New home permits are rebounding. And there are lots of stories out there about low apartment vacancy rates and soaring rents. My assumption has been that a real bottom in prices will greatly reduce the incidence of default and should accordingly lead banks to relax lending standards (which are currently at unreasonably tight levels). That, in turn, should flip the housing market equilibrium to one of price stability, construction, employment growth, and new household formation.

Consumer Spending Probably Paced Growth: U.S. Economy Preview - The biggest gain in consumer spending in a year probably helped the U.S. economy keep expanding in the first quarter even as fuel costs climbed, economists said before a report this week. Gross domestic product, the value of all goods and services the nation produced, rose at a 2.5 percent annual rate after advancing 3 percent in the previous three months, according to the median forecast of 72 economists surveyed by Bloomberg News before the Commerce Department’s April 27 release. Consumer purchases that account for about 70 percent of the economy climbed by the most since the end of 2010, the survey showed. Job creation and warmer winter weather helped Americans overcome higher prices at the gas pump as auto sales powered ahead and retailers enjoyed more foot traffic. At the same time, the pace of growth may not be enough to convince Federal Reserve policy makers meeting this week to stray from their plan to keep borrowing costs low through 2014.

The US recovery is thinning - If the new normal thesis holds then the US recovery meme is now running on empty. That’s not say we’re dipping towards a recession, we’re not, I don’t think. But growth is clearly slowing and the mix is getting less convincing. Consider manufacturing expansion, a key plank in the new normal thesis because it is a tradable good and can grow external demand, has slowed significantly again this month in the Feds regional indexes. The New York Fed: 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 Philly Fed: 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 (see Chart 1).  The Kansas City Fed: The month-over-month composite index was 3 in April, down from 9 in March and 13 in February (Tables 1 & 2, Chart). The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. The Richmond Fed was better though it fell hardest last month: In April, the seasonally adjusted composite index of manufacturing activity—our broadest measure of manufacturing—advanced seven points to 14 from March’s reading of 7.

Making heavy weather of economic forecasting - Dean Baker - After touting the economy's strong growth over the last three months, we are now seeing news reports warning that the economy is actually weaker than we thought.  The problem in this picture is that these analysts are worrying about the weather, literally. The weather can have a substantial effect on the economy. Much of this effect is entirely predictable. We know that every summer, tens of millions of people will take vacations and go to resort locations creating jobs in hotels, restaurants, and other vacation-related industries. To take account of these effects, we seasonally adjust our data. This way, it does not look like the economy is experiencing a boom every spring as warm-weather jobs start to appear and entering a recession as they disappear in the fall. However, there is also the impact of weather that is better or worse than normal. Last winter was unusually mild across the US northeast and midwest. Ordinarily, construction sites would be closed for at least a few days in these regions because of the bad weather. Also, starts of many construction projects would be put off until the weather had warmed up. In addition, people will be more likely to go out shopping on a relatively warm winter day than in a snowstorm or subzero weather. . For these reasons, the data in the winter months was better than would otherwise have been the case. However, this virtually guaranteed that the data for the spring months would look worse than would otherwise be the case.

US Economic Growth Slows to 2.2% Rate, Report Says - The economic output of the United States grew at an annual rate of 2.2 percent in the first quarter of the year, easing from the prior quarter’s growth rate of 3 percent, as expected, but maintaining what many economists have started to call a “sustainable” pace of recovery. The economy has been growing, though painfully slowly, since the second half of 2009, and the recovery accelerated throughout all of 2011. Early this year, economists forecast a weaker showing for the first quarter, and many revised their numbers upward in the past few weeks as several economic indicators came in better than expected. Still, mixed signals continue to cloud the picture, raising fears among some economists of a repeat of last year’s spring slowdown: Shipments of durable goods increased last month, but new orders showed their steepest drop since January 2009 (mostly because of a decline in aircraft orders); the trade balance improved, but job growth weakened and new unemployment claims have risen.

GDP report: rate of US economic growth slows to 2.2% - The U.S. economic recovery slowed in the first three months of the year, with growth falling to an annual rate of 2. 2 percent, as government spending declined and businesses invested less, the Commerce Department said Friday.  The number fell below expectations. The economy had been growing at a rate of 3 percent in the last three months of 2011, and economists had been anticipating growth of 2.5 percent or more, surveys showed. The report on gross domestic product, the value of all goods and services produced in the United States, is one of the most closely watched measures of the economy, particularly in an election year. Friday’s announcement — of growth, but not rapid growth -- will likely be addressed by both presidential campaigns.

What Hath Bernanke Wrought? - The advance estimate of GDP for the first quarter of 2012 published today provides little cause for celebration, and not much reason for hope.  Real GDP growth slowed to a 2.2% annual rate from the 3.0% rate in the previous quarter.  Nominal GDP growth remained at 3.8%, reflecting a spike in oil prices as a result of nervousness about disruptions in oil supplies from the Persian Gulf.  But despite the lackluster performance, Ben Bernanke no doubt feels well satisfied, as this answer, responding to criticism from Paul Krugman, from his press conference after this week’s FOMC meeting, demonstrates all too clearly. Why don’t we do more? I would reiterate, we’re doing a great deal of policies extraordinarily accommodative.  You know all the things we’ve done to try to provide support to the economy. I guess the, uh, the question is, um, does it make sense to actively seek a higher inflation rate in order to, uh, achieve a slightly increased pace of reduction in the unemployment rate?  The view of the committee is that that would be very, uh, uh, reckless. We have, uh, we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable, in that we’ve been able to take strong accommodative actions in the last four or five years to support the economy without leading to a, [indiscernible] expectations or destabilization of inflation. To risk that asset, for, what I think would be quite tentative and, uh, perhaps doubtful gains, on the real side would be an unwise thing to do.

Real GDP increased 2.2% annual rate in Q1 - From the BEA: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.2 percent in the first quarter of 2012 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.  The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, nonresidential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased. A few key numbers:
• Real personal consumption expenditures increased 2.9 percent in the first quarter, compared with an increase of 2.1 percent in the fourth.
• Investment growth slowed, except residential investment: "Real nonresidential fixed investment decreased 2.1 percent in the first quarter, in contrast to an increase of 5.2 percent in the fourth. Nonresidential structures decreased 12.0 percent, compared with a decrease of 0.9 percent. Equipment and software increased 1.7 percent, compared with an increase of 7.5 percent. Real residential fixed investment increased 19.1 percent, compared with an increase of 11.6 percent."
• Government spending continued to be a drag at all levels, but at a slower pace: "Real federal government consumption expenditures and gross investment decreased 5.6 percent in the first quarter, compared with a decrease of 6.9 percent in the fourth."

GDP Q1 Advance Estimate Disappoints at 2.2% - The Advance Estimate for Q1 GDP came in at 2.2%, down from 3.0% in the previous quarter, which was below most mainstream media estimates. The consensus at was for 2.5%, and's own estimate was for 2.9%. However, today's number exactly matched the median and mean of the forecasts of 51 economists who responded to the Wall Street Journal April survey, which I reported on last week. Here is an excerpt from the Bureau of Economic Analysis news release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.2 percent in the first quarter of 2012. The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, nonresidential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.  . [Full ReleaseHere is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. To be more precise, what the lower half of the chart shows is the percent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product. I've also included recessions, which are determined by the National Bureau of Economic Research (NBER).

Sluggish U.S. growth continues - The Bureau of Economic Analysis reported today that U.S. real GDP grew at a 2.2% annual rate during the first quarter, down from the 3.0% growth of 2011:Q4, and below the 2.4-2.9% range that the FOMC indicated yesterday it is anticipating for 2012 as a whole. I see some reasons to agree with the Fed that the rest of the year may be slightly better than the first quarter.Lower spending by federal, state, and local governments subtracted 0.6% from the first quarter's growth rate. Continuing federal fiscal drag seems likely for the rest of the year. An even bigger disappointment in the 2012:Q1 GDP report might be nonresidential fixed investment. This had been making a solid contribution over the previous year, but subtracted 0.2% from Q1 growth. If business investment continues to make a negative contribution for the rest of the year, it could pose a stiff headwind. But I think it's worth emphasizing what's been happening in two sectors that play a critical role in most business cycles. Housing contributed 0.4 percentage points to the 2.2% Q1 growth, and autos an additional 0.7 percentage points. These two categories usually make a big contribution both to the drop in GDP during a recession as well as to the rebound usually seen in the early recovery phase. For example, in the 2007:Q4-2009:Q2 recession, real GDP fell on average at a 2.7% annual rate, with autos and housing accounting for about half of this decline all by themselves.

GDP grows modestly - GDP grew at a 2.2 percent annual rate in the first quarter of 2012, a slowdown from the previous quarter's growth of 3 percent. That's just below normal growth, so it's enough to keep the recovery growing at the present rate. But a 2.2 percent GDP growth rate translates roughly into an annual decline in unemployment of just over 1 percentage point, and at that pace we won't reach full employment for several years. The details of the report provide a bit more encouragement. In particular, private sector growth was relatively robust. Personal consumption expenditures increased at a 2.9% annual rate, and residential investment increased at a 19.1% annual rate. However, investment in equipment and software slowed to a 1.7%, and non-residential investment (spending on plants and equipment) was negative, falling 2.1 percent. Changes in inventory levels also detracted from growth. Overall, private sector growth was approximately 2.7 percent. That's lower than in many past recoveries when private sector growth was as high as 4 to 5 percent. Households had large losses in housing, stocks, and other assets they depend upon for retirement, education and other needs, and it takes time to overcome these losses -- and that helps to explain why this recovery is slower than in the past.

US Economic Growth Slows In Q1, But Annual Pace Quickens - U.S. economic growth slowed in the first quarter, the Bureau of Economic Analysis reports. Q1 GDP grew at an annual 2.2% rate in the first three months of 2012, considerably slower than the 3.0% increase in last year’s fourth quarter. The downshift will surely feed worries that the economy is struggling, particularly after the sharp drop in March durable goods orders and the modest upturn in recent weeks in new jobless claims. But today's GDP report isn’t a smoking gun for arguing that a recession is imminent. Measured on a year-over-year basis, GDP growth accelerated, which suggests that the economy still has enough forward momentum to steer clear of a new downturn for the immediate future. Let's review the numbers by starting with the traditional measure of GDP: real (inflation-adjusted) quarterly changes. As the chart below shows, there's been an obvious slowing of growth. As today's government release explains, "the deceleration in real GDP in the first quarter primarily reflected a deceleration in private inventory investment and a downturn in nonresidential fixed investment that were partly offset by accelerations in [personal consumption expenditures] and in exports." As a result, the pace of growth slowed for the first time in a year.

U.S. Growth Slowed to 2.2% in First Quarter — The U.S. economy grew more slowly in the first three months of this year. Stronger consumer spending was offset by cutbacks in government spending and business investment. The Commerce Department said Friday that the economy expanded at an annual rate of 2.2 percent in the January-March quarter, compared with a 3 percent gain in the final quarter of 2011. Consumers spent at the fastest pace in more than a year. In 2011, the economy grew just 1.7 percent. But growth is expected to rebound to around 3 percent for all of 2012 as stronger job growth spurs increased consumer spending. Consumer spending accelerated to an annual rate of 2.9 percent in the first quarter, the best showing since the final quarter of 2010. The strength came from a second strong quarter of growth in auto purchases. Consumer spending is closely watched since it accounts for 70 percent of economic activity. All levels of government remain under pressure as they struggle to control budget deficits. Government spending fell at an annual rate of 3 percent in the first quarter. The 2.2 percent increase in the economy in the first quarter marked the 11th consecutive quarter that the gross domestic product has expanded since the deep 2007-2009 recession ended in June 2009. But the gains have been far below the usual increases coming out of a deep recession.

Breaking Down First Quarter 2012 GDP Numbers - In their "advanced" estimate of the first quarter 2012 GDP, the Bureau of Economic Analysis (BEA) found that the annualized rate of U.S. domestic economic growth was 2.20%, down more than three-quarters of a percent from the fourth quarter of 2011. The vast bulk of the downturn was in commercial activities, with both fixed investments and inventories lowering the headline number substantially. Consumer spending on both goods and services improved slightly, and the ongoing contraction in governmental spending moderated somewhat. The BEA’s bottom-line "real final sales" improved about a half-percent to an annualized growth rate of 1.61% — hardly robust and certainly not the kind of numbers we would expect to see nearly three years into a recovery. Once again the BEA has used "deflaters" that will strain the credibility of the public, especially if they buy gasoline. To correct the "nominal" data into "real" numbers the BEA assumed that the annualized inflation rate during 1Q-2012 was 1.54%. As a reminder, lower "deflaters" cause the reported "real" growth rates to increase — and once again very low seasonally adjusted BEA inflation "deflaters" have been the headline number’s best friend. If the raw "nominal" numbers were instead "deflated" by using the seasonally corrected CPI-U calculated by the Bureau of Labor Statistics (BLS) for the same time period, nearly the entire headline growth rate vanishes — and the resulting growth rate would have been a minuscule 0.08% with "real final sales" contracting.  And real per capita disposable income actually shrank during the quarter — even using the BEA’s optimistic "deflaters." Real-world households likely felt the pinch even more.

Visualizing GDP - The chart below is my way to visualize real GDP change since 2007. I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. As the analysis clear shows, personal consumption is key factor in GDP mathematics. My data source for this chart is the Excel file accompanying the BEA's latest GDP news release (see the links in the right column). Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product. Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa. In the latest GDP data, the contribution of PCE came at 2.04 of the 2.21 real GDP. This is an improvement over the 1.47 PCE contribution to the 2.95 (rounded to 3.0) Q3 GDP. PCE was also the largest GDP contributor in Q1, taking the lead from gross private domestic investment, which was the top contributor in Q4. For a long-term view of the role of personal consumption in GDP and how it has increased over time, here is a snapshot of the PCE-to-GDP ratio since the inception of quarterly GDP in 1947. The Q1 2012 ratio is the all-time high of 71.24%.

Private Real GDP Grew at 3.4% in First Quarter, Twice the 1.76% Average Growth Rate Since 2000 - The BEA reported today that the overall economy (real GDP) grew by 2.2% at an annual rate in the first quarter of 2012. However, the private components of GDP (personal consumption expenditures, gross private domestic investment, and net exports) grew by 3.4% from January-March, following a 4.6% increase in  Q4 2011 (see chart above). In contrast, there was a 3.1% decline in total government spending in Q1, which created a drag on overall economic growth and brought real GDP growth down to 2.2%.  The decrease in government spending was driven by a 12.1% decline in first quarter spending on national defense and ongoing cuts in state and local government spending (-2.2% in Q1).     The average growth rate in private real quarterly GDP since 2000 has been 1.76%, so the private sector of the U.S. economy expanded in the first quarter of 2012 at twice the average rate over the last 12 years (see chart).  And going back to 1947, private real GDP has grown at an average rate of 3.27% per quarter, so the expansion of private GDP in the first quarter is slightly above the long-term historical average.

The Secret of Our Non-success - Krugman - Disappointing GDP number — we’re not growing fast enough to make any significant headway on reducing the output gap — but hey, no need for further Fed action. But let’s talk right now about fiscal policy. I wrote this morning about our de facto austerity. Here’s another indicator. Look at government (all levels) purchases of goods and services, that is, actually buying stuff as opposed to transfer payments like Social Security and Medicare. Here’s the past decade:  Obama, far from presiding over a huge expansion of government the way the right claims, has in fact presided over unprecedented austerity, largely driven by cuts at the state and local level. And it’s therefore an amazing triumph of misinformation the way that lackluster economic performance has been interpreted as a failure of government spending.

GDP Growth Could be Higher - GDP growth for the first quarter, as noted in the post below this one, is estimated to be 2.2%. That is not as high as it needs to be to recover in a decent amount of time, and one of the problems is that government spending has declined during the recession. This has been driven largely by cuts at the state and local level, and it is holding back GDP growth. I probably should have used the mediocre growth in the first quarter to call, yet again for more aggressive monetary and fiscal policy -- fiscal policy in particular. What are we thinking making cuts like this as the economy is trying to recover from such a severe recession? But what's the use? Policymakers have made it very clear they are unwilling to do more to try to help the unemployed. In fact, many policymakers would like to do less and it's only because of gridlock on Congress, and gridlock on the Fed's monetary policy committee that the cuts (austerity) haven't been worse, and interest rates are still low. So I probably should have noted the need for more aggressive policy, but thought, why bother? I suppose there's value in pointing out the failure, but at this point that shouldn't be news.

Waiting for a boom - THESE days, a rich country growth figure not preceded by a minus sign is a rarity worth boasting about. Britain and much of Europe are in recession. By contrast, America's first quarter performance—a 2.2% annual rate of growth—looks positively robust. Yet few Americans are likely to cheer this morning's release, for several reasons. First, the headline figure came in below expectations for 2.5% growth, and it arrives on the heels of a series of similarly disappointing data releases. (It also looks like a slowdown; the economy grew at a 3.0% pace in the fourth quarter of 2011.) Initial jobless claims have inched upward in recent weeks, and together the two numbers reinforce the view that the first quarter's encouraging job growth—payrolls rose by an average of 212,000 a month—was unusually high given the underlying pace of growth and therefore unlikely to be sustained. April jobs data (due out a week from today) will provide a better look at the state of the labour market, but expectations will certainly drop in the wake of today's release. The internals of the first-quarter report are also a bit discouraging. Growth in personal consumption expenditures was pretty good at 2.9%, but private investment growth slowed sharply. Growth in final sales of domestic product, a good measure of underlying demand, came in at an anaemic 1.6% pace. Current-dollar GDP growth was a paltry 3.8% for a second consecutive quarter. The American economy is clearly one in need one of demand.

GDP report mixed for U.S. households -Real gross domestic product increased at an annual rate of 2.2% in the first quarter of 2012, according to the Bureau of Economic Analysis. In the fourth quarter of 2011, real GDP increased 3%. Despite the slowdown, economist are still positive that the current economic recovery, while slow, is on a sustainable path. "Despite the weak start to the year, the economy appears solid," said Scott Hoyt, senior director of consumer economics, Moody’s Analytics. "Looking beyond temporary factors, GDP appears to be growing at an annual rate near 2.5%. While hardly a boom pace, this is strong enough to expand employment and reduce joblessness especially as some of the current drags wane in the second half of the year." The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures, exports, private inventory investment, and residential fixed investment, the report said. These positives were partly offset by negative contributions from federal government spending, nonresidential fixed investment, and state and local government spending. According to Capital Economics, the report is mixed for the nation's households. The economics firm found real personal disposable incomes rose only 0.4%.

Don’t get too worked up about today’s GDP numbers - The initial GDP estimates are out for the first quarter of 2012. And the results are… disconcerting. According to the Commerce Department, the economy grew at a mere 2.2 percent pace from January to March. Analysts were expecting 2.5 percent.  Yet some economists are already cautioning us not to read too much into these numbers. The GDP figures are, after all, just a first-pass estimate — and they’ll be revised later on. “Given the noise in the advance GDP estimate,” says Justin Wolfers, “a number 0.3% below consensus isn’t really at odds with either bullish or bearish sentiment.”  Some people might read this statements as an attempt to spin away bad news for President Obama’s re-election bid. But it’s not. (After all, the revisions could be even worse.) It’s more an acknowledgment that first-pass GDP estimates have usually been way off in recent years. A recent study from the Federal Reserve Bank of St. Louis put this in helpful chart form:

Q1 GDP: Comments and Investment - Residential Investment (RI) made a positive contribution to GDP in Q1 for the fourth consecutive quarter. Usually residential investment leads the economy, but that didn't happen this time because of the huge overhang of existing inventory, but now RI is contributing. Sure - some of the boost could be weather related, but RI has clearly bottomed. The contribution from RI will probably continue to be sluggish compared to previous recoveries, but the ongoing positive contribution to GDP is a significant story. Equipment and software investment has made a positive contribution to GDP for eleven straight quarters (it is coincident). However the contribution from equipment and software investment in Q1 was the weakest since the recovery started. The contribution from nonresidential investment in structures was negative in Q1. Nonresidential investment in structures typically lags the recovery, however investment in energy and power has masked the ongoing weakness in office, mall and hotel investment (the underlying details will be released next week). Residential Investment as a percent of GDP is still near record lows, but it is increasing. Usually RI bounces back quickly following a recession, but this time there is a wide bottom because of the excess supply of existing vacant housing units. Last year the increase in RI was mostly from multifamily and home improvement investment. Now the increase is probably from most categories including single family. I'll break down Residential Investment (RI) into components after the GDP details are released this coming week. Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories. The last graph shows non-residential investment in structures and equipment and software. Equipment and software investment had been increasing sharply, however the growth slowed over the last two quarters. Non-residential investment in structures decreased in Q1 and is still near record lows as a percent of GDP. The recent small increase has come from investment in energy and power. I'll add details for investment in offices, malls and hotels next week.

GDP Miss Far Bigger Than Announced; Real GDP is 0% Using More Reasonable Deflator - The Advance Estimate for Q1 GDP came in at 2.2%, down from 3.0% in the previous quarter, and below most mainstream media estimates of 2.5%. However, my friend BC notes .... The GDP deflator is reported to have averaged 1.2% annualized in the past 2 qtrs. Had the trend rate from '11 persisted, the deflator would have subtracted 2.6% annualized from real GDP, resulting in a 2-qtr. growth of real GDP of 0%.  Rick Davis at the Consumer Metric Institutes makes a similar calculation.  The BEA's bottom-line "real final sales" improved about a half-percent to an annualized growth rate of 1.61% -- hardly robust and certainly not the kind of numbers we would expect to see nearly three years into a recovery. Once again the BEA has used "deflaters" that will strain the credibility of the public, especially if they buy gasoline. To correct the "nominal" data into "real" numbers the BEA assumed that the annualized inflation rate during 1Q-2012 was 1.54%. As a reminder, lower "deflaters" cause the reported "real" growth rates to increase -- and once again very low seasonally adjusted BEA inflation "deflaters" have been the headline number's best friend. If the raw "nominal" numbers were instead "deflated" by using the seasonally corrected CPI-U calculated by the Bureau of Labor Statistics (BLS) for the same time period, nearly the entire headline growth rate vanishes -- and the resulting growth rate would have been a minuscule 0.08% with "real final sales" contracting.

We've Never Left The Recession - It is three and a half years since the Great Recession hit in 2008 with the collapse of our financial system caused by the Wall Street banks and their captured politician cronies in Washington D.C. Their mouthpieces in the mainstream media have been telling the American sheeple that we have been out of recession and in recovery since the 4th quarter of 2009. It truly has been a recovery for the Wall Street bankers and the mega-corporations that have laid off millions and opened new factories in the Far East while generating record profits and rewarding their executives with millions in bonuses. The stock market has doubled from its 2009 lows. All is well on Wall Street – not so much on Main Street.  The compliant non-questioning MSM reported that GDP in the 1st quarter rose 2.2%, less than expected. This pitiful government manipulated result confirms that we are back in recession. The first quarter had the huge benefit of fantastic weather, an extra day, and a supposed surge in jobs. And this is all we got? Take a good long hard look at this chart.

Neither Real, nor Business, nor Cycles - It has often been said of the Holy Roman Empire that it was "neither Holy, nor Roman, nor an Empire."  Real Business Cycle models, it turns out, are neither Real, nor about Business, nor about Cycles. First, "Cycles". The "business cycles" in RBC models are not periodic, like cycles in physics. But they are also not "cycles" in the sense that a bust must follow a boom. Booms and busts are just random shocks. The "business cycle" that we think we see, according to these models, is simply a statistical illusion. ( Next, "Business". Businesses are called "firms" in economic models. But if you look at the firms in an RBC model, you will see that they bear very little resemblance to real-life firms. For one thing, they make no profits; their revenues equal their costs. For another thing, they produce only one good. (Also, like firms in many economic models, they are all identical, they live forever, they make all their decisions to serve the interests of households, and they make all decisions perfectly. Etc. etc.) In other words, they display very few of the characteristics that real businesses display.  Finally, "Real". This is the one that really gets me. "Real" refers to the fact that the shocks in RBC models are "real" as opposed to "nominal" shocks (I've actually never liked this terminology, since it seems to subtly imply that money is neutral, which it isn't). But one would have to be a fool not to see the subtext in the use of the term - it implies that business-cycle theories based on demand shocks are not, in fact, real; that recessions and booms are obviously caused by supply shocks.

Chart Of The Day: Change In Q1 American Debt And GDP -  Presented without much commentary, because little is necessary: the only ratio that matters for the US economy, the change in US public debt ($359.1 billion) and US GDP ($142.4) in the first quarter, hit 2.52x and rising. It takes $2.52 in new debt to "buy" $1 of economic "growth"

'Fiscal cliff' threatens economy on Dec. 31, Bernanke warns Congress  - At year-end, a range of tax cuts are set to expire, potentially dampening consumer spending. Fed Chairman Ben Bernanke said Wednesday there's not much he can do if Congress doesn't act. Ben Bernanke has often talked about the need for sounder budget policies in Washington, but the Federal Reserve chairman has ramped his message up a notch: Failure to take new action by the end of year, he said, would have negative effects on the economy that even the Fed couldn't offset. .The reason for his urgency is what some economic analysts call a "fiscal cliff" that awaits America on Dec. 31. Others call it "Taxmageddon." At year-end, a range of tax cuts are currently set to expire, potentially dampening consumer spending as households are forced to send more of their income to the US Treasury. The Federal Reserve chief was asked about the implications in a press conference Wednesday afternoon, following a scheduled meeting of the Fed's policy committee. Specifically, if no action occurs before a new Congress convenes early in 2013, would the Fed try to act to offset the impact? "We'll have to take fiscal policy into account to some extent," Mr. Bernanke said, "but I think it's very important to say that if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there's I think absolutely no chance that the Federal Reserve could or would have any ability whatsoever to offset that effect on the economy."

Will the Fiscal Cliff Eat the Recovery, Such as It Is? - Yves Smith - Lately, the US has been winning the investment beauty contest among Cinderella’s ugly sisters. Europe’s addiction to austerity, rolling rescues, and inability to address internal imbalances means at best a wild ride and at worst a crisis resurgence.  The US, by comparison, does not look too bad. Or does it? One of the lurking worries in the background is the so-called fiscal cliff. At the end of 2012, a whole passel of tax breaks and special programs expire, from lower payroll tax rates to extended unemployment benefits. This has been lurking in the background for a while (indeed, the US would have faced a contraction in fiscal spending at the end of 2012 had various breaks not been extended).  Ben Bernanke brought the issue to the fore in Congressional testimony today, stating that consumer spending would suffer if Washington continues on an inertial course. Estimates of impact vary considerably. Normura puts the effect at nearly 5% of GDP in the first half of fiscal 2013, which starts October 2012. Deutsche Bank estimates the drag at only 1% of GDP, but the consensus seems to be 3% to 5%. Needless to say, Wall Street does not want its punchbowl taken away (they really don’t care about the impact on ordinary people) and Uncle Ben also said clearly that he can’t compensate for the contractionary impact, so we have a flurry of alarmed reports tonight.  Some recent commentators are worried that it isn’t possible to get a deal done post election (the trigger date for most of the changes is calendar year end). For instance, FT Alphaville pointed to this column by Stan Collander a few days ago:

Where Will US Growth Come From If Austerity Reigns? - That’s one of the questions the Levy Institute’s latest Strategic Analysis asks as it examines the Congressional Budget Office’s projections for growth and employment in the context of tighter and tighter government budgets.  At the federal level alone we’re facing a well-publicized “fiscal cliff” in 2013, featuring large scheduled spending cuts and the expiration of a number of tax cuts. As Dimitri Papadimitriou, Gennaro Zezza, and Greg Hannsgen note, the CBO “expects real GDP to grow by 2.2 percent in 2012 and by only 1 percent in 2013, and to accelerate once most of the fiscal adjustment has taken place, with growth reaching 3.6 percent in 2014 and 4.9 percent in 2015.  The unemployment rate is expected to rise to 9.1 percent with the slowdown in economic activity, and to fall rapidly from 2014 onward, once the economy recovers.”  This is all expected to take place in the presence of shrinking government deficits (based on the CBO’s “current law” projections for the federal budget).Using the CBO’s numbers, the Institute’s macro team ran a simulation to find out what would have to happen in the rest of the economy to make this combination of budget austerity and even tepid-to-moderate growth possible.  The answer:  dramatic increases in private sector borrowing.  Here’s their graph showing, through 2016, the rise in private sector debt that would be necessary to attain the CBO’s economic growth projections in the context of austerity:

Paul Krugman's Prescription For A 'Depression' - NPR interview - In his new book, End This Depression Now! Paul Krugman states that the U.S. is in the throes of a depression — not merely an economic crisis. The New York Times columnist and Nobel laureate argues that Keynesian economics got us out of a much worse depression in the 1930s, so if we were to follow Keynesian prescriptions now, we could get out of this one too. Krugman says he uses the term depression to describe today's economy because "it's qualitatively similar to the Great Depression." He tells NPR's Robert Siegel, "It is a sustained period of really lousy economic performance and an enormous amount of suffering." Krugman worries that we're becoming accustomed to this reality. "We've kind of settled into the notion that this is the new normal," he says. "But it shouldn't be. And it's not something we should accept." In End This Depression Now! Krugman excuses 1930s policymakers for fumbling their way out of the Great Depression. There simply was no track record of successful policies for pulling out of such an entrenched depression. But now we know what works, says Krugman. Which is why he became so frustrated when Democrats pushed through a stimulus package he believed was far too small. "I, among other people, was screaming at the time, tearing my hair out very publicly in the Times," he says. "We had an epochal financial shock ... and we responded to it with a policy that was really quite modest — that was not nearly enough to offset that shock."

Dixit on 'the 21st Century’s Economic Hurricane' - Princeton emeritus professor Avinash Dixit is always worth reading, even when he is speculating about the economy over the next hundred years. Likening economic forecasting to weather forecasting, his approach is suitably skeptical. Here's how he kicks off:At least one prediction can be made with high confidence... in the course of the next century there will be several financial and economic crises. Each crisis will be preceded by a boom and by a state of euphoria, when almost everyone will believe that “this time is different; we have learned how to avoid crises, and have finally learned the secret of how to sustain the Great Moderation.”When the crisis hits, policymakers everywhere will be shocked and unprepared. Their panicked responses will merely paper over the real problems and sow the seeds of the next crisis a few years down the line. Dixit lays out some provocative scenarios for our economic future: In America, recurrent macroeconomic crises will be made worse by the loss of technological leadership, as governments controlled by or beholden to religious conservative forces forbid research on the frontiers of biotech and related areas. American education will continue to be squeezed...; this will accelerate the decline. China lost its technological leadership in the 1400s because of capricious decisions of its emperors, and took almost six centuries to climb back; for the U.S. the 21st century will be just be beginning of a similar downhill slide.

U.S. Lost AAA on Danger of Liquidity Crisis: S&P - The U.S. lost its top credit grade in August because of the imminent danger of a “real liquidity crisis,” and Standard & Poor’s made no errors in its analysis, said Moritz Kraemer, managing director of sovereign ratings. “Last summer, the U.S. government got extremely close to a real liquidity crisis because the Washington establishment could not agree on the way forward that would have been required to raise the debt ceiling,” Kraemer told lawmakers on the U.K. Parliament’s Treasury Committee today in London. S&P cut the rating by one level to AA+ on Aug. 5, criticizing the nation’s political process and saying that spending cuts agreed on by lawmakers wouldn’t be enough to reduce record deficits. Treasuries surged after the move, and while Moody’s Investors Service and Fitch Ratings have kept their top grades on the U.S., both have a negative outlook. The U.S. Treasury criticized S&P for flawed analysis. “There was no mistake,” Kraemer said today. “There were different scenarios. These are measures about the future which you have to have an analytical debate on what is the likely strategy of fiscal consolidation the government might take.”

Kohn: ‘Huge Risk’ U.S. Won’t Take Steps on Debt, Deficit by Year End - There is a real danger U.S. authorities won’t take the necessary steps to fix the country’s debt and deficit problems between the elections and the end of this year, former Federal Reserve Board Vice Chairman Donald Kohn said Monday. “What’s required to put the fiscal deficit on a sustainable path are some difficult decisions having to do with entitlement spending and taxes in the United States,” Kohn said at the Europlace forum. “There’s a high degree of uncertainty … there’s a huge risk that they won’t.”

The Day Austerity Died - Austerity is dead! Long live Spending! The first question is “what is defined as austerity?”  Programs that are providing money today, that is quickly re-circulated into the economy because it is paying for people to live should not be cut – that is bad austerity.   The second, and more important question, is “why does any sane person think spending for growth will work?”  Just pause for 1 moment.  How were these massive deficits built up? Was all the spending frivolous?  I don’t think so.  A lot of spending was meant to target growth in certain areas.  It is just very difficult to achieve.  If spending to get growth was so easy in a global economy, the U.S., the current king of spending, would have Chinese like GDP growth.  It is not that easy to spend your way to growth.  I’m sure at some level, Solyndra received money because there was a real belief somewhere that it was a good investment for growth.  GM might be used as an example, but I’m not convinced that the government spending did anything more than private capital would have done in the wake of a real bankruptcy.   But, there is one part that does make sense, at least from a Wall Street perspective. So the final question is, “who will finance all that spending?”  Ahhh, the real reason Wall Street is enthusiastic about spending for growth.  The only way a spending for growth campaign can begin, is with another massive round of balance sheet expansion by central banks.  That has been great for banks and wall street, while less clear what it has done for the economy, or anyone without a significant portion of their wealth in stocks. 

Sequestration will slow the recovery and job growth, period - Wednesday morning, the House Budget Committee is holding a hearing on “Replacing the Sequester”—the sequester being the automatic spending cuts established by the debt ceiling deal that are scheduled to kick in next year. It’s a safe bet that Republicans will scream about defense cuts being bad for jobs, but let’s just remember that ALL these cuts are bad for joblessness in the short-run. (Defense and nondefense spending are split roughly evenly on the sequester chopping block.) We’ve been asked many times “how much” of an impact sequestration would have on near-term employment and here are our best estimates: These estimates reflect the impact of sequestration on total nonfarm payroll employment at the end of each fiscal year. They assume a fiscal multiplier of 1.4 for general government spending, which is Moody’s Analytics most recent public estimate of the government spending multiplier. While we use the same multiplier for all cuts, we’d guess that these likely slightly overstate the adverse economic impact resulting from defense spending cuts and understate job losses from domestic spending cuts. Budgetary programs for lower-income households in the discretionary budget—such as housing assistance and the special supplemental food program for women, infants, and children (WIC)—as well as infrastructure spending have particularly high multipliers.

The Budget Debate Should Not Be Fiscal Instant Messaging - Three things have changed in the decades since the budget process’s message-sending capabilities started to be understood. First, instead of primarily being used as an internal memo to talk to others on Capitol Hill, Members of Congress today use it to reach those outside the Beltway. Second, the messages that once primarily were about Budget Committee preferences on how programs and provisions should be changed are today about electoral maneuvering. Third, the subtle messaging from early days has been replaced by shameless political efforts. That’s the only conclusion that’s possible after watching how the budget process became the political equivalent of Twitter last week. Economic policymaking — that is, what the budget process is supposed to do — was completely replaced with instant-message-like efforts that definitely were not worth the time, taxpayer money or energy it took to send the messages.

Senate Votes to Abandon Budget Control Act - Last summer, Republicans in Congress agreed to increase the federal debt limit in exchange for the Democrats’ pledge to cap future spending at agreed-upon levels. The compromise was embodied in the Budget Control Act; discretionary spending was to increase by no more than $7 billion in the current fiscal year. I wrote yesterday about the fact that the Democrats intended to violate the Budget Control Act by increasing deficit spending on the Post Office by $34 billion. The measure probably would have glided through the Senate without notice had Jeff Sessions not challenged it. Sessions insisted on a point of order, based on the fact that the spending bill violated the Budget Control Act. It required 60 votes to waive Sessions’ point of order and toss the BCA on the trash heap. Today the Senate voted 62-37 to do exactly that. This means that the consideration that Republicans obtained in exchange for increasing the debt limit is gone. Moreover, some Republicans–I haven’t yet seen the list–voted with the Democrats today.  One principal lesson can be drawn from this experience. It happens all the time that Congressional leaders will trumpet a budget agreement that allegedly saves the taxpayers trillions of dollars–not now, of course, but in the “out years.” But the out years never come. Tax increases are rarely deferred to the out years; they take place now, when it counts. But spending cuts? Never today, always tomorrow.

Plan to fix Postal Service passes Senate - The Senate on Wednesday passed a plan to save the struggling U.S. Postal Service, an effort that could save thousands of jobs and 100 mail processing plants now slated to be closed or consolidated next month. In an unusual showing of bipartisanship, the Senate voted 62-37 to throw a lifeline to the indebted Postal Service. Without help, the Postal Service would otherwise cut Saturday service, delay mail delivery and close hundreds of postal processing plants and post offices, triggering thousands of job cuts nationwide. Print Comment"My hope is that our friends over in the U.S. House, given our bipartisan steps we took this week, will feel a sense of urgency," said Sen. Tom Carper, a Delaware Democrat, one of the Senate bill's co-sponsors. "The situation is not hopeless, the situation is dire." The House has yet to take up a different bill to reform the Postal Service. However, Rep. Darrell Issa, a key Republican on postal service legislation, called the Senate bill "wholly unacceptable," in a statement released Wednesday. Congress faces a deadline of May 15, when a moratorium on postal closures expires. The Senate bill, offered by members in both parties, forces the Postal Service to ease off part of its plan to slow down the delivery of first-class mail, the kind of mail that most consumers use.

Postmaster Calls for House Action to Stem $25 Million-a-Day Loss - Postmaster General Patrick Donahoe said it’s urgent for the U.S. House of Representatives to act by next month on legislation to stem U.S. Postal Service losses running at $25 million a day. “We have to act,” Donahoe said in a telephone interview yesterday. “It’s very important, I think, to get these issues off the table in terms of the industry. Big mailers don’t want to keep hearing the Postal Service is losing money.” Donahoe wants a final measure that would let him close post offices and processing plants, as the House legislation would do, while including a provision from the Senate’s version that would relieve the Postal Service of a $5.5 billion annual payment for health costs. Donahoe and the Postal Service’s board hasn’t embraced the Senate’s version, passed April 25, because it would delay closing mail facilities. He said early House action is necessary so the two chambers can arrive at a compromise. “The later we go, the more problematic of passing a bill,” Donahoe said. “I would love to see action within the next few weeks here and wrapped up before Memorial Day,”

House GOP Threatens Government Shutdown To Get Steeper Cuts To Food Assistance, Financial Regulations -  House Republicans made it clear earlier this year that they had no intention of upholding the debt deal reached in 2011, despite a vow from President Obama that he would veto any appropriations bills that attempted to cut more spending than was agreed upon last August and a pledge from Senate Minority Leader Mitch McConnell (R-KY) that the deal would be upheld in the Senate. After earlier indications that they would make substantial cuts to domestic programs to preserve defense spending, the House Appropriations Committee made it official yesterday, setting a spending level $27 billion below the level agreed to in the debt deal. The committee, bowing to the GOP’s more conservative wing, will make deep cuts to food assistance, financial regulations, and a host of other programs, setting up the potential for a government shutdown when the fiscal year ends in October, Politico reports: The House begins with a total of $1.028 trillion for discretionary spending, $19 billion below the $1.047 trillion target set last summer and $15 billion below what was enacted just months ago for the current 2012 fiscal year. Republicans would also go $8 billion over the caps set in the Budget Control Act for defense spending, and the result would be a net reduction of more than $27 billion from all other appropriations.

House GOP Would Kick 280,000 Children Off School Lunch Program To Protect Tax Cut For Millionaires - House Republicans recently proposed cuts to nutrition assistance that will kick 280,000 low-income children off automatic enrollment in the Free School Lunch and Breakfast Program. Those same kids and 1.5 million other people will also lose their Supplemental Nutrition Assistance Program (formerly food stamp benefits) that help them afford food at home.  Ten years’ worth of these nutrition cuts could be prevented for the price of one year of tax cuts on 3,340 multimillion dollar estates that House Republicans are protecting in their budget.  On April 18 the House Agriculture Committee passed a bill cutting over $33 billion from SNAP over the next decade. About one-third of these cuts ($11.5 billion) comes from putting restrictions on “categorical eligibility,” a provision that enables states to better coordinate between programs and improves access to assistance for low-income families.  By restricting this provision, the bill would kick an average of 1.8 million low-income people a year off of food aid and end automatic enrollment in free school meals for 280,000 children in struggling families.

INFOGRAPHIC: How The House GOP’s Budget Would Hurt Kids - House Republicans have touted their budget as a prescription for economic growth that will return the United States economy to prosperity. In reality, as ThinkProgress has documented, the GOP budget slashes social spending on programs that protect the most vulnerable while giving more than $3 trillion in tax breaks to the wealthiest among us — and even after all that, it not only fails to reduce the national debt but actually adds to it. More than 60 percent of the spending cuts in the GOP budget would come from programs that benefit the poor, including food assistance, Women, Infant, and Children programs, and potentially even tax credits that have huge effects on poverty and hunger. Those cuts would undoubtedly not only hurt adults in struggling families, but harm children as well. According to a new report from the Half In Ten project at the Center for American Progress, millions of children will lose assistance from a number of services, as the following infographic shows:

Nancy Pelosi Says She Would Back Plan That Cuts Social Security, Medicare -  During a recent press conference, and again during an interview with Charlie Rose, the California Congresswoman said that she would support what's known as the Simpson-Bowles plan, a budget proposal that was created by the co-chairs of a fiscal commission set up by President Obama (dubbed the "Catfood Commission" by progressives). The plan was rejected by members of the commission, failing to win the necessary votes to move to a vote in Congress. Yet the co-chairs -- former Republican Sen. Alan Simpson of Wyoming and Morgan Stanley director Erskin Bowles, a Democrat -- have worked recently to revive it, and the political class speaks of it as if it passed and is an official recommendation of the commission. At the end of March, a version of the Simpson-Bowles plan was given a vote on the House floor. It was annihilated, 382-38, with Pelosi and most Democrats voting against it. But Pelosi, the day after the vote, said that she could still support the plan if it stuck more closely to the original version put out by Simpson and Bowles. "I felt fully ready to vote for that myself, thought it was not even a controversial thing ... When we had our briefing with our caucus members, people felt pretty ready to vote for it. Until we saw it in print," she said. "It was more a caricature of Simpson Bowles, and that's why it didn't pass. If it were actually Simpson-Bowles, I would have voted for it

The very unRepublican Small Business Tax Cut - My Tax Policy Center colleague Eric Toder and I are mystified by how unRepublican the House GOP’s Small Business Tax Cut Act really is. Sure, cutting taxes for businesses and high-income individuals is very much part of the Republican playbook these days. But the mechanics of this one seem to fly in the face of what many in the party have been saying lately.  The bill would allow both C corporations and pass-through businesses with fewer than 500 employees to deduct 20 percent of their income from federal income tax for one year. The proposal was wrapped in rhetoric about job-creators and small businesses. But, in fact, it is exactly the sort of anti free-market, short-term industrial policy that Republicans rightly decry when Democrats try it. To see how, let’s pull the bill apart:

Romney’s fiscal fantasy plan - Larry Summers - Political arithmetic is always suspect, and one should always examine carefully the claims of those seeking votes. Smart observers have learned to distinguish between the claims of political candidates and their advisers and proposals that have been evaluated by independent scorekeepers such as the Congressional Budget Office (CBO). This principle was aptly illustrated by the “budget analysis” Mitt Romney’s chief economic adviser, Glenn Hubbard, recently put forward. In a Wall Street Journal op-ed this week, Hubbard constructs a budget plan that he imagines President Obama might propose someday, engages in a set of his own extrapolations and then makes assertions about it. He does not discuss the actual Obama plan or how it has been evaluated by the CBO. Nor does Hubbard invest his credibility in defending the claims that Romney has made about his own fiscal plans. He simply states that “Yes, President Obama and Mitt Romney have budgets with competing visions. But Gov. Romney’s budget makes tough choices” — without delving into the specifics or trade-offs that Romney’s “tough choices” entail.

Romney opposes the Buffett Rule? Why would that be? - Via the Washington Post‘s Fact Checker by Glenn Kessler, I see that Mitt Romney has adopted the specious “if it doesn’t fix the entire problem, it’s not worth doing,” objection to the Buffett Rule. Romney brushed aside the Buffett Rule because the $5 billion in revenue it would raise for fiscal 2013 relative to current law would only fund government for 11 hours. First, it’s interesting to note that Romney and other individuals deriving the vast majority of their income from investments benefit tremendously from the lack of a Buffett Rule (which is more accurately characterized as the Romney Rule). The Paying a Fair Share Act—the Senate’s legislative version of the Buffett Rule that was filibustered last week (in spite of 72 percent public support)—would serve as a millionaires’ alternative minimum tax.  Second, there’s an enormous amount of hypocrisy and insincerity going on here. As I recently noted, this ice-thin defense against popularly supported progressive tax policies is often used by the same people who spend inordinate amounts of time on defunding the National Endowment for the Arts, National Public Radio, Planned Parenthood, or other small budgetary line-items. Romney himself devotes eight full pages in his economic plan to his proposal to cut job training programs, which together represent one-half of 1 percent of the budget.

The Rich Are Different From You And Me - Krugman - Mitt Romney (emphasis added): This kind of divisiveness, this attack of success, is very different than what we’ve seen in our country’s history. We’ve always encouraged young people: Take a shot, go for it, take a risk, get the education, borrow money if you have to from your parents, start a business.

Income versus Wealth - One way to think about the political economy of macropolicy is to divide people into two camps, those who are motivated primarily by threats to income and those by threats to wealth.  (I will emphasize threats rather than enhancements for simplicity, and in recognition of the force of loss aversion.)  Threats to income take the form of unemployment, wage loss and the loss of public benefits (the social wage).  The policies attractive to this group are generally Keynesian: looser fiscal and monetary policy, measures to increase wages, and other interventions to prevent the economy from producing below its potential due to insufficient demand. Threats to wealth take the form of inflation and default.  The policies these people are drawn to are what we usually call orthodox: tight monetary policy, restrictions on new borrowing (particularly by the public sector) and hostility to measures that would reduce the profitability seen as underlying asset and credit markets.  The latter often comes dressed as labor market flexibility. Do these perspectives correspond to class interests?  Yes and no.  Clearly wealthier individuals are likely to be more concerned with wealth rather than income, and the reverse holds for those with little wealth.  Nevertheless, it is not a strict mapping.

Why Romney and Obama Pay the Taxes They Pay - By now, many readers of TaxVox know how much Barack Obama and Mitt Romney pay in taxes. But true tax wonks are more interested in why the candidates paid what they paid. A new infographic from the Tax Policy Center tells that story.  The interactive display of the president’s and Romney’s (preliminary) 2011 tax returns walks readers through each return to show the sources of income, how income from each source is taxed, the components of the candidates’ income and payroll tax bills, and their effective tax rates. We also toss in Vice President Biden’s return as well as one for a typical middle-class couple with children. All four returns are joint filings by the married couples. The results are interesting, if not surprising. The president’s 2011 income came in almost equal parts from his White House job and his book royalties. The Obamas claimed itemized deductions totaling 37 percent of their adjusted gross income (AGI)—mostly for charitable contributions—and ended up paying 19 percent of their AGI in income taxes and another 4.4 percent for combined employee-employer payroll taxes. Mitt Romney’s taxes are another story. More than half of his 2011 income was long-term capital gains and qualified dividends that face a reduced 15 percent tax rate. His itemized deductions reduced the amount of his income subject to ordinary rates by 60 percent.  And because so little of his income was from working, his payroll tax rate was just 0.6 percent of AGI.

Time for a Serious Review of Tax Extenders - A House panel today began what could be the beginning of a remarkable exercise: It is reviewing the merits of dozens of expiring tax provisions that litter the Revenue Code. I hesitate to say so, but this could be a case of Congress doing its actual job.   By the Joint Committee on Taxation’s count, 75 of these tax extenders have already expired this year or will do so before New Year’s Day. That doesn’t include tax breaks related to the Transportation Trust Fund or federal disaster relief. It is quite a collection: Subsidies for both oil and gas and alternative fuels, enhanced charitable contributions for computers, the infamous NASCAR race track give-away, and special tax breaks for movie and TV producers, mining companies, railroads, rum, and investment companies to name only a few. And, of course, the Research and Experimentation Tax Credit that has taken on mythical status in Washington yet seems to do little or nothing to enhance research.     The House Ways & Means Select Revenue Measures subcommittee began its review today by hearing from fellow Members of Congress—most of whom wanted to preserve one subsidy or another.

Polling, Progressive Taxation and Bloggers - Suzy Khimm, Kevin Drum and Greg Sargent comment on the series of gallup polls dating back to 1992 in which a solid majority of US adults, ranging from 55% to 77%, say that they think the rich pay less than their fair share of taxes. Please click the link to Drum then come back. I don't want to excerpt. Oddly the fact stressed by Drum (and the only fact noted by Sargent) is the modest decline in this fraction from 77% to 62%since 1992 not the fact that a major party is totally dedicated to reducing taxes which a solid majority think are too low already. Khim is just describing the data. Drum has a long history of warning liberals not to trust the polls which seem to show our countrypeople are liberal (search for "polling literalism") and a long record of not knowing about, then downplaying the exact polls under discussion. he change from 1992 to the present came in two or three phases. The third possible phase (stressed by Drum) was an increase from 55% in 2010 to 62% in 2012. I'm not convinced that anything really changed. I think the 2010 sample just happened to be unusual, since other polls from around then show support of 60% or more for higher taxes on the rich.  If we ignore the 2010 poll, we see a decline from 68% in 1994 to 62% in 2012.  I have three problems with Drum's analysis.

High Tax Rates Won't Slow Growth, by Peter Diamond and Emmanuel Saez, The share of pre-tax income accruing to the top 1% of earners in the U.S. has more than doubled to about 20% in 2010 from less than 10% in the 1970s. At the same time, the average federal income tax rate on top earners has declined significantly. Given the large current and projected deficits, should the top 1% be taxed more? But will taxable incomes of the top 1% respond to a tax increase by declining so much that revenue rises very little or even drops? In other words, are we already near or beyond the peak of the famous Laffer Curve, the revenue-maximizing tax rate?  According to our analysis of current tax rates and their elasticity, the revenue-maximizing top federal marginal income tax rate would be in or near the range of 50%-70% (taking into account that individuals face additional taxes from Medicare and state and local taxes). Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50% rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s. To reduce tax avoidance opportunities, tax rates on capital gains and dividends should increase along with the basic rate. Closing loopholes and stepping up enforcement would further limit tax avoidance and evasion.

The Economic Impact of Raising Taxes on High-Income Households - Opponents of raising the taxes that high-income households face often point to findings that high-income taxpayers respond to tax-rate increases by reporting less income to the Internal Revenue Service (IRS) as evidence that high marginal tax rates impose significant costs on the economy.  However, an important study by tax economists Joel Slemrod and Alan Auerbach found that such reductions in reported income largely reflect timing and other tax avoidance strategies that taxpayers adopt to minimize their taxable income, not changes in real work, savings, and investment behavior.  While such strategies entail some economic costs, these costs are relatively modest.  Moreover, policymakers can limit high-income taxpayers’ ability to respond to increases in tax rates by engaging in tax avoidance activity — and also enhance the efficiency of the tax code — by broadening the tax base, as discussed below. evidence shows that changes in tax rates that fall within the ranges that policymakers are debating have little impact on high-income individuals’ decisions regarding how much to work.  As Leonard Burman, former head of the Urban-Brookings Tax Policy Center (TPC), recently testified, “Overall, evidence suggests [high-income Americans’] labor supply is insensitive to tax rates.”[2] A marginal rate increase may encourage some taxpayers to work less because the after-tax return to work declines, but some will choose to work more, to maintain a level of after-tax income similar to what they had before the tax increase.  The evidence suggests that these two opposing responses largely cancel each other out.

Why Tax Cuts for the 1% Are Self-Defeating - A new GOP budget released Tuesday brings renewed attention onto the issues of tax policy and the economy. Of course, there will be debate over what effects various policy options would have on the economy, something I have previously addressed in a previous article. But inevitably, there will also be arguments made by Republicans regarding the fairness of those policies as well.The problem with many of the GOP arguments made in regard to fairness is that they lead to a self-defeating paradox in either the logic of the argument, or in the outcomes of their recommended policy solutions.  For example, one common argument made is on the grounds that it is unfair for the wealthiest to pay higher taxes since they are already paying the most federal income tax while many people pay none at all. But this argument is flawed in multiple ways.  First of all, the logic of this argument is paradoxical. As the wealthy get wealthier while others fall behind in comparison, the share of tax burden on the wealthy would continually increase.  Second, the big irony here is that the policies that would seem to make it more fair for the wealthy in the short-term (lowering their tax rates at the expense of other policy options) are policies that would tend to further increase income disparity in the long-term. This is due to these policies' lower effect on creating demand (lower economic multiplier), which means less need for labor (a weaker labor market).

America's true tax rate - A week after Tax Day, the incessant drumbeat continues: conservatives are, as usual, insisting that the wealthy pay too much in taxes, and that middle- and lower-income Americans should therefore pay more. The idea is that the U.S. tax code is so intensely progressive, that it not only punishes the so-called “job creators,” but also allows millions of supposed loafers to not “have skin in the game,” as Rep. Pat Tiberi (R-OH) insisted. The key unquestioned assumption baked into this crusade, however, is flawed. Setting aside the indisputable reality that almost every American pays some form of taxes and that almost nobody “doesn’t pay taxes,” the supposition that the tax system is punitively progressive is simply false. Sure, a few specific taxes such as federal income and federal estate levies are mildly progressive — but because there are so many other stunningly regressive policies in place (capital gains taxed lower than wages, dividends taxed lower than wages, etc.) the tax system as a whole is almost completely flat. To illustrate this point, behold what is perhaps the single most important and easy-to-understand chart outlining this truism. It comes from the watchdog group Citizens for Tax Justice. Unlike deceptive charts from right-wing foundations that only focus on one or two taxes in order to pretend the rich are persecuted, CTJ evaluates the entire system:

We Like Facts (Tax Rates) - Three charts lifted from Just How Progressive is the U.S. Tax Code?:

The Charitable Deduction as a Tax Expenditure: What it Buys and What to Do About It (Part 2) In the first part of this post, I argued that the popularity of the charitable deduction rests on the perception that it is a reduction in taxes that encourages charitable giving. It is really something else. It is better viewed as a tax expenditure than as a tax reduction; surprisingly little of it goes to genuinely charitable purposes; and the degree to which it stimulates giving is often exaggerated. This second part of the post extends the critique and examines the pros and cons of possible reforms.Up to this point, I have emphasized the inefficiency of the charitable deduction, which violates the presumption that an efficient tax system should have a broad base and low marginal rates. The deduction could overcome that presumption if it were a highly effective way of promoting charity, but, as I argued in Part 1, the evidence does not support such a conclusion. Meanwhile, a commenter was kind enough to provide a link to a study from the Center on Philanthropy at Indiana University that further undermines the status of at the deduction as an effective way of helping the poor and needy. Using various surveys and data sources, the IU study concludes that Only 8 percent of households’ donated dollars were reported as contributions to help meet basic needs—providing food, shelter, or other necessities. An estimated additional 23 percent of total private philanthropy (including donations from foundations, corporations, and estates) went to programs specifically intended to help people of low income–either providing other direct benefits (such as medical treatment and scholarships) or through initiatives creating opportunity and empowerment (such as literacy and job training programs).

Number of the Week: Smaller Tax Refunds This Year - $101: How much less the average tax refund was in 2012 compared with 2011, as of the week ending April 6. The U.S. Treasury has paid out less this year in tax refunds than last. That could disappoint consumers, but may be good news for politicians. Associated Press The government has paid out $227.45 billion so far this year in refunds, down 2.8% from $234.12 billion through the comparable week in 2011, according to Treasury data parsed by Stone & McCarthy Research. Meanwhile, the average 2012 refund has dropped to $2,794 from $2,895 last year. That comes even as the Internal Revenue Service has processed more returns this year than last. Those numbers may shift over coming weeks as the flood of last-minute tax returns come in, but if the trend continues it could mean taxpayers will have less money in their pockets this spring. That could prove to be a mild drag on consumer spending compared to last year, but isn’t likely to have a major effect on the economy. First, a large portion of refunds are saved. But more importantly, as the larger number of filed tax returns shows more people have jobs in 2012 than in 2011, more than offsetting the smaller refunds in the consumer-spending picture.

American Taxpayer Liabilities Just Went Up, Again – Why Isn’t Congress Paying Attention? – Simon Johnson - Most Americans paid no attention this weekend when the International Monetary Fund announced it was well on its way to roughly doubling the money that it can lend to troubled countries – what the organization calls a $430 billion increase in the “global firewall.”The United States declined to participate in this round of fund-raising, so the I.M.F. has instead sought commitments from Europe, Japan, India and other larger emerging markets. At first glance, this might seem like a free pass for the United States. The additional I.M.F. lending capacity is available to euro-zone countries that now face pressure, such as Spain or Italy, so it might seem that global financial stability is increased without any cost to the American taxpayer.  But such an interpretation mistakes what is really happening – and actually represents a much broader problem with our budgetary thinking. The I.M.F. represents a contingent liability to taxpayer sin the United States – much as the Federal National Mortgage Association (known as Fannie Mae) and Freddie Mac (formerly the Federal Home Loan Mortgage Corporation) have in the past — and as too-big-to-fail mega-banks do now.

Who Bails Out the IMF? - Us, says Simon Johnson: Over the weekend, the monetary fund became a lot more leveraged — that is, its debt increased relative to its equity. The potential future liability to American taxpayers went up, because the risk of large credit losses increased, and those losses would need to be covered by shareholders (and the American stake in the fund is 17.69 percent of quota, with 16.8 percent of the votes). There is also an implicit guarantee — arguably without limit — from the United States to the monetary fund. The United States set up the world trading system after World War II, and has a huge amount to lose if it fails. It also has deep pockets, compared with almost all other countries. It hadn't occurred to me to worry about that.  Darn those "implicit guarantees"... But this one seems very different from the implicit guarantees of Fannie Mae, Freddie Mac and "too big to fail" financial institutions that have made so much trouble.  When a government "bails out" a financial institution, it is really bailing out the financial institution's creditors.   The IMF's creditors, on the other hand, are governments.  If the IMF were to become insolvent, it would be a diplomatic issue, since governments would stand to lose money, but I'm not sure it would be such a problem for the world financial system.  How much - beyond the money the US has put into it - the US would have to lose if the IMF fails is not immediately obvious to me. 

Reform that "high" statutory corporate tax rate? Not necessary - I got an interesting item pushed to me from an online-MBA website blog where today's item was on "10 Big Businesses That Barely Pay Taxes". It looks at companies like GE, duPont, Verizon, ExxonMobil, FedEx, Boeing, Google and others that aggressively maximize the offshoring of profits and the onshoring of deductions (like the "domestic manufacturing" reduction in the tax rate, the research deduction, etc.) in order to tap out on taxes at zero or awfully close thereto.  The companies tend to dislike such coverage of their very low tax rates of only slightly more than 0% when they are quite loudly (and hypocritically) protesting how uncompetitive the 35% statutory rate makes them. The site notes that most of the companies have claimed that they pay a higher rate than the one noted here--usually by counting their financial statement deferred taxes as though they were already paid. Deferred taxes, however, are just an accounting way of noting the possibility of future taxes--they may never be paid (for example, if offshore profits are not repatriated, or if corporations are successful in lobbying for another very-low-tax repatriation holiday), and years of deferral can convert what appear to be substantial taxes into de minimis amounts, since that money is meanwhile invested and earning more money.

GE CEO defends tax rate after protesters disrupt speech - General Electric CEO Jeff Immelt defended the company's payment of income taxes after protesters interrupted his speech here at the SAE World Congress."Tax rate was 29 percent last year," Immelt told a couple protesters at Cobo Center as they chanted "pay your fair share" a few feet from where he was speaking.About 20 protesters scuffled with Detroit Police before they were escorted out of the building. The protestors blew whistles and attempted to enter the SAE exhibition hall, but were forcibly blocked from doing so.GE spokesman Gary Sheffer said the company paid a 25 percent income tax rate in the United States in 2011 — and a 29 percent rate globally.In total, GE paid $2.9 billion globally in income tax in 2011, Sheffer said.GE said it paid a 7 percent U.S. tax rate in 2010 because it had lost $32 billion in its financial services unit and because of other tax breaks, Sheffer said. "We paid income taxes and we paid another $1 billion in taxes across the U.S. — state, local federal."

Bill Black: Mankiw Hearts “Governmental Competition” That Made Romney Rich - This is the second part of my discussion of N. Gregory Mankiw’s column asserting that governmental competition is desirable for the same reason that private competition is. Mankiw was Chairman of President Bush’s Council of Economic Advisors from 2003-2005. He was one of the principal architects of the perverse incentive structures that proved so criminogenic and drove the ongoing financial crisis. He gave no useful warnings of the necessity for containing the developing crisis – even after the FBI’s September 2004 warning that mortgage fraud was become “epidemic” and would cause a financial “crisis” if it were not contained. He is now Mitt Romney’s principal economic advisor. His column favors the “competition” argument that led him to support crippling financial regulation even as private sector competition led to endemic fraud.  Mankiw is a moral failure as well as a failed economist. He said that it would be “irrational” for CEOs not to loot “their” corporations. He ignored all of the prescient warnings we made about how accounting control fraud drove our crises and he continues to ignore those warnings and the reality of our recurrent, intensifying financial crises. He wants the U.S. to move even more rapidly downward in the “competition in regulatory laxity” that is driving those crises. Mankiw is serving as Romney’s propagandist in chief. He is writing columns trying to defend Romney’s vulnerabilities, e.g., claiming that Romney should pay a marginal income tax rate that is lower than the marginal rate his secretary pays. In the column I am responding to, Mankiw chose this frame for his analysis: “SHOULD governments — of nations, states and towns — compete like business rivals?” (The capitalization is in the original.) He answered his question in this self-referential manner.

Greg Mankiw doesn't understand competition​n for investment - Greg Mankiw's column in Sunday's New York Times makes the case that competition between governments is a good thing, thatit makes them more efficient in the same way that competition amongfirms does. He paints it as also being about choosing redistributionist policies or not, with Brad DeLong and Harold Pollack both ably making the case that of course governments should engage in redistribution.  I am more interested in the question of whether government competition for investment leads to more efficient outcomes. The answer, in short, is that it does not. Indeed, competition forinvestment leads to economic inefficiency, heightened incomeinequality, and rent-seeking behavior by firms (a further cause ofinefficiency). Mankiw claims: ...competition among governments leads to better governance. In choosing where tolive, people can compare public services and taxes. They areattracted to towns that use tax dollars wisely....The argumentapplies not only to people but also to capital. Because capital ismore mobile than labor, competition among governments significantlyconstrains how capital is taxed. Corporations benefit from variousgovernment services, including infrastructure, the protection ofproperty rights and the enforcement of contracts. But if taxes vastly exceed these benefits, businesses can – and often – move to places offering a better mix of tax and services. Mankiw doesn't stop to think about what this competition looks like in the real world. To attract mobile capital, immobile governments offer a dizzying array of fiscal, financial, and regulatory incentives to companies in sums that have been growing over time for U.S. state and local governments, as I document in Competing for Capital

Fed Paper on Repo Exposes Inadequacy of Financial Reforms - I’m late to write on a terrific and largely unnoticed paper presented at the Federal Reserve Board’s research conference on “Central Banking: Before, During and After the Crisis” in late March “A Proposal for the Resolution of Systemically Important Assets and Liabilities: The Case of the Repo Market” which could be more accurately titled, “What Financial Reform Missed.” The authors politely point out that the new Dodd Frank resolution powers would have done squat to prevent chaos in the wake of the Lehman implosion. Readers may recall that one disaster-in-the-making was the run on money market funds triggered when the Reserve Fund, a fund that invested heavily in Lehman commercial paper, broke the buck, leading investors to start to withdraw funds from other money market funds en masse. Money market funds are major providers of repo funding; the resulting run on repo would have been tantamount to a run on the major dealer banks. Not only would the Orderly Liquidation Authority under Dodd Frank have been unable to address the panicked withdrawals from money market funds, it is also unable to deal with other aspects of the Lehman failure (insolvency proceedings outside the US, some of which had systemic impact, the panic surrounding which hedge funds were caught with accounts frozen in the collapse of Lehman’s London broker-dealer).

A Dodd-Frank Regulatory Exemption Grows by 7,900% - For two years, regulators and business tussled over which companies that trade derivatives must submit to strict oversight as part of the Dodd-Frank financial reform. Credit default swaps and other derivatives, of course, were a major cause of the 2008 financial crisis.  Federal regulators made their first proposal in 2010, saying that only small players that trade less than $100 million a year would be exempt from rules requiring them to hold more capital and report more information on their trades. Regions Financial (RF), energy giant BP (BP), and other companies that write and use derivatives pushed back. They argued that a broader exemption makes more sense because derivatives trading is highly concentrated. According to the Office of the Comptroller of the Currency, five large banks—JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Morgan Stanley (MS), and Goldman Sachs (GS)—hold almost 96 percent of the notional value of all derivatives contracts. The smaller players, the argument goes, shouldn’t be burdened with extra requirements that would ultimately drive up costs for consumers.   This week, the regulators finally settled the issue, and generally the industry won out. Regulators expanded the exemption to include companies that do less than $8 billion in swaps a year—80 times more than the initial proposal.

How the Euromess could roll back Dodd-Frank - Under Dodd-Frank, U.S. derivatives dealers who trade with foreign customers or foreign branches of U.S. firms will soon be subject to a host of new rules — forcing them to raise their cash reserves, clear certain transactions on a central desk, and so forth. Now the Commodity Futures Trading Commission is thinking of issuing foreign banks and subsidiaries a temporary reprieve from the new rules, the Financial Times reports — a development that could open the door for a more permanent exemption.  European banks had already been protesting the new U.S. regulations: The E.U.’s financial services commissioner warned Securities and Exchange Commission Chairman Mary Schapiro that their implementation could create “confusion and legal uncertainty,” particularly as Europe is still in the process of hammering out its own regulations, as the Financial Times notes. At the same time, Republican legislators in the United States have been trying to roll back these regulations as well, arguing that they would drive the derivatives market away from American firms.  As a result, U.S. bank regulators have been under mounting pressure, both at home and abroad, to ease up on the new rules.  The CFTC is thinking of granting exemptions only if there are similarly stringent regulations overseas. But the fear of holding back markets in Europe at a time of distress could also persuade U.S. regulators to tread more cautiously.

Strong Evidence from Academic Research: Speculation Has Not Driven High Oil, Gas Prices - Economics professor Lutz Killian, University of Michigan, has a research paper titled "The Role of Speculation in Oil Markets: What Have We Learned So Far?" here's the abstract:"A popular view is that the surge in the price of oil during 2003-08 cannot be explained by economic fundamentals, but was caused by the increased financialization of oil futures markets, which in turn allowed speculation to become a major determinant of the spot price of oil. This interpretation has been driving policy efforts to regulate oil futures markets. This survey reviews the evidence supporting this view. We identify six strands in the literature corresponding to different empirical methodologies and discuss to what extent each approach sheds light on the role of speculation. We find that the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the co-movement between spot and futures prices reflects common economic fundamentals rather than the financialization of oil futures markets."

60 Minutes: The Case Against Lehman Brothers - Via Barry Ritholtz, who says "Other than getting Lehman’s role in the overall crisis wrong, this is a fascinating look at Lehman’s demise": [transcript]

The Central Question Posed by the Great Crash - The Great Crash posed one question for this country: who would bear the losses? Would it be the banks that caused the problems? The officers, directors and shareholders of those banks? Their careless counterparties? The investors who bought the fraudulent real estate mortgage-backed securities and the complex spin-offs? The owners of capital who threw money into hedge funds and other exotic investments expecting a geyser of money in return? No. That group doesn’t lose money. They used their control over the government and the Fed to make sure that the losses would be passed on to the rest of us, pushing millions into or near poverty. The savers were trashed by the Fed’s zero interest rate policies. The national debt run up by tax cuts and wars gave the rich an opportunity to end the safety net and focus all of the efforts of government on protecting them and their interests. The rich are safe. The rest of us are in deep trouble. The government threw money at banks with abandon, leaving incompetent failed executives in place. When it turned out that banks lied about the quality of the notes and mortgages transferred to the RMBS Trusts, the SEC and the Department of Justice refused to investigate, let alone prosecute.

Frontline’s Astonishing Whitewash of the Crisis -  Yves Smith - Several of my savviest readers wrote expressing disappointment and consternation with the Frontline series on the crisis, “Money, Power, and Wall Street.” The first two parts of the four part series have been released, and it’s probably safe to say that this program is far enough along to be beyond redemption. It’s a recitation of conventional wisdom, with just enough focus on some of the numerous things the banks and the authorities did wrong so as to make it seem daring for mainstream TV. But anyone who has been on this beat will find the first two segments cringe-making (one advantage I had was that of reading the transcripts, which makes it much easier to parse the construction). Despite the obligatory shots of Occupy Wall Street protestors, displaced homeowners, and stymied officials, much of the story line is remarkably bank-friendly.

The Laugher Curve: Romney Etch-A-Sketch Aide Says Romney Thought TARP Unnecessary but Urged Support of It as a Give-Away to Wall Street - Okay.  The subtitle of this post is a loose paraphrase of statements that Romney aide Eric Fehrnstrom made to ABC News on Thursday. As Washington Post blogger Greg Sargent mentioned on Friday, Fehrnstrom test-drove a new, or rather a newly clarified and perfected, campaign theme.  He claimed that the economic collapse began three years ago, immediately after Obama’s inauguration, rather than during the Bush administration.  Or that the severe economic downturn, which began in late 2007, and the near-collapse of the banking system, which occurred in the last few months of 2008, are unrelated to the deepening of the recession in 2009 and the ongoing high (but decreasing) unemployment rate, and also are unrelated to each other.  I’m not sure which.  Nor apparently is Fehrnstrom.   He is sure, though, that the jobs created since the beginning of this administration, including the ones generated in, say, the last two years, owe nothing to Obama’s policies.   Call it the theory of neo-economic severability.  Which occurs when some political hatchet wielder misjudges the level of most people’s credulity.  Or misjudges the public’s memory about major, fairly recent events, or at least about the public’s ability to have its memory refreshed by a few video clips and headlines from, say, the fall of 2008.   Or just call it the Laugher Curve. 

Michael Hudson: Productivity, The Miracle of Compound Interest, and Poverty - Yves Smith - Suppose you were alive back in 1945 and were told about all the new technology that would be invented between then and now: the computers and internet, mobile phones and other consumer electronics, faster and cheaper air travel, super trains and even outer space exploration, higher gas mileage on the ground, plastics, medical breakthroughs and science in general. You would have imagined what nearly all futurists expected: that we would be living in a life of leisure society by this time. Rising productivity would raise wages and living standards, enabling people to work shorter hours under more relaxed and less pressured workplace conditions. Why hasn’t this occurred in recent years? In light of the enormous productivity gains since the end of World War II – and especially since 1980 – why isn’t everyone rich and enjoying the leisure economy that was promised? If the 99% is not getting the fruits of higher productivity, who is? Where has it gone? Under Stalinism the surplus went to the state, which used it to increase tangible capital investment – in factories, power production, transportation and other basic industry and infrastructure. But where is it going under today’s finance capitalism? Much of it has gone into industry, construction and infrastructure, as it would in any kind of political economy. And much also is consumed in military overhead, in luxury production for the wealthy, and invested abroad. But most of the gains have gone to the financial sector – higher loans for real estate, and purchases of stocks and bonds.

Jamie Galbraith on Changes in Finance as the Driver of Inequality - Yves Smith -  I’m working my way around to the INET talks that I missed, and this one by Jamie Galbraith is very much worth viewing. It takes a while to build up steam, so be patient.  Galbraith has marshaled a great deal of cross country data over time, and shows how changes in equality happened in a very large number of economies in parallel. He explains, persuasively, that the most plausible culprit is changes in the financial regime.  Given the considerable evidence that inequality is costly even to the wealthy, Galbraith’s analysis provides another reason for reining in the major dealer banks.

CFPB to Take on Shadow Corporate Justice System - The Consumer Financial Protection Bureau announced Tuesday morning a “public inquiry” into how the financial services industry uses arbitration clauses to protect itself from consumer lawsuits. These clauses are often hidden from consumers, deep in contractual fine print, and strip away basic rights to judicial review. Banks, credit cards, cell phone companies or even employers routinely offer contracts that, in the event of a dispute, mandate an arbitration procedure in which there is not a judge or jury—but rather, a private arbitrator often chosen by the corporation being sued. Naturally, this creates a pseudo-judicial system heavily weighted towards corporations. Forced arbitration has a particularly pernicious effect in allowing companies to avoid class action lawsuits. Big companies hate class action lawsuits because without them, they are free to nickel-and-dime consumers without much fear of legal action—few people would take the time to individually sue their credit card company or cell-phone provider over a couple hundred dollars in bogus fees. Twenty states do not allow companies to ban class-action suits in contracts, but in AT&T Mobility v. Concepcion, the Supreme Court said companies can ban class actions through forced arbitration clauses. (Similarly, the Supreme Court upheld forced arbitration specifically by credit card companies in a case earlier this year).

Chasing Fees, Banks Court Low-Income Customers - “I may as well have gone to a payday lender,” said Mr. Wegner.  Along with a checking account, he selected a $1,000 short-term loan to help pay for his cystic fibrosis medications. The loan cost him $100 in fees, and that will escalate if it goes unpaid.  An increasing number of the nation’s large banks — U.S. Bank, Regions Financial and Wells Fargo among them — are aggressively courting low-income customers like Mr. Wegner with alternative products that can carry high fees. They are rapidly expanding these offerings partly because the products were largely untouched by recent financial regulations2, and also to recoup the billions in lost income from recent limits on debit and credit card fees.  Banks say that they are offering a valuable service for customers who might not otherwise have access to traditional banking and that they can offer these products at competitive prices. The Consumer Financial Protection Bureau, a new federal agency, said it was examining whether banks ran afoul of consumer protection laws in the marketing of these products.  In the push for these customers, banks often have an advantage over payday loan companies and other storefront lenders because, even though banks are regulated, they typically are not subject to interest rate limits on payday loans and other alternative products.

Consumers Need More Protection, Not Less -- The new Consumer Financial Protection Bureau is supposed to shield Americans from abusive banking and lending practices. And in its first nine months, it has been doing a good job. But consumer advocates are rightly alarmed that the bureau might now revoke a Federal Reserve rule that limited the fees credit card issuers can charge new customers.  The rule was put in place after some card issuers tried to evade a provision of the Credit Card Act of 2009 that said that companies could not charge more than 25 percent of a customer’s credit limit in upfront fees. The provision was intended to rein in so-called harvesters, which issued cards to poor customers and then charged them so much in fees that they barely had any credit left to spend. Some companies immediately tried to get around the law by charging new fees — application or processing fees — before the account was opened. The Federal Reserve rightly revised the rule to make these new charges subject to the same fee limit in the Credit Card Act. The Consumer Financial Protection Bureau argued for the rule in district court. But it now seems ready to give in. Instead of appealing, the bureau has proposed a rule that would no longer limit charges levied prior to the opening of the credit card account. If the proposed rule stands, countless low-income Americans could be harmed. It would also send a message of weakness to the credit card industry and could open the door to a new round of abuses.

President to Oil Speculators: Cut It Out - President Obama has taken a lot of heat from Republicans in recent weeks over high gas prices, and what he coulda, shoulda done to keep them lower.. It’s no wonder that the President is now trying to turn the tables by going after commodities speculators, whom he blames for distorting markets, with tougher regulation. Before I weigh in on the political and economic validity of that, let’s get a few facts straight. The price of gas is dependent on the price of oil. The price of oil is set on global markets, not in the U.S. And oil has been rising lately not because of Keystone, or opposition to fracking, or anything the White House has or hasn’t done – it’s been rising because emerging markets like China consume a ton of energy, because refinery capacity in the U.S has been constrained, because worries over conflict and supply disruption in Iran and other parts of the Middle East have added in a large fear premium to oil prices, and because oil is no longer just a raw material, but a tradable asset. In fact, commodity stocks now rival tech stocks as an investment of choice – as of last year, they accounted for about 30% of the global stock markets.

Oil prices - It appears that gasoline and crude oil prices are falling once again.  Energy prices are notoriously volatile so this is no surprise.  Market forces are complex and prices are very hard to explain or predict day-to-day. It's an old story.  When oil prices rise, politicians, including President Obama and his Oil Speculation Task Force (apparently not from The Onion), sense a grandstanding opportunity and start looking for shadowy plotting "speculators".   What about when prices fall?  All markets develop spot prices based on demand and supply hunches by participants who try to look at more than the present.   This is regardless of whether they actively enter into futures contracts.  The option of futures contracts allows side bets for those who want them -- for those who want a portfolio that includes hedges.  This is good for them and good for the rest of us who benefit from better informed prices in our lives.But side bets and hedges can also go wrong.  Corrections happen all the time.  The wisest traders encounter surpsises.  Prices can always be wrong.  The world we live in is that way.  The good news is that the prospect of corrections is built in. This is apparently too subtle for the world of politics.  So we get the spectacle of adults seriously touting childish stories.

More on speculation -- In addition to my discussion last week on the role of speculation in oil markets, let me call attention to commentary from some of my academic colleagues on the same topic:

Oil Speculation Imposes “The Most Insidious Tax” On Americans: Leo Hindery - A day after President Obama called for increased oversight of speculation in energy markets, House Republicans struck back, at least indirectly. On Wednesday, the House Financial Services Committee voted on budget legislation that would, among other things, repeal the Resolution Authority granted the Federal Reserve in the Dodd-Frank legislation and subject the Consumer Financial Protection Bureau to the annual appropriations process. (Editor's note: The accompanying video was taped Wednesday ahead of the House committee vote, which approved the measure 31-26). The developments speak to the starkly different philosophical approaches the two parties have regarding regulation of financial markets. They are related because the Commodity Futures Trading Commission (CFTC) was given authority in the Dodd-Frank Act to impose position caps on oil traders, beginning in January 2011. (See: Oil Speculators Must Be Stopped and the CFTC "Needs to Obey the Law": Sen. Bernie Sanders) These limits have not yet been implemented because the CFTC's budget was slashed ahead of Dodd-Frank's passage, says Leo Hindery, founder of InterMedia Partners, a private equity firm, and a former economic adviser to President Obama."Dodd-Frank was a painful bill to get passed," Hindery recalls. "It didn't do everything a lot of us wanted but, that said, it was a pretty good piece of legislation despite untold opposition."

The American Conservative: “Extractive Elites” and “Macro-Corruption” - It’s pretty amazing to read a cover story in, and by the publisher of, The American Conservative that could have run in The Nation, Mother Jones, or on Daily Kos — almost. Certainly America’s top engineers and entrepreneurs have created many of the world’s most important technologies, sometimes becoming enormously wealthy in the process. But these economic successes are not typical nor have their benefits been widely distributed. Over the last 40 years, a large majority of American workers have seen their real incomes stagnate or decline. Ordinary Americans who work hard and seek to earn an honest living for themselves and their families appear to be suffering the ill effects of exactly this same sort of elite-driven economic pillage. The roots of our national decline will be found at the very top of our society, among the One Percent, or more likely the 0.1 percent. This is in The American Conservative! Macro-corruption is a great coinage. Former S&L enforcer Bill Black should adopt it in place of his perhaps more descriptive but not very catchy “control fraud.” Unz (emphasis mine): although American micro-corruption is rare, we seem to suffer from appalling levels of macro-corruption, situations in which our various ruling elites squander or misappropriate tens or even hundreds of billions of dollars of our national wealth, sometimes doing so just barely on one side of technical legality and sometimes on the other.

MF Global: The Untold Story of the Biggest Wall Street Collapse Since Lehman - Only on Wall Street can you bankrupt a company; misplace $1.6 billion of customers’ money; lose 75 percent of shareholders’ money in two weeks; speed dial a high priced criminal attorney and get a court to authorize the payment of your multi-million dollar legal tab from the failed company’s insurance policies; have regulators waive your requirements to take licensing exams required to work in the securities and commodities industry; have your Board of Directors waive your loyalty to the firm; run a bucket shop out of the UK; and still have the word “Honorable” affixed to your name in a Congressional investigations hearing. This is not a flashback to the rotting financial carcasses of 2008. This putrid saga has been playing out in five Congressional hearings since December with the next episode scheduled for Tuesday, April 24, before the Senate Banking Committee under the auspicious title: “The Collapse of MF Global: Lessons Learned and Policy Implications.” (The title might more appropriately be, “MF Global: Lessons  Never Learned and Policy Implications of a Wild West Financial System Just One TradeAway from the Next Taxpayer Bailout.”)

MF Customers Press J.P. Morgan for Funds - Customers of MF Global Holdings Ltd. are pushing regulators to get tougher on J.P. Morgan Chase & Co. about money that went missing from accounts just before the firm's collapse. The move comes as a bankruptcy trustee representing brokerage customers of MF Global has said he is conducting an investigation of J.P. Morgan and had entered "substantive discussions regarding the resolution of claims" against the Wall Street firm. In a letter set to be sent to regulators and lawmakers on Monday, an MF Global customer group calls for J.P. Morgan to "return hundreds of millions of dollars in MF Global customer funds transferred" to J.P. Morgan in late October. The group, called the Commodity Customer Coalition, urged U.S. officials to "demand" that the New York bank "disgorge all MF Global customer property immediately." J.P. Morgan is cooperating with the ongoing investigation, has said it did nothing wrong and lost some of its own money in the Oct. 31 bankruptcy because it was a creditor of MF Global.

$1.6 billion in missing MF Global funds traced - Investigators probing the collapse of bankrupt brokerage MF Global said Tuesday that they have located the $1.6 billion in customer money that had gone missing from the firm. But just how much of those funds can be returned to the firm's clients, and who will be held responsible for their misappropriation, remains to be seen. Print CommentJames Giddens, the trustee overseeing the liquidation of MF Global Inc, told the Senate Banking Committee on Tuesday that his team's analysis of how the money went missing "is substantially concluded." "We can trace where the cash and securities in the firm went, and that we've done," Giddens said. MF Global failed last year after its disclosure of billions of dollars worth of bets on risky European debt sparked a panic among investors. About $105 billion in cash left the firm in its last week, Giddens said, as clients withdrew their funds and trading partners called for increased margin payments, leaving the firm scrambling to make good on its obligations. It has since emerged that MF Global tapped customer funds for its own use during this crisis and failed to replace them, in violation of industry rules.

New York Times Details Widespread Bribery in Wal-Mart Mexico and Top Executive Coverup - The Grey Lady has an amazingly detailed, must-read account of corruption at the highest levels of Wal-Mart. In 2005, Sergio Cicero Zapata, a lawyer who had been with WalMart in Mexico for ten years and had resigned in 2004, came forward with a description of his involvement, sanctioned by top executives in Wal-Mart’s Mexican operation, of handing out bribes totaling over $24 million to accelerate the construction of new stores. This activity is a clear violation of the Foreign Corrupt Practices Act.  Even though the Bentonville giant quickly found evidence corroborating the Cicero’s charges, as well as that of a cover-up by the top brass in Mexico, and looked into hiring an outside law firm to conduct an independent investigation, it quickly converted it to a limited review by an internal unit whose main activity was handling shoplifting cases. And lead responsibility for the probe was assigned to the general counsel of Wal-Mart de Mexico, a sure-fire way to assure no tough questions would be asked. Not only was the Mexico CEO who was deeply involved in this program promoted repeatedly after the notification by Cicero, ultimately becoming vice chairman at the parent level, but the current CEO, Michael Duke, had just been installed as the head of WalMart International, was involved in the coverup. The then-current CEO, Lee Scott, criticized the internal investigators for being too aggressive.

Weighing the Legal Ramifications of the Wal-Mart Bribery Case - The United States government puts a premium on corporate cooperation in foreign bribery cases, relying on companies to conduct thorough internal investigations and voluntarily disclose any wrongdoing. Indications that Wal-Mart Stores may have taken steps to keep an internal investigation from digging deeper into $24 million in questionable payments — and later promoting an executive who may have been implicated in them — may affect how the government decides to proceed against the giant retailer. Wal-Mart first disclosed in December that it had started “a voluntary internal review of its policies, procedures and internal controls pertaining to its global anticorruption compliance program.” That review was the result of reporting by The New York Times about bribery by Wal-Mart de México to secure permits and approvals to build new stores. The company’s disclosures did not give any information about where the foreign bribery issues had arisen, only that the focus was on whether “permitting, licensing and inspections were in compliance with the U.S. Foreign Corrupt Practices Act.” Wal-Mart said it had informed the Justice Department and the Securities and Exchange Commission about the internal investigation, and the company issued a statement in response to the Times article that its outside advisers “have and will continue to meet with the D.O.J. and S.E.C. to report on the progress of the investigation.”

Wal-Mart aided effort to change anti-bribery law - Wal-Mart, the giant retailer now under fire over allegations of foreign bribery in Mexico, has participated in an aggressive and high-priced lobbying campaign to amend the long-standing U.S. anti-bribery law that the company might have violated.The push to revisit how federal authorities enforce the statute has been centered at a little-known but well-funded arm of the U.S. Chamber of Commerce where a top executive of Wal-Mart has sat on the board of directors for nearly a decade.  The effort has intensified in the past two years, drawing on the backing of several large companies and trade groups such as the Retail Industry Leaders Association, where one of Wal-Mart’s top executives serves as a director. It also has involved high-powered lobbyists, including former attorney general Michael B. Mukasey. The 1977 law, known as the Foreign Corrupt Practices Act, prohibits U.S. companies from offering fees or gifts to foreign officials to advance corporate interests.

Attorney General in Mexico Will Investigate Wal-Mart - The Mexican government on Thursday stepped up its response to the bribery allegations that have been tied to Wal-Mart’s breakneck growth here, announcing that the federal attorney general’s office would begin an investigation into the company’s actions. President Felipe Calderón also made his first public comment on the Wal-Mart scandal since The New York Times first reported the bribery allegations over the weekend. Calling himself “very indignant” about the case during a meeting with Mexican migrants in Houston on Wednesday evening, Mr. Calderón said “it wasn’t right” to do business “based on mordidas,” using the common expression for the petty bribes Mexicans pay to smooth their way through bureaucracy or extricate themselves from traffic offenses and legal scrapes. The Times reported that Wal-Mart had detected that its Mexican subsidiary had paid $24 million in bribes or “donations” last decade to speed up permits and licenses for new stores. The company then buried its own investigation.  Mr. Calderón’s government at first dismissed the bribery as a local problem, arguing that construction and zoning permits of the sort described in The Times’s investigation are the responsibility of state and municipal authorities. As criticism echoed in Mexico’s media and became part of the presidential campaign ahead of the July 1 vote, the Calderón administration has appeared to backtrack.

S.E.C. Asks if Hollywood Paid Bribes in China - The Securities and Exchange Commission has begun an investigation into whether some of Hollywood’s biggest movie studios have made illegal payments to officials in China to gain the right to film and show movies there, according to a person with knowledge of the investigation.  The inquiry creates a potential roadblock for the industry’s plans to expand in one of the world’s largest markets.  The S.E.C. investigation has so far focused on at least three studios, the person said, but all of the largest and some smaller studios have been contacted or made aware of the inquiry, according to the person, who has direct knowledge of the investigation but who spoke on the condition of anonymity because the matter could end up in court.  In the last year, both the S.E.C. and the Justice Department have increased investigations under the Foreign Corrupt Practices Act, known as F.C.P.A., which forbids American companies from making illegal payments to government officials or others to ease the way for operations in foreign countries.

Wells Fargo Turns Away Its Own Shareholders From Its Shareholder Meeting -  At around noon today, some 2,000 activists launched a blitzkrieg against the bank's annual shareholder meeting at the Merchants Exchange Building, where they blocked entrances, inflated a two-story cigar-smoking rat in the street, and deployed hundreds of shareholder activists to pack the joint. Citing space constraints, the bank turned away many of the shareholders, a move protesters quickly decried as an illegal attempt to dodge tough questions. A press release from the activist group Cal Organize claimed Wells Fargo packed the meeting with its own employees, and continued to let shareholders who were not part of the protest in through a side door.

US banks to put stress tests case to Fed - Wall Street chief executives are to meet Daniel Tarullo, the Federal Reserve governor, next week to thrash out disagreements over capital stress tests. Jamie Dimon, chief executive of JPMorgan Chase, Lloyd Blankfein of Goldman Sachs, Brian Moynihan of Bank of America and James Gorman of Morgan Stanley are to meet in New York on Wednesday, say people familiar with the plan, although Vikram Pandit of Citigroup is out of New York then. The Fed published the results of the stress tests last month, causing consternation among the largest US banks as their capital buffers were deemed less resilient to a market meltdown than had been assumed. The biggest blow was to Citigroup, which the Fed found fell short of a minimum threshold for capital adequacy under a stress scenario if it distributed its preferred amount of cash to shareholders. That led to Citi’s plan to step up share buybacks being vetoed after having pledged to return significant amounts of cash since its near-collapse in the financial crisis. Bank of America was in the same predicament last year. But even healthier banks such as JPMorgan fared worse than their own models predicted in a scenario that showed the US unemployment rate rising to more than 13 per cent, a deepening sovereign bond crisis in Europe and a global recession.

Chris Whalen: The Fallacy of “Too Big To Fail”–Why the Big Banks Will Eventually Break Up - In a riveting interview on the banking industry, Christopher Whalen of Tangent Capital Partners in New York joins Jim on Financial Sense Newshour to discuss the fallacy of "too big to fail," conflicts of interest in the derivatives markets, problems with the 2005 bankruptcy laws, and why politicians let MF Global investors get taken. (with transcript)

The Hidden Bank Time Bomb: Interest Rate Risk - Yves Smith - At the Atlantic Economy Summit in Washington last month, Sheila Bair fielded a question about the just-released results of the latest bank stress tests. The former FDIC chief took pains to point out that they were an improvement over earlier iterations by virtue of keying off a truly dire economic scenario, but then ticked off a number of ways in which they fell short. One was in that they focused solely on credit risk, when historically, adverse interest rate moves have proven very effective in decimating the banking sector. Witness phase one of the savings and loan crisis, in which hasty deregulation and gimmickry in the early 1980s set up the crisis later in the decade, or the derivatives wipeout of 1994, in which an unexpected 25 basis point Fed funds increase created bigger losses than the 1987 crash, or the losses on US bond portfolios in 1997 and 1998, which among other things nearly wiped out Lehman. The perils of interest rate risk have largely receded from memory since the US has been in a long-term disinflationary trend since 1983. But with rates at zero, we have nowhere to go but up from here.  Chris Whalen, in his latest newsletter, argues that this risk is even nastier than it might appear. One way of mitigating interest rate risk is by holding shorter-dated instruments. But, as Whalen points out, this all goes haywire when interest rates are super low. So much of the value is in the repayment of principal and so little in the intervening interest payments that it pushes duration out and increases interest rate risk disproportionately. That effect may be further compounded by the fact that banks are desperate for yield and with the yield curve flatish, they are likely to be extending the maturity of their assets.

Finance in Denial - The largest banks in America–Citibank, Bank of America, Wells Fargo, and others–are probably insolvent. I learned of this from my companions in Occupy Wall Street’s Alternative Banking Working Group. It seems that, based on a host of legal and accounting irregularities, the banks have been able to conceal real and potential losses far larger than their capital reserves. But this has been difficult to confirm. Isn’t that strange? Wouldn’t the possible insolvency of the core of our banking industry be a matter of nearly universal importance? Shouldn’t we be trying to figure out if this is in fact so, how it came to be, what we’re going to do about it, and how we can prevent its happening again? Anyone investigating the true health of the banking industry, apparently including regulators, is faced with opacity, complexity, and even outright hostility that stymies all but the most savvy and persistent. Fortunately, people within OWS, including the Occupy the SEC Working Group, are that savvy and persistent. But the reaction of the industry and its partisans to such efforts has included the not-so-subtle suggestion that inquiring into the well-being of the banking industry will somehow cause problems to arise that wouldn’t otherwise exist if we would all just mind our own business. This seems odd in an ostensibly objective and quantitative context like banking. Shouldn’t the truth be clearly visible in the accounting? Shouldn’t we all–borrowers, investors, depositors, and regulators–want to know exactly what’s going on?

Finance in Denial – The Addiction - Is it fair to say that because the quality of the denial surrounding the banking industry’s problems is so similar to that of the denial surrounding addiction, that addiction is therefore the root of those problems and our ongoing failure to adequately address them? Perhaps not, but others have come to describe money, debt, and banking as something very much like addiction for entirely different, and far better argued, reasons. In Debt: The First Five Thousand Years, David Graeber looks deeply into the anthropological record and finds that money and debt, and, by extension, banking, are all essentially the same thing, and they’re not what most of us understand them to be. Money is certainly not simply the objective store of value and medium of exchange that economists would have us believe it is. Because money is created as debt, its use to finance productive activity means that that activity, whatever it is, must then generate interest to be returned to money’s creators in addition to the money lent. This has given rise to an industry, even a class of people, that derives its livelihood not from any productive activity of its own, but merely from having money. In Sacred Economics, Charles Eisenstein takes this a step further to show that this overhead cost inherent in all monetarily denominated activities means that the value represented by money must always grow. There is no logical end to what must be monetized–natural resources, ideas, time. Nothing can remain unowned and clear of liens, and that will eventually consume any finite realm:

Just Banking Presentation - Steve Keen video

CBO Update on TARP Disbursements and Costs - The Congressional Budget Office’s Report on the Troubled Asset Relief Program—March 2012 provides updated analysis of the program started in October 2008. The report concludes that as of February 2012, $431 billion of the possible $700 billion has been disbursed. More than half of that has already been repaid and AIG’s $50 billion represents nearly 40% of payments still outstanding. This most recent report estimates net cost to the government at $32 billion, a drop from the $34 billion estimated in December 2011’s report. The $2 billion drop is mostly due to the appreciation of the government’s investments in AIG and General Motors. Here is a great chart summarizing the costs and disbursements related to TARP

TARP: Billions in Loans in Doubt = Hundreds of small banks can't afford to repay federal bailout loans, a top watchdog will warn Wednesday in a report that challenges the government's upbeat assessment of its financial-system rescue. Christy Romero, special inspector general for the Troubled Asset Relief Program, said 351 small banks with some $15 billion in outstanding TARP loans face a "significant challenge" in raising new funds to repay the government. Ms. Romero made the comments in her quarterly report to Congress, the first since the Senate approved her appointment in March as special inspector general for the program. She urged the government and regulators to find a way to help banks raise funds to repay the loans.

Tarp Overseer Debunks Bailout Myths: Big Companies HAVEN’T Repaid Tarp Funds … And Funds to Help Homeowners HAVEN’T Been Disbursed - Apologists for government bailouts push two main myths:

  • That all of the bailout funds have been repaid
  • That the bailouts helped the average American

But the official government overseer of the Tarp bailout program – the special inspector general for TARP, Christy L. Romero – has debunked both myths. Today, Romero wrote the following to Congress: After 3½ years, the Troubled Asset Relief Program (“TARP”) continues to be an active and significant part of the Government’s response to the financial crisis. It is a widely held misconception that TARP will make a profit. The most recent cost estimate for TARP is a loss of $60 billion. Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost). And earlier this month, Romero stated that the portion of the Tarp funds which were supposed to help homeowners haven’t been disbursed: A fund to support homeowners in the communities hit hardest by the collapse of the housing bubble has disbursed just 3 percent of its budget and aided only 30,640 homeowners in the two years since its creation, according to a report released on Thursday by a federal watchdog office.

TARP’s Illusory Profits - The Troubled Asset Relief Program (TARP) was recently claimed by the Treasury department to be likely to recoup the money it spent trying to prop up the economy. While that would be wonderful news, judging the impact of a huge financial program like TARP on the federal budget is much more complex that simply totaling dollars in and dollars out. Daniel Indiviglio of Reuters applied some basic financial accounting techniques to determine that TARP is actually likely to cost the taxpayers hundreds of billions of dollars. The Treasury says the Troubled Asset Relief Program might turn a profit. But the agency’s fuzzy math wouldn’t fly with any sensible portfolio manager. What it calls a gain looks more like a loss of at least $230 billion. Treasury’s rosy projections aren’t half as bad as its methodology. The government declares a return when an investment’s payments exceed the initial cash outlay. That boldly disregards the cost of money and its value over time. Compare that to TARP, which had seven broad components. Start with the banks. Treasury estimates an ultimate profit of $22 billion. Even if that’s achieved by year’s end, taxpayers will have earned a paltry annualized return of 2 percent. Simply investing in the S&P 500 index would have earned 14 percent a year.

Rationality of Banks - For a while Diogenes was associated with a company who told the world they had $10 billion from overseas investors, and that these investors wanted to buy the toxic assets of US Banks, at 26 cents on the dollar.  Seemed like a pretty straightforward assignment, just call some large number of banks, talk to the people responsible for unloading the things, and arrange a deal. Not one bank that wanted to do a deal. For a while people said this was because we let them know the price in advance. It really was no secret how they came to the price of 26%: When Merrill Lynch had to unload a ton of these assets in order for Bank of America to take them over, the assets sold in a hurry at that price.  It was not about price. It turns out that all of the banks preferred to let the assets get picked up by FDIC for 16%, instead of selling them privately for 26%. HSBC turned over the assets that my associates wanted to buy at 26 cents, and gave them them up to the government at a lower price, 16%.  Seemed pretty stupid to me. And some of the banks lied to me. The VP at IndyMac told Diogenes they were selling these assets (actual foreclosed houses) one by one at 90 cents on the dollar, and would not entertain any bulk sales of any kind.  In order to actually make a deal with investors, someone at the bank would have to take responsibility for de-valuing assets, in writing. That is, the bank officer would have to make a decision to sell assets that were on the books for a billion dollars, and make the bank lose 740 million dollars, before the sale could take place at 260 million. That guy would immediately lose his job and he would never be able to work in the banking business again. Let it go to FDIC, nobody has to sign off on it. As we say here in Brooklyn, Poi-fict.

Unofficial Problem Bank list declines to 939 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for April 20, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  As expected, the OCC released its enforcement action activity through mid-March this week, which contributed to many changes to the Unofficial Problem Bank List. In all, there were 12 removals and seven additions that result in the list having 939 institutions with assets of $365.6 billion. A year ago, the list held 976 institutions with assets of $422.2 billion. The removals, which are centered in Texas, Michigan, and Minnesota, include 10 action terminations, one failure, and one unassisted merger.

Ally says may put mortgage unit in bankruptcy- Ally Financial Inc, the U.S. government-owned lender, said its mortgage unit could file for bankruptcy, in the company's most direct statement so far about its plans for the struggling business. Ally Chief Executive Michael Carpenter said its Residential Capital LLC unit has been examining options that range from "staying the course" to bankruptcy. "We think that the single most important thing that we can do to preserve and enhance shareholder value is to distance Ally from the mortgage business," Carpenter said on a conference call with investors after the company posted quarterly earnings. Sources have told Reuters that bankruptcy was an option for ResCap, possibly as early as mid-May, but the company had previously only hinted at the possibility. An executive said Ally failed a recent test from regulators for soundness in distressed economic situations, known as the Federal Reserve's "stress test," in large part because of liabilities linked to the mortgage business. Ally, which was originally the lending arm of General Motors, said it learned on Wednesday that Chrysler Group LLC was not renewing a preferred lending agreement that will now expire next year, but executives downplayed the importance of that loss on the call.

Attorneys general seek role in BofA’s Countrywide bond case - The New York and Delaware attorneys general urged a judge to approve their participation in litigation over Bank of America Corp.'s $8.5-billion settlement with mortgage-bond investors. New York Atty. Gen. Eric Schneiderman and Delaware Atty. Gen. Beau Biden have criticized Bank of America's proposed settlement and asked Justice Barbara Kapnick of New York State Supreme Court in Manhattan on Tuesday to approve their requests to intervene in the case. "This is a massive waiver of liability for Bank of America and Countrywide," . Schneiderman says the settlement, reached with investors in Countrywide Financial Corp. mortgage bonds, is unfair and settles investor claims for "a small fraction" of losses. Biden said intervention should be approved because the settlement, which includes provisions for servicing mortgage loans, affects homeowners who aren't involved in the case. The servicing proposals are vague and don't provide an incentive for servicers to help struggling borrowers, the office said in court papers.

Interview, MERS RICO complaint: Doug Welborn, State District Court Clerk vs. MERSCORP Shareholders and Trustees (“the banksters”) - The triple damages claim under civil (sigh) RICO is a billion dollars or so for Louisiana alone — real money — which makes Welborn interesting. Even more interesting is that RICO, as a “theory of the case,” is simple, clean, and easy to explain, unlike so many of our criminal banksters’ crooked schemes. We caught up with the trial lawyer for Welborn, Ted Lyon, and interviewed him. Did I mention the claim is for a billion? Skip ahead, if you want, to the interview, it’s indented, but the backstory is important, too: Hat tip to alert reader Roger Bigod, who piqued my interest in comments with “county clerk’s suit”, leading to this link on Louisiana clerks suing the banks under RICO. So I searched the go-to site on foreclosure fraud and found this post (love the graphic!), which linked to this fine story in the Baton Rouge Advocate. The reporter, Bill Lodge, had some excellent quotes from Richard D. Faulkner, Esq., so I found Faulkner and called him. Faulkner was gracious enough to play phone tag with a pseudonymous blogger whose answering machine was full, and then to hear him out. He put me in touch with Ted Lyon, who’s going to try Welborn. (It seems that these days there are very few lawyers who actually appear in court, but Lyon is one such. I note with pleasure that Lyons took a packet from Koch Industries for the death of a child.) I then arranged, on very short notice, for a professional interviewer (hat tip, SM) to speak with Lyon, and a professional transcriptionist (hat tip, KL), whose collaboration you see below.

$20B Package of Bank of America MSRs Still Hasn’t Traded - A $20 billion package of residential mortgage servicing rights being offered by Bank of America has yet to trade even though the bidding ended about two weeks ago, according to investment bankers familiar with the deal.

After the bailout: few fans but no fix for Fannie and Freddie (Reuters) - In considering how to fix the ailing U.S. housing market, Republicans and Democrats in Washington have found a rare point of agreement: they would prefer life without failed mortgage giants Fannie Mae and Freddie Mac. But even with agreement that the system is broken, it is unlikely Congress will soon tackle the mammoth task of winding down two entities that have cost taxpayers more than $150 billion since their bailout in September 2008. Fannie and Freddie now support about 60 percent of all new U.S. home loans. Already, lawmakers have taken tentative steps to scale back Fannie Mae and Freddie Mac's involvement by reducing the size of loans that they can guarantee. Republicans and Democrats have unified behind preserving affordable homeownership. But more dramatic actions could be politically treacherous in an election year. Home buyers still rely on the government backstop in nine of 10 new mortgages, and the fragile market must be weaned slowly from its dependence on federal programs providing financial backing.

Setting the Record Straight: The Housing Bubble Lie - Let’s get something straight: we did not have a housing “bubble”, in the usual sense of the word. The mainstream narrative of crazed, greedy, irresponsible homeowner-wannabes driving prices unsustainably high, causing the still ongoing crash is wrong. Yes, we had a housing “bubble” in one sense; prices soared way beyond reality because excess demand fueled irrational bidding wars. The lie deals with why we had a housing bubble. The lie matters because like all problem-defining narratives, it shapes the policy solutions offered. So let’s take a look at the lie. The classic example of a demand-driven bubble is Holland’s tulip craze in the 1600s. A much more recent version was the DotCom fever a couple of decades ago. How did these bubbles happen? Simple. Irrational economic actors, that is, normal people acting as consumers, got a kind of mob/herd madness/fever and outbid each other endlessly, until suddenly reality intruded and they stopped. But here’s the thing: Houses are not like tulips, shares of stock, dolls, or any other mass-market consumer product. They just cost too much. The only people who can buy a house simply because they want to are cash buyers. We didn’t have a housing bubble in the ordinary sense because consumers don’t buy houses; banks buy houses. The housing market cannot undergo a demand-driven bubble without lender collusion and complicity.

The Ministry of Truth Speaks: American Prospect Tries to Pass Off Mortgage Turncoat Schneiderman as Hero -- Yves Smith - I’m not looking forward to months of pre-election image-burnishing fabrication. The nausea-inducing offering of the day, The Man the Banks Fear Most from the American Prospect, gives us an idea of what we have in store. The good news is that this revisionist history on the craven sellout by Eric Schneiderman on the mortgage settlement appears to be in response to a damaging New York Daily News article last week. That story outed the fact that the mortgage task force, the trinket offered to Schneiderman in return for going silent on his stance on the settlement talks, appears to be going nowhere. (Efforts to rebut this charge served only to establish that the officialdom has totaled the investigations that were underway and are trying to depict them as new activity) Schneiderman had been the leader of the opposition. Getting him on the side of the Administration enabled them to push the deal over the line.  Matt Stoller pointed out that he is either unknown or disliked in New York. Today, Politico, which is more influential in DC than American Prospect, ran an op-ed by Tracy Van Slyke on Obama’s Missing Task Force. But you really need to have a look at the American Prospect piece to see how transparently awful it is. It is clearly based on interviews with Schneiderman and a few of his allies. Much of the piece is told from his perspective and other bits, such as a flattering recap of his career, are pure PR puffery.

Rep. Brad Miller Speaks Out on Why He Wasn't Hired for Mortgage Fraud Task Force - A central focus for progressives that want to see the Residential Mortgage Backed Securities working group get tough on the financial industry has been the role of executive director. Currently, the group has five co-chairs from four different federal and state agencies, and the staffers are spread through ten different US Attorney offices and several more state attorney general offices—that is, there are a lot of chefs in the kitchen. A strong executive director could focus the work of the task force and help smooth over any potential disagreements between the varying departments and chairmen. Several progressive activists pushed early on for Representative Brad Miller, a Democrat from North Carolina, to get the job. He has a strong record of getting tough on Wall Street from his seat on the House Financial Services Committee, and is also a Columbia Law School graduate with twenty years of private litigation experience before coming to Congress. But David Dayen reported earlier this month that Miller would not get the job. In a phone interview last night, Miller told me about his experience with the working group and the reasons he believed he was not selected—reasons that will likely give advocates for getting tough on Wall Street some serious heartburn.

RealtyTrac: Foreclosure activity mixed in Q1 - From RealtyTrac: 54 Percent of U.S. Metros Post Quarterly Increase in Foreclosure Activity in First Quarter of 2012: First quarter foreclosure activity increased from the previous quarter in 26 out of the nation’s 50 largest metro areas, led by Pittsburgh (up 49 percent), Indianapolis (up 37 percent), Philadelphia (up 30 percent), New York (up 24 percent), Raleigh, N.C. (up 23 percent), and Virginia Beach, Va. (up 22 percent). The biggest quarterly decreases in foreclosure activity among the 50 largest metro areas were in Portland, Ore. (down 28 percent), Las Vegas (down 26 percent), Providence, R.I. (down 24 percent), Salt Lake City (down 22 percent), Boston (down 21 percent), and San Jose, Calif. (down 21 percent). “While the majority of metro areas continued to show foreclosure activity down from a year ago, more than half reported increasing foreclosure activity from the previous quarter — an early sign that long-dormant foreclosures are coming out of hibernation in many local markets.” This graph from RealtyTrac shows some market are seeing an increase in foreclosure activity and others a decrease. RealtyTrac doesn't mention this, but Pennsylvania, Indiana, New York and North Carolina are all judicial states (the top 5 metro increases were in those states). The states with the largest decreases in foreclosure activity - Oregon, Nevada, Rhode Island, Utah, Massachusetts, and California - are all non-judicial states.

LPS: Percent of delinquent mortgage loans declined in March - LPS released their First Look report for March today. LPS reported that the percent of loans delinquent declined in March from February. However the percent of loans in the foreclosure process remained at a very high level. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) declined to 7.09% from 7.57% in February. This is the lowest delinquency rate since August 2008; however the percent of delinquent loans is still significantly above the normal rate of around 4.5% to 5%. The percent of delinquent loans peaked at 10.97%, so delinquencies have fallen over half way back to normal. Note: There is a seasonal pattern for delinquencies, and it is not unusual to see a decline in March. The following table shows the LPS numbers for March 2012, and also for last month (Feb 2012) and one year ago (Mar 2011).The number of delinquent loans is down about 14% year-over-year (580,000 fewer mortgages deliquent), but the number of loans in the foreclosure process has only declined slightly year-over-year. This remains far above the "normal" level of around 0.5%.

Further Decline in California Foreclosure Activity - The number of California homes entering the formal foreclosure process during the first quarter declined to its lowest level in almost five years, the result of a more stable economy and housing market, as well as policies that increasingly favor short sales, a real estate information service reported.  A total of 56,258 Notices of Default (NODs) were recorded at county recorders offices during the first quarter of this year. That was down 8.5 percent from 61,517 for the prior three months, and down 17.6 percent from 68,239 in first-quarter 2011, according to San Diego-based DataQuick.  Last quarter's tally of 56,258 NODs was the lowest since 53,943 NODs were recorded in second-quarter 2007. NOD filings peaked in first-quarter 2009 at 135,431.  The most active "beneficiaries" in the formal foreclosure process last quarter were Bank of America (10,419), Wells Fargo (7,577), Bank of New York (5,380) and JP Morgan (5,343).

Short Sales Soar as Home Foreclosures Fall  - The foreclosure crisis isn’t over, but a new trend in real estate sales could be the light at the end of the tunnel for many borrowers and lenders. Short sales, which occur when homeowners sell their homes for less than what they still owe, outpaced foreclosures for the first time ever in January, according to a new report from Lender Processing Services, Inc. Another report by RealtyTrac estimates that short sales rose 33 percent between January 2011 and January 2012. Short sales accounted for 23.9 percent of January home sales, compared with 19.7 percent for foreclosures. The LPS report also says that while foreclosed homes sold at average discounts of 29 percent in January, homes in short sales were only marked down 23 percent. Short sales are also closing faster than foreclosure sales, and they relieve banks of the responsibility of managing and protecting vacant homes. With lenders poised to reap such significant benefits, the real question isn’t why they’re warming up to short sales, but why they’re doing it right now.  For starters, they’re being forced to. The Federal Housing Finance Agency announced this month that mortgage servicers will be required to review and respond to short sale offers within 30 days and make final sale decisions within 60 days. The new requirements, which take effect in June, have kept lenders busy expanding and training the staff needed to catch up with growing short sale demand.

MBA: Mortgage Purchase activity increased slightly, Refinance activity declined, Record Low Mortgage Rates - Form the MBA: Mortgage Applications Decrease Despite Survey Low Rates in Latest MBA Weekly Survey. The Refinance Index decreased 5.6 percent from the previous week, with the Conventional Refinance Index decreasing by 6.1 percent and the Government Refinance Index decreasing by 2.1 percent. The seasonally adjusted Purchase Index increased 2.7 percent from one week earlier. The refinance share of mortgage activity decreased to 73.4 percent of total applications from 75.2 percent the previous week....The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 4.04 percent from 4.05 percent,with points decreasing to 0.40 from 0.45 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This is the lowest 30-year fixed interest rate recorded in the history of the survey.The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.32 percent from 3.33 percent, while points remained unchanged at 0.41 (including the origination fee) for 80 percent LTV loans. This is the lowest 15-year fixed interest rate recorded in the history of the survey.

Fixed Mortgage Rates Hold Near Record Lows - Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates down slightly and hovering just above their record lows as markets waited for the Federal Reserve's monetary policy announcement. The 30-year fixed-rate mortgage averaged 3.88 percent and has been below 4 percent all but one week in 2012. The 15-year fixed, a popular refinancing choice, averaged 3.12 percent. 30-year fixed-rate mortgage (FRM) averaged 3.88 percent with an average 0.7 point for the week ending April 26, 2012, down from last week when it averaged 3.90 percent. Last year at this time, the 30-year FRM averaged 4.78 percent.

Low-ball bidders in many markets learn they can no longer get a steal on a house  - A year ago, according to researchers at the National Association of Realtors, one out of 10 members surveyed in a monthly poll complained about low-ball offers on houses listed for sale. In the latest survey — conducted in March among 4,500 agents and brokers across the country but not yet released — there were hardly any. Instead, the focus of volunteered comments has shifted to declining inventory levels — fewer houses available to sell — and multiple offers on well-priced listings.A low-ball offer typically involves a contract submitted to a seller where the price proposed by the purchaser is 25 percent or more below list. Low-balls increase sharply when there’s a glut of properties available, asking prices are out of sync with local economic realities and values are depressed or uncertain. Buyers figure: Hey, why not? Maybe I’ll get lucky. Based on the latest survey results, that sort of strategy is not a winning move in many communities this spring. In fact, in local markets where inventories are tight and competition for homes rising, realty agents say that buyers looking to steal houses by low-balling their offers are ending up at the back of the line, their contracts either rejected out of hand or countered close to the original asking price.

Inventory Shortages Mean Bidding Wars Are Back (For Now) A new development is catching home buyers off guard as the spring sales season gets under way: Bidding wars are back. From California to Florida, many buyers are increasingly competing for the same house. Unlike the bidding wars that typified the go-go years and largely reflected surging sales, today's are a result of supply shortages.Competitive bidding in the current environment isn't producing huge price increases or leaving sellers with hefty profits, as occurred during the housing boom. Still, the bidding wars caused by tight inventory provide the latest evidence that housing demand is starting to pick up after a six-year-long slump. An index that measures the number of contracts signed to purchase previously owned homes rose in March to its highest level in nearly two years, up 12.8% from a year ago and 4.1% from February, the National Association of Realtors reported on Thursday. "We very much believe we've hit bottom," said Ivy Zelman, chief executive of a research firm, who was among the first to warn of a downturn seven years ago. Earlier this week, she raised her home-price forecast for the year, calling for a 1% annual gain, up from a 1% decline.

The growing optimism on housing is not justified - Not only is the recent data disappointing, but the overhang of shadow inventories threatens to keep the housing market depressed for some time to come. We’ll begin with a look at the data. Existing home sales were down 2.6% in March, the second straight monthly decline. Sales remain depressed, and are still 37% below the peak during the boom. The purchase index for the latest reported week was down 11%, and is down 15% from a year earlier. New housing starts dropped for the second consecutive month to a paltry 654,000. It topped out at 2,273,000 in January 2006. The NAHB housing index for April dropped back to its early January level. It remains at 25, compared to a peak reading of 70. The latest Case/Shiller report show year-over-year national average price declines of 4% To find anything encouraging in these numbers is quite a stretch. In addition to the data already reported, it is difficult to be optimistic about the period ahead. Although the bulls talk a great deal about the decline in inventories of homes for sale, keep in mind that the official inventory numbers include only homes that are now on the market, and ignores the importance of the so-called "shadow inventories" that loom over the industry like the sword of Damocles. The shadow inventories include houses that are not now on the market, but are either delinquent on mortgage payments, in default, owned by banks or are in some stage of the foreclosure process. Estimates of the number of houses in this category vary anywhere between 2 million and 10 million.

FNC: February Residential Property Values Down 0.8% - From FNC: February Residential Property Values Down 0.8% FNC’s latest Residential Price Index™ (RPI), released Friday, indicates that U.S. residential property values continued to show signs of persistent weakening - ending in February with a seventh consecutive month-to-month decline. Despite sharply rising activities in existing home sales and new housing starts from a year ago, prices on non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales) continue to slide, down 0.8% from February or 3.0% from a year ago. All three RPI composites (the National, 30-MSA, and 10-MSA indices) show similar month-to-month declines in February, down about a percentage point from January. ... The year-to-year declines at the nation’s top housing markets, as indicated by the 30- and 10-MSA composites, have also decelerated to below 4.0% -- their slowest pace since May 2010. This graph is based on the FNC index (four composites) through February 2012. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals. The indexes are generally showing less of a year-over-year decline in February (I think prices will fall seasonally through the March report). This is the smallest year-over-year decline in the FNC index since the housing tax credit expired.

US home prices drop for 6th straight month - Home prices dropped in February in most major U.S. cities for a sixth straight month, a sign that modest sales gains haven't been enough to boost prices. The Standard & Poor's/Case-Shiller home-price index shows that prices dropped in February from January in 16 of the 20 cities it tracks. The steepest declines were in Atlanta, Chicago and Cleveland. Prices rose in Phoenix, San Diego and Miami. They were unchanged in Dallas. The declines partly reflect typical offseason sales. The month-to-month prices aren't adjusted for seasonal factors. Still, prices fell in 15 of the 20 cities in February compared with the same month in 2011. That indicates that the housing market remains far from healthy despite the best winter for sales in five years. The steady price declines have brought the nationwide index to its late 2002 level. Home prices have fallen 35 percent since the housing bust. Prices in nine cities fell to their lowest levels since the housing bust. The average price in Atlanta fell 17.3 percent in February compared with a year earlier. That's the biggest annual drop in the history of the index for any city.

Case Shiller: House Prices fall to new post-bubble lows in February NSA - S&P/Case-Shiller released the monthly Home Price Indices for February (a 3 month average of December, January and February). This release includes prices for 20 individual cities, and two composite indices (for 10 cities and 20 cities). Note: Case-Shiller reports NSA, I use the SA data.  From S&P: Nine Cities and Both Composites Hit New Lows in February 2012 According to the S&P/Case-Shiller Home Price Indices Data through February 2012, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices ... showed annual declines of 3.6% and 3.5% for the 10- and 20-City Composites, respectively. This is an improvement over the annual rates posted for the month of January, -4.1% and -3.9%, respectively. ... Nine MSAs and both Composites posted new cycle lows as of February 2012.The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 34.2% from the peak, and up 0.2% in February (SA). The Composite 10 is at a new post bubble low Not Seasonally Adjusted. The Composite 20 index is off 33.9% from the peak, and up 0.1% (SA) from January. The Composite 20 is also at a new post-bubble low NSA. The second graph shows the Year over year change in both indices. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Home prices lowest since 2002 -- Home prices hit new post-bubble lows in February, according to a report out Tuesday. The S&P/Case-Shiller home price index of 20 cities recorded a decline of 3.5% from 12 months earlier. Home prices have not been this low since November 2002. "Nine [housing markets] hit post-bubble lows," said David Blitzer, spokesman for S&P. Those nine markets include Atlanta, Charlotte, Chicago, Las Vegas and New York. The main challenge for housing continues to be foreclosures and other distressed property sales, according to Pat Newport, an analyst for IHS Global Insight. "We still have 6 million homeowners who are late on their payments," he said. "We'll still have lots of foreclosures, which will depress prices." 

U.S. home prices hit nearly decade low in February - U.S. home prices dropped sharply in February to hit the worst level in nearly a decade, according to a closely followed index released Tuesday. The S&P/Case-Shiller 20-city composite fell 0.8% compared to January levels to take the year-on-year drop to 3.5%. The index is at its lowest level since October 2002. Of the 20 cities measured, 16 had negative readings and only three showed gains. The decline may be due to the typical pattern of diminished interest during the winter and heightened interest in housing during the spring and summer, as prices rose 0.2% on a seasonally adjusted basis. House prices have dropped by over a third from their peak as the bubble burst. High levels of distressed properties on the market have hampered the market, as has the high unemployment rate and tough credit conditions, which have offset the benefit of mortgage rates near or at record lows.

FHFA House Price Index Up 0.3%; Comparisons with Case-Shiller - The FHFA’s house price index showed a month-over-month increase of 0.3 percent in February on a seasonally adjusted basis and a 0.4 percent increase compared to a year ago in February 2011. This marks the first 12-month gain since the July 2006 – July 2007 yearly increase.  The FHFA’s index still remains 19.4 percent below its April 2007 peak and is roughly the same as the January 2004 index level. The index uses purchase prices of houses backing mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac. For the nine FHFA census divisions, Mountain (+1.9 percent), West South Central (1.5 percent), East South Central (1 percent), New England (0.8 percent), and South Atlantic (0.7 percent) posted price gains from January to February, while West North Central (-1 percent), Pacific (-0.7 percent), East North Central (-0.1 percent), and Middle Atlantic (-0.1 percent) saw price decreases.  The Case-Shiller index, which was also released Tuesday, showed a slight month-over-month increase for February on a seasonally adjusted basis, with home prices rising 0.2 percent for the 20-city composite, and 0.1 percent for the 10-city composite. On a non-seasonally adjusted basis, home prices fell 0.8 compared to January, and on a yearly basis, prices fell 3.6 percent and 3.5 percent for the 10- and 20-city indexes of metropolitan areas.

Housing Market Indexes: One Up, One Down - Are U.S. home prices rising or falling? Two indexes that measure the nation’s housing market, both released Tuesday, are telling seemingly contradictory stories. One, the prominent S&P/Case-Shiller index of home prices in major metropolitan areas said home prices reached new lows in February, and only three out of 20 cities posted monthly gains. On the other hand, the Federal Housing Finance Agency said home prices were up 0.4% in February from a year earlier, the first time the index has gained on a annual basis since July 2007. On a monthly basis, the index was up 0.3% from January. So what’s going on? In a nutshell, the answer is foreclosures. The FHFA’s index contains only loans backed by Fannie Mae and Freddie Mac, the government-controlled mortgage giants. While defaults on Fannie and Freddie’s loans have soared during the housing bust, the companies still have far lower default and foreclosure rates than mortgage loans packaged into “private label” securities – those issued outside Fannie and Freddie. “Mortgages that carry Freddie or Fannie’s seal of approval are in much better shape than mortgages overall,”

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

Falling home prices drag new buyers under water (Reuters) - More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth, and Federal Housing Administration loans that require only a tiny down payment are partly to blame. That figure, provided to Reuters by tracking firm CoreLogic, represents about one out of 10 home loans made during that period. It is a sobering indication the U.S. housing market remains deeply troubled, with home values still falling in many parts of the country, and raises the question of whether low-down payment loans backed by the FHA are putting another generation of buyers at risk. As of December 2011, the latest figures available, 31 percent of the U.S. home loans that were in negative equity - in which the outstanding loan balance exceeds the value of the home - were FHA-insured mortgages, according to CoreLogic. Many borrowers, particularly since late 2010, thought they were buying at the bottom of a housing market that had already suffered steep declines, but have been caught out by a continued fall in prices in wide swaths of America.

U.S. Home Values Post Largest Monthly Gain Since 2006; Majority of Markets Covered by Zillow Home Value Forecast To Hit Bottom by Late 2012 - Home values in the United States increased, rising 0.5 percent from February to March, according to Zillow's first quarter Real Estate Market Reports. This marks the largest monthly increase in the Zillow Home Value Index (ZHVI) since May 2006, when home values also rose 0.5 percent. Nationally, the Zillow Home Value Forecast shows that home values will fall 0.4 percent over the next 12 months, with many months showing no change or slight appreciation late this year, suggesting that U.S. home values could reach a bottom in late 2012.  "For people who have been waiting to time their home purchase close to market bottom, it's time to start shopping," said Zillow Chief Economist Dr. Stan Humphries. "When the bottom will hit will vary by market, and it's nearly impossible to time a purchase exactly right."

Home Prices Strengthened Considerably in February, But the Strength May Not Last - According to the February 2012 RPX Monthly Housing Market Report released today by Radar Logic Incorporated, the RPX Composite price, which tracks home prices in 25 major US metropolitan areas, increased 1.9 percent over the month ending February 16, 2012. Notwithstanding the strength exhibited by home prices in February, the RPX Composite price was 3.18 percent lower than it was in February 2011. Transaction activity in the 25 MSAs increased 16 percent on a year-over-year basis. ... Investment buying and mild weather likely contributed to the strength in the housing market during February. Unfortunately, the positive impact of both these factors will probably be temporary.

Investors Flock To Housing, Looking To Buy Thousands Of Homes In Bulk - Forbes: Investors have been snapping up homes. Lots of homes. The National Association of Realtors’ Investment and Vacation Home Buyers Survey reports that investment-home sales soared a whopping 64.5% in 2011, with investors purchasing 1.23 million homes compared to 749,000 in 2010. With foreclosures continuing to flood marketplaces and home prices down nationally about 35% over the past five years (and down more than 50% in the hardest hit areas), investors believe housing is a promising place to park cash. Even billionaire Warren Buffett, told CNBC that distressed single-family homes were one of the best investment opportunities around, asserting, “…It’s a leveraged way of owning a very cheap asset now and I think that’s probably as an attractive an investment as you can make.” So perhaps it’s not surprising to see a concept that has been kicked around real estate circles for the past several years begin to materialize into reality: the bulk buying of distressed homes by large scale investors.  What exactly is REO bulk buying? It’s when investors, usually institutional, usually hedge funds and private equity firms, negotiate to buy dozens, hundreds, even thousands of distressed homes at deeply discounted prices. Rather than flip these properties, though, they fix them up and rent them out. A large-scale buy and hold investment play, if you will.

Housing Declared Bottoming in U.S. After Six-Year Slump - Bloomberg: The U.S. housing market is showing more signs of stabilization as price declines ease and home demand improves, spurring several economists to call a bottom to the worst real estate collapse since the 1930s. “The crash is over,” Mark Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Pennsylvania, said in a telephone interview yesterday. “Home sales -- both new and existing -- and housing starts are now off the bottom.”Data released yesterday showing better-than-estimated new- home sales and a slowdown in price declines are bolstering optimism that the market is poised for a sustainable recovery. Economists including Bank of Tokyo-Mitsubishi UFJ’s Chris Rupkey, Bank of America Corp.’s Michelle Meyer and Mark Fleming of CoreLogic Inc. are also predicting prices are close to a trough after a 35 percent slump from a July 2006 peak, even as the threat of more foreclosures loom to boost supply. Values in 20 U.S. cities fell 3.5 percent in February, the smallest 12-month drop since February 2011, the S&P/Case-Shiller index showed yesterday. The Federal Housing Finance Agency’s home-price index, which measures properties with mortgages backed by Fannie Mae or Freddie Mac, had a 0.4 percent rise for the same period, according to a separate report.

The Bottom for House Prices - Back in February, I argued that The Housing Bottom is Here. My previous house price call was back in December 2010, and at that time I thought we'd see another 5% to 10% decline on the repeat sales indexes. Corelogic is down 7.3% since October 2010, and the Case-Shiller composites indexes (NSA) are down about 7.6% (both will probably fall further with the March report). About what I expected. Here are some more bottom calls (or close to bottom calls). Most of the following analysts and economists haven't called a bottom before - so this isn't the usual annual "Rite of Spring" bottom calls, but we have to be careful about an echo chamber since we all look at the similar data. Also these are just forecasts ... From John Gittelsohn and Prashant Gopal at Bloomberg: Housing Declared Bottoming in U.S. Economists including Bank of Tokyo-Mitsubishi UFJ's Chris Rupkey, Bank of America Corp.'s Michelle Meyer and Mark Fleming of CoreLogic Inc. are also predicting prices are close to a trough after a 35 percent slump from a July 2006 peak, even as the threat of more foreclosures loom to boost supply. Meyer, senior economist with Bank of America in New York, said the recovery will be led by the parts of the country with fewer foreclosures and more job growth. She estimates that U.S. prices will reach bottom this year and stay little changed until 2014, when they may gain about 2.5 percent.

Hope for Housing - This is something that is hard to convey when people see how anemic housing is and how many problems there are in the market. However, measured by the absolute growth of housing permits issued, growth is now back to where it was during the boom. That seems crazy? However, first permits are going to be a little more steady than starts and of course lead starts. This is because when you break ground might depend on lots of different temporary factors. Also, while the seasonal flux in permits is strong its not quite as bad as starts. Second, and more important, the contribution to growth comes from the absolute change. So, going from nothing to really crappy can be a strong contributor to growth. Just as going from a boom to normal can be a strong drag on growth.

Housing Market Still Searching for Turnaround - There have been several housing-related reports this week, some better than others, so analysts have been reading the entrails to determine whether the housing market is finally starting to hit bottom and turn around.  The answers are mixed — some regions are doing better than others — but we still seem to have a ways to go before the national market stops falling and begins to pick up in any meaningful way. Yves Smith had a helpful post yesterday summarizing many of the reasons to be skeptical of the more optimistic take from Bloomberg. Yves also provides a helpful presentation by Josh Rosner which is worth flipping through (about 13 pages).   Yves notes: One of the useful parts is on pages 6-9, where he debunks “new household formation means higher housing prices.” This series shows that the age groups with the largest numbers of households among them are in the 35 to 64 year old cohorts. Home ownership is already high in those age groups. And as we have discussed, home buying among the young is constrained by high levels of student debt. Rosner also suggests that financial pressures on new retirees (inadequate pensions and savings, rising health care costs) will lead them to try to sell their homes, either to downsize or to rent, when they would otherwise have remained in their homes. She then points us to the most recent Case-Shiller index numbers, so for that, let’s go over to those wonderful charts at Calculated Risk.

Maybe no housing rebound for a generation: Shiller (Reuters) - The Housing market is likely to remain weak and may take a generation or more to rebound, Yale economics professor Robert Shiller told Reuters Insider on Tuesday. Shiller, the co-creator of the Standard & Poor's/Case-Shiller home price index, said a weak labor market, high gas prices and a general sense of unease among consumers was outweighing low mortgage rates and would likely keep a lid on prices for the foreseeable future. "I worry that we might not see a really major turnaround in our lifetimes," Shiller said. The S&P/Case-Shiller composite index of 20 metropolitan areas gained 0.2 percent in February on a seasonally adjusted basis, the first uptick in prices in 10 months. But Shiller called it "a very mixed bag." Nine of the 20 cities recorded falling or flat prices on the month. He said suburban areas in particular might endure further price declines as high gas prices increase demand for "walkable cities."

U.S. New Home Sales off 7% in March— Sales of new homes fell in March by the largest amount in more than a year, indicating that the U.S. housing market remains under strain despite some modest signs of improvement. The Commerce Department says sales dropped 7.1 percent in March to a seasonally adjusted annual rate of 328,000 units. That followed a 7.3 percent increase in sales in February. This figure was revised up from an initial estimate that February sales had fallen 1.6 percent. The weakness in March could reflect that a warmer-than-normal winter caused sales that normally occur at the start of the spring sales season in March to occur in February. The median home price was $234,500 in March, down 1 percent from the February sales price.

New Home Sales in March at 328,000 Annual Rate - The Census Bureau reports New Home Sales in March were at a seasonally adjusted annual rate (SAAR) of 328 thousand. This was down from a revised 353 thousand SAAR in February (revised up sharply from 313 thousand). December and January were revised up too. The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Sales of new single-family houses in March 2012 were at a seasonally adjusted annual rate of 328,000 ... This is 7.1 percent (±20.7%) below the revised February rate of 353,000, but is 7.5 percent (±19.6%) above the March 2011 estimate of 305,000.. The second graph shows New Home Months of Supply. Months of supply increased to 5.3 in March from 5.0 in February. .  This is now in the normal range (less than 6 months supply is normal).This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale was at a record low 48,000 units in March. The combined total of completed and under construction is at the lowest level since this series started. The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In March 2012 (red column), 32 thousand new homes were sold (NSA). Last year only 28 thousand homes were sold in March. This was the third weakest March since this data has been tracked. The high for March was 127 thousand in 2005.

Comments on Housing and "Distressing Gap" Graph - The solid new home sales report this morning is further confirmation that the recovery for the housing industry has started. New home sales are up about 17% from the weakest three month period during the housing bust. That is a significant improvement, even if the absolute levels are still very low. The debate is now about the strength of the recovery, not whether there is a recovery. My view is housing will remain sluggish for some time, and I expect 2012 to be another historically weak year, but better than 2011. For house prices, the Case-Shiller index has a serious lag, and the key right now is to see if the year-over-year change is declining (it is). Note: The current Case-Shiller report was an average of December, January and February closing prices, and some of those sales were probably negotiated last October, about six months ago! More current, but less reliable, pricing data (such as asking prices, new home prices and some anecdotal comments) suggest that house prices have stopped falling in most areas, and I expect the year-over-year change in the Case-Shiller index to turn slightly positive in the not too distant future. Of course the number of REO sales (lender Real Estate Owned) are down, and some of the improvement is related to fewer foreclosures and other distressed sales.  Here is an update to the "distressing gap" graph that shows existing home sales (left axis) and new home sales (right axis) through March. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

NAR: Pending home sales index increased in March - From the NAR: March Pending Home Sales Rise, Market Recovering The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 4.1 percent to 101.4 in March from an upwardly revised 97.4 in February and is 12.8 percent above March 2011 when it was 89.9. The data reflects contracts but not closings. The index is now at the highest level since April 2010 when it reached 111.3. The PHSI in the Northeast slipped 0.8 percent to 78.2 in March but is 21.1 percent above March 2011. In the Midwest the index declined 0.9 percent to 93.3 but is 16.9 percent higher than a year ago. Pending home sales in the South rose 5.9 percent to an index of 114.1 in March and are 10.6 percent above March 2011. In the West the index increased 8.7 percent in March to 108.0 and is 9.0 percent above a year ago. Contract signings usually lead sales by about 45 to 60 days, so this is for sales in April and May.

Lawler: Builder Reports Exceed Expectations - The Ryland Group, the 8th largest US home builder in 2010, reported that net home orders (including discontinued operations) in the quarter ended March 31st totaled 1,357, up 40.5% from the comparable quarter of 2011. The company’s sales cancellation rate, expressed as a % of gross orders, was 18.0% last quarter, down from 18.2% year ago. Home closings totaled 848 last quarter, up 23.3% from the comparable quarter of 2011. PulteGroup, the 2nd largest US home builder in 2010, reported that net home orders in the quarter ended March 31st totaled 4,991, up 14.9% from the comparable quarter of 2011. The sales gain came despite a 6% decline in community count. The company’s sales cancellation rate, expressed as a % of gross orders, was 15% last quarter, down form 16% a year ago. Meritage Homes, the 10th largest US home builder in 2010, reported that net home orders in the quarter ended March 31st totaled 1,144, up 36.2% from the comparable quarter of 2011. Home closings last quarter totaled 759, up 11.9% from the comparable quarter of 2011. The company’s order backlog as of 3/31/12 totaled 1,300, up 38.3% from last March.

U.S. homeownership hits record low: Gallup - The 62% of Americans who say they own their own home marks a new low since Gallup began tracking self-reported homeownership in 2001. It's down from 68% in 2011. But those surveyed also said they thought it was a good time to buy and that they thought prices would rise this year. While the recession and financial crisis took place in 2008-2009, homeownership rates didn't begin to reflect the bursting of the housing bubble until 2010, when 65% of Americans reported owning their own home — the lowest level recorded before this year. Fifty-three percent of Americans believe their house is worth more today than when they bought it, down significantly from 80% in 2008 and 92% in 2006. Still, 70% of Americans surveyed said it's a good time to buy a house. Americans are also much more positive about the direction of housing prices this year than they were last year. Thirty-three percent expect houses in their neighborhood to rise in price. Last year, only 28% expected prices to rise. Results were based on telephone interviews conducted April 9-12 with a random sample of 1,016 adults in all 50 states.

NMHC Apartment Survey: Market Conditions Tighten in Q1 2012 - From the National Multi Housing Council (NMHC): Market Conditions Improve For Apartment Industry. Optimism continues for the apartment industry, according to the latest results of the National Multi Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions. The findings reflect a gradual recovery for the multifamily sector that faced a 50-year low in apartment starts in 2009.  The Q1 2012 survey’s four indexes measuring Market Tightness (74), Sales Volume (57), Equity Financing (62) and Debt Financing (65) remained above 50 for the eighth time in the past nine quarters. Any number above 50 indicates quarter-to-quarter growth. "Market conditions improved across the board, even from the rather strong level of three months ago,”

Top Experts Diss Housing Market Bullishness, Foresee Protracted Headwinds - The housing bulls seem unable to contain themselves. Today, in a prominently featured Bloomberg story, “Sales of New U.S. Homes Exceeded Estimates in March,” experts cheerily discuss a “firming” housing market and call for a bottom this year. Funny how these predictions for a real estate recovery seem to be a moving target. I recall seeing a panel in November last year at a serious mortgage nerd conference, AmeriCatalyst, where the most pessimistic forecast was that housing would be flat in 2012. Everyone else called for home price appreciation. Even though some distressed markets have seen an upsurge in speculative buying, the fundamentals are not at all rosy. Nick Timiraos of the Wall Street Journal pointed out, as others have, that the “inventories are tight” picture is misleading. Even though banks have put houses on the market, a lot of private sellers are holding back, still (after 5 years) hoping for a better market. And servicers slowed down new foreclosures and attenuated foreclosures while the mortgage settlement negotiations were on. They have sped up new foreclosures considerably, which will eventually show up in the liquidation of more homes (note we think there’s good reason for banks to be dragging out the foreclosure process: they make more money that way and defer the recognition of losses on related second liens).  A third cause is that investors are picking up properties to rent. We have a sneaking suspicion that this trend will cool off, in that favorable rental market dynamics are a function of a marked shift in homeownership v. renting (due to tighter credit standards and families losing their homes needing a place to rent). But as more formerly owned homes are converted to rentals, the increased supply will lower the landlords’ pricing power. And a continued supply of properties sold out of REO raises the possibility of later landlords with lower priced properties offering rentals at lower prices than the current crop of investor/buyers.

Here Is What The “Other” Financial Health Metrics Are Showing - For all those starry-eyed readers of Floyd Norris' New York Times real-estate column this morning who have been out viewing new homes this afternoon and already scratching together the down-payment with the family's EBT cards, we have a little contextual reality checking. Norris points to the factual reality that a broad ratio of all financial obligations - both homeowners and renters - relative to disposable income stands at an impressive-sounding lowest level since 1984, and uses this wondrous statistic, in its sublime uniqueness, as an indication to suggest the consumer may be coming back as the household debt burden has been so reduced from a record 14% of disposable income to a 'mere' 10.9% now indicating just what good little deleveraging beings we Americans have been.  However, as Nomura noted so clearly this week, this statistic is just a small part of everything when we consider the balance sheet (and not just cash-flow) of the household, 'many homeowners are likely to take little comfort from the decline in average debt service costs relative to incomes.' For millions of homeowners whose property is now worth less than the debt used to finance it, mortgage interest costs may be more usefully gauged relative to the equity they retain in their homes. Mortgage Debt Servicing Relative to Housing Equity...oops! Not quite such a pretty picture...

Massive Debt: Why Banks Will Own You For A Lifetime - Debt is a “soft” form of slavery.  In America today, it is not legal to bind people up with chains and force them to work for you, but that doesn’t mean that there are not millions upon millions of slaves in this country.  When you borrow money, you willingly become a servant to the lender.  Sadly, there are millions of Americans that will spend the rest of their lives working to pay off their debts but they will never escape the endless debt slavery that they have gotten themselves into.  When you add up all forms of debt in the United States at this point, it comes to more than 54 trillion dollars.  That is more than $178,000 for every man, woman and child in America.  We truly are one nation under debt, and we have created the biggest debt bubble in the history of the planet.  Unfortunately, all debt bubbles eventually burst, and when this one bursts the consequences are going to be unlike anything ever seen before. When most Americans think of the “U.S. debt problem”, they tend to only think of the U.S. national debt.  Well, that certainly is horrifying, but it is only a small part of the overall problem. The chart posted below shows the growth of total debt in the United States over the last several decades.  Total credit market debt owed was less than 5 trillion dollars back in 1980, but now it is over 54 trillion dollars….

DOT: Vehicle Miles Driven increased 1.8% in February - The Department of Transportation (DOT) reported:Travel on all roads and streets changed by +1.8% (3.9 billion vehicle miles) for February 2012 as compared with February 2011. Travel for the month is estimated to be 216.1 billion vehicle miles..The following graph shows the rolling 12 month total vehicle miles driven.  Even with the year-over-year increase in February, the rolling 12 month total is mostly moving sideways. In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.  Currently miles driven has been below the previous peak for 51 months - and still counting. The second graph shows the year-over-year change from the same month in the previous year. This is the third consecutive month with a year-over-year increase in miles driven - for the first time since 2010.

Olbermann: ‘Almost deliberate’ gas price hikes are to hurt Obama | The Raw Story: Liberal commentator Keith Olbermann on Sunday suggested that the price of gas had been artificially manipulated since President Barack Obama took office to hurt his chances at re-election. In an appearance on ABC, Olbermann noted he had become suspicious after gas prices increased from $1.61 a gallon when Obama took the oath of Office in January 2009 to nearly $4 a gallon earlier this month. “The lowest gas prices in the last six years, the nadir of gas prices at the pump, was the day of this president’s inauguration in 2009,” Olbermann explained. “There has to be some connection between that being the least-busy political moment of a president’s career — when you’re not going to hurt him and you’re not going to harm him that way — and the price of gas.”

Gasoline-Futures Prices Tumble 16 Cents in Last Week, Due to Market Forces: Increased Oil Supply - Well now those greedy, market-destabilizing, market-manipulating speculators have changed course, and they're now driving gasoline futures prices down, see chart above from the CME.  From today's WSJ: "U.S. gasoline-futures prices have dropped 16 cents a gallon over the past eight trading days, as more U.S. crude becomes available for refining into gasoline and fears about a shortage of refining capacity fade. Helping to spur the downturn is the reversal of a pipeline's flow that will give refiners in the Gulf Coast region greater access to crude, the basic feedstock for gasoline. North Sea Brent crude, the European benchmark which holds sway over gasoline prices, already has fallen by more than $7 a barrel this month, partly on this development."

BPP@MIT Inflation Is Lowest in Two Years at 2.2% - The Billion Prices Project @ MIT recently released daily online price index data through March 31, and annual inflation rates for the last two years are displayed in the chart above.  According to this real-time measure of major inflation trends in the U.S., inflationary pressures have been subsiding since last summer, and the annualized inflation rate of about 2.2% through the entire month of March (flat area in the graph) is at the lowest level in more than two years.   Update: The chart below shows that over the last four years, MIT's online price index has tracked the CPI pretty closely.  Despite the fact that the online price index doesn't capture all of the items in the CPI, it's still a useful alternative measure of inflationary pressures in the U.S. economy that gives us additional information about the trends in consumer prices and inflation.

These 10 Corporations Control Almost Everything You Buy - A chart we found on today shows that most products we buy are controlled by just a few companies. It's called "The Illusion of Choice." Unilever produces everything from Dove soap to Klondike bars. Nestle has a big stake in L'Oreal, which features everything from cosmetics to Diesel designer jeans. Despite a wide array of brands to choose from, it all comes back to the big guys. Click this image to see full size: 

Consumer confidence edges down in April (Reuters) - Consumer confidence edged slightly lower in April, while Americans also reined in their inflation expectations after a surge in the previous month, according to a private sector report released on Tuesday. The Conference Board, an industry group, said its index of consumer attitudes edged down to 69.2 from a downwardly revised 69.5 in March. Economists had expected a reading of 69.7, according to a Reuters poll. For March, the index was originally reported as 70.2. The expectations index eased to 81.1 from 82.5, but the present situation index fared better, rising to 51.4 from 49.9. "As was the case last month, the slight dip (in the main index) was prompted by a moderation in consumers' short-term outlook, while their assessment of current conditions continued to improve," Lynn Franco, director of The Conference Board Consumer Research Center, said in a statement. "Overall, consumers are more upbeat about the state of the economy, but they remain cautiously optimistic." Consumers' view of the labor market was mixed. The "jobs hard to get" index fell to 37.5 percent from 40.7 percent, while the "jobs plentiful" index also declined to 8.4 percent from 9.0 percent.

Consumer Sentiment increases slightly in April to 76.4 - The final Reuters / University of Michigan consumer sentiment index for April increased slightly to 76.4, up from the preliminary reading of 75.7, and up from the March reading of 76.2. This was above the consensus forecast of 75.7. Overall sentiment is still fairly weak - probably due to a combination of the high unemployment rate, high gasoline prices and sluggish economy - however sentiment has rebounded from the decline last summer.

Vital Signs: Confidence Gains Among Lessors - Confidence is edging up among those who help companies finance and lease new and used equipment. A measure of optimism about current and future economic conditions among executives in the equipment leasing and finance industry increased to 62.1 in April from 61.7 in March. The index has drifted upward since September, 2011, when it hit a recent low of 47.6.

US Containerized Imports Rose 7.3 Percent in March - U.S. imports rebounded sharply in March after falling in February on tough year-over-year comparisons because of the early closing of factories in China. Overall U.S. containerized imports in March increased 7.3 percent year-over-year to 1.37 million 20-foot equivalent units. Imports fell 5.9 percent year-over-year in February. “The latest TEU data supports my view of very modest imports growth through the second half of the year,” said Mario Moreno, economist for The Journal of Commerce. “Although the U.S. economy is showing signs of deceleration, I do think it will be momentary as the Fed has made it clear it is prepared to do more if conditions worsen. Imports growth should regain speed in the second half of the year.” Leading the March gains were furniture, up 15 percent, or 18,377 TEUs; empty containers and drums, up 178 percent, or 16,873 TEUs; and auto parts, up 15 percent, or 8,052 TEUs. Sales of existing homes declined in March for the second consecutive month, a concern for the short-term imports outlook of furniture and other home goods. Solid gains were seen in miscellaneous plastic products, up 17 percent; bananas, up 12 percent; and miscellaneous metal ware, up 18 percent.

ATA Trucking index Increased 0.2% in March - From ATA: ATA Truck Tonnage Index Up 0.2% in March The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index rose 0.2% in March after increasing 0.5% in February. (February’s rise was unchanged from the preliminary gain we reported on March 27th.) The SA index stood at 119.5 (2000=100), up from 119.3 in February. Compared with March 2011, the SA index was up 2.7%, which was the smallest year-over-year increase since December 2009. Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The dashed line is the current level of the index. The index is above the pre-recession level and up 2.7% year-over-year. More sluggish growth.  From ATA:  Trucking serves as a barometer of the U.S. economy, representing 67.2% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9 billion tons of freight in 2010. Motor carriers collected $563.4 billion, or 81.2% of total revenue earned by all transport modes.

US durable goods orders fall sharply - Orders for manufactured goods meant to last at least three years decreased 4.2 per cent, the biggest decrease since January 2009, according to commerce department statistics. This followed an upwardly revised 1.9 per cent February increase. Analysts had expected a decline of 1.5 per cent last month. Orders for durable goods last month were dragged down by a 12.5 per cent plunge in bookings for transportation equipment – a volatile segment – the most since November 2010, due to a near 48 per cent fall in non-defence aircraft and parts orders. Boeing, the aircraft maker, said it received orders for 53 aeroplanes last month, down from 237 in February.  Analysts said that the unexpectedly big slump at the headline level is not quite as bad as it looks.  February core capital goods orders were revised up $683m. Without that revision, these orders would likely have increased slightly in March. Excluding transportation, new orders fell 1.1 per cent, while excluding defence, new orders decreased 4.6 per cent. Orders for automobiles and parts increased 0.1 per cent after a 2 per cent uptick the month before. But shipments of durable goods rose 1 per cent in March after slipping 0.3 per cent the month before. Machinery had the largest increase, up 6.5 per cent, at the highest level since the series was first published in 1992. That followed a 3.1 per cent increase in February. New orders for non-defence capital goods excluding aircraft – which go into the calculation of gross domestic product – slipped 0.8 per cent in March. But this was after a 2.8 per cent boost the month before. Shipments for this series jumped 2.6 per cent, following a 1.4 per cent rise in February.

Durable Goods Orders Show Biggest Drop in 3 Years - Orders for long-lasting factory goods fell by the largest amount in three years last month, mostly because demand for commercial aircraft plummeted. But companies also ordered less machinery and other equipment, in a sign that manufacturing output may slow. Orders for durable goods dropped 4.2 percent in March, the steepest since January 2009, the Commerce Department said on Wednesday. Commercial aircraft orders, a volatile category, fell by nearly 50 percent. Durable goods, which include appliances, cars and heavy machinery, are products that are expected to last at least three years. Excluding transportation equipment, orders declined 1.1 percent. That is the second drop in that category in three months. And orders for so-called core capital goods, a solid measure of business investment plans, declined 0.8 percent. Companies cut their orders for steel and other metals, industrial machinery and computers. Shipments of durable goods increased last month, which added to growth in the first three months of the year. The government will report on the economy’s first-quarter growth on Friday.

March Durable Goods Orders Drop Sharply - The margin of safety for durable goods orders is wearing thin. This series isn't forecasting a recession, at least not yet, but it's now the closest to crossing the line since the U.S. slipped into macro darkness in 2008.  The Census Bureau reports that new orders for manufactured durable goods dropped 4.2% in March on a seasonally adjusted basis. That's the steepest monthly decline since the Great Recession was slicing into business activity in 2009. Business investment (new orders for nondefense capital goods ex-aircraft) fared better, dropping only 0.8% in March. But it's hard to ignore the overall trend of late, which looks increasingly bearish on a monthly basis. Monthly numbers for new durable goods orders are a volatile lot, of course, and so it's crucial to cut through the short-term noise in search of the bigger picture for this series, which is widely considered one of several leading indicators of future economic activity. Unfortunately, there's not much cheer to report here either: New orders for both durable goods and business investment rose a slim 2.7% and 3.9%, respectively, on a year-over-year basis. Those are the lowest annual growth rates since 2009.

US Orders for Long-lasting Goods Plunge in March - Orders for long-lasting factory goods fell by the largest amount in three years last month, mostly because demand for commercial aircraft plummeted. But companies also ordered less machinery and other equipment, a sign manufacturing output may slow. Orders for durable goods dropped 4.2 percent in March, the steepest fall since January 2009, the Commerce Department said Wednesday. Commercial aircraft orders, a volatile category, fell by nearly 50 percent. Excluding transportation equipment, orders declined 1.1 percent. That’s the second drop in that category in three months. And orders for so-called “core” capital goods, a good measure of business investment plans, declined 0.8 percent. Companies cut their orders for steel and other metals, industrial machinery and computers.Shipments of durable goods increased last month, which adds to growth in the first three months of the year. The government will report on the economy’s first quarter growth Friday.But the decline in orders indicates that growth may slow in the months ahead, economists said. It “certainly points to slowing business investment as we enter the second quarter.”

Drop in U.S. Durables Orders Masks Investment Gain - Orders for U.S. durable goods fell in March by the most in three years, depressed by a pullback in demand for aircraft that masked gains in business investment.  Bookings for goods meant to last at least three years dropped 4.2 percent, more than forecast and the biggest decrease since January 2009, Commerce Department data showed today in Washington. Sales of non-military capital equipment excluding planes climbed for a second month, prompting some economists to raise first-quarter forecasts for gross domestic product.  Demand for cars and auto supplies is supporting companies from 3M Co. (MMM) to Texas Instruments Inc., showing manufacturing will underpin the world’s largest economy. At the same time, factories may give way to service industries as a pillar of the expansion as a slowdown in global growth curbs exports.

Durable Goods Orders Fell 4.2 Percent: Far Below Expectations - The April Advance Report on March Durable Goods was released this morning by the Census Bureau. Here is the summary on new orders:  New orders for manufactured durable goods in March decreased $8.8 billion or 4.2 percent to $202.6 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 1.9 percent February increase. Excluding transportation, new orders decreased 1.1 percent. Excluding defense, new orders decreased 4.6 percent.  Transportation equipment, also down two of the last three months, had the largest decrease, $7.1 billion or 12.5 percent to $49.7 billion. This was due to nondefense aircraft and parts, which decreased $7.7 billion. Download full PDF  The new orders at -4.2 percent came in substantially below the consensus estimate of -1.7 percent. Similarly, the ex-transportation -1.1 percent was below than the consensus forecast of 0.5 percent. If we exclude both transportation and defense, the core durable goods orders declined 1.5 percent in March following a 1.3 percent increase in February, and a 3.5 percent decline in January. The first chart is an overlay of durable goods new orders and the S&P 500. We see an obvious correlation between the two, especially over the past decade, with the market, not surprisingly, as the more volatile of the two.

The "Real" Goods on the Durable Goods Report - Earlier this morning I posted an update on the March Advance Report on March Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation. Let's now review the same data with two adjustments. In the charts below the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in today's dollar value. This gives us the "real" durable goods orders per capita. The snapshots below offer a quite sobering corrective to the standard reports on the nominal monthly data (which itself was significantly below expectations). Here is the same chart, this time ex Transportation. Now we'll exclude Defense orders. And finally we'll exclude both Transportation and Defense for a better look at core durable goods orders. As these charts illustrate, when we study durable goods orders in the larger context of population growth and also adjust for inflation, the data becomes a coincident macro-indicator of a major shift in demand within the U.S. economy. It correlates with a decline in real household incomes, as illustrated in my analysis of the most recent Census Bureau household income data:

Lack of Demand - Just a reminder of why companies aren't investing more ... from Bruno Navarro at CNBC: Why Businesses Aren't Investing in the US: CEO Businesses aren’t investing in the United States because of a lack of consumer demand, International Paper CEO John Faraci said Friday.  “I think this was all about consumer spending and demand. You know, the problem we have is there’s inadequate demand to create jobs. We know how to respond when there is demand,” he said ... “Productivity has obviously been very good, so we’re creating more capacity with less resources. But at the end of the day, this is really about responding to demand, whether it’s automobiles or packaging products we make for a whole variety of industries and end users,” It really isn't hard to understand why certain companies aren't investing - these companies have adequate capacity to meet expected demand.

Manufacturing Activity Picks Up the Pace in April; Expectations Remain Upbeat - Richmond Fed - Manufacturing activity in the central Atlantic region advanced somewhat faster in April following slightly slower growth in March, according to the Richmond Fed's latest survey. A significant increase in the shipments component pushed the overall index higher, while employment grew at a rate above March's pace and growth in new orders held nearly steady. Most other indicators also suggested solid activity. District contacts reported capacity utilization grew more quickly, while backlogs grew more slowly. In addition, manufacturers reported that delivery times lessened, while inventories grew at a somewhat higher rate. Looking ahead, manufacturers' optimism remained in place in April. Contacts at more firms anticipated that shipments, new orders, backlogs, capacity utilization, and capital expenditures would continue to grow at a solid pace in the months ahead. Survey assessments of current prices revealed that raw materials prices grew at a somewhat quicker rate in April than a month ago, while finished goods prices grew more slowly. Over the next six months, respondents expected growth in finished goods prices to rise at a somewhat faster pace than they had anticipated last month, while they expected raw materials prices to grow at a slower rate.

A Look Inside the U.S. Labor Market - FRB St. Louis - The U.S. economy lost almost 8 million jobs in the latest recession, and the unemployment rate rose to over 9 percent. Roughly 1 million jobs have been added to the economy since early 2010, but the unemployment rate remains persistently high. Some policymakers are concerned about the prospect of a prolonged "jobless recovery," a period of rising average income (GDP) with little or no employment growth. There is considerable debate over what, if anything, monetary and fiscal policy can or should do to help the labor market adjust in the wake of one of the worst recessions since the Great Depression. Disagreements over what should be done to stimulate the labor market stem, in part, from its complicated nature. The labor market has many moving parts, and policies frequently have unintended consequences. The purpose of this essay is to describe a few of these moving parts and to explain why it is sometimes difficult to interpret the ups and downs we experience in the labor market. One theme that emerges is that the big picture, as seen in the aggregated data, is not always representative of what is happening up close, as seen in the data that have been dissected.

Randy Wray: The Job Guarantee and Real World Experience - There have been many job creation programs implemented around the world, some of which were narrowly targeted while others were broad-based. The American New Deal included several moderately inclusive programs such as the Civilian Conservation Corp and the Works Progress Administration. Sweden developed broad based employment programs that virtually guaranteed access to jobs. From WWII until the 1970s a number of countries, including Australia, maintained a close approximation of full employment (measured unemployment below 2%) through a combination of high aggregate demand plus loosely coordinated direct job creation. (Often there would be an informal “employer of last resort”, such as the national railroads, that would hire just about anyone.) As Bill Mitchell argues, a national commitment to full employment spurred government to implement policies that created jobs—even if it did not explicitly embrace a national and universal job guarantee/employer of the last resort program. In the aftermath of its economic crisis that came with the collapse of its currency board, Argentina created Plan Jefes y Jefas that guaranteed a job for poor heads of households. The Jefes program provided a payment of 150 pesos per month to a head of household for a minimum of 4 hours of work daily. Participants worked in community services and small construction or maintenance activities, or were directed to training programs (including finishing basic education). Government’s total spending reached about 1% of GDP, with nearly 2 million participants (about 1.6 million in Jefes and 300,000 in a similar program that we did not study, PEL). However, it should be noted that the U.S. spends 1% of GDP on anti-poverty social assistance, while France and the UK spend 3-4% of GDP on such programs.

An Ultraminimalist Model of the Beveridge Curve, or, How I Learned to Start Worrying and Love Structural Unemployment: Where do businesses find people to hire? A few new employees – graduating students, for example – are recruited from outside the labor force, but I’m going to ignore them (as later I will also ignore retirees, figuring that they roughly offset each other). Most new employees come either from among the unemployed or from other firms. Hiring the unemployed is easy inasmuch as they’re usually knocking at your door asking for jobs. On the other hand, the selection process might be difficult, since they aren’t doing a job now, so you have to make an educated guess as to whether they’ll be good at the job for which you’re hiring. Hiring people from other firms is difficult in that you have to go out and actively recruit them, as well making an offer that justifies leaving their old job, but the selection process is easier, because all you have to do is find someone who is already doing a job similar to the one for which you’re hiring. So there is a tradeoff.   Presumably the terms of this tradeoff depend on how many people are unemployed:  if only a few people are unemployed, then the number of qualified unemployed applicants will be low, and they’ll be in demand from other firms, so you’ll have to pay them well, so you might as well just try to poach someone directly from another firm; if a lot of people are unemployed, the number of qualified unemployed applicants will be high, and they’ll be willing to accept less attractive offers, so poaching might not be worth it.

Falling Labor Force Participation -The percentage of the U.S. adult population that is either working or unemployed and looking for a job is called the labor force participation rate. From the early 1960s to the late 1990s, this percentage rose more-or-less steadily, from 59% to 67%. But since then, starting well before the Great Recession, the labor force participation rate has been falling. Here's the pattern of the labor force participation rate. The first figure shows the overall number. The second figure shows the breakdown by gender: that is, the declining labor force participation rate for men, and the women's labor force participation rate that was rising until about 2000, but then flattened out and has now declined.How much of the recent sharp decline in the labor force participation rate is the Great Recession, and how much is other factors? This article presents a variety of evidence—including data on demographic shifts, labor market flows, gender differences, and the effects of long-term unemployment—to disentangle the roles of the business cycle and trend factors in the recent drop in participation. Taken together, the evidence indicates that long-term trend factors account for  about half of the decline in labor force participation from 2007 to 2011, with cyclical factors accounting for the other half."

Mitt Romney, American Parasite - It was the early 1990s, and the 750 men and women at Georgetown Steel were pumping out wire rods at peak performance. They had an abiding trust in management's ability to run a smart company. That allegiance was rewarded with fat profit-sharing checks. In the basement-wage economy of Georgetown, South Carolina, Sanderson and his co-workers were blue-collar aristocracy. What he didn't know was that it was about to end. Hundreds of miles to the north in Boston, a future presidential candidate was sizing up Georgetown's books. At the time, Mitt Romney had been running Bain Capital since 1984, minting a reputation as a prince of private investment. His specialty was flipping companies—or what he often calls "creative destruction." It's the age-old theory that the new must constantly attack the old to bring efficiency to the economy, even if some are destroyed along the way. In other words, people like Romney are wolves, culling the herd of the weak and infirm.  Bain would purchase a firm with little money down, then begin extracting huge management fees and paying Romney and his investors enormous dividends. The result was that previously profitable companies were now burdened with debt.  Bain would slash costs, jettison workers, reposition product lines, and merge its new companies with other firms. With luck, they'd be able to dump the firm in a few years for millions more than they'd paid for it. But the beauty of Romney's thesis was that it really didn't matter if the company succeeded. Since he was yanking out cash early and often, he would profit even if his targets collapsed.

Congress and Long-Term Unemployment - The talk in Washington these days is all about budget deficits, tax rates, and the “fiscal crisis” that supposedly looms in our near future. But this chatter has eclipsed a much more pressing crisis here and now: almost thirteen million Americans are still unemployed. Though the job market has shown some signs of life in recent months, the latest figures on new jobs and on unemployment-insurance claims have been decidedly unimpressive. We are stuck with an unemployment rate three points higher than the postwar average, and the percentage of working adult Americans is as low as it’s been in almost thirty years. What’s most troubling is that so much of this unemployment is long-term. Forty per cent of the unemployed have been without a job for six months or more—a much higher rate than in any recession since the Second World War—and the average length of unemployment is about forty weeks, a number that has changed very little since 2010. The economic recovery has now lasted nearly three years, but for millions of Americans it hasn’t yet begun.  Unemployment doesn’t hurt just the unemployed, though. It’s bad for all of us. Jobless workers, having no income, aren’t paying taxes, which adds to the budget deficit. More important, when a substantial portion of the workforce is sitting on its hands, the economy is going to grow more slowly than it could. After all, people doing something to create value, rather than nothing, is the fundamental driver of growth in any economy.

Postal Service closings? System faces cash crunch. Again. It will run out of money in August if Congress doesn't act. Even if lawmakers come up with temporary fixes, the long-term outlook is stark. In the Internet Age, regular mail service can't continue as is.. The squeeze puts postal customers in a difficult spot. Do they want a leaner system? Postal Service closings? And possibly slower delivery? Or do they want one that relies on taxpayer funding? Since 2006, its peak year of mail delivery, the USPS has already cut operating expenses, consolidated nearly a third of its processing locations, frozen salaries, and shrunk its workforce by 140,000. There are now fewer postal workers than at any time since 1965. Despite these cost-cutting moves, revenues have fallen even faster: down more than 12 percent -- a whopping $9 billion -- since 2007. The USPS's debt has tripled, and its finances are sketchy. "Declines in mail volume have brought the U.S. Postal Service (USPS) to the brink of financial insolvency," the US Government Accountability Office warned in a November report.

Killing the Messenger: The Downsizing and Death of the Postal Service - Dean Baker - It is fashionable to think of the postal service as an antiquated relic of a different era in the same way that all right-thinking people regarded standard 30-year fixed rate mortgages as old-fashioned at the peak of the housing bubble. Many of the same people who assured us that we could effectively manage risk through mortgage securitization are now anxious to hand the postal service a death sentence.  Death, or at least a near death experience, is the likely outcome of S.1789, the bill to downsize the Postal Service that the Senate is scheduled to vote on Tuesday night. The bill would end Saturday delivery and also raise the target delivery time from 1-2 days to 2-3 days.  The idea is that people won't generally care if a letter takes 3 days rather than 2 to reach its destination. While that is probably true, this additional delay is likely to seriously reduce the standing of the Postal Service in most people's eyes, leading to a further erosion of business. The certain effect of this bill is to cut 100,000 jobs over the next three years. This is somewhat better than the 200,000 job loss that would result from a bill being pushed by Representative Darrell Issa and the House Republicans, but any final bill is likely to end up somewhere in the middle. If we assume 150,000 lost jobs, that is equivalent to more than 5 weeks of job growth at the March rate.

Weekly Initial Unemployment Claims at 388,000 - The DOL reports:In the week ending April 21, the advance figure for seasonally adjusted initial claims was 388,000, a decrease of 1,000 from the previous week's revised figure of 389,000. The 4-week moving average was 381,750, an increase of 6,250 from the previous week's revised average of 375,500.  The previous week was revised up to 389,000 from 386,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 381,750. This is the highest level for the 4-week moving average this year. And here is a long term graph of weekly claims: After falling to 363,000 at the end of March, the 4-week average has increased for three straight weeks and is at the highest level this year.

U.S. Unemployment Aid Requests Near 3-Month High — The number of people seeking U.S. unemployment benefits remained stuck near a three-month high last week, a sign that hiring has likely slowed since winter. The Labor Department said Thursday that weekly applications dipped 1,000 to a seasonally adjusted 388,000. It was little changed from the previous week’s figure, the highest since Jan. 7. The four-week average, a less volatile measure, rose to 381,750, also the highest in three months. Applications jumped sharply three weeks ago, a sign that employers had stepped up layoffs and added fewer jobs. Economists said the increase might have been inflated by temporary layoffs during the spring holidays, when many school employees are laid off. But applications haven’t dropped back since then. The increase follows a report earlier this month that showed hiring slowed in March.

Has The Labor Market Hit A Wall... Again? - Weekly claims for new unemployment benefits are in a holding pattern these days. But holding for what? For the third straight week, new claims hovered at just under 390,000 on a seasonally adjusted basis last week, the Labor Department reports. That's the highest since January and it's a sign that recent revival in the labor market has slowed. That was certainly the case with the March payrolls report, which reflected a sharp slowdown in jobs creation. The modest rise in jobless claims in recent weeks implies that there may be more to the new sluggishness in the labor market than one drab month for payrolls.  But if the recent rise in jobless claims is worrisome—and it is—there's still room for debate about what it means on a broader scale for the weeks and months ahead. Even with last week's seasonally adjusted 388,000 tally, new claims are still near the lowest levels in nearly four years. As the chart above reminds, weekly filings have been falling fairly persistently for most of the past year. A few weeks of modestly elevated numbers doesn't erase this progress, but the question is turning to whether the progress has hit a wall?

Notes on Initial Claims - Two quick things One, is that – actually amazingly – the absolute change year-over-year in initial claims is following steady channel. You usually see the pace of decline, itself decline over time but that is not happening. This to me suggests that nothing special has happened in the labor market since the summer of 2011 and that its essentially steady as she goes. As stated before, I have expected to see the economy “kick” by March or April of this year but as things look it will be late. The pressures do still seem to be building, as I’ll talk about in another post. The other quick note, is that while Initial Claims tells us a whole lot about the labor market what they don’t actually tell us that much about are layoffs, which people sometimes mistake. You can file an initial claim if you are laid off but whether or not you do so, is dependent on the state of the job market. That’s why initial claims are actually a better indicator than layoffs themselves which are back down to the lows of the previous recovery.

Why America Is One Big Pothole  - Nearly every day, rush-hour traffic backs up for miles on both ends of the overburdened Brent Spence Bridge, which spans the Ohio River and links Cincinnati with its suburbs in Kentucky. The bridge, one of the busiest in the U.S. interstate system, has been dubbed "functionally obsolete" by the federal government because its narrow four lanes on each level, originally designed as three lanes, create massive bottlenecks for traffic. For commuters and businesses desperate for an improved crossing, the good news is that they have a powerful friend in Congress: U.S. House Speaker John Boehner, a Republican whose district includes Cincinnati suburbs. But a $2.4 billion plan to replace the Interstate 71/75 bridge has gotten little help from Boehner's House of Representatives, which abandoned efforts to pass long-term federal highway funding in favor of two 90-day extensions, the second of which passed last week. In the process, the highway bill has become a symbol of Boehner's frustrations in dealing with budget-conscious Republicans allied with the Tea Party movement. It also is part of a broader debate over whether the U.S. government, at a time when the federal debt tops $15 trillion, should spend billions of dollars on much-needed projects that would create thousands of jobs.

U.S. Firms Add Jobs, But Mostly Overseas - Thirty-five big U.S.-based multinational companies added jobs much faster than other U.S. employers in the past two years, but nearly three-fourths of those jobs were overseas, according to a Wall Street Journal analysis. Those companies, which include Wal-Mart Stores Inc., International Paper Co., Honeywell International Inc. and United Parcel Service Inc., boosted their employment at home by 3.1%, or 113,000 jobs, between 2009 and 2011, the same rate of increase as the nation's other employers. But they also added more than 333,000 jobs in their far-flung—and faster-growing— foreign operations.  Collectively, they employed roughly 6.4 million workers world-wide last year, up 7.7% from two years earlier. Over the same period, the total number of U.S. jobs increased 3.1%, according to the Labor Department. The data show that global companies, aided by overseas revenue, are faring better than purely domestic companies during the economic recovery. Nearly 60% of the revenue growth between 2009 and 2011 at the companies in the Journal's analysis came from outside the U.S. Partly as a result, these companies are more likely to focus their resources and people outside the U.S. The nation's largest private-sector employer, Wal-Mart, added 100,000 jobs outside the U.S. last year; its head count in the U.S. has been flat at 1.4 million since 2007.

Epic Fail: Part One -  The first fact that can’t be ignored is how many Americans are actually unemployed today. Here is some truth you won’t get from a politician or media talking head:

  • There are 243 million working age Americans.
  • There are 142 million employed Americans.
  • Only 101 million of the employed Americans are working more than 35 hours per week. This means that only 41.6% of all working age Americans have a full-time job.
  • According to the government drones at the BLS, 88 million Americans have “chosen” to not be in the labor force – the highest level in U.S. history.
  • The percentage of Americans in the workforce at 63.8% is the lowest since 1980 and down from a peak of 67.1% in 2000. The difference between these two percentages is 8 million Americans.
  • The BLS reports there are only 12.7 million unemployed Americans in the country, down from 15.3 million in 2009.
  • The BLS reports the unemployment rate has dropped from 10% in late 2009 to 8.3% today. Over this time frame the working age population grew by 5.7 million, while the number of employed Americans grew by 3.6 million. Only a government drone could interpret this data and report a dramatic decline in the unemployment rate.

1 in 2 new graduates are jobless or underemployed - — The college class of 2012 is in for a rude welcome to the world of work.  A weak labor market already has left half of young college graduates either jobless or underemployed in positions that don't fully use their skills and knowledge. Young adults with bachelor's degrees are increasingly scraping by in lower-wage jobs — waiter or waitress, bartender, retail clerk or receptionist, for example — and that's confounding their hopes a degree would pay off despite higher tuition and mounting student loans. An analysis of government data conducted for The Associated Press lays bare the highly uneven prospects for holders of bachelor's degrees. Opportunities for college graduates vary widely. While there's strong demand in science, education and health fields, arts and humanities flounder. Median wages for those with bachelor's degrees are down from 2000, hit by technological changes that are eliminating midlevel jobs such as bank tellers. Most future job openings are projected to be in lower-skilled positions such as home health aides, who can provide personalized attention as the U.S. population ages.

Would a Substantial Fall in Unemployment Help Single-parent Families? - Has the tough labor market of the past five years caused an increase in the severity of the economic problems facing women who are raising children mostly on their own? In this blog entry, we provide updated information on a topic featured in a 2010 post to this blog. The idea of the figure shown above is to illustrate how the labor-market situation affects this group of women (known as “female householders” or by the roughly equivalent category of “women maintaining families”) and their children. The red line indicates that both of the two most recent recessions triggered sharp increases in the relevant unemployment rate. The most recent increase began in 2007—about five years ago. Fortunately, the first few months’ data for 2012 indicate a possible reversal of the post-2007 trend, with the unemployment rate falling to 11.5 percent on average for January, February, and March, compared to 12.9 percent last year. Will lower unemployment bring lower poverty rates for female householders and their children? The 2010 post referred to above noted that poverty among families with a female householder rose from 2000 through 2008. This improvement followed a decline that lasted through most of the 1990s, the decade of a landmark welfare reform bill at the federal level. Unfortunately, according to Census Bureau data, the upward trend that we noted in our earlier post continued in 2009–2010. The blue line depicts data on children under 18 years old in female-householder families. The most recent publicly available data, which are for 2010, indicate that poverty among these children reached approximately 47 percent that year.

Valuing Family Work - The recent dust-up over a Democratic consultant’s comment that Ann Romney, a stay-at-home mother, had never worked a day in her life initially seemed like a minor campaign skirmish. Everyone, including the woman who made the comment, quickly agreed that parenting was work. As the air cleared, however, the policy implications of defining unpaid activities as work — productive, socially valuable work — suddenly shimmered in the spotlight. MSNBC’s Chris Hayes quickly pointed out that Mrs. Romney’s husband, Mitt, had, while serving as governor of Massachusetts, insisted on strict work requirements for single mothers applying for Temporary Assistance for Needy Families. Ezra Klein of The Washington Post elaborated on this point, observing that government social programs ranging from Temporary Assistance for Needy Families to Social Security don’t count parenting as work. Jon Stewart of “The Daily Show” poked fun at Mrs. Romney’s enthusiasm for motherhood as a career choice. As someone put it on, welfare mothers should try harder to find a husband worth a quarter of a billion dollars.  Representative Pete Stark, Democrat of California, introduced the Women’s Option to Raise Kids Act, H.R. 4379, which would “recognize the critical job of raising children age 3 or younger as work.” Under the legislation, low-income parents could receive Temporary Assistance for Needy Families even if not engaged in paid employment.

Research shows the US is a low wage country - Recent research from John Schmitt of the Center for Economic Policy Research shows that the US leads developed countries in the share of workers earning low wages. The research also shows that increased wage polarization over the last several decades is one of the reasons for the large share of low wage-work in the US. The bars in this graph represent the share of workers in low wage work, where low wage work is defined as employees earning less than 2/3 of the median wage (approximately $10 per hour or $20,000 per year). In this category, the US leads among developed nations:  The next graph shows that the share of employees earning low wages has increased from 22 percent in 1979 to 28 percent in 2009. Thus, we have more people at the extremes of the distribution, and fewer in the middle. This helps to explain why the US has such a large share of workers engaged in low wage work:  The bottom line is that there are two big issues facing US labor markets. The first is getting people back to work as soon as possible. The unemployment rate is still far too high, and our most immediate problem is providing jobs for the millions of people who are still seeking work. But there is also the the problem of reversing the trend toward increased wage polarization.

Fact Check: Income Losses Under Obama - Mitt Romney has been citing an interesting economic statistic lately about the economy under Barack Obama: “Well, let’s look at what happened. What you’re not going to hear is that during his term median income in America has dropped by $3,000.” Here he is on “Hannity,” repeating the same number. That’s a pretty striking figure. Is it true? The answer depends somewhat on what numbers you use — there are more and less charitable options available — but the answer is arguably yes. The Labor Department’s official data on annual household income come from a giant survey called the American Community Survey. The most recent figures available from that survey go through only 2010, unfortunately. Some economists have tried to estimate this number from a much smaller survey that is conducted each month as part of the jobs report. These numbers are noisy but can still be useful. Mark Zandi, the chief economist at Moody’s Analytics, sent us his own quarterly calculations based on this source:  President Obama took office in the first quarter of 2009, when median household income was $54,797.63. As of the last quarter of 2011, median household income was $52,377.21.

Understanding the wedge between productivity and median compensation growth - One of the key dynamics of our economy for more than 30 years has been the divergence between productivity growth and compensation (or wage) increases for the typical worker. This divergence between pay and productivity has been increasingly recognized as being at the heart of the growth of income inequality. Jared Bernstein (yo, Jared!) and I were the first ones to call attention to this, which we did in the introduction to The State of Working America 1994/1995, which was published on Labor Day in 1994. At that time, we were responding to the oft-repeated claim that wage stagnation experienced by most workers was caused by the post-1973 productivity slowdown. Get productivity up and all would be OK, we were told. Bob Rubin told us reducing the deficit would help accomplish that. By plotting productivity and median wage growth together, we were able to demonstrate that even though productivity growth was indeed historically slow in the preceding two decades, the growth of the median wage had substantially lagged even this anemic productivity growth. As it turns out, productivity growth accelerated in 1996 and has remained higher than in the 1973-1995 period since. Interestingly, the gap between productivity and median hourly compensation growth has grown at its greatest rate over the 2000-11 period despite productivity growth that continued to outpace the 1973-95 rates.

Where The Productivity Went - Krugman - Larry Mishel has a systematic breakdown of the reasons for worker income stagnation since 1973. He starts with the familiar divergence: productivity up 80 percent, the compensation (including benefits) of the median worker up only 11 percent. Where did the productivity go? The answer is, it’s two-thirds the inequality, stupid. One third of the difference is due to a technical issue involving price indexes. The rest, however, reflects a shift of income from labor to capital and, within that, a shift of labor income to the top and away from the middle. What this says is that widening inequality makes a huge difference. Income stagnation does not reflect overall economic stagnation; the incomes of typical workers would be 30 or 40 percent higher than they are if inequality hadn’t soared.

Philly Fed State Coincident Indexes increased in March - From the Philly FedThe Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for March 2012. In the past month, the indexes increased in 48 states, decreased in one state (Rhode Island), and remained stable in one state (South Dakota), for a one-month diffusion index of 94. Over the past three months, the indexes increased in all 50 states, for a three-month diffusion index of 100. This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged). In March, 49 states had increasing activity, up from 47 in February. The number of states with increasing activity has been at or above 47 for the last seven consecutive months. Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession.  Now the map is all green. The recovery may be sluggish, but it is widespread geographically.

Manufacturing States Post Drops in Unemployment - See the full interactive graphic. - State unemployment rates were steady in March from a month earlier and the nation’s jobs recovery continues to be best in states heavy in manufacturing and worst in places hit hard by the housing bust. The national unemployment rate was 8.2% in March, down from 8.3% a month earlier and 8.9% a year ago. New York was the only state that had a higher unemployment rate this year than last. The Midwest, which was among the hardest hit by the recession but has been a huge beneficiary of the revival in manufacturing, now has the nation’s lowest unemployment rate, at 7.4%. Perhaps the best illustration of this is Michigan, which had the nation’s highest unemployment rate through much of the recession. Michigan’s unemployment, which topped out at 14.2% in summer 2009 when the recovery began, now stands at 8.5%. Ohio’s unemployment is now at 7.5% compared with 8.8% a year ago. To be sure, not all of this is due to the improving economy. Some people have moved away in search of better pastures while discouraged workers have simply given up looking for work. Both Michigan and Ohio have seen year-on-year declines in their labor force, which is the number of people working and looking for work.

The geography of unemployment - Here's a map showing the average unemployment rate over the last year by U.S. county. Things are back to normal along a swath through the middle of the country, but still fairly bleak elsewhere, particularly for example here in California. Calculated Risk also prepared this interesting graphic comparing current unemployment rates by state (in red) with the maximum achieved during the recession (in blue). Karl Smith comments on some related graphs. The states which had experienced the biggest run-up in real-estate prices between 2000 and 2005-- California, Rhode Island, Nevada, and Florida-- were among those hit hardest by the recession and today are the places having the most difficult time recovering. That observation is consistent with the claim that the recession was fundamentally a spending shock, with the ongoing deleveraging in affected regions a main factor holding back spending. I would emphasize another point, however, which is that it is not easy for unemployed Californians to take the jobs currently available in North Dakota, just as it's hard for a skilled former construction worker in California to find something else to do where that person could be nearly as productive as he or she used to be. The ongoing housing slump is not just a drag on aggregate demand, but also a key part of why life remains tough for a number of real people with real histories and particular jobs they may still be hoping to get back to.

California Fed-Ed jobless benefits to end mid-May - As of this week, California no longer qualifies for the federal program that provides up to 20 weeks of jobless benefits to the long-term unemployed in high-unemployment states. Starting in mid-May, no one in California can begin or continue receiving this final round of federal benefits, known as Fed-Ed in California and Extended Benefits elsewhere. About 90,000 Californians are receiving Fed-Ed. Their benefits will end abruptly in mid-May, even if they still have weeks remaining in their Fed-Ed claim. The program's end will reduce the maximum weeks of unemployment to 79 from 99 for most people in California, although a small segment can get up to 89. The California Employment Development Department plans to announce the development Tuesday at "We will be sending out notices to those impacted to alert them to this change in Fed-Ed availability," EDD spokeswoman Loree Levy says. Even though California's unemployment rate crept up to 11 percent in March, it was not high enough to maintain eligibility for this program, according to the U.S. Department of Labor.

George Will Makes It Up to Go After Public Sector Workers - Dean Baker - Okay, I know that picking on George Will might seem like cheap fun, but as oped columnist for the Washington Post we are supposed to take him seriously. Today Will is beating up on states that don't follow his pro-rich prescriptions focusing on California and my home state of Illinois. Let me start with my favorite Will line: "From September through December 2008, the premium that investors demanded before they would buy California debt rather than U.S. Treasurys jumped from 24 to 271 basis points (100 points equals 1 percent). The bond market, the only remaining reality check for state politicians, must be allowed to work." Okay, boys and girls, can anyone think of anything that might have affected spreads in the bond market in the fall of 2008? (Hint: Federal Reserve Board Chairman Ben Bernanke and then Treasury Secretary Henry Paulson were running around screaming that the world was about to end.) That's right, we had the collapse of Lehman Brothers and a financial freeze-up. The yield on anything that wasn't U.S. Treasury bonds soared in this period. In other words, Will's statement here means absolutely nothing -- but it is good enough for the Washington Post editorial page.

Mexican immigration to U.S. stalls; cause is debated - There is much debate over the cause for a drop in immigration from Mexico to the United States. Amid an economic downturn and increased enforcement at the U.S.-Mexico border, the number of Mexicans coming to the United States dropped significantly, while the number of those returning home increased sharply over the last several years, according to a report by the Pew Hispanic Center. Advocates against illegal immigration said the report confirms that stricter enforcement combined with tougher job prospects work to curtail illegal immigration. "If you dry up the job magnet because of the bad economy or increased work-site enforcement, you reduce illegal immigration," said Bob Dane, a spokesman for the Federation for American Immigration Reform, which advocates for restricted immigration."The fact remains there's still 7 million illegal aliens occupying jobs that should go to American citizens," he said. "It's nowhere near mission accomplished."

Young men in Mexico say the US no longer offers them a better future - In a typical year, the young men in this agricultural region of western Mexico would have made the journey north to America. But not this year or for this generation: a better future across the border is a promise they no longer trust. "For years, we dreamed of America, but now that dream is no good," says 18-year-old Pedro Morales, sitting in the elegant Spanish colonial square of Comala under the shadow of the spectacular Volcan de Fuego. "There are no jobs and too many problems. We don't want to go." In an historic shift, the tide of immigration from Mexico to the US has stalled. Villages that were empty of young men are now full. A report published by the Pew Hispanic Center this week confirmed what was already anecdotally clear: the largest wave of immigration in US history has stalled and is now close to slipping into reverse. Between 2005 and 2010, 1.4 million Mexicans immigrated to the United States, less than half the number that migrated between 1995 and 2000. At the same time, the number of Mexicans who moved to Mexico over the same period rose to 1.4 million, double the number over the previous five years. Other research groups in the field say the narrowing gap in wages and relative costs of living between Mexico and the US, as well as improving education standards in Mexico, has tipped the calculation back.

Jailed for $280: The Return of Debtors' Prisons - How did breast cancer survivor Lisa Lindsay end up behind bars? She didn't pay a medical bill -- one the Herrin, Ill., teaching assistant was told she didn't owe. "She got a $280 medical bill in error and was told she didn't have to pay it," The Associated Press reports. "But the bill was turned over to a collection agency, and eventually state troopers showed up at her home and took her to jail in handcuffs." Under the law, debtors aren't arrested for nonpayment, but rather for failing to respond to court hearings, pay legal fines, or otherwise showing "contempt of court" in connection with a creditor lawsuit. That loophole has lawmakers in the Illinois House of Representatives concerned enough to pass a bill in March that would make it illegal to send residents of the state to jail if they can't pay a debt. The measure awaits action in the senate. "Creditors have been manipulating the court system to extract money from the unemployed, veterans, even seniors who rely solely on their benefits to get by each month," Illinois Attorney General Lisa Madigan said last month in a statement voicing support for the legislation. "Too many people have been thrown in jail simply because they're too poor to pay their debts. We cannot allow these illegal abuses to continue."

Debtors filing lawsuits over aggressive collection tactics - In rural Fresno County, an 18-year-old student living with her parents became anxious and depressed and eventually dropped out of school after a Hanford-based collector kept calling at home and at work about a delinquent $3,509.18 hospital bill. "Her voice is stuck in my head, and it's ugly, ugly," said Margarita Guzman of Parlier, a town of about 13,000 southeast of Fresno. "She made me feel like I was this bad person and couldn't be responsible. "Then people started asking me, 'Why are you putting up with this?' " said Guzman, now 23. Harassing phone calls, threats of arrest, vulgar language, calls to employers, lawsuits against people who don't even owe money – all are hallmarks of the Wild West tactics consumers are confronting amid the troubled economy. But there is a twist. A surging number of Californians – including Guzman and Schwarm – are turning the tables on collection agencies as the state experiences an explosion in lawsuits filed against debt collectors. In the last seven years, the number of lawsuits in California accusing collectors of violating federal law has increased fivefold, The Bee found in an analysis of more than 5,000 debt-collection cases filed in California's federal courts since 2005.

Debtors' Prison Legal In More Than One-Third Of U.S. States - Not paying off debts can eventually land you in jail -- at least in a sizable minority of U.S. states. Borrowers who can't or don't pay their debts can be sent to jail in more than one-third of states, the Wall Street Journal reports. Judges may issue a warrant when a borrower either misses court ordered payments or doesn't show up in court after being sued for payments on outstanding debt. Though there are no national statistics on the practice of jailing debtors, a WSJ analysis found that judges have issued more than 5,000 debt-related warrants since the beginning of 2010.  As high joblessness, slow wage growth and plummeting home values push more Americans into debt, the aftermath of the recession also makes it increasingly difficult for consumers to pay it back, and the collectors of that debt are getting more aggressive as a result.  Some states are attempting to rein in the practice of putting borrowers in jail, even as the number of borrowers threatened with arrest has surged since the financial crisis, according to a separate WSJ report. Washington state's House of Representatives voted unanamously in March to require debt collection companies to provide proof that borrowers had been notified about lawsuits before judges could issue an arrest warrant.

Locking down an American workforce -- Sweatshop labor is back with a vengeance. It can be found across broad stretches of the American economy and around the world. Penitentiaries have become a niche market for such work. The privatization of prisons in recent years has meant the creation of a small army of workers too coerced and right-less to complain. Prisoners, whose ranks increasingly consist of those for whom the legitimate economy has found no use, now make up a virtual brigade within the reserve army of the unemployed whose ranks have ballooned along with the U.S. incarceration rate. The Corrections Corporation of America and GEO, two prison privatizers, along with a third smaller operator, G4S (formerly Wackenhut), sell inmate labor at subminimum wages to Fortune 500 corporations like Chevron, Bank of America, AT&T, and IBM. These companies can, in most states, lease factories in prisons or prisoners to work on the outside. All told, nearly a million prisoners are now making office furniture, working in call centers, fabricating body armor, taking hotel reservations, working in slaughterhouses, or manufacturing textiles, shoes, and clothing, while getting paid somewhere between 93 cents and $4.73 per day. Rarely can you find workers so pliable, easy to control, stripped of political rights, and subject to martial discipline at the first sign of recalcitrance — unless, that is, you traveled back to the nineteenth century when convict labor was commonplace nationwide. Indeed, a sentence of “confinement at hard labor” was then the essence of the American penal system. More than that, it was one vital way the United States became a modern industrial capitalist economy — at a moment, eerily like our own, when the mechanisms of capital accumulation were in crisis.

Why Is It Necessary For The Federal Government To Turn The United States Into A Prison Camp?: There has been no society in the history of the world that has ever been 100% safe. No matter how much money the federal government spends on "homeland security", the truth is that bad things will still happen. Our world is a very dangerous place and it is becoming increasingly unstable. The federal government could turn the entire country into one giant prison camp, but that would still not keep us safe. It is inevitable that bad stuff will happen in life. But we have a choice. We can choose to live in fear or we can choose to live as free men and women. Our forefathers intended to establish a nation where liberty and freedom would be maximized. But today we are told that we have to give up our liberties and our freedoms and our privacy for increased security. But is such a trade really worth it? Just think of the various totalitarian societies that we have seen down throughout history. Have any of them ever really thrived? Have their people been happy? Unfortunately, the U.S. federal government has decided that the entire country needs to be put on lock down. Nearly everything that we do today is watched and tracked, and personal privacy is rapidly becoming a thing of the past. Many of the things that George Orwell wrote about in 1984 are becoming a reality, and that is a very frightening thing. The United States is supposed to be the land of the free and the home of the brave. Sadly, we are rapidly becoming the exact opposite of that.

The Fight Over Inequality -  The headline promised an article of critical importance: “Obama’s inequality argument just utterly collapsed.” James Pethokoukis, a conservative columnist and blogger at the American Enterprise Institute, wrote on April 11 that a new academic study put the lie to Democratic claims of endemic inequality and grotesquely distorted income gains by the top 1 percent. The “tax and regulatory policies of the past three decades,” he wrote, did not lead to stagnation for the middle class at the hands of the rapacious rich. Claims to the contrary — such as those made by Obama, the Occupy movement, and many liberal economists — never really passed the sniff test of anyone who lived through the past few decades. And now we know why: The inequality and stagnation alarmists were wrong. And so, therefore, is the economic rationale of the president’s class-warfare economic policies. The paper by Burkhauser, Larrimore and Simon on which Pethokoukis builds his argument, “A ‘Second Opinion’ on the Economic Health of the American Middle Class,” appeared in the March 2012 issue of the National Tax Journal. The paper does, in fact, provide valuable insights into the sometimes daunting arguments over inequality, income stagnation and economic stratification.  Some of the findings of Burkhauser et al are advantageous to the political right; others undermine the conservative agenda. I will explore both below, but first we must turn to the crucial dispute over the definition of income.

The Impact of Inequality on Macroeconomics Dynamics - James Galbraith on inequality: (video) Here's the entire session: The Impact of Inequality on Macroeconomics Dynamics.  Moderator  Henrik Enderlein, Professor of Political Economy, Hertie School of Governance.  Speakers:

  • Peter Bofinger, Member of the German Council of Economic Experts Paper / Presentation / Video
  • Arjun Jayadev, Assistant Professor of Economics, University of Massachusetts, Boston Paper / Presentation / Video
  • James Galbraith, Lloyd M. Bentsen Jr. Chair in Government and Business Relations, University of Texas. Presentation / Video
  • Michael Kumhof, Deputy Division Chief, Modeling Unit, Research Department, International Monetary Fund. Paper / Paper 2 / Presentation / Video

    American Austerity - Krugman - With all the focus on Europe’s sudden discovery that austerity doesn’t work, we shouldn’t lose sight of just how much de facto austerity we’ve done on this side of the Atlantic. Here’s a comparison of changes in government employment (federal, state, and local) during the first four years of three presidents who came to office amid a troubled economy: That spike early on is Census hiring; once that was past, the Obama years shaped up as an era of huge cuts in public employment compared with previous experience. If public employment had grown the way it did under Bush, we’d have 1.3 million more government workers, and probably an unemployment rate of 7 percent or less.

    The Other America, 2012: Confronting the Poverty Epidemic - The side streets of central Clarksdale are lined with tiny, dilapidated wooden homes. Most residents here make do without basic services and amenities, including anything beyond a bare-bones education, and many lack access to the broader cash economy. In contrast, the stately old townhouses in the historic district—places where several Mississippi governors grew up, where the young Tennessee Williams ran around while staying with his grandparents—look like the scenic backdrop to a romantic film set in the antebellum South. And the newer, more palatial mansions in the suburbs ringing the town could serve as staging grounds for a reality TV show on the nouveau riche. In the poorer section of Clarksdale, in a subsidized housing unit about the size of a small boat’s cabin, lives 88-year-old Amos Harper, a jack-of-all-trades who grew up in a sharecropping family. Harper spent decades doing everything from farmwork to interstate tractor-trailer transport. These days, he gets up early to supplement his $765 monthly Social Security check, collecting cans from the gutters and trading them in for 49 cents per pound. When he isn’t doing that, he’s mowing lawns and running errands for several of the town’s richer residents, including Bill Luckett.

    Fairness Can Pay Economic Dividends -There’s a reason they call economics the dismal science, but Professor Armin Falk’s presentation at an economics conference in Berlin a few days ago made me smile. That’s because his big conclusion — fairness has a financial pay-off — is so cheering. Prof. Falk’s conclusion is easy to square with our experience of everyday life. Any parent — I’m a mother of three — knows that nothing enrages a child a more than the belief that her brother or sister is getting preferential treatment. Everyone with a job knows the same thing — there are few things more demotivating than discovering that the guy in the cubicle next to you, who does the same job you do, earns more. But that instinctive sense that fairness matters hasn’t always been shared by mainstream economics. Instead, economists have built their models around the idea of ‘homos economicus,’ a human being who is perfectly rational and whose only goal is to pursue his economic self-interest. Prof. Falk goes a long way to debunking that view. ... Read what conclusions he comes to in my column...

    State Tax Collections Pass Peak From Recession’s Start - State tax collections, which during the recession experienced their steepest and longest drop since at least the Great Depression, have been climbing back for the last two years and finally surpassed their previous peaks as 2011 drew to a close, according to a report issued on Thursday. The total amount of tax revenue collected by the states was 3 percent higher than it was during the last quarter of 2007, when the recession hit, according to the report, by the Nelson A. Rockefeller Institute of Government, in Albany. But the recovery has been uneven: 17 states collected less in taxes in the last quarter of 2011 than they did four years earlier. Surpassing the 2007 peak in collections was an important milestone for the states, which have struggled mightily to balance their budgets in recent years. But huge challenges remain, as their populations and the cost of providing services have continued to rise, and the growth in tax collections has begun to soften. “You could say that the glass is half-full, but we have to be aware that the glass is still half-empty, and states still have a long way to go before full recovery,”

    Monday Map: Inheritance and Estate Tax Rates and Exemptions - Today's Monday Map shows inheritance and estate tax rates and exemptions as of January 1, 2012. Estate taxes are levied on the estate itself prior to transfer; inheritance taxes are levied on the transfer of wealth based on the recipient's relationship to the decendent. New Jersey and Maryland are notable for having both an estate tax and an inheritance tax.

    What Tax Reform Means for State and Local Tax and Fiscal Policy - In testimony before the Senate Committee on Finance this morning, I discussed what federal tax reform would mean for state and local governments and how Congress could help by coordinating tax law across states. Here are my opening remarks. You can find my full testimony here.Decisions about changing federal policy should take into account the potential effects on state and local government budgets in both the short and the long run. I will make 4 points today.

    • Federal tax policy and reform can help or hurt states. Federal policy affects how attractive specific taxes are for state and local governments and, therefore, how those governments organize their tax and revenue systems.  
    • Unstable federal tax policy trickles down to the states and uncertainty is especially problematic for state and local governments.  State and local governments are required to pass balanced budgets every year.  This requires being able to accurately forecast revenues. 
    • If fundamental tax reform is undertaken, transition relief might be important for state and local governments.  Understanding the state of the economy and the fiscal health of state and local governments will be important.
    • Due to our federalist system, Congress has a role in helping to coordinate or protect the existing state and local tax base.

    Taxed by the boss: 16 states redirect income taxes to corporate profiteers instead of education, public safety - 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.

    How American municipalities can learn from Parisian mistakes - Across the nation cash-strapped municipalities are considering the sale of their public-utility systems. These moves are intended to raise cash and rid the municipalities of expensive liabilities such as debt service and pension obligations. But officials considering this approach might do well to look to France and other nations that are rapidly moving in the opposite direction with a “remunicipalization” of their utility systems. In 2010, Paris, in the best known case of remunicipalization, ended contracts with the world’s two biggest water service companies, Suez and Veolia, bringing an end to their 100-year private duopoly. The reversal of a century-old practice in Paris was an acceleration of an international movement away from private control. Per The promises that privatisation would improve the provision of drinking and wastewater services soon faltered. Many of the privatised operations quickly began to show weaknesses as they missed targets for expanding and upgrading networks, introduced excessive tariff increases alongside connection fees which were unaffordable for low-income families. Management activities were not transparent and accountable. As a result numerous contracts with private operators were terminated often following popular unrest. Many cities, regions and even countries have chosen to close the book on water privatisation and instead embarked on remunicipalisation or renationalisation of water delivery.

    What Are These Two Time Series? - The red line is employment in the euro zone (seasonally adjusted, for 17 countries, from ECB). The blue line is private nonfarm payroll employment in Wisconsin (seasonally adjusted, average of monthly data). I discovered these interesting similarities as I was preparing for a panel presentation on the eurozone crisis this Wednesday. Policy makers in the euro zone are embarking upon continued austerity measures, reinforcing contraction, given fiscal multipliers are large in the presence of slack, and at the zero interest rate bound [1] (More on the euro crisis by Michael Klein). Since Wisconsin does not possess its own currency, it is not surprising to see lackluster growth (or contraction) in the face of fiscal retrenchment here as well (the downturn correlates well with the new budget year).

    Weak tax revenue to increase California budget deficit - With tax revenue slowing to a trickle as the end of April draws near, the state's top fiscal analyst predicted late Wednesday that California would be "a few billion dollars" shy of Gov. Jerry Brown's budget projections through June 2013. The nonpartisan Legislative Analyst's Office said total personal income tax collections would likely be more than $2 billion below Brown's expectation of $9.4 billion for the month. Because the state was already running behind, it would mean the take from income taxes would be $3 billion shy for the fiscal year that ends June 30 compared with Brown's updated January projections. Corporate taxes are also likely to trail Brown's forecast by about $450 million for the fiscal year so far, according to the analyst. Unless sales taxes are robust, that means the state would be about $3.5 billion behind for this fiscal year, and likely a "few billion dollars" through the budget cycle that ends in June 2013, the Legislative Analyst's Office estimates. Brown pegged the state's deficit at $9.2 billion through that month, and he suggested last week that the problem might be $1 billion or $2 billion worse than previously stated.

    Illinois ‘Treads Water’ as Unpaid Bills Top $9 Billion - llinois’s backlog of unpaid bills has risen to more than $9 billion because of pension costs and falling federal aid, leaving the state “essentially treading water,” Comptroller Judy Baar Topinka said.  While revenue grew from higher personal and corporate taxes, “Illinois’ financial position has not improved,” Topinka said in a report today. The combination of unpaid bills to vendors and Medicaid obligations, estimated at $8.5 billion in January, means payment delays will persist, according to the report.   While tax increases boosted revenue by about $7 billion, or 3.9 percent in the first three quarters of the fiscal year that began in June, the gains were undercut by the loss of federal funding and financing of pension contributions directly, rather than through bonds as in the past two years, Baar Topinka said.   Democratic Governor Pat Quinn has proposed a voluntary 3 percent increase in pension contributions from current employees and a cut in cost-of-living increases for retirees.  “Bold action” is required to save the retirement systems, the governor told reporters in Chicago April 20. In fiscal 2010, Illinois had the lowest-funded state pension in the U.S., with assets equal to 45.4 percent of projected obligations, according to data compiled by Bloomberg. 

    Illinois mulling introduction of state-park admission fees - With the state deeply in debt, lawmakers in Springfield are mulling a proposal to charge admission fees for the first time to the state’s hundreds of recreational properties. The money, proponents say, would be used to close a $750 million backlog in park maintenance and repairs due to years of shrinking budgets. If the legislature approves it, a bill sponsored by Rep. JoAnn Osmond, R-Antioch, would allow state officials to charge visitors an annual or daily fee to enter state parks. An annual admission fee would be no more than $25 and a daily pass around $5 to $8. The House approved Osmond’s measure by 81-29 in March, and it is now moving through the Senate. The original bill would charge fees to anyone who entered the parks, but Osmond said the Senate may amend the bill to affect only car visitors.

    Illinois Taxpayers Penalized by Unpaid-Bill Backlog: Muni Credit - Illinois residents, whose income taxes rose by a record last year to help close a budget deficit, are paying the price again for the state’s fiscal mismanagement. With its pile of unpaid bills growing about 30 percent this year, the weakest pension-funding ratio among states and falling federal aid, Illinois and its municipalities are paying a penalty above AAA debt that’s twice their five-year average. Illinois plans to issue $1.8 billion of debt as soon as next week, yet asset managers such as Schroder Investment Management North America and BNY Mellon Wealth Management said they’re reluctant to buy. “We’re not going to participate in this sale because we think the credit quality could get worse before it gets better,”

    Meredith Whitney: State Finances Are Still Doomed, And These Three States Are In The Most Trouble - Meredith Whitney was on CNBC's Closing Bell today. Jeff Cox at spotlights one area where she's wildly bullish. She likes the agriculture and commodity states that are 'right-to-work' where businesses are creating jobs: "But there are three stats in particular she doesn't like: California (which is the worst) followed closely by Illinois and New Jersey. In Illinois, in particular, she cited something new about parents being forced to pay for school busses because finances have gotten so bad. Some other points she made: Europe is stil in a lot of trouble. And beyond Spain, you have to watch France. The panic in Europe will keep US rates low, and that makes the Fed's job easier since rates will stay low. On Citi, there are no big risks out there any more. She's 'absolutely' still worried about state finances. In fact there's more evidence supporting the thesis that the states are in trouble.

    Firm Leaves Miss. After Its Prison Is Called 'Cesspool' - One month after a federal court ordered sweeping changes at a troubled juvenile prison in rural Mississippi, the private company managing the prison has announced it is pulling out of the state. A report by the Justice Department describes "systemic, egregious and dangerous practices" at the Walnut Grove Youth Correctional Facility. As those words imply, the official report is scathing. Federal Judge Carlton Reeves wrote that the youth prison "has allowed a cesspool of unconstitutional and inhuman acts and conditions to germinate, the sum of which places the offenders at substantial ongoing risk. Among the conditions described in the report released last month:

    • Prison staff had sex with incarcerated youth, which investigators called "among the worst that we've seen in any facility anywhere in the nation."
    • Poorly trained guards brutally beat youth and used excessive pepper spray as a first response.
    • The prison showed "deliberate indifference" to prisoners possessing homemade knives, which were used in gang fights and inmate rapes.
    • Some guards had gang affiliations — a finding confirmed to NPR last year by former inmate Justin Bowling.

    Private Prison Corporations Are Slave Traders - The nation’s largest private prison company, the Corrections Corporation of America, is on a buying spree. With a war chest of $250 million, the corporation, which is listed on the New York Stock Exchange, this month sent letters to 48 states, offering to buy their prisons outright. To ensure their profitability, the corporation insists that it be guaranteed that the prisons be kept at least 90 percent full. Plus, the corporate jailers demand a 20-year management contract, on top of the profits they expect to extract by spending less money per prisoner. For the last two years, the number of inmates held in state prisons has declined slightly, largely because the states are short on money. Crime, of course, has declined dramatically in the last 20 years, but that has never dampened the states’ appetites for warehousing ever more Black and brown bodies, and the federal prison system is still growing. However, the Corrections Corporation of America believes the economic crisis has created an historic opportunity to become the landlord, as well as the manager, of a big chunk of the American prison gulag.

    Georgia Tries to Get to Zero Welfare Recipients - t’s not easy for poor people to get cash assistance in America. Prior to welfare reform in 1996, 68 of every 100 poor families with children received cash assistance through Aid to Families with Dependent Children (AFDC). But by 2010, under the Temporary Assistance for Needy Families (TANF) program which replaced AFDC, just 27 of every 100 poor families received benefits. The rolls shrunk as states were given wide discretion over eligibility, benefit levels, time limits, and how to use their TANF block grants which were frozen at 1996 funding levels and not indexed for inflation. Georgia is known as a particularly difficult state when it comes to accessing TANF. According to the Center on Budget and Policy Priorities (CBPP), in 2008-09 for every 100 poor families with children in Georgia, only eight received cash aid. Now the state is set to make its TANF application process even more onerous. On Monday, Republican Governor Nathan Deal signed a law requiring that people approved for TANF receive a drug test within forty-eight hours. They also have to pay a $17 fee for the test and it isn’t refunded, even if a person passes. In addition to the financial burden, forty-eight hours can be tough for someone who may need to arrange for childcare, or find transportation to a testing site. “In effect it’s an application fee,”

    Flint emergency manager unveils budget with fee hikes, public safety layoffs - The cost to live in the city of Flint could be going up for some residents if Flint emergency manager Michael Brown enacts his budget proposal.With the city facing a projected $25 million deficit next year, Brown unveiled a financial plan for the city Monday that includes fee hikes as well as steep cuts to personnel in the form of layoffs and compensation cuts. The budget includes 19 fewer police officers, 31 firefighter layoffs and closing up to two fire stations. Brown also plans to ask the state's permission to borrow up to $20 million to cover past deficits, he said. The steep budget cuts and revenue increases proposed are "significant but unavoidable" in order to Flint on a path to financial solvency, Brown said in the budget proposal released Monday.

    2,566 Detroit workers could get layoffs, according to fine-tuned budget - City of Detroit administrators are suggesting 2,566 layoffs across all departments, according to a new budget presented to City Council today. "Those are people," City Council President Charles Pugh said, frowning at the figures. Mayor Dave Bing has already called for 1,000 layoffs this year. The additional layoffs are both grant-funded and non-grant-funded positions. During a council session last week, Deputy Mayor Kirk Lewis warned that there would be significant cuts to drive down the city's $265 million deficit. Brown said 800 of the 1,000 earlier layoffs have been targeted. During last week's budget presentation, Lewis and Brown said there would be no layoffs among police and fire workers. Today's proposal banks on a $20 million federal grant to keep at least 100 public safety workers in place.

    Detroit fire plan allows vacant buildings to burn - Detroit Executive Fire Commissioner Donald Austin is proposing the city allow vacant buildings and homes to burn themselves out - but under conditions. "We are in no way looking to 'let the city' burn, this is about saving lives and money," Austin said. "My department is strapped, the budget is strapped, and it's time to look at a new way of doing things." Austin, a former Los Angeles assistant fire chief, became head of Detroit fire operations last May. Wide swaths of Detroit's once-teeming neighborhoods now consist of scattered occupied homes, surrounded by boarded-up structures, burned-out husks and weed-covered vacant lots.One of Austin's proposals would allow vacant buildings to burn if they're more than 50 percent ablaze - as long as they're not a risk to inhabited structures and the weather is favorable. Austin said about 40 to 60 percent of the fires in Detroit are in vacant structures.

    Child poverty growing 14 percent in New Jersey - The latest "Kids Count" report shows more children in New Jersey are living in families that are struggling to make ends meet. The annual survey by Advocates for Children of New Jersey finds about a third of the young people in the Garden State live in households that earn too little to meet their basic needs. Executive director Cecila Zalkind says that's 14 percent higher than five years ago. "I think we're beginning to see the fallout from the economic downturn in 2008," said Zalkind. "Child poverty over the years has gone up steadily since 2008. What we're seeing now is a far deeper pocket than we anticipated and far greater need." Zalkind says low-income residents are having trouble finding full time-jobs. She's wants more money for state funded child care that would help parents devote more time to work.

    San Diego school workers face nearly 1,000 layoffs - The San Diego school board has voted to issue layoff warnings to nearly 1,000 non-teaching employees as it struggles with a budget crunch. Tuesday's vote affects full- and part-time employees such as custodian, cafeteria workers and classroom assistants. Last month, the board issued layoff notices last month to nearly 1,700 teachers, counselors and nurses. Actual layoffs must be made by May 15th but they may be avoided if the district gets more state money. The board must adopt a final budget by June 30. The district is projecting a budget shortfall of $122 million next year. It wants employees to forego raises, accept furlough days and make other concessions.

    More lay-offs for massive California school district (Reuters) - California's second-largest school district is preparing lay-off notices for roughly 2,600 of its credentialed and non-teaching staff if the state does not provide funds to help close its $122 million deficit. The board of the 120,000-student San Diego Unified School District voted on Tuesday to send out the preliminary lay-off notices to clerical, food service and other employees. That followed warnings issued for teachers and other credentialed staff. Layoffs would be effective for the school year beginning in September, a district spokesman said on Wednesday. The district has cut about 2,000 positions since 2008, leaving its payroll at about 14,000, said Bernie Rhinerson, the district's chief of staff. He cited shrinking financial help from state officials who have had to contend with weak revenue due to California's recent hard times.

    Why Isn’t Closing 40 Philadelphia Public Schools National News? Where Is the Black Political Class? - In what should be the biggest story of the week, the city of Philadelphia's school system announced Tuesday that it expects to close 40 public schools next year and 64 by 2017. The school district expects to lose 40% of current enrollment to charter schools, the streets or wherever, and put thousands of experienced, well qualified teachers, often grounded in the communities where they teach, on the street.  Ominously, the shredding of Philadelphia's public schools isn't even news outside Philly.  Corporate media in other cities don't mention massive school closings, whether in Chicago, Atlanta, NYC, or in this case Philadelphia, perhaps so people won't have given the issue much deep thought before the same crisis is manufactured in their town. Even inside Philadelphia the voices of actual parents, communities, students and teachers are shut out of most newspaper and broadcast accounts.  The black political class is utterly silent and deeply complicit. Even local pols and notables who lament the injustice of local austerity avoid mentioning the ongoing wars and bailouts which make these things “necessary.” A string of black mayors have overseen the decimation of Philly schools. Al Sharpton, Ben Jealous and other traditional “civil rights leaders” can always be counted on to rise up indignant when some racist clown makes an inappropriate remark about the pretty black First Lady and her children.  But they won't grab the mic for ordinary black children.

    Philadelphia Blows Up Its School District, And No One In The Complicit National Media Even Cares -- The elites' plans are in place to close 40 schools, break the teacher and janitorial unions, and put the education of the City of Philadelphia's children up for bid. I never expected it to happen this fast. It feels like a kick to the gut. Our schools were taken over by the state in 2001 (you can read the gruesome history here) and instead we're run by a five-person School Reform Commission. (The governor gets to appoint three members, the mayor gets to appoint two.) And even though the reason for declining results may have more to so with the fact that the state contribution to public education has dropped from 55 percent in 1975 to 36 percent in 2001, the hillbilly politicians in the Pennsyltucky parts of the state have done a fine job convincing voters outside the more educated areas that funding schools in Philadelphia is throwing money down a "black hole." (Emphasis on the word "black," since color plays a very large part in these funding decisions.)  But don't worry, the charter schools-privatization crowd has bought off some prominent black politicians, too, so at least the payoffs are color-blind. Here's the thing: It's not the school district's fault that Pennsylvania funds its schools through an inequitable system of property taxes, nor that the state voters rejected attempts to fix that. The Philadelphia schools pay an average of $7,000 per pupil. The suburban districts? Almost double. We could probably do better if we had that kind of money. (And that "average figure" is misleading, anyway. It includes special education funding. Urban districts include far more at-risk students, who usually require more special ed money.)

     Illinois might let schools charge for bus service -  School buses might be the next target of state officials who are trying to stretch every dollar as Illinois' budget crisis drags on. State education officials are looking at ways to make the most of the limited amount of money available to pay for student transportation. One proposal would change the way Illinois distributes that money, and another would let schools charge for bus service. A proposal could be introduced as early as this week, a spokesman for the State Board of Education said Monday. It would have to be approved by legislators before it could take effect.

    Education Slowdown Threatens U.S. - Throughout American history, almost every generation has had substantially more education than that of its parents.That is no longer true.When baby boomers born in 1955 reached age 30, they had about two years more schooling than their parents, In contrast, when Americans born in 1980 turned 30 in 2010, they averaged about eight months more schooling than their parents. This development already has broad ramifications across the U.S. job market: Those with only a high-school diploma had an 8% unemployment rate in March, roughly double that of college graduates, who had a 4.2% unemployment rate. Workers with bachelor's degrees earn 45% more in wages on average than those of demographically similar high-school graduates. And in today's highly automated factories, many manufacturers demand the equivalent of a community-college degree, even for entry level workers.  More serious consequences may be felt in the future. Without better educated Americans, economists say, the U.S. won't be able to maintain high-wage jobs and rising living standards in a competitive global economy. Increasingly, the goods and services in which the U.S. has an edge rely more on the minds of American workers—than on their muscle. "The wealth of nations is no longer in resources. It's no longer in physical capital. It's in human capital," says Ms. Goldin.

    The factory farm? - There are no professors in Virginia Tech’s largest classroom, only a sea of computers and red plastic cups. In the Math Emporium, the computer is king, and instructors are reduced to roving guides. Lessons are self-paced, and help is delivered “on demand” in a vast, windowless lab that is open 24 hours a day because computers never tire. A student in need of human aid plants a red cup atop a monitor. The Emporium is the Wal-Mart of higher education, a triumph in economy of scale and a glimpse at a possible future of computer-led learning. Eight thousand students a year take introductory math in a space that once housed a discount department store. Four math instructors, none of them professors, lead seven courses with enrollments of 200 to 2,000. Students walk to class through a shopping mall, past a health club and a tanning salon, as ambient Muzak plays…Virginia Tech students pass introductory math courses at a higher rate now than 15 years ago, when the Emporium was built. And research has found the teaching model trims per-student expense by more than one-third, vital savings for public institutions with dwindling state support. “When I first came here, I was like, ‘This is the dumbest thing ever,’” said Mike Bilynsky, a freshman from Epping, N.H., who is taking calculus. “But it works.”

    Laura Tyson: The Public University Dilemma (video) Laura D’Andrea Tyson, a contributor to this blog and an economist at the University of California, Berkeley, spoke with Catherine Rampell about the toll that state cutbacks have taken on public universities. Middle-class applicants are most seriously affected, as they may lack the assets or the financial aid to enroll. “It’s part of the broader polarization of the United States,” she says. Part of the solution might be to raise the sticker price for those who can afford it, in order to subsidize others — but such plans run up against state restrictions designed to ensure the university’s public mission.

    Get Rich U.: There are no walls between Stanford and Silicon Valley. Should there be? - Stanford University is so startlingly paradisial, so fragrant and sunny, it’s as if you could eat from the trees and live happily forever. Students ride their bikes through manicured quads, past blooming flowers and statues by Rodin, to buildings named for benefactors like Gates, Hewlett, and Packard. Everyone seems happy, though there is a well-known phenomenon called the “Stanford duck syndrome”: students seem cheerful, but all the while they are furiously paddling their legs to stay afloat. What they are generally paddling toward are careers of the sort that could get their names on those buildings. The campus has its jocks, stoners, and poets, but what it is famous for are budding entrepreneurs, engineers, and computer aces hoping to make their fortune in one crevasse or another of Silicon Valley.  Innovation comes from myriad sources, including the bastions of East Coast learning, but Stanford has established itself as the intellectual nexus of the information economy. In early April, Facebook acquired the photo-sharing service Instagram, for a billion dollars; naturally, the co-founders of the two-year-old company are Stanford graduates in their late twenties. The initial investor was a Stanford alumnus.

    Audit finds College Illinois deficit remains - A report on the commission in charge of the troubled College Illinois prepaid tuition program continues to run a deficit well into the hundreds of millions of dollars. The Illinois Auditor General's office said in an annual report Tuesday on the Illinois Student Assistance Commission that the tuition program's deficit as of June 30, 2011, was down from $338 million to $262 million. But the commission itself uses an accounting method used by other prepaid tuition programs - also noted in the audit - which shows that the deficit rose slightly from $531 million to $536 million. The commission is the state's primary provider of college financial aid, and runs the $1.1 billion tuition program, which has run a deficit for several years, a problem that contributed to the ouster of the executive director. Because of the problems, College Illinois stopped signing new contracts with families last year.

    University of Florida Eliminates Computer Science Department, Increases Athletic Budgets. Hmm. - Let’s get this straight: in the midst of a technology revolution, with a shortage of engineers and computer scientists, UF decides to cut computer science completely? Students at UF have already organized protests, and have created a website dedicated to saving the CS department.  Several distinguished computer scientists have written to the president of UF to express their concerns, in very blunt terms.  Prof. Zvi Galil, Dean of Computing at Georgia Tech, is “amazed, shocked, and angered.”  Prof. S.N. Maheshwari, former Dean of Engineering at IIT Delhi, calls this move “outrageously wrong.”  Computer scientist Carl de Boor, a member of the National Academy of Sciences and winner of the 2003 National Medal of Science, asked the UF president “What were you thinking?”  I think this move is shockingly short-sighted.  The University of Florida is moving backwards while the rest of the world moves ahead. Meanwhile, the athletic budget for the current year is $99 million, $97.7 million, an increase of more than $2 million from last year.  The increase alone would offset the savings supposedly gained by cutting computer science.

    Does Not Compute -- Steven Salzberg from Forbes is right about this: Wow, no one saw this coming.  The University of Florida announced this past week that it was dropping its computer science department, which will allow it to save about $1.7 million.  The school is eliminating all funding for teaching assistants in computer science, cutting the graduate and research programs entirely, and moving the tattered remnants into other departments. Let’s get this straight: in the midst of a technology revolution, with a shortage of engineers and computer scientists, UF decides to cut computer science completely? Salzberg, however, is critical of Florida Governor Rick Scott for cutting university funding overall (Scott famously decried anthropology degrees in favor of STEM). Salzberg also finds it “unintentionally ironic” that in announcing a new polytechnic just two day ago Gov. Scott said: “At a time when the number of graduates of Florida’s universities in the STEM [science, technology, engineering, and mathematics] fields is not projected to meet workforce needs, the establishment of Florida Polytechnic University will help us move the needle in the right direction.”Meanwhile, the athletic budget for the current year is $99 million, an increase of more than $2 million from last year.  The increase alone would more than offset the savings supposedly gained by cutting computer science.

    The University of Florida Responds A Forbes article by contributing writer Steven Salzberg falsely claims that the University of Florida is eliminating the Computer Science Department. The Dean of the College of Engineering has put on the table for discussion a budget plan to reorganize the Computer & Information Science and Engineering Department. Under that proposal, all undergraduate and graduate degree curriculum would remain the same and the college would maintain its brainpower and research capacity. The plan calls for no lay-offs of tenure-track faculty. Faculty lay-offs are expected, however, if across-the-board cuts are made in the College of Engineering. The proposed budget plan would grow the number of graduates from the CISE department because faculty members would be expected to assume a greater teaching responsibility. About $1.4 million in savings would come primarily from the elimination of graduate teaching assistants. We are aware faculty and students have expressed serious concern with this plan. We ask for everyone’s patience as we work through this process.

    More universities charging more tuition for harder majors – A growing number of public universities are charging higher tuition for math, science and business programs, which they argue cost more to teach — and can earn grads higher-paying jobs. More than 140 public universities now use "differential tuition" plans, up 19% since 2006, according to research from Cornell's Higher Education Research Institute. That number is increasing as states cut higher-education spending and schools try to pay for expensive technical programs. "It's been a lifesaver," said Donde Plowman, College of Business Administration dean at the University of Nebraska-Lincoln, which charges business and engineering majors $50 more a credit. "We can be excited for the future."  The money at Nebraska paid to create a career center, renovate a student lounge and hire an additional academic adviser. The college is also hiring new faculty.

    The Biggest Student Uprising You’ve Never Heard Of - On an unseasonably warm day in late March, a quarter of a million postsecondary students and their supporters gathered in the streets of Montreal to protest against the Liberal government’s plan to raise tuition fees by 75% over five years.  As the crowd marched in seemingly endless waves from Place du Canada, dotted with the carrés rouges, or red squares, that have become the symbol of the Quebec student movement, it was plainly obvious that this demonstration was the largest in Quebec’s, and perhaps Canadian, history. The March 22nd Manifestation nationale was not the culmination but the midpoint of a 10-week-long student uprising that has seen, at its height, over 300,000 college and university students join an unlimited and superbly coordinated general strike.  As of today, almost 180,000 students remain on picket lines in departments and faculties that have been shuttered since February, not only in university-dense Montreal but also in smaller communities throughout Quebec. Although generally peaceful, these actions have met with increasingly brutal acts of police violence: Student protesters are routinely beaten, pepper-sprayed, and tear-gassed by riot police, and one, Francis Grenier, lost an eye after being hit by a flashbang grenade at close range.  Meanwhile, college and university administrators have deployed a spate of court injunctions and other legal measures in an unsuccessful attempt to break the strike, and Quebec’s premier, Jean Charest, remains intransigent in spite of growing calls for his government to negotiate with student leaders. So, why haven’t you heard about this yet?

    Half of new graduates are jobless or underemployed - A weak labor market already has left half of young college graduates either jobless or underemployed in positions that don't fully use their skills and knowledge. Young adults with bachelor's degrees are increasingly scraping by in lower-wage jobs — waiter or waitress, bartender, retail clerk or receptionist, for example — and that's confounding their hopes a degree would pay off despite higher tuition and mounting student loans. Median wages for those with bachelor's degrees are down from 2000, hit by technological changes that are eliminating midlevel jobs such as bank tellers. Most future job openings are projected to be in lower-skilled positions such as home health aides, who can provide personalized attention as the U.S. population ages. Taking underemployment into consideration, the job prospects for bachelor's degree holders fell last year to the lowest level in more than a decade. "About 1.5 million, or 53.6%, of bachelor's degree-holders under the age of 25 last year were jobless or underemployed, the highest share in at least 11 years. In 2000, the share was at a low of 41%, before the dot-com bust erased job gains for college graduates in the telecommunications and IT fields.

    College Degrees: A Sure Ticket To Unemployment In 2012 - Welcome to corporate America is the memo that new college graduates are expecting to receive after graduating from college. But only half of new graduates will even have jobs after they graduate.  1 in 2 college graduates from the class of 2012 are unemployed or underemployed. Many will have to move back in with Mom and Dad. Others will survive but take menial jobs working as minions for restaurants, bars, and local coffee shops until they figure out what they want to do.  Bachelors Degrees just aren’t worth what they used to be.  About the only sure thing about a bachelors degree is that you’ve got a 50% chance of being unemployed, or underemployed and have mounting debt to boot to go along with it. Debt you may never recover from.

    Trying to Shed Student Debt - The growth of student debt is stirring debate about whether the government should step in to ease the burden by rewriting the bankruptcy laws—again. In 2005, Congress prohibited student debt from being discharged through bankruptcy, except in rare cases, because of concerns that many young graduates—who often have no major assets such as a house or a car—would be tempted to walk away from loan obligations. Some lawmakers now want to temper that position, pointing to concerns that a significant number of Americans could be buried under education loans for decades. Their efforts, however, would apply only to private loans—a fraction of the market. In the past decade student debt has surged as tuition and enrollment climbed. At the same time, college graduates' earnings have declined. The average debt load of all new graduates rose 24%, adjusted for inflation, from 2000 through 2010, to $16,932, says the Progressive Policy Institute, a left-leaning think tank in Washington. Over the same period, the average earnings of full-time workers ages 25 to 34 with no more than a bachelor's degree fell by 15% to $53,539.

    Student Loan Interest Rates Loom as Political Battle - President Obama begins an all-out push on Friday to get Congress to extend the low interest rate on federal student loans, White House officials said, an effort that is likely to become a heated battle along party lines. If Congress fails to act, the interest rate on the loans, which are taken out by nearly eight million students each year, will double on July 1, to 6.8 percent. White House officials said the president was planning a sustained effort through the spring: On Friday, Education Secretary Arne Duncan will discuss the issue at a White House briefing, and on Saturday in his weekly address, the president will call on Congress to pass legislation preventing the rate hike. Next week, Mr. Obama will again hammer the issue — during visits on Tuesday to the University of North Carolina at Chapel Hill and the University of Colorado at Boulder, and on Wednesday at the University of Iowa. The White House also has plans for a social media campaign through Facebook, Google+ and Twitter. But the question of what to do about the looming interest rate increase has landed deep in the chasm separating Democrats from Republicans, who accuse the president of using the issue in a fiscally irresponsible way, in an attempt to buy the youth vote.

    The GOP’s Zero-Sum Economics: Forcing Health Care to Pay for Student Loans -  Should we reduce the immediate costs of those going into higher education?  And how should we pay for it?  The immediate issue is whether we should continue to subsidize student loans or allow those rates to double back to what they were before 2009.  Obama says extend the low rates; Romney seems to agree, sorta, but what about the GOP Congress? The enlightened general principle for hundreds of years begins with this:  an educated population is the foundation not only for democracy, hence a free, self-governing people; it’s also essential to a vibrant economy — something our competitors clearly understand.  It’s also a foundation for a humane society. For these obvious reasons, America has from it’s beginnings supported public education with public dollars, collected by government via taxes.  This is so fundamental, so obvious, so compelling, that we do it at the local level, augment it at the state level and provide additional federal funding, especially when states and local governments are struggling during economic downturns. We continue that with public Universities and Community Colleges.  Americans historically believed that educating the populace is part of what it means to be an American.

    White House Threatens to Veto Student Loan Bill — The White House threatened a veto Friday of a Republican bill keeping the interest rates on federal student loans from doubling this summer, objecting that the measure would finance its $5.9 billion cost by abolishing a health care program. The veto warning came as GOP leaders hunted for votes for the measure, which they were trying to push through the House. They were running into opposition from outside conservative groups like the Club for Growth, which was pressuring Republicans to oppose the legislation because, they said, the government should not subsidize student loans. The election-year clash between the White House and Republicans over the bill has escalated from a dispute over helping millions of students into a broader proxy battle over how to best help families cope with the weak job market and ailing economy, and how each side treats women’s issues. The GOP bill would repeal a preventive care program created under President Barack Obama’s health care overhaul law of 2010. Picking up on a theme that House Democrats have been sounding this week, the White House said that “women in particular” benefit from the program — a message that reflects the Democratic effort to woo women voters by accusing Republicans of waging a war on them.

    Beyond the Debt-For-Diploma System: 10 Ways Student Debt Is Blocking the Economic Mobility of Young Americans - America’s experiment with the debt-for-diploma system has officially failed. Total student loan debt in the U.S. now tops $1 trillion – an unprecedented sum that represents the unprecedented obstacles students and recent graduates face in their pursuit of the American Dream. Over the last several decades, our nation slowly and steadily shifted the burden of paying for college from a public responsibility to a private one, leaving most students with debt and leaving many potential students behind. As state funding declined and tuition at state universities rose in response, federal financial aid has shifted from making college affordable through grants to lower income students to providing loans that simply help families finance a college degree.  It’s time to renew our commitment to an accessible and affordable higher education system in the United States. Debt is not financial aid—it allows students to pay for college but also raises the cost of a degree because all student loans, especially private loans, include interest charges and origination fees. The need for student loans has also created a very lucrative market for the private lenders and banks who, until 2010, profited from guarantees through the federal student loan system and who are benefiting today from the demand for financing beyond the federal loan program. As activists across the country protest the debt-for-diploma system and its $1 trillion mark, below are the top ten reasons why our nation must embark on a new strategy to make college affordable as opposed to merely financeable through student loans.

    Low Interest Student Loans – A Very Small Step - Mitt Romney apparently agrees with President Obama on extending the 3.4% interest rate on student loans, which puts both of them at odds with Republicans in Congress. Of course, we will have to wait and see if Mr. Romney shows any real leadership in helping the President overcome the opposition in Congress from his own party. I would humbly submit that this is only a very small step in restoring the recent damage to our education system. Our chart shows the decline in real government spending using data from this source (see Table 3.15.6. Real Government Consumption Expenditures and Gross Investment by Function). Phil Oliff and Michael Leachman documented how state and local government support of elementary and high school education has been declining since the recession. Diane Epstein discussed what the Ryan budget would mean to education spending a month ago. Pell Grants, which already have seen declining values relative to college costs, are slated to be drastically reduced. Head Start funding will also be reduced. Of course, most of what public commitment to education comes from state and local governments, but the Federal government can reverse these recent cuts with a greater commitment to Federal revenue sharing. And the bonus would be that we might avoid doing further damage to the economic recovery ala austerity. In other words – if Mr. Romney wants to really lead, then he will insist that we reject this Ryan budget.

    The Student Loan Tax - As student loan debt passed the $1 trillion mark, President Obama, speaking at Chapel Hill yesterday, called the upcoming interest rate hike on student loans a tax.  He didn’t tell the half of it.  Congress’ dirty secret is that the government makes a huge annual profit on student loans.   According to the scrupulously nonpartisan Congressional Budget Office, $37 billion will flow IN to Treasury from student loans made this fiscal year at the 3.4% rate (on a net present value basis and net of about $1.5 billion to administer them.)   The President’s current dispute with Congressional Republicans is about whether to increase this annual profit next year.  The interest rate that students pay on the basic “subsidized” loan is slated to rise from 3.4% this year to 6.8% next year, unless the lower rate is extended by Congress. How does the government profit from student loans?  In two words, yield spread.  Treasury can borrow money at 0.5% or less, and lends it to students at 3.4%.   Administrative costs are well below 1%. Prepayment risk is minimal; repayment stretches over many, many years, and the yield spread just keeps on coming.  Interest rate risk is also minimal, given that Treasury can issue debt in a range of maturities.    The Education Department assumes it will collect between 75% and 80% of defaulted loans (on a discounted NPV basis), using its supercreditor powers, especially wage garnishment and tax refund intercepts. There is no statute of limitations on student loans, and even bankruptcy discharge is difficult. The $37 billion Treasury profit for FY2012 is after allowing for estimated credit losses in the $5 billion range.

    Wall Street-Inflated Student Debt Bubble Hits $1 Trillion; Debtors Rally for Relief - You could call it a bubble, but it's more like a ball and chain. Bubbles are, after all, light and airy.  The collective weight of American student debt is now over $1 trillion, and that weight is a drag not just on those paying the debt, but on our entire economy. It's hard to calculate exactly, because the lenders are notoriously unwilling to hand over their data, and with students defaulting at ever-higher rates, interest rates and fees are always changing, adding constantly to the weight of the burden college graduates (and those who didn't graduate but still have to pay off the loans they took out in more hopeful times) carry. Around the country, activists are marking the date with actions; in New York, a rally and march will be the centerpiece of what the Occupy Student Debt Campaign has dubbed 1-T day; the day the amount of debt we're carrying to pay for our education officially got too big to bear silently. The rallies aim to end the isolation that debtors often feel, to bring people together to understand that the problem they have is shared by millions of others—and that it calls for political solutions. “I think that we in America have become so separated from one another, partially due to this debt,” . “The debt makes us very individual; we can't afford to help someone else, we can't afford to spend our time in a way that's not productive.”

    Illinois: Governor Calls for Help on Pension Funds - Gov. Pat Quinn called for public employees to delay retirement and pay more into their pension funds to help close a huge shortfall that he acknowledged was largely created by the poor decisions of state leaders. Mr. Quinn wants to raise the retirement age to 67 for state employees, some teachers, college employees and others in state retirement systems. He also wants a 3 percent increase in the amount they contribute to the funds. The retirement systems are roughly $85 billion short of what would be needed to pay pensions in the decades to come.

    Chart: Pension shortfall in Providence tops $1B at state’s rate - Providence Mayor Angel Taveras warned Monday night that “the threat of eventual, inevitable bankruptcy will continue to plague our city” without changes to shrink its $901 million unfunded pension liability. The mayor’s seven-point pension proposal would cut that figure by about a quarter. As Justin Katz points out, what Taveras didn’t say is that the $901 million estimated liability is actually on the optimistic side, because it assumes the Providence pension fund’s investments will earn an average of 8.25% every year in perpetuity – a relatively optimistic assumption. If Providence lowered that forecast to 7.5%, as the state did last year, its liability would balloon to slightly more than $1 billion, according to estimates the city’s actuarial firm, Buck Consultants, gave to the law department on Feb. 23. Here’s how Providence’s pension balance sheet looks using four different rate of return forecasts:

    Rhode Island Pension Cuts Set Chilling Precedents - If you thought retiring would help you avoid the ruination of living standards brought on by the economic crisis, Rhode Island’s pension overhaul just proved you wrong. The changes to the pension system passed last November affect every public employee—current, retired, or prospective. The retirement age rose from 62 to 67 for new hires, and somewhere in between for current employees. The overhaul moves all public employees into a “hybrid” system, combining a defined benefit plan with a 401k-style plan, thus shifting risk for bad investments onto workers. And it freezes cost-of-living adjustments for all retirees and retirees-to-be for 19 years, sending their standard of living tumbling.

    Sacramento cops, firefighters face layoffs unless they give more to pensions - Sacramento's police officers and firefighters have been presented with a stark choice: They can contribute more toward their pensions, or watch nearly 100 of their comrades lose their jobs. In a budget proposal considered among the most draconian the city has faced, City Manager John Shirey on Thursday recommended laying off 62 firefighters and 34 police officers to address a $15.7 million deficit for the fiscal year that begins July 1. Another 10 Police Department employees also would lose their jobs under the proposal. Those layoffs could be avoided, Shirey said, if public safety workers agree to pick up the entirety of the employee share of their CalPERS contributions.

    Chicago Gets Negative Outlook From Moody’s on Pension Gaps - Chicago’s “outsized pension pressures,” unemployment and foreclosure backlog prompted Moody’s Investors Service to assign a negative outlook today to the third-largest U.S. city’s general-obligation debt. Citing Chicago’s “persistent economic challenges,” Moody’s affirmed the Aa3 rating on $7.78 billion of debt while changing the outlook from stable. .While the ratings company said Mayor Rahm Emanuel’s administration has addressed infrastructure needs and reduced reliance on cash reserves, it “has yet to unveil a detailed strategy for improving pension funding levels.” Unresolved pension funding shortfalls are the primary reason for the outlook change, Moody’s said. “Should the pension pressures continue to escalate absent a specific plan of reform, the city’s credit quality will likely weaken,” the opinion said. The rating applies to general-obligation bond sales expected May 14. The city is scheduled to sell $540.9 million, according to Moody’s.

    More Americans find aging is a gateway to poverty - Over the last several years, more Americans have found that aging has left them in the clutch of poverty. Between 2005 and 2009, the rate of poverty among American seniors rose as they aged, as did the number of people entering poverty, according to a new report from the nonpartisan Employee Benefit Research Institute (EBRI). Poverty rates fell in the first half of the last decade for almost all age groups of older Americans (defined as age 50 or older) but increased since 2005 for every age group. Says Sudipto Banerjee, EBRI research associate and author of the report: As people age, personal savings and pension account balances are depleted, and as people age, their medical expenditures tend to increase. Compounding the problem, the odds of suffering a health condition – acute or otherwise – goes up 45-55 percent for those below the poverty line, he said. Poverty rates, as defined by U.S. Census poverty thresholds, were highest for the oldest of the elderly. Almost 15 percent of Americans older than age 85 were in poverty in 2009, compared with approximately 10.5 percent of those older than 65, EBRI found. Additionally, in 2009, 6 percent of those age 85 or older were new entrants in poverty

    My Faith-Based Retirement - My body creaks and groans. My eyes aren’t what they used to be. I don’t sleep as soundly as I did just a few years ago. Lately, I’ve been seeing a lot of doctors, just to make sure everything still more or less works. I’ve also found myself with a sudden urge to get my house in order — just, you know, in case. Insurance, wills, that sort of thing. Sixty is when you stop pretending you’re going to live forever. You’re officially old. Or at least old-ish. The only thing I haven’t dealt with on my to-do checklist is retirement planning. The reason is simple: I’m not planning to retire. More accurately, I can’t retire. My 401(k) plan, which was supposed to take care of my retirement, is in tatters. Like millions of other aging baby boomers, I first began putting money into a tax-deferred retirement account a few years after they were legislated into existence in the late 1970s. The great bull market, which began in 1982, was just gearing up. As a young journalist, I couldn’t afford to invest a lot of money, but my account grew as the market rose, and the bull market gave me an inflated sense of my investing skills. The bull market ended with the bursting of that bubble in 2000. My tech-laden portfolio was cut in half. A half-dozen years later, I got divorced, cutting my 401(k) in half again. A few years after that, I bought a house that needed some costly renovations. So I threw another chunk of my 401(k) at the renovation. That’s where I stand today.

    Aging workforce strains Social Security, Medicare - An aging population and an economy that has been slow to rebound are straining the long-term finances of Social Security and Medicare, the government's two largest benefit programs. Those problems are getting new attention Monday as the trustees who oversee the massive programs release their annual financial reports. Medicare is in worse shape than Social Security because of rising health care costs. But both programs are on a path to become insolvent in the coming decades, unless Congress acts, according to the trustees. Last year, the trustees projected the Medicare hospital insurance fund for seniors would run out of money in 2024. Social Security's retirement fund was projected to run dry in 2038, while the disability fund was projected to be drained by 2018. New projections in March gave a more dire assessment of the disability program, which has seen a spike in applications as more disabled workers lose jobs and apply for benefits. The nonpartisan Congressional Budget Office said the disability fund would run out of money in 2016. Social Security's trustees are again urging Congress to shore up the disability system by reallocating money from the retirement program, just as lawmakers did in 1994.

    2012 Social Security (and Medicare) Reports: due Monday - If past file conventions hold true these links should work immediately on release of the 2012 Social Security and Medicare Reports Monday morning. This link  SHOULD get you to the CURRENT summary. Which means 2011 until it means 2012. When it does. Social Security and Medicare Summary Report BTW from all evidence 99% of all Social Security reports found in the lamestream media (because on this one the Snow Queen is right) are cribbed from the Summary which also is much the same as the introduction to the full Report. But the real juice is in the Tables and Figures which among other things show alternate projections besides the standard 'Intermediate Cost alternative' always cited.

    Social Security: Trust fund in the red by 2033 - CBS News: The Social Security Trustees' annual report on the state of the government retirement and Medicare trust funds is out, and the news is worrying: A challenging economy and higher energy prices have hurt the entitlement programs. The combined Social Security trust funds are expected to be exhausted in 2033, three years earlier than projected in last year's annual report. Medicare's finances have stabilized, but the hospital insurance fund is still projected to run out of money in 2024. The most problematic program is the Social Security disability insurance program, which "faces the most immediate financing shortfall of any of the separate trust funds," according to the trustees. It is forecast to exhaust its trust fund in 2016, two years earlier than projected in last year's report. The trustees urged Congress to take steps to shore up the programs, noting that projected long-run costs for Medicare and Social Security "are not sustainable under currently scheduled financing, and will require legislative modifications if disruptive consequences for beneficiaries and taxpayers are to be avoided." Yet few, if any, political observers expect any significant legislative action until after the November election.

    Social Security Hurt by GOP Obstructionism -The Center for Economic and Policy Research (CEPR) published its commentary on Monday's release of the Social Security Trustees Report, which found that the Social Security trust fund would be exhausted in 2033. CEPR rightly blames the recession for the deterioration of Social Security's finances. As I argued last September with regard to falling health care coverage, the new results from the Trustees show the need for a jobs agenda. In fact, in just four years, the estimated trust fund exhaustion date (intermediate assumption) has gotten eight years closer. It was 2041 in the 2008 report, 2037 in the 2009 report, 2037 in the 2010 report, and 2036 in the 2011 report. Jared Bernstein charts these trends going back to 1985: The CEPR analysis highlights just how crucial jobs are to Social Security's solvency: As workers have found themselves without jobs, Social Security has received fewer contributions. The 2007 Trustees' Report projected 169.0 million workers in 2011 earning $6.5 trillion in taxable earnings. Last year, there were only 157.7 million workers earning $5.5 trillion. Yet what is the Republican response to this situation? At the federal level, there has been universal opposition to anything that might create more jobs as long as Obama is President. At the state and local level, as Paul Krugman points out, 70% of the decline in public sector jobs has come in Texas and in the states where Republicans took control of government in 2010.

    Reading the Social Security Report: "What is crisis? In context?" - The first link is to the 2011 Report and is meant as a teaching tool. The Table shows projected income, cost, and balance projections over what the Trustees consider the 'short term', which is the same ten years used by OMB and CBO in their scoring. Table IV.A3.—Operations of the Combined OASI and DI Trust Funds, Calendar Years 2006-20 Traditionally income came in three primary forms: contributions from payroll (FICA), tax on benefits, and interest on Trust Fund principal. In 2011 the loss of income due to the payroll tax holiday was projected to be replaced by General Fund transfers so adding a fourth (offsetting) category. Cost also comes in three forms with benefits constituting more than 99% (including Railroad Retirement Board interchange) and admin just under 1%. In any year when total income including accrued interest exceeds total cost the Table shows a surplus 'Net increase during year' and a corresponding addition to the Trust Fund balance 'Amount at end of year'. And taken ON ITS OWN TERMS, combined OASDI shows continuing surpluses through the ten year window to a total of something over $900 billion in surpluses. Which BTW score as such on the top line number CBO and subsequently the press report as THE Budget Surplus/Deficit. Okay then where is the crisis? What part of 'near a trillion dollar surplus' don't we understand? Well there are a couple of answers to that, which to start with will require some longer range outlook. New table below the fold.

    A Guide to the 2012 Social Security Trustees Report - This will be the first of two articles on the 2012 Social Security and Medicare Trustees’ reports. I am one of the six trustees of these two programs, and one of two public trustees along with Dr. Robert Reischauer. Our annual reports on these two programs’ finances were released with an accompanying summary on Monday, April 23. Social Security is now putting substantial pressure on the federal budget and will add much more in the years to come. In 2011, program costs exceeded tax collections by $148 billion. In 2012 they’re projected to exceed tax collections by $165 billion. Some of this gap arises from the recently-adopted policy of cutting the payroll tax. The graph here (copied from the report summary) shows the future budget pressure that would arise from making scheduled benefit payments of Social Security and Medicare. The bottom blue portion of the graph (“OASDI”) represents Social Security. As seen here, the fiscal strains arising from Social Security will diminish but not disappear once the payroll tax cut expires, but will then rise substantially before and until insolvency occurs in 2033

    Sen. Tom Harkin: Preserving Social Security: It might surprise many in Washington, but if you ask hardworking Americans what their greatest economic concern is they don't say budget deficits or the national debt. No, what I hear most often from Americans is that they are frightened at the prospect of being financially insecure in retirement. By some estimates, the gap between what Americans have saved for retirement and what they need to maintain their standard of living in retirement stands at $6.6 trillion. Despite this, every spring when the Social Security Trustees' annual report is published, the usual suspects take to the airwaves to blame Social Security for our budget problems and urge deep cuts to the program, something that would make the retirement crisis even worse. While not surprising, it is disappointing to see Social Security come under unwarranted attack, year after year. Here are the facts:

    • The Social Security Trust Fund can pay full benefits until 2033. That's another 20 years.
    • Social Security is financed by its own revenue stream, the payroll tax and, by law, it cannot add to the deficit. Since the payroll tax will still be collected, even after 2033, Social Security will be able to pay 75 percent of scheduled benefits going forward, assuming that Congress would take no action to address this problem.

    Before you write that Social Security is bankrupt…. The most important take-away points from the 2012 Trustees Report will be that Social Security has a large and growing surplus; that without any Congressional action, Social Security will continue to pay benefits to America’s eligible working families for decades; and that with modest legislated increases in revenue, it will continue to pay those benefits for the next century and beyond. Because the economic recovery and wage growth have been slower than expected and the cost of living was higher, this year’s report is likely to project that the number of years that Social Security can continue to pay benefits in full with no Congressional action will be a year or two shorter. But it is still decades away -- and the precise year has fluctuated in virtually every Trustees Report, sometimes sooner, sometimes later. The fluctuation is unsurprising given the uncertainties related to projecting inflation, wage growth, productivity, immigration rates, fertility rates, and other factors so far into the future.With the issuance of the 2012 report, journalists will have an opportunity to correct the common misunderstanding that Social Security is now paying out more in benefits than it is collecting in income. Social Security is prohibited by law from doing that, and if there were less income than outgo this year, the Trustees would be announcing an immediate cut in benefits. They are not.

    Social Security Fund to Run Out in 2035, Trustees Say - The budget outlook for Social Security is getting dimmer, the U.S. government said, with its primary trust fund now projected to run dry three years sooner than anticipated.  The fund that helps finance benefits for 44 million senior citizens and survivors of deceased workers will be exhausted by 2035, the program’s trustees said in an annual report yesterday. Aid would have to be cut at that point if Congress doesn’t intervene.  Social Security’s disability program, which helps support 11 million Americans, will run through its trust fund in 2016, two years earlier than predicted. The report attributed the fiscal stress in part to the weak economy.  The main trust fund that supports the Medicare health-care program for the elderly will run out of money in 2024, the report said.  The giant retirement programs are straining the U.S. government’s finances, and what to do about them is a central issue in the election-year debate between Democrats and Republicans as President Barack Obama seeks a second term.

    The Primary Cause of Social Security's Bleak Outlook Is Upward Redistribution, by Dean Baker - In an article on the release of the 2012 Social Security trustees report the Washington Post told readers that: "Social Security’s bleak outlook is primarily driven by the ever-larger numbers of people in the baby boom generation entering retirement." Actually the fact that baby boomers would enter retirement is not news. Back in 1983, the Greenspan Commission knew that the baby boomers would retire, yet they still projected that the program would be able to pay all promised benefits into the 2050s.The main reason that the program's finances have deteriorated relative to the projected path is that wage growth has not kept pace with the path projected. This is in part due to the fact that productivity growth slowed in the 80s, before accelerating again in the mid-90s and in part due to the fact that much more wage income now goes to people earning above the taxable cap. In 1983 only 10 percent of wage income fell above the cap and escaped taxation. Now more than 18 percent of wage income is above the cap.

    The Joys of Recession: The Social Security Trustees have just projected that the date by which the system will no longer be able to meet all of its payouts has been moved up three years from 2036 to 2033. This has prompted the usual clucking about the need for drastic benefit cuts of partial privatization right now.   What nobody seems to have noticed is that the primary reason for the pessimistic forecast is the lousy economy, particularly the high unemployment and depressed wages. Social Security is of course financed by payroll taxes. There’s no better way to put the system into the red than to have a recession and to have 93 percent of the gains to go to the top one percent (whose payroll taxes are capped). In the late 1990s, when we had full employment, in one three-year period Social Security’s Year of Reckoning was set back by eight years, from 2029 to 2037. Full employment would solve all the system’s problems. And if wages rose with productivity growth, as they did until the late 1970s, Social Security would enjoy a perpetual surplus and we could raise benefits. Conversely, an austerity program will help kill the system.

    The Social Security trustees report—now what? - As I wrote in an earlier blog, Social Security’s projected shortfall is around 20 percent larger than last year, though still less than one percent of GDP over the 75-year projection period. This doesn’t change the basic story that costs are rising from around 5 to 6 percent of GDP before leveling off after the Baby Boomer retirement, with costs at the end of the period slightly lower as a share of GDP than in the peak Boomer retirement years. Raising Social Security taxes on both employers and workers from 6.2 percent to around 7.6 percent would close the projected shortfall.1 But there are better ways to raise the necessary revenue. The fairest and simplest is eliminating the cap on taxable earnings, which is currently set at $110,100. Though people pay income and Medicare taxes on all earned income (and will soon pay Medicare tax on unearned income as well), earnings above $110,100 aren’t subject to Social Security tax. Scrapping the cap would close 71-87 percent of the shortfall, depending on whether or not you increase benefits for high earners to reflect their higher contributions. Other no-brainers include covering newly-hired public-sector workers who currently aren’t in Social Security (closing 6 percent of the shortfall) and subjecting Flexible Spending Accounts and other salary-reduction plans to Social Security taxes (closing 9 percent). Another option that has more mixed support among Social Security advocates is gradually increasing the contribution rate to offset increases in life expectancy.

    Social Security Hurt by Republican Jobs Obstructionism -The Center for Economic and Policy Research (CEPR) published its commentary on Monday's release of the Social Security Trustees Report, which found that the Social Security trust fund would be exhausted in 2033. CEPR rightly blames the recession for the deterioration of Social Security's finances. As I argued last September with regard to falling health care coverage, the new results from the Trustees show the need for a jobs agenda. In fact, in just four years, the estimated trust fund exhaustion date (intermediate assumption) has gotten eight years closer. It was 2041 in the 2008 report, 2037 in the 2009 report, 2037 in the 2010 report, and 2036 in the 2011 report. Jared Bernstein charts these trends going back to 1985:The CEPR analysis highlights just how crucial jobs are to Social Security's solvency:As workers have found themselves without jobs, Social Security has received fewer contributions. The 2007 Trustees' Report projected 169.0 million workers in 2011 earning $6.5 trillion in taxable earnings. Last year, there were only 157.7 million workers earning $5.5 trillion.In other words, there was a $1 trillion shortfall of income in 2011 alone compared to the pre-recession baseline. If this doesn't highlight the need for much greater action on the jobs front, nothing does.

    Media Jump On Idea That Social Security Is Going Bankrupt, Ignore Easy Way To Ensure Its Future - Social Security is going broke even faster than expected, according to a report from the program’s actuaries released yesterday. At least, that’s the narrative the national media presented to the American public.  Headlines from across the country — like the following from the Wall Street Journal, Los Angeles Times, and New York Times — were quick to paint a grim picture of the program’s future finances, noting that “painful” changes would need to be made to ensure its solvency beyond 2033:  The headlines and stories that follow create the illusion that Social Security is fast going broke, even though it is fully funded for another two decades and could pay 75 percent of its benefits thereafter (imagine the shock the media would display, meanwhile, if transportation, food stamps, or other programs had two decades of guaranteed funding).  They also ignore an easy way to ensure the program’s long-term solvency without large changes or cuts to benefits. Payroll taxes that finance Social Security are only collected on income up to a certain level ($110,100 in 2012), creating a regressive system that puts an undue burden on low- and middle-income workers. Eliminating that cap would allow Social Security to pay full benefits for the next 75 years, according to a Congressional Research Service report.

    Let's beef up Social Security benefits instead of cutting them - Advocates for strengthening Social Security have come to dread the release of the annual report of the program's trustees. That's because the event has become the basis for more hand-wringing about Social Security's fiscal condition and calls to cut benefits for current and future retirees. This week's release of the 2012 report is no exception. If you concentrate on what is sure to be the headline figure, you're led to believe that the program has seldom been in lousier shape. Largely because of disappointing economic growth, high unemployment and an unexpectedly large cost-of-living increase for beneficiaries, the date of exhaustion of the program's trust fund has been moved forward three years to 2033 since last year's report. What won't be adequately explained is that the program isn't "insolvent" or "bankrupt." Even if you accept the dire forecast, it's still two decades off. Economic recovery alone will improve the program's fiscal condition, and the trustees say that even if Congress does absolutely nothing, in 2033 there still will be money to pay about 75% of currently scheduled benefits. And by the way, despite facing the worst economic conditions in its history, the program ran a surplus of $69 billion last year, increasing the trust fund to nearly $2.7 trillion.

    Saving Social Security Simplified -The Trustees Report came out again this week. And all the newspeople told us again that we are doomed. Doomed. "Social Security is running out of money!" Except it isn't. And all the Professional Defenders of Social Security rushed out to tell us, "We can save Social Security: just make the rich pay for it!" Except they won't. And they really shouldn't. And we shouldn't want them to. Most workers understand that Their Social Security is Their money. They paid for it. They need to know that IT'S NOT WELFARE. But all the paid experts and politicians, and all the high end newssources can only think in terms of welfare. So the Bad Cop says we got to cut it. And the Good Cop says we got to make the rich pay for it. But actually all we really need to do is just pay for it ourselves... as we always have. It wont cost much. An additional 40 cents per week each year will pay for the whole "shortfall." You don't have to take my word for it. The Congressional Budget Office says the same thing. A CBO Study: Social Security Policy Options, July 2010, Option 2 (page 17) says "Increase the Payroll Tax Rate by 2 Percentage Points Over 20 years... this option would raise the combined payroll tax rate gradually, by 0.1 percentage point (0.05 percentage points each for employers and employees) every year from 2012 to 2031... This option would extend the trust fund exhaustion date to 2083."

    Now Is the Time to Increase Social Security - The collapse in home values (a main source of personal wealth for many), the big drop in the stock market following the economy meltdown, and the long term trend away from traditional pensions have, surprisingly, left a growing majority of adults feeling they don’t have enough saved for retirement. From Gallup: Less than ten years ago you had large majorities believing they had enough set aside for their old age. Since 2008 there has been a total reversal. Now only 38% think they have enough for retirement, while 55% believe they do not. An honest look at the total situation should lead people to the conclusion that the only real crisis with Social Security is that its benefits are not large enough. Given the collapse of the other two primary sources of retirement income, personal savings and employer pensions, there is a real need to increase the size of the public social insurance system which has been working well in these times. With so many people struggling at this moment what Congress should currently be working at is modestly increasing Social Security to make up for the break down of our private retirement systems.

    Medicaid plan would shift $250 million tab to private insurers — The Quinn administration's proposal to force health insurance companies to shoulder a greater share of the cost for treating severely sick children might save the state $250 million a year, but it likely will drive up premiums on policyholders. Reducing Medicaid spending on children with “special health care needs” — ranging from cystic fibrosis and sickle cell disease to chronic pain and depression — is a key part of Gov. Pat Quinn's plan to cut spending by $2 billion a year for the federal-state health insurance program for the poor. Getting insurance companies to contribute to the cost of caring for the sickest children was first proposed to the state by Children's Memorial Hospital, where Medicaid is a key source of revenue. The proposal is the second-largest source of cuts identified by the Quinn administration, behind only a plan to reduce provider reimbursement rates by $675 million a year, all of which Mr. Quinn says are necessary to save a program that runs a massive deficit and is “on the brink of collapse.” The plan would tighten an apparent loophole in which Medicaid picks up the cost of caring for chronically sick children even if they are eligible for private insurance. But as health insurance companies cover those additional costs, they are likely to pass them along to policyholders.

    Study: ID thieves robbing the grave; 2.5 million dead hit annually - Ruthless ID thieves are robbing identities even from the grave, a new study has found. Nearly 2.5 million dead people are victims of identity theft every year, according to a data analysis by fraud prevention firm ID Analytics being made public Monday. The study offers the first hard data about a little-understood aspect of ID theft that can cause unnecessary pain and suffering to family members already dealing with loss. ID Analytics works with dozens of credit-granting companies, such as banks and cellphone providers, to find common patterns among fraudsters as they fill out credit applications. The firm has unique insight intro fraud trends, as it screens more than 1 billion such applications annually. For this study, it considered 100 million applications filed during the first three months of 2011 and compared Social Security numbers and other information in those applications against the Social Security Administration's Death Master File, which tracks the identities of people after they die.

    Medicaid spending growth is surprisingly modest - Christopher Flavelle has put together a fascinating Bloomberg Government Study on the allure and growth of Medicaid managed care and the recent trend in Medicaid spending by states. It’s the first of three pieces in this area and, unfortunately, is behind a paywall. If you can get your hands on it, it’s worth a full read. If you can’t, here are a few details we thought worth highlighting. Flavelle writes that advocates of turning Medicaid into a block grant program often claim it would “increase spending predictability.” Given this and other rhetoric from states about their “out of control” Medicaid growth, you’d think that spending has been growing exceptionally rapidly recently. According to analysis by Flavelle, that’s not the case. Inflation adjusted Medicaid spending per capita by state general funds increased just 3.8% between 2002 and 2011. This is illustrated by the dotted line in the chart below. Per capita Medicaid spending by each of the five states with the largest Medicaid programs is also shown. Though they gyrate up and down, they all end up at the end up in 2011 close to or even below where they started in 2002.

    Medicare funding runs short by 2024, trustees say -- Highlighting the fiscal problems posed by growing health costs and an aging population, the trustees of the nation's main entitlement programs estimated Monday that Medicare will only be able to pay a portion of its expected costs starting in 2024. That's the same year the trustees had estimated a year ago. Their outlook for Social Security worsened somewhat. Every year the trustees release an annual report on both programs' long-term financial outlook. In this year's report, they said that unless Congress makes changes to Medicare, or overall health costs come down, Medicare will only be able to pay 87% of expected costs by 2024 and 67% by 2050. Put another way, if lawmakers wanted to make the program solvent over the next 75 years, they would need to raise the 2.9% Medicare tax on all wages to 4.25%. And that may be the best-case scenario, since the trustees' estimates assume that a scheduled cut in Medicare payments will go through, even though Congress regularly overrides it. Their numbers also assume that the cost-savings measures called for under the new health reform law will occur as predicted. As it is, costs under Medicare Part A -- which pays for hospital services -- have outrun revenue coming into the program since 2008. The government has made up the difference by redeeming hospital trust fund assets and also by paying interest on other trust fund assets. But by 2024, that trust fund source will run dry. 

    Reports of Medicare’s death are greatly exaggerated -  Around this time last year, Americans got a dire warning: Medicare was heading into the red, quickly. “Medicare to go broke in 2024,” one headline proclaimed. “We know,” Sen. Kelly Ayotte (R-N.H.) told Fox News, “that Medicare is going broke by 2024.” Those predictions of Medicare’s impending doom came from the 2011 Medicare Trustees Report, an annual look at the entitlement program’s finances. The dense, 267-page tome is never much of a page-turner. Most of it is obtuse, economical analysis and endless charts — not, of course, that there’s anything wrong with endless charts. But there’s one figure that always gets a lot of attention: The date by which, if things stay on current course, the Medicare trust fund will become insolvent. At 12:45 p.m. today, the Medicare Trustees will release their 2012 report. It’s likely to elicit a similar round of headlines. Before that happens, it’s worth understanding why projections of the fund’s insolvency actually say very little about whether Medicare is going bankrupt. Reports of Medicare’s death are, as Mark Twain would put it, greatly exaggerated.

    Medicare’s Financial Condition Holds Pat After Debt Deal - The deal President Barack Obama made last year with Republicans to reduce the U.S. deficit may have stalled a worsening in the financial condition of Medicare. The debt-reduction legislation included cuts to Medicare payments that will be enacted in 2013. Those pending reductions are offsetting gloomier assumptions about the nation’s future economic performance, leading to no change in the 2024 date that trustees said Medicare will exhaust its main trust fund. "While Medicare is stable for now, we have a lot of work ahead of us to guarantee its future,” Marilyn Tavenner, acting administrator for the Centers for Medicare, said in a statement.  The insolvency date didn’t change, in part, because of 2 percent payment cuts called for in the congressional debt- reduction deal, according to a report today from the trustees. The long-term projections for the U.S. health program, which covers the elderly and disabled, still worsened because the trustees adopted more conservative assumptions about economic growth, which would lead to reduced revenue from Medicare’s payroll tax, and the growth of Medicare’s costs.

    Medicare trustee report hangs on uncertain assumptions - Medicare, the U.S. healthcare program for the elderly, should be able to stave off insolvency for the next 12 years, depending on a number of financial and political assumptions that may prove unrealistic, officials and other experts said on Monday. The annual report of the Medicare trustees predicted that the program's key hospital trust fund will become exhausted in 2024, prompting Medicare to begin paying out only 87 percent of scheduled hospital benefits to tens of millions of future retirees and disabled beneficiaries. With the fate of Medicare a hot-button election year issue for the program's 49 million beneficiaries, the report is likely to become fodder for Democrats and Republicans as they battle for control of the White House and Congress. The 2024 forecast is unchanged from a year ago and shows that the deterioration of $549 billion-a-year program's finances has not accelerated since 2010. But the outlook is based on assumptions that may be unlikely, including a scheduled 31 percent pay cut for doctors in 2013, which Congress is almost certain to override. The forecast also assumes that a deficit-reduction agreement to slash Medicare spending by 2 percent a year can be sustained over the coming decade and that the U.S. Supreme Court will not overturn President Barack Obama's healthcare reform law in June.

    Reprehensible Behavior a Cornerstone of its Business Model - Although I (and many others) have long been critics of Wall Street's incredibly sleazy, recklessly psychopathic, and relentlessly self-destructive underbelly, there is another corner of the financial services industry that seems to have made reprehensible behavior a cornerstone of its business model. As the New York Times reports in, "Insurers Alter Cost Formula, and Patients Pay More," the insurance industry seems intent on making Congress look like a bastion of honesty and ethical behavior. Despite a landmark settlement that was expected to increase coverage for out-of-network care, the nation’s largest health insurers have been switching to a new payment method that in most cases significantly increases the cost to the patient. The settlement, reached in 2009, followed New York State’s accusation that the companies  manipulated data they used to price such care, shortchanging the nation’s patients by hundreds of millions of dollars. Though the settlement required the companies to underwrite the new database with $95 million, it did not obligate them to use it. So by the time the database was finally up and running last year, the same companies, across the country, were rapidly shifting to another calculation method, based on Medicare rates, that usually reduces reimbursement substantially.

    Debt Collector Is Faulted for Tough Tactics in Hospitals - Hospital patients waiting in an emergency room or convalescing after surgery are being confronted by an unexpected visitor: a debt collector at bedside.  This and other aggressive tactics by one of the nation’s largest collectors of medical debts, Accretive Health, were revealed on Tuesday by the Minnesota attorney general, raising concerns that such practices have become common at hospitals across the country.  The tactics, like embedding debt collectors as employees in emergency rooms and demanding that patients pay before receiving treatment, were outlined in hundreds of company documents released by the attorney general. And they cast a spotlight on the increasingly desperate strategies among hospitals to recoup payments as their unpaid debts mount.  To patients, the debt collectors may look indistinguishable from hospital employees, may demand they pay outstanding bills and may discourage them from seeking emergency care at all, even using scripts like those in collection boiler rooms, according to the documents and employees interviewed by The New York Times.  In some cases, the company’s workers had access to health information while persuading patients to pay overdue bills, possibly in violation of federal privacy laws, the documents indicate.

    Cross-conflicting regulations, employer confusion - Most of you will be familiar with the medication drowsiness warnings to the effect of "don't operate machinery or heavy equipment, etc. etc." This is from FDA regs. (  OSHA has extensive guidance about employee safety with manufacturing machinery, heavy equipment and driving and the impact of drowsiness. (  So it seemed sensible for employers to ask for voluntary disclosure by employees taking pain medications in these work environments, because OSHA puts the safety burden on the employers. Not so fast! The EEOC ( is litigating cases claiming the request for medication information is a violation of the Americans with Disabilities Act. For a plain English summary of a recent case see The EEOC.

    Cross-conflicting regulations health facility edition - The most recent regulatory question I had trouble answering. The situation is as follows (the state will remain nameless):  State nursing home inspectors: certain antibiotics cannot be administered for certain conditions without a three day lab culture being done first; if the nursing home administers certain antibiotics without the three day culture the facility, administrator and nurses are subject to citations and penalties.  State physician licensing board: physicians can order the administration of medications including antibiotics within the standards of practice, failure to do so may be considered malpractice State nurse licensing board: a nurse is to follow the orders of a licensed physicianunless the orders fall outside the standards of practice or treatment is contraindicated (medication conflict for example); failure to do so may be subject to disciplinary proceedings  State nursing home inspectors: failure to follow physician orders makes the facility, administrator and nurses subject to citations and penalties, and possible referral to various licensing boards Office of the Inspector General: treatments which violate state or federal regulations (even unintentionally) may make the billing for such treatments an act of fraud.  So, a physician orders an antibiotic for a patient to be started immediately, in violation of the three day rule…….. the correct answer is?

    The Chief Complaint: Dr. Otis Brawley - For a man with such respectable bona fides—University of Chicago medical school graduate, trained in oncology at the National Cancer Institute, Emory professor, and currently chief medical officer at the American Cancer Society—Dr. Otis Brawley sure knows how to piss people off. Since long before October, when he spoke out to the New York Times Magazine, he’s been accused of prosecuting an irrational “vendetta” against use of the prostate-specific antigen (PSA) test to screen apparently healthy men for prostate cancer. Some critics say he’s killing men by steering them away from this test, which in the best cases leads to lifesaving treatment but in worse cases leaves men impotent and incontinent after treatment for growths that posed no danger.

    State Life Expectancy: Report Details Gains And Losses In Life Expectancy Around The Country - A new study is giving a glimpse at who's living the longest around the country, and the rate at which life expectancies are improving or declining county by county.  Women's life expectancies are improving at a slower rate than men's across the country, according to the research from the Institute for Health Metrics and Evaluation.  Between 1989 and 2009, the researchers found that men's life expectancy increased by an average of 4.6 years. But women's life expectancy only increased by an average of 2.7 years.  Now, in 2009, men's average life expectancy is 81.6 years and the women's average life expectancy is 86, according to the study.  The researchers also found that, for women, the divide between the counties with the highest life expectancies and those with lowest life expectancies is growing. In 1989, the gap used to be 8.7 years. But in 2009, the gap was 11.7 years -- 85.8 years on average for women in Collier county in Florida, and 74.1 years on average for women in McDowell county, West Virginia. The gap between the longest and shortest life expectancies for men was 15.5 years in the study, but the researchers reported that the gap hasn't even grown by a year between 1989 and 2009. In Marin, Calif., the men's average life expectancy is 81.6, and in Quitman and Tunica, Miss., the average life expectancy for men is 66.1.

    State Of The Air 2012: American Lung Association Reports Improvements, Challenges: More than 127 million Americans -- about 41 percent of the country -- still suffer from pollution levels that can make breathing dangerous, according to a new report. The American Lung Association State of the Air 2012, released Wednesday, shows signs of air-quality improvement, but also indicates struggles in many regions nationwide. The volunteer health organization examined 2008-2010 ozone levels, the main ingredient of smog air pollution, and air-particle pollution at official measuring sites across the U.S. Out of the 25 cities with the most ozone pollution, 22 saw improvements in air quality over last year's report. Similar advancements were seen among cities with the most year-round particle pollution. “State of the Air shows that we’re making real and steady progress in cutting dangerous pollution from the air we breathe,” . "But despite these improvements, America’s air quality standards are woefully outdated, and unhealthy levels of air pollution still exist across the nation, putting the health of millions of Americans at stake.”

    ‘Mystery’ skin disease kills 19 in Vietnam: WHO - The World Health Organisation said Monday it was “concerned” about an outbreak of a mysterious skin disease in central Vietnam which has killed 19 people, mostly children. More than 170 people have fallen ill with the unidentified illness, which causes stiffness in the limbs and ulcers on victims’ hands and feet that look like severe burns. “We are concerned about this. WHO is very aware of this case,” said Wu Guogao, the organisation’s chief officer in Hanoi, adding Vietnam had not asked for help with an investigation into the outbreak.

    USDA to Let Industry Self-Inspect Chicken - Chicken is the top-selling meat in the United States. The average American eats 84 pounds a year, more chicken than beef or pork. Sorry red meat, chicken is what's for dinner. And now the USDA is proposing a fundamental change in the way that poultry makes it to the American dinner table. As early as next week, the government will end debate on a cost-cutting, modernization proposal it hopes to fully implement by the end of the year. A plan that is setting off alarm bells among food science watchdogs because it turns over most of the chicken inspection duties to the companies that produce the birds for sale. The USDA hopes to save $85 million over three years by laying off 1,000 government inspectors and turning over their duties to company monitors who will staff the poultry processing lines in plants across the country. The poultry companies expect to save more than $250 million a year because they, in turn will be allowed to speed up the processing lines to a dizzying 175 birds per minute with one USDA inspector at the end of the line. Currently, traditional poultry lines move at a maximum of 90 birds per minute, with up to three USDA inspectors on line.

    Mad cow disease found in California dairy cow - Federal officials say a case of mad cow disease has been found in a dairy cow in the Central Valley. The animal was found at a rendering facility, John Clifford, the USDA’s chief veterinarian, told reporters Tuesday in a briefing in Washington. Its meat did not enter the food chain and the carcass will be destroyed, Clifford said. This is the fourth confirmed case of the brain-wasting disease in the U.S. cattle herd since the first case was discovered in December 2003 in an animal that came from Canada. Mad cow disease, which humans can get by eating beef from infected cattle, has killed 171 people and been responsible for the deaths of more than 4 million cattle, slaughtered in attempts to eradicate the disease. Officially known as variant Creutzfeldt-Jakob disease, the infection is caused by prion proteins that cause the brain to start breaking down.

    A Ban on Some Seafood Has Fishermen Fuming - Starting Sunday, gray sole and skate, common catches in the region, will no longer appear in Whole Foods artfully arranged fish cases. Atlantic cod, a New England staple, will be sold only if it is not caught by trawlers, which drag nets across the ocean floor, a much-used method here.  “It’s totally maddening,” Mr. Sanfilippo said. “They’re just doing it to make all the green people happy.”  Whole Foods says that, in fact, it is doing its part to address the very real problem of overfishing and help badly depleted fish stocks recover. It is using ratings set by the Blue Ocean Institute, a conservation group, and the Monterey Bay Aquarium in California. They are based on factors including how abundant a species is, how quickly it reproduces and whether the catch method damages its habitat.  “Stewardship of the ocean is so important to our customers and to us,” said David Pilat, the global seafood buyer for Whole Foods. “We’re not necessarily here to tell fishermen how to fish, but on a species like Atlantic cod, we are out there actively saying, ‘For Whole Foods Market to buy your cod, the rating has to be favorable.’ ”

    6.7 million bats already dead, White-nose Syndrome could lead to extinction of some species - scientists - More than six million bats are dead, and millions more are expected to fall victim to a disease known as White-nose Syndrome, or WNS. First identified in the northeastern United States, WNS has wiped out an estimated 95% of Pennsylvania’s bat population and is quickly spreading across the country. It was most recently discovered in Missouri, Delaware and Alabama. “This is like bringing small pox to the New World. It is surely an unprecedented wildlife disaster for North America,” said Bucknell University professor Dr. DeeAnn Reeder. Reeder is one of the country’s leading experts on WNS, and one of the researchers responsible for identifying the cause of the disease in 2011. “We can’t stop this thing. It’s marching across the country and we’re going to see some extinction.” Reeder has been studying the disease since shortly after it was discovered in a New York cave in 2006. Since then it was been detected in at least 17 other states. Few bats exposed to the fungus that causes WNS survive. “I was recently in a mine where I should’ve seen 10,000 or so bats. There were 150,” Reeder recalled. “We don’t know if the survivors have some immunity, or are lucky. If they’re just lucky, we’re in trouble.”

    Why 'the sex life of the screwworm' deserves taxpayer dollars -  Rep. Jim Cooper (D-Tenn.) believes it is time the sex life of the screwworm got its due. On Wednesday afternoon, Cooper rose to the defense of taxpayer-funded research into dog urine, guinea pig eardrums and, yes, the reproductive habits of the parasitic flies known as screwworms--all federally supported studies that have inspired major scientific breakthroughs. Together with two House Republicans and a coalition of major science associations, Cooper has created the first annual Golden Goose Awards to honor federally funded research “whose work may once have been viewed as unusual, odd, or obscure, but has produced important discoveries benefiting society in significant ways.” Federally-funded research of dog urine ultimately gave scientists and understanding of the effect of hormones on the human kidney, which in turn has been helpful for diabetes patients. A study called “Acoustic Trauma in the Guinea Pig” resulted in treatment of early hearing loss in infants. And that randy screwworm study? It helped researchers control the population of a deadly parasite that targets cattle--costing the government $250,000 but ultimately saving the cattle industry more than $20 billion, according to Cooper’s office.

    Giant cannibal shrimp that can grow up to 13 INCHES long invade waters off of Gulf Coast -A big increase in reports of Asian tiger shrimp along the U.S. Southeast coast and in the Gulf of Mexico has federal biologists worried the species is encroaching on native species' territory.The shrimp are known to eat their smaller cousins, and sightings of the massive crustaceans have gone up tenfold in the last year, biologists say.The black-and-white-striped shrimp can grow 13 inches long and weigh a quarter-pound, compared to eight inches and a bit over an ounce for domestic white, brown and pink shrimp.

    Mounting Evidence Suggests Sharks Are In Serious Trouble - Can you imagine oceans without sharks? We may soon have to, as new research suggests may already be 90% of the way there. Studying shark populations can be tricky. As David Shiffman explains well, while there are a number of methods that can be used to study shark populations, quantifying just how far their numbers have fallen can be difficult. However, recent research out of the University of Hawaii suggests that the presence of humans has a severe and strong negative impact on sharks, driving down numbers by over 90%. Sharks play a vital role in coral reef ecosystems. Yet every year, millions are killed for asian delicacies and disproven cancer cures. There is no question our shark fishing habits have devastated their populations; the only questions that remain are how much of an effect are we having, and can the sharks recover.

    First evaluation of the Clean Water Act's effects on coastal waters reveals major successes - Levels of copper, cadmium, lead and other metals in Southern California's coastal waters have plummeted over the past four decades, according to new research from USC. Samples taken off the coast reveal that the waters have seen a 100-fold decrease in lead and a 400-fold decrease in copper and cadmium. Concentrations of metals in the surface waters off Los Angeles are now comparable to levels found in surface waters along a remote stretch of Mexico's Baja Peninsula. Sergio Sañudo-Wilhelmy, who led the research team, attributed the cleaner water to sewage treatment regulations that were part of the Clean Water Act of 1972 and to the phase-out of leaded gasoline in the 1970s and 1980s."For the first time, we have evaluated the impact of the Clean Water Act in the waters of a coastal environment as extensive as Southern California," "We can see that if we remove the contaminants from wastewater, eventually the ocean responds and cleans itself. The system is resilient to some extent," he said

    Meet a pesticide even conventional vegetable farmers fear - A new coalition is trying to throw sand in the gears of industrial agriculture’s chemical treadmill. And this one just may have what it takes to slow it down. I’m referring to the fight over USDA approval for Dow AgroScience’s new genetically modified corn seeds (brand name “Enlist”), which are resistant to the herbicide 2,4-D.This is part of biotech’s “superweed” strategy, by which they hope to address the fact that farmers across the country are facing an onslaught of weeds impervious to the most popular herbicide in use, Monsanto’s glyphosate or RoundUp (and in some cases impervious to machetes as well!). Of course, this is a problem of the industry’s own making. It was overuse of glyphosate caused by the market dominance of Monsanto’s set of glyphosate-resistant genetically engineered seeds that put farmers in this fix in the first place. One of the older herbicides, 2,4-D is a pretty nasty chemical — it’s been linked to cancer, neurotoxicity, kidney and liver problems, reproductive effects, and shows endocrine disrupting potential — which is one of the many reasons farmers prefer the more “benign” glyphosate. In fact, on the basis of the scientific evidence, especially related to human cancers, the Natural Resources Defense Council (NRDC) petitioned the Environmental Protection Agency (EPA) several years ago to withdraw its approval for 2,4-D. Earlier this month, the petition was summarily denied.

    A Battle Over an Engineered Crop - To Jody Herr, it was a telltale sign that one of his tomato fields had been poisoned by 2,4-D, the powerful herbicide that was an ingredient in Agent Orange, the Vietnam War defoliant.  “The leaves had curled and the plants were kind of twisting rather than growing straight,” Mr. Herr said of the 2009 incident on his vegetable farm in Lowell, Ind. He is convinced the chemical, as well as another herbicide called dicamba, had wafted through the air from farms nearly two miles away.  Mr. Herr recalled the incident because he is concerned that the Dow Chemical company is on the verge of winning regulatory approval for corn that is genetically engineered to be immune to 2,4-D, allowing farmers to spray the chemical to kill weeds without harming the corn stalks. That would be a welcome development for corn farmers like Brooks Hurst of Tarkio, Mo., who are coping with runaway weeds that can no longer be controlled by Roundup, the herbicide of choice for the last decade. But some consumer and environmental groups oppose approval of Dow’s corn, saying it will lead to a huge increase in the use of 2,4-D, which they say may cause cancer, hormone disruption and other health problems. They are being joined by a coalition of fruit and vegetable farmers like Mr. Herr and canners like Red Gold and Seneca Foods, which filed petitions with the government last week seeking a delay in the corn’s approval.

    How Corn Keeps Fertilizer Costly - Here’s a puzzle: How is it that fertilizer prices are so stubbornly high while the production cost has plunged? The answer lies in the Corn Belt — and it will boost fertilizer equities for the foreseeable future. Anhydrous ammonia, a nitrogen-based plant food, now sells for nearly $700 a ton. That’s off from the highs of $800 late last year. But the biggest variable cost in making fertilizer, natural gas, has seen its price collapse. It’s off over half from $4.50 a million British thermal units in mid-2011. Natural gas for May delivery closed at $1.927 on the New York Mercantile Exchange Friday, down 2.7% for the week. If that drop in input costs were passed through, farmers would be paying around $231 a ton for nitrogen fertilizer, according to an analysis of the historical relationship between gas and fertilizer prices by Kevin Dhuyvetter, a farm-management specialist at Kansas State University. So what gives? A combination of abnormally high corn prices and increased plantings is keeping plant-food costs elevated. Fertilizer products “have been more tied to crop prices than lower natural-gas prices,” says Jeffrey Stafford, a Morningstar analyst in Chicago. “So producers have been able to capture that wide margin.”

    Effects of Climate Change Seen for Corn Prices - Researchers have found that climate change is likely to have far greater influence on the volatility of corn prices over the next three decades than factors that recently have been blamed for price swings — like oil prices, trade policies and government biofuel mandates. The new study, published on Sunday in the journal Nature Climate Change, suggests that unless farmers develop more heat-tolerant corn varieties or gradually move corn production from the United States into Canada, frequent heat waves will cause sharp price spikes. Noah S. Diffenbaugh, a climate scientist at Stanford and an author of the study, said he was surprised by the notable effect of climate change on price volatility for corn, the country’s largest crop. “I really thought climate would be a minor player before we did this analysis,” Professor Diffenbaugh said. “We’re looking at a period over the next three decades or so of moderate global warming, after all.” Instead, the analysis found that a moderate warming trend was likely to increase the number of days of severe heat in the growing season, thus doubling the volatility of corn yields.

    Venezuela Faces Shortages in Grocery Staples - Venezuela is one of the world’s top oil producers at a time of soaring energy prices, yet shortages of staples like milk, meat and toilet paper are a chronic part of life here, often turning grocery shopping into a hit or miss proposition. Some residents arrange their calendars around the once-a-week deliveries made to government-subsidized stores like this one, lining up before dawn to buy a single frozen chicken before the stock runs out. Or a couple of bags of flour. Or a bottle of cooking oil. The shortages affect both the poor and the well-off, in surprising ways. A supermarket in the upscale La Castellana neighborhood recently had plenty of chicken and cheese — even quail eggs — but not a single roll of toilet paper. Only a few bags of coffee remained on a bottom shelf. At the heart of the debate is President Hugo Chávez’s socialist-inspired government, which imposes strict price controls that are intended to make a range of foods and other goods more affordable for the poor. They are often the very products that are the hardest to find.

    Food Security Slipping Ever Further Away - Continuing near-record high food prices around the world are highlighting international inattention to a looming threat, observers here warned on Friday. According to speakers at the launch of the World Bank-International Monetary Fund (IMF) Global Monitoring Report 2012, on the sidelines of the Bank-IMF spring meetings, a lack of focus on agriculture and nutrition in development priorities could prove disastrous in the event of another spike in food prices. The sudden rise in food prices in 2007-08 is thought to have brought the number of hungry people to more than one billion internationally. While food costs dropped in 2009 due to the international financial crisis, 2011 again saw record highs, brought about in part by variable weather conditions, mounting oil prices and the growing use of biofuels. According to information released by the United Nations Food and Agriculture Organisation in early April, food prices have continued to rise during the first three months of this year, and currently remain higher than during the crisis period of 2007-09. According to many observers, high food costs have become the "new norm". The social implications of fluctuations in food costs have been clear. The high cost of staple foods was a major driver behind the Arab Spring protests, for instance. Today, continued high food prices are fuelling inflation worries across the globe, notably in India and China.

    Report: Global warming threatens US water supply — Researchers warned that global warming threatens the water supply for urban communities in Arizona1, in a new report funded by the Department of Commerce. "Rapid growth in these areas has increased the vulnerability of urban water users to climatic changes," the University of Arizona2 researchers, who collaborated with Mexican researchers at El Colegio de Sonora3, reported today4. UA News explained5 that "researchers found increased vulnerability of urban water users to climatic changes because of factors such as aging or inadequate water-delivery infrastructure, over-allocation of water resources within the region and the location of poor neighborhoods in flood-prone areas or other areas at risk." The reserachers proposed solutions tailored to various areas. For Tucson6, Ariz., for instance, they suggested "long-term water supply/climate scenario" and "conservation promotion at household scale."

    US Drought Map for Week of April 14 - The map above shows the Palmer Drought Severity Index map for the US as of the week of April 14th, 2012.  Texas is back to normal, but parts of the south east are in the grip of severe or extreme drought, and much of the interior south-west is in moderate to severe drought.  If this were to continue, these regions are at risk of problems later in the summer.

    Death Valley's 113°: Hottest April Temperature On Record In U.S. - An unprecedented April heat wave brought a second day of sizzling temperatures to the Western U.S. yesterday, where temperatures ranging 20 – 30 degrees above normal have toppled numerous all-time April heat records. Nearly every weather station in the Inter-mountain West has broken, tied, or come within 1- 2 °F of their all-time record April heat record since Sunday. Most notably, the 113°F measured at Furnace Creek in Death Valley, California on Sunday, April 22 was tied for the hottest April temperature ever recorded in the U.S. According to wunderground weather historian Christopher C. Burt, the hottest reliable April temperature ever measured in the U.S. was 113°F in Parker, Arizona in The previous hottest April day in Death Valley was 111°F. Yesterday, the high temperature in Death Valley “cooled off” to 110°F, merely the third highest April temperature ever measured there. The heat wave peaked Sunday and Monday, and temperatures will be closer to normal for the remainder of the week.

    Study finds warming speeding up rainfall cycle - An Australian study of ocean salinity over the past 50 years has revealed a "fingerprint" showing that climate change has accelerated the rainfall cycle, according to a researcher. The study published in the journal Science and conducted by Australian and US scientists looked at ocean data from 1950 to 2000 and found that salinity levels had changed in oceans around the world over that time. Co-author Susan Wijffels said the figures were revealing because ocean salinity was indicative of changes in the water cycle of rainfall and evaporation. "What the results are saying is we have an ocean fingerprint, a very clear fingerprint, that the earth's water cycle has already spun up," she told AFP. "What we see in the observations of how the salinity field has changed already over the last 50 years, (is) our hydrological cycle has already intensified significantly." Wijffels said the pattern was amplifying over time and it could be inferred that the same dynamics were also happening over land. "What it really means is that the atmosphere can actually shuttle more water from the areas that are drying out to the areas that have lots of rain faster," she said. "And essentially it means that the wet areas are going to get wetter and the dry areas are going to get drier."

    Study Hints at Greater Threat of Extreme Weather - New research suggests that global warming is causing the cycle of evaporation and rainfall over the oceans to intensify more than scientists had expected, an ominous finding that may indicate a higher potential for extreme weather in coming decades.By measuring changes in salinity on the ocean’s surface, the researchers inferred that the water cycle had accelerated by about 4 percent over the last half century. That does not sound particularly large, but it is twice the figure generated from computerized analyses of the climate. If the estimate holds up, it implies that the water cycle could quicken by as much as 20 percent later in this century as the planet warms, potentially leading to more droughts and floods. The researchers’ analysis found that over the half century that began in 1950, salty areas of the ocean became saltier, while fresh areas became fresher. That change was attributed to stronger patterns of evaporation and precipitation over the ocean. 

    'Warming hole' delayed climate change over eastern United States: — Climate scientists at the Harvard School of Engineering and Applied Sciences (SEAS) have discovered that particulate pollution in the late 20th century created a "warming hole" over the eastern United States -- that is, a cold patch where the effects of global warming were temporarily obscured. While greenhouse gases like carbon dioxide and methane warm Earth's surface, tiny particles in the air can have the reverse effect on regional scales. "What we've shown is that particulate pollution over the eastern United States has delayed the warming that we would expect to see from increasing greenhouse gases," says lead author Eric Leibensperger (Ph.D. '11), who completed the work as a graduate student in applied physics at SEAS. "For the sake of protecting human health and reducing acid rain, we've now cut the emissions that lead to particulate pollution," he adds, "but these cuts have caused the greenhouse warming in this region to ramp up to match the global trend."

    Extreme Weather Climate Preparedness (scribd doc)

    Flooding ravages Peru and Colombia – Amazon River reaches record breadth, width, and height - The Amazon has reached record breadth, width, and height this rainy season. According to Peru’s Health Ministry, the river has grown at least 6.5 feet during the floods, with the Marañón River, which feeds the Amazon, increasing some 13 feet. Neither river has swelled this much since the 1970s, when a similar flood affected the area. Peruvian newspaper El Comercio reported Health Minister Alberto Tejada’s alarm at the situation: “In 1971 [the flood] did not have an urban impact because today’s human settlements did not exist.” A state of emergency has been declared in the regional capital of Iquitos, and narrow wooden bridges have been constructed to help residents get around. Some 80,000 people have been forced to inhabit only the upper levels of their homes while others have been left homeless by the flooding. The San Juan de Yanayacu Indian community has also been hard-hit; the small group — more than half of whom are children — has been living on rooftops, in canoes, or on makeshift tree platforms. Along the Tahuayo River the small farms of the approximately 7,000 people living in small agrarian villages there have been washed away and most people’s homes have been flooded.

    CO2 now: 394.45ppm - Atmospheric CO2 for March 2012 - infographic

    Natural Gas Cuts 2012 US Carbon Emissions By 300 Million Tons - While the argument rages about whether natural gas will be a "bridge" to a low-carbon future, natural gas will cut US carbon emissions by at least 300 million tons in 2012 alone.  How much is 300 million tons?  It is about equal to the entire annual carbon emissions of Pennsylvania or an amount little less than 1% of annual global emissions.  It's a lot. Each percentage point in the decline of coal's electricity generation market share cuts carbon emissions by about 45 million tons.  Coal's 14 percentage point market share decline from 52% in 2000 to 38% in 2012 (the EIA 2012 forecast) means that emissions in 2012 from coal will be about 630 million tons lower this year than if coal still provided 52% of our electricity.  Indeed, coal's market share will decline 4 percentage points this year, dropping from 42% in 2011 to 38% in 2012, according to EIA data.  Just that 4 percentage points 2012 market share decline for coal will drop carbon emissions by 180 million tons.   Natural gas is displacing coal almost one for one. Since carbon emissions from gas generation are about half or 50% of the carbon emissions from coal generation, the 14 percentage point decline and 13 percentage point rise in natural gas yields about 300 million tons or more of net carbon reductions.

    Arctic Ocean could be source of greenhouse gas: study: Researchers carried out five flights in 2009 and 2010 to measure atmospheric methane in latitudes as high as 82 degrees north. They found concentrations of the gas close to the ocean surface, especially in areas where sea ice had cracked or broken up. The study, published in the journal Nature Geoscience, wonders if this is a disturbing new mechanism that could accelerate global warming. "We suggest that the surface waters of the Arctic Ocean represent a potentially important source of methane, which could prove sensitive to changes in sea-ice cover," it says. If so, the Arctic Ocean would add to several identified "positive feedbacks" in Earth's climate system which ramp up the greenhouse effect. One such vicious circle is the release of methane from Siberian and North American permafrost. The thawing soil releases methane that has been locked up for millions of years, which adds to global warming -- which in turns frees more methane, and so on. But this is the first evidence that points to a methane contribution from the ocean, not the land, in Arctic latitudes.

    Arctic Region Holds Huge Amount of Methane, Says Nasa  - Nasa scientists have discovered an excessive amount of methane in the Arctic region. They claim as the earth's climate warms, the methane frozen in reservoirs stored in Arctic tundra soils or marine sediments, is released into the atmosphere and the harmful gas can add to global warming.    "It's possible that as large areas of sea ice melt and expose more ocean water, methane production may increase, leading to larger methane emissions," said Eric Kort, postdoctoral scholar at the Keck Institute of Space Studies at the California Institute of Technology in Pasadena. Scientists discovered this when they were analysing data collected from the HIAPER Pole-to-Pole Observations (HIPPO) aircraft. HIPPO collects the atmospheric measurements from the Earth's surface to an altitude of 8.7 miles. It was designed to improve our understanding of where greenhouse gases are originating and being stored in the Earth system.   During five HIPPO flights over the Arctic from 2009 to 2011, scientists found increased methane levels in the low altitudes over the remote Arctic Ocean, north of the Chukchi and Beaufort Seas. To know exactly from where the methane was coming, scientists analysed several other sites and they found that methane came from the Arctic surface waters.

    Seascape With Methane Plumes -  For several years now, it has been possible for ships to sail from the northern Atlantic to the northern Pacific via the Arctic Ocean in late summer and early autumn. In the great days of European maritime exploration, any number of expeditions wrecked themselves in Arctic ice in futile attempts to find the fabled Northwest Passage; now, for the first time in recorded history, it’s a routine trip for a freighter, and as often as not the route is blue water all the way without an ice floe in sight. (Somehow global warming denialists never get around to talking about this.) Last autumn, though, crew members aboard several ships reported seeing, for the first time, patches of sea that appeared to be bubbling, and initial tests indicated that the bubbles were methane. This was a source of some concern, since methane is a far more powerful greenhouse gas than carbon dioxide, there’s a great deal of it trapped in formerly frozen sediments in the Arctic, and the risk of massive methane releases from the polar regions has played a substantial role in the last decade or so of discussions of the risks of global warming. Word of the bubbling ocean up north got briefly into the media, and provoked a fascinating response. The New York Times, for example, published a story that mentioned the reports,and then insisted in strident terms that reputable scientists had proven that the methane plumes were perfectly normal, part of the Arctic Ocean’s slow response to the warming that followed the end of the last ice age. This same “nothing to see here, move along” attitude duly appeared elsewhere in the media. What makes this fascinating is that the New York Times, not that many years earlier, carried bucketloads of stories about the threat of climate change, including stories that warned about the risk that the thawing out of the Arctic might release plumes of methane into the atmosphere.

    Increased Antarctic Ice Loss by Warm Ocean Currents - Reporting in this week's journal Nature, an international team of scientists including Helen Amanda Fricker of Scripps Institution of Oceanography at UC San Diego has established that warm ocean currents are the dominant cause of recent ice loss in Antarctica. New measurement techniques have been used to differentiate, for the first time, between the two causes of thinning ice shelves - warm ocean currents melting the underside, and warm air melting from above. This finding brings scientists a step closer to providing reliable projections of future sea-level rise. The work was initiated during a late 2009 visit to Scripps by British Antarctic Survey (BAS) scientist Hamish Pritchard, lead author of the study. Working with Fricker, Pritchard used measurements made by a laser instrument mounted on NASA's ICESat (Ice, Cloud and Land Elevation Satellite) to estimate the changing thickness of almost all the floating ice shelves around Antarctica, revealing the pattern of ice-shelf melt around the continent. Of the 54 ice shelves studied, warm ocean currents are melting 20, most of which are in West Antarctica. In every case, the inland glaciers that flow down to the coast and feed into these thinning ice shelves are also draining more ice into the sea, contributing to sea-level rise. Only Larsen Ice Shelf, on the eastern side of the Antarctic Peninsula (the long stretch of land pointing towards South America), is thinning because of warm air above it instead of melting from ocean currents.

    Insurance Companies Face Increased Risks from Warming, Mounting Claims - Given that insurers are likely to be among the first companies affected by climate change, you might expect the industry to be better prepared than most. But that is not how it appears to many analysts, regulators, and industry representatives, who say insurers are showing a lack of urgency on the twin threats of massive future damage claims from weather-related events, and the prospect of growing climate change-related litigation. A report published last September by Ceres, a Boston-based coalition of investors and environmental groups, puts it starkly. Surveying the disclosures of 88 U.S. insurance companies to the National Association of Insurance Commissioners (NAIC), it found that only 11 had formal climate change policies and that just 60 percent were assessing climate risks. Insurers are central to how we deal, or don’t deal, with climate change. They price the risk facing property owners, and others, from weather events —  effectively sending a signal to the rest of the economy about how seriously to take the threat. And with $23 trillion in global investments, insurers are also systemically important. If these companies fail to properly account for the risks they face from climate change, they could become financially vulnerable, with serious repercussions for the global economy.

    Governments failing to avert catastrophic climate change, IEA warns - Governments are falling badly behind on low-carbon energy, putting carbon reduction targets out of reach and pushing the world to the brink of catastrophic climate change, the world's leading independent energy authority will warn on Wednesday. The stark judgment is being given at a key meeting of energy ministers from the world's biggest economies and emitters taking place in London on Wednesday – a meeting already overshadowed by David Cameron's last-minute withdrawal from a keynote speech planned for Thursday. "The world's energy system is being pushed to breaking point," Maria van der Hoeven, executive director of the International Energy Agency, writes in today's Guardian. "Our addiction to fossil fuels grows stronger each year. Many clean energy technologies are available but they are not being deployed quickly enough to avert potentially disastrous consequences." On current form, she warns, the world is on track for warming of 6C by the end of the century – a level that would create catastrophe, wiping out agriculture in many areas and rendering swathes of the globe uninhabitable, as well as raising sea levels and causing mass migration, according to scientists.

    Countries Losing Steam On Climate Change Initiatives - Energy ministers from around the world met in London this week and got a scolding. The International Energy Agency warned the ministers that they are falling way behind in their efforts to wean the world from dirty sources of energy. Nations are nowhere near being on track to avert significant climate change in the coming decades. It turns out that right now, just about everything is conspiring to make it harder to clean up the world's energy supply. Nuclear power produces very little carbon dioxide, but it is on the ropes after the Fukushima meltdowns in Japan. New methods for extracting natural gas from underground make that fossil fuel much cheaper than low-carbon fuels. And don't forget the economy. "What's happened across the industrialized world is the governments are feeling poor these days," says David Victor at the University of California, San Diego. "So they are a lot less willing to put money into loan guarantees, production tax credits and feed-in tariffs and other policies that have historically been the big drivers of very low-emission technologies like nuclear and wind." Wind subsidies are on the chopping block here in the United States. And clean energy subsidies have already been scaled way back in Europe, where wind and solar had been riding high, thanks to generous government support.

    What Foreign Corporations Will Obama Empower to Undermine Environmental Laws Near You? - The White House wants to fast track the Trans-Pacific Partnership (TPP) “free trade” agreement with Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam. Japan is waiting in the wings, Canada and Mexico want in, Taiwan has announced its intention to meet membership requirements and China says it will “earnestly study” whether to seek entry into the agreement. Basically, the TPP is NAFTA on steroids.  Under TPP, foreign corporations would receive:

    • Compensation for loss of “expected future profits” if local health, labor or environmental laws limited their ability to do business
    • Rights to acquire land, natural resources and factories without government review
    • Risks and costs of offshoring to low wage countries eliminated
    • Special guaranteed “minimum standard of treatment” for relocating firms
    • Right to move capital without limits
    • New rights covering a vast definition of investment: intellectual property, permits, derivatives
    • A ban performance requirements and domestic content rules (no “made in the USA,” “buy local” or “green jobs”). An absolute ban, not only when applied to investors from signatory countries
    • Ability to extend drug patents and limit production of generic medicines that are used for global health programs
    • Rollback of regulations that were put in place to prevent another global economic crisis such as “too big to fail” remedies

    Arizona Tea Party-Backed Bill Gutting Sustainability Efforts Advances: -- An Arizona Tea Party-backed bill that would gut government-run green programs in the state may have the support it needs to go before Gov. Jan Brewer (R). In a preliminary voice vote on Wednesday, the Arizona House approved a bill introduced by Tea Party member Rep. Judy Burges (R-Sun City West) with the stated goal of preventing "social engineering ... including where we live, what we eat." Burges' bill, Senate Bill 1507, targets a United Nations declaration promoting international environmental sustainability, which was adopted by the governments of 172 nations -- including the United States under the George H. W. Bush Administration -- in 1992. Conspiracy theories about the non-binding plan to foster environmental stewardship have long been entertained by conservative organizations such as the John Birch Society, which refers to the declaration as "Agenda 21."

    A Book Review Of ‘The Crash Course’: The Unsustainable Future Of Our Economy, Energy and Environment -  - The first thing to say about The Crash Course is that it is an impressive work of scholarship. It is reminiscent of Guns, Germs and Steel in terms of the scope and breadth of knowledge brought to bear by the author in support of his thesis – which is basically that we’re headed for hard times unlike anything humanity has seen. The second is that it contains a few fundamental flaws. The third is that you should read it anyway. His thesis is more than plausible; his research is meticulous; and no matter how much you think you know about sustainability, you will walk away from The Crash Course wiser, if sadder. Martenson is an intellectual omnivore. From peak oil to finance to economics, he bores deeply into his chosen topics – without being boring. His lens on the future centers on the three E’s: Economics, Energy and Environment, viewed through the remorseless calculus of exponential growth. Let’s look at each in turn, although it is important to understand that for Martenson, it is the confluence of forces between the three that make the future so challenging.

    Population and consumption ‘key’ - Over-consumption in rich countries and rapid population growth in the poorest both need to be tackled to put society on a sustainable path, a report says. An expert group convened by the Royal Society spent nearly two years reading evidence and writing their report.Firm recommendations include giving all women access to family planning, moving beyond GDP as the yardstick of economic health and reducing food waste. The report will feed into preparations for the Rio+20 summit in June."This is an absolutely critical period for people and the planet, with profound changes for human health and wellbeing and the natural environment," said Sir John Sulston, the report's chairman."Where we go is down to human volition - it's not pre-ordained, it's not the act of anything outside humanity, it's in our hands." Sir John came to fame through heading the UK part of the Human Genome Project.

    Low Prices a Problem? Making Sense of Misleading Talk about Cap-and-Trade in Europe and the USA - Some press accounts and various advocates have labeled the Regional Greenhouse Gas Initiative (RGGI) as near “the brink of failure” because of the recent trend of very low auction prices.  Likewise, commentators have recently characterized the European Union Emission Trading Scheme (EU ETS) as possibly “sinking into oblivion” because of low allowance prices.  Since when are low prices (which in this case reflect low marginal abatement costs) considered to be a problem?  To understand what’s going on, we need to remind ourselves of the purpose (and promise) of a cap-and-trade regime, and then look at what’s been happening in the respective markets.

    When should China start cutting its emissions? - China’s economy has grown at a record-breaking pace for almost two decades. This growth was fuelled by a rapid industrial expansion and it causes an ever-growing appetite for natural resources in general and energy in particular, with worldwide implications on commodity markets and on the environment (Moran 2010). China became the world leading carbon dioxide emitter in 2006, five to nine years earlier than what was forecasted as recently as in 2004.Future prospects for the Chinese economy look bright. Home to one fifth of the world population, China will become a global economic giant. Yet the road to prosperity is long – China’s GDP per capita is still a small fraction of the average GDP per capita in OECD economies (10% if measured in MER, 23% if measured in PPP).1 Such a prolonged period of high economic growth has the potential to multiply China’s carbon emissions by a factor of two or three. In 2006 China became the world’s largest carbon dioxide polluter. This column argues that China is not rich enough to start reducing emissions immediately, but it is far too big not to do anything. The question is when and at what rate it is reasonable to call on China to start cutting back.

    US and UK to collaborate on 'floating' wind turbines - The UK and US will work together to develop "floating" wind turbines to harness more offshore wind power at a potentially lower cost, the government said on Monday. Before this week's clean-energy meeting of ministers from 23 countries in London, the government announced it will collaborate with the US in developing wind technology to generate power in deep waters that are currently off-limits to conventional turbines. In order to exploit the UK's huge wind resource, which accounts for about one-third of Europe's offshore wind potential, new technology is needed to access waters between 60 and 100 metres deep: too deep for turbines fixed to the seabed, but where wind speeds are consistently higher. It is hoped that developing the technology will increase the UK's potential for offshore wind power, particularly after 2020, by which time many shallower sites will have been developed.

    Shell’s Profits and Investment in Renewables -- Two articles in the Guardian today:

    Shell’s profits increased 11%  in first-quarter of 2012 to $7.3bn (Annual profit of around $29bn) Shell Claim:“Our profits pay for Shell’s dividends and substantial investments in new energy projects, to ensure affordable, reliable energy supplies for our customers, which create value for our shareholders.” But, should that appease customers paying record prices at the petrol pumps?

    MAPS: Biblical Flooding Is Coming to a Refinery Near You - A rare Senate hearing on the threat of rising sea levels last week coincided with a new report from Climate Central, a non-profit that publishes peer-reviewed environmental research, that shows rising seas may soon be lapping at the country's oil and gas refineries, electric and natural gas power plants, and even nuclear facilities. Climate change has raised global sea levels by eight inches since the late 19th century, amping up storm surges and flooding around the world. Extreme coastal deluges—of the sort that's only supposed to happen once a century—are those that reach at least four feet above local high tides. The rate of this kind of biblical flooding is expected to more than double by 2030, according to the report. Check out the researchers' map of coastal threats from rising waters in your area:  This is bad news for coastal energy facilities. The analysis, which assessed data from the National Ocean and Atmospheric Administration, the US Geological Survey and FEMA, tallied nearly 300 locations, spread across 22 coastal states, which stand on ground below that critical high tide-plus-four level. That includes 130 natural gas, 96 electric, 56 oil and gas, and 4 nuclear facilities. Here's Climate Central's map of of all the at-risk locations. (You can adjust the data to show energy facilities at higher and lower flood levels.)

    Ethanol, environmental mandates blamed for Phila. refinery woes - Oil-industry experts told a congressional panel on Thursday that regulations requiring more ethanol in motor fuel and setting stricter federal emission standards have driven some refineries out of business. A Joint Economic Committee hearing in Washington on the effect of the closure of Philadelphia area refineries turned into a broad-spectrum denunciation of federal environmental mandates. U.S. Sen. Robert Casey (D., Pa.), the committee’s chairman, called the hearing in response to moves by ConocoPhillips and Sunoco Inc. to sell or shut down their Philadelphia area refineries. Republican members of the committee — Casey was the only Democrat who attended, and he missed a big part of the hearing to attend a floor vote — singled out Obama administration policies for blame. But Thomas D. O’Malley, chairman of PBF Energy, which owns refineries in Paulsboro, N.J., and Delaware City, Del., spared no party in his colorful testimony.

    How to calculate the true cost of energy - The Washington Post: There are two ways to think about the cost of energy. There’s the dollar amount that shows up on our utility bills or at the pump. And then there’s the “social cost” — all the adverse consequences that various energy sources, from coal to nuclear power, end up foisting on the public. Economists have been working to quantify these social costs for some time: from the premature deaths due to air pollution to the damage wrought by the Deepwater Horizon oil spill in the Gulf Coast. Yet rarely has anyone tried to tally them up in a comprehensive fashion. Which is what makes this new paper from Michael Greenstone and Adam Looney of the Hamilton Project so valuable. The two economists sift through all of these economic papers and try to calculate what the price of various energy sources would actually look like if these external social costs were included. The graph below offers a good overview of their results. The blue bars represent the current market cost of various energy sources. On top of that, Greenstone and Looney have added estimated health damages from air pollution (the purple bar), as well as the cost of climate-changing carbon emissions that come with burning fossil fuels (the gray bar). They do not, however, include external costs from drilling or mining:

    Feds And Utilities Face Off Over The Electromagnetic Pulse Threat Coming In 2014  – As scientists warn of an impending solar storm between now and 2014 that could collapse the national power grid, thrusting millions into darkness instantly, a debate has flared up between utilities and the federal government on the severity of such an event.  NASA and the National Academy of Sciences previously confirmed to G2Bulletin that an electromagnetic pulse event from an intense solar storm could occur any time between now and 2014. They say it could have the effect of frying electronics and knocking out transformers in the national electric grid system. Already, there are separate published reports of massive solar storms of plasma – some as large as the Earth itself – flaring off of the sun's surface and shooting out into space, with some recently having come close enough to Earth to affect worldwide communications and alter the flights of commercial aircraft near the North Pole. But in February, the North American Electric Reliability Corporation, which represents the power industry, issued a stunning report asserting that a worst-case geomagnetic "super storm" like the 1859 Carrington Event likely wouldn't damage most power grid transformers. Instead, it would cause voltage instability and possibly result in blackouts lasting only a few hours or days, but not months and years.

    Edison says San Onofre not expected to close for good - The extended closure of the San Onofre nuclear plant due to safety concerns has led some to speculate — or hope — that the plant will be shuttered for good, but the chief nuclear officer for plant operator Southern California Edison said he doesn't believe the problems signal the plant's demise. "There's nothing I'm aware of today that would make me conclude that," Southern California Edison Senior Vice President Pete Dietrich said in a telephone interview Monday, speaking to The Times for the first time since the plant was forced to close. The plant has been shuttered for nearly three months due to unexpected wear in tubes that carry radioactive water in the plant's recently replaced steam generators. The problem came to light when one tube sprang a small leak on Jan. 31. Since then, 509 of the plant's nearly 39,000 tubes have been taken out of service because of excessive wear, apparently a result of vibration that caused the tubes to rub against each other and against support structures.

    Nuclear Engineer Arnie Gundersen: Fukushima Meltdown Could Result in 1 Million Cases of Cancer: The Obama administration is backing an expansion of nuclear power plants, but have the lessons of Fukushima been learned? We speak to former nuclear industry executive Arne Gundersen on the fallout from Fukushima, the design failures of the Mark I nuclear reactor used at Fukushima and many U.S. power plants, the economics of nuclear energy and the battle over nuclear power in his home state of Vermont. Gundersen is a former nuclear industry senior vice president who has coordinated projects at 70 nuclear power plants around the country. He is the chief engineer at Fairewinds Associates and co-wrote the new Greenpeace report, "Lessons from Fukushima." [includes rush transcript]

    Why Fukushima is a Greater Disaster Than Chernobyl - In the aftermath of the world’s worst nuclear power disaster, the news media is just beginning to grasp that the dangers to Japan and the rest of the world posed by the Fukushima-Dai-Ichi site are far from over.   After repeated warnings by former senior Japanese officials, nuclear experts, and now a U.S. Senator, it is sinking in that the irradiated nuclear fuel stored in spent fuel pools amidst the reactor ruins may have far greater potential offsite consequences  than the molten cores. After visiting the site recently, Senator Ron Wyden (D-OR) wrote to Japan’s ambassador to the U.S. stating that, “loss of containment in any of these pools could result in an even greater release than the initial accident.” This is why:

    • Each pool contains irradiated fuel from several years of operation, making for an extremely large radioactive inventory without a strong containment structure that encloses the  reactor cores;
    • Several  pools are now completely open to the atmosphere because the reactor buildings were  demolished by explosions; they are about 100 feet above ground and could possibly topple or collapse from structural damage coupled with another powerful earthquake;
    • The loss of water exposing the spent fuel will result in overheating can cause melting and ignite its zirconium metal cladding – resulting in a fire that could deposit large amounts of radioactive materials over hundreds of miles.

    Irradiated nuclear fuel, also called “spent fuel,” is extraordinarily radioactive.  In a matter of seconds, an unprotected human one foot away from a single freshly removed spent fuel assembly would receive a lethal dose of radiation within seconds. As one of the most dangerous materials in the world, spent reactor fuel poses significant long-term risks, requiring isolation in a geological disposal site that can protect the human environment for tens of thousands of years.

    Fukushima air to stay radioactive in 2022 --Radiation forecasts were compiled to help municipalities draw up recovery and repopulation programs for the nuclear disaster.  A decade from now, airborne radiation levels in some parts of Fukushima Prefecture are still expected to be dangerous at above 50 millisieverts a year, a government report says. The report, which contains projections through March 2032, was presented by trade minister Yukio Edano Sunday to leaders of Futaba, one of the towns that host the crippled Fukushima No. 1 power plant.

    Russia Stunned After Japanese Plan to Evacuate 40 Million Revealed - A new report circulating in the Kremlin today prepared by the Foreign Ministry on the planned re-opening of talks with Japan over the disputed Kuril Islands during the next fortnight states that Russian diplomats were “stunned” after being told by their Japanese counterparts that upwards of 40 million of their peoples were in “extreme danger” of life threatening radiation poisoning and could very well likely be faced with forced evacuations away from their countries eastern most located cities… including the world’s largest one, Tokyo. The Kuril Islands are located in Russia's Sakhalin Oblast region and stretch approximately 1,300 km (810 miles) northeast from Hokkaido-, Japan, to Kamchatka, Russia, separating the Sea of Okhotsk from the North Pacific Ocean. There are 56 islands and many more minor rocks. It consists of Greater Kuril Ridge and Lesser Kuril Ridge, all of which were captured by Soviet Forces in the closing days of World War II from the Japanese. The “extreme danger” facing tens of millions of the Japanese peoples is the result of the Fukushima Daiichi Nuclear Disaster that was a series of equipment failures, nuclear meltdowns, and releases of radioactive materials at the Fukushima I Nuclear Power Plant, following the To-hoku earthquake and tsunami on 11 March 2011.

    The Fukushima Nuclear Disaster Is Far From Over: Spent reactor fuel, containing roughly 85 times more long-lived radioactivity than released at Chernobyl, still sits in pools vulnerable to earthquakes. More than a year after the Fukushima nuclear power disaster began, the news media is just beginning to grasp that the dangers to Japan and the rest of the world are far from over. After repeated warnings by former senior Japanese officials, nuclear experts, and now a U.S. senator, it's sinking in that the irradiated nuclear fuel stored in spent fuel pools amidst the reactor ruins pose far greater dangers than the molten cores. This is why:

    • • Nearly all of the 10,893 spent fuel assemblies sit in pools vulnerable to future earthquakes, with roughly 85 times more long-lived radioactivity than released at Chernobyl
    • • Several pools are 100 feet above the ground and are completely open to the atmosphere because the reactor buildings were demolished by explosions. The pools could possibly topple or collapse from structural damage coupled with another powerful earthquake.
    • • The loss of water exposing the spent fuel will result in overheating and can cause melting and ignite its zirconium metal cladding resulting in a fire that could deposit large amounts of radioactive materials over hundreds, if not thousands of miles.

    Fukushima: A Nuclear War without a War: The Unspoken Crisis of Worldwide Nuclear Radiation -  The World is at a critical crossroads. The Fukushima disaster in Japan has brought to the forefront the dangers of Worldwide nuclear radiation.  The crisis in Japan has been described as "a nuclear war without a war". In the words of renowned novelist Haruki Murakami: "This time no one dropped a bomb on us ... We set the stage, we committed the crime with our own hands, we are destroying our own lands, and we are destroying our own lives."  Nuclear radiation --which threatens life on planet earth-- is not front page news in comparison to the most insignificant issues of public concern, including the local level crime scene or the tabloid gossip reports on Hollywood celebrities.   While the long-term repercussions of the Fukushima Daiichi nuclear disaster are yet to be fully assessed, they are far more serious than those pertaining to the 1986 Chernobyl disaster in the Ukraine, which resulted in almost one million deaths (New Book Concludes - Chernobyl death toll: 985,000, mostly from cancer) The dumping of highly radioactive water into the Pacific Ocean constitutes a potential trigger to a process of global radioactive contamination. Radioactive elements have not only been detected in the food chain in Japan, radioactive rain water has been recorded in California:

    Audit Confirms EPA Radiation Monitors Broken During Fukushima Crisis - An internal audit has confirmed observers’ concerns that many of the U.S. Environmental Protection Agency’s radiation monitors were out of service at the height of the 2011 Fukushima power plant meltdown in Japan, a finding one critic said raises “serious questions” about the federal government’s ability to respond to nuclear emergencies and to alert the public of their consequences (see GSN, Dec. 21, 2011). The April 19 report by the EPA Inspector General’s Office also casts further doubt on the agency’s already controversial claims that radiation from Fukushima did not pose any public health threat on U.S. soil, said Daniel Hirsch, a nuclear policy lecturer at the University of California (Santa Cruz) and president of Committee to Bridge the Gap. The agency on Monday said it stands by its radiation detection work in the aftermath of the Fukushima disaster. The report details problems with the agency’s “RadNet” monitoring system. The web of detectors is intended “to monitor environmental radioactivity in the United States to provide high-quality data for assessing public exposure and environmental impacts resulting from nuclear emergencies, and to provide baseline data during routine conditions,” the report notes.

    Tokyo Soil Samples Would Be Considered Nuclear Waste In The US - About this video.  While traveling in Japan several weeks ago, Fairewinds’ Arnie Gundersen took soil samples in Tokyo public parks, playgrounds, and rooftop gardens. All the samples would be considered nuclear waste if found here in the US. This level of contamination is currently being discovered throughout Japan. At the US NRC Regulatory Information Conference in Washington, DC March 13 to March 15, the NRC's Chairman, Dr. Gregory Jaczko emphasized his concern that the NRC and the nuclear industry presently do not consider the costs of mass evacuations and radioactive contamination in their cost benefit analysis used to license nuclear power plants. Furthermore, Fairewinds believes that evacuation costs near a US nuclear plant could easily exceed one trillion dollars and contaminated land would be uninhabitable for generations. Video transcript:

    Preparing for tsunami debris, wherever it may make landfall-- First came the stuff that floats on the surface and is pushed by wind: Buoys, a soccer ball, flotation devices. And, most notably, a rust-stained unmanned fishing trawler in Alaskan waters.  Communities in Alaska, Hawaii, the West Coast and Canada are preparing for the main event from debris pushed offshore by last year's massive Japanese earthquake and tsunami. About 70% of the debris sank, according to Japanese government estimates. No one knows how much of the remaining 1.5 million tons of debris is still floating in the Pacific Ocean. But U.S. and state officials say that some items washing ashore may be from the disaster, which took place 13 months ago and nearly 5,000 miles away. Thousands of people were killed. "Our models show the outer edge of the debris is at the West Coast and Alaska now," Nancy Wallace, program director and division chief of the National Oceanic and Atmospheric Administration's Marine Debris Program, said Wednesday. The bulk of the debris is north of Hawaii, slowly moving east. In Washington state, there have been reports of lumber, lightbulbs and fishing items reaching land. Their source has not been confirmed.

    Natural gas: U.S. energy market’s best bargain? - For those who follow the natural-gas markets, it was no shock to see the commodity fall to its lowest level in a decade, but prices may finally be nearing a bottom as production levels continue to slow. “Gas is more than a bargain. It is not sustainable at this price,” said James Williams, an energy economist at WTRG Economics. “The question isn’t whether prices will rise, but when.” April natural gas prices Natural gas for April delivery settled at $2.27 per million British thermal units on March 12. That was the lowest settlement level for a front-month contract since February 2002, according to data from FactSet Research. On Thursday, it closed at $2.28 on the New York Mercantile Exchange. That’s a more than 80% drop from the high above $15 seen in 2005, and year-to-date, futures prices have fallen more than 20%. “Realistically, it will be difficult for prices to sustain current levels for an extended period due to the fact that current spot prices are approaching cash costs for marginal production,”

    Here's Why Natural Gas Could Go To Zero - My friend who has been running hedge fund money for years had this to say: “Nat Gas could go to zero. Gas is a byproduct of drilling for oil. With US oil still worth $100+ a barrel, the drilling will continue, and more gas will be the result.” “There are many things that are changing due to the cheap Nat. gas. Companies that are running short haul truck routes out of central locations are converting to gas. Chemical companies that use natural gas as a feedstock are seeing new opportunities. The first new ethylene plant (plastic from natural gas) in many years will be built in Oklahoma. This plant was going to be built in Mexico, but cheap gas has brought it back home.”“The near zero cost of natural gas will transform energy use in America over the next five years.” I’m not sure I believe in this “miracle” story just yet. But coming from this guy, the conversation has me wondering

    The Coming U.S. Shale-Based Economic Boom - Philip Verleger, visiting fellow at the Peterson Institute for International Economics, writing in today's Financial Times:  "Today, few realize that the U.S. stands on the cusp of significant economic gains stimulated by low energy costs. Ten years from today, [we will] celebrate a decade of unexpected strong growth, and the credit will go to countrywide gains from the very low energy prices found only in the U.S.. Low-cost energy will have spawned an export surge in all sorts of goods, from chemicals to tires. Fracking and the other technologies that gave us low natural gas prices will have added more than 1 percent a year to U.S. growth.  Four conditions will contribute permanently to a big improvement in the competitive position of the U.S. 

    • 1. The U.S. has perfected a means of “manufacturing” natural gas from shale, in effect breaking the monopolistic control on hydrocarbon supply once enjoyed by the majors.
    • 2. This advantage gives manufacturing plants in the U.S. up to an 80 percent cost advantage over those operating in China, Japan, South Korea or European countries.
    • 3. U.S. financial markets (principally futures markets) enable producers and consumers to lock in profits for years ahead. Low cash prices now do not deter producers that sold today’s production a year ago at much higher and profitable prices.
    • 4. Competitive and open pipeline systems prevent any single large participant from denying these economic benefits to any producer or consumer.

    Natural Gas Is on a Roll, Executive Declares - A “perfect storm” of economic and regulatory factors is driving major United States utilities to rapidly switch from coal to natural gas as an electric power source, the top executive of one of the nation’s largest utilities said on Thursday. Nicholas K. Akins, chief executive of Ohio-based AEP, said the company plans to retire 5 of its 25 coal-burning plants and shut down coal-powered units at other plants it owns in a shift that collectively means the elimination of about 5,000 megawatts of capacity. The result will be that by 2020, only about half of the power AEP produces will come from coal, down from about 67 percent last year. The surge in domestic production of cheap natural gas, largely yielded by the rise of the controversial technique of forcing gas out of shale through hydraulic fracturing, has been a big factor in this shift. A series of new environmental regulations and pressure from environmentalists are also leading major utilities to either shut down older plants or spend billions of dollars to upgrade them. Mr. Akins estimated that AEP alone would have to spend about $300 billion through the end of the decade to expand natural gas power generation capacity or retrofit older coal-fueled plants so they can meet new environmental standards — investments that it is asking regulators to allow it to pass on to its customers, at least in part, which total five million accounts in 11 states.

    Dominion Resources' Cove Point Natural Gas Terminal Faces Challenge: — The Sierra Club said Thursday it will try to block an energy company's plan to export liquefied natural gas to find new markets for the drilling boom that has flooded the Mid-Atlantic with natural gas. Virginia-based Dominion Resources Inc. is seeking to export 1 billion cubic feet per day through a terminal it owns in Maryland. A previous legal settlement dating to the 1970s gives the Sierra Club the ability to reject any significant changes to the purpose or footprint of the existing natural gas terminal in Cove Point, Md., 60 miles southeast of Washington. The environmental group says the export project could result in major damage to the Chesapeake Bay and nearby Calvert Cliffs State Park in Maryland. "The damage that this project would bring to the Maryland coast as well as the disastrous effects of the fracking boom on communities in states like Pennsylvania make it clear that exporting liquefied natural gas is bad news for Americans' air, water and health," said Michael Brune, executive director of the Sierra Club.

    Egypt scraps Israel gas supply deal: Egypt's state-owned gas company says it has scrapped a controversial deal which supplies Israel with 40% of its natural gas at lower than market prices. Egyptian Natural Gas Holding Company (EGAS) complained it had not been paid by the Israeli-Egyptian firm that buys gas from Egypt and sells it to Israel. Israel denied the claim and warned Egypt that it was violating an economic annex of their 1979 peace treaty. Egypt's military rulers have not yet commented on the deal's cancellation. The deal was widely unpopular in Egypt, but solidly backed by former President Hosni Mubarak who was forced to step down last February after mass protests.

    UK Govt. Seismic Fracking Report Certain to Sharpen Debate - The process of hydraulic fracturing is a mining technique which uses injected fluid to propagate fractures in a rock layer to release hydrocarbon deposits that would otherwise be uncommercial.    While initial environmental protests of the technique centered around its possibility of polluting underground water aquifers as a number of known carcinogenic substances are used in the procedure, more recently research has focused on an even more ominous byproduct of the technique – the increased possibility of earthquakes. While in the U.S. the U.S. Geological Survey and the state governments are investigating the link, in Britain the Department of Energy and Climate Change on 17 April published an independent expert report recommending measures to mitigate the risks of seismic tremors from hydraulic fracturing and invited public comment on its recommendations. The report reviewed a series of studies commissioned by Cuadrilla, whose fracking operations in Lancashire aroused public debate, and the document “confirms that minor earthquakes detected in the area of the company’s Preese Hall operations near Blackpool in April and May last year were caused by fracking.” DECC’s Chief Scientific Advisor David MacKay remarked, “If shale gas is to be part of the UK’s energy mix we need to have a good understanding of its potential environmental impacts and what can be done to mitigate those impacts. This comprehensive independent review of Cuadrilla’s evidence suggests a set of robust measures to make sure future seismic risks are minimized - not just at this location but at any other potential sites across the UK.”

    Private Water Companies Join Forces With Fracking Interests - Two of the country’s largest private water utility companies are participants in a massive lobbying effort to expand controversial shale gas drilling — a heavy industrial activity that promises to enrich the water companies but may also put drinking water resources at risk. The situation — which some watchdogs describe as a troubling conflict of interest — underscores the complex issues raised by the nationwide push to privatize infrastructure and services like water, prisons, and roads. The water companies – American Water and Aqua America – are leading drinking water suppliers in Pennsylvania, where drilling is booming. They also sell water to gas companies — which use a drilling technique that requires massive amounts of water — and have expressed interest in treating drilling wastewater, a potentially lucrative opportunity. These investor-owned, publicly traded water utility companies are also dues-paying “associate members” of the gas industry’s powerful Marcellus Shale Coalition, a fact confirmed by coalition spokesman Travis Windle, who says associate members pay $15,000 annually in dues. “Our associate members are really the backbone of the industry,” adds Windle.

    Investigation: Two Years After the BP Spill, A Hidden Health Crisis Festers - In her cramped but immaculate trailer on a muddy back road in the small town of Buras, Louisiana, Nicole tells me that the two years since the tragedy began on April 20, 2010, have been “a total nightmare” for her family. Not only has her husband William’s fishing income all but vanished along with the shrimp he used to catch but the entire family is plagued by persistent health problems. For months following the onset of the disaster, she says, there was an oil smell outside their home and “a constant cloudiness, like a haze, but it wasn’t fog.” Her 6-year-old daughter Brooklyn’s asthma got worse, and she now has constant upper respiratory infections. “Once it goes away, it comes right back,” Nicole explains. Before the spill, Elizabeth, 9, was her “well kid.” But now Elizabeth constantly suffers from rashes, allergies, inflamed sinuses, sore throat and an upset stomach. Nicole stares at me and catches her breath; she apologizes for the tears that flow down her face. “It’s a touchy subject,” she says. “They are just tired. Tired of being sick.” William’s symptoms began with coughing, then headaches and skin rashes, followed by vomiting and diarrhea. About three to six months later, he started bleeding from his ears and nose and suffering from a heavy cough.

    Drilling In The Gulf Is Back With A Vengeance --Drilling in the deep Gulf of Mexico is becoming robust two years after the oil spill that prompted a six-month moratorium on deep-water exploration, but more of the work now is left to large companies. Triple-digit oil prices are driving the activity, making it worthwhile to go forward even given the cost, risk and heightened government scrutiny of working in waters often a mile deep or more. "We are seeing deep-water drilling coming back with a vengeance in the Gulf," said Dr. RV Ahilan, executive vice-president for GL Noble Denton, a technical adviser for the oil and gas industry. "The price is too big to ignore. People are quite keen and are booking rigs for long drilling campaigns in deeper drilling waters." But while activity has resumed, it involves a smaller group of players with the deep pockets and deep experience necessary to navigate the complexity of the Gulf. "It has always been dominated by the large internationals -- the BPs and Chevrons -- and in the future that is likely to be even more so," said Pavel Molchanov, an analyst with Raymond James. "They are really the only companies that can take on the liability risk of having a multibillion-dollar oil spill."

    Keystone XL East? Enbridge’s Line 9 Tar Sands Pipeline - Now yet another key tar sands export pipeline is in the works, this one making a voyage to New England: the Enbridge Line 9 Reversal pipeline. Enbridge, overseer of the controversial proposed Northern Gateway tar sands pipeline which would send tar sands crude westward from Alberta, Calgary to Kitimat, B.C., has yet another pipeline in the works: the already existing Line 9 Pipeline. Line 9 currently takes oil Middle Eastern/African oil imports from the Portland-Montreal Pipeline and sends it to the Imperial Oil-owned Westover, Ontario Terminal located near Lake Huron, where it then heads further westward to the Imperial Oil-owned Sarnia Terminal in Sarnia, Ontario. The oil is then refined and taken to various Canadian markets at the end of the journey. In August 2011, while most green movement eyes were on the Keystone XL, Enbridge quietly submitted an application to Canada’s National Energy Board (NEB) that would reverse the flow of oil for Line 9, sending Tar Sands crude eastward to the state of Maine, where it would be sent to the coast and placed on the European export market. Imperial Oil, a subsidiary of ExxonMobil, is the main proponent of this plan, according to Inside Climate News, which explains, “Imperial Oil has explained to Enbridge how an easterly flow would benefit its refinery near Westover and access to the Ontario market. A subsidiary of ExxonMobil, Imperial produces more than 200,000 barrels a day from tar sands mines, and claims proven oil sands reserves of more than 2.4 billion barrels.”

    Tar Sands Production In America Is Closer Than You Think -  Utah, which has never met a dirty fuel it didn’t love, has been encouraging efforts to develop a home-grown tar sands industry. Construction on a project located on state lands in the eastern part of the state could begin by the end of the year, according to a story in Environment and Energy Publishing’s Energy Wire:It’s not just something that’s up in Canada,” Utah Tar Sands Resistance member Raphael Cordray told E&E. “People don’t know it’s here in Utah. Our goal is to get the citizens of Utah to recognize that there’s a proposed tar sands site in Utah that could become the first commercial site in America, and what is at stake.” Utah has about a third of the roughly 36 billion barrels of tar sands oil thought to be located in the U.S. Not all of that is estimated to be technically or commercially recoverable, however.  Tar sands contain a form of petroleum called bitumen that can be refined into gasoline. But the process is costly, energy-intensive, and on a life-cycle basis releases far more global warming pollutants than conventional oil refining operations. U.S. Oil Sands, the Canadian based company that is working to develop the Utah deposits, has leases on about 32,000 acres of land in the state. The company was granted permits to begin production by the state in 2009. But it faces a legal challenge from an environmental group, Living Rivers, which fears tar sands production will harm Utah’s desert and mountain landscapes.

    Peak Oil Off: Great Game On - Peak oilers have had a pretty hard time lately. Not only have global unconventional finds flattened Hubbard’s ‘peak’, more and more conventional plays are cropping up. ‘Running out’? We have more than enough of the black stuff to incinerate ourselves several times over. Such supply side bounty has been well documented in the Americas – not just in the US and Canada, but across Latin America, offering a second pass at resource riches. Head all the way over to Australia, and you’ll see a dazzling display of unconventional technologies rapidly increasing kangaroo LNG production. The North Sea can squeeze out a few more drops; Europe can finally get it’s ‘energy sovereignty’ back from shale plays, all while the Arctic offers Russia untold oil riches. Anywhere you look, the narrative is the same. But just when we thought the global hydrocarbon map was complete, another serious player has cropped up, and it comes in the form of East Africa. This is the new African oil rush, and the race to secure regional riches between East and West is on. What’s particularly interesting about East Africa finds in Kenya, Tanzania, Mozambique, Madagascar, Ethiopia and more established fields in Uganda and Sudan, isn’t just the size of the finds, but the fact that European players have been leading the charge to secure concessions. Nobody wants to lose: Peak oil is dead, the Great Game is back.

    Drilling into Big Oil's big job claims - Big Oil is about to report big profits this week. So the industry is trying to focus people on a different story -- that it is a big jobs producer, worthy of its tax breaks and public appreciation in this time of still high unemployment. This week, the industry went on the offensive, saying that one in ten of the new jobs created in America in 2011 were oil jobs. And it launched an ad campaign saying it could create another million jobs in the next seven years if it gets greater freedom to drill wherever it thinks it might find more domestic oil. "Our industry is successful, and our nation shares in and benefits from that success. We need to remember that when earnings are released," said John Felmy, chief economist of the American Petroleum Institute. Those profits are forecast by analysts surveyed by Thomson Reuters to come to $21.2 billion for the quarter, or just less than $10 million an hour over the course of three months. The oil industry was one of the few recession-proof sectors, piling up $290 billion in profits over the last four years, according to Thomson Reuters

    U.S. oil production is up, so why are gas prices so high? – Given America's new oil rush, it would seem the best of times for gas prices. But with $4-per-gallon sticker shock, it might feel like the worst of times.How can this be? The question is all the more perplexing, because the United States is not only producing more crude oil but also using less of it. As a result, net oil imports have dropped a third since 2005. With such good fortune, America's soaring pump prices seem to defy the laws of supply and demand — except for one fact: It's increasingly not just about us. U.S. gas prices are largely determined by global crude oil prices, which depend on a widening and shifting array of factors half a world away: economic sanctions on Iran; deepwater drilling off Brazil; spare oil capacity in Saudi Arabia; auto use in China; less nuclear power in Japan. So oil rigs may be hopping in North Dakota, but what happens in the Strait of Hormuz will likely have more impact on prices at the local gas station — even though the U.S. doesn't import a single gallon from Iran.

    The Cost of New Oil Supply - Numerous factors affect oil prices, like supply and demand, geopolitical unrest, natural disasters, monetary policy, and speculation, as I detailed in February. But there is another factor exerting a continuous upward pressure on prices: the substitution of unconventional resources for conventional crude. When conventional oil hit its production plateau around 72 – 74 million barrels per day at the end of 2004, but demand kept growing, we turned to various unconventional liquid fuels to make up the difference, such as natural gas liquids, biofuels, and most recently, “tight oil” from shales like the Bakken Formation in the U.S. The above chart, from an excellent new post by Gail Tverberg summarizing new international production data from the EIA, shows our increasing reliance on unconventional liquids. The supply of crude (plus condensates) flattened out, while natural gas plant liquids (NGPLs) grew substantially, and “other liquids” (mostly ethanol) became significant contributors to supply.  The new floor for oil prices is being set increasingly by the production cost of these unconventional liquids. A few decades ago, we could produce conventional oil profitably in the U.S. for under $15 a barrel. But those days are long gone for the U.S., and for most of the world (except a few old fields in places like Saudi Arabia). As every major oil company has admitted in the past few years, the age of easy and cheap oil has ended.

    US Oil Consumption and Oil Prices - The chart above shows weekly US oil consumption since 2000 as the blue curve (the EIA weekly product supplied series).  I have added a 13 week centered moving average (red) to cut the noise a bit.  Both of these are on the left scale in millions of barrels/day (not zero-scaled to better show changes).  Then the green curve is Brent oil price (right scale). There's a couple of points worth making here.  I have a very rough rule of thumb -- now that we are on the oil plateau -- that if US consumption is increasing, oil prices are below the required level.  US consumption must decrease overall to accomodate rising consumption in the developing world, and stagnant supply.  Since the beginning of 2011, oil consumption has been decreasing, suggesting that oil prices are in roughly the right range. However, it's also worth noting that the price required to make consumption decline has increased over time.  In 2006-2007, prices of around $70 were enough to make oil consumption flatten and then decline. However, in late 2009 and 2010, similar prices obtained while consumption continued to rise.  It took the rise to over $100 in spring 2011 to get consumption to start to decline again. Thus it seems likely that at some point, higher prices will be required to get US consumption to continue to decline.  As usual, timing is hard to determine.

    GDP, oil consumption and prices - Commenter Nick G noted that Wednesday's post neglected the role of GDP which is, of course, important to oil consumption in addition to oil prices.  Accordingly I have added a top panel showing real US GDP (in trillions of chained $2005).  A you might expect in the recent era of high oil prices, oil consumption and GDP are diverging as the US economy becomes more oil efficient.  Still, you can see that part of the 2008 and early 2009 drop in oil consumption was due to the great recession, in addition to the ongoing process of becoming more efficient. I would guess that the lower pace of economic growth evident in 2011 and 2012, versus late 2009 and 2010, is due to the drag exerted by high ongoing oil prices.

    Oil Prices Could Follow Gas Prices Down as Demand Decreases - In the short term, it is difficult to see how prices can go any way but up. As the Economist Intelligence Unit wrote last week, the price for dated Brent Blend averaged US $125.50 per barrel in March, up from US $119.70 per barrel in February and just US$107.90 per barrel in December 2011. These price movements were driven in large part by fears of supply, particularly supply disruption due to the standoff with Iran, but also because of an accumulation of small disruptions in Africa, the Middle East and the North Sea. Output from Syria and Yemen has fallen as a result of civil unrest in these countries, and the pipeline carrying 260,000 barrels per day of South Sudanese oil has closed as a result of tensions between Sudan and South Sudan. Production in the North Sea has been weak, and the EIU reports that exports from Iraq’s Kurdistan region (which account for about 75,000 barrels per day) have halted. In themselves, these disruptions amount to only about 1 million barrels per day, but they largely negate the increased output delivered by Saudi Arabia intended to calm fears of insufficient supply. Nevertheless, the EIU estimates the market is likely to be in surplus this year and, providing negotiations with Iran proceed if not satisfactorily then at least without drama, oil prices should soften in the second half as weak demand meets ever-rising inventory levels.

    Inter-Regional Trade Movements of Petroleum to and from the Middle East: Part 7 -  In the context of discussing other regions, I have talked a lot about the Middle East (ME). In Part 3, we saw seen prominent diminishing exports from the ME to North America (NA), and the same trends of diminishing exports to South America (SA), Africa (AF), and Europe (EU), in Part 4, Part 5, and Part 6, respectively. Where has that Middle East petroleum been going to, or, is this just part of an overall trend of there simply been less exports of petroleum out of ME? As you will see, ME’s total inter-regional exports of petroleum have only slightly declined, but those exports are being diverted to some parts of Asia. Figure 1 presents ME’s total petroleum consumption rate (i.e., both domestic and imported petroleum) since 1980 as reported by the EIA or BP review (solid red circles and squares, respectively).  Both the EIA and BP data set illustrate the long-time increase in ME’s consumption of petroleum, and, as I showed over a year ago, this consumption rate data, when fit the Hubbert Equation, suggests a yearly growth rate in consumption of 5.6 percent per year. Figure 2 shows ME's total petroleum production rate (i.e., the entire region’s domestic production, solid blue circles and squares for EIA and BP data, respectively) and crude oil production (solid purple circles).

    Iraq oil exports jump nearly 15 percent in March -- Iraq says oil exports jumped by 15 percent in March compared to the previous month, putting them at the highest level the nation has seen since 1989. Oil Ministry spokesman Assem Jihad said Sunday that last month's oil exports averaged 2.31 million barrels a day, up from an average of 2.01 million barrels a day in February. He added that the sales grossed $8.472 billion, an increase of nearly 28.5 percent from February's revenues of $6.595 billion. The oil was sold to a 28 international oil companies. Iraq relies on oil exports for 95 percent of its revenues. The increase is attributed to the inauguration of a new export terminal in the Persian Gulf last month.

    Iraqi oil projects could add upto 12mbpd in extra supplies - Iraq's new oil projects could add upto 12mbpd of extra supplies to the global oil market, effectively dampening any rising concerns of oil shortage in the future. "This is to assure the world market that there is sufficient crude for them. We'd like Iraq to be considered as a dependable long-term supplier of world energy needs, whether oil or gas, and there should not be concerns of shortages in the supply in the near future”, RTT news quotes Iraqi Deputy Prime Minister for Energy Hussain Al Shahristani. Iraq currently has signed 12 contracts for its 12 oil fields which could potentially produce upto 12 million barrels per day (mbpd). Considering that the country currently produces about 3mbpd, these extra supplies will push Iraq's oil production to around 15mbpd. To put this into a more significant perspective- Saudi Arabia and Russia, the two top oil producers in the world, currently produce around 10mbpd each. Concerns of oil shortages have been the recurring theme in oil markets over the past many months thanks to the Libyan crisis and then the prevailing Iran tensions. As such, Iraq's assurance that it will more than triple its production comes as a satisfaction.

    Facing Cyberattack, Iranian Officials Disconnect Some Oil Terminals From Internet - Iran disconnected several of its main Persian Gulf oil terminals from the Internet on Monday, local news media reported, as technicians were struggling to contain what they said were intensifying cyberattacks on the Oil Ministry and its affiliates. There were some reports that the virus had forced widespread Internet shutdowns. “The ministry has disconnected all oil facilities, operations and even oil rigs from the Internet to prevent this virus from spreading,” said another Oil Ministry official who asked to remain anonymous, because he was not authorized to speak publicly about the attack. “Everybody at the ministry is working overtime to prevent this.” His assertion about the extent of the shutdowns could not be independently verified.

    Thinking the unthinkable: Much has been written in respect of the sanctions being applied to Iran, in two areas: oil and finance. The oil sanctions are, as similar sanctions have almost always been, counterproductive, and to date have probably served to increase Iran's net oil receipts.  This is because an "Iran risk premium" of some US$20 to $30 per barrel has been a factor in the oil market for some time, caused by refiners and governments bidding up the price in order to secure physical supplies. The bets placed on the future oil price on derivatives markets - despite the popular misconception as to the role of speculators shared even by US President Barack Obama - have had no direct effect on the physical market price.  But looking forward, we may expect China, India and a few other buyers to pick up Iran's crude oil at a steep discount, and to sell or export their refined products very profitably. Dollar payments have been made it impossible for Iranian banks generally and Iran's Central Bank Markazi in particular - by having them ejected from the SWIFT financial messaging system.  In doing so, the US and the EU may well have made a strategic error with unintended consequences on a historic scale.

    Saudi Arabia Builds Up Crude Inventories: Goldman - Saudi Arabia appears to have been building crude oil inventories in lower domestic demand months in a scramble to offset the risks of “limited” effective spare production capacity, Goldman Sachs said on Wednesday. In a note to clients, Goldman Sachs cited a crude oil inventory build of 35.4 million barrels in the period December-February, based on numbers from the Joint Organizations Data Initiative (JODI). The reason the increased production was not pooled into exports, Goldman Sachs analysts argue, is grounded in an anticipation of “a substantial increase” in demand that cannot be covered by “simply raising production levels”. The logic behind the build-up in stocks, which amount to 390,000 barrels per day (bpd) in that period, is not the possibility of shortages resulting from escalating tensions with Iran. Rather, it is primarily in preparation for the strains of peak domestic demand that the summer heat brings to the Kingdom. In the past, oil-fired power generation often took its toll on Saudi Arabia’s export volumes. The situation has become more pronounced than it has been due to what Goldman Sachs analysts describe as a market that has remained “very tight, despite the return of Libyan crude oil production”."This is consistent with our view that Saudi crude oil production is unlikely to be sustained over 10.5 million b/d in the near future,” the note said.

    OPEC: near record production, spare capacity a concern - Big Asian oil consumers (other than India) continue to cut oil purchases from Iran. WSJ: – China, Japan and South Korea, Asia’s largest oil consumers, significantly cut imports of Iranian crude in the first quarter of 2012 after the U.S. and the European Union moved to tighten sanctions against Iran over its nuclear program, opening the way to rival suppliers.  Iran is the world’s fifth-largest oil producer, exporting about 2.26 million barrels a day of crude in the first half of 2011, according to the U.S. Energy Information Agency.  China, Japan, India and South Korea made up the bulk of its customers, accounting for 59% of its exports or 1.46 million barrels a day. Iran, on the other hand, accounts for about 10% of each of those countries’ crude imports.  Between January and March 2012, China cut Iranian crude purchases by a third to about 350,000 barrels a day because of a pricing dispute which has since been resolved–it has consistently said that it respects only U.N.-imposed sanctions.  Japan and South Korea cut imports by more than 20% to 330,000 barrels a day and 200,000 barrels a day, respectively, as political pressure from the U.S. mounted.

    Current Oil Prices Not Justified By Fundamentals - Current oil prices aren't justified by fundamentals, but are rather juiced up by speculation and worries over potential oil-supply disruptions, an Organization of Petroleum Exporting Countries official said Friday. "This upward movement in prices has been primarily driven by geopolitical factors, amplified by excess speculation," Hasan Qabazard, director of OPEC's research division, said in a statement to the International Monetary Fund. The IMF said the risk of oil prices spiking on the back of escalating tensions with OPEC producer Iran was one of the major threats to a global economic recovery. Qabazard said OPEC oil production has seen a steady rise in recent months to 31.3 million barrels a day in March, which "far exceeds the market requirements for OPEC crude oil this year." Despite geopolitical tensions, the IMF forecasts oil prices to fall marginally this year and next, absent any major supply disruptions. OECD crude stocks "are expected to see an upward trend, in particular due to high crude oil supply," he said.

    What Happened To Peak Oil? -- Fears that the world is running short of oil aren't going away, but judging by the latest figures on global oil production there's no sign that the peak oil factor is an imminent threat. Global output rose to a new all-time high last December, according to data from the U.S. Energy Information Administration (EIA): 75.384 million barrels per day, or just ahead of the previous peak of 75.170 million barrels a day in January 2011. A new high may ease anxiety over oil supplies for the moment, but it's sure to be a temporary respite. All the challenges that have weighed on the outlook for raising production over the past decade are still with us. Discoveries of big, easily recoverable supplies are dwindling. Yes, U.S. consumption of oil has reportedly fallen 10% since 2005, but world demand keeps rising, mostly because of increasing growth from China, India, and other emerging markets that are rapidly industrializing and using ever larger quantities of fossil fuels.  Yet the peak oil theorists, if not wrong in the long term, seem to have been premature in warning that the summit for production was upon us.

    Rethinking Peak Oil - In recent years, Chinese scholars have been embracing “peak oil” theory in increasing numbers. The idea – first put forward by American geophysicist MK Hubbert in 1949 – is that individual oil fields, oil-producing regions and world oil production will display a “bell curve”: a steep rise in available supplies, narrow peak and subsequent rapid fall. Proponents argue that world oil supplies will peak in the mid 2020s at an annual output of 40.3 billion tonnes, while China will see domestic oil production peak at 190 million tonnes per year by around 2015. At first glance, their view that finite subsoil resources like oil will be harder to find and harder to tap appears very reasonable. But the peak oil model itself shows an inadequate empirical representation of historical patterns. World oil discoveries have peaked at least four times since 1950. Peak oil theory holds a static view of the world, and its models ignore price effects: lots of oil discoveries and high production mean that prices and profits wane, and incentives for further exploration decline. But ensuing oil shortages then restore these incentives. When incentives exist, the industry will continue to produce and is likely to produce even more. Peak oil theorists also neglect the role of technological advances in oil production as a great multiplier. The history of the oil industry reflects an endless struggle between nature and our knowledge. Progress in technology allows both new discoveries and the increase in recovery rate needed to turn non-recoverable or hypothetical resources into recoverable reserves

    China's Iran oil imports drop 54% in March - China, the second biggest crude oil consumer in the world, reduced its oil imports from Iran by more than half in March 2012, latest data from the General Administration of Customs shows. March 2012 Iranian imports at 1.08 million metric tonnes was 54% lower than in March 2011. On a Month-on-Month basis, imports from Iran declined by 6% from February. China's Unipec had opted to skip oil imports from Iran due to a pricing dispute with Iran's National Iranian Oil Co. However, the matter may be resolved and shipments may be restarted in the coming months. Crude oil imports from Sudan also saw sharp drop of 52% due to disputes over transit fees. The ongoing dispute between Sudan and its neighbour South Sudan is increasingly becoming problematic for oil exports from the region. China had recently sent an envoy to settle the dispute between the two nations. Total Chinese March oil imports stood at 23.55 million metric tonnes, up 8.7% from the same month last year

    China, Iceland announce deal on oil-rich Arctic — China and Iceland announced a deal on the oil-rich Arctic region Friday after Chinese Premier Wen Jiabao flew in to Reykjavik on the first stage of a four-nation European tour. The deal was part of a package of six agreements signed on the first day of the Chinese premier’s visit to the country, during which he held talks with his Icelandic counterpart Johanna Sigurdardottir. The Arctic’s oil reserves were high on the agenda for energy-hungry China during the high-powered delegation’s visit to Iceland—though Sigurdardottir touted the Arctic deal as a research collaboration. “These agreements will provide various opportunities for increased cooperation on research between Icelandic and Chinese scientists in this area,” her office said on its website. Iceland’s strategic location near the Arctic has not gone unnoticed in China, the world’s biggest energy consumer: the shrinking of the polar ice cap is making the region’s mineral resources more accessible. The retreat of the ice has also opened up the potential for a shorter cargo shipping route with Asia, which would cut the sea voyage between Shanghai and northern Europe by some 6,400 kilometers.

    The black hole - FOR much of the past few years, China has been at the centre of heated rhetoric over its contribution to global imbalances and a corresponding shortfall in global aggregate demand. As this week's Free exchange column explains, the surpluses of oil exporters are the bigger culprit: The biggest counterpart to America’s current-account deficit is the combined surplus of oil-exporting economies, which have enjoyed a huge windfall from high oil prices (see left-hand chart). This year the IMF expects them to run a record surplus of $740 billion, three-fifths of which will come from the Middle East. That will dwarf China’s expected surplus of $180 billion. Since 2000 the cumulative surpluses of oil exporters have come to over $4 trillion, twice as much as that of China. For the past two years, China's surplus has been falling. Oil exporters's surplus dropped sharply along with the price of oil during the global recession. It has come roaring back, however, and is now higher than ever.

    Nomura joins commodity super cycle bears - Various investment banks have been weighing in on whether or not the end of the commodity/ steel/ metal and other super-cycles, which have been led primarily by China’s increasing demand. Credit Suisse has different teams on either side of the debate, and Citi thinks that it’s over.  Now it is Nomura’s turn.Similar to Citi’s argument, Nomura thinks that while commodity consumption per capita-type of analysis shows that China’s metal consumption does not look very stretched, this type of analysis is understating the true usage.  Citi argues that the value in use (i.e. taking the prices of those metal into account) analysis shows that China has overtaken most of the developed world in terms of metal consumption, while Nomura points out that the amounts of various metals used per USD1 million of GDP for China are basically outliers and outrageously high: Why we are different is more important than the fact we are different: Our analysis is focussed on metal intensity of China’s GDP, not per capita metal consumption We have performed a detailed analysis of metal intensity of GDP for steel, copper and aluminium in the following pages, which we believe clearly outlines our view that China’s economy is not large enough (in GDP terms) to support a continuation of the rapid growth in metal consumption seen in 2000-11.

    China's rare earth policy backs Apple into a corner - Apple’s shiny fondleslabs are made in China not only because of the low cost of labour in the People’s Republic but also due to the surging prices and tightening export restrictions on rare earth minerals which the nation has a near monopoly on, according to a report. Although Apple has been notoriously secretive about the materials it uses to produce the iconic tablet, tech repair site spoke to Cambridge professor Tim Coombs who reckons the fondleslab could be packed with the rare minerals. First up there could be lanthanum in the device’s lithium-ion polymer battery, while the magnets along the side and in the cover were pegged as containing neodymium alloy, followed by a selection of rare earths to produce the different colours in the display, he said. Apple didn’t immediately reply to a request for comment from The Reg but considering the near-ubiquity of rare earth minerals in modern tech kit and the famously huge margins Cupertino manages to make on its shiny toys, the story does make sense. As the report suggests, manufacturing the device at or closer to the source of these rare minerals would circumvent China’s increasingly tight export quotas and cut costs pretty significantly. The problem of supply and demand with these seemingly vital components is only going to get worse, with China – which has a global market share of around 97 per cent – cutting back on the mining of rare minerals apparently due to environmental reasons

    China’s Biggest Banks Are Squeezed for Capital - China’s banks are among the biggest and most profitable financial institutions in the world. But the state-backed banks are also starved for capital, after an aggressive lending spree that was encouraged by the government. In the last year, seven of the biggest Chinese banks tapped the markets for 323.8 billion renminbi ($51.4 billion) in new money, according to Citigroup estimates. Several financial firms are expected to raise another $17.7 billion in the next few months, with China’s fifth-biggest lender, the Bank of Communications, accounting for $9 billion. Banks around the world have been tapping investors for money as they struggle with slumping share prices and waning profits. But Chinese firms have maintained that their profit growth is strong and their balance sheets are solid, raising red flags among some analysts about the banks’ persistent capital needs. The concerns were heightened after rare and blunt criticism by the prime minister, Wen Jiabao. In early April, he accused banks of reaping easy profits, and called for breaking up the monopoly held by the country’s biggest lenders. The New York Times“Frankly, our banks make profits far too easily. Why? Because a small number of major banks occupy a monopoly position, meaning one can only go to them for loans and capital,” Mr. Wen said, according to China National Radio. “That’s why right now, as we’re dealing with the issue of getting private capital into the finance sector, essentially, that means we have to break up their monopoly.” 

    Chinese banks and stealth easing - Although many are probably still hoping for official monetary cuts in China, credit easing appears underway anyway in mortgages. This is not completely new. In fact, some weeks ago I became aware of some banks offering mortgages with interest rates reduced by 10-15% for first-time buyers.  Sina is now reporting that reduction of mortgage rates in various cities, and today it is said that more people are able to enjoy a 15% reduction of rates in Shanghai than previously.  On top of this reduction in interest rates, mortgages are also easier to come by.  However, banks continue to deny that they are giving out more mortgages at lower rates, despite evidence to the contrary. Still on banks and the China Banking Regulatory Commission (CBRC) has published its 2011 annual report.  Here are some of the figures I find interesting. Total banking and financial institutions assets amounted to RMB113.3 trillion at the end of 2011 (239.7% of 2011 nominal GDP), increased by RMB18 trillion from the previous year.  Total liabilities amounted to RMB106.1 trillion, increased by RMB16.6 trillion from the previous year.  Shareholders’ equity amount to RMB7.2 trillion, increased by RMB1.4 trillion from the previous year.  Of all the assets, 47.3% of them are held by big commercial banks.  The charts below show the assets and liabilities of banks (left) and the share of assets by various types of banks (right):

    China Helps First-Home Buyers as Market Cools - Kevin Xi had no trouble getting a mortgage to buy a 1.53 million yuan ($242,563) one-bedroom apartment in Beijing last month, even as China’s government tries to cool the housing market. He even got a 10 percent reduction on interest. The government is pushing in two directions as it seeks to slow price growth while avoiding a collapse. It’s lowering borrowing costs for first-time homebuyers to encourage purchases while Premier Wen Jiabao keeps curbs in place to stem the speculators who have helped drive home prices up by as much as 140 percent since 1998. China’s 18 percent first-quarter drop in home sales contributed to the slowest economic growth in almost three years.  “Property is an important sector for China’s economy,” said Jack Gong, a Hong Kong-based property analyst at Jefferies Group Inc. “The central government will not forcefully crack down on the market even if it is not supporting it. Fine-tuning the mortgage policies shows the government’s clear intention to uphold economic growth.”

    China's Tax Revenue Growth Hits Three-year Low - Growth of China's tax revenues logged the slowest pace in three years in the first quarter of 2012 as a result of the country's cooling economy, official data showed Tuesday. Tax revenues rose 10.3 percent year-on-year to 2.5858 trillion yuan (410.4 billion U.S. dollars) in the first quarter, the Ministry of Finance said in a statement posted on its website. The growth rate marked the slowest pace in three years, pulling back 22.1 percentage points from the same period last year, the ministry said. Revenues from major tax items saw slower year-on-year gains. Receipts from value-added tax, consumption tax and turnover tax rose 5.4 percent, 15.1 percent and 7.6 percent, respectively, down 17.8 percentage points, 6.4 percentage points and 18.7 percentage points from a year earlier, the statement said. Revenues from corporate income tax increased 20.5 percent during the January-March period, while those from personal income tax dropped 6.2 percent year-on-year, slumping 43.2 percentage points on the same period last year.

    China's weak spot for manufacturing -- China's manufacturing sector contracted in April, but not as much as in the previous month, according to a preliminary survey of purchasing managers released Monday. HSBC's flash index rose to 49.1 in April from 48.3 the previous month. Any reading below 50 indicates contraction of the manufacturing sector. Among report components, HSBC said employment and manufacturing output continued to contract, but not as quickly as in March. The report shows that the Chinese economy won't slow as rapidly as some analysts have feared, according to Hongbin Qu, HSBC's chief economist for China. "That said, the pace of both growth and demand output remains at a low level in a historical context and the job market is under pressure," Qu noted in the report. Qu advocated further economic easing by the Chinese government.

    Here’s Why China’s Flash PMI Is Weaker Than The Official Number - China's HSBC flash PMI climbed to 49.1 in April, from 48.1 the previous month. The flash number has been much lower than official numbers the past two months.  In his latest report, Ting Lu, China economist for Bank of America-Merrill Lynch says he expects the official number to stay above 51 in April. He also cites three key reasons for this trend:

    1. The HSBC index focuses more heavily on small-and-medium enterprises (SMEs) than the official index. SME's could be hit harder by tightened liquidity conditions, though liquidity conditions have improved recently.
    2. China’s export manufacturers tend to be of small scale, and the HSBC PMI sample could have more exposure to the export sector. Remember, export growth decelerated to 7.6 percent YoY in the first quarter from 14.3 percent the previous quarter. In contrast, fixed asset investment (FAI) and retail sales growth was strong in the first quarter. 
    3. Finally, small manufacturers are less efficient and are being consolidated into big ones which could affect the flash PMI reading because of it's focus on SMEs.

    Lu says it is misleading to judge the trend using just monthly data and says the HSBC PMI tends to paint a more bearish picture of China’s manufacturing sector at the moment than the official number suggests. Moreover, he adds that the Chinese service sector is quite resilient at this stage.

    China offshores manufacturing to the U.S. - NEW YORK (CNNMoney) -- Chinese conglomerates, on a mission to expand their global footprint and avoid "anti-dumping" tariffs, are shifting more of their production to America.In the United States, cash-strapped states desperate for revenue and jobs, are rolling out the welcome mat for foreign companies that can guarantee both. More Chinese manufacturers have been launching their own U.S. facilities in the last five years, said Thilo Hanemann, research director at Rhodium Group, a New York-based economic advisory group. The biggest investments are being made by Chinese firms with products that have been slapped with hefty anti-dumping tariffs, he said. The United States imposes these financial penalties on imported products that it believes are being sold cheaper than the cost it takes to produce them. Dumping creates an unfair advantage in the marketplace, according to the Department of Commerce. In recent years, the agency has imposed these fines on solar technology and heavy industrial products from China, including steel pipes, copper tubing and aluminum extrusions. Xinxiang, China-based Golden Dragon Precise Copper Tube Group, Inc., the world's largest producer of copper tubing used in air conditioning, refrigeration and autos, broke ground last month on a $100 million plant in Thomasville, Ala.

    U.S. companies dump billions into China -- While U.S. businesses are still reluctant to invest in new plants and jobs in the United States, many are pouring money into China. But not for the reasons you'd think. Rather than "outsourcing" their operations to China's low-cost environment to produce cheap goods for U.S. consumers, multinational corporations are pouring billions into China to meet demand from the rapidly growing Chinese middle class. Total investments in China by U.S. multinationals were worth $49 billion as of 2009 -- up 66% from two years earlier, according to U.S. Commerce Department figures. And 2010 is shaping up to be another banner year for the Chinese -- U.S. companies poured an additional $6 billion into China in the first three quarters alone. "American investment in China is still growing,"  "It's one of their most profitable markets, if not their most profitable market. No one is pulling back." 

    While The US Was Basking In Warmth, China Just Had Its Coldest Winter In 27 Years - Everyone has been making a big stink about the unseasonably warm winter the U.S. has just experienced.  However, this was not a global phenomenon.  In fact, according to Ting Lu, Bank of America's top China economist, the world's second largest economy experienced quite the opposite. From a new note to Bank of America's clients: "This past winter was the coldest in 27 years, and Lu expects a natural rebound in coming months as weather turns normal" This was the first of six reasons why Lu believes China's economy will accelerate in Q2.  Here are the others:

    • Political disturbance in 1Q deflected Beijing's focus on the economy. With the aggressive challenger out of the game, both outgoing and incoming policymakers can refocus on delivering stable growth to ensure a stable leadership transition.
    • With robust fixed-asset investment demand, the stabilized situation in Europe and China’s own policy easing, Lu thinks the previous destocking is over.

    America's Renminbi Fixation - Stephen S. Roach - Since 2005, the US Congress has repeatedly flirted with legislation aimed at defending hard-pressed American workers from the presumed threat of a cheap Chinese currency. Bipartisan support for such a measure surfaced when Senators Charles Schumer (a liberal Democrat from New York) and Lindsey Graham (a conservative Republican from South Carolina) introduced the first Chinese currency bill. The argument for legislative action is tantalizingly simple: the US merchandise trade deficit has averaged a record 4.4% of GDP since 2005, with China accounting for fully 35% of the shortfall, supposedly owing to its currency manipulation. “Enough is enough,” President Barack Obama replied, when queried on the renminbi in the aftermath of his last meeting with Chinese President Hu Jintao. Obama’s presumptive Republican challenger, Mitt Romney, has promised to declare China guilty of currency manipulation the day he takes office.But, however appealing this logic may be, it is wrong. First, America’s trade deficit is multilateral: the US ran deficits with 88 nations in 2010. A multilateral imbalance – especially one that it is traceable to a saving shortfall – cannot be fixed by putting pressure on a bilateral exchange rate. Indeed, America’s major threat is from within. Blaming China merely impedes the heavy lifting that must be done at home – namely, boosting saving by cutting budget deficits and encouraging households to save income rather than rely on asset bubbles.

    One step closer to a global yuan - (Xinhua) -- As China accelerates bold steps to live up to its ambition of a global yuan, London's emergence as a leading Western hub for off-shore yuan trading is likely to add impetus to the Chinese currency's global status. Market observers and economists say that HSBC's issuance of the first international renminbi-denominated bond in London has signaled an important stage for the Chinese currency's journey of "going global," but they also noted that the steps should be taken prudently and gradually. Banking giant HSBC announced last week that it plans to sell 2 billion yuan (about 317 million U.S. dollars) of yuan-denominated bonds in London with a yield of 3 percent, the first-ever international yuan-denominated bonds to be sold outside China's sovereign territories. The move came along with British Chancellor of the Exchequer George Osborne speaking of the country's ambition to boost London as an off-shore trading center for the Chinese currency. "As the world's leading financial center, London is uniquely well placed to assist China in its goal of further expanding the international use of the RMB," Osborne has said. London already represents 26 percent of the global offshore RMB spot forex market, with the majority being based in Hong Kong, Osborne said.

    Surpassing the Great American Consumer - Once upon a time, the world vied primarily for the attention (and dollars) of American consumers. Just a decade ago, they were responsible for nearly a quarter of the world’s economy. Now, however, Americans are on their way to being displaced by upwardly mobile consumers from much poorer countries. The chart above, created by economists at IHS Global Insight, shows the share of the world’s gross domestic product that is contributed by personal spending in various countries. The blue line represents American consumers, and shows that in percentage terms, their share of the world’s domestic product has fallen significantly in the last decade. That is partly because American spending had been artificially inflated by the credit bubble. When the credit bubble burst, consumers retrenched and their spending plunged. The other major factor is that living standards in the developing world are improving so quickly that these countries are now driving global economic growth. The green line in the chart above shows consumer spending in four important emerging market economies: Brazil, Russia, India and China. Collectively these are known as the “BRICs.” As you can see, the green and blue lines have been steadily converging. That indicates that residents of these emerging markets are contributing almost as much to the global economy as Americans are.

    A History of the World, BRIC by BRIC - Goldman Sachs -- via economist Jim O’Neill -- invented the concept of a rising new bloc on the planet: BRICS (Brazil, Russia, India, China, South Africa). Some cynics couldn’t help calling it the “Bloody Ridiculous Investment Concept.” Not really. Goldman now expects the BRICS countries to account for almost 40% of global gross domestic product (GDP) by 2050, and to include four of the world’s top five economies. Soon, in fact, that acronym may have to expand to include Turkey, Indonesia, South Korea and, yes, nuclear Iran: BRIIICTSS?  Despite its well-known problems as a nation under economic siege, Iran is also motoring along as part of the N-11, yet another distilled concept.  (It stands for the next 11 emerging economies.) The multitrillion-dollar global question remains: Is the emergence of BRICS a signal that we have truly entered a new multipolar world? Yale’s canny historian Paul Kennedy (of “imperial overstretch” fame) is convinced that we either are about to cross or have already crossed a “historical watershed” taking us far beyond the post-Cold War unipolar world of “the sole superpower.” There are, argues Kennedy, four main reasons for that: the slow erosion of the U.S. dollar (formerly 85% of global reserves, now less than 60%), the “paralysis of the European project,” Asia rising (the end of 500 years of Western hegemony), and the decrepitude of the United Nations.

    The Doubling Rates of U.S.-China Trade Since January 1985 - What these two charts illustrate is the period of time in which the volume of either U.S. exports to China, or U.S. imports from China, have taken to sustainably double since January 1985. And by "sustainably double", we mean to exceed a previous level at which the volume has trade has doubled, without having fallen back below that level since.  For example, in looking at U.S. exports to China, we see that although the volume of U.S. exports was well above the previous doubling line of $2,553.6 billion for much of 2007 and 2008, the crashing of exports as China went into a full-blown recession in December 2008 extended the doubling period out to 65 months.  We likewise see a similar pattern for what the U.S. has imported from China since January 2006. Here, the U.S. recession, which deepened severely in late 2008 and early 2009 with the large-scale failures in the U.S. automotive industry, also pushed out the amount of time it has taken the volume of Chinese goods and services consumed in the U.S. to double from it's previous mark. At present, it is six years and counting....

    Latest Global Trade - Time for an update in my seasonally adjusted global trade series (see here for sources and methodology).  The data above go through February (which has pretty complete data - and March is too incomplete to form even a preliminary estimate).  You can see that it continues to look like global trade, recovering since 2009, hit a significant pothole in 2011 from which it has not recovered.  Last spring it stopped growing, and then in the fall it fell sharply, and it has only slightly recovered since. In a week or two it might be possible to form a reasonable preliminary estimate for March, which seems like it will be interesting.

    JOC: Container Ship Fleet Grows 10 Percent  - Capacity aboard the active container ship fleet has grown 10 percent in the past year, running ahead of cargo demand and putting pressure on freight rates and vessel utilization levels in a lackluster peak season, according to Alphaliner. Carriers have boosted capacity on all routes with the secondary line-haul markets in South America and Africa seeing the largest percentage increases, the container market analyst said. The world’s active fleet reached 14.95 million 20-foot equivalent units on April 1, an increase of 1.33 million TEUs over the past year. The recent withdrawal of capacity on the main Far East-Europe and Far East-North America trade lanes has largely resulted in the redeployment of tonnage to secondary routes. As a result, capacity jumped 20 percent on African routes during the past year, 14 percent on the Trans-Atlantic and 13 percent on Latin American trade lanes. Despite capacity cuts, the Far East-Europe route is under pressure from a 12 percent year-on-year increase in supply, with 430,000 TEUs added to the trade. The arrival of new vessels onto the trade has increased weekly capacity by 32,000 TEUs to 400,000 TEUs, accounting for a third of the total worldwide increase in capacity in the past 12 months.

    A World Adrift - Europe’s economic crisis dominated this year’s IMF/World Bank meetings. The Fund is seeking to create an emergency rescue mechanism in case the weak European economies need another financial bailout, and has turned to major emerging economies – Brazil, China, India, the Gulf oil exporters, and others – to help provide the necessary resources. Their answer is clear: yes, but only in exchange for more power and votes at the IMF. As Europe wants an international financial backstop, it will have to agree. The underlying reason is not difficult to see. According to the IMF’s own data, the European Union’s current members accounted for 31% of the world economy in 1980 (measured by each country’s GDP, adjusted for purchasing power). By 2011, the EU share slid to 20%, and the Fund projects that it will decline further, to 17%, by 2017. This decline reflects Europe’s slow growth in terms of both population and output per person. On the other side of the ledger, the global GDP share of the Asian developing countries, including China and India, has soared, from around 8% in 1980 to 25% in 2011, and is expected to reach 31% by 2017. The US, characteristically these days, insists that it will not join any new IMF bailout fund. This, too, reflects the long-term wane of US power. The US share of global GDP, around 25% in 1980, declined to 19% in 2011, and is expected to slip to 18% in 2017, by which point the IMF expects that China will have overtaken the US economy in absolute size (adjusted for purchasing power).

    Reining in Finance and the Effort to Silence a Critical UN Agency - This Real News Network segment gives a window into the efforts to squash criticism of the neoliberal orthodoxy in the world of international agencies. Even though the UN Conference on Trade and Development (UNCTAD) gets very little attention in the major media, its well researched and often prescient reports are enough of a threat to the orthodoxy to produce efforts by the advanced economy block in the UN to try to clip the wings of the agency. The start of this interview may seem like a bit of inside baseball, but it shortly gets to issues that are critically important.

    India's Investment Grade Rating at Risk as S&P Cuts Outlook - India's sovereign credit outlook was lowered to negative from stable by Standard & Poor's, taking the nation a step closer to junk status and dealing a further blow to Prime Minister Manmohan Singh's economic agenda. "India's investment and economic growth have slowed, and its current-account deficit has widened," S&P said in a statement today, reaffirming its BBB- long-term India rating, the lowest investment grade. "We are revising the outlook on the long-term ratings on India to negative to reflect at least a one-in-three likelihood of a downgrade." Bonds fell, stocks declined and the rupee pared gains as S&P's decision underscored rising concern that Asia's third- largest economy will fail to stem a growth slowdown and widening budget and current-account deficits. Singh's push to lure investment has been hurt by corruption scandals, inflation and political opposition to steps such as opening the retail industry to foreign companies.

    World Needs to Create 200 Million Jobs - The world needs to create about 200 million jobs to reach full employment. That’s one finding from a new report released Friday by the International Labor Organization and the World Bank. The two groups, based on a request from the Group of 20 advanced and developing economies, are unveiling a database that tallies policy responses to the financial crisis and global economic downturn. The site includes data from 77 countries representing 89% of global GDP and 86% of the global labor force, reviewing their growth and employment policies. (The sample includes 22 high-income countries and 55 low-income and middle-income countries.) The employment tally found that the world lost 27 million jobs between 2007 and the height of the crisis in 2009. But labor force growth adds about 40 million people to the global labor market each year, and overall economic growth — even before the crisis — hadn’t been strong enough to absorb them. That created a long-run jobs gap of 177 million, on top of the 27 million jobs lost in the downturn.

    Japan’s fuel imports driving trade deficit to record - As predicted earlier this year, Japan continues to struggle with its energy needs. The chart below shows the recent trend in Japan’s imports of residual fuel oil. Residual fuel is used for electricity generation, industrial process and space heating, as well as fuel for large ships. Japan had always bought some fuel oil for shipping and certain industrial processes, but nuclear generators had in the past been the dominant source of electricity. Now the source of power has been replaced by expensive fuel oil. Source: Joint Organisations Data Initiative These fuel imports are quickly translating into a rising trade deficit. AP/WP: – Disaster-battered Japan reported its biggest annual trade deficit ever Thursday, a contrast from decades of surpluses, as a nuclear crisis boosted expensive oil and gas imports. The Finance Ministry’s preliminary trade data showed a 4.41 trillion yen ($54 billion) trade deficit for the fiscal year that ended March 31. The chart below shows Japan Merchandise Trade Balance (seasonally adjusted) from the Ministry of Finance. This is not the full trade deficit, but is a strong indicator of trade flows.

    One reason why Japan allows deflation - Why do Japanese investors keep buying their own public sector debt, which is racing to 250% of GDP by 2015, twice the level that got Greece in trouble? Part of the explanation is what we call financial repression, where thegovernment puts pressure on domestic institutional investors, frequently through regulations. But much of the explanation is likely deflation, which creates acceptable real return to bonds, that are not taxed. The eventual JGB crisis must await 2015 or later, when demographics drive the country into an external balance that requires foreign borrowing, something that will not be possible at current yields. The post offers good points on other topics too.  Here is more on Japan’s future funding issues.

    Bank of Japan Expands Stimulus as Lawmakers Seek Growth: Economy -- The Bank of Japan expanded its plan for government-bond purchases by 10 trillion yen ($124 billion) after the world's third-largest economy showed signs of slowing and lawmakers pressed for more aggressive steps. The BOJ will boost its asset-purchase fund to 40 trillion yen by June 2013, compared with the previous target of 30 trillion yen by year-end, it said in a statement today in Tokyo. A separate central bank program providing funds to banks was pared by 5 trillion yen amid lackluster demand for loans. Governor Masaaki Shirakawa was under pressure to act after a group of lawmakers proposed overhauling the BOJ's governing law to ensure steps to end the deflation afflicting the nation for more than a decade. The BOJ today said today its 1 percent inflation goal will be achieved before too long, a prediction of victory that undermines the impact of today's stimulus, according to Credit Suisse Group AG's chief Japan economist. "The effect of these positive actions could be completely erased,"

    Japan’s IMF Pledge Makes It No. 1 Fund Contributor - Japan’s pledge to lend the International Monetary Fund $60 billion as part of its resource drive makes the Asian country the fund’s top contributor, taking the lead from the U.S. The U.S. was one of the few countries in the Group of 20 largest economies that said it wouldn’t contribute any cash to bolster the IMF’s lending base. Japan, meanwhile, was one of the first non-European countries to commit money to the IMF. U.S. commitments to the fund currently total around $172 billion. Japan’s committments, including a promise made earlier this week to loan the IMF $60 billion, pushes Tokyo’s total to $186 billion, giving it a $14 billion edge. G-20 said Friday that nations plan to inject more than $430 billion into the IMF to help the fund deal with the fallout from a potential deterioration in Europe’s debt crisis. Although a U.S. official said the U.S. supports the G-20′s decision, Treasury Secretary Timothy Geithner has said Europe has the resources to fix its own problems and the IMF loans should only be viewed as supplementary. Fund watchers say Congress, meanwhile, would never approve of new cash for the IMF. Legislation in the House of Representatives has gathered backing from nearly a quarter of the chamber’s lawmakers for a bill that would repeal a $100 billion loan to the IMF Washington made in 2009.

    If Japan Is Broke, How Is It Bailing Out Europe? - It is interesting to note that as the International Monetary Fund wound down its semi-annual meeting in Washington yesterday, the Japanese government emerged as by far the largest single non-eurozone contributor to the latest  euro rescue effort.  Yes, this is the same government that has been going round pretending to be bankrupt (or at least offering no serious rebuttal when benighted American and British commentators portray Japanese public finances as a trainwreck). Japan is putting up $60 billion. That  is equal to 14 percent of the total of $430 billion in pledges drummed up by the  IMF’s overworked managing director Christine Lagarde.  By comparison the United Kingdom with almost half of Japan’s population is throwing in  a mere $15 billion, or one-quarter as much. And the U.K. actually looks generous by comparison with the United States and Canada, neither of which is prepared to proffer so much as a single brass cent. Besides Japan, the most significant contributors are Saudi Arabia and South Korea.This is not the first time that Japan has stepped up to the plate as lender of last resort to the world financial system. At the height of the global panic in 2009, the Tokyo Ministry of Finance more or less single-handedly rescued this system when it injected $100 billion into the IMF. How can a nation whose government is supposedly the most overborrowed in the advanced world afford such generosity?

    IMF encourages Europe’s economic suicide - China, Japan, America, the oil powers, and the rising economies of Latin America had a chance to pull Europe back from suicide through IMF pressure, but the world dropped the ball. Another vast pledge to save the euro, another chance lost to break the hold of Europe’s austerity mystics and force a shift in strategic direction. “We’re north of a trillion dollars,” said Christine Lagarde, the International Monetary Fund’s queen bee. Kudos to her for netting such sums in her Louis Vuitton handbag but what exactly does this achieve, given that Europe remains bent on committing “economic suicide” -- in the words of Nobel laureate Paul Krugman? Big language from world officialdom had traction in the early phases of this saga, when episodic spasms of angst caused “sudden stops” in capital to the South – each quickly reversed by bazookas, firewalls, and solemn incantations. Europe has by now progressed to the tertiary phase of its currency disease. A large chunk of global funding for EMU deficit states has been cut off indefinitely. There has been an almost irreversible collapse of investor confidence in the policy mix and governing machinery of monetary union. It is a “permanent stop”. Firewall can do nothing for this condition. The IMF’s trillion talk merely encourages EMU and German elites to persist in their belief/dogma that the essence of this crisis is a speculative attack on the euro, and that defensive firepower on a crushing scale is therefore the solution.

    After $14 Trillion Bailout, Global Recovery Still Uncertain - The amount of money thrown at rescuing the world economy since the Great Recession began is truly staggering, probably more than $14 trillion, and the financial spigots are still open. Industrialized and emerging nations pledged another $430 billion to boost the International Monetary Fund's lending power this weekend, doubling the size of its crisis-fighting war chest in case Europe's problems worsen and engulf more countries. Three weeks earlier, European Union leaders set aside $1 trillion for Europe's bailout fund creating a firewall to prevent the euro zone's sovereign debt woes from spreading. Major central banks haven't finished pumping money into the global economy either. The Federal Reserve meets on Tuesday and Wednesday and the Bank of Japan meets on Friday, and their bias toward monetary easing through bond purchases is likely to remain firmly in place. Japan may even ease again to counter deflationary pressures. The IMF has recommended more action from the European Central Bank, and the People's Bank of China is seen cutting its bank reserve requirements this year to underpin growth.

    IMF allows eurozone to stay in its fantasy world - Under Christine Lagarde’s stewardship the IMF is continuing to indulge the eurozone’s banks while the fund’s donor countries seethe . For some time, International Monetary Fund supremo Christine Lagarde has argued that a stronger “global firewall” is needed, to contain “any future financial crises”. Well, at this weekend’s IMF-World Bank meetings in Washington, she announced there are now “firm commitments” from member states to boost the IMF’s lending power. The extra resources, Lagarde’s officials dutifully claimed, will be “available for the whole IMF membership, not earmarked for any particular region”. Everyone knows this is nonsense. This higher IMF firewall has been created because governments around the world are petrified the eurozone could implode, sparking another “Lehman moment”. Since 2007, the IMF has extended over $300bn in loans. With another $430bn of finance now available, in theory at least, these latest “pledges” have almost doubled its existing lending capacity.

    Why The Euro Isn't Worth Saving - How big should Spain's surpluses have been during its housing bubble days? In retrospect, they should have been huge. The logic is that less government spending would have helped cool its overheated economy. The bubble might not have been quite as bad. But only quite. And, again, this was necessary because of the euro. Spain couldn't just raise interest rates to slow down its economy because Spain couldn't raise interest rates.  It shows us how unworkable the euro is in its current form. Not that the crisis hasn't already shown us that many times over. It would have required something approaching inhuman clairvoyance -- or at least Michael Burry-level clairvoyance -- for Spain to have run "big enough" surpluses in the mid-aughts.  If Spain's government had been that prescient, they may as well have shorted themselves. Now, I'm being a bit facetious, but let's remember: this wouldn't have "saved" Spain. Even counter-cyclical fiscal policy during the boom only would have ameliorated the subsequent slump. Spain would still have a competitiveness problem today. Unemployment would almost certainly still be disastrously high.

    Ex-Prime Minister of Iceland Convicted on Charge Related to Financial Crisis - Iceland’s former prime minister, Geir H. Haarde, was found guilty of failing to keep his cabinet informed of major developments during the 2008 financial crisis, but was cleared of three more serious charges of negligence on Monday. Mr. Haarde was acquitted of three charges that were linked to his management during Iceland’s economic collapse in 2008, which could have resulted in a jail sentence. A Reykjavik court ruled that Mr. Haarde would not receive any punishment on the one guilty count, and that his legal expenses would be covered. Mr. Haarde was the first politician to face a court over his actions — or, in this case, inactions — during the financial crisis as three of the nation’s largest banks collapsed. He was accused of not doing enough to avoid the failure of the banking system and the economy, which forced the country to seek financial help from the International Monetary Fund.

    European Budget Deficits Did Not "Balloon" in the Bubble- Dean Baker - Fox on 15th Street is on the loose again. A Washington Post article on renewed worries over European sovereign debt referred to: "massive cuts in government spending aimed at reducing deficits that ballooned during the credit bubble of the past decade." No, the deficits did not balloon during the bubble. Greece and Portugal did run large deficits in the budget years. However Italy's debt to GDP ratio was falling and the other two crisis countries, Spain and Ireland were running budget surpluses. How can a Washington Post reporter not know these facts? How can an editor allow this assertion to get into print? We know that claims like this fit the Post's obsession with deficits, but the paper should show a bit more respect for the facts.

    Is high public debt harmful for economic growth? - Do high levels of public debt reduce economic growth? This is an important policy question. A positive answer would imply that, even if effective in the short-run, expansionary fiscal policies that increase the debt-to-GDP ratio may reduce long-run growth, and thus partly (or fully) negate the positive effects of the fiscal stimulus. Most policymakers do seem to think that debt reduces growth. This view is in line with the results of a growing empirical literature which shows that there is a negative correlation between public debt and economic growth, and finds that this correlation becomes particularly strong when public debt approaches 100% of GDP. Correlation, however, does not imply causation. The link between debt and growth could be driven by the fact that it is low economic growth that leads to high levels of public debt (Krugman 2010).1 Establishing the presence of a causal link going from debt to growth requires finding what economists call an ‘instrumental variable’.2  In a new paper, we propose a novel instrument variable that allows us to reject the notion that debt causes slower growth in OECD countries. We do confirm the oft-noted negative correlation between debt and growth, but show that debt does not have a causal effect on growth. The discussion of the instrument is somewhat technical, so we omit it here; interested readers can find all the details in Section 2 of our paper.

    A time to spend: New insights into the multiplier effect - With debt-levels hitting record highs and growth running low on steam, European policymakers have found themselves facing a grim dilemma: should government spending be increased at the risk of reawakening the wrath of the sovereign bond markets? Or should austerity instead assume the political mantra with the hope of merely muddling through? Many developed economies are in a liquidity trap with interest rates at or near zero. Many also have high unemployment that looks set to persist. This column argues that it is times like these when governments should be spending more, not less – they just have to be careful how they do it.

    Has the Variable Rate saved the Eur. Mortgage Market? - Remarkably, default rates in Ireland and Spain in 2009, while high by historical standards at 3.6 and 2.9 percent respectively, were substantially lower than in the United States, where the default rate was 13 percent (see Fiorante and Mortgage Bankers Association of America).  Dwight Jaffee has argued that this difference in performance is the result of the fact that mortgages in Europe give lenders recourse to the borrower.  I find it plausible that recourse matters, but not that it matters quite so much.  For example, while purchase money loans in California are non-recourse, refinance loans are not.  The preponderance of mortgages in California are refinance loans, and California's default rate is extraordinarily high. So why haven't borrowers in Spain and Ireland defaulted more?  According to the European Mortgage Federation, more than 80 percent of loans in Spain and Ireland are variable rate mortgages.  As a consequence, as market interest rates fell, so too did mortgage interest rates.   The typical mortgage borrower in Ireland and Spain is currently paying considerable less than 4 percent on their mortgage.

    Vote of No Confidence in Europe - Germany and France are serious this time. During next week's meeting of European Union interior ministers, the two countries plan to start a discussion about reintroducing national border controls within the Schengen zone. According to the German daily Süddeutsche Zeitung, German Interior Minister Hans-Peter Friedrich and his French counterpart, Claude Guéant, have formulated a letter to their colleagues in which they call for governments to once again be allowed to control their borders as "an ultima ratio" -- that is, measure of last resort -- "and for a limited period of time." They reportedly go on to recommend 30-days for the period. Of course, using catchphrases like "ultima ratio" and "limited period of time" is supposed to make such policies sound reasonable and proportionate. After all, the reasoning goes, it's just a few occasional border controls for up to 30 days. What's the big deal, right? But the proposal is far from harmless and would throw Europe back decades. Since 1995, the citizens of Schengen-zone countries have gotten used to freely traveling within Continental Europe. Next to the euro common currency, free movement is probably the strongest symbol of European unity. Indeed, for many people, it's what makes this abstract idea tangible in the first place.

    Hollande and Sarkozy Head to Runoff in French Race - The Socialist candidate, François Hollande, won a narrow victory in Sunday’s first round of France’s presidential elections, riding promises of economic growth and a general dislike for the incumbent, Nicolas Sarkozy, into a favorable position before a runoff with Mr. Sarkozy on May 6. The strong showing by the left and anger on the political extremes seemed to reflect a desire for change in France after 17 years of centrist, conservative presidents. And it could continue an anti-incumbency trend that began with the economic crisis in Western Europe, where center-right governments dominate from Britain to Spain to Germany. It may also represent the first stirrings of a challenge to the German-dominated narrative of the euro crisis, which holds that public debt and runaway spending are the main culprits and that austerity must precede growth.

    Le Pen voters to arbitrate Hollande-Sarkozy duel - The centre-left Hollande narrowly beat the conservative Sarkozy in Sunday's 10-candidate first round by 28.6 percent to 27.1 percent, the Interior Ministry said with 99 percent of votes counted, but Le Pen stole the show by surging to 18.0 percent, the biggest result for a far-right candidate. Her breakthrough mirrored advances by anti-establishment Euroskeptical populists from Amsterdam and Vienna to Helsinki and Athens as anger over austerity, unemployment and bailout fatigue deepen due to the euro zone's grinding debt crisis. "The battle of France has only just begun," Le Pen, 43, daughter of former paratrooper and National Front founder Jean-Marie Le Pen, told cheering supporters. Declaring that her wave of support was "shaking the system" of mainstream consensus politics, she said: "We are now the only real opposition." The gravel-voiced blonde, who wants France to abandon the euro currency, said she would give her view on the runoff at a May Day rally in Paris next week. But she saved most venom for Sarkozy, aiming to pick up the pieces in any recomposition of the right and hoping the Front can enter parliament in June. More than one third of French voters cast their ballots for protest candidates outside the political mainstream.

    A Note on the French Election - Paul Krugman - I don’t know much about French politics. From here, however, it looks as if Sarkozy has a very clear idea of what he should be doing on economic policy, while Hollande doesn’t. And this is a reason to root for Hollande. If Sarkozy somehow pulls off an upset win, it will mean more of the same European economic orthodoxy — the insistence that fiscal responsibility is the only virtue and austerity the universal answer. This orthodoxy somehow retains its grip despite overwhelming evidence that it’s wrong and disastrous failures in practice. An Hollande victory would shake things up, and offer at least the possibility of something better. Oh, and Hollande is clearly a crazy person for actually calling for tax rates on top incomes that are around as high as leading public finance experts calculate they should be.

    Why you should care about the French election -  In normal years, a presidential election in France wouldn’t garner much interest here in the United States. But this isn’t a normal year. The euro zone is lurching from crisis to crisis, and France, the continent’s second-largest economy, will need to play a crucial role in fixing things. The current front-runner in the French race, Francois Hollande of the Socialist party, has vowed to renegotiate the treaties that bind the euro zone together, arguing that the current focus on austerity is counterproductive. His main opponent, incumbent president Nicolas Sarkozy, argues that Hollande is threatening to undermine the entire euro zone project. The first round of the French election is Sunday, April 22, and the top two candidates will compete in a run-off on May 6. Some observers fear that if Hollande wins, investors in Europe will get spooked, which could, in turn, ripple out to our economy, and even to our election.

    Dutch prime minister says government austerity talks collapse - The ruling Dutch minority government was on the brink of collapse Saturday after anti-EU lawmaker Geert Wilders torpedoed seven weeks of austerity talks, saying he would not cave in to budget demands from “dictators in Brussels.” New national elections that will be a referendum on the Netherlands’ relationship with Europe and its ailing single currency are now all-but-certain. But before Prime Minister can tender his resignation — possibly as early as Monday — he must consult with allies and opposition parties on how to run a caretaker government that will have to make important economic decisions in the coming weeks and months. Austerity talks began in early March after the Dutch economy sank into recession and forecasts showed the 2012 budget deficit will reach 4.6 percent — well above the 3 percent limit mandated by European rules. Dutch politicians have strongly demanded that Greece and other countries meet that target.

    Dutch Austerity Talks Fail as Geithner Prods Europe - More uncertainty loomed for the euro zone on Saturday after the prime minister of the Netherlands, Mark Rutte, said he expected new elections to take place following the collapse of talks on new austerity measures. The announcement is unwelcome news for Europe’s single currency zone, particularly because the Netherlands is one of just four countries using the euro currency that have maintained a coveted AAA credit rating. Over the weekend, officials from the International Monetary Fund and the World Bank met in Washington and sought ways to bolster contingency plans if the debt crisis in Europe worsened. The United States Treasury secretary, Timothy F. Geithner, declined to pledge any new money to a rescue fund but urged European leaders to be aggressive. “The success of the next phase of the crisis response will hinge on Europe’s willingness and ability, together with the European Central Bank, to apply its tools and processes creatively, flexibly and aggressively to support countries as they implement reforms and stay ahead of markets,” he said Saturday.

    Geithner Says Europe Must Be Creative, Aggressive in Crisis - U.S. Treasury Secretary Timothy F. Geithner said the global economic recovery is fragile and Europe’s effort to prevent the spread of its debt crisis depends on the willingness and ability of the region’s leaders to act aggressively and creatively. “The recovery remains fragile, with continued risks from the euro area and higher oil prices,” Geithner said in a statement today in Washington to the International Monetary Fund’s policy steering committee. The U.S. economy “continues to gather strength,” he said. While cautioning Europe to stay vigilant, Geithner was less pessimistic than when he warned the IMF in September to intensify its efforts to avoid the “threat of cascading default, bank runs and catastrophic risk.”

    European turmoil, American collateral - Robin Wells - In the Netherlands, the center-right government of Mark Rutte fell, unable to cobble together a coalition to pass budget cuts required by EU fiscal rules – rules that mandate that eurozone countries run annual deficits no more than 3% of GDP, which would force stringent austerity upon the Dutch to bring down a deficit that is currently projected to be 4.6% of GDP in 2012. Rutte, along with Merkel of Germany, was a hardline advocate of the 3% fiscal discipline rules. But given that the sober Dutch are in no danger of defaulting on their AAA-rated bonds, why the turmoil and panic? Because, perhaps, the Dutch are indeed sober – and a significant number of them have said "enough". What are the implications for the US, economically and politically? Direct links between the US and eurozone economies are fairly minor: we don't export that much to them, they don't import that much from us, and US banks have had an extended time to cut their exposure to eurozone risk. Yet the collateral damage could still prove significant. When the stock markets fall, consumer and business confidence falls, leading to cutbacks in spending – bad news for an American economy that is still mired in recession. In addition, crisis in Europe makes for a stronger US dollar, as investors flee to safer abodes. Again, bad for the economy as a stronger dollars hurts US exports.

    Dutch government falls over budget talks - The Dutch governing coalition collapsed on Saturday when far-right politician Geert Wilders pulled out of budget cut talks, saying it was not in the Netherlands’ interest to meet the deficit limit of three per cent imposed by the new European fiscal pact. EU-imposed austerity measures have cost leaders in southern European countries, including Greece, Italy and Spain, their jobs. With the fall of the conservative Dutch government, and the possibility that Nicolas Sarkozy may lose the French presidential election that begins on Sunday, the damage seems to have spread to Europe’s prosperous north.  Highlighting widespread voter anger over EU-imposed budget cuts, Mr Wilders said he could not allow Dutch citizens to “pay out of their pockets for the senseless demands of Brussels”. “We don’t want to follow Brussels’ orders. We don’t want to make our retirees bleed for Brussels’ diktats,” Mr Wilders said. The loss of Mr Wilders’ support left the conservative government of Mark Rutte, prime minister, with just over a third of the seats in parliament.

    Dutch Prime Minister, Cabinet Resign — The Dutch government, one of the most vocal critics of European countries failing to rein in their budgets, quit Monday after failing to agree on a plan to bring its own deficit in line with EU rules.  The government information service announced Queen Beatrix had accepted the resignation of Prime Minister Mark Rutte and his Cabinet after a meeting in which Rutte told her talks on a new austerity package had failed over the weekend.  Rutte is to address parliament Tuesday to discuss interim measures to keep public finances in order and schedule new elections. No date for elections was immediately announced, but opposition lawmakers called for a vote as soon as possible.  The Dutch government collapse came a day after the first round election victory of France's soft-on-austerity socialist candidate Francois Hollande. It calls into question whether austerity policies that are causing trauma in countries such as Greece, Spain and Portugal can be enforced even in "core" European countries such as France — or the Netherlands, one of the few along with Germany to maintain an AAA credit rating.

    Dutch crisis puts eurozone debt rescue plans at risk - The Dutch prime minister will on Monday launch a bid to salvage his austerity budget amid political chaos that could cost the country its AAA credit rating and plunge Europe’s debt rescue plans into disarray.Mark Rutte, who is a key ally of Germany and the eurozone’s “hardliners” on financial discipline, has called an emergency cabinet meeting after budget talks collapsed at the weekend. He is expected to resign today and announce snap elections, pushing yet another “core” eurozone country into political and economic uncertainty. In France, early polls pointed to a victory of Francois Hollande in the first round of the presidential elections. Mr Hollande has pledged to renegotiate the European fiscal pact that binds countries to a 3pc deficit limit by next year. The “non-negotiable” fiscal pact, which was vetoed by David Cameron, triggered the collapse of the coalition government in the Netherlands. Geert Wilders, the far-right leader, said he could not support the €16bn (£13bn) of cuts needed to meet the 3pc target. He wouldn’t allow Dutch citizens to “pay out of their pockets for the senseless demands of Brussels” he said.

    Dutch Debt Insurance Costs Near Record Wide - The cost of protecting against a Dutch default edged towards a record wide in early trading Monday after talks to cut the country's budget deficit collapsed over the weekend. Around 0750 GMT, five-year credit default swaps on the Netherlands widened 13 basis points to 132 basis points, four basis points off its record wide 136 basis points hit back in November, according to data-provider Markit. Credit default swaps are derivatives that function like an insurance contract for debt. If a borrower defaults, sellers compensate buyers. Discussions between the Dutch government's coalition partners to introduce reforms and cut the country's debt load broke down after the right-wing Freedom Party pulled out and called for fresh elections. Earlier this month Fitch Ratings said the Netherlands may lose its coveted triple-A status if it failed to tackle its deficit. Protection on France also jumped wider following the first round of its presidential election Sunday. France's CDS moved out seven basis points to 206 basis points after socialist leader Francois Hollande narrowly defeated current incumbent Nicolas Sarkozy in the contest. Hollande is tipped to win the run off May 6, sparking renewed concerns over the future of the euro zone after the challenger pledged to renegotiate the terms of the recently signed fiscal compact.

    Czech protesters stage anti-government rally - The Czech government faces a test of its ability to continue governing after an ambitious fiscal tightening programme splintered the ruling coalition and brought tens of thousands of protesters on to the streets of Prague at the weekend. Petr Necas, premier, has set a Monday deadline for a breakaway group from Public Affairs – the smallest of the three parties that made up his centre-right coalition – to demonstrate that it has the support of at least 10 MPs, which would give him a working majority in the 200-member parliament. Mr Necas has sacrificed much of his popularity after introducing a series of tax increases and benefit cuts in order to keep the budget deficit below 3 per cent next year. The additional measures were brought in after the Czech Republic posted worse than expected growth numbers – largely a consequence of the slowdown in the eurozone, the country’s largest export market. “We cannot behave in a populist way and we must continue our policy of budget responsibility and debt reduction,” Mr Necas told reporters after one of the largest demonstrations in the Czech Republic’s post-communist history filled the streets of the capital on Saturday to protest at his policies and to show disgust with political corruption.

    Central Europe's centre-right teeters under corruption claims - Austria, Slovakia, Croatia and Czech Republic gripped by sleaze allegations involving senior politicians and governing parties. Ruling parties, political elites and former ministers in a string of EU countries are embroiled in cash-for-influence scandals that are exposing widespread allegations of corruption, triggering public revulsion and a voters' backlash. Hunting parties, expensive gifts, drunken car crashes, secret police wiretaps, paper bags stuffed with money and public budgets being treated as private accounts all feature in the lurid revelations and allegations being leaked daily on to the front pages of central Europe. Austria, Slovakia, Croatia and the Czech Republic are in the throes of sleaze allegations involving senior politicians and governing parties said to be funded by dirty money. Tales of criminality, thuggery, and vast amounts of cash flowing to politicians from companies, lobbyists, and middlemen are dominating the newspapers and blogosphere across central Europe. In contrast, successful prosecutions are extremely rare for a political class that often seems to operate with impunity. Austria, Slovakia, Croatia, and the Czech Republic are in the throes of major sleaze allegations involving senior politicians and governing parties said to be funded by dirty money.

    Democracy Could Destroy the Euro - The euro has survived a string of disasters, from the banking crisis in Ireland to the real estate collapse in Spain as well as nonstop economic chaos in Greece. But now the common European currency faces an even greater threat, one that it may be unable to overcome: democracy. Quite simply, in most of the countries that make up the euro zone, there is no longer a substantial majority willing to make the sacrifices needed to keep the euro currency system together. This has always been true to some extent. Commentators have long talked about the euro zone’s “democratic deficit,” meaning Europe’s economic system is largely the creation of powerful political and business interests and lacks transparency, accountability and a broad popular mandate. But up until now, support by the elites has been more than sufficient to keep the system intact. Over the next few weeks, however, the elites are likely to start losing their grip. A number of key European countries are facing elections, and the political parties that support the euro are expected to fare badly. In the most financially troubled European countries, popular resistance to austerity policies is mounting. At the same time, in those countries that are still financially stable, the electorate is growing increasingly unwilling to keep doling out money to keep the weaker countries from insolvency.

    The Unbearable Slowness of Internal Devaluation - Krugman - The euro area’s economic strategy, such as it is, rests on two pillars: confidence through austerity, and “internal devaluation”. You know how the first is going; what about the second? For the uninitiated, internal devaluation means getting your wages and other costs to a competitive position, not by devaluing your currency, because you don’t have one, but by reducing wages relative to those of your trading partners. Now Eurostat has the latest on hourly labor costs (pdf); let’s look at changes from 2009 to 2011:What we see is that even in Ireland, which has made the most progress, wages have fallen only slightly. Since wages have risen in the rest of the euro area (that’s the bar labeled EA17), the actual internal devaluation is bigger — about 5 1/2 percent in Ireland’s case — but still only a fraction of what’s needed.Oh, and Germany — which should be experiencing substantial internal revaluation, a rise in its relative costs — hasn’t. You can argue that adjustment is happening here, but it’s painfully slow — and not remotely fast enough to avert catastrophe on the current course.

    IMF wants European governments to pursue bold actions to deal with their debt problems - The International Monetary Fund, armed with a replenished arsenal containing billions of dollars to battle Europe's lingering debt crisis, now must press governments in the eurozone to carry out bold changes to reassure nervous financial markets and avert sending the crisis into a more dangerous phase. The IMF's final communique Saturday after hours of high-level meetings did not go beyond saying what structural reforms were needed to restore fiscal health and spur economic growth in the 17 countries that use the euro. But U.S. Treasury Secretary Timothy Geithner told the IMF policy-setting panel that Europe needs to be more creative and aggressive in fighting its debt crisis, employing all the financial resources at its disposal, including the European Central Bank. "The success of the next phase of the crisis response will hinge on Europe's willingness and ability ... to apply its tools and processes creatively, flexibly and aggressively to support countries as they implement reforms and stay ahead of the markets," Geithner said.

    Europe: 'Dark clouds on the horizon' - This weekend's meetings of the International Monetary Fund and the World Bank are overshadowed by "dark clouds on the horizon" that threaten the "light recovery blowing in a spring wind," according to Christine Lagarde, the managing director of the IMF. The main source of the dark clouds is Europe, where recovery remains weak. More than three years into the crisis, policy options in Europe are limited; fiscal stimulus is out of reach for many countries, and recent efforts by the European Central Bank provided only a temporary respite. In this environment, strong and sustained recovery depends upon rebalancing within Europe, whereby countries' trade imbalances are reduced. But rebalancing is a two-sided affair. We have all heard the ongoing calls for some European countries to rebalance deficits through painful austerity measures. These calls need to be balanced with demands that countries with surpluses also move to rebalance.

    As If Nothing Matters - It is true that the European financial fiasco is a story of such fantastic mystifying complexity that the public can't possibly be expected to follow each twist of the plotline. But the fact is that nothing was fixed for Greece or after Greece and the hazard of evermore profound wreckage is assured. The only question is how many months before the appearance of normality in financial matters yields to fighting in the streets of supposedly civilized countries. Spain, it was revealed this week, has turned to a form of finance that could only have been designed by M.C. Escher. The plan for stabilizing Spain's hemorrhaging insolvency position works as follows: Spain's big banks borrow billions from the European Central Bank (ECB); the Spanish banks then turn around and lend the Spanish government the money to fund a bailout operation for the Spanish banks; the Spanish banks then use the bailout money to buy Spanish sovereign bonds, that is, lend money to the government. The world received news of this dangerous idiocy with a yawn. You'd at least expect a few Germans to choke on a bratwurst here and there. The idea that shenanigans like this can continue must amuse the historians looking on. But three weeks into April so far nothing has penetrated the stupendous wall of illusion that separates money matters from reality like the one-way mirror in the interrogation chamber of a police precinct where every last officer of the law is on the take.

    The sadly unpalatable solution for the eurozone  - A consensus has gradually emerged among experts about the first necessary step to solve the eurozone crisis: a eurozone-wide system of banking resolution, prudential supervision and deposit insurance. The idea is essentially to take the nation state out of banking and to make the eurozone – or the European Union – responsible for everything. The notion of, say, a Spanish bank would cease to exist. It is in many respects a very obvious solution to a big part of the crisis – the weakness of eurozone banks and their toxic relationship with national governments. The eurozone still needs solutions to its diverging competitiveness and low growth. But this would be an impressive start. Economically, it is obvious that a monetary union requires an integrated banking sector. It can otherwise not handle a banking crisis. With such a system in place, it becomes possible for the central regulator to force banks to take losses or fire incompetent directors. It could take equity stakes in banks, force banks to merge, close them or fully nationalise them. A centralised banking resolution and supervision system is probably only the bare minimum of an economic infrastructure that a monetary union needs. But there are also problems with this approach. First, it would only ever be a solution if the proposal were not fudged. If one remembers the palaver over the recently agreed extension of EU-level financial supervision, it would be naive to believe the EU could agree on anything of such a scale, fudge-free.

    Rogoff's Bad Parable - Krugman - Ken Rogoff has a piece in the FT comparing Europe’s woes to those of a family with a shared checking account, some of whose members start abusing the privilege. It’s a cute story — but it’s almost completely wrong. “Almost” because of yes, Greece. But Ken is basically buying into the German-preferred frame that it’s all about fiscal irresponsibility, which is completely wrong for everyone else — above all for Spain, the heart of the crisis. For the umpteenth time, the key crisis countries did not have large deficits before the crisis struck. Taken as a group, the debt/GDP ratios of the GIPSIs were falling, not rising: What brought on the crisis were huge private capital inflows. Don’t think runaway politicians; think German Landesbanken lending money to Spanish cajas, fueling a real estate bubble. So what was the big problem with the euro? Not so much that it promoted these flows; it probably did, but the GIPSIs aren’t the first economies bond markets have temporarily loved not wisely but too well. No, the key problem is lack of a way to adjust when the music stopped. It’s really frustrating that a completely, demonstrably false narrative about the crisis continues to dominate the discourse; and I’d hoped for better from Ken.

    Euro-Zone's Private Sector Shrinking Fast - The euro zone's private sector contracted in April at the sharpest pace since November, damaged by a steep decline in the manufacturing sector, suggesting the region won't rebound quickly from the recession recent data are pointing to. And, with new orders falling, input prices rising and firms cutting jobs as confidence weakens, the second part of the likely double-dip recession may be as debilitating as the first. The euro zone emerged from the latest recession in the third quarter of 2009.  The preliminary composite PMI for the euro zone slumped to 47.4 in April from March's 49.1, Markit's preliminary purchasing managers' index showed Monday. The April manufacturing PMI slipped to 46 from March's 47.7 while the services PMI also declined to 47.9 from 49.2 over the same period

    Eurozone Manufacturing PMI Hits 34 Month Low; German Manufacturing Hits 33 Month Low; Orders Drop Steeply Across the Board - Markit reports Eurozone sees stronger rate of decline at start of second quarter

    • Flash Eurozone PMI Composite Output Index(1) at 47.4 (49.1 in March). 5-month low.
    • Flash Eurozone Services PMI Activity Index(2) at 47.9 (49.2 in March). 5-month low.
    • Flash Eurozone Manufacturing PMI (3) at 46.0 (47.7 in March). 34-month low.
    • Flash Eurozone Manufacturing PMI Output
    The Markit Eurozone PMI® Composite Output Index fell to a five-month low in April, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. The index fell for the third month in a row to 47.4, down from 49.1 in March, to signal a faster rate of decline of private sector economic activity. Output has fallen seven times in the past eight months.

    German manufacturing shrinks at fastest pace since 2009: PMI (Reuters) - Germany's manufacturing sector unexpectedly shrank at the fastest pace in nearly three years in April, denting hopes it can drive growth in the euro zone and casting a shadow over upbeat business sentiment surveys. Markit's manufacturing Purchasing Mangers Index (PMI) fell sharply to 46.3 from March's 48.4, according to a flash estimate released on Monday, well below the 50 mark which would sign al growth in activity. It marked the fastest rate of contraction since July 2009 in the sector, which has been hit by a decline in some exports as the debt crisis in the euro zone has choked demand from key trading partners. “Reports are that sales to southern Europe are particularly weak, so there is some evidence of troubles in the periphery (of the euro zone) spilling over to the core," said Chris Williamson at Markit, adding that global trade was also sagging. “Germany produces exports that people want to buy when growth is good but cut back on when there are worrying signs, and that's what we've got at the moment," he said. Germany's export-driven economy, the largest in Europe, recovered swiftly from the 2008/09 global financial crisis, interrupted only by a 0.2 percent contraction in the final quarter of last year on weak exports and private consumption.

    Euro zone slump deepens unexpectedly in April (Reuters) - The euro zone's business slump deepened at a far faster pace than expected in April, suggesting the economy will stay in recession at least until the second half of the year. The Markit PMI fell to 47.9 from 49.2 in March, a five-month low and confounding the forecast for a rise to 49.3. Optimism from this weekend's deal to boost the International Monetary Fund's crisis-fighting firepower quickly evaporated and worried investors sold the euro and bought safe-haven German and U.S. government bonds. "Today's dismal PMI figures clearly indicate that the euro zone economy remains in dire straits," said Martin Van Vliet, senior economist at ING. "Our base case scenario is still for a gradual return to modestly positive growth in the second half of this year, but with the lingering debt crisis and the ongoing drag from fiscal policy, the risks are clearly skewed to a more protracted recession." European factories had their worst month since June 2009. Companies said their order books were shrinking and they were cutting jobs in reaction to falling demand. The overall index slipped further below the 50 threshold that divides growth from contraction.

    Europe sets course for perpetual recession - Another evening of Purchasing Manager Index (PMI) data from the Eurozone. As readers may be aware my major macro theme on Europe under current policies has been the same for quite some time now: Periphery nations weakening, France in the middle, Germany outperforming, but the whole ship slowly sinking. To the last night’s data then… German Flash PMI

    • Flash Germany Composite Output Index(1) at 50.9 (51.6 in March), 5-month low.
    • Flash Germany Services Activity Index(2) at 52.6 (52.1 in March), 2-month high.
    • Flash Germany Manufacturing PMI(3) at 46.3 (48.4 in March), 33-month low.
    • Flash Germany Manufacturing Output Index(4) at 47.8 (50.7 in March), 5-month low.

    Spain's Economy Dwindling - Spain's central bank said Monday that the country's economy contracted 0.4% in the first quarter from the fourth, evidence that a worsening downturn is making it tougher for Madrid to reach ambitious austerity targets.  On an annual basis, the economy contracted 0.5%, the first negative reading after seven-consecutive quarters of modest growth, the Bank of Spain said in its monthly economic report. This marks the official end of a mild recovery between late 2010 and late 2011, after a deep slump started in 2008 in tandem with the country's property bust.  In the fourth quarter last year, Spain's gross domestic product had contracted 0.3% from the third quarter, but grew 0.3% on an annual basis.

    Cost of Spain’s Housing Bust Could Force a Bailout - By any measure, the Spanish real estate boom was one of the headiest ever. Spurred by record-low interest rates, Spaniards piled into holiday villas along the Costa Blanca, gaudy apartments in Madrid and millions of starter homes throughout the country. But since the frenzy drove Spanish home prices to a peak in 2007, they have fallen by at least one-fourth, and the bottom seems nowhere in sight. As Spain endures its second recession in three years and unemployment nears 25 percent, an increasing number of debt-heavy Spaniards can no longer meet monthly payments on the mortgages that their banks were all too eager to give. With a rising portion of Spain’s 663 billion euros, or $876 billion, in home mortgages at risk of default, many economists say it is only a matter of time before some of Spain’s biggest banks will need a bailout. And the Spanish government, staggering under its own debt and budget deficit burdens, may not have the money to come to the rescue. The implications of all this for the rest of Europe were a prime topic at last weekend’s meetings of the International Monetary Fund and the World Bank in Washington. The big fear is that the European Union will need to step in with a Spanish bailout — one much bigger than any of those already extended to Ireland, Greece and Portugal.

    Judging by Ireland, Spanish banks to take a lot more credit writedowns - Ireland dealt fairly quickly with its property market bubble by effectively and forcefully nationalizing and recapitalizing its banking sector. They clearly still have a serious problem on their hands, but the nation has been aggressive in addressing the issue of distressed real estate loans. In contrast, Spain’s banking system is nowhere close to fully recognizing the full extent of the problem. Not facing the problem however is not going to make it go away. Reuters: "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 [property developers] companies" in Spain that owe banks 126 billion euros, Rodriguez said, basing his estimates on recent data from Spanish mercantile records. He said the banks were covered for only 67.5 percent of that risk, leaving 40 billion euros of exposure if all the companies filed for bankruptcy.

    Ireland's key plan to pay back EU/IMF loan is faltering (Video)  - One of Ireland's key plans to pay back its massive EU/IMF bailout loan appears to be faltering. The republic wants every home to pay a blanket 100 euros levy but the tax is being fiercely resisted. The BBC's Andy Martin reports from County Donegal, where up to three quarters of the people living there have refused to pay up.

    Europe’s Lunatics Rise - Back in December last year while discussing the ongoing woes of Europe, I suggested tha the fiscal compact may never actually be enacted because attempts to do so would have such a disastrous outcome that European nations will inevitably give up. I also mentioned in February that one of the things that could potentially effect any implementation was the European people themselves when they got to have a say about what was going on. Over the weekend round one of the French presidential elections took place, and the results certainly aren’t pro-compact. In fact, I am not even sure they are pro-Europe: Far-rightist Marine Le Pen threw France’s presidential race wide open on Sunday by scoring nearly 20 percent in the first round – votes that may determine the runoff between Socialist favorite Francois Hollande and conservative President Nicolas Sarkozy.  Hollande led Sarkozy by about 29 to 26 percent in reliable computer projections broadcast after polling stations closed, and the two will meet in a head-to-head decider on May 6. But Le Pen’s record score of 18-20 percent was the sensation of the night, beating her father’s 2002 result and outpolling hard leftist Jean-Luc Melenchon, in fourth place on 11 percent. Centrist Francois Bayrou finished fifth on less than 10 percent. Le Pen, who took over the anti-immigration National Front in early 2011, wants jobs reserved for French nationals at a time when jobless claims are at a 12-year high. She also advocates abandoning the euro currency and restoring monetary policy to Paris

    Hungary to pull treatments from diabetics who don’t stick to diets - Hungarian diabetics who fail to stick to their diet will be deprived of more modern treatments from July, under a government decree published Monday aimed at cutting health spending. Diabetics undergo a blood test on average every three months and those who score high levels of glycemia more than twice a year could be turned away from treatments with analog insulin — more efficient but also more expensive — and left with the less efficient human insulin, under the new rules. Currently, all diabetes treatments are subsidised by the state, which hopes to reduce health spending with the new rules.

    Euro-Region Debt Rises to Highest in Currency’s History - The debt of the euro region rose last year to the highest since the start of the single currency as governments increased borrowing to plug budget deficits and fund bailouts of fellow nations crippled by the fiscal crisis. The debt of the 17 euro nations climbed to 87.2 percent of gross domestic product in 2011 from 85.3 percent the previous year, official European Union figures showed today. That’s the highest since the euro was introduced in 1999. Greece topped the list with debt at 165.3 percent of GDP, while Estonia had the least at 6 percent of GDP. Euro-region nations are on the hook for the bulk of the 386 billion euros ($508 billion) in bailouts for Greece, Ireland and Portugal after those nations were forced to seek rescues when their borrowing costs become unsustainable. Concern that Spain and Italy may follow has led their bonds to decline for six weeks, pushing yields toward the 7 percent level that triggered the other aid programs.

    Spain and Italy borrowing rates soar in latest auctions - Spain's borrowing rate nearly doubled in a short-term debt auction as investors fretted over the euro zone's determination to deal with its debts. And Italy raised nearly €3.5 billion in a short-term bond sale today but at sharply higher interest rates amid fresh concerns over the euro zone outlook, the Bank of Italy said. The Spanish treasury said it raised €1.933 billion but the timing could hardly have been worse, with financial markets slumping on concern that Europeans are wavering in their commitment to austerity. The sale of three-month and six-month bills came a day after Spain's central bank declared the country had plunged back into recession in the first quarter of 2012. Markets were shaken after a first round of French presidential elections on Sunday put Socialist Francois Hollande, who wants the euro zone to focus on growth rather than austerity, ahead of incumbent Nicolas Sarkozy. The two contenders face off in a final vote May 6. Further undermining stability, the Netherlands' government collapsed yesterday after failing to reach agreement over austerity measures, placing its AAA credit rating at risk. But Spain still managed to lure strong interest in the auction with overall demand outstripping supply by more than four-to-one.

    Painful Greek austerity bit into 2011 budget gap (Reuters) - Battered Greece saw its budget deficit fall to 9.1 percent of gross output last year as severe austerity required to secure international aid bit into spending. Athens managed a 1.2 percentage point fiscal improvement compared with 2010 but its primary budget balance - which excludes debt servicing costs - has yet to move into surplus as a deep economic slump continues. Greece's economy is in its fifth year of recession and could contract by more than 4.8 percent this year. Unemployment is also a record high, hitting tax receipts and requiring more spending on jobless benefits. "According to provisional data, the deficit of the general government, as measured under the excessive deficit procedure (EDP) is estimated at 19.6 billion euros or 9.1 percent of GDP," the statistics agency ELSTAT said on Monday.

    Bank Of Greece: 2012 GDP Drop Worse Than Expected - Greece is facing yet another year of sharp recession with GDP expected to contract by as much as 5% in 2012, higher than previously forecast, the Bank of Greece said in a report released today. The central bank said the recession would weigh on the ability of Athens to meet its fiscal targets. The forecast is being revised only three weeks after the central bank's monetary policy report had said the economy would contract by 4.5% this year. Greece has been in recession since 2008, and its GDP contracted by a debilitating 6.9% last year. "The recession is expected to be close to 5% in 2012, milder than 2011, but only provided that all structural reforms are implemented," the central bank's report said. It attributed its new projection of a bigger contraction to a slump in consumption and productivity, slower overall business activity and a deterioration in the financial sector. The report underlined that there is no time to waste in implementing the country's economic program, and it urged that after the general election on May 6 the implementation process continue immediately, echoing the fears of Greece's leading European partners that the elections could bring delays. The Bank of Greece conceded that the bigger-than-expected recession in Greece feeds into higher deficits, but argued that it is a mistake to think the strict fiscal discipline is to be blamed.

    More grief for Greece as recession seen deeper (Reuters) - Greece's economy will contract a deeper than expected 5 percent this year, the country's central bank chief said on Tuesday, piling more pressure on to a citizenry already battered by crippling austerity and record joblessness. The projection topped a previous forecast the central bank made in March, when it projected the 215 billion euro economy would contract 4.5 percent after a 6.9 percent slump in 2011. Twice bailed-out Greece is in its fifth consecutive year of recession. Speaking to shareholders at the central bank's annual assembly, George Provopoulos, also a European Central Bank Governing Council member, urged strict adherence to reform and fiscal adjustment commitments Greece has agreed with its euro zone partners, saying they were needed to return the economy to sustainable growth. Athens is under pressure to apply more fiscal austerity to shore up its finances as part of a new rescue package agreed this year with its euro zone partners and the International Monetary Fund (IMF) to avert a chaotic default. Its continued funding under the 130 billion euro package will hinge on meeting targets.

    Greece worse off staying in euro, says Ifo - Greece's ability to recover competitive economic standing will be severely constrained if it continues to use the euro, and other indebted eurozone countries will likely face similar struggles, the head of Germany's prominent Ifo economics institute has said. "I personally believe there's no chance for Greece to become competitive [while] in the eurozone," Hans-Werner Sinn, president of Ifo, said in a luncheon speech in New York on Monday. "If Greece is kept in the eurozone, there will be ongoing mass unemployment. But if they exit, they will see a very sudden recovery," he said, as lower prices boost competitiveness. He also cited risks of other indebted eurozone countries facing severe spending cuts and tax hikes. "Cutting wages and prices to the extent necessary in some southern European countries is impossible, whatever the politicians say," Sinn said. "Policy is unable to overcome the laws of economics."

    How Richer States Finance Poorer Ones - The discourse on the euro crisis is dominated by experts who come from the world of finance; these experts seek a solution in “financial stability.” To them, that means shielding major international banks from the fate of Lehman Brothers, however recklessly these banks may have mismanaged their loan portfolios. Furthermore, it means that interest rates on sovereign debt should be kept artificially low, lest they push the already deeply indebted peripheral nations of Europe — Greece, Italy, Spain, Portugal and Ireland — even further into the debt trap that their public or private sectors had busily built for them during the last decade, abetted by reckless bankers inside the countries and abroad. To achieve this “financial stability,” a standby pool of money between 1 trillion and 2 trillion euros is said to be needed now to prop up the price of the risky sovereign of the periphery and thus to keep interest on it lower than it would otherwise be.  Viewed from the perspective of the real economy, then, “financial stability” has become code for sizable and long-term transfers of real resources from the hitherto better-managed, more productive and internationally more competitive European economies to the heavily indebted countries in the euro club. The latter will ultimately have to be forgiven much of the debt they will have accumulated.It would not be amiss to call these transfers welfare payments. 

    Eurozone Austerity by the Numbers - Today Eurostat released its official tally of the budget deficits recorded by the EU and eurozone countries during 2011: In 2011, the government deficit of both the euro area2 (EA17) and the EU27 decreased in absolute terms compared with 2010, while the government debt rose in both zones. In the euro area the government deficit to GDP ratio decreased from 6.2% in 20103 to 4.1% in 2011, and in the EU27 from 6.5% to 4.5%. In the euro area the government debt to GDP ratio increased from 85.3% at the end of 2010 to 87.2% at the end of 2011, and in the EU27 from 80.0% to 82.5%. During 2011 the borrowing requirements of the eurozone's governments fell by about €180bn, of which nearly 60% was accounted for by the two largest economies, France and Germany.  But expressed as percent of GDP, it was the countries that have been forced to implement tough austerity measures that were at the top of the deficit reduction list between 2009 and 2011.  The following table illustrates.Greece, Portugal, and Spain have substantially reduced their deficits over the past two years, despite the fact that their economies were stagnant or contracting. And of course, their terrible economic performance can be attributed in large part precisely to those very same austerity measures, as contractionary fiscal policy in each country has depressed their economies.  Yet eurozone politicians' obsession with deficit reduction continues -- and continues to have new repercussions every day on the eurozone's economies and governments. 

    Austerity And Growth, Again (Wonkish) Krugman - Kash has a nice summary of what the new Eurostat numbers on budget balance mean. So I thought I’d do a bit more. What Eurostat gives us are budget balances in euroland as a percentage of GDP. Kash focuses on the change from 2009 to 2011 as an indicator of austerity, although as he notes, falling GDP means that the true amount of austerity in places like Greece is much bigger than that. Let’s run with that, and create a crude adjusted measure of austerity. I calculate the amount the budget balance “should” have changed as 0.45*(growth from 2009 to 2011 – 4). In this formula, 0.45 is the average share of government revenue in GDP in the euro area, so this is a rough measure of revenue effects of growth; I’m just assuming that 4 percent would represent normal growth for a euro country over 2 years. And I estimate austerity as the difference between the actual change in budget balance and this predicted change. What do we get if we plot this estimated austerity against the actual change in real GDP 2009 to 2011? It’s worth noting that this also implies that 1 euro of austerity yields only about 0.4 euros of reduced deficit, even in the short run. No wonder, then, that the whole austerity enterprise is spiraling into disaster.

    In Europe, Now What? - Is this the end of austerity? What happens to Europe if the Germany-France alliance is broken?

    Call for Growth Puts Pressure on German-Led Austerity - With political allies weakened or ousted, Chancellor Angela Merkel’s seat at the head of the European table has become much less comfortable, as a reckoning with Germany’s insistence on lock-step austerity appears to have begun.“The formula is not working, and everyone is now talking about whether austerity is the only solution,” said Jordi Vaquer i Fanés, a political scientist and director of the Barcelona Center for International Affairs in Spain. “Does this mean that Merkel has lost completely? No. But it does mean that the very nature of the debate about the euro-zone crisis is changing.” A German-inspired austerity regimen agreed to just last month as the long-term solution to Europe’s sovereign debt crisis has come under increasing strain from the growing pressures of slowing economies, gyrating financial markets and a series of electoral setbacks. Spain officially slipped back into recession for the second time in three years on Monday, after following the German remedy of deep retrenchment in public outlays, joining Italy, Belgium, the Netherlands and the Czech Republic. In the Netherlands, Prime Minister Mark Rutte handed his resignation to Queen Beatrix on Monday after his government failed to pass new austerity measures over the weekend.

    Europe’s Austerity Backlash Gathers Steam in Merkel Test - Europe’s backlash against austerity gained momentum, in a challenge to German Chancellor Angela Merkel’s budget-cutting prescriptions for resolving the debt crisis. French President Nicolas Sarkozy lost the first round of his re-election bid and a revolt against extra spending cuts in the traditionally budget-conscious Netherlands propelled Prime Minister Mark Rutte’s coalition toward an early breakup. Together with anti-austerity rumblings in a campaign for elections in Greece, the shift in grass-roots sentiment at the heart of Europe generated fresh doubts about the German-driven strategy for getting to grips with the two-year-old crisis. “We have organized the track of discipline, that’s very good and we have to continue on that, but we need desperately also to organize the second track, the track of growth, solidarity, investment,” former Belgian Prime Minister Guy Verhofstadt, now a member of the European Parliament,

    IT’S OFFICIAL: Keynes Was Right - This morning brings news that Europe may finally be beginning to soften on the "austerity" philosophy that has brought it nothing but misery over the past several years. The "austerity" idea, you'll remember, was that the continent's huge debt and deficit problem had ushered in a "crisis of confidence" and that, once business-people saw that governments were serious about debt reduction, they'd get confident and start spending again. That hasn't worked. Instead, spending cuts have led to cuts in GDP which has led to greater deficits and the need for more spending cuts. And so on. And the same may well be said for the U.S. next year if the government continues with its plan for "Taxmaggedon." (A huge tax increase on January 1).

    The Big Wrong - Krugman - It’s Official: Keynes Was Right, says Henry Blodget. Recent election results in Europe seem to have raised consciousness in a way literally years of economic data couldn’t: the austerity doctrine that has ruled European policy is a big fat failure. I could have told you that would happen, and sure enough, I did. Did I mention that after three years of dire warnings that the bond vigilantes are attacking, the interest rate on US 10-years remains below 2 percent? It’s important to understand that what we’re seeing isn’t a failure of orthodox economics. Standard economics in this case — that is, economics based on what the profession has learned these past three generations, and for that matter on most textbooks — was the Keynesian position. The austerity thing was just invented out of thin air and a few dubious historical examples to serve the prejudices of the elite. And now the results are in: Keynesians have been completely right, Austerians utterly wrong — at vast human cost.I wish I could believe that this would really be enough for us to move on and consider what can be done, now that we know that the ideas behind recent policy were all wrong. But that’s wishful thinking, I suppose. Nobody ever admits that they were wrong, and Austerian ideas clearly have an emotional and political appeal that is resilient to any and all evidence.

    ‘Berlin Is Running Out of Allies in Euro Crisis’ - German Chancellor Angela Merkel is running out of allies in her drive to solve the euro debt crisis through strict austerity programs.  French Socialist François Hollande looks on course to oust President Nicolas Sarkozy, who has been Merkel's most important partner in the fight to overcome the debt crisis, in a run-off vote on May 6 after beating him into second place in the first round on Sunday.  And Dutch Prime Minister Mark Rutte, whose minority government has been lecturing Greece and other high-debt countries about the need for strict spending cuts, resigned on Monday after the far-right Freedom Party of populist Geert Wilders refused to back budget cuts for the Netherlands, regarded as one of the most stable economies in Europe.  Across Europe, right-wing populists are on the rise, winning votes from ordinary people disenchanted with cuts that have been making their lives harder. In France, the National Front of Marine Le Pen won 17.9 percent on Sunday, the highest result a far-right candidate has ever managed in France.

    Sorry Angela, The Jig Is Up - Let's hope this article by Nicolas Kulish at The New York Times (via Morning Money) represents a turning point in the European crisis.  It's all about how finally, it seems, there's a serious counter-weight to the German idea that austerity is the only way forward. With political allies weakened or ousted, Chancellor Angela Merkel’s seat at the head of the European table has become much less comfortable, as a reckoning with Germany’s insistence on lock-step austerity appears to have begun. “The formula is not working, and everyone is now talking about whether austerity is the only solution,” . “Does this mean that Merkel has lost completely? No. But it does mean that the very nature of the debate about the euro-zone crisis is changin. From trading floors to polling stations to the streets of cities across Europe, the message appears increasingly to be that countries cannot cut their way to fiscal health. They need growth, too. In recent months, powerful voices have joined the chorus, including those of the managing director of the International Monetary Fund, Christine Lagarde, and Italy’s prime minister, Mario Monti. Treasury Secretary Timothy F. Geithner has called repeatedly for Europe to defer budget cutting in favor of some form of stimulus spending.

    A Europe Tired of Cutbacks Has Few Alternatives -— Citizens from Prague to Paris to Amsterdam have made it abundantly clear the last few days that they are tired of the economic austerity forced on them by the euro zone debt crisis. But as the budget-cutting pain of reduced government benefits and social services brings protesters to the streets and drives support for nationalist or far-left parties, it is not clear what the economic alternative might be. Rejecting austerity budgets in favor of more government spending will not automatically ensure economic growth, many economists say. “The last thing these economies need is a debt-financed stimulus program,” said Jörg Krämer, the chief economist of Commerzbank in Frankfurt. Governments in countries like Spain are having enough trouble financing their existing debt, much less coming up with money for stimulus spending. Germany, the only large country in the euro zone with budgetary room to increase its deficit by spending more, is not willing to. (And neither was the Netherlands, at least until its government collapsed Monday over a dispute that essentially involves the austerity vs. growth debate.)

    Dutch crisis deepens as opposition rejects austerity - The biggest Dutch opposition parties refused on Tuesday to back austerity cuts needed to meet EU budget targets after the government fell, deepening the crisis in a nation probably facing a long period of uncertainty until elections. Prime Minister Mark Rutte, whose minority government collapsed on Monday, must now turn to a clutch of tiny parties for help if he is to have any chance of forcing his plan for 14 to 16 billion euros in budget cuts through parliament. With doubts growing across Europe about the price of austerity, parties to Rutte's left said trying to meet the European Union's deficit target would hurt the economy and the Dutch people. To Rutte's right, Freedom Party leader Geert Wilders - who brought down the coalition by refusing to support the cuts - declared that the elections would be a referendum on the EU and Dutch sovereignty.

    Greek families forage abroad to stay afloat in crisis - Put out of business by a shrinking economy that has been crushed by the eurozone crisis, unable to find work at home and desperate to stay afloat financially, Kapetanios, his wife Katerina Germanou and daughter Paraskevi came to London months ago so the parents could find work abroad. In Munich, Maria Zatse dreams of work and frets about improving her faltering German. The 49-year-old was a hairdresser in her native Greece for 30 years. The story for the Kapetanioses and the Zatses is being replayed for Greek families all over Greece and Europe. About 600,000 jobs in debt-riddled Greece have disappeared since 2008 and economic output has shrunk by around 20 percent. So far, more than a fifth of all Greeks are unemployed, creating an army of jobseekers spreading out across the European Union and beyond.

    Greek anger keeps German tourists away (Reuters) - German tourists are in short supply in Greece these days, frightened away by reports of visceral anti-German sentiment in some places, fears of being stranded by strikes and television images of fiery anti-austerity riots. Who in their right mind, after all, would want to go on holiday to a place where they might be called a Nazi?The dearth of Germans is especially noticeable in tourist hotspots like Corinth, an enchanting ancient town 80 km west of Athens famous for the steep and narrow walls of its 6-km (4-mile) long canal that cuts across the Peloponnesian Peninsula.Because tourism accounts for a disproportionately large 15 percent of Greece's gross domestic product (GDP) and Germans are the largest group of visitors, their absence is causing pain."The Germans aren't coming here this year but there's no reason for them to be afraid," said Nicki Nastouli, who works at a tourist shop and restaurant near the rim of the Corinth Canal. "They're not coming because of the problems. But we don't have a problem with German people, only their government." And what a problem. Rioting protesters in Athens have taken to burning German flags and carrying around effigies of Chancellor Angela Merkel in a Nazi uniform. Greek newspaper cartoons depict Merkel and Finance Minister Wolfgang Schaeuble as concentration camp guards with Greeks held inside.

    Immigration Debate in Switzerland: Politician Sparks Uproar with Call to Limit German Workers - - A Swiss politician has prompted a heated debate after suggesting that there are too many German immigrants in her country. "We really have too many Germans in the country," Natalie Rickli, a member of Switzerland's parliament with the right-wing populist Swiss People's Party (SVP), said during a television talk show on Sunday. The actual topic of discussion on the talk show, broadcast on Zürich local television station TeleZüri, was supposed to be Switzerland's decision last week to curb immigration from eight central and eastern European countries. Last Wednesday, the Swiss cabinet, the Federal Council, announced it had decided to invoke the so-called "safeguard clause" in its agreement with the European Union on the free movement of persons. The move will significantly reduce the number of jobseekers from these countries allowed to enter Switzerland for a one-year period. But that initiative apparently does not go far enough for Rickli. On the talk show, she argued that the safeguard clause should also apply to Germans. Many people shared her view that there were "too many Germans" in Switzerland, she said. The other guests on the show reacted with shock, but Rickli kept going. "The parliament should have already activated the safeguard clause in 2009, when it would have also affected the Germans," she said, adding that Switzerland had a problem with the sheer scale of immigration. She said that she had already received a lot of mail from Swiss people saying that they had lost their jobs because cheaper Germans had been hired instead. 

    Greek Central Banker Warns Of Greek Euro Exit --Greece's central bank governor Tuesday warned the country's politicians that any deviation from strict austerity targets after May 6 general elections would risk forcing the country out of the 17-member euro currency bloc, even as the central bank signaled that the economy would contract by worse-than-expected 5% this year. In an unusually blunt warning that cut through much of the lofty rhetoric coming from candidates, George Provopoulos said Greece faced a stark and historic choice between overhauling its economy as a member of the currency bloc, or turning back the clock on decades of economic development and eventual exit from the euro. "There is no easy way out of the crisis. The adjustment must be pursued with determination," Provopoulos said in a speech. "If, after the elections, there is any question about the will of the new government and society to implement the program...the country will then be at risk of finding itself very quickly in a particularly adverse situation." "What is at stake is the choice between an orderly, albeit painstaking, effort to reconstruct the economy within the euro area, with the support of our partners; or a disorderly economic and social regression, taking the country several decades back, and eventually driving it out of the euro area and the European Union," he said

    There Goes Greek GDP: Nazional Lampoons Greek Vacation Just Got Cancelled - As if the Greeks haven't suffered enough from Northern European actions (admittedly in response to their own actions), it seems the anti-German sentiment is keeping the wealthy tourists away from the beaches. As Reuters notes today, 'German tourists are in short supply in Greece these days, frightened away by reports of visceral anti-German sentiment in some places'. Data for the main summer holiday season shows pre-bookings from Germany down by some 30 percent. We guess the pictures of Molotov cocktails being thrown, city-wide strikes, and cardboard cities full of unemployed youths was too much but as one Greek tourist-shop-owner clarified "They're not coming because of the problems. But we don't have a problem with German people, only their government." Tourism - the one remaining possibility for Greece to drag themselves out of the quagmire (aside from olive oil and yoghurt) - is now under pressure as The Germans ("That's just the way Germans are: if there's trouble in some country, then Germans just don't go there on their holidays.") wage "an economic war against Greece". Sadly the xenophobic and nationalist tensions are indeed rising (as we warned many times in the past - and suggest will be the ultimate undoing of the political compact in Europe) as the crisis had revived anti-German sentiment from World War Two that most thought had long since disappeared. "The Greeks moved on and tried to forget, then this. If you ask me, Germany owes Greece billions for all the murders and war crimes. Germany should pay Greece what it owes."

    Greece to seize money from suspected tax evaders' accounts  - The Greek government is to begin seizing money from the bank accounts of suspected tax evaders, Finance Minister Filippos Sachinidis told Skai TV on Thursday. Sachinidis said that the relevant authorities have been instructed to seize the amount that account holders are suspected of owing to the state. The minister said that this would happen before suspected tax evaders go on trial. Banks, insurance companies and the stock market will have to submit the full details of transactions by taxpayers so that the ministry can draft a property profile for each person and compare it with the tax statement submitted. Public and private hospitals to send information about the doctors they employ and their activity. Private insurance companies as well as social security funds must supply in electronic form all the statements they issue to their clients or beneficiaries for tax purposes, showing the taxpayers’ payments and contributions, while utilities, including cell phone networks, must supply account data such as total annual bills. Credit card companies will also have to submit data on transactions in Greece for cards issued not just in this country but also abroad.

    Rising Italy-to-Spain Yields Keeping Banks on ECB's Life Support -- European lenders, more reliant than ever on emergency aid after borrowing $1.3 trillion from their central bank, may need additional cash infusions until policy makers stem the crisis engulfing Spain and Italy. After more than 30 bond sales in the first quarter, no bank has sold unsecured debt this month, and the cost of insuring against default has soared to levels last seen in January. Financial stocks, which rallied 20 percent following the European Central Bank's December decision to provide unlimited three-year loans, are now 2 percent lower since then. Investors are balking after some lenders used the ECB cash to boost holdings of sovereign debt and governments struggled to rein in deficits. Because banks post collateral in exchange for the ECB loans, the amount unsecured bondholders would get back in a default has shrunk. That has raised funding costs for what Morgan Stanley estimates is about 700 billion euros ($924 billion) of debt lenders must refinance by the end of 2013.

    Spain Following in Ireland’s Footsteps - Watching developments in Spain since the beginning of April has been source of non-stop déjà vu for anyone who spent 2010 watching events unfold in Ireland. There are a number of striking similarities between the position in which the Spanish government now finds itself and the Irish government’s situation in November 2010, just before it was forced into an EU/IMF bailout programme. Based on Ireland’s experience, a bailout for Spain seems inevitable. While many have deemed the eurozone (EZ) crisis to be fiscal in nature, it has never been that simple. It is true that neither Ireland nor Spain were as fiscally healthy as the headline numbers they were posting may have suggested. But that fiscal vulnerability was largely a reflection of other problems in the two economies. Both Ireland and Spain had allowed their public finances to become reliant on property bubbles that had also seen the countries’ banks over-extend themselves and their construction sectors grow unsustainably large.When the property bubbles burst, this house of cards fell in on itself. Banks in the two countries faced massive losses and in some cases were pushed to insolvency, while in the real economy unemployment spiked as construction activity ground to a halt. The Irish and Spanish governments were left to pick up the tab, just as government revenues started to slump.

    Spain presents toughest austerity budget since Franco era (video) The Spanish government has presented to parliament the country’s most austere budget since the Franco dictatorship. Another round of cuts worth 27 billion euros is aimed at reducing Spain’s huge debt, and follows other austerity measures that have already sparked street protests. The Budget Minister Cristobal Montoro said there was no other option. The government is trying to cut the annual deficit progressively, under the watchful eye of often sceptical investors. “The situation is difficult, very complicated and the government is aware of that, so that is why we are taking those decisions to overcome this grave situation”, said Prime Minister Mariano Rajoy. Concerns over Spain’s ability to control the deficit have had a negative impact on the markets and pushed up the country’s borrowing rates, aggravating the debt problem. The fact that Spain has tipped back into recession only makes matters worse, as income from taxes is likely to fall, with expenses for welfare set to rise.

    Why Spain Won’t Regain Market Confidence - Spain is back in the limelight in the EZ crisis, where it has always belonged based on its fiscal, financial and economic fundamentals. Throughout this crisis, the liquidity or solvency of various sovereigns has been determined to a large degree by market sentiment. For Spain’s borrowing costs to recede again to sustainable levels, Spain needs to regain investor confidence. As Spanish government bond yields began to soar in early April, the government announced on April 9th an additional €10bn in spending cuts. This came just days after prime minister Mariano Rajoy announced €27bn in austerity measures and tax hikes in the 2012 budget. Markets weren’t at all impressed by the additional cuts and bond yields rose further, proving that the Spanish government is truly in a no-win austerity/recession spiral. If the Spanish government does not announce further austerity measures, the markets think it is not serious about hitting its fiscal targets and shun Spanish sovereign debt. If the Spanish government does announce additional austerity measures, however, the markets fret that the swingeing cuts will push Spain further into recession and shun Spanish government debt. No matter what the Spanish government does, investors are spooked, and this is unlikely to change over the next year unless Spain shows signs of being on a path towards sustainable growth.

    Austerity bites - ECONOMIC developments have the austerity-growth connection in the news once again. First, Spain continued its austerity push, even as it became clear that the Spanish economy remains in a recession that's undermining fiscal goals. And secondly, Britain's economy appears to have contracted in the first quarter, placing it officially in recession—thanks, say the critics, to the government's ambitious fiscal consolidation programme. The temptation, to which many writers are succumbing, is to say that fiscal cuts automatically translate into slower growth, and that weak economies should delay austerity as much as possible. That's more right than wrong, but a little too oversimplified for my taste. When it comes to questions of austerity and growth there are a few key things to remember. First, there is no "monetary demand" distinguishable from "fiscal demand". If there is an output gap that could potentially be filled by fiscal expansion, that same gap is amenable to monetary expansion. And so the impact of fiscal changes on the economy depends quite heavily on the central-bank reaction. When we look at the Alesina-Ardagna evidence on the relative success rate of spending-cut versus tax-rise austerity, we find that the difference in impact on growth is mostly attributable to differing central banks responses: central banks ease to offset spending cuts but are reluctant to do so for tax hikes, perhaps because spending cuts are seen as the more durable form of consolidation. In weighing the impact of austerity, then, the first question to ask is what the central bank is doing?

    The Meaning of “Austerity Measures” - The eurozone is slipping into a recession that could have been avoided. Had policymakers provided fiscal support for stricken countries in the South and guarantees on their government bonds, (as the USG does for US Treasuries) then their economies could have continued to grow while the necessary reforms were put in place. But the Troika (The IMF, the ECB, and the European Commission) decided to make the bailouts conditional on member states’ acceptance of harsh austerity measures which forced leaders to slash government payrolls, services and programs. The result was entirely predictable; economic activity began to sputter as one country after another succumbed to a vicious slump.  So the downturn was a basically matter of choice, a self-inflicted wound brought on by poor decision-making in Brussels and Frankfurt. Anyone could see what the result was going to be because contractionary policy leads to economic contraction. Implement policies that are designed to shrink the economy, then the economy will shrink.

    Spain Yields at 6% Show Bank, Economy Risk - As Spain’s recession undermines efforts to cut the deficit, the risk of bank losses is keeping 10-year yields at almost 6 percent as investors speculate the government will be forced to bail out the financial system. The nation’s 10-year borrowing costs have climbed about 70 basis points this year as Prime Minister Mariano Rajoy struggles to convince investors he can control public finances amid soaring unemployment and a contracting economy. Banks threaten to disrupt the premier’s efforts as bad loans reach the highest levels in almost two decades. “Spain is likely to need support in both the banking and government sectors,” said Jamie Stuttard, head of international bond portfolio management at Fidelity Investments, which has $1.2 trillion of assets. “Government bond market developments hold the key.” Yields on 10-year Spanish bonds surpassed 6 percent on seven trading days this month, boosting concern that borrowing costs may reach levels that prompted bailouts for Greece, Ireland and Portugal.

    S.&P. Cuts Its Rating on Spain, Citing Debt - Standard & Poor’s downgraded Spain’s credit rating on Thursday, saying that the country’s sovereign debt levels were too high and that its banks would need an infusion of aid as the country’s economy contracted. S.& P., in its second downgrade of the country this year, lowered Spain’s long-term rating two notches, to BBB+ from A, with a negative outlook, indicating the possibility of a further reduction. It also lowered the country’s short-term ratings. The downgrade came with Spain emerging as a looming problem for Europe, with fears that the country will be next in line for a huge bailout, after Greece. In January, S.& P. downgraded nine European countries, including France, Italy and Spain, while warning that as Europe’s debt crisis entered its third year, not enough measures had been taken to shore up its financial system. S.& P. repeated that complaint Thursday. “In our view, the strategy to manage the European sovereign debt crisis continues to lack effectiveness,” it said, even as it commended Spain’s efforts at reform.

    Spain Cut by S&P for 2nd Time This Year on Banks, Economy. - Spain's sovereign credit rating was cut for the second time this year by Standard & Poor's on concern that the country will have to provide further fiscal support to banks as the economy contracts. S&P lowered the long-term grade to BBB+ from A, with a negative outlook. Spain’s short-term rating was reduced to A-2 from A-1, New York-based S&P said in a statement yesterday.  “Spain’s budget trajectory will likely deteriorate against a background of economic contraction,” S&P wrote in the statement yesterday. “At the same time, we see an increasing likelihood that Spain’s government will need to provide further fiscal support to the banking sector. As a consequence, we believe there are heightened risks that Spain’s net general govern debt could rise further.” “We could also consider a downgrade if political support for the current reform agenda were to wane,” the S&P statement said. “Moreover, we could lower the ratings if we see that Spain’s external position worsens or its competitiveness does not continue to approach that of its trading partners, a key factor for Spain to return to sustainable economic and employment growth.”

    Spanish jobless rate soars to record 24.4% - Spain announced on Friday that its jobless rate surged to a record 24.4 percent at the end of March, pounding financial markets already reeling from a Spanish sovereign debt downgrade. A total 5.64 million people searched in vain for work in the recession-bound, deficit-plagued economy, the National Statistic Institute said. Already, Spain had the highest unemployment ratio in the industrialized world, as the slumping economy failed to absorb the millions of workers cast out of jobs when a property bubble imploded in 2008. In a climate of recession, compounded by a renewed zeal for austerity to rein in the deficit and curb mushrooming debt, the jobs market deteriorated dramatically. The unemployment rate soared to 24.44 percent of the potential workforce at the end of March from 22.85 percent three months earlier, the National Statistics Insitute report showed.

    Spain's triple blow: downgrade, unemployment figures and mortgage-default fears‎ - Poor economic data released on Friday comes hot on the heels of Standard & Poor’s two-notch sovereign credit downgrade to BBB+, though markets had largely priced this in. Data released on Friday states that unemployment in Spain is more than 24%, the highest in 18 years, and retail sales have dropped 3.7% year on year – the 21st straight month that such sales have declined. The timing is problematic for Spain’s May 3 auctions of three- and five-year debt, say markets players. “This puts more focus on next week’s bond auctions – while the market may have seen it coming, it certainly can’t help,” says Daniel Baker, head of FX and fixed income for Europe and emerging markets at Informa Global Markets. Against this backdrop, markets fears over Spanish mortgage delinquency rates have snowballed1. However, Santander CEO Alfredo Saenz derided these fears at a news conference outside the bank’s headquarters:

    Depression in Spain: Unemployment Rate Up .5 Percentage Points to 23.6%; Expect Much Higher Rates Later This Year; When is the Breaking Point? - Via email from Barclays Capital, Spain: This morning Spain released labour market statistics for Q1. Seasonally adjusted, the unemployment rate rose to 23.6% from 23.1% in Q4 last year (Figure 1). We think that the labour market's deterioration is likely to continue over the next 3-4 quarters. We look for unemployment to peak at nearly 26% in H1 2013, before slowly starting to decline. Beyond cyclical lags, the Spanish labour market trend, to a large extent, is a reflection of the hangover from a boom-bust in the construction sector, which for many years has been an important source of employment growth (Figure 2). It seems that the adjustment in the construction sector's employment is close to an end: it now contributes c.10% to total employment, in line with the long-term average pre the housing sector boom. However, we think that the unemployment rate is likely to stay elevated for a while and that it will decline only slowly as the economy likely starts to grow in H2 2013. There are at least two reasons for our view: 1) fiscal consolidation will negatively affect consumers' spending, economic activity and consequently employment; 2) As we pointed out in Spain: Assessing the fiscal and labour market reforms, we think that Spain needs better "active labour market policies" that can address long-term unemployment (Figure 3) and the retraining of young (in some cases) low-skilled unemployed workers (Figure 4).

    Spain jobless rate rises near one in four - Nearly one Spaniard in four is unemployed, according to data released on Friday, as the country’s economic and financial predicament prompted a government minister to talk of a “crisis of enormous proportions”. The data from the National Statistics Institute showed 367,000 people lost their jobs in the first three months of the year. That means more than 5.6m Spaniards or 24.4 per cent of the workforce are unemployed, close to a record high set in 1994. The data, which follow a sovereign credit rating downgrade, prompted José Manuel García-Margallo, foreign minister, to say that they were “terrible for everyone and terrible for the government”. He compared the European Union to the doomed liner Titanic, saying that passengers would be saved only if all worked together to find a solution. Half of young people under 25 have no work and in more than 1.7m households no one has a job. That contrasts starkly with fellow eurozone country Germany, where unemployment is at its lowest point since east and west reunited in 1990.

    Merkel Blasts Hollande as Spain Worries Increase - With the dark clouds of the ongoing euro crisis thickening over Spain this spring, German Chancellor Angela Merkel on Thursday staunchly defended her focus on euro-zone austerity and once again insisted that the EU fiscal pact, signed in March, would not be revisited. In comments clearly aimed at French presidential candidate François Hollande, Merkel told Germany's WAZ media group that the pact "cannot be renegotiated." The Socialist Hollande has suggested that, if he emerges victorious over French President Nicolas Sarkozy in the second round of elections on May 6, he would ask for changes to the agreement. The fiscal pact, which imposes strict new rules governing budget deficits and sovereign debt, was signed by 25 of the 27 European Union member states. The UK and Czech Republic declined to join. Hollande's reply was not long in coming. Speaking to broadcaster France 2 on Thursday evening, he said: "It is not Germany that will decide for the entirety of Europe." When asked what he plans to say to Merkel should he win the election, he said: "I will tell her that the French people had made a decision that envisages a renegotiation of the pact."

    Europe. Rinse. Repeat. - So Spain has got the downgrade and now folks have worked themselves into a lather. The question remains, as it has for the last 18 months: what did you think was going to happen? And the truth is, it's going to happen again. This is not happening, primarily, because Southern European countries refuse to cut spending.  Many of the countries may need to cut spending and regulation but these crises are happening because Southern European countries aren't growing and when you don't grow, your deficit blows up.  Recessions do that (Mr. Ryan, take note). Europe has a banking crisis from under capitalized banks who hold rapidly depreciating assets (in the form of these government bonds) so there is a constant danger of insolvency and runs on them.  It's not so different from the US banks in 2008 in that way.  But, rather than directly recapitalize the banks a la TARP, the ECB is giving the banks cheap loans to keep themselves running. They are taking the money and calling in every loan they can to reduce their leverage.  So it has set the stage for an awful credit crunch which undermines growth.

    BBC News - Spanish unemployment hits record 5.64 million: The number of unemployed people reached 5,639,500 at the end of March, with the unemployment rate hitting 24.4%, the national statistics agency said. The figures came hours after rating agency Standard & Poor's downgraded Spanish sovereign debt. Official figures due out on Monday are expected to confirm that Spain has fallen back into recession. Earlier this week, the Bank of Spain said the economy contracted by 0.4% in first three months of this year, after shrinking by 0.3% in the final quarter of last year. Other figures released on Friday showed that Spanish retail sales were down 3.7% in March from the same point a year ago, the 21st month in row sales have fallen. 'Huge crisis' In the first three months of the year, 365,900 people in Spain lost their jobs.

    Spain to persist in ‘suicidal’ austerity policies despite 25% unemployment rate - Figures released by the Spanish government on Friday show that country with an unemployment rate of 24.4%, the highest in Europe, and a rate of over 50% among 16-24 year olds. But despite the bad economic news, that country’s leadership appears determined to stick with the austerity program it has pursued for the last two years and has even recently announcing an increase in consumer taxes for next year. According to the San Francisco Chronicle, “Prime Minister Mariano Rajoy passed a plan in February to make it cheaper for employers to let workers go while raising taxes and cutting spending including health care and education.” As explained by The New York Times, the Spanish government’s hope has been that even if growth and jobs suffer from draconian budget cuts, the lower interest rates that result will keep bond investors happy. But instead, foreign capital has been fleeing the country.

    Spain Is Still Awaiting the Payoff From Austerity— Since the beginning of the debt crisis in Europe more than two years ago, defenders of the euro currency union have stuck to a basic argument: if the euro zone’s weaker economies would only keep pursuing policies of austerity, even as growth collapsed and job losses mounted, they would be rewarded by investors more willing to buy their bonds. Yes, the social cost would be high, but over the long term economies would benefit from the lower interest rates that can come with the seal of approval from global bond investors. Or so goes the argument. That approach, though, has failed in Greece, Ireland and Portugal. And now it is being severely tested in Spain, where the more the government promises to cut its budget deficit, the more foreigners are unloading their Spanish bond holdings. Late Thursday, when Standard & Poor’s jumped into the fray by slapping Spanish bonds with a two-notch downgrade, it gave public voice to what investors have been sensing for months now — that it will be nearly impossible for Spain to meet its current deficit-lowering target amid one of the most severe recessions in the euro zone. Yet another batch of grim job figures from Spain on Friday seemed to underscore this contention. Spain’s unemployment rate is now 24.4 percent, the highest in Europe and an especially stark figure given that the Madrid government has not yet begun to lay off public sector servants in any significant number.

    ECB urges euro zone to share bank rescue costs (Reuters) - The European Central Bank called on authorities to set up a body to manage bank rescues in the euro zone, marking the central bank's strongest intervention yet in the debate on whether the costs of bailing out troubled banks should be shared. Having been firmly rebuffed by key euro zone members so far during the debt crisis, the idea of a rescue fund that would cover all banks in the currency bloc is now gaining traction as policymakers begin to suspect it may be the only way of snuffing out investors' fears about the bloc's fragile banks. "The case for strengthening banking supervision and resolution at a euro area level has become much clearer (as a result of the crisis)," ECB President Mario Draghi said at a conference on financial integration. "Work on this would be most helpful at the current juncture," he added.

    The ECB is on Mars - Overnight the president of the European Central Bank, Mario Draghi, gave a speech to the Hearing at the Committee on Economic and Monetary Affairs of the European Parliament. The speech was not particularly out of line with what Mr Draghi usually says, such as: Available indicators for the first quarter of 2012 broadly confirm a stabilisation in economic activity at a low level. Latest developments in survey data are mixed, highlighting prevailing uncertainty. Looking ahead, growth should be supported by foreign demand, the very low short-term interest rates as well as our non-standard measures. At the same time, downside risks relate in particular to a renewed intensification of tensions in euro area sovereign debt markets and their potential spillover to the real economy. Further increases in commodity prices may also hamper economic activity. This is the same speech lead-in we have been hearing since Mario Draghi took over the helm of the ECB from Jean-Claude Trichet. Given recent PMI data much of this statements appears to be completely disconnected from the reality of what is happening in Europe, but this isn’t the first time I have noted Mr Draghi’s apparent delusion.

    Romanian government toppled, Czechs face test too (Reuters) - Romania's opposition torpedoed the center-right cabinet in a confidence vote on Friday, raising the prospect of months of political turmoil and questions over a belt-tightening campaign that has caused a wave of protests against IMF-backed reforms. Prime Minister Mihai Razvan Ungureanu's two-month-old government is the latest in a string of austerity-minded ruling coalitions that have fallen across the European Union in disputes over spending cuts and tax hikes. The defeat came ahead of another confidence vote, in the Czech Republic, whose budget-cutting cabinet is expected to survive but may find itself hamstrung by infighting among its scandal-plagued parties and widespread public anger over its policies. The European Union's second-poorest member slashed public sector salaries and raised sales taxes to put its economy on a more solid footing, but the measures have hit the poorest in the country of 22 million, which is only now emerging from a two-year crisis-induced recession.

    Italy aims to curb evasion with €1000 cash limit - Italian Prime Minister Mario Monti's technocrat government has introduced a €1,000 euro ceiling for all cash transactions. It's an effort to curb under-the-counter payments in a country where dentists, masons and plumbers often offer discounts for bills settled in cash. Tax evasion in Italy is worth an estimated €120 billion euro a year. Italian banks are launching cheap current accounts for low-income households and pensioners as a government crackdown on tax evasion limits the amount of payments that can be made in cash. An estimated 850,000 pensioners in Italy do not have a bank account according to the country's banking association. The government's move - flagged some weeks ago and formally launched today - has caused an outcry among low-earning Italians who are now being forced to open a bank account to receive payments above the €1,000 limit.

    Italian Borrowing Costs Jump at $7.9 Billion Auction - Italy sold 5.95 billion euros ($7.9 billion) of bonds today and the country paid 60 basis points more than a month ago to sell 10-year debt as Standard & Poor’s downgrade of Spain fueled concern about securities of so-called peripheral countries. The Treasury sold the 10-year benchmark at a rate of 5.84 percent, up from 5.24 percent at the previous auction on March 29. Investors bid for 1.48 times the amount offered, down from 1.65 times last month. The Treasury also sold 2.42 billion euros of five-year debt to yield 4.86 percent compared with 4.18 percent at the previous auction last month. .Italian bonds were weaker going into the auction after Standard & Poor’s cut its rating on Spain by two levels to BBB+ yesterday, saying the country may need to pour more money into shoring up the nation’s banks. Italian and Spanish 10-year yields have both risen about 60 basis points this month after both countries pushed back deficit-reduction goals, citing the deepening recession.

    Bank of Ireland Says Mortgage Arrears Increase This Year - Bank of Ireland Plc, the nation’s largest lender by assets, said the proportion of its Irish mortgages in arrears rose this year amid a weak economy and high unemployment. The bank, which had 5.6 percent of Irish home loans more than three months behind in payments in December, expects loan losses to reduce from 2011, the Dublin-based company said in a statement today. It posted a 1.94 billion-euro charge last year. “Given the continued difficult conditions in the Irish economy, our Irish business customers who have a high dependence on the domestic market continue to face challenges,” Bank of Ireland said in the statement.

    Ireland sees support for fiscal treaty wane - With six weeks to go before Ireland votes on the European fiscal treaty there are signs the government’s campaign for a Yes vote is in danger of unravelling as public attitudes towards austerity harden and instability in Europe feeds into its referendum debate. On Wednesday the Irish trade union movement said it could not support the treaty, which would tighten budget rules and introduce penalties for states that break the rules. Opponents of the treaty also threatened to take legal action against the government’s €2.2m information campaign, which they allege breaches a constitutional requirement in Ireland that all material paid for by public money should be impartial. . “Everyone thinks it is a bad treaty. We don’t see any merit in it. Opinion polls show a slim majority (30 per cent) in favour, with 23 per cent against. But with 39 per cent of the public undecided concern is rising in government circles that opinion could swing against the treaty during the campaign, as it did in 2008 when Ireland rejected

    Eurozone Retail Sales Plunge at Strongest Pace Since Late-2008; German Retail Sales Plunge Into Contraction; French Retail Sales Plunge at Record Pace; Record Job Losses, Record Retail Plunge in Italy - The word of the day is plunge. Retail sales fell like a rock in Germany and fell at a record pace in France. Jobs and retail sales plunged at a record pace in Italy, and in general, did a nose-dive across the entire Eurozone. Please Consider the Markit Germany Retail PMI® Report. Fastest drop in retail sales since April 2010 as year-and-a-half run of growth comes to an end.Lower sales and strong market competition resulted in a sharp and accelerated decline in margins across the German retail sector. The latest fall in margins was seventeenth in consecutive month and also the steepest for two years. Please Consider the Markit France Retail PMI® Report. French retail sales fall at survey-record rate in April  Please Consider the Markit Eurozone Retail PMI® Report. Plunging to its second-lowest level on record in April, the PMI hit 41.3, down from 49.1 in March. The latest figure signaled the largest monthly fall in retail sales across the single currency area since the depths of the global financial crisis in November 2008 (40.6). Eurozone retail PMI figures are based on responses from the three largest euro area economies. For the first time since September 2010, retail sales fell across Germany, France and Italy. The rate of contraction in Germany was the fastest since April 2010, while French retailers posted a survey-record drop as they reported disruption due to the presidential elections. Italy continued to see the steepest overall rate of decline, however, as the pace of contraction reaccelerated to approach the record level posted in January.

    Joseph Stiglitz | Austerity, and a New Recession? - Politics Is at the Root of the Problem - Austerity policies are driving us towards a double-dip recession, warns US economist Joseph Stiglitz. He sat down with Martin Eiermann to discuss new economic thinking and the influence of money in politics.

    Euro Austerity, Continued - Krugman - Martin Wolf does his own version of my austerity versus growth analysis; he uses a different measure of austerity and a different time period, but the results are basically the same. Martin’s graph, which would be unreadably small in this format, is here. To focus things a bit, here’s a reduced set of countries using the Wolf definitions of growth and austerity:Basically, what we’re seeing is the contrast between the forced-austerity periphery and the core. Notice, also, that tales of German austerity are greatly exaggerated; the Germans haven’t actually done much real austerity, just as we here haven’t done much real stimulus. You can try to make excuses here, but imagine what the austerians would be saying if the correlation went the other way.

    'Europe Could Economize Itself to Death' - Leaders across Europe continued to struggle Thursday with backlash against the largely German-driven austerity measures imposed as a result of the ongoing euro zone debt crisis. In the Netherlands, where the ruling government coalition collapsed last weekend over failure to reach a deal on the country's budget, Finance Minister Jan Kees de Jager told reporters that he had constructive talks with different political factions. "I cannot say there is the prospect of an agreement," De Jager told reporters on Thursday. "But I see reason to continue talks." Government instability in the Netherlands has translated into shaky markets this week, and further signals indicated a growing level of popular resistance to austerity measures as a solution for the debt crisis. Large-scale protests over the financial crisis have been staged recently across Europe, including in the Czech Republic, where 100,000 people took to the streets in Prague over the weekend to oppose government reforms and cuts. On Wednesday, European Central Bank (ECB) head Mario Draghi made headlines by calling for a "growth pact" to help Europe out of the financial crisis. French Presidential candidate Francois Hollande, who is leading in the polls in advance of his country's May 6 runoff election, jumped on the comments. Hollande has proposed renegotiating the euro zone's fiscal pact to add provisions for stimulating growth

    Austerity Backlash Unites European Leaders - It's so nice to see Europe in agreement once again. Whether it's German Chancellor Angela Merkel, European Commission President José Manuel Barroso or French presidential candidates François Hollande and Nicolas Sarkozy -- everyone seems to think a "growth pact" for the continent is a good idea. But it is precisely this agreement that should make one skeptical -- because all the vague phrase really does is verbally lump together Europe's tremendous conflicts of interest.  The suggestion came from European Central Bank (ECB) President Mario Draghi. "We have had a fiscal compact," Draghi told the economic and monetary affairs committee of the European Parliament on Wednesday, referring to the treaty European governments signed in March, pledging to toughen their spending rules. "What is most present in my mind now is to have a growth compact."  Since then, the concept has garnered acceptance from all sides. "Growth is the key, growth is the answer," European Commission President Barroso said in a speech. In France, where the presidential campaign continues, both conservative incumbent Sarkozy and his Socialist challenger Hollande saw affirmation of their own positions on the issue. Hollande said it went in the same direction as his earlier policy suggestions, while Sarkozy said that a policy based on austerity alone would be a mistake.

    Brussels to relax 3pc fiscal targets as revolt spreads The European Commission is preparing a major shift in economic strategy, fearing that excessive fiscal tightening will inflict unnecessary damage on a string of eurozone countries. Officials believe they have enough legal leeway to relax budget deficit targets for eurozone states without violating the Stability and Growth Pact, though the plans risk a serious showdown with Germany. "The Stability Pact is not stupid. There are elements of flexibility when growth is lower than expected," said a senior Commission strategist.  Current EU rules stipulate that every state must cut its deficit to 3pc of GDP by next year but this is not written in stone. "So long as a country is doing its homework and taking 'effective action', we can show some flexibility," the strategist said.

    Growth will save us? You bet! - There are so many reasons for believing that the European ‘recovery’ plan is not working now and will continue to not work no matter how long we are forced to subsidize it. Today we can add one more reason – Mr Francois Hollande is now the favourite to beat Mr Sarkozy and become France’s next President. Mr Hollande evidently does not believe the pious fiction that underpins almost the whole European and in fact global fiction of recovery, namely that there is now, or will be soon – quite soon, fairly soon, just over the next hill… some growth. For the financial class who rely on endless public bailing of the banks, and whose chosen political agenda is to cut the State, the very prospect that Mr Hollande might replace Mr Sarkozy is enough for all the European markets to head straight down. Germany and Spain are both down over 2.7%.  Why should this be so? Because Mr Hollande has made it clear he will ‘renegotiate’ France’s role in Europe’s various bail out plans. Any such renegotiation would leave Europe’s bail-out fund fiction in tatters. What then for the financial elite and their insolvent private banks?

    How Much Bigger Can TARGET2 Imbalances Grow? Goldman Answers: "A Lot" - Back in December, Goldman Sachs entered the fray of what has since become the most sensitive topic for Germans (courtesy of this particular exponentially rising chart), namely the German funding of Europe's current account via the TARGET2 balance. Since then much has been said, up to and including a letter that Jens Weidmann sent to Mario Draghi expressing a concern about the "net receivable" status of the German central bank vis-a-vis the periphery. Unfortunately, since then the Bundesbank added another nearly EUR100 billion in net deficit balance, which has hardly helped the German people sleep better at night. So in the meantime, one question has arisen: "how much more can the TARGET2 imbalances increase?" The scientific and, non-scientific answer, comes from Goldman Sachs: "a lot."

    Germany Folding? Europe's Insolvent Banks To Get Direct Funding From ESM - We start today's story of the day by pointing out that Deutsche Bank - easily Europe's most critical financial institution - reported results that were far worse than expected, following a decline in equity and debt trading revenues of 23% and 8%, but primarily due to Europe simply "not being fixed yet" despite what its various politicians tell us. And if DB is still impaired, then something else will have to give. Next, we go to none other than Deutsche Bank strategist Jim Reid, who in his daily Morning Reid piece, reminds the world that with austerity still the primary driver in a double dipping Europe (luckily... at least for now, because no matter how many economists repeat the dogmatic mantra, more debt will never fix an excess debt problem, and in reality austerity is the wrong word - the right one is deleveraging) to wit: "an unconditional ECB is probably what Europe needs now given the austerity drive." However, as German taxpayers who will never fall for unconditional money printing by the ECB (at least someone remembers the Weimar case), the ECB will likely have to keep coming up with creative solutions. Which bring us to the story du jour brought by Suddeutsche Zeitung, according to which the ECB and countries that use the euro are working on an initiative to allow cash-strapped banks direct access to funding from the European Stability Mechanism. As a reminder, both Germany and the ECB have been against this kind of direct uncollateralized, unsterilized injections, so this move is likely a precursor to even more pervasive easing by the European central bank, with the only question being how many headlines of denials by Schauble will hit the tape before this plan is approved.

    Biderman Bets Against A Better Europe  "Europe is in big trouble, and the trouble is getting worse - much worse" is how Charles Biderman begins his latest missive. The diatribe focuses on the shortcomings of both the left (the existing political structure of government-dominated economies) and the right (a German-style austerity program of slashing spending and raising taxes) of inane politicians in Europe as the two main issues of over-spending and declining economic activity come home to roost. Starting from the Euro's inception and its implicit permission to allow each country to borrow as much as they want without regard to what was going on in their local economy is just as pernicious as the cradle-to-grave welfare state that is the prevailing mantra "everyone deserves to be taken care of". Therein lies the crux of the matter as borrowing (excessively) to support the people's supposed 'deserved' welfare is viewed as 'just-and-fair' whereas in reality, simply put, "the economies of most of Europe do not work." The Bay-Area bad-boy does offer reasoned solutions that offer hope for growth as opposed to just austerity for the sake of it as, among other things, he suggests eliminating red-tape to create a more entrepreneurial environment but ultimately he sees the probability of this as low and suggests being short via EUO (the double-levered Euro short) and EMZ (short non-USD developed - mostly Europe - markets).

    'Economic unfairness' growing, says BBC poll - A new poll for the BBC World Service has found widespread perceptions of economic unfairness. The poll found that more than 50% of respondents in 17 out of 22 countries believe economic benefits and burdens are not fairly distributed in their own nation. But there was also strong support for free market capitalism. Among those holding that view, most thought it had problems that could be addressed through regulation. The poll of developed and developing nations, which questioned almost 12,000 in 22 countries between December and February, found that a majority in most countries saw economic unfairness around them. In some countries, the view was held by an overwhelming number of respondents: 90% in the case of Spain; 80% or more in France, South Korea and Chile, and close to that level in Russia. In the United States it was nearly two thirds, and it was 61% in the UK. In one country, Ghana, the perception of unfairness was less than 50%, but still ahead of the number thinking things were fair. Four countries returned different results. In Australia, Canada, India and Kenya over half said that the benefits and burdens were fairly distributed.

    UK Fund Manager Challenges Deutsche Bank on Executive Pay - Yves Smith - It’s taken a few years, but the revolt against extractive pay in banking is getting traction. The UK fund manager Hermes* is leading a charge against the pillar of the German establishment, Deutsche Bank, over compensation and succession planning. Hermes, which is leading 27 funds that hold only 0.5% of the votes, is urging other shareholders to vote no on the annual resolution approving the supervisory board’s performance for the past year. A bit of background per the Financial Times: The investor group is particularly angry that Europe’s ­largest bank by assets did not give shareholders the opportunity to vote on its remuneration report for last year. The bank’s move followed a rejection by 42 per cent of shareholders of the pay system the year before, the second worst voting result on such a matter in the German blue-chip Dax index. The bank has put the vote on executive pay back on to the agenda for the AGM. Now this might seem as if this measure is getting headlines by virtue of coming right after the shareholder rejection of Vikram Pandit’s $15 million pay package, but the Hermes move is significant in its own right. The UK investor has made itself a force to be reckoned with in Germany, having launched a proxy fight against Dax 30 company Infineon.

    Inflation targeting and distortions - With inflation proving to be more persistent than had been initially anticipated in the UK at the moment and evidence showing that real wages are currently lower than they have been for some time, there are inevitably going to be calls for the Bank of England to tighten monetary policy in order to bring CPI inflation back down to within its target range. But this would be totally inappropriate, not only because a significant proportion of the higher inflation rate is a result of higher oil prices, but also because of the lacklustre economic growth rate in the UK and the distortionary impact that monetary policy tightening would impose on the economy. As already briefly mentioned above the majority of the price increases over recent months have been a result of the negative supply side shocks within the oil market as fears over conflict in the middle east with Iran, the already imposed trade restrictions and the further threat of the closure of the Straight of Hormuz have led to realised and potential further downside supply restrictions. This specific supply shock however is only part of a general picture that has transpired over the past 4-5 years now as the financial crisis and the ensuing economic recession led to a contraction of output as many firms either went out of business or reduced their supply because of economic uncertainty which resulted in a general flight to safe assets and liquidity.

    U.K. Posts Larger-Than-Forecast March Government Deficit -- Britain's budget deficit unexpectedly widened in March, intensifying pressure on Chancellor of the Exchequer George Osborne to keep squeezing spending as austerity strains governments across Europe. Net borrowing excluding support for banks was 18.2 billion pounds ($29.4 billion), up from 18 billion pounds a year earlier and the most since November 2010, the Office for National Statistics said in London today. The median of 20 forecasts in a Bloomberg News survey was for a shortfall of 16 billion pounds. Spending rose 4.2 percent and tax revenue climbed 1.4 percent. The figures come as Prime Minister David Cameron renews his commitment to erasing a budget deficit that totaled 8.3 percent of gross domestic product in the last fiscal year. The political perils of austerity were underlined this week as Nicolas Sarkozy slumped to second place in the first round of French presidential elections and the government of the Netherlands collapsed amid a clash over spending cuts.

    Britain in recession, intensifying government woes (Reuters) - Britain's economy has fallen into its second recession since the financial crisis after an shock contraction at the start of 2012, heaping pressure on Prime Minister David Cameron's government as it reels from a series of political missteps. Britain's Conservative-Liberal Democrat coalition has seen its support crumble after weeks of criticism over unpopular tax measures in last month's budget, and is under further pressure from revelations about its close links with media tycoon Rupert Murdoch. With local elections taking place on May 3, there could hardly be worse timing for Wednesday's news from the Office for National Statistics that Britain's gross domestic product fell 0.2 percent in the first quarter of 2012 on top of a 0.3 percent decline at the end of 2011. Most economists had expected Britain's economy to eke out modest growth in early 2012, but these forecasts were upset by the biggest fall in construction output in three years, coupled with a slump in financial services and oil and gas extraction.

    Britain slides back into recession - Britain slipped back into recession at the start of this year, with economists concluding that even the most generous interpretation of official data released on Wednesday suggested the economy had flatlined for over a year.  The Office for National Statistics said that output for the first three months of the year contracted by 0.2 per cent, following a 0.3 per cent decline at the end of 2011. “A second consecutive drop in GDP in the first quarter leaves the UK meeting the technical definition of recession,” . “But we believe it is fairer to characterise the UK as under-delivering on growth, rather than experiencing a double-dip recession.” However, economists were troubled by the insipid performance of Britain's services sector – the UK’s economic powerhouse, accounting for around 75 per cent of output. Without the sharply negative performance of the construction sector, which fell by 3.0 per cent, GDP would have been flat for the quarter. Michael Saunders, economist at Citi, said Britain was experiencing “the deepest recession and weakest recovery for 100 years.” “It is now four years since real GDP peaked in the first quarter of 2008,” he said, noting that the level of GDP at the end of the first quarter of 2012 stood 4.3 per cent below its pre-recession peak.

    Britain falls back into recession in first quarter The British economy unexpectedly shrank in the first three months of 2012, falling back into recession as construction activity and industrial output fell. The U.K. Office for National Statistics said gross domestic product contracted by 0.2% in the first three months of the year, following a 0.3% fall in the final quarter of last year. A recession is widely defined as at least two consecutive quarters of shrinking GDP. The economy contracted 0.8% on an annualized quarterly basis, the method used to express quarterly changes in U.S. GDP. Compared with the first quarter of 2011, GDP was flat, the ONS said. The results deal a blow to the British government and Chancellor of the Exchequer George Osborne, who have insisted that austerity measures will set the stage for growth. Read “Mervyn King may be the world’s worst central banker.” “The Office for Budgetary Responsibility will now have to revise down its forecast, which will worsen the fiscal numbers further. It’s too early to call for a reversal of government policy, though these latest results do highlight that the economy will not withstand any further acceleration in cuts,”

    U.K. Succumbs to First Double-Dip Recession Since 1970s: The U.K. economy shrank in the first quarter as Britain slid into its first double-dip recession since the 1970s, forcing Prime Minister David Cameron to defend his spending cuts in Parliament.  Gross domestic product fell 0.2 percent from the fourth quarter of 2011, when it declined 0.3 percent, the Office for National Statistics said today in London. The median of 40 estimates in a Bloomberg News survey was for an increase of 0.1 percent. A technical recession is defined as two straight quarters of contraction.  As an anti-austerity backlash gains ground in Europe, Cameron described the data as “disappointing” and pledged to support growth without backtracking on the U.K.’s biggest fiscal squeeze since World War II. The Bank of England is in the final month of its latest round of economic stimulus and the drop in output comes as prospects dim in the euro region, Britain’s biggest export market.

    Did the euro crisis cause the double dip recession? - The Office for National Statistics published GDP figures today showing that the UK is officially back in recession with negative growth of 0.2%. These are their toplines:

    • GDP decreased by 0.2% in Q1 2012
    • Output of the production industries decreased by 0.4% in Q1 2012, following a decrease of 1.3% in the previous quarter
    • Construction sector output decreased by 3% in Q1 2012, following a decrease of 0.2% in the previous quarter
    • Output of the service industries increased by 0.1% in Q1 2012, following a decrease of 0.1% in the previous quarter
    • GDP in volume terms is flat in Q1 2012, when compared with Q1 2011

    The Treasury is already briefing that this is an inevitable result of the euro crisis dampening economies across the continent. Labour blames the government's economic policies, saying they are cutting "too far and too fast" and that they still lack a growth strategy. I'm going to speak with the economists and analysts to try and get the facts on this.

    No recovery for UK: No let up for ONS - The phrase "double-dip recession" conjures up images of roller coasters, but if the UK's recovery were a fairground ride I'd be asking for my money back. The downward lurch in the economy in 2008-09 was certainly dramatic. But for the past 18 months the UK's national output has been broadly, and disappointingly, flat. The 0.2% decline in GDP in the first three months of 2012 is slightly worse than many expected, and bad news for those hoping the UK would avoid falling formally back into recession. But the underlying story told by these statistics is not news to anyone: the UK's economy is bumping along the bottom and still struggling to gain momentum. Economists at Citi point out that, excluding the war years, it's been the worst four years for the UK economy in at least 100 years: worse than what happened in the 1920s and 1930s, and worse than anything in the 1970s and 1980s. In all those other cases, it took less than four years for the economy to get back to where it was before the downturn started. Indeed, four years after the start of recession in the early 1980s - that iconic example of a double-dip - output was 3.2% higher than its pre-recession peak. Advertisement "We are in unknown territory; it's worse than the 1920s and the 1930s" Not this time. These figures show that the UK's national output was 4.3% lower in the first quarter of 2012 than it was in the first quarter of 2008, just before the recession started. Are the official numbers wrong? An impressive number of independent experts, with access to a lot less information than the ONS, are today convinced that they are. A quick taste:

    Bloomberg reports U.K. Plunges Into Double-Dip Recession, as does CNBC, UK Back Into Recession in First 'Double Dip' Since 1970s - Bloomberg reports U.K. Plunges Into Double-Dip Recession, as does CNBC, UK Back Into Recession in First 'Double Dip' Since 1970s: Britain's economy slid into its second recession since the financial crisis after official data unexpectedly showed a fall in output in the first three months of 2012, piling pressure on the embattled coalition government. My contention is that the UK has not fallen back into recession, but has never truly risen out of the last one. Accounting parlour tricks, financial engineering machinations and outright verbal sleight of hand (what some may call not telling the truth) has given the illusion of organic growth, but in reality and at best, it was simply buying $1.00 worth of growth with $1.20 worth of stimulus - or should I reference this in pounds. As we clearly articulated two years ago, when it was alleged that recession was over, in the subscriber (click here to subscribe) document UK Public Finances March 2010:

    We ARE back in recession: Economy suffers double dip as GDP figures fall for second quarter in a row:

    • Official figures today showed the economy shrank by 0.2 per cent in the first quarter of 2012
    • It follows a fall of 0.3 per cent in the final quarter of 2011
    • Cameron: 'I do not seek to explain away the figures'
    Britain has suffered its first double-dip recession since the 1970s after a surprise contraction in the first three months of the year. Official figures today showed the economy shrank by 0.2 per cent in the first quarter of 2012 having declined by 0.3 per cent in the final quarter of 2011. It marked the first double-dip since 1975 and was a bitter blow to Chancellor George Osborne in the wake of last month’s 'omnishambles' Budget. The decline in gross domestic product (GDP) was driven by the biggest fall in construction output for three years, while the manufacturing sector failed to return to growth, the Office for National Statistics (ONS) said. 'But worse, output remains broadly unchanged from its level in the third quarter of 2010 and, four years on from its pre-recession peak is still some 4 per cent down – making this slump longer than the 1930s Depression

    Cameron's Remarkable Achievement - Krugman - From Britain’s Office of National Statistics (pdf): When David Cameron became PM, and announced his austerity plans — buying completely into both the confidence fairy and the invisible bond vigilantes — many were the hosannas, from both sides of the Atlantic. Pundits here urged Obama to “do a Cameron”; Cameron and Osborne were the toast of Very Serious People everywhere. Now Britain is officially in double-dip recession, and has achieved the remarkable feat of doing worse this time around than it did in the 1930s. Britain is also unique in having chosen the Big Wrong freely, facing neither pressure from bond markets nor conditions imposed by Berlin and Frankfurt. Now, the defense I hear from Cameron apologists is that the austerity mostly hasn’t even hit yet. But that’s really not much of a defense. Remember, the austerity was supposed to work by inspiring confidence; where’s the confidence? Basically, the expansionary aspect should already have kicked in; it’s all contraction from here. Needless to say, Cameron and Osborne insist that they will not change course, which means that Britain will continue on a death spiral of self-defeating austerity.

    The Chancellor must ignore this double-dip recession – Telegraph Blogs: Here's Ronald Reagan's famous definition of the difference between a recession, a depression and a recovery. A recession, he said in the run up to his 1981 presidential election victory, was when your next-door neighbour loses his job; a depression was when you lose yours. And recovery begins when Jimmy Carter loses his. Ed Balls, the shadow Chancellor, might think of adapting this for his own campaign trail, for he sees in today's GDP numbers complete vindication of what he's been saying about the Government's austerity programme. The slight fall in first-quarter output is frankly neither here nor there, and is in any case quite likely to be revised upwards at some future date. Labour market and survey evidence points to a slightly better economy than the GDP estimate suggests. None the less, the figures have enormous symbolic significance. The Government was praying that it could avoid a double-dip recession; it has not. And Balls is claiming it's all the fault of the Coalition's economic policies. Only quite recently, the Chancellor, George Osborne, claimed that he'd won the argument over deficit reduction. These latest numbers will reopen the debate. Personally, I wouldn't try to deny that fiscal consolidation is damaging growth; the more important question is whether the Government has any choice in the matter. In my view it does not. We'll never know what would have happened to interest rates had Labour won the last election and pursued a different policy, but the evidence of sharply rising spreads around the political negotiations that led up to the formation of the Coalition is that like the eurozone periphery, they might well have run out of control.

    Double-dip recession affords George Osborne no escape from this reality | Business | The Guardian: This was not real, they claimed. It was just fantasy, they suggested, that the hard data showing a second successive quarter of negative growth should fly in the face of the upbeat picture of business surveys. Give it a few months, they said, and fresh information would show a second recession in three years was a figment of the imagination. Even if this occurred – and there is no guarantee it will – it will come as cold comfort to George Osborne because the damage has been done. For him the next two lines of Bohemian Rhapsody – "caught in a landslide, no escape from reality" – were the ones that sprang to mind following the baleful news from the Office for National Statistics. Here's the position. When the government took office in May 2010, the economy was in the middle of a relatively vigorous recovery from the slump of 2008-09, the deepest in Britain's postwar history. Helped by cheap money, a falling pound, temporary tax cuts, the bringing forward of infrastructure projects and a pick-up in global demand, the economy grew by 1.1% in the second quarter of 2010. Now look at what has happened since then. The economy grew by 0.7% in the third quarter of 2010 – another respectable performance – but then contracted in four of the next six quarters. Britain has clambered only half way out of the deep trough into which it fell in after the collapse of Lehman Brothers in September 2008, making recovery even slower than in the 1930s.

    Austerity in the UK — losing the argument and the economy - New data from the United Kingdom indicates that its economy has seen six consecutive months of economic contraction—the rule of thumb definition of recession. The lesson here should be pretty plain: this is the utterly predictable (and predicted  in real time) result of these policies. Let’s be even more concrete: If the U.K. had just followed the fiscal stance of the United States over the past two years, they would not have re-entered recession. Adam Posen of the Bank of England recently estimated that the U.S. fiscal stance has contributed about 3 percent extra to overall GDP growth compared to a scenario where they had followed the U.K. stance. And this gap has actually widened in more recent years (and is projected to widen even further for 2012). Posen’s estimate crucially includes the drag from state and local governments in the U.S., so it’s not like this overall fiscal stance in the U.S. over this time has been wildly expansionary. Just matching the U.S. fiscal support over this time period would have been a pretty modest goal. But of course, this goal was rejected by the conservative government elected in mid-2010, and instead the U.K. has followed a plan based on austerity. There is plenty to lament in policymaking responses to the crisis of the past four years, but the U.K. fiscal tightening may well be the single most avoidable own-goal over the period.

    Death of a Fairy Tale, by Paul Krugman - This was the month the confidence fairy died. For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.  Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. Or as I put it way back when, the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.  The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.

    How Europe's Double Dip Could Become America's - Robert Reich  - Europe is in recession. Britain’s Office for National Statistics confirmed today (Wednesday) that in the first quarter of this year Britain’s economy shrank .2 percent, after having contracted .3 percent in the fourth quarter of 2011. (Officially, two quarters of shrinkage make a recession). On Monday Spain officially fell into recession, for the second time in three years. Portugal, Italy, and Greece are already basket cases. It seems highly likely France and Germany are also contracting. Why should we care? Because a recession in the world’s third-largest economy, combined with the current slowdown in the world’s second-largest (China), spells trouble for the world’s largest. Remember – it’s a global economy. Money moves across borders at the speed of an electronic impulse. Wall Street banks are enmeshed into a global capital network extending from Frankfurt to Beijing.  Meanwhile, goods and services slosh across the globe. If there’s not enough demand for them coming from the second and third-largest economies in the world, demand in the U.S. can’t possibly make up the difference. That could mean higher unemployment here as well as elsewhere. Blame it on austerity economics – the bizarre view that economic slowdowns are the products of excessive debt, so government should cut spending. Germany’s insistence on cutting public budgets has led Europe into a recession swamp

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